EXPRESS INVESTMENTS VS.

BAYANTEL
G.R. No. 174457
December 5, 2012

Facts:
This case involves 7 consolidated petitions for review on certiorari filed in connection with
the corporate rehabilitation of Bayan Telecommunications, Inc. (Bayantel).

Bayantel Domestic Corporation engaged in the business of providing telecommunication

services
98.6% of Bayantel owned by Bayan Telecommunications Holdings Corporation (BTHC)
85.4% of BTHC owned by the Lopez Group of Companies and Benpres Holdings Corporation

Bayantel entered into several credit agreements. To secure said loans, Bayantel executed an
Omnibus Agreement and an EVTELCO Mortgage Trust Indenture.

Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor

of the lenders under the Omnibus Agreement (hereinafter, Omnibus Creditors, Bank
Creditors, or secured creditors). In the Assignment Agreement, Bayantel bound itself to
assign, convey and transfer to the Collateral Agent, certain properties as collateral security
for the prompt and complete payment of its obligations to the Omnibus Creditors.

Foreseeing the impossibility of further meeting its obligations, Bayantel sent a proposal for
the restructuring of its debts to the Bank Creditors and the Holders of Notes. To facilitate the
negotiations between Bayantel and its creditors, an Informal Steering Committee was
formed. In its initial proposal called the "First Term Sheet," Bayantel suggested a 25% write-
off of the principal owing to the Holders of Notes. The Informal Steering Committee rejected
the idea, but accepted Bayantels proposal to pay the restructured debt, pari passu, out of
its cash flow. This pari passu or equal treatment of debts, however, was opposed by the
Bank Creditors who invoked their security interest under the Assignment Agreement.

Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped
paying the Holders of Notes. Bayantels total indebtedness had reached US$674 million or
P35.928 billion in unpaid principal and interest. Out of its total liabilities, Bayantel allegedly
owes 43.2% or US$291 million (P15.539 billion) to the Holders of the Notes.

The Bank of New York, as trustee for the Holders of the Notes, wrote Bayantel an
Acceleration Letter declaring immediately due and payable the principal, premium interest,
and other monetary obligations on all outstanding Notes. Then, The Bank of New York filed a
petition for the corporate rehabilitation of Bayantel upon the instructions of the Informal
Steering Committee.

Pasig RTC issued a Stay Order, which directed, among others, the suspension of all claims
against Bayantel and required the latters creditors and other interested parties to file a
comment or opposition to the petition. The court appointed Atty. Noval as receiver wherein
he classified Bayantels debts into three:
1) Those owed to secured Bank Creditors pursuant to the Omnibus Agreements (Omnibus
Creditors);
2) Those owed to Holders of the Senior Notes and Bank Creditors combined (Chattel
Creditors);
3) Those that Bayantel owed to persons other than Financial Creditors/unsecured creditors.
Subsequently, negotiations for the restructuring of Bayantels debt reached an impasse
when the Informal Steering Committee insisted on a pari passu treatment of the claims of
both secured and unsecured creditors.

Pasig RTC, acting as a Rehabilitation Court, approved the Report and Recommendations
attached by the Receiver, subject to the following clarifications and/or amendments. 1
Dissatisfied, The Bank of New York filed a Notice of Appeal, so did the others, which filed a
Joint Record on Appeal.

Bayantel submitted an Implementing Term Sheet to the Rehabilitation Court and the
Receiver. Claiming that said Term Sheet was inadequate to protect the interest of the
creditors, The Bank of New York filed a Manifestation, praying for the constitution of a
Monitoring Committee and the creation of a convertible debt instrument to cover the
unsustainable portion of the restructured debt.

The Rehabilitation Court issued an Order directing the creation of a Monitoring Committee to
be composed of one member each from the group of Omnibus Creditors and unsecured
creditors, and a third member to be chosen by the unanimous vote of the first two members.
In case of disagreement between the Monitoring Committee and the Board of Directors of
Bayantel on any of the foregoing matters, the same shall be submitted to the Court for
resolution.

