FIRST DIVISION

PRYCE CORPORATION, G.R. No. 172302

Petitioner,

Present:

PUNO, C.J., Chairperson,

-versus- SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

THE COURT OF APPEALS and

CHINA BANKING Promulgated:
CORPORATION,
Respondents. February 4, 2008

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DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is a petition for review on certiorari seeking to reverse the
[1]
Decision of the Court of Appeals (Seventh Division) dated July 28, 2005 in CA-G.R. SP
No. 88479.

Pryce Corporation, petitioner, was incorporated under Philippine laws on September

7, 1989. Its primary purpose was to develop real estate in Mindanao. It engaged in the
development of memorial parks, operated a major hotel in Cagayan de Oro City, and
produced industrial gases.

The 1997 Asian financial crisis, however, badly affected petitioners operations,
resulting in heavy losses. It could not meet its obligations as they became due. It incurred
losses of P943.09 million in 2001, P479.05 million in 2002, and P125.86 million in 2003.

Thus, on July 12, 2004, petitioner filed with the Regional Trial Court (RTC), Branch
[2]
138, Makati City, acting as Commercial Court, a petition for rehabilitation, docketed as
Special Proceedings No. M-5901. Petitioner prayed for the appointment of a Rehabilitation
Receiver from among the nominees named therein and the staying of the enforcement of all
claims, monetary or otherwise against it. Petitioner also prayed that after due hearing, its
proposed Rehabilitation Plan be approved. The salient features of the proposed
[3]
Rehabilitation Plan are:

[1] the bank creditors will be paid through dacion en pago of assets already mortgaged
to them, to the extent sufficient to pay off the outstanding obligations. The excess assets, if
any, will be freed from liens and encumbrances and released to the petitioner.
[2] in case the value of the mortgaged assets for dacion is less than the amount of the
obligation to be paid, the deficiency shall be settled by way of dacion of memorial park lots
owned by the petitioner.
[3] pricing of the assets for dacion shall be based on the average of two valuation
appraisals from independent third-party appraisers accredited with the Bangko Sentral ng
Pilipinas (BSP) to be chosen by the creditors and acceptable to the petitioner, except for
memorial park lots which shall be valued at P16,000 per lot.
[4] all penalties shall be waived by the creditors.
[5] interest on the loans shall be accrued only up to June 30, 2003.
[6] titles of properties and sales documents held by the bank as additional security but
without actual mortgage on the properties will also be released to the petitioner after the
dacion.
[7] memorial park mother titles mortgaged to a creditor bank shall be priced based on
the value of individual memorial lots comprising those titles, the mother titles shall be released
to the petitioner.
[8] for purpose of the dacion, the foreign currency loan from China Banking
Corporation, the only US Dollar-denominated obligation, will be converted to peso based on
the average exchange rate for the year 2003 (P54.2033 to US$1.00), being the mean of 12
monthly averages, as quoted on the statistics web page of the Bangko Sentral ng Pilipinas.
 [9] the bank creditors will avail of the tax exemption and benefits offered under the
Special Purpose Vehicle (SPV) Law or R.A. No. 9182 to minimize the dacion-related costs for
all parties concerned. Any concerned bank or financial institution which does not avail of said
tax exemption through its own fault will shoulder the applicable taxes and related fees for the
dacion transaction.
[10] trade creditors will be paid through dacion of memorial park lots.
[11] any other debt not covered by mortgaged (sic) of assets or not falling under the
aforementioned categories shall be paid through dacion of memorial park lots.

[4]
On July 13, 2004, the RTC issued a Stay Order directing that: all claims against
petitioner be deferred; the initial hearing of the petition for rehabilitation be set on
September 1, 2004; and all creditors and interested parties should file their respective
comments/oppositions to the petition. In the same Order, the RTC then appointed Gener T.
Mendoza as Rehabilitation Receiver.

The petition was opposed by petitioners bank-creditors. The Bank of the Philippine
Islands claimed that the petition and the proposed Rehabilitation Plan are coercive and
violative of the contract. The Land Bank of the Philippines contended, among others, that
the petition is unacceptable because of the unrealistic valuation of the properties subject of
the dacion en pago.

The China Banking Corporation, respondent herein, alleged in its opposition that
petitioner is solvent and that it filed the petition to force its creditors to accept dacion
payments. In effect, petitioner passed on to the creditors the burden of marketing and
financing unwanted memorial lots, while exempting it (petitioner) from paying interests and
penalties.

