12. G.R. Nos.

175418-20
IN THE MATTER OF:
THE CORPORATE REHABILITATION OF DAYAN TELECOMMUNICATIONS, INC. PURSUANT
TO THE INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION (A.M. NO. 00-
8-10-SC)
THE BANK OF NEW YORK AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5%
SENIOR NOTES OF DAYAN TELECOMMUNICATIONS, INC.
DUE 2006 ACTING ON THE INSTRUCTIONS OF THE INFORMAL STEERING COMMITTEE:
AVENUE ASIA INVESTMENTS, L.P., AVENUE ASIA INTERNATIONAL, LTD., AVENUE ASIA
SPECIAL SITUATIONS FUND II, L.P. AND AVENUE ASIA CAPITAL PARTNERS, L.P., Petitioner, 
vs.
DAYAN TELECOMMUNICATIONS, INC., Respondents.

FACTS:
Before us are seven consolidated petitions for review on certiorari filed connection with the corporate
rehabilitation of Bayan Telecommunications, Inc. (Bayantel).

Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing
telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings Corporation (BTHC),
which in turn is 85.4% owned by the Lopez Group of Companies and Benpres Holdings Corporation.
On various dates between the years 1995 and 2001, Bayantel entered into several credit agreements with
Express Investments III Private Ltd. And Export Development Canada (petitioners in G.R. Nos. 174457-59),
Asian Finance and Investment Corporation, Bayerische Landesbank (Singapore Branch) and Clearwater Capital
Partners Singapore Pte Ltd., as agent for Credit Industriel et Commercial (Singapore), Deutsche Bank AG,
Equitable PCI Bank, JP Morgan Chase Bank, Metropolitan Bank and Trust Co., P.T. Bank Negara Indonesia
(Persero), TBK, Hong Kong Branch, Rizal Commercial Banking Corporation and Standard Chartered Bank. To
secure said loans, Bayantel executed an Omnibus Agreement dated September 19, 1995 and an EVTELCO
Mortgage Trust Indenture9 dated December 12, 1997.10
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, the
following properties as collateral security for the prompt and complete payment of its obligations to the
Omnibus Creditors:
(i) all monies payable to Bayantel under the Project Documents (as the term is defined by the Omnibus
Agreement);
(ii) all Project Documents and all Contract Rights arising thereunder;
(iii) all receivables;
(iv) all general intangibles;
(v) each of the Accounts (as the term is defined by the Omnibus Agreement);
(vi) all amounts maintained in the Accounts and all monies, securities and instruments deposited or required to
be deposited in the Accounts;
(vii) all other chattel paper and documents;
(viii) all other property, assets and revenues of Bayantel, whether tangible or intangible; and
(ix) all proceeds and products of any and all of the foregoing.11
In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an Indenture 12 dated
July 22, 1999 that it entered into with The Bank of New York (petitioner in G.R. Nos. 175418-20) as trustee for
the holders of said notes. Pursuant to the said Indenture, the notes are due in 2006 and Bayantel shall pay
interest on them semi-annually. Bayantel managed to make two interest payments, on January 15, 2000 and July
15, 2000, before it defaulted on its obligation.
Foreseeing the impossibility of further meeting its obligations, Bayantel sent, in October 2001, 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 composed of Avenue Asia
Investments, L.P., Avenue Asia International, Ltd., Avenue Asia Special Situations Fund II, L.P., Avenue Asia
Capital Partners, L.P. (petitioners in G.R. Nos. 175418-20) and Van Eck Global Opportunity Masterfund, Ltd.
The members of the Informal Steering Committee are the assignees of the unsecured credits extended to
Bayantel by J.P. Morgan Europe, Ltd., Bayerische Landesbank Singapore Branch and Deutsche Bank AG,
London in the total principal amount of US$13,637,485.20. They are holders, as well, of the Notes issued by
Bayantel pursuant to the Indenture dated July 22, 1999.
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 Bayantel’s proposal to
pay the restructured debt, pari passu,13 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 starting July 17, 2000. By May 31, 2003, Bayantel’s total indebtedness had reached US$674 million or
P35.928 billion in unpaid principal and interest, based on the prevailing conversion rate of US$1 = P53.282.
Out of its total liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the Holders of
the Notes.
On July 25, 2003, 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, on July 30, 2003, The Bank of New York filed a petition 14 for the
corporate rehabilitation of Bayantel upon the instructions of the Informal Steering Committee.
