Cram-Down Power of Rehabilitation Court

The court may approve a rehabilitation plan over the objection of the creditors if, in its judgment, the rehabilitation of the debtors is feasible and the opposition of the creditors is manifestly unreasonable.

Marilyn Victorio-Aquino v. Pacific Plans, Inc. (G.R. No. 193108)

Facts:

Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or “APEC”) is engaged in the business of selling pre-need plans and educational plans, including traditional open-ended educational plans (PEPTrads). PEPTrads are educational plans where respondent guarantees to pay the planholder, without regard to the actual cost at the time of enrolment, the full amount of tuition and other school fees of a designated beneficiary. Petitioner is a holder of two (2) units of respondent’s PEPTrads.

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing planholders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the Regional Trial Court (Rehabilitation Court), praying that it be placed under rehabilitation and suspension of payments pursuant to Presidential Decree (P.D.) No. 902-A, as amended, in relation to the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules).

Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, respondent proposed the implementation of a “Swap,” which will essentially give the planholder a means to exit from the PEPTrads at terms and conditions relative to a termination value that is more advantageous than those provided under the educational plan in case of voluntary termination.

On February 16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan (ARP) for the approval of the Rehabilitation Court. Under the ARP, the benefits under the PEP Trads shall be translated into fixed-value benefits as of December 31, 2004, which will be termed as Base Year-end 2004 Entitlement. The ARP also provided for tuition support for each enrollment period until SY 2009-2010 depending on the prevailing market rate of the NAPOCOR Bonds and Peso-Dollar exchange rate.

The value of the Philippine Peso strengthened and appreciated. In view of this development, and considering that the trust fund of respondent is mainly composed of NAPOCOR bonds that are denominated in US Dollars, respondent submitted a manifestation with the Rehabilitation Court on February 29, 2008, stating that the continued appreciation of the Philippine Peso has grossly affected the value of the U.S. Dollar-denominated NAPOCOR bonds, which stood as security for the payment of the Net TranslatedValues of the PEPTrads.

Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated March 7, 2008, echoing the earlier tenor and substance of respondent’s manifestation, and praying that the Modified Rehabilitation Plan (MRP) be approved by the Rehabilitation Court. Under the MRP, the ARP previously approved by the Rehabilitation Court is modified.

After the submission of comments/opposition by the concerned parties, the Rehabilitation Court issued a Resolution dated July 28, 2008 approving the MRP. In approving the same, the Rehabilitation Court reasoned that in view of the “cram down” power of the rehabilitation court under Section 23 of the Interim Rules, courts have the power to approve a rehabilitation plan over the objection of creditors and even when such proposed rehabilitation plan involves the impairment of contractual obligations.

Petitioner questioned the approval of the MRP before the Court of Appeals (CA) on September 26, 2008. It likewise prayed for the issuance of a TRO and a writ of preliminary injunction to stay the execution of the Resolution dated July 28, 2008.

Petitioner contends that the MRP is ultra vires insofar as it reduces the original claim and even the original amount that petitioner was to receive under the ARP. She also claims that it was beyond the authority of the Rehabilitation Court to sanction a rehabilitation plan, or the modification thereof, when the essential feature of the plan involves forcing creditors to reduce their claims against respondent.

Issue:

Whether or not the rehabilitation court may approve the rehabilitation plan over the opposition of the creditors.

Ruling:

Yes.

Petitioner’s argument is misplaced. The “cram-down” power of the Rehabilitation Court has long been established and even codified under Section 23, Rule 4 of the Interim Rules, to wit: Section 23. Approval of the Rehabilitation Plan. – The court may approve a rehabilitation plan over the opposition of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable.

Such prerogative was carried over in the Rehabilitation Rules, which maintains that the court may approve a rehabilitation plan over the objection of the creditors if, in its judgment, the rehabilitation of the debtors is feasible and the opposition of the creditors is manifestly unreasonable. The required number of creditors opposing such plan under the Interim Rules (i.e.,those holding the majority of the total liabilities of the debtor) was, in fact, removed. Moreover, the criteria for manifest unreasonableness is spelled out, to wit:

SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. The opposition of the creditors is manifestly unreasonable if the following are present:

(a) The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3;

(b) The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)month period from the date of filing of the petition; and

(c) The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not impaired. The court shall also issue the necessary orders or processes for its immediate and successful implementation. It may impose such terms, conditions, or restrictions as the effective implementation and monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fail.

This legal precept is not novel and has, in fact, been reinforced in recent decisions such as in Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation,  where the Court elucidated the rationale behind Section 23, Rule 4 of the Interim Rules, thus:

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the “cram-down” clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors toaccept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.

as well as in Pryce Corporation v. China Banking Corporation, to wit:

In any case, the Interim Rules or the rules in effect at the time the petition for corporate rehabilitation was filed in 2004 adopts the cramdown principle which “consists of two things: (i) approval despite opposition and (ii) binding effect of the approved plan x x x.”

First, the Interim Rules allows the rehabilitation court to “approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable.”

Second, it also provides that upon approval by the court, the rehabilitation plan and its provisions “shall be binding upon the debtor and all persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled.”

Based on the aforequoted doctrines, petitioner’s outright censure of the concept of the cram-down power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of petitioner would be a step backward — a futile attempt to address an outdated set of challenges. It is undeniable that there is a need to move to a regime of modern restructuring, cram-down and court supervision in the matter of corporation rehabilitation in order to address the greater interest of the public. This is clearly manifested in Section 64 of Republic Act (R.A.) No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the latest law on corporate rehabilitation and insolvency.

While the voice and participation of the creditors is crucial in the determination of the viability of the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the interests of all stakeholders is the ultimate and prime consideration. Thus, while we recognize the predisposition of the planholders in vacillating on the enforcement of the MRP, since the terms and conditions stated therein have been fundamentally changed from those stated in the Original and Amended Rehabilitation Plan, the MRP cannot be considered an abrogation of rights to the planholders/creditors.

We hold that the modification of the rehabilitation plan is a risk management tool to address the volatility of the exchange rate of the Philippine Peso vis-à-vis the U.S. Dollars, with the goal of ensuring that all planholders or creditors receive adequate returns regardless of the tides of the Philippine market by making payment in U.S. Dollars. This plan would prevent the trust fund of respondent from being diluted due to the appreciation of the Philippine Peso and assure that all planholders and creditors shall receive payment upon maturity of the NAPOCOR bonds in the most equitable manner.