Rehabilitation Plan Contents + Conversion of Rehab Proceedings to Liquidation Proceedings

Viva Shipping Lines v. Keppel (2016)

Doctrines:

 Specific characteristics of economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily operations than if sold.
b. Liquidity issues can be addressed by practicable business plan that will generate enough cash to sustain daily
operations.
c. The debtor has a definite source of financing for the proper and full implementation of a Rehabilitation Plan that is
anchored on realistic assumptions and goals.
 Courts must ensure that the projected cash flow from a business’ rehabilitation plan allows for the closest present value
recovery for its creditors

FACTS:

 In 2005, Viva Shipping Lines (Viva) filed a Petition for Corporate Rehabilitation before the RTC of Lucena.
 The RTC initially denied the petition for failure to comply with the requirements of the Interim Rules of Procedure on
Corporate Rehabilitation.
 Viva then filed an Amended Petition, claiming that it owned and operated 19 maritime vessels and Ocean Palace Mall, a
shopping mall in Lucena.
 Viva also declared its total properties’ assessed value at about P45M.
o However, these allegations were contrary to the attached documents in the Amended Petition.
 One of the attachments, the Property Inventory List (PIL), showed that Viva only owned 2 maritime vessels and that the
FMV of all of Viva’s assets amounted to P400M.
 Some of the properties listed in the PIL were already encumbered by Viva’s creditors and only P147M of its assets were
“free assets.”
 Viva also declared several debts:
o Metrobank – loan secured by real estate mortgage – P176M
o Keppel – Charges for Repair of vessels – P9M
o Lucena and Batangas Cities – taxes & assessments - P35M
 In its Company Rehabilitation Plan, Viva enumerated possible sources of funding such as the sale of old vessels and
commercial lots of its sister company, Sto. Domingo Shipping Lines.
 It also proposed the conversion of its mall into a hotel, the acquisition of 2 new vessels for shipping operations, and the “re-
operation” of an oil mill in Quezon province.
 Viva nominated 3 individuals to be appointed as receiver: Ragudo, Atty. Dauz and Judge Mendoza.
 The RTC found the Amended Petition sufficient and issued a stay order against the enforcement of all monetary and judicial
claims against Viva, and prohibited Viva from selling, transferring or disposing of any of its properties except in the ordinary
course of business.
 The RTC also appointed Judge Mendoza as rehabilitation receiver but he later withdrew his acceptance as receiver.
 Metrobank filed a Motion for Production/Inspection of relevant documents relating to Viva’s business operations such as
board resolutions, tax returns, accounting ledgers, bank accounts and contracts and such motion was granted.
o Viva failed to comply.
 RTC lifted the stay order and dismissed Viva’s Amended Petition for failure to show the company’s viability and the feasibility
of rehabilitation.
o It found all of Viva’s assets to be non-performing.
 Viva then filed a Petition for Review under Rule 43 before the CA but failed to implead its creditors, only impleading the
Presiding Judge of the RTC.
 CA dismissed the petition for failure to comply with procedural requirements.
 Viva filed a Petition for Review on Certiorari with the SC.
 Respondent-creditors point out that Viva’s admission that almost all its vessels are rendered unserviceable suggests that
rehabilitation is no longer viable.

ISSUES/HELD:

Can a corporation be under rehabilitation and liquidation at the same time? - NO

 Corporate rehabilitation is a remedy for corporations, partnerships, and associations “who foresee the impossibility of
meeting theirs debts when they respectively fall due.”
 A corporation under rehabilitation continues with its corporate life and activities to achieve solvency, or a position where the
corporation is able to pay its obligations as they fall due in the ordinary course of business.
 Solvency is a state where the businesses’ liabilities are less than its assets.
  Corporate rehabilitation is a type of proceeding available to a business that is insolvent.
 In general, insolvency proceedings provide for predictability that commercial obligations will be met despite business
downturns.
 The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because "assets . . . are often more
valuable when so maintained than they would be when liquidated.
 Rehabilitation assumes that assets are still serviceable to meet the purposes of the business.
 The corporation receives assistance from the court and a disinterested rehabilitation receiver to balance the interest to
recover and continue ordinary business, all the while attending to the interest of its creditors to be paid equitably.
o These interests are also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation.
 Clearly then, there are instances when corporate rehabilitation can no longer be achieved.
 When rehabilitation will not result in a better present value recovery for the creditors, the more appropriate remedy
is liquidation.
 Liquidation allows the corporation to wind up its affairs and equitably distribute its assets among its creditors.
 Liquidation is diametrically opposed to rehabilitation.
o Both cannot be undertaken at the same time.
 In rehabilitation, corporations have to maintain their assets to continue business operations.
 In liquidation, corporations preserve their assets in order to sell them.

