Pryce Corporation v.

China Banking Corp

DOCTRINE:

FACTS:
The case stemmed from Pryce Corporation (Pryce) being subjected to corporate rehabilitation as proposed by the
rehabilitation receiver. The Rehabilitation was granted by the rehabilitation court by issuing a stay order and appointing a
receiver upon finding that the petition was sufficient in form and substance.

Rehabilitation court issued a China Banking corporation (China Bank) elevated the case to the CA 7th division (CA
th
7 ) questioning the rehabilitation plan as it impaired the obligations of contracts. Bank of the Philippine Islands (BPI),
another creditor of Pryce, filed a separate petition with the CA assailing the same order by the rehabilitation court.

With respect to BPI’s appeal, the CA 1st division (CA 1st) granted its petition initially and set aside the order of the
rehabilitation court. On reconsideration, the CA stet aside its original decision and dismissed the complaint. BPI elevated it
to the SC 1st division (SC 1st) but denied the petition and reconsideration with finality (GR 180316).

Pryce appealed to the SC 1st decision of CA 7th granting China Bank’s petition. SC 1st denied the petition of Pryce and
affirmed decision of CA 7th. Both Pryce and China Bank filed a motion for reconsideration (1st motion). June 16, 2008 SC 1st
ruled with finality the separate motion for reconsideration by the parties

Pryce filed a 2nd motion for reconsideration (2nd motion) before SC 1st praying that decision of CA 1st be set aside.
CA 1st referred the case to the En Banc En Consulta (SC En Banc).

Pryce and China Bank filed a joint manifestation and motion to suspend proceedings as they wanted to work out a
mutually acceptable agreement, however despite being given 2 months, no agreement was filed by the parties. SC En Banc
now rules on the case

ISSUE:
1. WON the rehabilitation court is required to hold a hearing to comply with the “serious situations” test laid down in
the case of Rizal Commercial Banking Corp. v. IAC before issuing a stay order.
2. WON corporate rehabilitation is an impairment to the obligations of contracts

HELD:
1. NO. the rehabilitation court complied with the interim rules on the issuance of a stay order and appointment of a
rehabilitation receiver.

Section 6 of the Interim Rules states explicitly that “[i]f 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 x x x. ”

Compliant with the rules, the stay order was issued not later than five (5) days from the filing of the petition on July
9, 2004 after the rehabilitation court found the petition sufficient in form and substance.

We agree that when a petition filed by a debtor “alleges all the material facts and includes all the documents
required by Rule 4–2 [of the Interim Rules],” it is sufficient in form and substance.

Nowhere in the Interim Rules does it require a comprehensive discussion in the stay order on the court’s findings of
sufficiency in form and substance.

The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an “extraordinary, preliminary, ex
parte remed[y]. ”The effectivity period of a stay order is only “from the date of its issuance until dismissal of the petition or
termination of the rehabilitation proceedings.” It is not a final disposition of the case. It is an interlocutory order defined as
one that “does not finally dispose of the case, and does not end the Court’s task of adjudicating the parties’ contentions and
determining their rights and liabilities as regards each other, but obviously indicates that other things remain to be done by
the Court.”

Thus, it is not covered by the requirement under the Constitution that a decision must include a discussion of the
facts and laws on which it is based.

Neither does the Interim Rules require a hearing before the issuance of a stay order. What it requires is an initial
hearing before it can give due course to or dismiss a petition.
 Nevertheless, while the Interim Rules does not require the holding of a hearing before the issuance of a stay order,
neither does it prohibit the holding of one. Thus, the trial court has ample discretion to call a hearing when it is not confident
that the allegations in the petition are sufficient in form and substance, for so long as this hearing is held within the five (5)–
day period from the filing of the petition — the period within which a stay order may issue as provided in the Interim Rules.

2. NO. The SC has brushed aside invocations of the non-impairment clause to give way to the exercise of police power
and afford protection to labor

In Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc. which similarly involved corporate
rehabilitation, this court found no merit in Pacific Wide’s invocation of the non–impairment clause, explaining as follows:

We also find no merit in PWRDC’s contention that there is a violation of the impairment clause. Section 10, Article
III of the Constitution mandates that no law impairing the obligations of contract shall be passed. This case does not
involve a law or an executive issuance declaring the modification of the contract among debtor PALI, its creditors and
its accommodation mortgagors. Thus, the non–impairment clause may not be invoked. Furthermore, as held in Oposa
v. Factoran, Jr. even assuming that the same may be invoked, the non–impairment clause must yield to the police
power of the State. Property rights and contractual rights are not absolute. The constitutional guaranty of non–
impairment of obligations is limited by the exercise of the police power of the State for the common good of the
general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees, and economy in
general. The court may 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. The rehabilitation plan, once approved, is 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 have opposed
the plan or whether or not their claims have been scheduled.

rehabilitation is one of many statutorily provided remedies for businesses that experience a downturn. Rather than
leave the various creditors unprotected, legislation now provides for an orderly procedure of equitably and fairly addressing
their concerns. Corporate rehabilitation allows a court–supervised process to rejuvenate a corporation. Its twin, insolvency,
provides for a system of liquidation and a procedure of equitably settling various debts owed by an individual or a business.
It provides a corporation’s owners a sound chance to re–engage the

NOTE: In Relation to Issue #1

Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation does not always result
in the appointment of a receiver or the creation of a management committee. The SEC has to initially determine whether
such appointment is appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of Presidential
Decree No. 902–A, certain situations must be shown to exist before a management committee may be created or appointed,
such as:

1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties; or
2. when there is paralization of business operations of such corporations or entities which may be prejudicial to the
interest of minority stockholders, parties–litigants or to the general public.

On the other hand, receivers may be appointed whenever:

These situations are rather serious in nature, requiring the appointment of a management committee or a receiver
to preserve the existing assets and property of the corporation in order to protect the interests of its investors and creditors.

Thus, in such situations, suspension of actions for claims against a corporation as provided in Paragraph (c) of Section
6, of Presidential Decree No. 902–A is necessary, and here we borrow the words of the late Justice Medialdea, “so as not to
render the SEC management Committee irrelevant and inutile and to give it unhampered ‘rescue efforts’ over the distressed
firm” (Rollo, p. 265).”

Otherwise, when such circumstances are not obtaining or when the SEC finds no such imminent danger of losing
the corporate assets, a management committee or rehabilitation receiver need not be appointed and suspension of actions
for claims may not be ordered by the SEC. When the SEC does not deem it necessary to appoint a receiver or to create a
management committee, it may be assumed, that there are sufficient assets to sustain the rehabilitation plan, and that the
creditors and investors are amply protected. However, this case had been promulgated prior to the effectivity of the Interim
Rules that took effect on December 15, 2000.