Petition of Express Investments III Private Ltd. and Export Development Canada

(guys, there is a long discussion about rehabilitation proceedings in the case, as what weve
learned in Credtrans *triggered* pls check nalang to refresh your memory)

Issue: Whether secured creditors may enforce preference in payment during

rehabilitation by virtue of a contractual agreement?

Held: NO. Section 6(c), PD 902-A provides that upon the appointment of a management
committee, rehabilitation receiver, board or body, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly. The suspension of action for claims
against the corporation under a rehabilitation receiver or management committee embraces
all phases of the suit, be it before the trial court or any tribunal or before this Court.

The justification for suspension of actions for claims is to enable the management
committee or rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extrajudicial interference that might unduly hinder or prevent the "rescue" of the
debtor company. It is intended to give enough breathing space for the management
committee or rehabilitation receiver to make the business viable again without having to
divert attention and resources to litigation in various fora.

Alemars Sibal & Sons, Inc. v. Judge Elbinias case: During rehabilitation receivership,
the assets are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of an
attachment, execution or otherwise. As between the creditors, the key phrase is
"equality is equity." When a corporation threatened by bankruptcy is taken over
by a receiver, all the creditors should stand on equal footing. Not anyone of them
should be given any preference by paying one or some of them ahead of the
others.
1
The principle of equality in equity has been cited as the basis for placing secured and
unsecured creditors in equal footing or in pari passu with each other during rehabilitation.
Pari passu is used especially of creditors who, in marshaling assets, are entitled to receive
out of the same fund without any precedence over each other.

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court case: Whenever a

distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert preference but shall stand on equal footing with other
creditors. Foreclosure shall be disallowed so as not to prejudice other creditors, or cause
discrimination among them. Preferred creditors of distressed corporations shall stand on
equal footing with all other creditors only after a rehabilitation receiver or management
committee has been appointed.

Guidelines for the treatment of claims against corporations undergoing rehabilitation:

1. All claims against corporations, partnerships, or associations that are pending before any
court, tribunal, or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board, or body in accordance with the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment of a
management committee, rehabilitation receiver, board, or body. In the event that
the assets of the corporation, partnership, or association are finally liquidated, however,
secured and preferred credits under the applicable provisions of the Civil Code will definitely
have preference over unsecured ones.
Basically, once a management committee or rehabilitation receiver has been appointed in
accordance with PD 902-A, no action for claims may be initiated against a distressed
corporation and those already pending in court shall be suspended in whatever stage they
may be. Notwithstanding, secured creditors shall continue to have preferred status but the
enforcement thereof is likewise held in abeyance. However, if the court later determines that
the rehabilitation of the distressed corporation is no longer feasible and its assets are
liquidated, secured claims shall enjoy priority in payment.
While Section 24(d), Rule 4 of the Interim Rules states that contracts and other
arrangements between the debtor and its creditors shall be interpreted as continuing to
apply, this holds true only to the extent that they do not conflict with the provisions of the
plan. Here, the stipulation in the Assignment Agreement to the effect that Bayantel shall pay
petitioners in full and ahead of other creditors out of its cash flow during rehabilitation
directly impinges on the provision of the approved Rehabilitation Plan. In the event that the
court terminates the proceedings for reasons other than the successful implementation of
the plan, the secured creditors may foreclose the securities and the proceeds thereof
applied to the satisfaction of their preferred claims.

