Protecting Secured Creditors in Corporate Rehabilitation: No Forced Dacion en Pago

TLDR: The Supreme Court clarifies that while corporate rehabilitation proceedings in the Philippines can suspend actions against a distressed company to facilitate its recovery, they cannot force secured creditors to accept disadvantageous payment terms like a dacion en pago or waive accrued interests and penalties without mutual agreement. Secured creditors retain their preferential rights even during rehabilitation.

G.R. NO. 166197, February 27, 2007

INTRODUCTION

Imagine a scenario where a bank, after lending a substantial sum to a real estate company secured by valuable properties, suddenly finds itself unable to enforce its loan agreements. This isn’t a hypothetical situation; it’s the reality faced by creditors when debtor companies undergo corporate rehabilitation in the Philippines. The process, designed to rescue financially struggling businesses, can sometimes seem to tip the scales against creditors. The Supreme Court case of Metropolitan Bank & Trust Company vs. ASB Holdings, Inc. provides crucial insights into balancing the interests of distressed corporations and their secured creditors during rehabilitation. At the heart of the dispute was whether a rehabilitation plan could compel a bank to accept a dacion en pago (payment in kind) arrangement and waive interests, potentially impairing the bank’s contractual rights. This case delves into the extent of the Securities and Exchange Commission’s (SEC) power in rehabilitation proceedings and the constitutional limits on contract impairment.

LEGAL CONTEXT: CORPORATE REHABILITATION AND P.D. 902-A

Philippine corporate rehabilitation is governed primarily by Presidential Decree No. 902-A (P.D. 902-A), enacted to reorganize and rehabilitate distressed corporations to ensure their continued viability and benefit stakeholders. This law, at the time of this case, empowered the SEC to take charge of corporate rehabilitation. A key feature of rehabilitation proceedings is the “stay order,” which suspends all actions for claims against the distressed corporation. This breathing space allows the company to formulate and implement a rehabilitation plan without being overwhelmed by creditor lawsuits.

Section 6(c) of P.D. No. 902-A explicitly states:

“[U]pon 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.”

This suspension is not intended to extinguish creditor rights but to temporarily hold them in abeyance to facilitate the rehabilitation process. Crucially, the law recognizes the distinction between secured and unsecured creditors. While actions for claims are suspended, the preferential status of secured creditors, like banks holding mortgages, is generally maintained. The concept of dacion en pago, a common debt settlement method, involves the debtor transferring property to the creditor to extinguish a debt. However, the crucial question in rehabilitation is whether a rehabilitation plan can unilaterally impose a dacion en pago on a secured creditor, especially if the creditor finds the terms unacceptable. This touches upon the constitutional prohibition against impairment of contracts, which ensures that laws cannot unduly diminish the obligations of contracts.

CASE BREAKDOWN: METROBANK VS. ASB HOLDINGS

The ASB Group of Companies, a major real estate developer, faced financial difficulties and filed for rehabilitation with the SEC in 2000. Metropolitan Bank & Trust Company (Metrobank), a significant creditor with loans secured by real estate mortgages, was directly affected. ASB’s proposed Rehabilitation Plan included a dacion en pago arrangement for Metrobank, offering specific properties in exchange for debt settlement. However, Metrobank objected to the plan, primarily because it disagreed with the valuation of the properties offered and the proposed waiver of interests and penalties that accrued after April 30, 2000.

Here’s a step-by-step breakdown of the case’s procedural journey:

1. SEC Hearing Panel Approval: Despite Metrobank’s objections, the SEC Hearing Panel approved the Rehabilitation Plan, deeming Metrobank’s concerns “unreasonable.”
2. SEC En Banc Affirmation: Metrobank appealed to the SEC En Banc via a Petition for Certiorari, arguing grave abuse of discretion. The SEC En Banc denied the petition and affirmed the Hearing Panel’s decision.
3. Court of Appeals Rejection: Undeterred, Metrobank elevated the case to the Court of Appeals via a Petition for Review. The appellate court also denied due course to Metrobank’s petition, upholding the SEC’s decision.
4. Supreme Court Appeal: Finally, Metrobank brought the case to the Supreme Court, arguing that the Rehabilitation Plan unconstitutionally impaired its contractual rights and violated due process by forcing it to accept an unfavorable dacion en pago.
5. Intervention of Cameron Granville: During the Supreme Court proceedings, Cameron Granville 3 Asset Management, Inc., intervened, having acquired Metrobank’s loans and mortgages. Cameron Granville adopted Metrobank’s petition.

The Supreme Court, in its decision penned by Justice Sandoval-Gutierrez, sided with Metrobank. The Court emphasized that while rehabilitation proceedings legitimately suspend actions for claims, they do not erase the secured creditor’s preferential status or force them into disadvantageous arrangements. The Court highlighted the voluntary nature of the dacion en pago proposal in the Rehabilitation Plan itself.

