G.R. No. 190800, November 7, 2018,
♦ Decision, Reyes, A., Jr., [J]
♦ Concurring Opinion, Perlas-Bernabe, [J]

[ G.R. No. 190800, November 07, 2018 ]




I concur. This petition assailing the Decision1 dated July 7, 2009 of the Court of Appeals (CA) which upheld the Rehabilitation Plan of respondent Fortuna Paper Mill & Packaging Corporation (Fortuna) should be dismissed on the ground of mootness in view of the termination of the rehabilitation proceedings before the Court could resolve the instant petition. A case or issue is considered moot and academic when it ceases to present a justiciable controversy because of supervening events, rendering the adjudication of the case or the resolution of the issue without any practical use or value.2

This notwithstanding, the Court, in a number of instances,3 discussed the substantive merits of the case otherwise moot and academic whenever it found the need to formulate controlling principles to guide the bench, the bar, and the public in view of the public interest involved.4 In my view, and as the ponencia deemed fit, this case falls under the foregoing exception, considering the substantive issues raised concerning the technical subject of corporate rehabilitation and some of its working parameters.

As background, the basic facts of this case are as follows: on June 21, 2007, Fortuna filed a Petition5 for corporate rehabilitation (rehabilitation petition) before the Regional Trial Court of Malabon, Branch 74 (RTC), with prayer for the issuance of a Stay Order, docketed as SEC. Case No. S7-002-MN. It alleged, among others, that eighty-eight percent (88%) of its total obligations is owing to petitioner Metropolitan Bank & Trust Company (MBTC)6 which is secured by real estate and chattel mortgages over properties owned by it and its affiliates, and are now overdue.7 It claimed that rehabilitation is the best option for the company, as well as its creditors because any forced liquidation would give the unsecured creditors a mere P0.518 for every peso of exposure.9

Under the proposed Rehabilitation Plan,10 Fortuna intends to resume its operations which had ceased since the second quarter of 2006 due to the labor problems it encountered,11 that was followed by the disconnection of its supply of electricity.12 Essentially, the elements of the business plan are: (a) debt moratorium for two (2) years, restructuring of interest rates and waiver of penalty charges;13 (b) the infusion of investment by Polycity Enterprises Ltd. (HK; Polycity) which had indicated its interest to acquire fifty percent (50%) or more of the company's stocks that is valued at least P70 Million;14 and (c) entry into the business of condominium development on a 13,503 square meter-property owned by its sister company, Classic Frames Corp., located in Malabon, Metro Manila (Malabon property), which project shall be enrolled with the Pag-IBIG City Program backed with a Payment Guarantee Bond.15

Despite opposition, the rehabilitation petition was given due course, and the Rehabilitation Plan, which was found to be feasible and viable, was eventually approved by the RTC in an Order16 dated December 20, 2007. The said Order was subsequently affirmed by the CA in the assailed July 7, 2009 Decision.

Hence, the instant petition filed by MBTC, contending that: (a) Fortuna is not qualified to file a rehabilitation petition17 under the 2000 Interim Rules of Procedure on Corporate Rehabilitation18 (Interim Rules); and (b) there are no material financial commitments to support the Rehabilitation Plan.19 Subsequently, however, MBTC informed the Court that the RTC had already terminated the rehabilitation proceedings in SEC. Case No. S7-002-MN,20 which was affirmed by the CA.21 Thus, based on this supervening event, MBTC prayed that the instant petition be dismissed on the ground of mootness.

As earlier mentioned, although this case had indeed become moot and academic due to the termination of the rehabilitation proceedings, it would be highly instructive to delve into the aforementioned substantive issues to guide the bench, the bar, and the public in understanding some of the working parameters attending corporate rehabilitation.



