MTV Klinika Health Spa, Inc. v. BDO Leasing and Finance, Inc.

THIRD DIVISION

[G.R. No. 216123. July 24, 2017.]

MTV KLINIKA HEALTH SPA, INC., petitioner,vs. BDO LEASING AND FINANCE, INC. and BDO UNIBANK, INC., respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, Third Division, issued a Resolutiondated July 24, 2017, which reads as follows:

"G.R. No. 216123 (MTV KLINIKA HEALTH SPA, INC., Petitioner, v. BDO LEASING AND FINANCE, INC. and BDO UNIBANK, INC., Respondents.) — Under review is the decision promulgated on June 25, 2014, 1 whereby the Court of Appeals (CA) affirmed the dismissal by the Regional Trial Court (RTC), Branch 159, in Pasig City of petitioner MTV Klinika Health Spa, Inc.'s petition for corporate rehabilitation. SDHTEC

Antecedents

Petitioner MTV Klinika Health Spa, Inc. (MTV Klinika) is a domestic corporation engaged in providing aesthetic and pathological skin treatments with the use of dermatological equipment and products. 2

On November 21, 2007, respondents BDO Leasing and Finance, Inc. (BDOLF) and BDO Unibank, Inc. (BDO) entered into a lease agreement with MTV Klinika for the lease by the latter of several equipment for the operation of its business, namely: one unit of Resonax Machine at a monthly rental of P94,837.00 for 36 months; one unit of IPL Photorejuvenation Treatment System at a monthly rental of P73,128.00 for 24 months; one unit HS-300A IPL Photorejuvenation Treatment System at a monthly rental of P53,479.00 for 36 months; and one unit Radiancy Duet at a monthly rental of P74,757.00 for 24 months. 3

MTV Klinika also obtained loans from several banks, including BDO, Bank of Makati, Security Bank, and from private lenders and other financial institutions, totaling P43,069,635.10 as of November 30, 2010. 4

On December 15, 2010, MTV Klinika filed a petition for corporate rehabilitation in the RTC docketed as SEC Case No. 10-148, claiming therein that it had failed to build enough cash flow to finance its amortizations due to the high interest rates charged by its creditors; that the opening of other branches had not produced the expected volume of business, thereby causing the increase of its obligations and higher interest payments; and that it had adequate assets to recover if only it would be given enough space to deal with the causes of its distress. 5 It submitted its rehabilitation plan for approval. 6

Finding the petition sufficient in form and substance, the RTC issued a stay order on December 16, 2010; 7 appointed Atty. Rex Peter Garcia Raz as the rehabilitation receiver; set the initial hearing on February 17, 2011; and directed all creditors and interested parties to file their comments or opposition to the petition. 8

In due course, the respondents filed their opposition, and sought the dismissal of the petition and the lifting of the stay order on the grounds that the petition was defective in form and substance and contained false and misleading statements. 9

On June 17, 2011, BDOLF filed an Omnibus Motion to Exclude the Leased Properties of BDO Leasing and Finance, Inc. from the Rehabilitation Plan and Stay Order and Motion to Dispose Funds of the Petitioner for Payment of Rentals in the Ordinary Course of Business and as Part of Administrative Expense. It is noted, however, that the RTC did not act on the omnibus motion. 10

On December 16, 2011, the RTC directed MTV Klinika to furnish the rehabilitation receiver and all the creditors with its unaudited financial statement for 2011 not later than the end of January 2012, and its amended rehabilitation plan not later than the end of February 2012. 11

On March 7, 2012, the respondents filed a motion to dismiss for failure of MTV Klinika to provide to them its amended rehabilitation plan within the period fixed by the RTC. 12

It was only on September 11, 2012 13 when MTV Klinika submitted its second amended rehabilitation plan, whereby it manifested its need for a 10-year period for its rehabilitation, with an interest rate of 4% per annum, payable beginning on the second year and compounded to the principal, for all creditors; 14 and that during the one-year suspension of payments, it committed to establish an effective accounting system and to fix its corporate organization to correct errors in its system that had prevented it from building enough cash flow to pay its maturing amortizations. 15

