In the Philippine legal system, corporate rehabilitation aims to restore a struggling company to solvency. However, the Supreme Court clarified that rehabilitation is not a guaranteed right. In Philippine Asset Growth Two, Inc. v. Fastech Synergy Philippines, Inc., the Court emphasized that a rehabilitation plan must demonstrate a realistic chance of success, supported by solid financial commitments and a thorough analysis of the company’s assets. If a plan lacks these crucial elements, the Court will not hesitate to reject it, prioritizing the interests of creditors and the overall economic health.

When a Waiver Isn’t Enough: Can a Company Rehabilitate on Reprieves Alone?

Fastech Synergy Philippines, Inc., along with its subsidiaries Fastech Microassembly & Test, Inc., Fastech Electronique, Inc., and Fastech Properties, Inc. (collectively, “Fastech”), filed a joint petition for corporate rehabilitation before the Regional Trial Court (RTC) of Makati City. Planters Development Bank (PDB) was one of Fastech’s creditors. PDB had initiated extrajudicial foreclosure proceedings on two parcels of land owned by Fastech Properties. Fastech proposed a Rehabilitation Plan that sought a waiver of accrued interests and penalties, a two-year grace period for principal payments, and reduced interest rates.

The RTC initially dismissed Fastech’s petition, citing unreliable financial statements and unsubstantiated financial projections. The Court of Appeals (CA) reversed the RTC’s decision, approving the Rehabilitation Plan. The CA emphasized the opinion of the court-appointed Rehabilitation Receiver, who believed Fastech’s rehabilitation was viable. The CA also found that the Rehabilitation Plan was feasible. Philippine Asset Growth Two, Inc. (PAGTI), as the successor-in-interest of PDB, elevated the case to the Supreme Court, challenging the CA’s ruling.

The Supreme Court was tasked to resolve whether the petition for review on certiorari was timely filed and whether the Rehabilitation Plan was feasible. The Court noted that the petition was filed out of time. However, the Court decided to relax the procedural rules in the interest of substantial justice. The central issue revolved around the feasibility and compliance of the Rehabilitation Plan with the requirements set forth in the 2008 Rules of Procedure on Corporate Rehabilitation.

The Supreme Court ultimately ruled that the Rehabilitation Plan was not feasible and did not meet the minimum requirements outlined in the 2008 Rules of Procedure on Corporate Rehabilitation. Section 18 of the Rules states the requirements that 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 such as, but not limited, to the non-impairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale or exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.

The Court emphasized that a material financial commitment is crucial for gauging the distressed corporation’s resolve and good faith in financing the rehabilitation plan. According to the Court, this commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness, and ability to contribute funds or property to guarantee the continued successful operation of the debtor-corporation during the period of rehabilitation. In this case, Fastech’s plan lacked any concrete plans to build on its financial position through substantial investments. Instead, it relied primarily on financial reprieves, which the Court found insufficient for true rehabilitation. The Court stated that a distressed corporation cannot be restored to its former position of successful operation and regain solvency by the sole strategy of delaying payments/waiving accrued interests and penalties at the expense of the creditors.

Another deficiency was the lack of a liquidation analysis in the Rehabilitation Plan. The total liquidation assets, the estimated liquidation return to creditors, and the fair market value compared to the forced liquidation value of the fixed assets were not presented. The Court stated that it could not ascertain if the petitioning debtor’s creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. The absence of this analysis made it impossible to determine if the creditors would be better off under the proposed plan compared to immediate liquidation, a critical factor in rehabilitation cases.

The Court cited Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation to explain the test in evaluating the economic feasibility of the plan:

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough examination and analysis of the distressed corporation’s financial data must be conducted. If the results of such examination and analysis show that there is a real opportunity to rehabilitate the corporation in view of the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is feasible. In this accord, the rehabilitation court should not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and conditions stated in the approved rehabilitation plan. On the other hand, if the results of the financial examination and analysis clearly indicate that there lies no reasonable probability that the distressed corporation could be revived and that liquidation would, in fact, better subserve the interests of its stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the rehabilitation court may convert the proceedings into one for liquidation.

The Court also pointed out inconsistencies and deficiencies in Fastech’s financial statements. Their cash operating position was insufficient to meet maturing obligations. The current assets were significantly lower than the current liabilities. The unaudited financial statements for 2010 and early 2011 lacked essential notes and explanations. These financial documents failed to demonstrate the feasibility of rehabilitating Fastech’s business. The Supreme Court then stated that it gives emphasis on rehabilitation that provides for better present value recovery for its creditors.

The Supreme Court ultimately reversed the CA’s decision, dismissing Fastech’s joint petition for corporate rehabilitation. The Court stated that a distressed corporation should not be rehabilitated when the results of the financial examination and analysis clearly indicate that there lies no reasonable probability that it may be revived, to the detriment of its numerous stakeholders which include not only the corporation’s creditors but also the public at large.

FAQs

What was the key issue in this case?	The key issue was whether the proposed Rehabilitation Plan of Fastech met the legal requirements for feasibility, specifically regarding material financial commitments and liquidation analysis.
What is a material financial commitment in corporate rehabilitation?	A material financial commitment refers to the concrete pledges of financial support, such as investments or capital infusions, that demonstrate a company’s ability to fund its rehabilitation plan and sustain its operations.
What is a liquidation analysis and why is it important?	A liquidation analysis compares the potential returns to creditors under the rehabilitation plan versus immediate liquidation, ensuring creditors receive more value under the plan.
Why did the Supreme Court reject Fastech’s Rehabilitation Plan?	The Supreme Court rejected the plan because it lacked material financial commitments and a proper liquidation analysis, making it unlikely to succeed and potentially detrimental to creditors.
What happens to Fastech now that its rehabilitation petition was dismissed?	With the dismissal of the rehabilitation petition, Fastech may face liquidation or other legal actions from its creditors to recover outstanding debts.
Can the financial statements of a company affect its rehabilitation?	Yes, reliable and accurate financial statements are important to prove that the corporation is still feasible to continue its business and to be successfully rehabilitated.
What is the role of the rehabilitation receiver in rehabilitation cases?	Rehabilitation receivers are appointed by the court to provide professional advice and monitor the implementation of the corporation of the approved plan.
What is the effect of this decision to other companies that wants to undergo rehabilitation?	This decision serves as a reminder that rehabilitation is not a guaranteed process and that a solid plan with strong financial backing and realistic prospects for success is essential for approval.

This case underscores the importance of thorough financial planning and realistic commitments when seeking corporate rehabilitation in the Philippines. The Supreme Court’s decision reinforces the need to protect creditors’ interests and ensure that rehabilitation is a viable path to recovery, not just a means of delaying inevitable liquidation.

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: PHILIPPINE ASSET GROWTH TWO, INC. VS. FASTECH SYNERGY PHILIPPINES, INC., G.R. No. 206528, June 28, 2016