As presently defined, "[r]ehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated."22 Under Section 1,23 Rule 4 of the Interim Rules, any debtor who foresees the impossibility of meeting its debts when they respectively fall due may file a petition for corporate rehabilitation before the RTC. In this case, MBTC insists that Fortuna is not qualified to file a rehabilitation petition under the Interim Rules since the phrase "who foresees the impossibility of meeting its debts when they respectively fall due" must be construed to mean that an element of foresight is required, and that the debts of the corporation should not have matured.24 It maintains that "[t]he unequivocal language of the [said] provision demonstrates a manifest intent on the part of its drafters to make a distinction between debtors already in default and those who are not, to the end that only debtors in the latter class may petition to be placed under rehabilitation."25

In MBTC v. Liberty Corrugated Boxes Manufacturing Corporation26 (Liberty), wherein Fortuna's sister company was involved, the Court had already struck down MBTC's proposed interpretation as contradicting provisions of the Interim Rules, which contemplate situations where a debtor corporation may already be in default,27 and defeats the clear purpose of the lawmakers.28 The Court declared that a corporation with debts that have already matured may still file a petition for corporate rehabilitation under the Interim Rules because: (a) the condition that triggers rehabilitation proceedings is not the maturation of a corporation's debts but the inability  of the debtor to pay these; and (b) the definition under the Interim Rules is encompassing; hence, there should be no distinction whether a claim has matured or otherwise.29



Under Section 5,30 Rule 4 of the Interim Rules, the rehabilitation plan shall include the material financial commitments supporting the same. In this case, MBTC faults the CA for relying on the highly contingent and speculative proposal given by Polycity – the alleged White Knight investor – prior to the latter's conduct of due diligence on Fortuna and while funding negotiations were still placed on hold. It pointed out that while the rehabilitation receiver concluded that the said proposal was a distinct possibility, his recommendation in favor of Fortuna's rehabilitation was precisely conditioned on the completion of such due diligence by Polycity and the corresponding cash infusion within nine (9) months from approval of the rehabilitation plan.31

In BPI Family Savings Bank, Inc. v. St. Michael Medical Center, Inc.,32 the Court explained that "nothing short of legally binding investment commitment/s from third parties is required to qualify as a material financial commitment."33 However, no such binding investment was presented by Fortuna in this case. Clearly, Polycity only presented an offer to purchase that is contingent upon, among others, "the conduct of financial, operational, legal[,] and technical due diligence which yield satisfactory results to be completed within sixty (60) days of Fortuna's acceptance of [its] letter."34 Significantly, Polycity's Letter of Intent35 expressly states that: (a) the same "does not constitute a binding commitment on either party with respect to any transaction and is not intended to be and does not constitute a legal binding obligation;" and (b) "[n]o legal binding obligations will be created, implied or inferred until and unless a definitive agreement is executed and delivered by the parties."36 While Polycity's then President, Anthony Sher,37 informally affirmed his company's readiness to make the capital infusion subject to the resolution of the legal issues surrounding Fortuna's rehabilitation,38 the same was made at a time when it has not yet completed its due diligence on Fortuna,39 and has yet to ascertain satisfactory results that would convince it to invest. This hardly fits the description of a material financial commitment which would inspire confidence that the rehabilitation would turn out to be successful. Tellingly, even prior to the filing of the instant petition before the Court, Fortuna filed a Motion to Amend Rehabilitation Plan40 dated March 5, 2009 acknowledging that it was unable to come up with the scheduled payments in the first year of rehabilitation, on the ground, among others, that Polycity had not pushed through with its planned investment, leaving it with the necessity to raise its own funds,41 but without indicating how it shall proceed therewith. It is worthy to emphasize that while there is no absolute certainty in rehabilitation, the sacrifice that the creditors are compelled to make can only be considered justified if the restoration of the corporation's former state of solvency is feasible due to a sound business plan with an assured funding,42 which is lacking in this case.