Did Viva comply with the requirements for appeal of corporate rehabilitation cases? – NO

 Sec. 6 of Rule 43 provides:

o Sec. 6. Contents of the petition. – The petition for review shall:
 (a) state the full names of the parties to the case, without impleading the court or agencies either
as petitioners or respondents;
 (b) contain a concise statement of the facts and issues involved and the grounds relied upon for the
review;
 (c) be accompanied by a clearly legible duplicate original or a certified true copy of the award, judgment,
final order or resolution appealed from, together with certified true copies of such material portions of
the record referred to therein and other supporting papers; and
 (d) contain a sworn certification against forum shopping as provided in the last paragraph of section 2,
Rule 42. The petition shall state the specific material dates showing that it was filed within the period
fixed herein
 Viva failed to comply with these requirements.
o It did not implead its creditors as respondents.
o Instead, Viva only impleaded the Presiding Judge of the RTC, contrary to Sec. 6(a), Rule 43.
o It also did not serve a copy of the Petition on some of its creditors.
o It failed to serve a copy of the Petition on the RTC as well.
 Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is non-adversarial.
 A corporate rehabilitation case cannot be decided without the creditors’ participation.
 The court’s role is to balance the interests of the corporation, the creditors, and the general public.
o Impleading creditors as respondents on appeal will give them the opportunity to present their legal arguments
before the appellate court.

Can the courts convert rehabilitation proceedings into liquidation proceedings? - YES

 Under the Interim Rules of Procedure on Corporate Rehabilitation, a petition shall be dismissed if no rehabilitation plan is
approved by the court upon the lapse of 180 days from the date of the initial hearing.
 The proceedings are also deemed termination upon the trial court’s disapproval of a rehabilitation plan, or a determination
that the rehabilitation plan may no longer be implements in accordance with its terms, conditions, restrictions, or
assumptions.
 To determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough examination and analysis of
the distressed corporation’s financial data must be conducted.
 If the results of such examination and analysis show that there is a real opportunity to rehabilitate the corporation in view of
the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation
is feasible.
 On the other hand, if the results of the financial examination and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that liquidation would, in fact, better subserve the interests
of its stakeholders, then it may be said that a rehabilitation would not be feasible.
 In such case, the rehabilitation court may convert the proceedings into one for liquidation.

What are the tests that rehabilitation plan must meet? – Economic Feasibility Test & Present Value Recovery Test
  Professor Stephanie V. Gomez of the UP College of Law suggests specific characteristics of an economically feasible
rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily operations than if sold.
b. Liquidity issues can be addressed by practicable business plan that will generate enough cash to sustain
daily operations.
c. The debtor has a definite source of financing for the proper and full implementation of a Rehabilitation Plan
that is anchored on realistic assumptions and goals.
 On the other hand, this court enumerated the characteristics of a rehabilitation plan that is infeasible:
a. The absence of a sound and workable business plan
b. Baseless and unexplained assumptions, targets and goals
c. Speculative capital infusion or complete lack thereof for the execution of the business plan
d. Cash flow cannot sustain daily operations
e. Negative net worth and the assets are near full depreciation or fully depreciated.
 In addition to the tests of economic feasibility, Prof. Gomez also suggests that the FRIA emphasizes on rehabilitation that
provides for better present value recovery for its creditors.
o Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor will not be paid by
the debtor when the credit falls due.
o The court may order a suspension of payments to set a rehabilitation plan in motion; in the meantime, the creditor
remains unpaid.
o By the time the creditor is paid, the financial and economic conditions will have been changed.
o Money paid in the past has a different value in the future.
o Present value of the credit takes into account the interest that the amount of money would have earned
if the creditor were paid on time.
 Courts must ensure that the projected cash flow from a business’ rehabilitation plan allows for the closest present
value recovery for its creditors.
 If the projected cash flow is realistic and allows the corporation to meet all its obligations, then courts should favor
rehabilitation over liquidation.
 However, if the projected cash flow is unrealistic, then courts should consider converting the proceedings into that for
liquidation to protect the creditors.

Did Viva’s rehabilitation plan pass all the required tests? – NOPE.