On August 8, 2003, the Pasig RTC, Branch 158, issued a Stay Order 15 which directed, among others, the
suspension of all claims against Bayantel and required the latter’s creditors and other interested parties to file a
comment or opposition to the petition. The court appointed Dr. Conchita L. Manabat to act as rehabilitation
receiver but the latter declined.16 In her stead, the court appointed Atty. Remigio A. Noval (Atty. Noval) who
took his oath and posted a bond on September 26, 2003.17
On November 28, 2003, the Rehabilitation Court gave due course to the petition and directed the Rehabilitation
Receiver to submit his recommendations to the court within 120 days from the initial hearing. 18 After several
extensions, Atty. Noval filed on March 22, 2004 a Compliance and Submission of the Report as Compelling
Evidence that Bayantel may be Successfully Rehabilitated.19
In his report, Atty. Noval classified Bayantel’s debts into three: (1) those owed to secured Bank Creditors
pursuant to the Omnibus Agreements (Omnibus Creditors) in the total amount of US$334 million or P17.781
billion; (2) those owed to Holders of the Senior Notes and Bank Creditors combined (Chattel Creditors),
comprising US$625 million, of which US$473 million (P25.214 billion) is principal and US$152 million
(P8.106 billion) is accrued unpaid interest; and (3) those that Bayantel owed to persons other than Financial
Creditors/unsecured creditors in the amount of US$49 million or P2.608 billion.
According to The Bank of New York, out of the US$674 million that respondent owes its creditors under
groups 2 and 3 above, the amount outstanding under the Senior Notes represent 43.2% of its liabilities as of
May 31, 2003. Subsequently, negotiations for the restructuring of Bayantel’s debt reached an impasse when the
Informal Steering Committee insisted on a pari passu treatment of the claims of both secured and unsecured
creditors.
Meanwhile, on January 20, 2004, Bayantel filed a "Motion to Include Radio Communications Philippines, Inc.
[RCPI] and Naga Telephone Company [Nagatel] as Debtor-Corporations for Rehabilitation x x x."20
The Rehabilitation Court denied said motion in an Order21 dated April 19, 2004. The fallo of said order reads:
WHEREFORE, the Court resolves the pending incidents as follows:
1. The Urgent Motion to Resolve of petitioner is hereby granted. The creditors of Bayantel, whether secured or
unsecured, should be treated equally and on the same footing or pari passu until the rehabilitation proceedings
is terminated in accordance with the Interim Rules;
2. The Motion of Bayantel to Include RCPI and Nagatel in the present rehabilitation proceedings as debtor-
corporations is denied;
3. The Motion of Bayantel to Exempt from the Stay Order the payment of the compensation package of its
former employees per Annex "A" attached to said motion is granted, subject to the verification and confirmation
of the items therein by the Rehabilitation Receiver;
4. The Motion of Petitioner to Strike Out the proposed rehabilitation plan of Bayantel is denied.
SO ORDERED.22
On June 28, 2004, the Pasig RTC, Branch 158, acting as a Rehabilitation Court, approved the Report and
Recommendations23 attached by the Receiver to his "Submission with Prayer for Further Guidance from the
Honorable Court,"24 subject to the following clarifications and/or amendments:
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.
2. Due regard shall be given to the rights of the secured creditors and no changes in the security positions of the
creditors shall be granted as a result of the rehabilitation plan as amended and approved herein.
3. The level of sustainable debt of the rehabilitation plan, as amended, shall be reduced to the amount of [US]
$325,000,000 for a period of 19 years.
4. Unsustainable debt shall be converted into an appropriate instrument that shall not be a financial burden for
Bayantel.
5. All provisions relating to equity in the rehabilitation plan, as approved and amended, must strictly conform to
the requirements of the Constitution limiting foreign ownership to 40%.
6. A Monitoring Committee shall be formed composed of representatives from all classes of the restructured
debt. The Rehabilitation Receiver’s 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.
SO ORDERED.25
Dissatisfied, The Bank of New York filed a Notice of Appeal 26 on August 6, 2004. So did Avenue Asia
Investments, L.P., Avenue Asia International, Ltd., Avenue Asia Special Situations Fund II, L.P., Avenue Asia
Capital Partners, L.P., and Avenue Asia Special Situations Fund III, L.P. which filed a Joint Record on
Appeal27 on August 9, 2004.
On September 28, 2004, 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 (petitioner in G.R. No. 177270) filed a Manifestation 28 dated October 15, 2004 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.