Neither can Fortuna's projected entry into the realty business be considered as an acceptable material financial commitment.ℒαwρhi৷ This is because no formal agreement was Shown to have been forged between it and its alleged joint venture partner, Oroquieta Properties, Inc. (Oroquieta). Similar to Polycity, Oroquieta only provided a proposal to develop Fortuna's properties, which was likewise still subject to the conduct of due diligence and the further execution of a formal Memorandum of Agreement "after the rehabilitation court has given its approval"43 of Fortuna's petition. In any event, capital infusion from this source is speculative at best, as there is no reasonable expectation that the Projects would be completed within the assumed target dates for completion in order to realize any income therefrom. As aptly pointed out by MBTC, Pag-IBIG's "guarantee lies only on the sale of the completed units but not on the means of sustaining the funds needed to complete the Project."44

But this is not all. In addition, Fortuna's rehabilitation petition lacks a proper liquidation analysis that would guide the Court in ascertaining if Fortuna's creditors can recover by way of the present value of payments projected in the plan, more if it continues as a going concern than if it is immediately liquidated, which is a crucial factor in a corporate rehabilitation case.45 The Interim Rules state that the rehabilitation plan shall include "a liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would receive if the debtor's properties were liquidated."46 However, while a liquidation analysis47 was attached to the rehabilitation petition, the same was not accompanied by any explanation or reliable market information to back the assumptions48 made by Fortuna's management as to the recoverable amount of its assets, and thus, preventing the Court from determining the feasibility of the plan.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation, as well as to include a proper liquidation analysis, renders the CA's considerations for approving the same49 as actually unsubstantiated, and hence, insufficient to decree Fortuna's rehabilitation. It bears to stress that the remedy of rehabilitation should be denied to corporations that do not qualify under the Interim Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors.50

At any rate, the financial documents presented by Fortuna clearly fail to demonstrate the feasibility of its proposed Rehabilitation Plan. In this case, the interim financial statements (FS) as of May 31, 2007 show that: (a) while Fortuna has substantial total assets, a large portion thereof is comprised of Property and Equipment,51 the bulk of which are mortgaged to MBTC;52 (b) Fortuna's cash operating position53 was insufficient to meet its maturing obligations as its current assets were substantially lower than its current liabilities;54 and (c) when compared vis-a-vis Fortuna's audited FS55 for the three (3) immediately preceding years, certain accounts were omitted56 or added57 without any explanation or justification. Moreover, no basis was provided for the projected sales,58 expenses, and net incomes for the ten (10)-year period59 following the filing of the rehabilitation petition, such as forecasts of independent industry analysts, and Fortuna's performance in previous years60 does not indicate that its sales grow annually at such rate.

Verily, Fortuna's rehabilitation plan should have shown that it has enough serviceable assets to be able to continue its business operation. In fact, opposed to this objective, the rehabilitation plan still requires: (a) the acquisition of a "coal-fired boiler for an estimated P15,000,000.00"61 to replace the bunker-fired boiler62 in order "to reduce its production costs and be competitive with its rivals;"63 and (b) the settlement of the liabilities to Manila Electric Company64 and its suppliers "essential for resumption of operations"65 – that would further sacrifice its cash flow. Without a definite source of financing, both internally and externally, or enough cash and other current assets to enable it to resume operations, it is difficult to perceive the feasibility of rehabilitating Fortuna's business.

The purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated. Therefore, the remedy of rehabilitation should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the business plan,66 as in this case.

Thus, Fortuna's rehabilitation petition should have been dismissed not only due to its failure to comply with the key requirements under the Interim Rules – i.e., to state any material financial commitment to support the rehabilitation, as well as to include a proper liquidation analysis – but also to establish the feasibility and viability of the Rehabilitation Plan. However, since the rehabilitation proceedings had already been terminated, the foregoing observations are purely academic as this case has already been mooted and therefore, must be dismissed.

ACCORDINGLY, I vote to DISMISS the petition on the ground of mootness.


