Case Summary (A.C. No. 4738)
Key Dates and Procedural Posture
Relevant dates and events stated in the record: February 27, 2004 — joint petition for suspension of payments filed by Basic Polyprinters and related Limtong Group companies; October 25, 2005 — Court of Appeals directed filing of individual petitions; August 31, 2006 — trial court issued stay order and gave due course to Basic Polyprinters’ individual petition; January 11, 2008 — Regional Trial Court (RTC), Branch 21 (Imus, Cavite) approved the rehabilitation plan; December 16, 2008 — Court of Appeals (CA) affirmed the RTC order; October 20, 2014 — Supreme Court decision reversing the CA and RTC and dismissing the petition for rehabilitation.
Applicable Law and Legal Framework
The 1987 Constitution is the applicable constitutional framework for decisions rendered in 1990 or later. Statutory and regulatory instruments directly invoked include Presidential Decree No. 902-A (as amended), the Interim Rules of Procedure on Corporate Rehabilitation (A.M. No. 00-8-10-SC, as amended), and subsequently relevant jurisprudential references and the Financial Rehabilitation and Insolvency Act (Republic Act No. 10142) and the Financial Rehabilitation Rules of Procedure (A.M. No. 12-12-11-SC) which the Court cites for definitional context. The Interim Rules governed the procedure at the time Basic Polyprinters filed its petition.
Antecedent Facts and Basis for Rehabilitation Petition
Basic Polyprinters alleged that though historically viable, it incurred substantial liabilities from bank loans and trade creditors and suffered business setbacks due to the Asian currency crisis, peso devaluation, high interest rates, declining demand for gift items (because of recession and mobile phone use), competition from large retail stores, and a July 19, 2002 fire that destroyed warehouse inventories valued at P264,000,000. The company reported assets of P15,374,654.00 and net liabilities of P13,031,438.00 and proposed a rehabilitation plan that included long-term repayment schemes, moratoria, a dacion en pago of affiliate property, and other measures intended to preserve the business as a going concern.
RTC Proceedings and Receiver’s Recommendation
The RTC found the petition sufficient in form and substance, issued a stay, and appointed a rehabilitation receiver who examined the petition and supporting documents. After evaluation, the receiver recommended approval of the rehabilitation plan based on factors such as petitioner’s positive net worth indicators, convertible inventory, the plan’s potential to preserve assets and optimize creditor recovery, projected cash flows, and restoration of profitability with attendant public benefits like employment. The RTC approved the detailed rehabilitation plan and directed strict monitoring by the receiver.
Court of Appeals’ Ruling
The CA affirmed the RTC’s approval, emphasizing the equitable and rehabilitative purposes of rehabilitation proceedings under PD No. 902-A and the Interim Rules: preserving a viable business as a going concern is often more beneficial to creditors and the public than immediate liquidation. The CA relied on the receiver’s findings and substantial-evidence review to uphold that the plan contained sufficient indicia of feasibility and likely successful rehabilitation.
Issues Presented on Appeal to the Supreme Court
PBCOM raised three principal contentions: (A) a rehabilitation petition presupposes the petitioning corporation has sufficient property to cover indebtedness and Basic Polyprinters was insolvent (assets less than liabilities); (B) the detailed rehabilitation plan lacked material financial commitments from the debtor or prospective investors as required by Section 5, Rule 4 of the Interim Rules; and (C) terms of the proposed plan were unduly onerous to creditors (notably a 15-year rehabilitation term and extensive waiver of interest and penalties), effectively granting an extended moratorium prejudicial to creditors.
Supreme Court’s Analysis — Liquidity and Insolvency
The Court rejected PBCOM’s contention that liquidity or the existence of assets sufficient to cover all indebtedness is the dispositive legal criterion for approving rehabilitation. Under the Interim Rules and established jurisprudence, rehabilitation is aimed at restoring the debtor to successful operation and solvency when it is economically feasible and creditors are likely to recover more under rehabilitation as a going concern than under immediate liquidation. The Court referenced jurisprudence recognizing the dual purposes of rehabilitation — equitable distribution of assets and providing the debtor with a fresh start — and noted that insolvency, defined under later legislation as liabilities greater than assets or inability to pay debts as they fall due, does not per se render rehabilitation inappropriate.
Supreme Court’s Analysis — Material Financial Commitment Requirement
The Court held that a material financial commitment is significant in evaluating the credibility and viability of a rehabilitation plan because it shows the debtor’s and investors’ genuine readiness to support the plan. It reviewed the specific commitments proffered by Basic Polyprinters: (1) an additional P10 million working capital to be sourced from an insurance claim; (2) conversion of directors’ and shareholders’ deposits for future subscription to common stock; (3) conversion of substituted liabilities to additional paid-in capital; and (4) reclassification of officers’ and stockholders’ cash advances as trade payables. The Court found these commitments insufficient for several reasons noted below.
Supreme Court’s Findings on the Insufficiency of Proffered Commitments
The Court concluded the P10 million commitment was doubtful because the insurance claim from which it was to be sourced had been written off by an affiliate (Wonder Book Corporation), and a written-off claim cannot be treated as a reliable source of fresh ca
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Procedural Posture and Decision
- This is an appeal from the Court of Appeals decision promulgated December 16, 2008 in C.A.-G.R. CV No. 102484, which affirmed the Regional Trial Court (RTC), Branch 21, Imus, Cavite order dated January 11, 2008 approving the rehabilitation plan of respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters).
