Allied Banking Corporation vs. Equitable PCI Bank, Inc.

A rehabilitation court’s stay order is effective from the date of its issuance and is immediately executory; the rehabilitation court may nullify a creditor’s set-off or payment made after issuance but before publication, provided publication later satisfies due process. The effects of a commencement order under the Rehabilitation Rules retroact to the date of filing of the rehabilitation petition.

Steel Corporation of the Philippines (SCP) was a debtor corporation that had obtained term loan facilities and working capital lines from various banks, including Equitable PCI Bank, Inc. (EPCIB) and Allied Banking Corporation (ABC). ABC’s claim arose from a revolving credit facility denominated as a letter of credit/trust receipt line in the amount of P100 million, under which SCP executed a trust receipt authorizing ABC to charge SCP’s account upon default. Corporate rehabilitation in the Philippines was then governed by the 2000 Interim Rules of Procedure on Corporate Rehabilitation; later, A.M. No. 12-12-11-SC, or the Financial Rehabilitation Rules of Procedure, and Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010, revised the framework and governed further proceedings in pending cases.

Steel Corporation of the Philippines (SCP) experienced a downward trend in its financial condition due to the 1997 Asian Financial Crisis. Various banks and financial institutions granted SCP term loan facilities and working capital lines, but SCP failed to make timely payments and defaulted on its loan obligations under the December 2002 Omnibus Agreement, where lending banks and other financial institutions agreed to reschedule and restructure SCP’s payments on principal and interest, reinstate its working capital lines, and establish a new trade financing line. ABC granted SCP a revolving credit facility denominated as a letter of credit/trust receipt line in the amount of P100 million, which SCP availed of to finance the importation of raw materials. Pursuant to this arrangement, SCP executed a trust receipt authorizing ABC to charge SCP’s account upon default, non-payment at maturity, or non-payment of any indebtedness.

On 11 September 2006, EPCIB, as creditor, filed a petition for corporate rehabilitation of SCP with the RTC, Branch 2, Batangas City. On 12 September 2006, the RTC issued an Order granting the petition. The Order appointed Santiago T. Gabionza Jr. as Rehabilitation Receiver, directed him to take possession, control, and custody of SCP’s assets, stayed all claims against SCP, prohibited SCP from selling, encumbering, transferring, or disposing of its assets except in the ordinary course of business or as approved by the Rehabilitation Receiver, and directed all creditors and interested parties to file verified comments. The Order was published on 16 September 2006, and ABC filed its verified comment on 17 October 2006.

On 15 September 2006, ABC applied the remaining proceeds of SCP’s Current Account No. 1801-004-87-6, maintained with ABC’s Aguirre Branch, in the amount of P6,750,000.00, to SCP’s obligations under the trust receipt. On 29 October 2006, SCP filed an urgent omnibus motion alleging that ABC violated the rehabilitation court’s stay order when it applied the proceeds of the current account to obligations covered by the stay order. SCP prayed that ABC be ordered to immediately restore its current account, credit back the amount of P6,750,000.00, and honor any and all transactions of SCP in said account.

On 2 November 2006, ABC filed an opposition, mainly contending that SCP’s obligations with it had become due and demandable, rendering legal compensation valid and proper; that ABC did not violate the stay order because it had no notice of its issuance at the time of the legal compensation; and that ABC cannot be legally compelled to extend credit to SCP against its will. On 22 November 2006, the RTC issued a Resolution finding merit in SCP’s position and ordered ABC to restore SCP’s Current Account No. 1801-004-87-6, credit back the entire deposit balance of P6,750,000.00, and honor any and all transactions of SCP in said account as approved by the Rehabilitation Receiver. The RTC found that ABC had applied the proceeds after the stay order was issued, and the CA affirmed, holding that the stay order was effective from issuance and that the account was under custodia legis.

• Due Process and Jurisdiction: ABC argued that it was deprived of its right to due process when the RTC ordered it to restore SCP’s current account and credit back the amount previously set off, because jurisdiction over ABC had not yet been acquired by the rehabilitation court when it made the set-off on 15 September 2006; the stay order was published only on 16 September 2006.
• Legal Compensation: ABC maintained that when it offset the proceeds in the subject account, it merely applied the provisions of law on legal compensation, since SCP had already incurred a default in its obligations rendering operative the terms of the trust receipt it had issued.
• No Notice and No Violation of Stay Order: ABC asserted that it did not violate the stay order because it had no notice of its issuance at the time of the legal compensation.
• Impairment of Contract and Credit Extension: ABC contended that the subject resolution constituted an impairment of its contract with SCP because under the trust receipt, ABC had the right to charge SCP’s account in case of nonpayment of any indebtedness; ABC also argued that it cannot be legally compelled to extend credit to SCP against its will.

