In a dispute between East West Banking Corporation and Victorias Milling Company, Inc. (VMC), the Supreme Court affirmed that VMC rightfully exercised its option to redeem Convertible Notes (CNs) issued to creditors, including East West Bank, as part of a debt restructuring agreement during VMC’s rehabilitation. The Court emphasized that contractual obligations must be interpreted based on the plain meaning of the agreement, prioritizing VMC’s right to redeem the CNs when exercised according to the agreed-upon terms. This decision underscores the principle that rehabilitation proceedings aim to give the distressed company a fresh start, allowing it to fulfill its obligations and prevent further accumulation of debt, and that the contract must be interpreted from the language of the contract itself.

Redemption or Conversion? Unpacking the Battle Over Victorias Milling’s Debt

The case arose from VMC’s petition for suspension of payments and subsequent rehabilitation plan approved by the Securities and Exchange Commission (SEC). As part of the rehabilitation, VMC entered into a Debt Restructuring Agreement (DRA) with its creditors, including East West Bank, leading to the issuance of Convertible Notes (CNs). These CNs gave creditors the option to either convert the notes into VMC common shares or have them redeemed by VMC under specific conditions. After settling its restructured loans, VMC sought to redeem the CNs, but East West Bank insisted on converting its CNs into shares, leading to a legal battle over which right, redemption or conversion, should prevail. The central legal question was whether East West Bank could compel VMC to convert the CNs despite VMC’s exercise of its right to redeem them, considering the terms of the DRA and the context of VMC’s rehabilitation.

The SEC initially sided with East West Bank, but the SEC En Banc reversed this decision, a ruling later affirmed by the Court of Appeals (CA). The CA emphasized that VMC was merely complying with the terms of the ARP, DRA, and CN when it redeemed the CNs. According to the CA, the payment or redemption of the CN became final and irrevocable when VMC sent East West Bank a written notice that it was exercising its option or right to redeem the CN. The Supreme Court agreed with the CA’s assessment, holding that VMC had validly exercised its option to redeem the CNs, and East West Bank had no legal basis to refuse this redemption. The Court highlighted that contractual obligations should be interpreted from the plain language of the contract itself.

The Supreme Court based its decision on several key factors. First, the Court examined the relevant provisions of the Alternative Rehabilitation Plan (ARP), Debt Restructuring Agreement (DRA), and the Convertible Note (CN) itself. The ARP stipulated that VMC’s excess cash flow should be used to pay or redeem the convertible notes once the restructured debt was fully settled. This mandate was reiterated in the DRA, which specified VMC’s obligation to use excess cash flow for redemption purposes. Furthermore, the CN provided that VMC unconditionally promised to pay the principal amount, reinforcing VMC’s obligation to redeem the notes.

Moreover, the CN explicitly stated that VMC had the option to redeem the note by paying East West Bank in cash. The clause further specified that VMC could exercise this option by sending written notice, which would then be deemed final and irrevocable. This provision was crucial in the Court’s determination that VMC had effectively exercised its right to redeem the CNs upon delivering the written notice to East West Bank, regardless of East West Bank’s refusal to accept the payment. The Court emphasized that East West Bank’s insistence on converting the CNs, despite VMC’s valid redemption, lacked contractual support.

Building on this principle, the Court rejected East West Bank’s argument that its option to convert the CNs into common shares was superior to VMC’s right to redeem them. The Court clarified that while the CN granted East West Bank the right to convert, this right was not absolute. Rather, the option to convert was contingent on specific conversion periods, as defined in the DRA and CN. Since VMC had exercised its option to pay/redeem the CNs outside of these designated conversion periods, East West Bank’s conversion right did not prevail. This limitation on the conversion right was crucial in upholding VMC’s redemption efforts.

The Court also addressed East West Bank’s contention that the provision allowing conversion during the conversion period gave it a superior right. The Court emphasized that contracts must be interpreted in their entirety, and one provision cannot be isolated to disregard others. The DRA was executed to give effect to the ARP’s objectives, and the CN was issued as a debt reduction measure under the DRA. Therefore, all provisions should be read together, preventing East West Bank from selectively invoking a single stipulation to override VMC’s right to redeem the CNs.

This approach contrasts with East West Bank’s view that its right to convert could be exercised at any time, irrespective of the conversion schedule. The Court found this interpretation unsupported by the clear language of the DRA and CN, which explicitly stated that the holder’s option to convert prevails only when exercised during the designated conversion periods. The documents granted VMC the privilege to exercise its payment/redemption option “at any time,” indicating that the parties intended to prioritize VMC’s redemption rights over East West Bank’s conversion rights outside the conversion periods. In essence, the timing of the options’ exercise was a deciding factor.