On November 9, 2004, the Rehabilitation Court issued an Order 29 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 the same Order, the court
defined the scope of the Monitoring Committee’s authority, as follows:
x x x The Monitoring Committee shall participate with the Receiver in monitoring and overseeing the actions of
the Board of Directors of Bayantel and may, by majority vote, adopt, modify, revise or substitute, any of the
following items:
(1) any proposed Annual OPEX Budgets;
(2) any proposed Annual CAPEX Budgets;
(3) any proposed Reschedule;
(4) any proposed actions by the Receiver on a payment default;
(5) terms of Management Incentivisation Scheme and Management Targets;
(6) the EBITDA/Revenue ratios set by the Bayantel Board of Directors; and
(7) any other proposed actions by the Bayantel Board of Directors including, without limitation, issuance of
new shares, sale of core and noncore assets, change of business, etc. that will materially affect the terms and
conditions of the rehabilitation plan and its implementation.
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.30
On November 16, 2004, The Bank of New York filed a Petition for Review 31 before the Court of Appeals. The
petition was docketed as CAG. R. SP No. 87100 in the Fifteenth Division of the Court of Appeals. On even
date, Avenue Asia Investments, L.P., Avenue Asia International, Ltd., Avenue Asia Special Situations Fund II,
L.P., Avenue Asia Capital Partners, L.P., and Avenue Asia Special Situations Fund III, L.P (Avenue Asia
Capital Group) filed a similar petition32 which was docketed as CA-G.R. SP No. 87111 in the Second Division
of the Court of Appeals. Both petitions contest the Rehabilitation Court’s June 28, 2004 Decision for, among
others, fixing the level of Bayantel’s sustainable debt at US$325 million to be paid in 19 years.
Thereafter, on November 30, 2004, petitioners Express Investments III Private Ltd. and Export Development
Canada along with Bayerische Landesbank (Singapore Branch), Credit Industriel et Commercial, Deutsche
Bank AG, P.T. Bank Negara Indonesia (Persero), TBK, Hong Kong Branch and Rizal Commercial Banking
Corporation filed a Petition for Review33 which was docketed as CA-G.R. No. 87203 in the Tenth Division of
the Court of Appeals. The secured creditors likewise assailed the Rehabilitation Court’s June 28, 2004 Decision
insofar as it ordered the pari passu treatment of all claims against Bayantel. Said petitioners invoke a lien over
the cash flow and receivables of Bayantel by virtue of the Assignment Agreement.
On December 23, 2004, Bayantel filed an Omnibus Motion34 for the consolidation of CA-G.R. SP Nos. 87111
and CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100, the lowest-numbered case.
In a Resolution dated January 20, 2005, the Court of Appeals, Fifteenth Division, ordered the consolidation of
CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100. This was accepted by the Court of Appeals, Seventh
Division, in a Resolution35 dated March 29, 2005. Then, in the Resolution 36 dated June 10, 2005, the Court of
Appeals, First Division, ordered the consolidation of CA-G.R. SP No. 87111 with 87100 and the transmittal of
the records of the three cases to the Seventh Division.
Meanwhile, on January 10, 2005, Atty. Noval submitted to the Rehabilitation Court an Implementing Term
Sheet37 to serve as a guide for Bayantel’s Rehabilitation. The same was approved in an Order 38 dated March 15,
2005. In the same Order, the Rehabilitation Court appointed Avenue Asia Investments L.P. and Export
Development Canada to represent the unsecured and secured creditors, respectively, in the Monitoring
Committee.
On May 26, 2005, Bayantel filed a petition for certiorari and Prohibition 39 docketed as CA-G.R. SP No. 89894
in the Court of Appeals. Said petition assailed the Rehabilitation Court’s Orders dated November 9, 2004 and
March 15, 2005, for purportedly conferring upon the Monitoring Committee, powers of management and
control over its operations.
The Court of Appeals Decision in CA-G.R. Nos. 87100, 87111 and 87203
In the assailed August 18, 2006 Decision, the Court of Appeals dismissed the petitions in CA-G.R. SP Nos.
87100, 87111 and 87203 for lack of merit. The appellate court upheld the Rehabilitation Court’s determination
of Bayantel’s sustainable debt at US$325 million payable in 19 years. It rejected the Receiver’s proposal to set
the sustainable debt at US$370 million payable in 15 years, and the proposal of the Avenue Asia Capital Group
to set it at US$471 million payable in 12 years.
The Court of Appeals agreed with the Rehabilitation Court that it is reasonable to adopt a level of sustainable
debt that approximates respondent Bayantel’s proposal because the latter is in the best position to determine the
level of sustainable debt that it can manage. It found Bayantel’s proposal more credible considering that it was
prepared using "updated financial information with realistic cash flow figures."[40] The appellate court noted
that Bayantel’s proposal was drafted without regard for its status as a "niche player" in the telecommunications
market and after factoring the cost of reorganization. In contrast, it expressed concern that the proposals
submitted by Avenue Asia Capital Group and the Receiver might eventually leave Bayantel with an unworkable
financial debt-to-revenue ratio.