• Due Process and Jurisdiction: Whether ABC is bound by the 12 September 2006 stay order even though it was published only on 16 September 2006, such that the order to restore the account deprived ABC of due process.
• Effectivity of Stay Order and Nullification of Pre-Publication Acts: Whether ABC was prohibited from applying the proceeds of SCP’s deposit account from the date of issuance of the stay order on 12 September 2006, as the proceeds were already under custodia legis, and whether the rehabilitation court could invalidate acts made after issuance but prior to publication.
• Applicability of the Rehabilitation Rules: Whether the 2013 Rehabilitation Rules may be applied to a rehabilitation petition filed under the 2000 Interim Rules.
• Impairment of Contract: Whether the rehabilitation court’s order to restore the account and credit back the set-off amount impaired ABC’s contract with SCP.

• Due Process and Jurisdiction: No. The stay order was immediately executory and effective from issuance under the Interim Rules; publication is required for jurisdiction over affected parties, but ABC was published and filed a verified comment, satisfying due process.
• Effectivity of Stay Order and Nullification of Pre-Publication Acts: Yes. The stay order was effective from 12 September 2006, and the rehabilitation court could nullify ABC’s 15 September 2006 set-off under Section 8 of the Interim Rules, even though publication came later.
• Applicability of the Rehabilitation Rules: Yes. Section 2, Rule 1 of the Rehabilitation Rules and Section 146 of R.A. No. 10142 allow application to pending cases unless infeasible or unjust; the retroactive effect of the commencement order supports the RTC’s order.
• Impairment of Contract: No. The law is deemed written into the trust receipt; the stay merely suspended enforcement and did not eliminate or reduce SCP’s debt, so ABC’s contractual right was not impaired.

• Due Process and Jurisdiction: Rehabilitation proceedings are considered in rem, and jurisdiction over all affected parties is acquired upon publication of the notice of commencement of proceedings. The immediate effectivity of the stay order is not inconsistent with the publication requirement. Publication means that all affected persons must be notified that, as of a particular date, the debtor requires rehabilitation and should temporarily be exempt from paying its obligations unless allowed by the court. Once due notice is made, the rehabilitation court may nullify actions inconsistent with the stay order but taken prior to publication, precisely because prior to publication creditors may not yet be aware that they are to desist from pursuing claims against the insolvent debtor. Here, the 12 September 2006 Order was published on 16 September 2006, contained a directive for all creditors to file their verified comments, and ABC filed its verified comment on 17 October 2006. ABC was therefore notified of the rehabilitation proceedings and given an opportunity to be heard, satisfying due process. There was also no undue deprivation of property because SCP’s obligation to ABC remains.
• Effectivity of Stay Order and Nullification of Pre-Publication Acts: Under Section 11, Rule 4 of the Interim Rules, the stay order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. Under Section 5, Rule 3 of the Interim Rules, any order issued by the court is immediately executory, and a petition for review or appeal does not stay execution unless restrained or enjoined by the appellate court. Section 8 of the Interim Rules further allows the court, upon motion or motu proprio, to declare void any transfer of property or any other conveyance, sale, payment, or agreement made in violation of its stay order. The RTC issued the stay order on 12 September 2006, and ABC applied the proceeds on 15 September 2006. The RTC properly invalidated ABC’s action made after the subject order was issued. The immediate effectivity of the stay order means the RTC can not only prohibit but also nullify acts made after its effectivity when such acts violate the stay order, to prevent irreparable detriment to the debtor’s successful restoration.
• Applicability of the Rehabilitation Rules: The rehabilitation petition was filed under the 2000 Interim Rules. On 27 August 2013, the Court enacted A.M. No. 12-12-11-SC, or the Financial Rehabilitation Rules of Procedure, which amended and revised the Interim Rules and the 2008 Rules to incorporate the significant changes brought about by R.A. No. 10142. Section 2, Rule 1 of the Rehabilitation Rules provides that the Rules shall govern all further proceedings in suspension of payments and rehabilitation cases already pending, except to the extent that, in the opinion of the court, its application would not be feasible or would work injustice. Section 146 of R.A. No. 10142 contains a similar mandate. The Court ruled that the Rehabilitation Rules may be applied. Under the Rehabilitation Rules, the commencement order stays claims against the debtor, and its effects retroact to the date of filing of the petition. Section 9 of the Rehabilitation Rules renders void any attempt to collect on or enforce a claim against the debtor or to set off any debt by the debtor’s creditors after the commencement date. The RTC order of 12 September 2006 is akin to a commencement order. If the Rehabilitation Rules were applied, the offsetting on 15 September 2006, after the commencement date on 11 September 2006, would be void. Application of the Rehabilitation Rules is proper to clarify the effect of an order staying claims against a debtor sought to be rehabilitated, promotes a just and sound resolution, and is feasible because the subject resolution was within the rehabilitation court’s powers.
• Impairment of Contract: ABC claimed that the subject resolution impaired its contract with SCP because the trust receipt gave ABC the right to charge SCP’s account upon nonpayment. The law is deemed written into every contract, such that while a contract is the law between the parties, the provisions of positive law which regulate contracts shall limit and govern their relations. At the time the trust receipt agreement was entered into, the law expressly allowed corporations to be declared in a state of suspension of payments under Section 5(d) of Presidential Decree No. 902-A, as amended by Presidential Decree No. 1758. The law and its implementing rules are deemed incorporated in the trust receipt agreement, thereby limiting ABC’s right to enforce its claim against SCP once a stay or suspension order is issued. The principle on inviolability of contracts was not violated. The subject order did not eliminate or reduce SCP’s obligations to ABC but merely suspended its enforcement while rehabilitation is being undertaken. In Golden Merchandising Corporation vs. Equitable PCI Bank, the Court ruled that there was no impairment because the provision in question did not divest juridical persons of their right to redeem but merely modified the time for the exercise of such right. Similarly, ABC was not deprived of its right to enforce its claim against SCP. Section 8 of the Rehabilitation Rules even allows the creditor to commence actions or proceedings to preserve ad cautelam a claim against the debtor and to toll the running of the prescriptive period to file the claim.