The Court further addressed East West Bank’s argument that the right to convert was a valuable property right purchased through substantial consideration. The bank claimed that CN holders accepted a lower interest rate in reliance on the potential appreciation of VMC’s common stocks. However, the Court clarified that East West Bank became a CN holder not as a plain investor but as part of VMC’s debt restructuring program. Given that East West Bank agreed to the terms of VMC’s rehabilitation, it could not claim preferential treatment over other creditors. Having committed to the debt restructuring, East West Bank could not seek terms that undermined the rehabilitation process.

Moreover, the Court highlighted that East West Bank’s proposed conversion of 13% of the CNs would not necessarily further VMC’s rehabilitation. While East West Bank argued that converting debt to equity requires no cash outlay, the Court pointed out that VMC would still be indebted for the remaining 87% of the CNs, which would continue to accrue interest. Allowing VMC to redeem the CNs, on the other hand, would fully satisfy its obligation, preventing further accumulation of debt and aligning with the objectives of rehabilitation. Therefore, the redemption of the CNs was more consistent with the goals of VMC’s rehabilitation plan.

Finally, the Court dismissed East West Bank’s argument regarding VMC’s failure to comply with the requirements for a valid tender of payment and consignation. The Court emphasized that the CN explicitly stated that VMC could exercise its option to redeem by sending written notice, which would be deemed final and irrevocable. The matter of consignation was not relevant to whether VMC had effectively exercised its redemption option. Even though VMC made payments via checks, which are not legal tender unless accepted, East West Bank’s consistent refusal was based on the exercise of VMC’s option to pay/redeem the CN, an unfounded refusal. Thus, the Court found that VMC had already effectively exercised its option to pay/redeem the CN, which East West Bank could not validly refuse.

FAQs

What was the key issue in this case?	The central issue was whether East West Bank could compel VMC to convert its Convertible Notes into common shares, despite VMC having exercised its right to redeem those notes according to the terms of the DRA and CN. The court had to determine which right, redemption or conversion, should prevail.
What are Convertible Notes (CNs)?	Convertible Notes are debt securities that can be converted into common shares of a company under certain conditions. They offer the holder the option to become a shareholder rather than just a creditor.
What is a Debt Restructuring Agreement (DRA)?	A Debt Restructuring Agreement is a contract between a debtor and its creditors to modify the terms of the debt. This usually happens when the debtor is facing financial difficulties and cannot meet its original obligations.
What was the main point of contention between East West Bank and VMC?	East West Bank wanted to convert its CNs into VMC common shares, while VMC wanted to redeem the CNs by paying East West Bank the principal amount plus interest. The conflict arose because VMC exercised its option to redeem outside the specified conversion periods.
What did the Supreme Court ultimately decide?	The Supreme Court ruled in favor of VMC, affirming that VMC had rightfully exercised its option to redeem the CNs and that East West Bank had no legal basis to refuse the redemption or insist on conversion. The Court upheld the principle that VMC’s redemption rights took precedence outside the designated conversion periods.
What does this ruling mean for corporate rehabilitation?	This ruling reinforces that rehabilitation proceedings aim to give distressed companies a chance to recover and fulfill their obligations. It supports the idea that a company’s efforts to redeem debt should be prioritized within the agreed-upon contractual terms.
When could East West Bank exercise its option to convert the CNs into shares?	East West Bank could only exercise its option to convert the CNs during the designated conversion periods specified in the DRA and CN. Outside these periods, VMC’s right to redeem the CNs prevailed.
What was the significance of VMC sending a written notice to East West Bank?	According to the CN, VMC could exercise its option to redeem the CN by sending written notice to East West Bank, which notice, when so sent, was deemed final and irrevocable. The Supreme Court held that by providing this notice, VMC had effectively exercised its right to redeem the CNs.

In conclusion, the Supreme Court’s decision in East West Banking Corporation v. Victorias Milling Company, Inc. clarifies the primacy of contractual obligations in corporate rehabilitation cases. The ruling emphasizes that redemption rights, when exercised according to agreed-upon terms, take precedence over conversion options exercised outside the specified periods. This decision provides valuable guidance for interpreting debt restructuring agreements and convertible notes in the context of corporate rehabilitation.

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: EAST WEST BANKING CORPORATION VS. VICTORIAS MILLING COMPANY, INC., G.R. No. 225181, December 05, 2019