Breathing space

Under the Corporation Code (Section 6 © P.D. 902-A as amended by PD 1799), the Securities & Exchange Commission (SEC) may suspend the proceedings of any collection suit filed before any court by a creditor against a corporation, partnership or association placed under management or receivership. But is this rule applicable to a secured creditor? This is the issue raised by a tourism development company (PICTD).

The case involved two loans obtained by a sugar milling company (VMC) from two religious congregations totaling P4.5 million which were assigned in favor of PICTD. When VMC failed to pay said loans on maturity and upon demand, PICTD filed on March 7, 1997, a complaint for collection of sum of money with prayer for issuance of a writ of preliminary attachment against VMC before the Regional Trial Court (RTC).

The RTC granted the prayer for a writ of attachment against VMC properties. Subsequently however, the writ of attachment was lifted when VMC deposited a counter-bond.

Then on July 4, 1997, VMC filed a petition before the SEC to declare itself in a state of suspension of payments, alleging that although it has sufficient property to cover all its debts, it foresees its inability to pay them when they become due because of financial difficulties. Thus it sought the appointment of a management committee that would oversee the implementation of its proposed rehabilitation plan so that it can continue its operations to meet its obligations and satisfy its liabilities.

On July 8, 1997, the SEC ordered the suspension of all actions or claims against VMC pending before any court, tribunal, office, board, body or commission. Pursuant to said order, the RTC granted VMC’s motion to suspend proceedings of the collection case filed by PICTD.

Hence PICTD asked the SEC to lift the suspension of proceedings. But SEC denied its motion on the ground that PICTD is merely a general creditor able to secure a writ of preliminary attachment and did not have a prior security agreement with VMC that ripened into a creditor’s right in case of default.

PICTD questioned this ruling. It argued that it was a secured creditor and as such, it was exempt from the order of the suspension of proceedings. Was PICTD correct?

No. Unlike the provisions in the Insolvency Law which exempt secured creditors from the suspensive effect of the order issued by the court in an ordinary suspension of payments proceedings, the provisions of P.D. 902-A when it comes to the appointment of a management committee or a rehabilitation receiver do not contain any exemption for secured creditors.

The purpose of the suspension of proceedings is to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. Such suspension is intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again without having to divert attention and resources to various forums, or enable it to effectively exercise its powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the “rescue” of the debtor company. To allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time effort and other resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation (Phil. Islands Corporation etc vs. Victorias Milling Company Inc. G.R. 167674, June 17, 2008)

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call Tel. 7249445.

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