• Immediate Effectivity of a Rehabilitation Stay Order — Under the Interim Rules, a stay order is effective from the date of its issuance until the dismissal of the petition or termination of rehabilitation proceedings, and any order issued by the rehabilitation court is immediately executory. The Court applied this rule to hold that ABC was bound by the 12 September 2006 stay order from its issuance, even though publication occurred later.
• Retroactive Effect of a Commencement Order — Under the Rehabilitation Rules, the effects of a commencement order retroact to the date of filing of the rehabilitation petition, and any set-off after the commencement date by a creditor is void. The Court applied this principle to clarify that the RTC’s 12 September 2006 order, akin to a commencement order, could support nullification of ABC’s 15 September 2006 set-off.
• In Rem Nature of Rehabilitation Proceedings and Due Process — Rehabilitation proceedings are in rem; jurisdiction over all affected parties is acquired upon publication of the notice of commencement. Publication satisfies due process by notifying affected persons that the debtor requires rehabilitation and should temporarily be exempt from paying obligations unless allowed by the court. Once jurisdiction is acquired, the court may nullify acts inconsistent with the stay order even if taken before publication. ABC’s filing of a verified comment after publication satisfied due process.
• Power to Nullify Acts Violating the Stay Order — Section 8 of the Interim Rules allows the rehabilitation court, upon motion or motu proprio, to declare void any transfer of property or any other conveyance, sale, payment, or agreement made in violation of its stay order. The Court applied this to uphold the RTC’s invalidation of ABC’s set-off.
• No Impairment of Contract in Rehabilitation Stay — The law is deemed written into every contract, and positive law regulating contracts limits and governs the parties’ relations. A rehabilitation stay that merely suspends enforcement of a claim without eliminating or reducing the debt does not violate the constitutional proscription on impairment of contracts. The Court applied this to ABC’s trust receipt.
• Applicability of New Rehabilitation Rules to Pending Cases — The Rehabilitation Rules and R.A. No. 10142 apply to pending suspension of payments and rehabilitation cases, except when application would not be feasible or would work injustice. The Court applied the Rehabilitation Rules to clarify the retroactive effect of the stay order.

• "The effects of the court's issuance of a Commencement Order shall retroact to the date of the filing of the petition and, in addition to the effects of a Stay or Suspension Order described in the foregoing section, shall" — This passage states the retroactive effect of a commencement order under the Rehabilitation Rules, which the Court used to support the validity of the rehabilitation court’s order nullifying ABC’s post-filing set-off.
• "The stay order shall be effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings." — This is the Interim Rules provision on the period of the stay order; the Court relied on it to hold that ABC was bound from 12 September 2006, not from the later date of publication.
• "Once due notice is made, the rehabilitation court may nullify actions inconsistent with the stay order but which may have been taken prior to publication, precisely because prior to publication, creditors may not yet be aware that they are to desist from pursuing claims against the insolvent debtor." — This passage articulates the ratio for upholding the rehabilitation court’s power to invalidate pre-publication acts that violate the stay order.
• "The law is deemed written into every contract, such that while a contract is the law between the parties, the provisions of positive law which regulate contracts shall limit and govern their relations." — This passage grounds the Court’s rejection of ABC’s impairment-of-contract argument, since rehabilitation laws and rules are deemed incorporated into the trust receipt.