2) Issue: Whether the pari passu treatment of claims violates not only the due
regard provision in the Interim Rules but also the Contract Clause in the 1987
Constitution? NO.

a) On the Due regard provision

When the Rules of Procedure on Corporate Rehabilitation took effect on January 16, 2009,
the "due regard" provision was amended to read:
SEC. 18. Rehabilitation Plan. The rehabilitation plan shall include (a) the desired business
targets or goals and the duration and coverage of the rehabilitation; (b) the terms and
conditions of such rehabilitation which shall include the manner of its implementation, giving
due regard to the interests of secured creditors such as, but not limited, to the non-
impairment of their security liens or interests; x x x.
Despite the additional phrase, however, the amendment simply amplifies the meaning of the
due regard provision in the Interim Rules.
i) The amendment exemplifies what giving due regard to the interests of secured creditors
contemplates, mainly, the non-impairment of securities.
ii) The specific reference to security liens and interests, separated by the disjunctive or,
describes what the interests of secured creditors consist of. Again, lien pertains only to
interests providing security that are created by operation of law while security interests
include those acquired by contract for the purpose of securing payment or performance of
an obligation or indemnifying against loss or liability.
iii) The addition of the phrase but not limited in the amendment shuns a rigid application of
the provision by recognizing that giving due regard to the interest of secured creditors may
be rendered in other ways than taking care that the security liens and interests of secured
creditors are adequately protected.

Petitioners are not without any remedy to address a deficiency in securities, if and when it
comes about. Under Section 12, Rule 4 of the Interim Rules, a secured creditor may file a
motion with the Rehabilitation Court for the modification or termination of the stay order. If
petitioners can show that arrangements to insure or maintain the property or to make
payment or provide additional security therefor is not feasible, the court shall modify the
stay order to allow petitioners to enforce their claim that is, to foreclose the mortgage and
apply the proceeds thereof to their claims. Be that as it may, the court may deny the
creditor this remedy if allowing so would prevent the continuation of the debtor as a going
concern or otherwise prevent the approval and implementation of a rehabilitation plan.

Neither the "due regard provision" nor contractual arrangements can shackle the
Rehabilitation Court in determining the best means of rehabilitating a distressed corporation.
The Rehabilitation 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.

In determining whether or not the opposition of the creditors is manifestly unreasonable, the
court shall consider the following:
a) That the plan would likely provide the objecting class of creditors with compensation
greater than that which they would have received if the assets of the debtor were sold by a
liquidator within a three-month period;
b) That the shareholders or owners of the debtor lose at least their controlling interest as a
result of the plan; and
c) The Rehabilitation Receiver has recommended approval of the plan.

The Receiver concluded that the shareholders shall receive nothing on respondents
liquidation while the latters creditors can expect significantly less than full repayment.
Moreover, regardless of whether the shareholders will lose at least their controlling interest
as a result of the plan, petitioners have signified their conformity with the CA decision to
limit the conversion of the unsustainable debt to a maximum of 40% of the fully-paid up
capital of respondent corporation. Lastly, the Receiver not only recommended the approval
of the Plan by the Rehabilitation Court, he, himself, prepared it. The concurrence of these
conditions renders the opposition of petitioners manifestly unreasonable.

b) On the Contract Clause

Article III, Section 10 of the Constitution mandates that no law impairing the obligation of
contracts shall be passed. Any law, which enlarges, abridges, or in any manner changes the
intention of the parties, necessarily impairs the contract itself. And even when the change in
the contract is done by indirection, there is impairment nonetheless.

The non-impairment clause is a limitation on the exercise of legislative power and not of
judicial or quasi-judicial power. The prohibition embraces enactments of a governmental law-
making body pertaining to its legislative functions. Strictly speaking, it does not cover the
exercise by such law-making body of quasi-judicial power.

The Decision of the Rehabilitation Court is not a proper subject of the Non-impairment
Clause.

Petition of Bank of New York and Avenue Asia Capital Group

1) Issue: Whether the admission of Bayantels rehabilitation plan is in violation of
the Interim Rules?
Held: NO. Rule 4 of the Interim Rules treats of rehabilitation in general, without distinction
as to who between the debtor and the creditor initiated the petition. Nowhere in said Rule is
there any provision that prohibits the debtor in a creditor-initiated petition to file its own
rehabilitation plan for consideration by the court. One of the functions and powers of the
rehabilitation receiver under Section 14(m) of said Rule is to study the rehabilitation plan
proposed by the debtor or any rehabilitation plan submitted during the proceedings,
together with any comments made thereon. This provision makes particular reference to a
debtor-initiated proceeding in which the debtor principally files a rehabilitation plan. In such
case, the receiver is tasked, among other things, to study the rehabilitation plan presented
by the debtor along with any rehabilitation plan submitted during the proceedings. This
implies that the creditors of the distressed corporation, and even the receiver, may file their
respective rehabilitation plans. By analogy, the same option may be available to a debtor in
creditor-initiated proceedings, which is also found in Rule 4 of the Interim Rules.

