FRIA CASES

1. Wonder Book Corporation vs. Philippine Bank of Communications, 676 SCRA 489, G.R. No. 187316 July 16, 2012;
2. Viva Shipping Lines, Inc. vs. Keppel Philippines Marine, Inc., 784 SCRA 173, G.R. No. 177382 February 17, 2016;
3. Ao-As v. CA, G.R. No. 128464, June 20, 2006, 491 SCRA 339;
4. Lingkod Manggagawa sa Rubberworld. v. Rubberworld [Phils.] Inc., G.R. No. 153882, January 29, 2007, 513 SCRA 208;
5. Negros Navigation v. CA, G.R. No. 163156, December 10, 2008, 573 SCRA 434;
6. Garcia, v. PAL, G.R. No. 164856, August 29, 2007, 576 SCRA 479;
7. Sobrejuanite v. ASB, G.R. No. 165675, September 30, 2005, 471 SCRA 763;
8. Garcia vs. Philippine Airlines, Inc., 576 SCRA 479, G.R. No. 164856 January 20, 2009;
9. MWSS v. Daway, G.R. No. 160732, June 21, 2004, 432 SCRA 559

WONDER BOOK CORPORATION, v. PHILIPPINE BANK OF COMMUNICATIONS,Respondent.

FACTS: 1. Wonder Book Corporation is a corporation engaged in the
business of retailing books, school and office supplies, greeting cards and
other related items. It operates the chain of stores known as the Diplomat
Book Center.
2. Wonder Book and eight other corporations, known as Limtong Group of
Companies filed a joint petition for rehabilitation with the RTC. On March 2, with interest during the two-year moratorium within ten years from the
2004, a Stay Order was issued.
3. On April 30, 2004, Equitable PCI Bank, one of the creditors of LGC, filed
an opposition raising the impropriety of nine corporations with separate and
distinct personalities seeking joint rehabilitation under one proceeding.
4. The RTC issued an Order approving the petition for rehabilitation,
granting the LGC a moratorium of two years in the payment of all its
obligations, together with the corresponding interests, to its creditor banks. detailed rehabilitation plan. The RTC issued an Order, approving the
After the two-year grace period, the LGC shall pay its existing obligations
with its creditor banks monthly within a period of fifteen years.
5. The foregoing was questioned by EPCI Bank and PBCOM before the CA.
The CA dismissed LGC's petition for rehabilitation.
6. On September 5, 2006, Wonder Book filed a petition for Rehabilitation
with the RTC. Wonder Book cited the following as causes for its inability to
pay its debts as they fall due: (a) high interest rates, penalties and charges
imposed by its creditors; (b) low demand for gift items and greeting cards
due to the widespread use of cellular phones and economic recession; (c)
competition posed by other stores; and (d) the fire on July 19, 2002 that
destroyed its inventories worth P264 Million, which are insured for P245
Million but yet to be collected. Wonder Book proposed to pay its creditors
approval of its rehabilitation plan. The RTC issued a Stay Order.
7. PBCOM filed an Opposition stating that the petition is vague and
anchored on baseless presumptions, that Wonder Book is insolvent and can
no longer be rehabilitated, the capital infusion is speculative at best, and that
Wonder Book's proposed payment program is too onerous.
8. On September 17, 2007, Wonder Book filed what it described as its
rehabilitation plan.
9. PBCOM filed a Petition for Review which the CA granted on the ground
that Wonder Book's financial statements reveal that it is not merely illiquid
but in a state of serious insolvency. In effect, the debt ratio of Wonder Book
is 2.11 to 1. This means that Wonder Book has P2.11 pesos in debt for
every peso of asset. Obviously, Wonder Book is in terrible financial condition
as it does not have enough assets to pay its obligations. For a good financial
status, the total debt ratio should be 1 or less, it is also noted that Wonder
Book's expected profits during the rehabilitation period are not sufficient to
cover its liabilities and reverse its dismal financial state.
ISSUE: Whether Wonder Book's petition for rehabilitation is impressed with
merit?
HELD: No. This remedy should be denied to corporations whose insolvency
appears to be irreversible and whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious
by the following: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets and goals; (c) speculative
capital infusion or complete lack thereof for the execution of the business
plan; (d) cash flow cannot sustain daily operations; and (e) negative net
worth and the assets are near full depreciation or fully depreciated.
1. Foremost of all, it appears that the petitioner does not really have enough
assets, net worth and earning to meet and settle its outstanding liabilities.
2. Secondly, this Court is not really prepared to give full faith to the financial
projections of the petitioner. The assumption that petitioner s gross sales will
increase by 25% to 30% within the next five years is without adequate basis.
It is too speculative and unrealistic. It is not borne by petitioner s historical
operations.
3. Another reason for this Court s denial of Wonder Book s petition is its
failure to comply with Section 5 of the Interim Rules, which enumerates the
minimum requirements of an acceptable rehabilitation plan:
Sec. 5. Rehabilitation Plan. The rehabilitation plan shall include: (a) the
desired business targets or goals and the duration and coverage of the
rehabilitation; (b) the terms and conditions of such rehabilitation which shall
include the manner of its implementation, giving due regard to the interests
of secured creditors; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include conversion of the debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest; (e) a liquidation analysis that estimates the proportion of
the claims that the creditors and shareholders would receive if the debtor s
properties were liquidated; and (f) such other relevant information to enable
a reasonable investor to make an informed decision on the feasibility of the
rehabilitation plan. It is imperative for a distressed corporation seeking
rehabilitation to present "material financial commitments" as this is critical in
determining its resolve, determination, earnestness and good faith in
financing its proposed rehabilitation plan.
4. While Wonder Book mentioned that there are individuals who have
expressed their interest in investing and financing its business plans, their
identities were not disclosed nor were the evidence of the existence of these
funds proved.
The foregoing only goes to show that rehabilitation is a vain waste of effort
and resources and a mere exercise in futility. Worse, that Wonder Book will
still post a negative net worth after its rehabilitation plan is fully implemented
suggests that the remedy of rehabilitation is availed without a reasonable
expectation that Wonder Book will regain its prior status of viability and
profitability but with a mere crapshoot that the value of its present pool of
assets will increase during the rehabilitation period.
[G.R. No. 177382. February 17, 2016.]
VIVA SHIPPING LINES, INC., petitioner, vs. KEPPEL PHILIPPINES
MINING, INC., METROPOLITAN BANK & TRUST COMPANY, PILIPINAS
SHELL PETROLEUM CORPORATION, CITY OF BATANGAS, CITY OF
LUCENA, PROVINCE OF QUEZON, ALEJANDRO OLIT, NIDA
MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, and HARLAN
BACALTOS, respondents.
FACTS: On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping
Lines) filed a Petition for Corporate Rehabilitation before the Regional Trial
Court of Lucena City. 2 The Regional Trial Court initially denied the Petition
for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the
Interim Rules of Procedure on Corporate Rehabilitation. 3 On October 17,
2005, Viva Shipping Lines filed an Amended Petition.
