Striking the right balance in corporate rehabilitation

To the chagrin of creditors, one of the most abused legal remedies these days is the remedy of rehabilitation under the Financial Rehabilitation and Insolvency Act (FRIA) and the Financial Rehabilitation Rules of Procedure (FR Rules).

More often than not, whenever business entities find difficulties in paying their lawfully contracted debts, they threaten their creditors with, and eventually file, a petition for rehabilitation.

On the pretext of saving a business, our courts of law thereafter approve the petition, no matter how unworkable the rehabilitation plan is.

The net effect of the indiscriminate filing and approval of rehabilitation petitions is that the enforcement of creditors’ claims is suspended and creditors are left at the mercy of their debtors and our courts of law.  This has given the country bad perception in the international community in terms of protecting creditors’ rights.

But there’s light of the end of the tunnel. Slowly but surely, our Supreme Court (SC) has been attempting to strike a balance between corporate rehabilitation and protection of creditors’ rights.

A recent case in point is BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc. [G.R. No. 205469, March 25, 2015], penned by Associate Justice Estela Perlas-Bernabe. The magistrate also happened to co-chair the Supreme Court committee that drafted the FR Rules.

Briefly, spouses Virgilio and Yolanda Rodil, sole proprietors of the St. Michael Diagnostic and Skin Care Laboratory Services and Hospital (St. Michael Hospital), planned on upgrading their hospital into a full service 11-story hospital. In line with this, the spouses Rodil incorporated the St. Michael Medical Center Inc. (SMMCI), where they intended to consolidate the operations of the hospital.

Using their personal funds and a mortgage loan from the BPI Family Savings Bank (BPI Savings Bank), the spouses commenced construction of a new hospital building. Unfortunately, only several floors were constructed and the 11-story hospital building was never completed as envisioned. As of May 2006, SMMCI was neither operational nor earning revenues.

On  Aug. 11, 2010, SMMCI filed a petition for corporate rehabilitation. In its petition, SMMCI claimed that St. Michael Hospital, although operating profitably, was weighed down by its loan obligations.

SMMCI further claimed that while several persons signified interest in investing in SMMCI, they needed enough time for audit and due diligence.

In its proposed rehabilitation plan, SMMCI wanted BPI Savings Bank to: (a) defer foreclosing on the mortgage constituted to secure the loan extended to SMMCI; and (b) agree to a moratorium of at least two years before SMMCI would start servicing its loan obligation to the bank.

A regional trial court approved the plan, which was later affirmed by the Court of Appeals. Consequently, BPI Savings Bank appealed.

In resolving BPI Savings Bank’s appeal, the SC reversed the lower courts’ rulings and laid down some important doctrines in rehabilitation law for the guidance of the bench and the bar in the future.

First, for a rehabilitation petition to be granted, there must be a viable business to be restored. This is because rehabilitation “contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency, the purpose being to enable the company to gain a new lease of life and allow its creditors to be paid their claims out of its earnings.”

The SC said that while SMMCI had indeed “commenced business” by opening a credit line with BPI Family Bank to finance the construction of the new hospital building, it neither formally operated nor earned any income since its incorporation.

Second, the high court said the petitioner must comply with the requirement of material financial commitment. A mere negotiation with investors is not enough.

Third, there must be a liquidation analysis submitted as part of a rehabilitation plan. The failure of SMMCI to comply with this requirement “prevent[ed] the Court from ascertaining if the petitioning debtor’s creditors can recover by way of the present value of payments projected in the plan…”

The right balance

What is admirable about the BPI Savings Bank case is that it strikes the right balance between the needs of the parties.

Indeed, “the purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated.”

Even without knowing the BPI Savings case, I have had the opportunity to point these matters out early this year as counsel for a creditor in the rehabilitation case involving the Philippine Women’s University.

Since it has been an icon in the country’s educational system, my personal concern then was that the court would take a populist approach and would arbitrarily grant the petition.

Having been at the forefront in the enactment of the FRIA and FR Rules, I felt obligated to emphasize that the law was not envisioned to delay the enforcement of lawfully contracted obligations and should be granted only in meritorious cases.

Fortunately, the judge was bold enough to dismiss the petition.

Dura lex sed lex, so to speak.

(The author, former president of the Philippine Stock Exchange, is a law professor of the Ateneo Law School and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (Accralaw). The views in this column are exclusively his. He may be contacted through [email protected])