[5]
On September 13, 2004, the RTC issued an Order, the dispositive portion of which
reads:

WHEREFORE, the Petition is given due course. Let the Rehabilitation Plan, Annex J,
Petition, be referred to Mr. Gener Mendoza, Rehabilitation Receiver, for evaluation and
recommendation to be submitted not later than December 15, 2004.
 SO ORDERED.

On December 6, 2004, the Rehabilitation Receiver, in compliance with the above

Order, submitted an Amended Rehabilitation Plan, recommending the following:

1. Payment of all bank loans and long-term commercial papers (LTCP) through dacion
en pago of PCs real estate assets;

2. Payment of all non-bank, trade and other payables amounting to at least P500,000
each through a dacion of memorial park lots; and

3. Payment in cash over a three-year period, without interest, of all non-bank, trade and
other payables amounting to less than P500,000 each. There are 290 of these creditors but
their aggregate exposure to PC is only P7.64 million.

The Rehabilitation Receiver further proposed the following amendments with respect
to the dacion payments to petitioners bank creditors:

1. The asset base from which the creditors may choose to be paid has been broadened.
Each creditor will no longer be limited to assets already mortgaged to it and may elect to be
paid from the many other assets of the company, including even those mortgaged to other
creditors. Any secured creditor, however, shall have priority to acquire the assets mortgaged to
it.

2. A third appraiser has been added to the two proposed by PC to undertake valuation
of assets earmarked for dacion. With three appraisers, more representative values are likely to
be obtained.

3. Valuation of the memorial lots has been configured to dovetail with values approved
in the corporate rehabilitation of Pryce Gases, Inc. (PGI), a subsidiary of PC. Thus, any
memorial lot ceded to secured creditors shall be valued at P13,125 per lot, and P17,500/lot for
unsecured creditors.

On January 17, 2005, the RTC issued an Order approving the Amended
Rehabilitation Plan and finding petitioner eligible to be placed in a state of corporate
rehabilitation; and directing that its assets shall be held and disposed of and its liabilities
paid and liquidated in the manner specified in the said Order.
 Consequently, on February 23, 2005, respondent filed with the Court of Appeals a
petition for review, docketed as CA-G.R. SP No. 88479. Respondent alleged that in
approving the Amended Rehabilitation Plan, the RTC impaired the obligations of contracts,
voided contractual stipulation and contravened the avowed policy of the State to maintain a
competitive financial system.

On July 28, 2005, the Court of Appeals rendered its Decision granting respondents
petition and reversing the assailed Orders of the RTC, thus:

WHEREFORE, premises considered, petition is hereby GRANTED. The assailed July

13, 2004, September 13, 2004 and January 17, 2005 Orders of the Regional Trial Court of
Makati City, Branch 138, are hereby REVERSED and SET ASIDE.

SO ORDERED.

Petitioner herein seasonably filed a motion for reconsideration but it was denied by
the appellate court in its Resolution dated April 12, 2006.

Hence, the instant recourse raising the sole issue of whether the Court of Appeals
erred in denying the petition for rehabilitation of petitioner Pryce Corporation.

[6]
Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation provides:

SEC. 6. Stay Order. If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition, issue an Order
(a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all
claims, whether for money or otherwise and whether such enforcement is by court action or
otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner
any of its properties except in the ordinary course of business; (d) prohibiting the debtor from
making any payment of its liabilities outstanding as of the date of filing of the petition; (e)
prohibiting the debtors suppliers of goods or services from withholding supply of goods and
services in the ordinary course of business for as long as the debtor makes payments for the
services and goods supplied after the issuance of the stay order; (f) directing the payment in
 full of all administrative expenses incurred after the issuance of the stay order; (g) fixing the
initial hearing on the petition not earlier than forty five (45) days but not later than sixty
(60) days from the filing thereof; (h) directing the petitioner to publish the Order in a
newspaper of general circulation in the Philippines once a week for two (2) consecutive
weeks; (i) directing all creditors and all interested parties (including the Securities and
Exchange Commission) to file and serve on the debtor a verified comment on or
opposition to the petition, with supporting affidavits and documents, not later than ten (10)
days before the date of the initial hearing and putting them on notice that their failure to do so
will bar them from participating in the proceedings; and (j) directing the creditors and
interested parties to secure from the court copies of the petition and its annexes within
such time as to enable themselves to file their comment on or opposition to the petition and to
prepare for the initial hearing of the petition.