1 Rollo, pp. 39-66. Penned by Associate Justice Arturo G. Tayag with Associate Justices Noel G. Tijam (now a Member of this Court) and Normandie B. Pizarro, concurring.

2 See Ayala Land, Inc. v. Heirs of Lactao, G.R. No. 208213, August 8, 2018.

3 See Mahinay v. Gako, Jr., 677 Phil. 292 (2011); Republic v. Manila Electric Company, 723 Phil. 776 (2013).

4 See Genuino v. De Lima, G.R. Nos. 197930, 199034 & 199046, April 17, 2018.

5 Rollo, pp. 85-97.

6 See id. at 92.

7 See id. at 90-91.

8 Should be P0.54. See Liquidation Analysis; CA rollo, p. 212.

9 Rollo, p. 95.

10 CA rollo, pp. 109-141.

11 See id. at 123.

12 See rollo, p. 13.

13 See CA rollo, p. 131-132.

14 See id. at 134. See also Polycity's letter of intent dated March 14, 2007; rollo, p. 104.

15 See CA rollo, pp. 135-136.

16 See rollo, pp. 226-228. Penned by Assisting Judge Leonardo L. Leonida.

17 See rollo, pp. 21-23.

18 A.M. No. 00-8-10-SC, November 21, 2000 (Re: Interim Rules of Procedure on Corporate Rehabilitation).

19 See rollo, pp. 29-31.

20 In its Decision dated November 21, 2011.

21 The CA denied Fortuna's Rule 43 petition in its Decision dated August 30, 2013 in CA-G.R. SP No. 124062. Penned by Associate Justice Vicente S.E. Veloso with Associate Justices Stephen C. Cruz and Myra V. Garcia-Fernandez, concurring.

Fortuna moved for reconsideration, but subsequently withdrew the motion on the ground that the petition has been overtaken by unspecified events which rendered the petition moot and academic, and admitting the correctness and validity of the November 21, 2011 RTC Order terminating the rehabilitation proceedings.

In a Resolution dated April 30, 2014, the CA granted Fortuna's motion to withdraw.


23 Section 1. Who May Petition. – Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, or any creditor or creditors holding at least twenty-five percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to have the debtor placed under rehabilitation.

24 See rollo, p. 21.

25 See id. at 22-23.

26 G.R. No. 184317, January 25, 2017, 815 SCRA 458.

27 See id. at 472.

28 See id. at 479.

29 See id. at 471-472.

30 Section 5. 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; (c) the material financial commitments to support the rehabilitation plan; (d) 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 enpago, or sale of assets or of the controlling interest; (e) a liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would receive if the debtor's properties were liquidated; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases supplied)

31 See rollo, pp. 26-27.

32 757 Phil. 251, 266 (2015).

33 Id. at 268.

34 Rollo, p. 104; underscoring supplied.

35 Id.

36 See id.

37 See id.

38 During an interview with the rehabilitation receiver; see id. at 212.

39 See id. at 215.

40 Id. at 229-236.

41 See id. at 230.

42 See Wonder Book Corp. v. Phil. Bank of Communications, 691 Phil, 83, 100 (2012).

43 See rollo, pp. 219-220.

44 See MBTC's Reply (Re: Comment dated 28 May 2010) dated September 20, 2010; id. at 266.

45 See BPI Family Savings Bank, Inc. v. St. Michael Medical Center, Inc., supra note 32, at 269.

46 See Section 5, Rule 4 of the Interim Rules.

47 CA rollo, p. 212.

48 Among the assumptions made was the inclusion of the account "Estimated receivable" from Liberty on the realizable value of its land pledged in the amount of P84,414,200.00 (see CA rollo, p. 212) in the computation of free/available assets. However, the records are bereft of showing that Liberty, which is also undergoing rehabilitation, had already sold or assigned the said land to Fortuna.