2) Issue: Whether the write-off of the default interest and penalties along with
the re-computation of past due interest violate the pari passu treatment of
creditors?
Held: NO. Section 5(d), Rule 4 of the Interim Rules provides that the rehabilitation plan shall
include the means for the execution of the rehabilitation plan, which may include conversion
of the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or
sale of assets or of the controlling interest.

Debt restructuring may involve conversion of the debt or any portion thereof to equity, sale
of the assets of the distressed company and application of the proceeds to the obligation,
dacion en pago, debt relief or reduction, modification of the terms of the loan or a
combination of these schemes.

In this case, the approved Rehabilitation Plan provided for a longer period of payment, the
conversion of debt to 40% equity in Bayantel, modification of interest rates on the
restructured debt and accrued interest and a write-off or relief from penalties and default
interest. These recommendations by the Receiver are perfectly within the powers of the
Rehabilitation Court to adopt and approve, as it did adopt and approve. In so doing, no
reversible error can be attributed to the Rehabilitation Court.

The pertinent portion of the fallo of said courts Decision dated June 28, 2004 states:
1. The ruling on the pari passu treatment of all creditors whose claims are subject to
restructuring shall be maintained and shall extend to all payment terms and treatment
of past due interest.

Thus, the court a quo provided for a uniform application of the pari passu principle among
creditor claims and the terms by which they shall be paid, including past due interest. This is
consistent with the interpretation accorded by jurisprudence to the pari passu principle that
during rehabilitation, the assets of the distressed corporation are held in trust for the equal
benefit of all creditors to preclude one from obtaining an advantage or preference over
another. All creditors should stand on equal footing. Not any one of them should be given
preference by paying one or some of them ahead of the others.

The pari passu treatment of claims during rehabilitation entitles all creditors, whether
secured or unsecured, to receive payment out of Bayantels cash flow. Despite their
preferred position, therefore, the secured creditors shall not be paid ahead of the unsecured
creditors but shall receive payment only in the proportion owing to them.

In any event, the debt restructuring schemes complained of shall be implemented among all
creditors regardless of class. Both secured and unsecured creditors shall suffer a write-off of
penalties and default interest and the escalating interest rates shall be equally imposed on
them. The commitment embodied in the pari passu principle only goes so far as to ensure
that the assets of the distressed corporation are held in trust for the equal benefit of all
creditors. It does not espouse absolute equality in all aspects of debt restructuring.

Petition of Bank of New York

(As to the pertinent portion of the fallo of the Decision dated June 28, 2004 provides: A
Monitoring Committee shall be formed composed of representatives from all classes of the
restructured debt. The Rehabilitation Receivers role shall be limited to the powers of
monitoring and oversight as provided in the Interim Rules. All powers provided for in the
Report and Recommendations, which exceed the monitoring and oversight functions
mandated by the Interim Rules shall be amended accordingly.)

Issue: Whether the Rehabilitation Court intended for the Monitoring Committee to
exercise powers greater than those of the Receiver?

Held: NO. The Rehabilitation Courts decision to form a monitoring committee was borne
out of creditors concerns over the possession of vast powers by the Receiver. While the
Rehabilitation Court was quick to delineate the Receivers authority, it nevertheless,
underscored the value of his role in overseeing the implementation of the Plan. It was on this
premise that the Rehabilitation Court appointed the Monitoring Committee to address the
concerns raised by the creditors. Yet, in its Orders, the Rehabilitation Court equipped the
Monitoring Committee with powers well beyond those of the Receivers. Apart from control
over respondents budget, the Monitoring Committee may also adopt, modify, revise or even
substitute any other proposed actions by respondents Board of Directors, including, without
limitation issuance of new shares, sale of core and non-core assets, change of business and
others that will materially affect the terms and conditions of the rehabilitation plan and its
implementation. Ironically, the court a quo diluted the seeming concentration of power in
the hands of the Receiver but appointed a Committee possessed of even wider discretion
over respondents operations.

