PHILIPPINE NATIONAL BANK and EQUITABLE PCI BANK, Petitioners,

vs.
HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION EN
BANC, ASB HOLDINGS, INC., ASB REALTY CORPORATION, ASB DEVELOPMENT
CORPORATION (formerly TIFFANY TOWER REALTY CORPORATION), ASB LAND INC.,
ASB FINANCE, INC., MAKATI HOPE CHRISTIAN SCHOOL, INC., BEL-AIR HOLDINGS
CORPORATION, WINCHESTER TRADING, INC., VYL DEVELOPMENT CORPORATION,
GERICK HOLDINGS CORPORATION, and NEIGHBORHOOD HOLDINGS, INC.
Facts: Philippine National Bank (PNB) and Equitable PCI Bank are members of the consortium of
creditor banks constituted pursuant to the Mortgage Trust Indenture (MTI), as amended, by and between
Rizal Commercial Banking Corporation-Trust and Investments Division, acting as trustee for the
consortium, and ASB Development Corporation (ASBDC, formerly Tiffany Tower Realty Corporation).
Other members of the consortium include Metropolitan Bank and Trust Company (Metrobank),
Prudential Bank, Union Bank of the Philippines, and United Coconut Planters Bank. Private respondents
ASB Holdings, Inc., ASBDC, ASB Land, Inc., ASB Finance, Inc., Makati Hope Christian School, Inc.,
Bel-Air Holdings Corporation, Winchester Trading, Inc., VYL Holdings Corporation, and
Neighborhood Holdings, Inc. (ASB Group) are corporations engaged in real estate development.
The ASB Group submitted a rehabilitation plan to enable it to meet all of its obligations. The
consortium of creditor banks moved for its disapproval on the ground that it is not viable; the proposals
are unrealistic; and it collides with the freedom of contract and the constitutional right against non-
impairment of contracts, particularly the release of portions of mortgaged properties and waiver of
interest, penalties, and other charges.
The Hearing Panel (SEC) denied the opposition of the banks and held that the ASB Group
complied with the requirements of Sec. 4-1 of the Rules of Procedure on Corporate Recovery, which
allows debtors who are technically insolvent to file a petition for rehabilitation. Since the ASB Group
foresees its inability to meet its obligations within one year, it was considered technically insolvent and,
thus, qualified for rehabilitation under Sec. 4-1.
The creditor banks appealed to the SEC en banc which dismissed the petition and its supplement,
thus affirming the orders of the Hearing Panel.
The creditor banks appealed to the CA which ruled that the Rules of Procedure on Corporate
Recovery allows financially distressed corporations to file for either suspension of payments (Rule III,
Sec. 3-1) or rehabilitation (Rule IV, Sec. 4-1). The Rules, the CA said, do not preclude a solvent
corporation, like the ASB Group, to file a petition for rehabilitation instead of just a petition for
suspension of payments because such temporary inability to pay obligations may extend beyond one
year or the corporation may become insolvent in the interim. The CA explained that the approval of the
Rehabilitation Plan does not violate the right against impairment of contracts since the legal
consequence of rehabilitation proceedings is merely a temporary suspension of such payments of
obligations falling due and not cancellation or repudiation of those contractual obligations.
Issue:
1. Does the rehabilitation plan impair the contract between creditor banks and the ASB Group?
2. Is the ASB group technically insolvent and hence qualified for rehabilitation?
Ruling:
1. It does not.
We adopt the ruling of the First Division in Metropolitan Bank & Trust Company, to wit:
We are not convinced that the approval of the Rehabilitation Plan impairs
petitioner bank’s lien over the mortgaged properties. Section 6 [c] of P.D. No. 902-A
provides that "upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended."
By that statutory provision, it is clear that the approval of the Rehabilitation Plan
and the appointment of a rehabilitation receiver merely suspend the actions for claims
against respondent corporations. Petitioner bank’s preferred status over the unsecured
creditors relative to the mortgage liens is retained, but the enforcement of such
 preference is suspended. The loan agreements between the parties have not been set
aside and petitioner bank may still enforce its preference when the assets of ASB Group
of Companies will be liquidated. Considering that the provisions of the loan
agreements are merely suspended, there is no impairment of contracts, specifically
its lien in the mortgaged properties.
