BPI vs.

Sarabia Manor CREDTRANS: FRIA

Recit Ready Summary

Sarabia Hotel obtained a special loan package from Far East Bank and Trust Company (FEBTC) in order
to finance the construction of a five-storeyCruz v. CACruz v. CACruz v. CACruz v. CA hotel
building for the purpose of expanding its hotel business. An additional credit in addition to the loan was
approved by FEBTC in the same year. By virtue of a merger, BPI assumed all of FEBTC’s rights against
Sarabia. Sarabia started to pay interests on its loans. However, largely because of the delayed
completion of the builing, Sarabia incurred various cash flow problems. Thus, despite the fact that it had
more assets than liabilities at that time, it nevertheless' filed a petition for corporate rehabilitation with
prayer for the issuance of a stay order before the RTC as it foresaw the impossibility to meet its maturing
obligations to its creditors when they fall due.

The RTC approved Sarabia’s rehabilitation plan as recommended by the receiver, finding the same to be
feasible. It observed that the recommended rehabilitation plan "as also practical in terms of the interest
rate pegged at 6.5% p.a. since it is based on Sarabia’s ability to pay and the creditors, perceived cost of
money. The CA affirmed the RTC’s ruling with the modification of reinstating the surety obligations of
Sarabia’s stockholders to BPI as an additional safeguard for the effective implementation of the approved
rehabilitation plant. It also upheld the 6.75% p.a. interest on Sarabia’s loans, finding the said rate to be
reasonable given that BPI’s inerests as a creditor were properly accounted for. BPI mainly argues that the
approved rehabilitation plan did not give due regard to its interest as a secured creditor in view of the
imposition of a fixed interest rate of 6.75% p.a. and the extended loan repayment period.

Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the RTC? Yes.

The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and
thereby allow creditors to be paid their claims from its earnings. Thus, rehabilitation shall be undertaken
when it is shown that the continued operation of the corporation is economically more feasible and its
creditors can recover, by way of the present value of payments projected in the plan, more, if the
corporation continues as a going concern than if it is immediately liquidated.

The Interim Rules of Procedure on Corporate Rehabilitation 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. It
forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term
viability over immediate but incomplete recovery.

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.

In this case: (1) Sarabia has the financial capability to undergo rehabilitation, (2) Sarabia has the ability to
have sustainable profits over a long period of time, (3) The interests of Sarabia’s creditors are well-
protected.
Facts

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 1. Sarabia has been in the hotel business for over thirty years, tracing its operations back to 1972. Its
hotel building has been even considered a landmark in Iloilo, being one of its kind in the province
and having helped bring progress to the community. Since then, its expansion was continuous which
led to its decision to commence with the construction of a new hotel building.

2. Its contractor defaulted which impelled Sarabia to take-over the same. This significantly skewed its
projected revenues and led to various cash flow difficulties, resulting in its incapacity to meet its
maturing obligations. Thus, it filed a Petition for Rehabilitation with prayer of issuance of stay order.

3. In its proposed rehabilitation plan, Sarabia sought for the restructuring of all its outstanding loans,
submitting that the interest payments on the same be pegged at a uniform escalating rate of: (a) 7%
per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c) 10% p.a. for
the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for the year 2018.
Likewise, Sarabia sought to make annual payments on the principal loans starting in 2004, also in
escalating amounts depending on cash flow. Further, it proposed that it should pay off its
outstanding obligations to the government and its suppliers on their respective due dates, for the
sake of its day to day operations.

4. The RTC issued a Stay Order finding the proposal sufficient and appointed Valderrama as Sarabia’s
rehabilitation receiver. Thereafter, BPI filed its Opposition. After several hearings, evaluation was
conducted by the receiver. The Receiver found that Sarabia may be rehabilitated and recommended
among others the fixing of the interest rate at 6.75% p.a. plus 10% value added tax on interest for
the entire term of the restructured loans; and release the surety obligations of Sarabia’s
stockholders, considering the adequate collaterals and securities covered by the rehabilitation plan
and the continuing mortgages over Sarabia’s properties.

5. The RTC approved Sarabia’s rehabilitation plan as recommended by the Receiver, finding the same
to be feasible. The RTC did not give credence to BPI’s opposition to the Receiver’s recommended
rehabilitation plan as neither BPI nor the Receiver was able to substantiate the claim that BPI’s cost
of funds was at the 10% p.a. threshold. In this regard, the RTC gave more credence to the
Receiver’s determination of fixing the interest rate at 6.75% p.a., taking into consideration not only
Sarabia’s ability to pay, BPI’s perceived cost of money based on its own published interest rates for
deposits, rates for treasury bills and CB overnight borrowings.

6. CA affirmed the rehabilitation but reinstated the surety obligations of Sarabia’s stockholders to BPI
as an additional safeguard for the effective implementation of the approved rehabilitation plan

7. In its opposition, BPI mainly argues that the approved rehabilitation plan did not give due regard to
its interests as a secured creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and
the extended loan repayment period. It likewise avers that Sarabia’s misrepresentations in its
rehabilitation petition remain unresolved.

Issue: Ruling
Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as Yes
approved by the RTC, with the modification on the reinstatement of the surety
obligations of Sarabia’s stockholders
Rationale

The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and
thereby allow creditors to be paid their claims from its earnings. Thus, rehabilitation shall be undertaken
when it is shown that the continued operation of the corporation is economically more feasible and its
creditors can recover, by way of the present value of payments projected in the plan, more, if the
corporation continues as a going concern than if it is immediately liquidated.

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure

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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 to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery.

On the Feasibility of Sarabia’s rehabilitation

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.

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate more
cash if used in its daily operations than sold. Its liquidity issues can be addressed by a practicable
business plan that will generate enough cash to sustain daily operations, has a definite source of
financing for its proper and full implementation, and anchored on realistic assumptions and goals. This
remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole
purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the
following: (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; and (e) negative net worth and the
assets are near full depreciation or fully depreciated.

Sarabia has the financial capability to undergo rehabilitation.

Sarabia has the ability to have sustainable profits over a long period of time.
As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year growth
from the time that it applied for rehabilitation until the end of its rehabilitation plan in 2018.

The interests of Sarabia’s creditors are well-protected.

Disposition

Petition DENIED.