Is stay under the rehabilitation rules automatic?

A basic concept in Philippine rehabilitation (reorganization) law is stay of actions. Under this concept, enforcement of claims of creditors, whether secured or unsecured, is suspended during rehabilitation proceedings. The principle is intended to facilitate the rehabilitation of the debtor. This is to enable the debtor and the rehabilitation receiver to focus their time and effort in rehabilitating the debtor rather than defending the claims of creditors. Stay of actions also preserves the assets of the debtor under rehabilitation. If no such rule exists, the assets of the debtor would be dismembered by auction or foreclosure proceedings initiated by creditors and there would be no assets left with which to rehabilitate the debtor.

Some quarters have asked me whether stay is automatic upon filing of a petition for rehabilitation. The question is propelled by a ruling of our Supreme Court in Rizal Commercial Banking Corporation (RCBC) v. Intermediate Appellate Court (213 SCRA 830) [1992]), which held that suspension of payments takes effect upon filing of the petition for suspension. Otherwise stated, a stay on enforcement of creditors’ claims is automatic upon the filing of a petition for rehabilitation or reorganization. There was uproar on the part of creditors over this ruling because debtors could easily frustrate creditors’ claims by the mere expedient of filing a petition for rehabilitation with the Securities and Exchange Commission (SEC). It was then extremely easy to file a petition with the SEC because there were no prescribed requirements as to what the petition should allege and what documents should accompany the petition. It was not uncommon for debtors to file "skeletal" petitions in order to defeat the claims of creditors. That was the plight of creditors, especially secured creditors whose security was effectively rendered useless by these so-called "skeletal" petitions filed by unscrupulous debtors.

The automatic stay doctrine was part of our legal system for quite a number of years. It was, however, subsequently abandoned in 1997 when the Supreme Court, in Barotac Sugar Mills, Inc. vs. Court of Appeals (275 SCRA 497), held that suspension of payments takes effect only upon the appointment of the rehabilitation receiver or the management committee, and not upon filing of the petition. Moreover, in 1999, on a motion for reconsideration, the Supreme Court reversed its earlier decision in RCBC vs. Intermediate Appellate Court and affirmed the Barotac ruling that suspension of payments does not take effect upon filing of the petition for rehabilitation, but only upon the appointment of the rehabilitation receiver or the management committee (RCBC vs. CA, 320 SCRA 279).

On Aug. 8, 2000, Republic Act No. 8799 went into effect that, among others, transferred jurisdiction over rehabilitation (reorganization) cases from the SEC to the Regional Trail Courts branches designated by the Supreme Court. These courts are now commonly known as special commercial courts. In December of the same year, the Supreme Court promulgated the Interim Rules of Procedure on Corporate Rehabilitation (Rehabilitation Rules) to govern rehabilitation cases handled by the special commercial courts.

The non-automatic stay principle adopted in Barotac and the reconsidered RCBC case is now codified in the Rehabilitation Rules. Under the Rehabilitation Rules, stay is not automatic upon filing of a petition for rehabilitation. The court has to issue a stay order. And, the court can issue the stay order only if it finds the petition "sufficient in form and substance." For a petition to be considered as sufficient in form and substance, it must allege, under oath, detailed material facts and accompanied by a number of documentary requirements. The requirements for sufficiency in form and substance are very stringent. For example, a debtor-initiated petition must be accompanied by several documents; to wit: (1) audited financial statements; (2) interim financial statements; (3) schedule of debts and liabilities; (4) inventory of assets; (5) schedule of accounts receivables; (6) rehabilitation plan containing the material facts prescribed by the Rehabilitation Rules; (7) schedule of payments and disposition of assets; (8) schedule of cash flow; (9) statement of possible claims; and (10) a detailed affidavit of general financial condition (Secs. 2-5, Rule 4, Rehabilitation Rules). Because creditors do not have the same access as the debtor to information regarding the debtor’s affairs and operations, the documentary requirements are less stringent for a creditor-initiated petition, but the Rehabilitation Rules require that said petition must initiated by a creditor or creditors holding "at least twenty-five percent (25%) of the debtorís total liabilities." (Sec. 1, Rule 4).

Our special commercial courts are now enforcing the non-automatic stay principle embodied in the Rehabilitation rules. Thus, in a number of cases, they have refused to issue stay orders (worse, dismissed petitions for rehabilitation) for failure to comply with the stringent requirements mandatorily prescribed by the rules. For example, in In re Associated Wire Corporation of the Philippines, a special commercial court in Makati dismissed the petition for being "deficient in form and substance." (Civil Case No. 02-1293, RTC-Makati, Branch 138, Order dated Oct. 28, 2002). Also, in In re AVT Corporation, a special commercial court in Quezon City dismissed the petition for failure to attach the documents as provided for in Section 2 ©,(d),(e),(f),(g), (h) and (k), Rule 4 of the Rehabilitation Rules (Civil Case No. Q-03-069, RTC-Quezon City, Branch 90, orders dated Nov. 13, 2003 and Feb. 17, 2004). The special court in Pasig City also dismissed a petition for rehabilitation for being insufficient in form and substance (In re R.S. Arrieta, Inc. (Civil Case No. 11273, RTC-Pasig, Branch 158, order dated April 9, 2002). A special commercial court in Quezon City also dismissed the petition for failure to pay the prescribed docket fees (In re ARG Realty and Development Corporation, SEC Case No. Q-02-022, RTC-Quezon City, Branch 93, order dated April 14, 2003). A special commercial court in Makati City dismissed a petition for rehabilitation filed by a bank for failure to secure the consent of the Bangko Sentral ng Pilipinas as required by P.D. 902-A (In re Unitrust Development Bank, Inc. (Civil Case No. 02-977, RTC-Makati, Branch 142, Orders dated 27 August 2002 and Oct. 29, 2002).

It is equally significant to point out is that the Philippine version of stay balances the rights of creditors and debtors. Thus, while creditors’ claims are stayed, the debtor undergoing rehabilitation is also prohibited from selling, encumbering, transferring, or disposing of its properties except in the ordinary course of business. The debtor is also prohibited from making payments of its outstanding liabilities (Sec. 6, Rule 4, Interim Rules). These rules are intended to prevent undue preferences, which are undoubtedly prejudicial to the general body of creditors. To give teeth to this policy, the rehabilitation rules expressly provide that the rehabilitation court may declare void any transfer of property or any conveyance, sale, payment or agreement made in violation of its stay order (Sec. 8, Rule 4). Also worth noting is that the rehabilitation rules have an adequate protection clause to protect creditors. For example, a rehabilitation court may relieve a secured creditor from the stay order if the property securing his claim has depreciated to an extent that the creditor is under secured and the rehabilitation receiver does not provide additional security to make the obligation fully secured (Sec. 11, Rule 4).

(The author is the co-managing partner and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He can be contacted through [email protected])