Quoting the Rehabilitation Plan, the Supreme Court noted:

“Secured creditors have been asked to waive all penalties and other charges. This dacion en pago program is essential to eventually pay all creditors and rehabilitate the ASB Group of Companies. If the dacion en pago herein contemplated does not materialize for failure of the secured creditors to agree thereto, this rehabilitation plan contemplates to settle the obligations…to secured creditors with mortgaged properties at ASB selling prices…”

The Court interpreted this to mean that the dacion en pago was “not compulsory in nature” but “merely proposals for the creditors to accept,” requiring “MUTUALLY AGREED UPON TERMS.” The Supreme Court also rejected ASB Group’s argument that Metrobank should have raised its objection to the inclusion of all ASB companies in the rehabilitation earlier. The Court found no grave abuse of discretion on the part of the SEC but clarified the limits of its power in compelling secured creditors to accept specific terms in a rehabilitation plan.

As the Supreme Court succinctly put it:

“Likewise, there is no compulsion on the part of petitioner bank to accept a dacion en pago arrangement of the mortgaged properties based on ASB Group of Companies’ transfer values and to condone interests and penalties…They are merely proposals for the creditors to accept…they must be ‘based on MUTUALLY AGREED UPON TERMS.’”

PRACTICAL IMPLICATIONS: PROTECTING SECURED LENDING

The Metrobank vs. ASB Holdings case provides critical reassurance to secured creditors in the Philippines. It confirms that corporate rehabilitation, while a powerful tool for business recovery, cannot be used to strong-arm secured creditors into accepting unfavorable debt settlements. This ruling is particularly significant for banks and financial institutions that rely on security interests when extending loans. It upholds the sanctity of contracts and prevents rehabilitation proceedings from becoming a tool to unilaterally rewrite loan agreements to the detriment of secured lenders.

For businesses undergoing rehabilitation, this case underscores the importance of negotiating in good faith with secured creditors and crafting rehabilitation plans that are mutually acceptable. While a stay order provides temporary relief, a successful rehabilitation ultimately depends on securing the cooperation of major creditors, especially those holding security interests.

Key Lessons for Secured Creditors:

• Rehabilitation Suspends, Not Extinguishes Rights: A stay order in rehabilitation only suspends actions for claims; it does not eliminate the preferential rights of secured creditors.
• No Forced Dacion en Pago: Secured creditors cannot be compelled to accept a dacion en pago or waive interests and penalties without their consent. Terms must be mutually agreed upon.
• Importance of Objection: Secured creditors should actively participate in rehabilitation proceedings and voice their objections to any plan provisions that unduly infringe on their contractual rights.
• Contractual Rights Protected: The constitutional prohibition against impairment of contracts provides a safeguard for secured creditors against unilateral alteration of loan agreements through rehabilitation plans.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q1: What is corporate rehabilitation in the Philippines?

A: Corporate rehabilitation is a legal process designed to help financially distressed companies recover and become viable again. It involves developing and implementing a rehabilitation plan, often under the supervision of a rehabilitation receiver and the court (or, previously, the SEC).

Q2: What is a stay order in rehabilitation proceedings?

A: A stay order is issued by the court (or SEC) at the start of rehabilitation proceedings. It suspends all actions for claims against the distressed company, providing it with a breathing space to reorganize.

Q3: Does corporate rehabilitation erase debts?

A: No, rehabilitation does not erase debts. It aims to restructure the company’s finances and operations so it can eventually pay its obligations, often through a payment plan outlined in the rehabilitation plan.

Q4: What is dacion en pago?

A: Dacion en pago is a method of debt settlement where the debtor transfers ownership of property to the creditor in lieu of cash payment.

Q5: Can a rehabilitation plan force a secured creditor to accept dacion en pago?

A: No, as clarified in Metrobank vs. ASB Holdings, a rehabilitation plan cannot force a secured creditor to accept a dacion en pago or waive their rights without mutual agreement. The terms must be negotiated and agreed upon.

Q6: What rights do secured creditors have in rehabilitation?

A: Secured creditors retain their preferential rights over their collateral even during rehabilitation. While enforcement actions are suspended, their claim is prioritized over unsecured creditors when assets are eventually liquidated or restructured.

Q7: What law currently governs corporate rehabilitation in the Philippines?

A: While P.D. 902-A was relevant at the time of this case, corporate rehabilitation is now primarily governed by the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, or Republic Act No. 10142.

Q8: How can I, as a creditor, protect my rights in corporate rehabilitation?

A: Actively participate in the proceedings, file your claims properly, scrutinize the rehabilitation plan, and object to any provisions that unfairly prejudice your rights. Seek legal counsel to ensure your interests are protected.

ASG Law specializes in Corporate Rehabilitation and Banking Law. Contact us or email hello@asglawpartners.com to schedule a consultation.