49 I.e., (a) Fortuna's assets, which are well in excess of its liabilities, would be even more valuable if Fortuna is preserved as a going concern rather than if it were liquidated outright (see rollo, p. 57); (b) Polycity's investment is a viable and realistic option (see id. at 58), and the approval of Fortuna's rehabilitation plan, as well as the lower court's close oversight of its implementation through the receiver "could well expedite the entry of Polycity" (see id. at 61); and (c) the proposed business of condominium development is a viable venture for the debtor and a good source of cash flow for its operations (see id. at 63).

50 Philippine Asset Growth Two, Inc. v. Fastech Synergy Philippines, Inc., 788 Phil. 355, 378 (2016).

51 See rollo, p. 125.

52 Comprising the following:

Buildings P 131,521,000.00
Machineries/Chattel 144,643,000.00
Land 36,772.000.00
Total assets mortgaged P 312,936,000.00 (see id. at 90-91)
Total Porperty & Equipment (PPE) ÷ 409,349,354.62 (see id. at 125)
Percentage of mortgaged properties in the PPE 76.45%

53 "A company's cash position refers specifically to its level of cash compared to its pending expenses and liabilities, x x x. In general, a stable cash position means the company can easily meet its current liabilities with the cash or liquid assets it has on hand. Current liabilities are debts with payments due within the next 12 months." (See footnote 54 in BPI Family Savings Bank, Inc. v. St. Michael Medical Center, Inc., supra note 32, at 269, citing Kokemuller, "Neil, "Cash Flow vs. Cash Position," Chron. < http://smallbusiness.chron.com/cash-flow-vs-cash-position-51149.html> [visited November 5, 2018)

54 Fortuna's current assets and current liabilities as of May 31, 2007 are as follows:

Total Current Assets    P  3,605,395.50

Total Current Liabilities    14,896,762.24 (see rollo, p. 125)

55 The audited financial statements atfached to the rollo and the CA rollo were not accompanied by any explanatory notes.

56 The account "Finished Goods Inventory" which was valued at P50,316,867.49 in the audited Balance Sheet as of December 31, 2006 (see rollo, p. 121) does not appear in the Interim Statement of Cost of Goods Manufactured and Sold (see id. at 127) and the Current Assets section of the Interim Balance Sheet (see id. at 125) without a showing that the same was sold and converted to cash or receivables, or otherwise disposed through a dacion en pago. Neither was it shown why the beginning balance of the "Raw Materials Inventory" in the Interim Statement of Cost of Goods Manufactured and Sold was reduced to P6,500,700.50 (see id. at 127) when the same was valued at P50,780,900.50 (see id. at 121) in the audited Balance Sheet as of December 31, 2006.

57 The account "Utilities Payable" in the amount of P30,354,849.60 corresponding to the liability to MERALCO was suddenly reported in the Interim Balance Sheet (see id. at 125) when the same was never reflected in Fortuna's audited balance sheets for the years 2005 (see id. at 115) and 2006 (see id. at 122), despite the compromise agreement entered with MERALCO on July 2005 (see id. at 88).


Year 2 Sales P 379,848,960.00
Year 1 Sales 323,872,960.00(see CA rollo, p. 135)
Increase in Sales P 55,976,000.00
÷ 379,848,960.00
x 100%
Sales growth percentage 14.74%

59 See id.

60 Considering the growth of 3.35% in sales from 2004 to 2005 computed as follows:

2005 Sales P 92,842,658.02(see rollo, p. 113)
2004 Sales - 89,730,395.13
(see id. at 107)
Increase in Sales P 3,112,262.89
÷ 92,842.658.02
x 100%
Sales growth percentage 3.35%

61 See CA rollo, p. 134.

62 See id. at 120.

63 See id. at 134.

64 Amounting to P30,354,849.60; see id. at 101.

65 See id. at 134.

66 See Philippine Asset Growth Two, Inc. v. Fastech Synergy Philippines, Inc., supra note 50, at 383-384.

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