Philippine Bank of Communications vs. Basic Polyprinters and Packaging Corporation

PHILIPPINE BANK OF COMMUNICATIONS
vs.
BASIC POLYPRINTERS AND PACKAGING CORPORATION
Facts: BPPC filed a Rehabilitation Program with the RTC with the following contents:
(a) its business since incorporation had been very viable and financially profitable;
(b) it had obtained loans from various banks, and had owed accounts payable to various
creditors;
(c) the Asian currency crisis, devaluation of the Philippine peso, and the current state of
affairs of the Philippine economy, coupled with:
(i) high interest rates, penalties and charges by its creditors;
(ii) low demand for gift items and cards due to the economic recession and the use
of cellular phones;
(iii) direct competition from stores like SM, Gaisano, Robinson and other malls;
and
(iv) the fire of July 19, 2002 that had destroyed its warehouse containing inventories
worth ₱264,000,000.00, resulting in difficulty of meeting its obligations;
(d) its operations would be hampered and would render rehabilitation difficult should its
creditors enforce their claims through legal actions, including foreclosure proceedings;
(e) included in its overall Rehabilitation Program was the full payment of its outstanding
loans in favor of petitioner Philippine Bank of Communications (PBCOM), RCBC, Land
Bank, EPCI Bank and AUB via repayment over 15 years with moratorium of two-years for
the interest and five years for the principal at 5% interest per annum and a dacion en pago
of its affiliate property in favor of EPCI Bank; and
(f) its assets worth ₱15,374,654.00 with net liabilities amounting to ₱13,031,438.00.
PBCom, a creditor of BPPC, opposed the program. Among its reasons is that the "detailed
rehabilitation plan" does not provide material financial commitments from BPPC itself or would-be
investors.
The RTC approved the program stating that:
“Petitioner’s primary business is in the printing business. Based on its updated financial report,
the financial condition has greatly improved.
However, because of the indebtedness and the slowdown in sales brought about by a depressed
economy, the present income from the operations will be insufficient to pay off its maturing obligations.
Thus, the success of the rehabilitation planlargely depends on its ability to reduce its debt obligation to a
manageable level by the suspension of payments of obligations and the proposed "dacion en pago.".”
The CA affirmed the questioned order of the RTC, agreeing with the finding of the rehabilitation
receiver that there were sufficient evidence, factors and actual opportunities in the rehabilitation plan
indicating that Basic Polyprinters could be successfully rehabilitated in due time.
Issue: Are the financial commitments made by BPPC sufficient to be called material financial
commitments?
Ruling: They are not.
A material financial commitment is significant in a rehabilitation plan. BPPC made no
commitment in relation to the infusion of fresh capital by its stakeholders, and presented only a "lopsided"
protracted repayment schedule that included the dacion en pago involving an asset mortgaged to PBCom
itself in favor of another creditor.
A material financial commitment becomes significant in gauging the resolve, determination,
earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness and ability to contribute
funds or property to guarantee the continued successful operation of the debtor corporation during the
period of rehabilitation.
BPPC presented financial commitments, as follows:
(a) Additional ₱10 million working capital to be sourced from the insurance claim;
(b) Conversion of the directors’ and shareholders’ deposit for future subscription to common stock;
(c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase the
company’s equity; and
(d) All liabilities (cash advances made by the stockholders) of the company from the officers and
stockholders shall be treated as trade payable
However, these financial commitments were insufficient for the purpose.
(a) The commitment to add ₱10,000,000.00 working capital appeared to be doubtful considering
that the insurance claim from which said working capital would be sourced had already been
written-off by BPPC’s affiliate, Wonder Book Corporation. A claim that has been written-off is
considered a bad debt or a worthless asset, and cannot be deemed a material financial commitment
for purposes of rehabilitation. At any rate, the proposed additional working capital was insufficient
to cover at least half of the shareholders’ deficit that amounted to ₱23,316,044.00.
(b, c and d). Conversion of all deposits for future subscriptions to common stock and the treatment
of all payables to officers and stockholders as trade payables was hardly constituting material
financial commitments. Such "conversion" of cash advances to trade payables was, in fact, a
mere re-classification of the liability entry and had no effect on the shareholders’ deficit. On
the other hand, we cannot determine the effect of the "conversion" of the directors’ and
shareholders’ deposits for future subscription to common stock and substituted liabilities on
the shareholders’ deficit because their amounts were not reflected in the financial statements
contained in the rollo.
Basic Polyprinters’s proposal to enter into the dacion en pago to create a source of "fresh capital"
was not feasible because the object thereof would not be its own property but one belonging to its affiliate,
TOL Realty and Development Corporation, a corporation also undergoing rehabilitation. Moreover, the
negotiations (for the return of books and magazines from Basic Polyprinters’s trade creditors) did not
partake of a voluntary undertaking because no actual financial commitments had been made thereon.
Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters,
being one of the corporations that had filed the joint petition for suspension of payments and rehabilitation.
Both of them submitted identical commitments in their respective rehabilitation plans. As a result,
as the Court observed in Wonder Book, the commitments by Basic Polyprinters could not be
considered as firm assurances that could convince creditors, future investors and the general public
of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation
proceedings, BPPC was expected to exert a conscious effort in formulating the same, for such plan would
spell the future not only for itself but also for its creditors and the public in general.
However, we must endeavor to balance the interests of all the parties that had a stake in the success
of rehabilitating the debtors. In doing so here, we cannot now find the rehabilitation plan for Basic
Polyprinters to be genuine and in good faith, for it was, in fact, unilateral and detrimental to its
creditors and the public.
BPPC’s rehabilitation plan was dismissed and it was made to pay the costs of the suit.

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