The second amended rehabilitation plan submitted by MTV Klinika, together with the comments/oppositions submitted by the creditors, was referred to the rehabilitation receiver, who in turn submitted his comments thereto. The rehabilitation receiver recommended the approval of the second amended rehabilitation plan, subject to the following conditions, namely: (1) that the nature and details of the management fee, which comprised almost 20% of the total expenses of MTV Klinika, should be indicated; (2) that the policy on the payment of commissions should be re-examined; (3) that MTV Klinika should embark on aggressive marketing activities to increase its clientele especially tapping the 25-45 years old bracket; and (4) that a schedule of payment of each creditor be presented indicating the dates and amounts to be paid. 16

Judgment of the RTC

On July 8, 2013, 17 the RTC rendered its judgment approving the second amended rehabilitation plan, and holding that with the projected income statements for the period of rehabilitation, MTV Klinika would be generating enough profit to cover and fully pay its outstanding obligations to all its creditors. AScHCD

The RTC cited the following considerations to justify its approval of the second amended rehabilitation plan, to wit: (1) with the capital, debt restructuring and business focus following the recommendations of the rehabilitation receiver, MTV Klinika could recover and be able to pay off its debts; 18 (2) a gross profit rate averaging 54% on the first seven years and increasing to 73% for the last three years in the projected income statements; 19 and (3) MTV Klinika's net profit after income tax expense averaged 7.7% in the first five years, increasing to 23% in the next five years. 20

The respondents appealed in due course.

Decision of the CA

In the now assailed decision promulgated on June 25, 2014, 21 the CA reversed the judgment of the RTC, disposing thus:

WHEREFORE, petition is GRANTED. The Decision dated July 8, 2013 of the RTC, Branch 159, Pasig City in Sec Case No. 10-148 is REVERSED and SET ASIDE. The petition for corporate rehabilitation is DISMISSED and the Stay Order dated December 16, 2010 is LIFTED.

SO ORDERED.22

On the procedural aspect, the CA found that the second amended rehabilitation plan was belatedly submitted, and was approved beyond the 180-day period required under the Interim Rules of Procedure on Corporate Rehabilitation; 23 and that, accordingly, the rehabilitation court failed to confirm a rehabilitation plan within one year from the filing of the petition as required by Section 72 of RA No. 10142 (Financial Rehabilitation and Insolvency Act of 2010). 24

On the substantive aspect, the CA observed that even brushing aside technicalities, a review of the second amended rehabilitation plan would show that it was bereft of any showing to the effect that MTV Klinika was susceptible of rehabilitation; 25 that the reliance of the RTC on the interim financial statements of MTV Klinika in determining the viability of its rehabilitation was misplaced inasmuch as the statements were self-serving, and MTV Klinika had not been audited by an independent financial auditor; 26 that MTV Klinika's projection of income statements seemed to be unrealistic and impractical with 54% profit rate in the first seven years and increasing to 73% in the last three years, without any discussion on how the profit would be realized; 27 that MTV Klinika did not allege in its rehabilitation plan a definite management plan that would bring about an expansion of its internal operations; 28 that although it projected an issuance of shares worth P12,000,000.00 for the 10-year rehabilitation period, it did not give details regarding its prospective investors who would put up additional cash for it; 29 and that the rehabilitation court did not address the issue of the leased properties of the respondents in the inventory of MTV Klinika's assets, which, if considered, would have modified its aggregate assets. 30

MTV Klinika moved for reconsideration, but its motion was denied.

Issues

Hence, MTV Klinika appeals based on the following issues, namely:

I.

THE DECISION AND RESOLUTION OF THE COURT OF APPEALS ARE VOID BECAUSE:

A. BOTH THE COURT OF APPEALS AND THE RESPONDENTS VIOLATED THE DUE PROCESS RIGHTS OF THE PETITIONER WHEN (1) THE RESPONDENTS FILED THE PETITION WITHOUT FURNISHING THE PETITIONER A COPY THEREOF AND (2) THE COURT OF APPEALS RENDERED ITS DECISION WITHOUT AFFORDING THE PETITIONER THE RIGHT TO PARTICIPATE IN THE PROCEEDINGS.

B. THE RESPONDENTS AVAILED OF THE WRONG REMEDY OF APPEAL FROM THE DECISION APPROVING THE REHABILITATION PLAN OF THE PETITIONER.