The Court of Appeals also confirmed the Rehabilitation Court’s authority to approve, reject, substitute, or even
change the rehabilitation plans submitted by the Receiver and the parties. It upheld the trial court in adopting
the Receiver’s recommendation to limit the equity conversion of Bayantel’s unsustainable debt to 40% of its
paid-up capital. This percentage, the appellate court explains, is consistent with the constitutional limitation on
the allowable foreign equity in Filipino corporations. It also maintained the write-off of penalties and default
interest and recomputation of Bayantel’s past due interest, as a valid exercise of discretion by the Rehabilitation
Court under the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). The appellate court
negated any violation of the pari passu principle with the use of these measures since they shall apply to all
classes of creditors.
As to the claim of the secured creditors in CA-G.R. SP No. 87203, the Court of Appeals ruled that while
rehabilitation is ongoing, the sole control over the security on the receivables and cash flow of Bayantel is
vested in the Rehabilitation Court. To allow otherwise would not only violate the Stay Order but interfere as
well with the duty of the Receiver to "take possession, control and custody of the debtor’s assets." 41 Ultimately,
the Court of Appeals ruled that preference in payment cannot be accorded the secured creditors since preference
applies only in liquidation proceedings.
Discontented, The Bank of New York and the Avenue Asia Capital Group (petitioners in CA-G.R. SP Nos.
87100 and 87111) filed a Motion for Partial Reconsideration. 42 Said motion was, however, denied in the
Resolution dated November 8, 2006.
In the meantime, Express Investments III Private Ltd. and Export Development Canada had filed before this
Court a Petition for Partial Review on Certiorari of the Court of Appeals Decision docketed as G.R. Nos.
174457-59. According to petitioners, the other secured creditors who were also petitioners in CA-G.R. SP No.
87203 had not remained in contact with them and had not authorized them to file further petitions on their
behalf.
On December 28, 2006, The Bank of New York and the Avenue Asia Capital Group also filed their own
Petition for Review on Certiorari which was docketed as G.R. Nos. 175418-20.
The Court of Appeals Decision in CA-G.R. SP No. 89894
In CA-G.R. SP No. 89894, the Court of Appeals rendered the assailed Decision dated October 27, 2006
declaring null and void the November 9, 2004 and March 15, 2005 Orders of the Rehabilitation Court insofar as
they defined the powers and functions of the Monitoring Committee.
The appellate court found grave abuse of discretion on the part of the Rehabilitation Court for conferring upon
the Monitoring Committee the power to modify, reverse or overrule the proposals of Bayantel’s Board of
Directors relative to operations. It stressed that the Committee’s functions are confined to monitoring and
overseeing the operations of Bayantel to ensure its compliance with the terms and conditions of the
Rehabilitation Plan. To conform therewith, the appellate court restated the Committee’s powers as follows:
The Monitoring Committee shall participate with the Receiver in monitoring and overseeing the operations of
Bayantel to ensure compliance by Bayantel with the terms and conditions of the Rehabilitation Plan. In the
event Bayantel fails to meet any of the milestones under the Rehabilitation Plan or fails to comply with any
material provision thereunder, the Monitoring Committee may, by majority vote, recommend modifications,
revisions and substitutions of the following items:
x x x x43 (Emphasis supplied)
The Court of Appeals likewise approved of the Implementing Term Sheet, clarifying that the same is not
intended to address every contingency that may arise in the implementation of the Plan. It assured that any
doubt in the interpretation of the Term Sheet shall be resolved by the Rehabilitation Court.
Lastly, the appellate court affirmed the creation of a convertible debt instrument to cover the unsustainable
portion of respondent’s debt. It perceives such instrument as a tool to generate surplus cash to satisfy Bayantel’s
debt under Tranche B. As well, it serves as a buy-back scheme for the assignment and transfer of credits by the
Financial Creditors in a manner that will not unduly burden Bayantel.

ISSUE:
The Bank of New York and the Avenue Asia Capital Group filed a Petition for Review on Certiorari docketed
as G.R. Nos. 175418-20, to question the appellate court’s August 18, 2006 Decision as well as its November 8,
2006 Resolution in CA-G.R. SP Nos. 87100 and 87111. This second consolidated petition raises the following
issues:

(1) Whether the Court of Appeals erred in setting Bayantel’s sustainable debt at US$325 million, payable in 19
years;
(2) Whether a debtor may submit a rehabilitation plan in a creditor-initiated rehabilitation; (3) whether the
conversion of debt to equity in excess of 40% of the outstanding capital stock in favor of petitioners violates the
constitutional limit on foreign ownership of a public utility;
(4) Whether the write-off of respondent’s penalties and default interest and recomputation of its past due
interest violate the pari passu  principle; and
(5) Whether petitioners are entitled to costs.

