Can a rehabilitation court empower a creditors committee to interfere with the notwithstanding any provision of law, articles of incorporation
oration or bylaws to 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 Bayantels 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 [Bayantels]
business necessitate close monitoring of its operations to ensure successful
rehabilitation.
BNY also cited Bayantels 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 [Bayantels]
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 Bayantels
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 powerswell beyond those of the
rehabilitation receiversgranted 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
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 francis.ed.lim@gmail.com.)