II.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN APPLYING THE DEFUNCT INTERIM RULES ON CORPORATE REHABILITATION CONTRARY TO THE RULES OF PROCEDURE ON CORPORATE REHABILITATION, WHICH WAS PREVAILING AT THE TIME THE PETITION FOR CORPORATE REHABILITATION WAS FILED, AND THE RATIONALE AND PRINCIPLES OF CORPORATE REHABILITATION. 31

MTV Klinika asserts that the respondents intentionally omitted to serve a copy of the petition for review to it and its counsel, in violation of its right to due process; that the respondents availed of the wrong remedy by filing with the CA a petition for review under Rule 43; that the CA erred in deciding the petition on the basis of the defunct Interim Rules of Procedure on Corporate Rehabilitation; and that in dismissing its petition, the CA did not consider the rationale and principle of corporate rehabilitation.

In contrast, the respondents contend that MTV Klinika's right to due process was not violated because it had been given all the opportunities to respond to the petition; 32 that the petition for review under Rule 43 was the remedy provided under the applicable rules on corporate rehabilitation for assailing the rehabilitation court's approval of the proposed rehabilitation plan; 33 that the CA correctly dismissed the petition for rehabilitation for failure of the rehabilitation court to confirm a viable rehabilitation plan within the period required under the Financial Rehabilitation and Insolvency Act of 2010, the 2000 Interim Rules on Corporate Rehabilitation, and even the 2008 Rules on Corporate Rehabilitation; 34 and that the CA did not err in ruling that petitioner's second amended rehabilitation plan was not viable because it was based on self-serving projections and sweeping generalizations instead of concrete plans on how to rehabilitate the company. 35

Ruling of the Court

The petition for review on certiorari lacks merit. AcICHD

1.

Procedural Issues

Under Section 2, Rule 8 of the Rules of Procedure on Corporate Rehabilitation (2008 Rules), the rules in force at the time MTV Klinika's petition for rehabilitation was filed on December 15, 2010, the proper remedy to assail in the CA an order approving or disapproving a rehabilitation plan was a petition for review under Rule 43 of the Rules of Court. Thus, the respondents availed themselves of the proper remedy to assail the decision of the RTC approving MTV Klinika's second amended rehabilitation plan.

Likewise, the records show that contrary to MTV Klinika's claim, its right to due process was not violated. The records show that the CA promulgated its resolution on September 27, 2013 directing MTV Klinika to file its comment on the respondents' petition for review; 36 that on January 15, 2014, the CA declared MTV Klinika to have waived the filing of the comment due to its non-submission of the same within the required period; 37 and that on April 11, 2014, the CA similarly declared MTV Klinika to have waived the filing of its memorandum because of its non-filing thereof within the allowable period. 38 All such resolutions of the CA were served directly to MTV Klinika and the rehabilitation receiver. Clearly, MTV Klinika was not deprived of the opportunity to participate in the proceedings before the CA. Indeed, ordinary prudence dictated that MTV Klinika, upon receipt of the petition for review and of the aforementioned resolutions, should have forwarded the same to its counsel, especially considering that it was the petitioning party in the rehabilitation proceedings.

2.

Substantive Issues

The central issue in a rehabilitation proceeding is the feasibility of continuing the operations of a distressed corporation, with a view of restoring it to the state of solvency, through the adoption of a workable rehabilitation plan. 39 Such rehabilitation plan, to be workable, should comply with Section 18, Rule 3 of the 2008 Rules, which states:

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; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. (Bold emphasis supplied)

The material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. It may include the voluntary undertakings of the stockholders or would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. 40

In this case, however, the second amended rehabilitation plan did not comply with the minimum requirements of the rule. In addressing its financial concerns, the petitioner made the following proposals and commitments in the plan, to wit: (a) a moratorium on payments during the first year of rehabilitation; (b) waiver of all interests, penalties and other charges that accrued after the filing of the petition for rehabilitation; (c) revenue growth of 7% in yearly sales from the increase in customer volume and prices; (d) improved marketing and distribution of old and new products and services; 41 (e) additional issuance of shares in exchange for equipment for new stockholders and investors; and (f) debt to equity conversion for willing creditors. 42 In short, MTV Klinika attempted to deal with its financial concerns through the suspension of payments to its creditors, a waiver of interests and penalties to convert into capital, and the improvement of its products and services to boost its revenue growth.