Contention:

Mainly, petitioners Bank of New York and Avenue Asia Capital Group impute error on the Court of Appeals
for affirming the Rehabilitation Court’s decision which adopted the sustainable debt level Bayantel proposed.
The court a quo  fixed respondent’s sustainable debt at US$325 million payable within 19 years against the
Receiver’s proposal of US$370 million payable in 15 years. Petitioners dispute Bayantel’s financial projections
as unreliable and contrived, designed to bear out a reduced level of sustainable debt and justify a substantial
write-off of its debts. In order to arrive at a reasonable level of sustainable debt, they believe that the
prospective cash flow of Bayantel must be reckoned against industry standards. Petitioners point out that the
Interim Rules only allows the debtor, in a creditor-initiated petition for corporate rehabilitation, to file a
comment or opposition but not to submit its own rehabilitation plan. They warn that if the fulfillment of the
obligation would be made to depend on the sole will of Bayantel, the entire obligation would be void.
Petitioners fault the trial court for basing the sustainable debt on the state of the telecommunications industry in
the country rather than consulting the financial projections and business models submitted by petitioners and the
Receiver. They stress that the state of the telecommunications industry is not among those which the court may
take judicial notice of by discretion.
Petitioners maintain that converting the unsustainable debt to 77.7% equity in Bayantel will not violate the
nationality requirement of the 1987 Constitution. They aver that the debts to domestic bank creditors 51 account
is US$473 million or 70.18% of Bayantel’s total liabilities. Considering the substantial write-off of penalties
and default interest in the amount of US$34,044,553.00 and past due interest of US$25,243,381.07, petitioners
believe that it is only fair to accord the Financial Creditors greater equity in Bayantel to compensate for said
losses.
Moreover, it is the petitioners’ view that the write-off contravenes the pari passu principle because they would
suffer greater losses than the Omnibus Creditors. According to petitioners, approximately 82% of the penalties
and interests shall be borne by the unsecured creditors and the Holders of Notes. In the same vein, petitioners
protest the recomputation of past due interest in accordance with the rate proposed by the Receiver. They claim
that recomputation would result in the condonation of 89% of the accrued interest owing them. The Receiver’s
report shows that as of the filing of the present petition, the total accrued interest amounts to
US$106,054,197.66, of which, US$91,100,000 are due the Holders of Notes.
Finally, petitioners reiterate their claim for costs. In its Order dated March 15, 2005, the Rehabilitation Court
awarded costs of suit to petitioner Bank of New York. In particular, it granted the latter’s prayer for the
payment of filing fees, costs of publication and professional fees. Even then, petitioner bank claims that a huge
amount of its expenses for the professional fees of counsels and advisers remain unpaid. More importantly, it
asserts precedence in payment over the preferred creditors. In the alternative, the Bank of New York prays that
the costs of suit be incorporated in the award to the nonfinancial or trade creditors. Similarly, the Avenue Asia
Capital Group seeks reimbursement for the docket fees, publication expenses and the professional fees it has
paid its counsels and financial adviser. It invokes Article 2208 of the Civil Code and the provisions of the
Indenture as legal bases therefor.
Meanwhile, the secured creditors in G.R. Nos. 174457-59 filed a Memorandum 52 dated April 30, 2009 with a
prayer for the dismissal of the bondholders’ petition in G.R. Nos. 175418-20. For the secured creditors, the
sustainable debt set by the Courts of Appeals is a more manageable and realistic undertaking compared to
herein petitioners’ proposal. They add that the fact that Bayantel’s actual revenues are lower than its cash flow
projections belies any scheme to avoid paying its debts in full. The secured creditors agree with the appellate
court in limiting the conversion of the unsustainable debt to a maximum of 40% shares in Bayantel as more in
keeping with the Constitution.
Further, the secured creditors point out that there is nothing in the Interim Rules which prohibits a debtor
company from submitting an alternative rehabilitation plan in creditor-initiated proceedings. In support of this,
they cite Section 22,53 Rule 4 of said rules which permits the debtor to modify its proposed plan or submit a
revised or substitute plan. According to them, Bayantel’s suggestion as to the terms of payment does not
constitute a potestative condition that would render the obligation void.
The secured creditors, however, join petitioners in protesting the condonation of penalties and default interest.