Section 6 provides that the petition must be sufficient in form and substance. In Rizal
[7]
Commercial Banking Corporation v. Intermediate Appellate Court, this Court held that
[8]
under Section 6(c) of P.D. No. 902-A, receivers may be appointed whenever: (1)
necessary in order to preserve the rights of the parties-litigants; and/or (2) protect the
interest of the investing public and creditors. The situations contemplated in these
instances are serious in nature. There must exist a clear and imminent danger of losing
the corporate assets if a receiver is not appointed. Absent such danger, such as where
there are sufficient assets to sustain the rehabilitation plan and both investors and creditors
are amply protected, the need for appointing a receiver does not exist. Simply put, the
purpose of the law in directing the appointment of receivers is to protect the interests
of the corporate investors and creditors.

We agree with the Court of Appeals that the petition for rehabilitation does not allege
that there is a clear and imminent danger that petitioner will lose its corporate assets if a
receiver is not appointed. In other words, the serious situation test laid down by Rizal
Commercial Banking Corporation has not been met or at least substantially complied
with. Significantly, the Stay Order dated July 13, 2004 issued by the RTC does not state any
serious situation affecting petitioners corporate assets. We observe that in appointing Mr.
Gener T. Mendoza as Rehabilitation Receiver, the only basis of the lower court was its
finding that the petition is sufficient in form and substance. However, it did not specify
any reason or ground to sustain such finding. Clearly, the petition failed to comply with
the serious situation test.
 As aptly held by the Court of Appeals:

There are serious requirements before rehabilitation can be ordered. That is why this
stay order is issued only after a management committee or receiver is appointed. Before a
management committee or receiver is appointed, the law expressly states the serious
requirements that must first exist: (1) an imminent danger (National Development Company
and New Agrix, Inc. v. Philippine Veterans Bank, G.R. Nos. 84132-33, December 10, 1990,
192 SCRA 257) of dissipation, loss, wastage or destruction of assets or of paralization of
business operations of the liquid corporation which may be prejudicial to the interest of
minority stockholders, parties-litigants or to the general public, or (2) there is a necessity to
preserve the rights and interests of the parties-litigants, of the investing public and of creditors.

In the case at bench, when the commercial court appointed a rehabilitation receiver, the
very next day after the filing of the Petition for Rehabilitation, it is highly doubtful and well-
nigh impossible, that, without any hearing yet held, the commercial court could have
already gathered enough evidence before it to determine whether there was any
imminent danger of dissipation of assets or of paralization of business operations to
[9]
warrant the appointment of a rehabilitation receiver.

In determining whether petitioners financial situation is serious and whether there is a

clear and imminent danger that it will lose its corporate assets, the RTC, acting as
commercial court, should conduct a hearing wherein both parties can present their
respective evidence. Hence, a remand of the records of this case to the RTC is imperative.

WHEREFORE, we DENY the petition. The assailed Decision of the Court of

Appeals in CA-G.R. SP No. 88479 is AFFIRMED with the modification discussed above.
Let the records of this case be REMANDED to the RTC, Branch 138, Makati City, sitting
as Commercial Court, for further proceedings with dispatch to determine the merits of the
petition for rehabilitation. No costs.

SO ORDERED.

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

WE CONCUR:
 REYNATO S. PUNO
Chief Justice
Chairperson

RENATO C. CORONA ADOLFO S. AZCUNA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Rollo, Vol. I, pp. 55-70. Penned by Associate Justice Vicente Q. Roxas and concurred in by Associate Justices Portia Alio-
Hormachuelos and Juan Q. Enriquez.
[2]
Rollo, Vol. II, pp. 1105-1119.
[3]
As summarized by the trial court in its Order dated September 13, 2004. See Rollo, Vol. I, p. 154.
[4]
Rollo, Vol. I, pp. 135-136.
[5]
Id. pp. 153-155.
[6]
A.M. No. 00-8-10-SC which took effect on December 15, 2000.
[7]
G.R. No. 74851, December 9, 1999, 320 SCRA 279.
[8]
Entitled Reorganization of the Securities and Exchange Commission with Additional Powers and Placing Said Agency Under the
Administrative Supervision of the Office of the President. The Decree was subsequently amended by Presidential Decree Nos.
1653, 1758, and 1799, and by Republic Act No. 8799 (The Securities Regulation Code of 2000), which transferred jurisdiction
over rehabilitation cases from the SEC to Regional Trial Courts sitting as Commercial Courts.
[9]
Rollo, pp. 66-67.