2014 Case Digest: Philippine Bank of Communications v. Basic Polyprinters

PHILIPPINE BANK OF COMMUNICATIONS, Petitioner,

vs.

BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.

G.R. No. 187581               October 20, 2014

PONENTE: Bersamin

TOPIC: FRIA, insolvency, rehabilitation plan

FACTS:

Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group of Companies filed a joint petition for suspension of payments with approval of the proposed rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the rehabilitation plan, but the CA reversed the RTC and directed the petitioning corporations to file their individual petitions for suspension of payments and rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, averring therein that: (a) its business since incorporation had been very viable and financially profitable; (b) it had obtained loans from various banks, and had owed accounts payable to various creditors; (c) the Asian currency crisis, devaluation of the Philippine peso, and the current state of affairs of the Philippine economy; (d) its operations would be hampered and would render rehabilitation difficult should its creditors enforce their claims through legal actions, including foreclosure proceedings; (e) included in its overall Rehabilitation Program was the full payment of its outstanding loans in favor of petitioner PBCOM and other banks

ISSUES:

1. Whether or not liquidity is an issue in a petition for rehabilitation
2. Whether or not material financial commitment is required in a rehabilitation plan

HELD:

FIRST ISSUE: No.

The Court held that liquidity is not an issue in a petition for rehabilitation.

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a position of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan more if the corporation continues as a going concern that if it is immediately liquidated.” It 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.

Two-pronged purpose of rehabilitation proceedings

1. Equitable purpose: To efficiently and equitably distribute the assets of the insolvent debtor to its creditors; and
2. Rehabilitative purpose: To provide the debtor with a fresh start

On the one hand, they attempt to provide for the efficient and equitable distribution of an insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors with a “fresh start” by relieving them of the weight of their outstanding debts and permitting them to reorganize their affairs. The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability of continuing the business operations of the petitioning corporation. The determination of such issues was to be carried out by the court-appointed rehabilitation receiver.

Moreover, Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a corporate debtor as a corporation duly organized and existing under Philippine laws that has become insolvent. The term insolvent is defined in said law as “the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.”

As such, the contention that rehabilitation becomes inappropriate because of the perceived insolvency of Basic Polyprinters was incorrect.

SECOND ISSUE: Yes.

The Court held that a material financial commitment is significant in a rehabilitation plan.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation.

However, the Court held that Basic Polyprinters commitment was insufficient for the following reasons:

The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the insurance claim from which said working capital would be sourced had already been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation.

The conversion of all deposits for future subscriptions to common stock and the treatment of all payables to officers and stockholders as trade payables was hardly constituting material financial commitments. Such “conversion” of cash advances to trade payables was, in fact, a mere re-classification of the liability entry and had no effect on the shareholders’ deficit.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to address the low demands for their products and the effect of direct competition from stores like SM, Gaisano, Robinsons, and other malls.

 Basic Polyprinters’s proposal to enter into the dacion en pagoto create a source of “fresh capital” was not feasible because the object thereof would not be its own property but one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also undergoing rehabilitation.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters to be genuine and in good faith, for it was, in fact, unilateral and detrimental to its creditors and the public.