Rather than observing absolute equality, they insist that the pari passu principle should be applied such that
creditors within the same class are treated alike.
In response, respondent Bayantel submitted on May 21, 2009, a Consolidated Memorandum 54 in G.R. Nos.
175418-20 and G.R. No. 177270. It practically echoed the ratio decidendi of the Court of Appeals in dismissing
both petitions.
In G.R. Nos. 175418-20, Bayantel defends the Rehabilitation Court for adopting the sustainable debt level it
proposed. Such approval by the court alone, Bayantel reasons, did not make the payment of its debt a condition
whose fulfillment rests on its sole will, as to render the obligation void under Article 1182 55 of the Civil Code.
Respondent maintains that among the stakeholders, it is in the best position to determine the level of debt that it
can pay. Moreover, it believes that a majority of the secured creditors are comfortable with the approved
sustainable debt since only two of them appealed. Respondent insists that altering the sustainable debt at this
point would be counterproductive.
Respondent equally opposes the Bondholders’ proposal to reduce the company’s capital expenditures to
between 9% and 11% to make more funds available for debt servicing. This approach, according to Bayantel,
ignores its need to make significant investments in new infrastructure in order to cope with competitors.
Respondent disputes the value of petitioners’ projections which were derived by benchmarking Bayantel’s
income, as a company under rehabilitation, against those of the major players, PLDT and Digitel.
Furthermore, respondent maintains that its rehabilitation plan was based on accurate financial data and
operation reports. It insists that the Interim Rules allows a debtor, in creditor-initiated rehabilitation
proceedings, to submit an alternative plan. It agrees with the Rehabilitation Court’s decision to restrict
conversion of the unsustainable debt to 40% of fully paid-up capital in Bayantel. Respondent believes that the
waiver of penalties and default interest and the recomputation of past due interest will not violate the pari
passu principle because said measures shall apply equally to all creditors. Lastly, respondent admits limited
liability for costs pursuant to the Assignment Agreement but not for those incurred by petitioners under "non-
consensual scenarios."

The Court’s Ruling:

In G.R. Nos. 175418-20
Prefatorily, we restate the time honored principle that in a petition for review on certiorari under Rule 45 of the
Rules of Court, only questions of law may be raised. Thus, in a petition for review on certiorari, the scope of the
Supreme Court's judicial review is limited to reviewing only errors of law, not of fact. 84 It is not our function to
weigh all over again evidence already considered in the proceedings below, our jurisdiction is limited to
reviewing only errors of law that may have been committed by the lower court.85
Before us, petitioners Bank of New York and Avenue Asia Capital Group raise a question of fact which is not
proper in a petition for review on certiorari. A question of law arises when there is doubt as to what the law is
on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the
alleged facts. For a question to be one of law, the same must not involve an examination of the probative value
of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what
the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the
evidence presented, the question posed is one of fact.86
Whether the Court of Appeals erred in affirming the sustainable debt fixed by the Rehabilitation Court is a
question of fact that calls for a recalibration of the evidence presented by the parties before the trial court. In
order to resolve said issue, petitioners would have this Court reassess the state of respondent Bayantel’s
finances at the onset of rehabilitation and gauge the practical value of the plans submitted by the parties vis-à-
vis the financial models prepared by the experts engaged by them. These tasks are certainly not for this Court to
accomplish. The resolution of factual issues is the function of lower courts, whose findings on these matters are
received with respect.87 This is especially true in rehabilitation proceedings where certain courts are designated
to hear the case on account of their expertise and specialized knowledge on the subject matter. Though this
doctrine admits of several exceptions,88none is applicable in the case at bar
Notably, the Interim Rules is silent on the manner by which the sustainable debt of the debtor shall be
determined. Yet, Section 2 of the Interim Rules prescribe that the Rules shall be liberally construed to carry out
the objectives of Sections 5(d),89 6(c)90 and 6(d)91 of PD 902-A.
Section 5(d), PD 902-A vested jurisdiction upon the SEC over petitions for rehabilitation. Later, RA 8799 or the
Securities Regulation Code, amended Section 5(d) of PD 902-A by transferring SEC’s jurisdiction over said
petitions to the RTC. Meanwhile, Section 6(c) of PD 902-A provides for the appointment of a receiver of the
subject property whenever necessary in order to preserve the rights of the parties and to protect the interest of
the investing public and the creditors. Upon the appointment of such receiver, all actions for claims against the
corporation pending before any court, tribunal, board or body shall be suspended accordingly. On the other
hand, Section 5(d), PD 902-A expands the power of the Commission to allow the creation and appointment of a
management committee to undertake the management of the corporation when there is imminent danger of
dissipation, loss, wastage or destruction of assets or other properties or paralyzation of the business of the
corporation which may be prejudicial to the interest of minority stockholders, parties-litigants or the general
public.
The underlying objective behind these provisions is to foster the rehabilitation of the debtor by insulating it
against claims, preserving its assets and taking steps to ensure that the rights of all parties concerned are
adequately protected.
This Court is convinced that the Court of Appeals ruled in accord with this policy when it upheld the
Rehabilitation Court’s determination of respondent’s sustainable debt. We find the sustainable debt of US$325
million, spread over 19 years, to be a more realistically achievable amount considering respondent’s modest
revenue projections. Bayantel projected a constant rise in its revenues at the range of 1.16%-4.91% with
periodic reverses every two years.92 On the other hand, petitioner’s proposal of a sustainable debt of US$471
million to be paid in 12 years and the Receiver’s proposal of US$370 million to be paid in 15 years betray an
over optimism that could leave Bayantel with nothing to spend for its operations.
Next, petitioners contest the admission of respondent’s rehabilitation plan for being filed in violation of the
Interim Rules. It is petitioner’s view that in a creditor-initiated petition for rehabilitation, the debtor may only
submit either a comment or opposition but not its own rehabilitation plan.
We cannot agree.
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. Quite the reverse, 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. We perceive no good reason why the same option should not be available, by
analogy, to a debtor in creditor-initiated proceedings, which is also found in Rule 4 of the Interim Rules.
Third, petitioners fault the Court of Appeals for ruling that the debt-toequity conversion rate of 77.7%, as
proposed by The Bank of New York, violates the Filipinization provision of the Constitution. Petitioners
explain that the acquisition of shares by foreign Omnibus and Financial Creditors shall be done, both directly
and indirectly in order to meet the control test principle under RA 704293 or the Foreign Investments Act of
1991. Under the proposed structure, said creditors shall own 40% of the outstanding capital stock of the
telecommunications company on a direct basis, while the remaining 40% of shares shall be registered to a
holding company that shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Moreover, petitioners maintain that it is only fair to impose upon the Omnibus and Financial Creditors a bigger
equity conversion in Bayantel considering that petitioners will bear the bulk of the accrued interests and
penalties to be written off. Initially, the Rehabilitation Court approved the Receiver’s recommendation to write-
off interests and penalties in the amount of US$34,044,553.00. The Rehabilitation Court likewise ordered a re-
computation of past due interest in accordance with the rate proposed by the Receiver. Following this,
petitioners estimate the total unpaid accrued interest of Bayantel as of July 30, 2003 to be at
US$140,098,750.66 while the Rehabilitation Court arrived at the total amount of past due interest and penalties
of US$114,855,369.59 upon recomputation. This makes for a difference of US$25,243,381.07 which,
petitioners claim, represents an additional write-off to be borne by them for a total write-off of
US$59,287,934.07.
The provision adverted to is Article XII, Section 11 of the 1987 Constitution which states:
SEC. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines.
This provision explicitly reserves to Filipino citizens control over public utilities, pursuant to an overriding
economic goal of the 1987 Constitution: to "conserve and develop our patrimony" and ensure "a selfreliant and
independent national economy effectively controlled by Filipinos."94
In the recent case of Gamboa v. Teves,95 the Court settled once and for all the meaning of "capital" in the above-
quoted Constitutional provision limiting foreign ownership in public utilities. In said case, we held that
considering that common shares have voting rights which translate to control as opposed to preferred shares
which usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only
to common shares. However, if the preferred shares also have the right to vote in the election of directors, then
the term "capital" shall include such preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the
election of directors.
Applying this, two steps must be followed in order to determine whether the conversion of debt to equity in
excess of 40% of the outstanding capital stock violates the constitutional limit on foreign ownership of a public
utility: First, identify into which class of shares the debt shall be converted, whether common shares, preferred
shares that have the right to vote in the election of directors or non-voting preferred shares; Second, determine
the number of shares with voting right held by foreign entities prior to conversion. If upon conversion, the total
number of shares held by foreign entities exceeds 40% of the capital stock with voting rights, the constitutional
limit on foreign ownership is violated. Otherwise, the conversion shall be respected.
In its Rehabilitation Plan,96 among the material financial commitments made by respondent Bayantel is that its
shareholders shall "relinquish the agreed-upon amount of common stock[s] as payment to Unsecured Creditors
as per the Term Sheet." 97 Evidently, the parties intend to convert the unsustainable portion of respondent's debt
into common stocks, which have voting rights. If we indulge petitioners on their proposal, the Omnibus
Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public utility company.
