Creditors’ committee in rehab proceedings

Can a rehabilitation court empower a creditors’ committee to interfere with the judgment of the board of directors of the company under rehabilitation?

This issue was discussed by the Supreme Court in The Bank of New York vs. Court of Appeals, G.R. No. 177270, Dec. 5, 2012. On July 30, 2003, the Bank of New York (BNY) filed a creditor-initiated petition to rehabilitate Bayantel Telecommunications Inc. (Bayantel).

During the proceedings, the rehabilitation court created a creditors’ committee (called the monitoring committee) composed of three of Bayantel’s creditors. The committee was empowered not only to “participate with the Receiver in monitoring and overseeing the actions of the Board of Directors of Bayantel,” but also to “adopt, modify, revise or substitute” certain actions of the board including the “issuance of new shares, sale of core and noncore assets, change of business, etc., that will materially affect the terms and conditions of the rehabilitation plan and its implementation.”

In the Supreme Court, BNY defended the grant of extensive powers to the creditors’ committee on the basis of the rule, which authorizes the rehabilitation court to “impose such terms, conditions, or restrictions as the effective implementation and monitoring of the rehabilitation plan may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fail.” BNY pointed out that “the magnitude and complexity of [Bayantel’s] business necessitate close monitoring of its operations to ensure successful rehabilitation.”

BNY also cited Bayantel’s “taciturn disposition [on] its budget and expansion costs” and that “such lack of transparency can be addressed by empowering the monitoring committee to approve measures that will ultimately affect [Bayantel’s] ability to settle its debts.”

For its part, Bayantel argued that vesting the committee with veto power over certain decisions of the board would effectively give it control over Bayantel’s operations. Bayantel also argued that there is “an underhanded attempt by [BNY] to create a management committee without satisfying the requisites therefor.”

The Supreme Court noted the expansive powers—well beyond those of the rehabilitation receiver’s—granted to the creditors’ committee. The court clarified that, while corporate powers of all corporations may be exercised, P.D. 902-A provides an exception by empowering the rehabilitation court to “create and appoint a management committee to undertake the management of corporations.

The exception applies “when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralyzation of business operations of such corporations which may be prejudicial to the interest of minority stockholders, parties-litigants or the general public.” In such a case, the management committee “may overrule or revoke the actions of the previous management and board of directors of the entity or entities under management notwithstanding any provision of law, articles of incorporation or bylaws to the contrary.”

However, since BNY neither petitioned for the appointment of a management committee nor presented evidence showing that any of the conditions to warrant its creation exist, the expansive powers granted to the monitoring committee are not sanctioned under the law.

A creditors’ committee is not expressly sanctioned by P.D. 902-A or any of the rules promulgated by the Supreme Court to implement said law. This is actually the problem.

The creation of a creditors’ committee is now expressly provided under the Financial Rehabilitation and Insolvency Act of 2010 (Fria). However, what the Fria contemplates is that the creditors’ committee will serve as the “primary liaison between the rehabilitation receiver and the creditors” in order to “assist the rehabilitation receiver in communicating with the creditors” of the debtor.

Unless the Fria rules that are being prepared by the Supreme Court expressly authorizes it, there may be an issue of whether a rehabilitation court can authorize a creditors’ committee, as the trial court did in the Bayantel case, to participate with the receiver in monitoring and overseeing the operations of the debtor under rehabilitation. That is the role of the rehabilitation receiver under the law, and there may be complications in making it a shared responsibility with the creditors’ committee.

Whatever the rules may be, the creditors’ committee is not authorized (even under the Fria) to modify or supplant the decisions of the board of directors of a debtor, as the Fria maintained the legal difference between a creditors’ committee and a management committee.

(While the author is co-managing partner and head of the corporate and special projects department of the Angara Abello Concepcion Regala & Cruz Law Offices, any views expressed in this column are purely his own. The author may be reached through [email protected].)