In the Amended Petition, Viva Shipping Lines claimed to own and operate
19 maritime vessels and Ocean Palace Mall, a shopping mall in downtown
Lucena City. Viva Shipping Lines also declared its total properties' assessed
value at about P45,172,790.00. However, these allegations were contrary to
the attached documents in the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva
Shipping Lines owned only two (2) maritime vessels: M/V Viva Peñafrancia
V and M/V Marian Queen. The list also stated that the fair market value of
all of Viva Shipping Lines' assets amounted to P447,860,000.00, P400
million more than what was alleged in its Amended Petition. Some of the
properties listed in the Property Inventory List were already marked as
"encumbered" by its creditors; 10 hence, only P147,630,000.00 of real
property and its vessels were marked as "free assets."
Viva Shipping Lines also declared the following debts:
According to Viva Shipping Lines, the devaluation of the Philippine peso,
increased competition, and mismanagement of its businesses made it
difficult to pay its debts as they became due. 13 It also stated that "almost all
[its] vessels were rendered unserviceable either because of age and
deterioration that [it] can no longer compete with modern made vessels
owned by other operators." 14
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated
possible sources of funding such as the sale of old vessels and commercial
lots of its sister company, Sto. Domingo Shipping Lines. 15 It also proposed
the conversion of the Ocean Palace Mall into a hotel, the acquisition of two
(2) new vessels for shipping operations, and the "re-operation" 16 of an oil
mill in Buenavista, Quezon. 17
Viva Shipping Lines nominated two individuals to be appointed as
rehabilitation receiver: Armando F. Ragudo, a businessman from Tayabas,
Quezon, and Atty. Calixto Ferdinand B. Dauz III, a lawyer from Lucena City.
18 A day after filing the Amended Petition, Viva Shipping Lines submitted
the name of a third nominee, Former Judge Jose F. Mendoza (Judge
Mendoza).
On October 19, 2005, the Regional Trial Court found that Viva Shipping
Lines' Amended Petition to be "sufficient in form and substance," and issued
a stay order. 20 It stayed the enforcement of all monetary and judicial claims
against Viva Shipping Lines, and prohibited Viva Shipping Lines from selling,
encumbering, transferring, or disposing of any of its properties except in the
ordinary course of business. The Regional Trial Court also appointed Judge
Mendoza as rehabilitation receiver. Before the initial hearing scheduled on
December 5, 2005, the City of Batangas, Keppel Philippines Marine, Inc.,
and Metropolitan Bank and Trust Company (Metrobank) filed their respective
comments and oppositions to Viva Shipping Lines' Amended Petition.
During the initial hearing, Pilipinas Shell Petroleum Corporation (Pilipinas
Shell) moved for additional time to write its opposition to Viva Shipping
Lines' Amended Petition. Pilipinas Shell later filed its Comment/Opposition
with Formal Notice of Claim.
Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a
Manifestation and Registration of Monetary Claim stating that Viva Shipping
Lines owes her P232,000.00 as separation and 13th month pay. The
Securities and Exchange Commission filed a Comment informing the
Regional Trial Court that Viva Shipping Lines violated certain laws and rules
of the Commission.
On March 24, 2006, Judge Mendoza withdrew his acceptance of
appointment as rehabilitation receiver. As replacement, Viva Shipping Lines
nominated Atty. Antonio Acyatan, while Metrobank nominated Atty. Rosario
S. Bernaldo. Keppel Philippines Marine, Inc. adopted Metrobank's
nomination.
On April 4, 2006, Metrobank filed a Motion for Production or Inspection of
relevant documents relating to Viva Shipping Lines' business operations
such as board resolutions, tax returns, accounting ledgers, bank accounts,
and contracts. Viva Shipping Lines filed its opposition. However, the
Regional Trial Court granted Metrobank's Motion. Viva Shipping Lines failed
to comply with the Order to produce the documents, 32 as well as with the
Regional Trial Court Order to submit a memorandum. 33
On September 27, 2006, Viva Shipping Lines' former employees Alejandro
Olit, Nida Montilla, Pio Hernandez, Eugenio Baculo, and Harlan Bacaltos 34
(Alejandro Olit, et al.) filed their comment on the Amended Petition,
informing the Regional Trial Court of their pending complaint against Viva
Shipping Lines before the National Labor Relations Commission.
In the Order dated October 30, 2006, 36 the Regional Trial Court lifted the
stay order and dismissed Viva Shipping Lines' Amended Petition for failure
to show the company's viability and the feasibility of rehabilitation. The
Regional Trial Court summarized Viva Shipping Lines' creditors and debts:
The Regional Trial Court also noted the following as Viva Shipping Lines’
free assets:
ISSUE: WON rehabilitation is proper
HELD: NO. Corporate rehabilitation is a remedy for corporations,
partnerships, and associations "who [foresee] the impossibility of meeting
[their] debts when they respectively fall due." A corporation under
rehabilitation continues with its corporate life and activities to achieve
solvency, or a position where the corporation is able to pay its obligations as
they fall due in the ordinary course of business. Solvency is a state where
the businesses' liabilities are less than its assets.
Corporate rehabilitation is a type of proceeding available to a business that
is insolvent. In general, insolvency proceedings provide for predictability that
commercial obligations will be met despite business downturns. Stability in
the economy results when there is assurance to the investing public that
obligations will be reasonably paid. It is considered state policy to encourage
debtors, both juridical and natural persons, and their creditors to collectively
and realistically resolve and adjust competing claims and property rights[.] . .
. [R]ehabilitation or liquidation shall be made with a view to ensure or
maintain certainty and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable treatment of creditors
who are similarly situated. When rehabilitation is not feasible, it is in the
interest of the State to facilitate a sp
The rationale in corporate rehabilitation is to resuscitate businesses in
financial distress because "assets . . . are often more valuable when so
maintained than they would be when liquidated." 98 Rehabilitation assumes
that assets are still serviceable to meet the purposes of the business. The
corporation receives assistance from the court and a disinterested
rehabilitation receiver to balance the interest to recover and continue
ordinary business, all the while attending to the interest of its creditors to be
paid equitably. These interests are also referred to as the rehabilitative and
the equitable purposes of corporate rehabilitation.
The Regional Trial Court correctly dismissed petitioner's rehabilitation plan.
It found that petitioner's assets are non-performing. 152 Petitioner admitted
this in its Amended Petition when it stated that its vessels were no longer
serviceable. 153 In Wonder Book Corporation v. Philippine Bank of
Communications, 154 a rehabilitation plan is infeasible if the assets are
nearly fully or fully depreciated. This reduces the probability that
rehabilitation may restore and reinstate petitioner to its former position of
successful operation and solvency.
Petitioner's rehabilitation plan should have shown that petitioner has enough
serviceable assets to be able to continue its business. Yet, the plan showed
that the source of funding would be to sell petitioner's old vessels. Disposing
of the assets constituting petitioner's main business cannot result in
rehabilitation. A business primarily engaged as a shipping line cannot
operate without its ships. On the other hand, the plan to purchase new
vessels sacrifices the corporation's cash flow. This is contrary to the goal of
corporate rehabilitation, which is to allow present value recovery for
creditors. The plan to buy new vessels after selling the two vessels it
currently owns is neither sound nor workable as a business plan.
The other part of the rehabilitation plan entails selling properties of
petitioner's sister company. As pointed out by the Regional Trial Court, this
plan requires conformity from the sister company. Even if the two companies
have the same directorship and ownership, they are still two separate
juridical entities. In BPI Family Savings Bank v. St. Michael Medical Center,
155 this court refused to include in the financial and liquidity assessment the
financial statements of another corporation that the petitioning-corporation
plans to merge with.
As pointed out by respondents, petitioner's rehabilitation plan is almost
impossible to implement. Even an ordinary individual with no business
acumen can discern the groundlessness of petitioner's rehabilitation plan.
Petitioner should have presented a more realistic and practicable
rehabilitation plan within the time periods allotted after initiatory hearing, or
otherwise, should have opted for liquidation.
Finally, petitioner argues that after Judge Mendoza's withdrawal as
rehabilitation receiver, the Regional Trial Court should have appointed a new
rehabilitation receiver to evaluate the rehabilitation plan. We rule otherwise.
It is not solely the responsibility of the rehabilitation receiver to determine the
validity of the rehabilitation plan. The Interim Rules of Procedure on
Corporate Rehabilitation allows the trial court to disapprove a rehabilitation
plan 156 and terminate proceedings or, should the instances warrant, to
allow modifications to a rehabilitation plan.
The Regional Trial Court rendered a decision in accordance with facts and
law. Thus, we deny the plea for liberalization of procedural rules. To grant
the plea would cause more economic hardship and injustice to all those
concerned.
REVALIDA FRIA – 03. A0-AS V. CA
FACTS: The Lutheran Church of the Philippines (LCP) is a religious
organization duly registered with the SEC. Its members are comprised of
Lutheran clergymen and local Lutheran congregations in the Philippines: the
North Luzon District (NLD); the South Luzon District (SLD); and the
Mindanao district (MDD).
The governing body of LCP were composed of 7 Board of Directors (BOD)
serving a term of 2 years. Six members of the LCP Board are elected
separately in district conferences held in each district, with two members
representing each district and the seventh member of the Board is the
National President of the LCP who is elected at large in a national
convention held in October of every even-numbered year.
A resolution was passed, dividing the NLD into two separate districts: NLD
Highland District and NLD Lowland District thereby increasing the BOD from
7 to 9. Another resolution was passed creating another district, Visayan
Islands District (VLD), thereby increasing the number of BOD further to 11.
The BOD managed the LCP without any challenge from the membership
until several years later when certain controversies arose involving the
resolutions of the Board terminating the services of the LCP business
manager and corporate treasurer since 1979, Mr. Eclesio Hipe. The said
termination sparked several intra corporate complaints and for the first time,
the legality of the 11 BOD was put in issue for being in excess of the number
of BOD provided in the AOI without it being amended to reflect the increase.
The members of the Batong group - RESPONDENTS are the duly elected
board of directors of the LCP at the time of the Iling of SEC-SICD Case No.
3857. On the other hand, the Ao-As group - PETITIONERS have served in
various capacities as directors or officers of the LCP.
The Ao-as group filed SEC-SICD Case No. 3857 for accounting and
damages with prayer for preliminary injunction and appointment of a
MANAGEMENT COMMITTEE. The grounds relied upon for the appointment
of a management committee are:
1. The alleged anomaly concerning the sale of the land and the purchase of
another land, both located in La Trinidad. The La Trinidad Land Transaction,
the proceeds whereof were allegedly unliquidated, was testiIed to by
petitioner Ao-As and Mr. Excelsio Hipe before the SEC-SICD in a hearing
conducted on 11 September 1990.
2. Unliquidated cash advances and unaccounted funds. Petitioners
presented evidence to prove the failure of respondent Batong to liquidate
cash advances and account for P4,000,000 of LCP funds.
3. Purchase of Leyte Land in the name of respondent Saquilayan with LCP
funds. Respondent LCP Vice-President Victorio Y. Saquilayan allegedly
purchased a parcel of land in Albuera, Leyte in his name, using LCP funds.
Respondent Saquilayan subsequently donated to the LCP, and explained
that the purchase in his name was upon advice of LCP's lawyers to comply
with the rulings in Republic of the Philippines v. Hon. Arsenio M. Gonong
and Republic of the Philippines v. Iglesia Ni Cristo.
4. Severance of partner-church relationship between the LCP and the
LCMS. Respondents issued LCP Board Resolution No. LCP-BD-28-90
severing all relations with the Lutheran Church-Missouri Synod (LCMS),
allegedly in violation of LCP Board Resolution No. LCP-BD-33-70 which
stated that "all actions taken by LCP in convention can only be amended,
modified and changed by LCP in convention."
5. Taking of LCP Books of Account . Respondent Batong, accompanied by
members of the LCP Board and about 15 armed security guards allegedly
barged into the premises of the LCP in Old Sta. Mesa, Manila, and removed
all of the official records and documents of the LCP (including the books of
account, official receipts, check and journal vouchers, official papers and
titles to property) and had the same relocated to his residence in Caloocan
City and to the offices of Immanuel Lutheran Church in Malabon.
During the hearings, the Batong group filed an Urgent Motion to Suspend
the Proceedings in view of an amicable settlement between them entitled “A
FORMULA FOR CONCORD”. However, the SEC did not suspend the
proceedings.
Subsequently an order creating a management committee was issued to
undertake the management of the Lutheran Church until such time as the
new BOD shall have been elected.
However, even before the creation of the management committee, the LCP
national convention called by the Batong group had already been called and
held at the Lutheran Hospice, Quezon City.
ISSUE: Whether the Ao-As group is entitled to an accounting and to the
creation of a management committee due to the Batong group's alleged
dissipation and waste of the assets of the LCP?
RULING: NO. The creation of a management committee is not warranted as
shown by the facts of the case.
"It is the general rule that a receiver (or a management committee) will not
be appointed unless it appears that the appointment is necessary either to
prevent fraud, or to save the property from fraud or threatened destruction,
or at least in case of solvent corporation . . . . The burden of proof is a heavy
one which requires a clear showing that an emergency exists. ". . .
Similarly, a receiver (or a management committee) should not be appointed
in an action by a minority stockholder against corporate officers for an
accounting where the corporation is solvent and going concern and a
receiver is not necessary to preserve the corporate property pending the
accounting". Furthermore, a management committee should not be created
when there was an adequate remedy available to private respondents for
the liquidation of unaccounted funds.
The Court of Appeals ruled that the members of the Ao-As group "have not
positively shown that the said funds are unaccounted for," and analyzed the
evidence presented by the Ao-As group to illustrate that the unaccounted
funds were only P1,572.43, "which may be attributable to adjustment errors
but certainly not a case of misappropriation or misuse.
Even without delving into the analysis of the prosecution evidence
concerning the six causes of action and the alleged acts subsequent to
these five causes of action, it is already appropriate for us to rule that the
facts as they appear to us now do not warrant the creation of a management
committee.
Refusal to allow stockholders (or members of a non-stock corporation) to
examine books of the company is not a ground for appointing a receiver (or
creating a management committee) since there are other adequate
remedies, such as a writ of mandamus. Misconduct of corporate directors or
other officers is not a ground for the appointment of a receiver where there
are one or more adequate legal action against the officers, where they are
solvent, or other remedies.
The appointment of a receiver for a going corporation is a last resort
remedy, and should not be employed when another remedy is available.
Relief by receivership is an extraordinary remedy and is never exercised if
there is an adequate remedy at law or if the harm can be prevented by an
injunction or a restraining order. Bad judgment by directors, or even
unauthorized use and misapplication of the company's funds, will not justify
the appointment of a receiver for the corporation if appropriate relief can
otherwise be had.
LINGKOD MANGGAGAWA SA RUBBERWORLD VS. RUBBERWORLD
INC.
G.R. NO. 153882
JANUARY 29, 2007
FACTS: On August 26, 1994, Rubberworld filed with the Department of
Labor and Employment (DOLE) a Notice of Temporary Partial Shutdown
due to severe financial crisis, therein announcing the formal actual company
shutdown to take effect on September 26, 1994. A copy of said notice was
served on the recognized labor union of Rubberworld, the Bisig Pagkakaisa-
NAFLU, the union with which the corporation had a collective bargaining
agreement.
On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It set up a
picket line in front of the premises of Rubberworld and even welded its gate.
As a result, Rubberworld's premises closed prematurely even before the
date set for the start of its temporary partial shutdown. On September 9,
1994, herein petitioner union filed a complaint against Rubberworld and its
Vice Chairperson, Mr. Antonio Yang, for unfair labor practice (ULP), illegal
shutdown, and non-payment of salaries and separation pay. On November
22, 1994, while the aforementioned complaint was pending with Labor
Arbiter Dinopol, Rubberworld filed with the SEC a Petition for Declaration of
a State of Suspension of Payments with Proposed Rehabilitation Plan. The
petition, docketed as SEC Case No. 11-94-4920, was granted by the SEC in
its Order dated December 28, 1994.
Notwithstanding the SEC's aforementioned suspension order and despite
Rubberworld's submission on January 10, 1995 of a Motion to Suspend
Proceedings, Labor Arbiter Dinopol went ahead with the ULP case and
rendered his decision thereon on August 16, 1995, saying in part that the
SEC Order notwithstanding, Labor Arbiters and the National Labor Relations
Commission should not abdicate the jurisdiction which Article 217 of the
Labor Code has conferred upon them subject to the condition that awards, if
any, should be presented to the Management Committee for processing and
payment. The decision further stated that Rubberworld committed ULP and
ordering the respondent to reinstate the petitioners and pay their
backwages. Despite Rubberworlds vigorous opposition, the First Division of
the NLRC, in its Order of January 22, 1996, required the corporation to post
an appeal bond in an amount equivalent to Mr. Atienzas computation, with a
warning that failure to do so shall result in the dismissal of its appeal for non-
perfection.
On February 8, 1999, Rubberworld filed with the Court a Motion to Admit its
Amended Petition for Certiorari and its Supplement, alleging therein that
pursuant to the SEC Order dated December 28, 1994, supra, the
proceedings before the Labor Arbiter should have been suspended. Hence,
since the Labor Arbiter disregarded the SECs suspension order, the
subsequent proceedings before it was null and void.
ISSUES: 1. Whether or not the proceedings before the Labor Arbiter
should have been suspended pursuant to the SEC Order dated December
28, 1994.
2. Whether or not PD 902-A is applicable to labor cases.
RULING: 1. Yes. Given the factual milieu obtaining in this case, it cannot be
said that the decision of the Labor Arbiter, or the decision/dismissal order
and writ of execution issued by the NLRC, could ever attain final and
executory status. The Labor Arbiter completely disregarded and violated
Section 6(c) of Presidential Decree 902-A, as amended, which categorically
mandates the suspension of all actions for claims against a corporation
placed under a management committee by the SEC. Thus, the proceedings
before the Labor Arbiter and the order and writ subsequently issued by the
NLRC are all null and void for having been undertaken or issued in violation
of the SEC suspension Order dated December 28, 1994. As such, the Labor
Arbiters decision, including the dismissal by the NLRC of Rubberworld’s the Labor Arbiters decision of August 16, 1995 was rendered at a time when
appeal, could not have achieved a final and executory status. Acts executed Lingkods complaint against Rubberworld in NLRC-NCR-Case No. 00-09-
against the provisions of mandatory or prohibitory laws shall be void, except 06637-94 ought to have been suspended. In short, at the time the SEC
when the law itself authorizes their validity. The Labor Arbiter's decision in issued its suspension Order of December 28, 1994, the proceedings before
this case is void ab initio, and therefore, non-existent. the Labor Arbiter were still very much pending. As such, nofinal and
executory decision could have validly emanated therefrom. Like the CA, we
2. Yes. The law is clear: upon the creation of a management committee or do not see any reason why the doctrine of stare decisis will not apply to this
the appointment of a rehabilitation receiver, all claims for actions shall be case.
suspended accordingly. No exception in favor of labor claims is mentioned in
the law. Since the law makes no distinction or exemptions, neither should
this Court. Ubi lex non distinguit nec nos distinguere debemos. Allowing
labor cases to proceed clearly defeats the purpose of the automatic stay and
severely encumbers the management committee's time and resources. The
said committee would need to defend against these suits, to the detriment of
its primary and urgent duty to work towards rehabilitating the corporation
and making it viable again. To rule otherwise would open the floodgates to
other similarly situated claimants and forestall if not defeat the rescue
efforts. Besides, even if the NLRC awards the claims of private respondents,
its ruling could not be enforced as long as the petitioner is under the
management committee.
Petitioners argue, however, that the doctrines laid down in the two aforecited
cases cannot be made to apply to the instant controversy because the SEC
order therein only mandates that all pending cases against Rubberworld
Philippines, Inc. should be deemed suspended. Petitioners contend that the
decision of the Labor Arbiter in the present case, as well the order of
dismissal and writ of execution issued by NLRC, have become final and
executory by reason of Rubberworlds failure to perfect its appeal by not
upgrading or completing the required cash or surety bond as ordained by the
NLRC. Petitioners thus conclude that the doctrine of stare decisis cannot
apply to the instant case. Petitioners are in error. It is incontrovertible that
the denial of Rubberworlds motion to suspend proceedings in the principal
case was incorporated in the decision of the Labor Arbiter. Obviously, then,
NEGROS NAVIGATION CO., INC., vs. COURT OF APPEALS, SPECIAL
TWELFTH DIVISION AND TSUNEISHI HEAVY INDUSTRIES (CEBU), INC.
G.R. No. 163156 December 10, 2008
x---------------------------------------------------x
TSUNEISHI HEAVY INDUSTRIES (CEBU), INC. Vs. NEGROS
NAVIGATION CO., INC., SULFICIO O. TAGUD, JR., AND THE
REHABILITATION RECEIVER FOR NEGROS NAVIGATION CO., INC.
G.R. No. 166845 December 10, 2008
FACTS: NNC, a shipping company that is primarily engaged in the business
of transporting through shipping vessels, passengers and cargoes at various
ports of call in the country.THI is engaged in the business of shipbuilding
and repair. NNC engaged the services of THI for the repair of its vessels.
THI filed a case for sum of money and damages with prayer for issuance of
writ of attachment against NNC before the Cebu RTC. The action is based
on the unpaid services for the repair of NNC’s vessels,
Cebu RTC issued an Order granting the issuance of a writ of preliminary
attachment against the properties of NNC since based on the affidavit in
support of the application for the writ, NNC committed fraud in contracting
the debt or in incurring the obligation upon which the action was brought.
Sheriff Rogelio T. Pinar levied on one of the vessels of NNC, the M/V St.
Peter the Apostle.
NNC filed a Petition for Corporate Rehabilitation with Prayer for Suspension
of Payments with the Manila RTC. Upon the issuance of the stay order by
the Manila RTC, NNC filed a Manifestation and Motion to Suspend
Proceedings and to Lift Preliminary Attachment with the Cebu RTC.
Cebu RTC issued an Order for the arrest of the vessels of NNC in the in rem
aspect of the case.
NNC filed a Motion to Suspend Proceedings and to Lift the Writ of
Attachment and Arrest Orders before the Cebu RTC by virtue of the Order of
the Manila RTC. However, the CA issued the Resolution assailed in what is
before this Court as G.R. No. 163156, wherein the appellate court
temporarily restrained the implementation of the Orders of the Manila. The
CA issued the Decision assailed in what is now G.R. No. 166845, denying
the petition of THI that sought to annul and enjoin the enforcement and
implementation of the Orders of the Manila RTC.
ISSUES: 1. Whether or not the CA Decision erred in ruling that neither THI’s
enforcement/the efficacy of its maritime liens against the Vessels nor the
Admiralty Court’s jurisdiction over those liens is impaired by the Stay Orders
issued by the Manila RTC? NO
2. Whether or not THI’s maritime liens are covered by, and are subject to the
Manila RTC’s jurisdiction in, [NNC’s] rehabilitation proceedings? NO
HELD: 1. THI maintains that its maritime liens against the vessels of NNC
were impaired by the issuance of the stay order and argues that the
issuance of the stay order by the Manila RTC, acting as rehabilitation court,
was erroneous considering that maritime liens cannot be enforced, divested,
and otherwise affected or dealt with except by an admiralty court in an
admiralty proceeding in rem.
The argument of THI is misplaced. There is no conflict as to which law
should apply to the case at bench. The Court agrees that PD 1521 is the
governing law concerning its maritime lien for the services it rendered to
NNC. However, when NNC filed a petition for corporate rehabilitation and
suspension of payments, and the Manila RTC found that the petition was
sufficient in form and in substance and appointed the rehabilitation receiver,
the admiralty proceeding was appropriately suspended in accordance with
Section 6 of the Interim Rules on Corporate Rehabilitation.
Rehabilitation contemplates 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 of rehabilitation proceedings
is precisely to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings. The rehabilitation of
a financially distressed corporation benefits its employees, creditors,
stockholders and, in a larger sense, the general public.
The governing law concerning rehabilitation and suspension of actions for
claims against corporations is PD 902-A, as amended. Republic Act No.
8799 (RA 8799), otherwise known as The Securities Regulation Code,
amended Section 5 of PD 902-A, thereby transferring to the Regional Trial
Courts the jurisdiction of the Securities and Exchange Commission (SEC)
over cases, among others, involving petitions of corporations, partnerships
or associations to be declared in the state of suspension of payments where
the corporation, partnership or association possesses property to cover all
its debts but foresees the impossibility of meeting them when they
respectively fall due, or where the corporation, partnership or association
has no sufficient assets to cover its liabilities, but is under the management
of a rehabilitation receiver or a management committee.
The Court adopted the Interim Rules of Procedure on Corporate
Rehabilitation on December 15, 2000, and these rules apply to petitions for
rehabilitation filed by corporations, partnerships, and associations pursuant
to PD 902-A.
PD 902-A mandates that upon appointment of a management committee,
rehabilitation receiver, board or body, all actions for claims against
corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be
suspended. PD 902-A does not make any distinction as to what claims are
covered by the suspension of actions for claims against corporations under
rehabilitation. No exception is made therein in favor of maritime claims.
Thus, since the law does not make any exemptions or distinctions, neither
should we. Ubi lex non distinguit nec nos distinguere debemos.
The justification for the suspension of actions or claims, without distinction,
pending rehabilitation proceedings is to enable the management committee
or rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extra-judicial interference that might unduly hinder or prevent the
"rescue" of the debtor company. To allow such other actions to continue
would only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward its
restructuring and rehabilitation.
It is undisputed that THI holds a preferred maritime lien over NNC’s assets
by virtue of THI’s unpaid services. The issuance of the stay order by the
rehabilitation court does not impair or in any way diminish THI’s preferred
status as a creditor of NNC. The enforcement of its claim through court
action was merely suspended to give way to the speedy and effective
rehabilitation of the distressed shipping company. Upon termination of the
rehabilitation proceedings or in the event of the bankruptcy and consequent
dissolution of the company, THI can still enforce its preferred claim upon
NNC.
PD 902-A was designed not only to salvage an ailing corporation but also to
protect the interest of investors, creditors and the general public. Section 6
(d) of PD 902-A provides: "the management committee or rehabilitation
receiver, board or body shall have the power to take custody of, and control
over, all the existing assets and property of such entities under
management; to evaluate the existing assets and liabilities, earnings and
operations of such corporations, partnerships or other associations; to
determine the best way to salvage and protect the interest of the investors
and creditors; to study, review and evaluate the feasibility of continuing
operations and restructure and rehabilitate such entities if determined to be
feasible by the [court]. It shall report and be responsible to the [court] until
dissolved by order of the [court]: Provided, however, That the [court] may, on
the basis of the findings and recommendation of the management
committee, or rehabilitation receiver, board or body, or on its own findings,
determine that the continuance in business of such corporation or entity
would not be feasible or profitable nor work to the best interest of the
stockholders, parties-litigants, creditors, or the general public, order the
dissolution of such corporation entity and its remaining assets liquidated
accordingly. The management committee or rehabilitation receiver, board or
body 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 by-laws to
the contrary."
When a distressed company is placed under rehabilitation, the appointment
of a management committee follows to avoid collusion between the previous
management and creditors it might favor, to the prejudice of the other
creditors. The stay order is effective on all creditors of the corporation
without distinction, whether secured or unsecured. All assets of a
corporation under rehabilitation receivership are held in trust for the equal
benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment, execution or
otherwise. As between the creditors, the key phrase is equality in equity.
Once the corporation threatened by bankruptcy is taken over by a receiver,
all the creditors ought to stand on equal footing. Not any one of them should
be paid ahead of the others. This is precisely the reason for suspending all
pending claims against the corporation under receivership.
Rizal Commercial Banking Corporation v. Intermediate Appellate Court
enumerates the guidelines in the treatment of claims involving corporations
undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are
pending before any court, tribunal, or board, without distinction as to whether
or not a creditor is secured or unsecured, shall be suspended effective upon
the appointment of a management committee, rehabilitation receiver, board,
or body in accordance with the provisions of Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment
of a management committee, rehabilitation receiver, board, or body. In the
event that the assets of the corporation, partnership, or association are
finally liquidated, however, secured and preferred credits under the
applicable provisions of the Civil Code will definitely have preference over
unsecured ones.
2. THI argues that the Manila RTC, in granting the stay order, divested the
Cebu RTC, which is acting as an admiralty court, of its jurisdiction over the
maritime case of THI. It insists that its maritime liens over the vessels of
NNC must be upheld, notwithstanding NNC’s rehabilitation proceedings. It
stresses that in in rem proceedings to enforce maritime liens, the vessels
alone may be impleaded as defendants. The vessels themselves answer for
the liens, and lienholders like THI have the substantive statutory right under
PD 1521 to insist on the vessels’ responsibility because an action in rem is a
proceeding against the ship itself. Furthermore, it emphasizes that a
maritime lien is not affected by bankruptcy or reorganization.
True enough, a maritime lien is not affected by bankruptcy or reorganization.
However, in the instant case, we are not dealing with bankruptcy or
reorganization; rather, we are confronted with NNC’s rehabilitation. If we
follow the argument of THI and allow the continued enforcement of its claims
against NNC, we would, in effect, violate provisions of PD 902-A. To
reiterate, the rationale behind PD 902-A is to effect a feasible and viable
rehabilitation of an ailing corporation.
There is no conflict between PD 1521 and PD 902-A. The Manila RTC
acting as a rehabilitation court merely suspended the proceedings in the
admiralty case in the Cebu RTC. It did not divest the Cebu RTC of its
jurisdiction over the maritime claims of THI against NNC. The preferred
maritime lien of THI can still be enforced upon the termination of the
rehabilitation proceedings, or if it such be unsuccessful, upon the dissolution
of the corporation.
Court Decision: G.R. No. 163156, the petition is DISMISSED for being moot
and academic and G.R. No. 166845, the petition is DENIED for lack of merit.
GARCIA VS. PAL
G.R. NO. 164856 AUGUST 29, 2007
QUISAMBING, J:
FACTS: Alberto J. Dumago and Juanito A. Garcia were employed by
respondent Philippine Airlines, Inc. (PAL) as Aircraft Furnishers Master "C"
and Aircraft Inspector, respectively. They were assigned in the PAL
Technical Center. On July 24, 1995, a combined team of the PAL Security
and National Bureau of Investigation (NBI) Narcotics Operatives raided the
Toolroom Section — Plant Equipment Maintenance Division (PEMD) of the
PAL Technical Center. They found petitioners, with four others, near the said
section at that time. When the PAL Security searched the section, they
found shabu paraphernalia inside the company-issued locker of Ronaldo
Broas who was also within the vicinity. Petitioners vehemently denied the
allegations and challenged PAL to show proof that they were indeed "caught
in the act of sniffing shabu.”
On October 9, 1995, petitioners were dismissed for violation of Chapter II,
Section 6, Article 46 (Violation of Law/Government Regulations) and
Chapter II, Section 6, Article 48 (Prohibited Drugs) of the PAL Code of
Discipline. Both simultaneously filed a case for illegal dismissal and
damages.
In the meantime, the Securities and Exchange Commission (SEC) placed
PAL under an Interim Rehabilitation Receiver due to severe financial losses.
LA: Decided in favour of Alberto J. Dumago and Juanito A. Garcia and
ordered PAL to pay the former back wages, 13th month pay, moral and
exemplary damages, and attorney’s fees. Moreover, PAL is directed to
immediately comply with the reinstatement aspect of this Decision. However,
in the event that reinstatement is no longer feasible, respondent[s] are
hereby ordered, in lieu thereof, to pay unto the complainants their separation
pay computed at one month for [e]very year of service.
Meanwhile, the SEC replaced the Interim Rehabilitation Receiver with a
Permanent Rehabilitation Receiver.
NLRC: Reversed LA decision and dismissed the case for lack of merit.
Motion for reconsideration was denied. Judgement became final. Writ of
execution was issued.
ISSUE: In the light of new developments concerning PAL's rehabilitation,
are petitioners entitled to execution of the Labor Arbiter's order of
reinstatement even if PAL is under receivership?
HELD: No, petirioners are not entitled to execution of LA’s order of
reinstatement. Worth stressing, upon appointment by the SEC of a
rehabilitation receiver, all actions for claims against the corporation pending
before any court, tribunal or board shall ipso jure be suspended. The
purpose of the automatic stay of all pending actions for claims is to enable
the rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extra-judicial interference that might unduly hinder or prevent the
rescue of the corporation. More importantly, the suspension of all actions for
claims against the corporation embraces all phases of the suit, be it before
the trial court or any tribunal or before this Court. No other action may be
taken, including the rendition of judgment during the state of suspension. It
must be stressed that what are automatically stayed or suspended are the
proceedings of a suit and not just the payment of claims during the
execution stage after the case had become final and executory.
Furthermore, the actions that are suspended cover all claims against the
corporation whether for damages founded on a breach of contract of
carriage, labor cases, collection suits or any other claims of a pecuniary
nature. No exception in favor of labor claims is mentioned in the law.

This Court's adherence to the above-stated rule has been resolute and
steadfast as evidenced by its oft-repeated application in a plethora of cases
involving PAL, the most recent of which is Philippine Airlines, Inc. v. Zamora.

Since petitioners' claim against PAL is a money claim for their wages during
the pendency of PAL's appeal to the NLRC, the same should have been
suspended pending the rehabilitation proceedings. The Labor Arbiter, the
NLRC, as well as the Court of Appeals should have abstained from resolving
petitioners' case for illegal dismissal and should instead have directed them
to lodge their claim before PAL's receiver.

However, to still require petitioners at this time to re-file their labor claim
against PAL under the peculiar circumstances of the case — that their
dismissal was eventually held valid with only the matter of reinstatement
pending appeal being the issue — this Court deems it legally expedient to
suspend the proceedings in this case.
SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE,
vs. ASB DEVELOPMENT CORPORATION
FACTS: On March 7, 2001, spouses Eduardo and Fidela Sobrejuanite
(Sobrejuanite) filed a Complaint for rescission of contract, refund of
payments and damages, against ASB Development Corporation (ASBDC)
before the Housing and Land Use Regulatory Board (HLURB).
nSobrejuanite alleged that they entered into a Contract to Sell with ASBDC
over a condominium unit and a parking space in the BSA Twin Tower-B
Condominum located at Bank Drive, Ortigas Center, Mandaluyong City.
They averred that despite full payment and demands, ASBDC failed to
deliver the property on or before December 1999 as agreed. They prayed
for the rescission of the contract; refund of payments amounting to
P2,674,637.10; payment of moral and exemplary damages, attorney’s fees,
litigation expenses, appearance fee and costs of the suit. ASBDC filed a
motion to dismiss or suspend proceedings in view of the approval by the
Securities and Exchange Commission (SEC) on April 26, 2001 of the
rehabilitation plan of ASB Group of Companies, which includes ASBDC, and
the appointment of a rehabilitation receiver. The HLURB arbiter however
denied the motion and ordered the continuation of the proceedings.
ISSUE: (1) Whether claim of spouses Sobrejuanite lies with the jurisdiction
of SEC.
(2) Whether the SEC’s approval of the corporate rehabilitation plan
has the effect of suspending the proceeding before HLURB.
HELD: (1) Yes. As provided under Section 6(c) of PD No. 902-A, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or
body shall be suspended accordingly. The afore cited law defines claim as
the debts or demands of a pecuniary nature. In settled jurisprudence, claim
means actions involving monetary considerations or all claims or demands,
of whatever nature or character against a debtor or its property, whether for
money or otherwise. It is evident that the spouses claim falls within the
definition of PD 902-A and settled jurisprudence. Hence, jurisdiction, as
correctly held by the Court of Appeals, lies with SEC and not HLURB. The
ratio behind is "equality is equity." When a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors should stand on
equal footing. Not anyone of them should be given any preference by paying
one or some of them ahead of the others. This is precisely the reason for the
suspension of all pending claims against the corporation under receivership.
Instead of creditors vexing the courts with suits against the distressed firm,
they are directed to file their claims with the receiver who is a duly appointed
officer of the SEC.
(2) Yes. Section 6(c) of PD No. 902-A empowers the SEC: “c) To appoint
one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission … whenever
necessary in order to preserve the rights of the parties-litigants and/or
protect the interest of the investing public and creditors: … Provided, finally,
That upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be
suspended accordingly.”
The purpose for the suspension of the proceedings is to prevent a creditor
from obtaining an advantage or preference over another and to protect and
preserve the rights of party litigants as well as the interest of the investing
public or creditors. Such suspension is intended to give enough breathing
space for the management committee or rehabilitation receiver to make the
business viable again, without having to divert attention and resources to
litigations in various fora. The suspension would enable the management
committee or rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extra-judicial interference that might unduly hinder or
prevent the “rescue” of the debtor company. To allow such other action to
continue would only add to the burden of the management committee or
rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its
restructuring and rehabilitation.
JUANITO A. GARCIA and ALBERTO J. DUMAGO, Petitioners, vs
PHILIPPINE AIRLINES, INC., Respondent.
G.R. No. 164856 January 20, 2009
CARPIO MORALES, J.:
FACTS: An administrative charge was filed by PAL against its employees-
herein petitioners after they were allegedly caught in the act of sniffing
shabu when a team of company security personnel and law enforcers raided
their department.
PAL dismissed petitioners for violation of PAL Code of Discipline, prompting
the latter to file a complaint for illegal dismissal and damages to which the
LA ruled in their favor. PAL was ordered to reinstate petitioners.
Prior to the promulgation of the LA decision, the SEC placed PAL, which
was suffering from severe financial losses, under an Interim Rehabilitation
Receiver, who was subsequently replaced by a Permanent Rehabilitation
Receiver.
PAL appealed to the NLRC. NLRC reversed the LA decision. On MR, it was
denied.
Subsequently, the LA issued a Writ of Execution respecting the
reinstatement aspect of its decision. It also issued a Notice of Garnishment.
PAL moved to quash the Writ and to lift the Notice while petitioners moved
to release the garnished amount.
PAL filed an Urgent Petition for Injunction with the NLRC which affirmed the
validity of the Writ and the Notice issued by the LA but suspended and
referred the action to the Rehabilitation Receiver for appropriate action.
PAL elevated the case to the appellate court which nullified the NLRC
Resolutions on two grounds: (1) a subsequent finding of a valid dismissal
removes the basis for implementing the reinstatement aspect of a labor
arbiters decision; and (2) the impossibility to comply with the reinstatement
order due to corporate rehabilitation provides a reasonable justification for
the failure to exercise the options under Article 223 of the Labor Code.
Hence, this petition.
SC: Partially granted the present petition and effectively reinstated the
NLRC Resolutions insofar as it suspended the proceedings. Since
petitioners' claim against PAL is a money claim for their wages during the
pendency of PAL's appeal to the NLRC, the same should have been
suspended pending the rehabilitation proceedings. The LA, the NLRC, as
well as the CA should have abstained from resolving petitioners case for
illegal dismissal and should instead have directed them to lodge their claim
before PAL's receiver. PAL was directed to quarterly update the Court as to
the status of its ongoing rehabilitation.
Later on, PAL, by Manifestation and Compliance, informed the Court that the
SEC granted its request to exit from rehabilitation proceedings.
In view of the termination of the rehabilitation proceedings, the Court now
proceeds to resolve the remaining issue for consideration.
ISSUE: W/N petitioners may collect their wages during the period between
the LA order of reinstatement pending appeal and the NLRC decision
overturning that of the LA, now that respondent has exited from rehabilitation
proceedings
RULING: NO. The prevailing principle is that even if the order of
reinstatement of the LA is reversed on appeal, it is obligatory on the part of
the employer to reinstate and pay the wages of the dismissed employee
during the period of appeal until reversal by the higher court.
The LA's order of reinstatement is immediately executory and the employer
has to either re-admit them to work under the same terms and conditions
prevailing prior to their dismissal, or to reinstate them in the payroll, and that
failing to exercise the options in the alternative, employer must pay the
employees salaries.
Nonetheless, the issue in this case is resolved in the negative on the
strength of that the peculiar predicament of a corporate rehabilitation
rendered it impossible for PAL to exercise its option under the
circumstances.
After the LA's decision is reversed by a higher tribunal, the employee may
be barred from collecting the accrued wages, if it is shown that the delay in
enforcing the reinstatement pending appeal was without fault on the part of
the employer.
The test is two-fold: (1) there must be actual delay or the fact that the order
of reinstatement pending appeal was not executed prior to its reversal; and
(2) the delay must not be due to the employers unjustified act or omission.
In the case at bar, petitioners exerted efforts to execute the LA order of
reinstatement until they were able to secure a writ of execution after the
reversal by the NLRC of the LA decision. Technically, there was still actual
delay which brings to the question of whether the delay was due to
respondents unjustified act or omission.
It is apparent that there was inaction on the part of respondent to reinstate
them, but whether such omission was justified depends on the onset of the
exigency of corporate rehabilitation.
It is settled that upon appointment by the SEC of a rehabilitation receiver, all
actions for claims before any court, tribunal or board against the corporation
shall ipso jure be suspended. Here, during the pendency of petitioners'
complaint before the LA, the SEC placed PAL under an Interim
Rehabilitation Receiver. After the LA rendered its decision, the SEC
replaced the Interim Rehabilitation Receiver with a Permanent Rehabilitation
Receiver.
Case law recognizes that unless there is a restraining order, the
implementation of the order of reinstatement is ministerial and mandatory.
This injunction or suspension of claims by legislative fiat partakes of the
nature of a restraining order that constitutes a legal justification for
respondent's non-compliance with the reinstatement order. Respondent's
failure to exercise the alternative options of actual reinstatement and payroll
reinstatement was thus justified. Such being the case, respondents
obligation to pay the salaries pending appeal, as the normal effect of the
non-exercise of the options, did not attach.
While reinstatement pending appeal aims to avert the continuing threat or
danger to the survival or even the life of the dismissed employee and his
family, it does not contemplate the period when the employer-corporation
itself is similarly in a judicially monitored state of being resuscitated in order
to survive.
The parallelism between a judicial order of corporation rehabilitation as a
justification for the non-exercise of its options, on the one hand, and a claim
of actual and imminent substantial losses as ground for retrenchment, on the
other hand, stops at the red line on the financial statements. Unlike the
ground of substantial losses contemplated in a retrenchment case, the state
of corporate rehabilitation was judicially pre-determined by a competent
court and not formulated for the first time in this case by respondent.
There are legal effects arising from a judicial order placing a corporation
under rehabilitation. Respondent was, during the period material to the case,
effectively deprived of the alternative choices under Article 223 of the Labor
Code, not only by virtue of the statutory injunction but also in view of the
interim relinquishment of management control to give way to the full exercise
of the powers of the rehabilitation receiver. Had there been no need to
rehabilitate, respondent may have opted for actual physical reinstatement
pending appeal to optimize the utilization of resources. Then again, though
the management may think this wise, the rehabilitation receiver may decide
otherwise, not to mention the subsistence of the injunction on claims.

In sum, the obligation to pay the employees salaries upon the employer's
failure to exercise the alternative options under Article 223 of the Labor
Code is not a hard and fast rule, considering the inherent constraints of
corporate rehabilitation.
G.R. No. 160732 June 21, 2004
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM,
petitioner,
vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the
Regional Trial Court of Quezon City, Branch 90 and Maynilad Water
Services, Inc., respondents
FACTS: On February 21, 1997, MWSS granted Maynilad under a
Concession Agreement a twenty-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and
sewerage services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates agreed
upon in said agreement5 which, among other things, consisted of payments
of petitioner’s mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the
Concession Agreement, Maynilad was required under Section 6.9 of said
contract to put up a bond, bank guarantee or other security acceptable to
MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for
a three-year facility with a number of foreign banks, led by Citicorp
International Limited, for the issuance of an Irrevocable Standby Letter of
Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and
prompt performance of Maynilad’s obligations to MWSS as aforestated.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of
Event of Termination, claiming that MWSS failed to comply with its
obligations under the Concession Agreement and Amendment No. 1
regarding the adjustment mechanism that would cover Maynilad’s foreign
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter
was eventually brought before the Appeals Panel on January 7, 2003 by
MWSS.10 On November 7, 2003, the Appeals Panel ruled that there was no
Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition
for rehabilitation before the court a quo which resulted in the issuance of the
Stay Order of November 17, 2003 and the disputed Order of November 27,
2003.
Respondent Maynilad seeks to refute this argument by alleging that:
- what is relevant is not whether the performance bond or assets of the
issuing banks are part of the estate of respondent Maynilad but whether the
act of petitioner in commencing the process for the payment by the banks of
US$98 million out of the US$120 million performance bond is covered
and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated
November 17, 2003;
- the jurisdiction of public respondent extends not only to the assets of
respondent Maynilad but also over persons and assets of "all those affected
by the proceedings x x x upon publication of the notice of
commencement;15" and
- the obligations under the Standby Letter of Credit are not solidary and are
not exempt from the coverage of the stay order.
ISSUE: WON the rehabilitation court sitting as such, act in excess of its
authority or jurisdiction when it enjoined herein petitioner from seeking the
payment of the concession fees from the banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of respondent
Maynilad?
HELD: NO. The public respondent relied on Sec. 1, Rule 3 of the Interim
Rules on Corporate Rehabilitation to support its jurisdiction over the
Irrevocable Standby Letter of Credit and the banks that issued it. The
section reads in part "that jurisdiction over those affected by the proceedings
is considered acquired upon the publication of the notice of commencement
of proceedings in a newspaper of general circulation" and goes further to
define rehabilitation as an in rem proceeding. This provision is a logical
consequence of the in rem nature of the proceedings, where jurisdiction is
acquired by publication and where it is necessary that the assets of the
debtor come within the court’s jurisdiction to secure the same for the benefit
of creditors. The reference to "all those affected by the proceedings" covers
creditors or such other persons or entities holding assets belonging to the
debtor under rehabilitation which should be reflected in its audited financial
statements. The banks do not hold any assets of respondent Maynilad that
would be material to the rehabilitation proceedings nor is Maynilad liable to
the banks at this point.
Respondent Maynilad’s Financial Statement as of December 31, 2001 and
2002 do not show the Irrevocable Standby Letter of Credit as part of its
assets or liabilities, and by respondent Maynilad’s own admission it is not. In
issuing the clarificatory order of November 27, 2003, enjoining petitioner
from claiming from an asset that did not belong to the debtor and over which
it did not acquire jurisdiction, the rehabilitation court acted in excess of its
jurisdiction.
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance of
certain terms and conditions of the Concession Agreement, particularly the
payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only those
claims against guarantors and sureties who are not solidarily liable with the
debtor. Respondent Maynilad’s claim that the banks are not solidarily liable
with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals16 that the
concept of guarantee vis-à-vis the concept of an irrevocable letter of credit
are inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it
was opened and the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On
the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation.
Letters of credit were developed for the purpose of insuring to a seller
payment of a definite amount upon the presentation of documents18 and is
thus a commitment by the issuer that the party in whose favor it is issued
and who can collect upon it will have his credit against the applicant of the
letter, duly paid in the amount specified in the letter.19 They are in effect
absolute undertakings to pay the money advanced or the amount for which
credit is given on the faith of the instrument. The prohibition under Sec 6 (b)
of Rule 4 of the Interim Rules does not apply to herein petitioner as the
prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor. The
participating banks’ obligation are solidary with respondent Maynilad in that
it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtor’s assets. These are the
same characteristics of a surety or solidary obligor.