However, the tenor of the Rehabilitation Courts Decision does not contemplate the creation
of a Monitoring Committee with broader powers than the Receiver. As the name of the
Monitoring Committee itself suggests, its job is to watch, observe or check especially for a
special purpose. The fundamental task of the Monitoring Committee is to oversee the
implementation of the rehabilitation plan as approved by the court. This should not be
confused with the functions of the Receiver under the Interim Rules or a management
committee under PD 902-A.

Under Section 14, Rule 4 of the Interim Rules, the Receiver shall not take over the
management and control of the debtor but shall closely oversee and monitor its operations
during the pendency of the rehabilitation proceeding. The Rehabilitation Receiver shall be
considered an officer of the court and his core duty is to assess how best to rehabilitate the
debtor and to preserve its assets pending the determination of whether or not it should be
rehabilitated and to implement the approved plan.

Corporation Law: The corporate powers of all corporations formed under BP Blg. 68 or the
Corporation Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees. Nonetheless, PD 902-
A presents an exception to this rule.

Section 6(d) of PD 902-A empowers the Rehabilitation Court to create and appoint a
management committee to undertake the management of corporations when there is
imminent danger of dissipation, loss, wastage or destruction of assets or other properties or
paralyzation of business operations of such corporations which may be prejudicial to the
interest of minority stockholders, parties-litigants or the general public. In the case of
corporations supervised or regulated by government agencies, such as banks and insurance
companies, the appointment shall be made upon the request of the government agency
concerned. Otherwise, the Rehabilitation Court may, upon petition or motu proprio, appoint
such management committee.

The management committee or rehabilitation receiver, board or body shall have the
following powers:
1) To take custody of, and control over, all the existing assets and property of the distressed
corporation;
2) To evaluate the existing assets and liabilities, earnings and operations of the corporation;
3) To determine the best way to salvage and protect the interest of the investors and
creditors;
4) To study, review and evaluate the feasibility of continuing operations and restructure and
rehabilitate such entities if determined to be feasible by the Rehabilitation Court; and
5) It may overrule or revoke the actions of the previous management and board of directors
of the entity or entities under management notwithstanding any provision of law, articles of
incorporation or by-laws to the contrary.

In this case, Bank of New York neither filed a petition for the appointment of a management
committee nor presented evidence to show that there is imminent danger of dissipation,
loss, wastage or destruction of assets or other properties or paralyzation of business
operations of Bayantel which may be prejudicial to the interest of the minority stockholders,
the creditors or the public. Unless Bank of New York satisfies these requisites, the Court
cannot sanction the exercise by the Monitoring Committee of powers that will amount to
management of Bayantels operations.

DISPOSITIVE:
WHEREFORE, the Court hereby RESOLVES to dispose of these consolidated petitions, as
follows:
(1) The petition for review on certiorari in G.R. Nos. 174457-59 is DENIED. The Decision
dated August 18, 2006 of the Court of Appeals in CA-G.R. SP No. 87203 is AFFIRMED;
(2) The petition for review on certiorari in G.R. Nos. 175418-20 is DENIED. The Decision
dated August 18, 2006 and Resolution dated November 8, 2006 of the Court of Appeals in
CA-G.R. SP Nos. 87100 and 87111 are AFFIRMED; and
(3) The petition for review on certiorari in G.R. No. 177270 is DENIED. The Decision dated
October 27, 2006 and Resolution dated March 23, 2007 of the Court of Appeals in CA-G.R. SP
No. 89894 are AFFIRMED.