- The Supreme Court, through Justice Bersamin, rendered judgment on October 20, 2014 (G.R. No. 187581).
- The Supreme Court reversed the Court of Appeals and RTC: it granted the petition for review on certiorari, set aside and reversed the CA decision (Dec. 16, 2008) and the CA resolution (Apr. 22, 2009), and set aside the RTC order (Jan. 11, 2008) approving Basic Polyprinters’ rehabilitation plan.
- The Supreme Court dismissed Basic Polyprinters’ petition for suspension of payments and rehabilitation and directed Basic Polyprinters to pay the costs of suit.
- Concurrence in the Supreme Court ruling: Chief Justice Sereno, Justices Leonardo-De Castro, Perez, and Perlas-Bernabe.
Antecedents and Corporate Profile of Respondent
- Basic Polyprinters and Packaging Corporation was a domestic corporation engaged in printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and other novelty items.
- On February 27, 2004, Basic Polyprinters and eight other corporations of the Limtong Group filed a joint petition for suspension of payments with approval of proposed rehabilitation in the RTC (docketed SEC Case No. 031-04).
- The RTC initially issued a stay order and approved the joint rehabilitation petition; the Court of Appeals reversed that approval on October 25, 2005 and directed the corporations to file individual petitions for suspension of payments and rehabilitation in the proper courts.
- Basic Polyprinters thereafter filed an individual petition for suspension of payments and rehabilitation.
Basic Polyprinters’ Allegations and Contents of Its Individual Petition
- Basic Polyprinters averred:
- Its business had been viable and financially profitable since incorporation.
- It obtained loans from various banks and owed accounts payable to various creditors.
- Adverse external and internal factors led to difficulty meeting obligations: the Asian currency crisis, devaluation of the peso, general economic condition, high interest rates/penalties/charges, low demand for gift items (including use of cellular phones), direct competition from malls (SM, Gaisano, Robinsons), and a July 19, 2002 fire that destroyed its warehouse containing inventories worth P264,000,000.00.
- Enforcement actions by creditors, including foreclosures, would hamper operations and render rehabilitation difficult.
- The Rehabilitation Program included full payment of outstanding loans to Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with a two-year moratorium on interest and five years on principal at 5% per annum, and a dacion en pago of affiliated property in favor of EPCIBank.
- Basic Polyprinters’ assets were worth P15,374,654.00 with net liabilities of P13,031,438.00 (as asserted in the petition).
RTC Proceedings, Receiver, and Order Approving Rehabilitation Plan
- The RTC issued a stay order dated August 31, 2006 after finding the petition sufficient in form and substance.
- The RTC appointed Manuel N. Cacho III as rehabilitation receiver and required creditors and interested parties, including the SEC, to file comments.
- After hearings and evaluations, the petition was given due course and referred to the rehabilitation receiver for evaluation and recommendation.
- The rehabilitation receiver submitted a report recommending approval of the rehabilitation plan on October 18, 2007 and later submitted clarifications and corrections on December 19, 2007.
- On January 11, 2008 the RTC issued an order approving the detailed Rehabilitation Plan, stating, among others:
- Petitioner’s updated financial report showed greatly improved financial condition but indebtedness and depressed sales made current operations insufficient to pay maturing obligations.
- Success of rehabilitation depended on reducing debt to a manageable level through suspension of payments and proposed dacion en pago; projected cash flows and repayment program demonstrated ability to settle debt liability.
- Factors justifying approval included: positive net worth and convertible inventory; plan ensuring preservation of assets, optimized recovery and orderly payment; restoration to profitability and solvency benefitting stockholders, investors and creditors; regeneration of employment; and endorsement by the Rehabilitation Receiver.
- The RTC enjoined the petitioner to strictly comply with the plan and directed the Rehabilitation Receiver to monitor implementation and submit quarterly reports.
Court of Appeals Ruling
- The Court of Appeals, in its decision promulgated December 16, 2008, affirmed the RTC’s approval of the rehabilitation plan.
- The CA agreed with the rehabilitation receiver’s finding that sufficient evidence, factors and actual opportunities existed indicating Basic Polyprinters could be rehabilitated in due time.
- The CA emphasized the equitable and rehabilitative purposes of rehabilitation proceedings under Presidential Decree No. 902-A, as amended, to preserve a foundering business as a going concern rather than pursue liquidation.
- The CA closed by stressing rehabilitation’s purpose: to give the company a new lease on life so creditors can be paid from earnings and to further the State’s objective to protect investments and promote equitable distribution of wealth.
Issues Raised on Appeal to the Supreme Court
- Petitioner Philippine Bank of Communications presented issues, summarized:
- Whether the CA erred in dismissing PBCOM’s petition for review and affirming the RTC order approving rehabilitation, because:
- A petition for rehabilitation presupposes that the petitioning corporation has sufficient property to cover all indebtedness; Basic Polyprinters was insolvent as assets were less than obligations.
- The “detailed rehabilitation plan” lacked material financial commitments from Basic Polyprinters itself or would-be investors (Section 5, Rule 4, Interim Rules).
- Terms of the approved plan were onerous (15-year term, waiver of all interest and penalties from February 2004 until approval) and effectively operated as an unwarranted moratorium prejudicial to creditors.
- Specific factual allegations included: u
- Whether the CA erred in dismissing PBCOM’s petition for review and affirming the RTC order approving rehabilitation, because: