In a ruling that underscores the importance of respecting corporate legal structures, the Supreme Court held that a corporation’s rehabilitation cannot be based on the assets of its stockholders. Furthermore, the Court clarified that a stay order in corporate rehabilitation proceedings does not suspend foreclosure actions against properties mortgaged by third parties to secure the corporation’s debts. This means creditors can still pursue foreclosure on these properties, even during rehabilitation. These principles ensure that creditors’ rights are protected and that rehabilitation efforts are focused on the actual assets and liabilities of the corporation itself.

The Chua Family’s Complex: Can Corporate Debts Be Dodged Through Rehabilitation?

The case revolves around Situs Development Corporation, Daily Supermarket, Inc., and Color Lithographic Press, Inc., all owned by the Chua family. To finance the Metrolane Complex, the corporations obtained loans from several banks, with the loans secured by real estate mortgages over properties owned by Tony Chua and his wife, Siok Lu Chua. When the corporations faced financial difficulties, they filed a petition for rehabilitation, seeking a stay order to prevent creditors from foreclosing on the mortgaged properties. The creditor banks, however, argued that the stay order should not apply to properties owned by the Chua spouses, as these were not corporate assets. The Regional Trial Court initially approved the rehabilitation plan, but the Court of Appeals reversed this decision, leading to the Supreme Court case.

At the heart of the matter is the fundamental principle of separate juridical personality. This principle dictates that a corporation is a distinct legal entity, separate and apart from its stockholders, officers, and directors. Because of this, the assets and liabilities of the corporation are not those of its owners, and vice versa. The Supreme Court has consistently upheld this doctrine, recognizing its importance in maintaining the integrity of corporate law. In the case of Siochi Fishery Enterprises, Inc. v. Bank of the Philippine Islands, the Supreme Court reiterated this principle, emphasizing the independence of a corporation from its owners.

Building on this principle, the Supreme Court found that the properties mortgaged to secure the loans were owned by the Chua spouses, not by the corporations themselves. While the properties were used as collateral for the corporate debts, they remained under the ownership of the Chua spouses. The court emphasized that “when a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not parted with,” citing Sps. Lee v. Bangkok Bank Public Co., Ltd. Thus, these properties could not be considered part of the corporations’ assets for the purpose of rehabilitation. This distinction is crucial because it prevents corporations from using the personal assets of their owners to artificially inflate their asset base during rehabilitation proceedings.

The Court also addressed the scope of the stay order, which is a key component of corporate rehabilitation. The stay order suspends all actions or claims against the debtor corporation, allowing it time to reorganize and restructure its finances. The Interim Rules of Procedure on Corporate Rehabilitation specify that a stay order covers the “enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor.” The critical issue here is whether the foreclosure proceedings against the Chua spouses’ properties constituted a claim against the debtor corporations.

The Supreme Court ruled that the stay order did not apply to the foreclosure proceedings because the claims were directed against the Chua spouses, not against the corporations themselves. The spouses acted as third-party mortgagors, offering their properties as security for the debts of the corporations. This arrangement is akin to an accommodation mortgage, where a party mortgages their property to secure the debt of another. The Court cited Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc., where it was held that a stay order does not suspend the foreclosure of accommodation mortgages. The rationale behind this is that the stay order is intended to protect the debtor corporation’s assets, not to shield third parties who have provided security for the corporation’s debts.

Moreover, even if the stay order were applicable, the Court noted that the foreclosure proceedings had already commenced before the stay order was issued. The auction sales for the properties mortgaged to Allied Bank and Metrobank took place before the corporations filed their petition for rehabilitation. In Rizal Commercial Banking Corporation v. Intermediate Appellate Court and BF Homes, Inc., the Supreme Court held that the operative act that suspends all actions or claims against a distressed corporation is the appointment of a management committee, rehabilitation receiver, board or body. Since the auction sales occurred before the appointment of the Rehabilitation Receiver, the execution of the Certificate of Sale could not be suspended.