• Philippine Bank of Communications vs. Basic Polyprinters and Packaging Corporation, 745 Phil. 651 (2014) — Cited for the equitable and rehabilitative purposes of rehabilitation proceedings: efficient and equitable distribution of an insolvent debtor’s remaining assets and providing the debtor a fresh start.
• BIR vs. Lepanto Ceramics, Inc., G.R. No. 224764, 24 April 2017 — Cited for the proposition that the filing of a rehabilitation petition is an acknowledgment of financial distress and an attempt to conserve and administer the debtor’s assets, and that rehabilitation aims to minimize expenses during the rehabilitation period.
• Golden Merchandising Corporation vs. Equitable PCI Bank, 706 Phil. 427 (2013) — Cited for the rule that no impairment of contract exists where the law does not divest a party of its right but merely modifies the time for the exercise of that right.
• Heirs of Severina San Miguel vs. CA, 416 Phil. 943 (2001); Sulo Sa Nayon, Inc. vs. Nayong Filipino Foundation, 596 Phil. 715 (2009) — Cited for the principle that the law is deemed written into every contract and limits and governs the parties’ relations.
• Aberca, et al. vs. Ver, et al., 684 Phil. 207 (2012) — Cited for the essence of procedural due process: it hears before it condemns, proceeds upon inquiry, and renders judgment only upon trial, contemplating notice and opportunity to be heard.
• De Pedro vs. Romasan Development Corporation, 748 Phil. 706 (2014) — Cited for the nature of in rem actions as binding upon the whole world and for the rule that courts need not acquire jurisdiction over the person of the defendant in in rem actions, only jurisdiction over the res.
• Biaco vs. Philippine Countryside Rural Bank, 544 Phil. 45 (2007) — Cited for the distinction between in rem actions, which are against the thing itself, and in personam actions, which are against a person on the basis of personal liability.

• Section 1, Rule 3, Interim Rules — Provides that any proceeding initiated under the Interim Rules is considered in rem, and jurisdiction over all those affected is acquired upon publication of the notice of commencement of proceedings. The Court used this to explain that publication is the operative act for jurisdiction over affected parties.
• Section 11, Rule 4, Interim Rules — Provides that the stay order is effective from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings. The Court applied this to hold ABC bound from 12 September 2006.
• Section 5, Rule 3, Interim Rules — Provides that any order issued by the court under the Interim Rules is immediately executory, and a petition for review or appeal does not stay execution unless restrained or enjoined by the appellate court. The Court relied on this to affirm the immediate effectivity of the stay order.
• Section 8, Interim Rules — Provides that upon motion or motu proprio, the court may declare void any transfer of property or any other conveyance, sale, payment, or agreement made in violation of its stay order or the Interim Rules. The Court applied this to uphold the nullification of ABC’s set-off.
• Section 2, Rule 1, Rehabilitation Rules — Provides that the Rehabilitation Rules shall govern all further proceedings in suspension of payments and rehabilitation cases already pending, except when application would not be feasible or would work injustice. The Court applied this to allow use of the Rehabilitation Rules.
• Section 9, Rehabilitation Rules — Provides that the effects of a commencement order retroact to the date of filing of the petition and renders void any extrajudicial activity to collect or enforce a claim and any set-off after the commencement date. The Court used this to support the retroactive effect of the stay order.
• Section 8, Rehabilitation Rules — Provides that rehabilitation proceedings commence from the date of filing of the petition and that the issuance of a stay order does not affect the right to commence actions to preserve ad cautelam a claim and toll the prescriptive period. The Court cited this to show ABC was not deprived of its right to enforce its claim.
• Section 146, R.A. No. 10142 — Provides that the Act governs all petitions filed after its effectivity and all further proceedings in pending insolvency, suspension of payments, and rehabilitation cases, except when application would not be feasible or would work injustice. The Court cited this as consistent with the Rehabilitation Rules’ scope provision.
• Section 5(d), Presidential Decree No. 902-A, as amended by Presidential Decree No. 1758 — Allowed corporations to be declared in a state of suspension of payments under specific instances. The Court held this law and its implementing rules were deemed incorporated in the trust receipt, limiting ABC’s right to enforce its claim once a stay order was issued.
• Section 6, Rule 4, Interim Rules — Cited in the RTC’s stay order as the basis for staying all claims against SCP. The Court’s analysis treated the stay order as effective from issuance.

Velasco, Jr. (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concur.