Directors’ Powers During Conservatorship: Foreclosure Still Valid?

ICON DEVELOPMENT CORPORATION vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, G.R. No. 220686, March 09, 2020

Imagine a company facing financial distress, placed under conservatorship to recover. Can its original directors still make decisions, like pursuing foreclosure on debtors? This case clarifies the extent to which a conservator’s appointment limits the powers of the existing board, especially when it comes to debt collection and asset preservation. It also highlights the strict requirements for obtaining injunctions against foreclosure sales.

In Icon Development Corporation v. National Life Insurance Company of the Philippines, the Supreme Court addressed whether a company’s board of directors could initiate foreclosure proceedings while the company was under conservatorship. The Court ultimately ruled in favor of the National Life Insurance Company, clarifying the roles and responsibilities during conservatorship and emphasizing the importance of adhering to procedural guidelines in foreclosure cases.

Understanding Conservatorship and Corporate Powers

Conservatorship is a legal process where a conservator is appointed to manage a company’s assets and liabilities when it faces financial difficulties. This is often seen in insurance and banking sectors. The goal is to rehabilitate the company and restore its financial health. But what happens to the existing management’s powers during this period?

Section 255 of the Insurance Code (formerly Section 248) outlines the powers of a conservator. It states that the conservator can “take charge of the assets, liabilities, and the management of such company, collect all moneys and debts due to said company and exercise all powers necessary to preserve the assets of said company, reorganize the management thereof, and restore its viability.” The conservator can even “overrule or revoke the actions of the previous management and board of directors.”

However, this power isn’t absolute. The key question is whether the conservator’s role completely replaces the board or if the board retains some authority, particularly in actions that preserve the company’s assets. For example, if a company under conservatorship has outstanding loans, can the board still pursue legal action to collect those debts? This is where the Icon Development case provides clarity.

The Story of the Icon Development Case

Icon Development Corporation had taken out several loans from National Life Insurance Company of the Philippines, securing them with mortgages on properties. When Icon Development defaulted on these loans, National Life, despite being under conservatorship, initiated extrajudicial foreclosure proceedings.

Icon Development fought back by filing a complaint with the Regional Trial Court (RTC), seeking to stop the foreclosure. They argued that National Life’s directors lacked the authority to initiate foreclosure because the company was under conservatorship. They also claimed overpayment and questioned the interest rates.

The RTC initially sided with Icon Development, issuing a Temporary Restraining Order (TRO) and later a Writ of Preliminary Injunction (WPI) to halt the foreclosure. The RTC believed that the conservator’s approval was necessary for such actions. However, the Court of Appeals (CA) reversed the RTC’s decision, leading to the Supreme Court case.

Here’s a breakdown of the procedural journey:

• RTC: Granted TRO and WPI in favor of Icon Development, stopping the foreclosure.
• CA: Reversed the RTC’s decision, siding with National Life Insurance.
• Supreme Court: Affirmed the CA’s ruling, solidifying National Life’s right to proceed with foreclosure.

The Supreme Court emphasized that conservatorship aims to preserve the company’s assets and restore its financial health. Allowing the board to collect debts, even during conservatorship, aligns with this goal. The Court quoted:

“The conservatorship of an insurance company should be likened to that of a bank rehabilitation… This Court held that once a bank is placed under conservatorship, an action may still be filed on behalf of that bank even without prior approval of the conservator.”

Furthermore, the Court highlighted the importance of following A.M. No. 99-10-05-0, which outlines the guidelines for issuing TROs and WPIs in foreclosure cases. This administrative matter requires debtors to present evidence of payment or to pay a certain percentage of interest to be entitled to injunctive relief. Icon Development failed to meet these requirements.

“With the foregoing yardstick, it is crystal clear that a WPI or TRO cannot be issued against extrajudicial foreclosure of real estate mortgage on a mere allegation that the debt secured by mortgage has been paid or is not delinquent unless the debtor presents an evidence of payment.”

Practical Takeaways for Businesses and Borrowers

This case has significant implications for companies under conservatorship and for borrowers dealing with such companies. It clarifies that the board of directors retains certain powers, especially those related to asset preservation and debt collection. For borrowers, it reinforces the need to comply with procedural requirements when seeking to stop foreclosure proceedings.

Key Lessons:

• Directors’ Authority: A company’s board of directors can still initiate foreclosure proceedings during conservatorship, as long as it aligns with the goal of preserving assets.
• Conservator’s Role: The conservator’s role is to oversee and, if necessary, overrule actions, but not to completely supplant the board’s functions.
• Procedural Compliance: Borrowers seeking to enjoin foreclosure must strictly adhere to the requirements of A.M. No. 99-10-05-0, including providing evidence of payment or paying the required interest.

For instance, imagine a small business that owes money to a bank under conservatorship. The bank’s board sends a demand letter for payment. According to this case, that demand is valid, even without the conservator’s explicit approval. The business cannot simply ignore it, assuming the board has no power.

Frequently Asked Questions

Q: Can a company under conservatorship still file lawsuits?

A: Yes, the board of directors generally retains the power to file lawsuits to protect the company’s assets, even without the conservator’s prior approval.

Q: What is the role of a conservator in foreclosure proceedings?

A: The conservator oversees the proceedings and can overrule any actions by the board that are deemed detrimental to the company’s rehabilitation.

Q: What is A.M. No. 99-10-05-0?

A: It’s an administrative matter that sets guidelines for issuing TROs and WPIs in foreclosure cases, requiring debtors to provide evidence of payment or pay a certain percentage of interest.

Q: What happens if a borrower claims overpayment to stop foreclosure?

A: The borrower must provide concrete evidence of overpayment to be successful in stopping the foreclosure.

Q: Does conservatorship mean the company is bankrupt?

A: No, conservatorship is a rehabilitation process aimed at restoring the company’s financial health, not necessarily a prelude to bankruptcy.

ASG Law specializes in banking and finance law, including foreclosure and conservatorship issues. Contact us or email hello@asglawpartners.com to schedule a consultation.