Finally, the Court dismissed the petitioners’ claim that they had a right to redeem the credit transferred by Metrobank to Cameron Granville II Asset Management, Inc. by reimbursing the transferee. The petitioners relied on Section 13 of the SPV Act of 2002, in conjunction with Art. 1634 of the Civil Code, which provides a debtor with the right to extinguish a credit in litigation by reimbursing the assignee. However, the Court found that this issue was raised belatedly and was not properly threshed out in the proceedings below. Furthermore, the credit owed by the corporations to Metrobank had already been extinguished when the bank foreclosed on the mortgaged property. What was transferred to Cameron was ownership of the foreclosed property, not a credit in litigation.

Furthermore, Article 1634 of the Civil Code applies to credits in litigation; it does not extend to real properties acquired by a financial institution. The court then cited R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002, particularly Sec. 3 (h) and (i), that what was transferred to Cameron was more properly a real property acquired by a financial institution in settlement of a loan (ROPOA). The Court also emphasized that the issuance of a Certificate of Sale should not have been restrained, as the rehabilitation court lacked jurisdiction to suspend foreclosure proceedings over a third-party mortgage.

FAQs

What was the key issue in this case?	The central issue was whether a stay order in corporate rehabilitation proceedings could prevent the foreclosure of properties mortgaged by third parties to secure the corporation’s debts.
Did the Supreme Court uphold the rehabilitation plan?	No, the Supreme Court denied the rehabilitation plan, ruling that the lower courts erred in including the assets of the shareholders as part of the assets of the corporation.
What is the principle of separate juridical personality?	This principle means that a corporation is a distinct legal entity from its stockholders, with its own assets and liabilities, separate from those of its owners.
What is a stay order in corporate rehabilitation?	A stay order is a court order that suspends all actions and claims against a debtor corporation to give it time to reorganize and restructure its finances.
What is an accommodation mortgage?	An accommodation mortgage is when a party mortgages their property to secure the debt of another, acting as a third-party mortgagor.
Does a stay order prevent the foreclosure of accommodation mortgages?	No, the Supreme Court has ruled that a stay order does not prevent the foreclosure of accommodation mortgages, as the stay order only protects the debtor corporation’s assets.
What is an NPL as it pertains to this case?	Non-Performing Loans or NPLs refers to loans and receivables such as mortgage loans, unsecured loans, consumption loans, trade receivables, lease receivables, credit card receivables and all registered and unregistered security and collateral instruments, including but not limited to, real estate mortgages, chattel mortgages, pledges, and antichresis, whose principal and/or interest have remained unpaid for at least one hundred eighty (180) days after they have become past due or any of the events of default under the loan agreement has occurred.
What is a ROPOA?	ROPOAs refers to real and other properties owned or acquired by an [financial institution] in settlement of loans and receivables, including real properties, shares of stocks, and chattels formerly constituting collaterals for secured loans which have been acquired by way of dation in payment (dacion en pago) or judicial or extra-judicial foreclosure or execution of judgment.
Can a debtor redeem a credit transferred by a bank to a special purpose vehicle (SPV) by reimbursing the SPV?	The Court ruled that since the obligation was already extinguished and foreclosed, what was transferred to the SPV was the real property already.

This case highlights the importance of adhering to the principle of separate juridical personality and respecting the rights of creditors in corporate rehabilitation proceedings. The ruling reinforces the idea that rehabilitation should be based on the actual assets and liabilities of the corporation and not on the personal assets of its owners or third parties. It also clarifies the scope of stay orders, ensuring that they do not unduly prejudice the rights of creditors who have obtained security for corporate debts.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Situs Development Corporation, Daily Supermarket, Inc. And Color Lithographic Press, Inc., Petitioners, vs. Asiatrust Bank, Allied Banking Corporation, Metropolitan Bank And Trust Company, And Cameron Granville II Asset Management, Inc. (Cameron), Respondents., G.R. No. 180036, July 25, 2012