This is precisely the scenario proscribed by the Filipinization provision of the Constitution. Therefore, the Court
of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.
As to the fourth issue, petitioners insist that 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.
Petitioner’s argument lacks merit.
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 respondent company, 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 court’s 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.[98 (Emphasis
supplied)
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.99
As applied to this case, the pari passu  treatment of claims during rehabilitation entitles all creditors, whether
secured or unsecured, to receive payment out of Bayantel’s 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. We repeat, 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.
As regards petitioners’ claims for costs, petitioner Bank of New York filed before the Rehabilitation Court a
Notice of Claim100 dated February 19, 2004 for the payment of US$1,255,851.30, representing filing fee, deposit
for expenses and the professional fees of its counsels and financial advisers. Earlier, said bank had filed a claim
for the payment of US$863,829.98 for professional fees of its counsels and professional advisers and
P2,850,305.00 for docket fees and publication expenses. On its end, the Avenue Asia Capital Group claims a
total of US$535,075.64 to defray the professional fees of its financial adviser, Price Waterhouse & Cooper and
the Bondholder Communications Group.
In an Order101 dated March 15, 2005, the Rehabilitation Court approved the claims for costs of petitioner Bank
of New York as follows:
i. filing fees of P2,701,750.00 as evidenced by O.R. Nos. 18463998, 18466286 and 0480246 all dated August
13, 2003 of the Regional Trial Court (of Pasig City);
ii. costs of publication of the Stay Order in the amount of P47,550.00 as evidenced by O.R. No. 86384 dated
August 13, 2003 of the Peoples Independent Media, Inc., the same being judicial costs authorized under Sec. 1,
Rule 142 of the Rules of Court;
iii. payments of professional fees to its Philippine Counsel, Belo Gozon Elma Parel Asuncion & Lucila, in the
total amount of US$152,784.32 as evidenced by the Affidavit of Atty. Roberto Rafael V. Lucila and the
Statements of Account attached thereto;
which the Court considers to be reasonable and finds authorized under Sec. 6.11 and 6.12 of the Indenture
attached as Annex "E" to the Petition;
The Receiver is hereby directed to cause the settlement of payment of the accounts within a period of sixteen
(16) months from receipt of this Order.102
The trial court made no pronouncement on the claims for cost of petitioner Avenue Asia Capital Group, either
in the same Order or in a subsequent order.
Before us, petitioners reiterate their claims for costs based on Sections 6.11 103 and 6.12104 of the
Indenture105 dated July 22, 1999, which was executed by respondent in their favor.
It bears stressing at this point that the subject of petitioners’ appeal before the Court of Appeals was the
Rehabilitation Court’s Decision dated June 28, 2004. Said Decision, however, bore no discussion on either
petitioners’ claim for costs from which they may appeal. Notably, the assailed Order of the Rehabilitation Court
was promulgated on March 15, 2005 or four (4) months after petitioners had appealed the Decision dated June
28, 2004 to the Court of Appeals on November 16, 2004. Evidently, the appellate court could not have acquired
jurisdiction to review said Order.
Nonetheless, we doubt the propriety of the Rehabilitation Court’s award for costs. A perusal of the Order dated
March 15, 2005 reveals that the award to petitioner Bank of New York was made pursuant to Section 1, Rule
142 of the Rules of Court, which states:
SECTION 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these Rules, costs shall be
allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to
adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable. No
costs shall be allowed against the Republic of the Philippines unless otherwise provided by law. (Emphasis
supplied)
However, there is no prevailing party in rehabilitation proceedings which is non-adversarial in nature. 106 Unlike
in adversarial proceedings, the court in rehabilitation proceedings appoints a receiver to study the best means to
revive the debtor and to ensure that the value of the debtor’s property is reasonably maintained pending the
determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan
after its approval.107 The main thrust of rehabilitation is not to adjudicate opposing claims but to restore the
debtor to a position of successful operation and solvency. Under the Interim Rules, reasonable fees and
expenses are allowed the Receiver and the persons hired by him, 108 for those expenses incurred in the ordinary
course of business of the debtor after the issuance of the stay order but excluding interest to creditors.109
Moreover, while it is true that the Indenture between petitioners and respondent corporation authorizes the
Trustee to file proofs of claim for the payment of reasonable expenses and disbursements of the Trustee, its
agents and counsel, accountants and experts, such remedy is available only in cases where the Trustee files a
collection suit against respondent company. Indubitably, the rehabilitation proceedings in the case at bar is not a
collection suit, which is adversarial in nature.