The proposals and financial commitment, albeit ideal, were not sufficient for the purpose of rehabilitation. We have stressed in Philippine Asset Growth Two, Inc. v. Fastech Synergy Philippines, Inc. (formerly First Asia System Technology, Inc.)43 that a distressed corporation cannot be restored to its former position of successful operation and regain its solvency merely by delaying payments and waiving accrued interest and penalties at the expense of the creditors. Also, valid and legally binding material financial commitments from third parties were required. 44 In that regard, Mary Jane Torres Valdecañas, the founder and President of MTV Klinika, averred in her affidavit of general financial condition dated December 14, 2010 45 that MTV Klinika would require new resources of about P50,000,000.00 to rehabilitate it. Yet, no such binding investment commitments were submitted by MTV Klinika. It was never enough that certain individuals or quarters might have expressed interest in investing new money in MTV Klinika. 46

Moreover, MTV Klinika did not attach to its rehabilitation plan the required liquidation analysis. The plan made no mention of the total liquidation assets and the estimated liquidation return to the creditors, as well as the fair market value of MTV Klinika's assets in comparison with the forced liquidation value of its fixed assets. 47 Thus, the Court could not properly determine whether its creditors could recover by way of the present value of the payments projected in the plan than if the assets were to be sold by a liquidator. 48 TAIaHE

Although it may consider the rehabilitation receiver's report favorably recommending the rehabilitation of the debtor, the Court is not bound by the report if rehabilitation, in its judgment, will not be viable. A debtor whose insolvency appears to be irreversible should be denied recourse to rehabilitation. 49 Neither should rehabilitation be allowed to a corporation whose purpose is only to delay the enforcement of the rights of its creditors. This purpose could become apparent from the absence of a workable business plan presented; from the baseless and unexplained assumptions, targets and goals; and from the lack of capital infusion for the execution of the business plan. 50 In the Court's judgment, all the aforementioned circumstances were present in the case of MTV Klinika.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated on June 25, 2014; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED."

Very truly yours,

(SGD.) WILFREDO V. LAPITANDivision Clerk of Court

 

Footnotes

1.Rollo, pp. 14-24; penned by Associate Justice Hakim S. Abdulwahid, and concurred in by Associate Justice Romeo F. Barza and Associate Justice Ramon A. Cruz.

2.Id. at 15.

3.Id.

4.Id. at 16.

5.Id.

6.Id.

7.Id.

8.Id. at 17.

9.Id.

10.Id.

11.Id. at 18.

12.Id.

13.Id. at 248-273.

14.Id. at 275.

15.Id.

16.Id. at 275-276.

17.Id. at 274-279; penned by Judge Rodolfo R. Bonifacio.

18.Id. at 277.

19.Id. at 278.

20.Id.

21.Supra note 1.

22.Rollo, p. 24.

23.Id. at 21.

24.Id. at 22.

25.Id.

26.Id.

27.Id. at 23.

28.Id.

29.Id. at 23-24.

30.Id. at 22.

31.Id. at 32-33.

32.Id. at 311-312.

33.Id. at 314.

34.Id. at 316.

35.Id. at 321.

36.Id. at 451.

37.Id. at 452.

38.Id. at 453.

39.Philippine Asset Growth Two, Inc. and Planters Development Bank v. Fastech Synergy Philippines, Inc. (formerly First Asia System Technology, Inc.), G.R. No. 206528, June 28, 2016, 794 SCRA 625, 640.

40.Philippine Bank of Communication v. Basic Polyprinters and Packaging Corporation, G.R. No. 187581, October 20, 2014, 738 SCRA 561, 572-573.

41.Rollo, p. 255.

42.Id. at 256.

43. G.R. No. 206528, June 28, 2016, 794 SCRA 625, 651.

44.BPI Family Savings Bank, Inc. v. St. Michael Medical Center, Inc., G.R. No. 205469, March 25, 2015, 754 SCRA 493, 510.

45.Rollo, pp. 179-186.

46.Id. at 185.

47.Supra, note 43, at 644.

48.Id.

49.Id. at 651.

50.Supra, note 44, at 513.