As we stressed in Rizal Commercial Banking Corporation v. Intermediate Appellate Court:
such suspension “shall not prejudice or render ineffective the status of a
secured creditor as compared to a totally unsecured creditor," for what P.D. No.
902-A merely provides is that all actions for claims against the distressed corporation,
partnership or association shall be suspended. This arrangement provided by law is
intended to give the receiver a chance to rehabilitate the corporation if there should
still be a possibility for doing so, without being unnecessarily disturbed by the
creditors’ actions against the distressed corporation. However, in the event that
rehabilitation is no longer feasible and the claims against the distressed corporation
would eventually have to be settled, the secured creditors, like petitioner bank, shall
enjoy preference over the unsecured creditors.
2. Yes it is.
PNB and PCI raise issues which mainly relate to technical insolvency; hence, we will limit our
interpretation of the rules based on the aforequoted sections (Secs. 3-12 and 3-13). Based on the
foregoing, we can deduce the following:
(1) A corporation which has sufficient assets to cover its liabilities but foresees its inability to
pay its obligations as they fall due may file a petition for suspension of payments under Rule III
of the Rules (Sec. 3-1);
(2) If the SEC finds that the corporation’s inability to pay will last more than one year from the
filing of the petition for suspension of payments, that is, the corporation becomes technically
insolvent, the petition shall be dismissed (Sec. 3-12);
(3) If the corporation is shown or actually becomes technically insolvent anytime during the
pendency of the proceedings (supervening technical insolvency), the SEC may either terminate
the proceedings or it may, upon motion, treat the petition as one for rehabilitation (Sec. 3-13);
and
(4) If from the start, a corporation which has enough assets foresees its inability to meet its
obligations for more than one year, i.e., existing technical insolvency, it may file a petition for
rehabilitation under Rule IV, Sec. 4-1.

A reading of Sec. 4-1 shows that there are two kinds of insolvency contemplated in it:
(1) actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities; and
(2) technical insolvency defined under Sec. 3-12, i.e., the corporation has enough assets but
it foresees its inability to pay its obligations for more than one year.
In the case at bar, the ASB Group filed with the SEC a petition for rehabilitation with prayer for
suspension of actions and proceedings pending rehabilitation. Contrary to petitioners’ arguments, the
mere fact that the ASB Group averred that it has sufficient assets to cover its obligations does not make
it "solvent" enough to prevent it from filing a petition for rehabilitation. A corporation may have
considerable assets but if it foresees the impossibility of meeting its obligations for more than one
year, it is considered as technically insolvent. Thus, at the first instance, a corporation may file a
petition for rehabilitation—a remedy provided under Sec. 4-1.
When Sec. 4-1 mentioned technical insolvency under Sec. 3-12, it was referring to the
definition of technical insolvency in the said section; it was not requiring a previous filing of a
petition for suspension of payments which petitioners would have us believe.
Petitioners harp on the SEC’s failure to examine whether the ASB Group is technically
insolvent. They contend that the SEC should wait for a year after the filing of the petition for suspension
of payments when technical insolvency may or may not arise. This is erroneous. The period mentioned
under Sec. 3-12, "longer than one year from the filing of the petition," does not refer to a year-
long waiting period when the SEC can finally say that the ailing corporation is technically
insolvent to qualify for rehabilitation. The period referred to the corporation’s inability to pay its
obligations; when such inability extends beyond one year, the corporation is considered
technically insolvent. Said inability may be established from the start by way of a petition for
rehabilitation, or it may be proved during the proceedings for suspension of payments, if the latter was
the first remedy chosen by the ailing corporation. If the corporation opts for a direct petition for
rehabilitation on the ground of technical insolvency, it should show in its petition and later prove during
the proceedings that it will not be able to meet its obligations for longer than one year from the filing of
the petition.
As regards the status of the Repayment Schedule required to be attached to the petition for
rehabilitation, this requirement is conditioned on whether one was approved by the SEC in the first
place. If there is none, as in the case of a petition for rehabilitation due to technical insolvency directly
filed under Rule IV, Sec. 4-1, then there is no status report to submit with the petition.