Cram-down is the power of the rehabilitation court to approve and implement a rehabilitation plan

notwithstanding the objection of the majority of creditors. As noted in the case of Bank of the Philippine
Islands vs. Sarabia Manor Hotel Corporation (G.R. No. 175844, 29 July 2013), the “cram-down” clause,
which is currently incorporated in Section 64 of Republic Act No. 10142, also known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, “is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater
long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.” Section 64 reads:

Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the
creditors and stakeholders that the Plan is ready for their examination. Within twenty (2Q) days from the
said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for
purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless approved by all
classes of creditors w hose rights are adversely modified or affected by the Plan. For purposes of this
section, the Plan is deemed to have been approved by a class of creditors if members of the said class
holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan. The
votes of the creditors shall be based solely on the amount of their respective claims based on the registry
of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if
all of the following circumstances are present:

(a) The Rehabilitation Plan complies with the requirements specified in this Act.

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a
result of the Rehabilitation Plan; and

(d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which
has a net present value greater than that which they would have received if the debtor were under
liquidation.
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To the chagrin of creditors, one of the most abused legal remedies these days is the remedy of
rehabilitation under the Financial Rehabilitation and Insolvency Act (FRIA) and the Financial Rehabilitation
Rules of Procedure (FR Rules).

More often than not, whenever business entities find difficulties in paying their lawfully contracted debts,
they threaten their creditors with, and eventually file, a petition for rehabilitation.

On the pretext of saving a business, our courts of law thereafter approve the petition, no matter how
unworkable the rehabilitation plan is.

The net effect of the indiscriminate filing and approval of rehabilitation petitions is that the enforcement
of creditors’ claims is suspended and creditors are left at the mercy of their debtors and our courts of
law. This has given the country bad perception in the international community in terms of protecting
creditors’ rights.

But there’s light of the end of the tunnel. Slowly but surely, our Supreme Court (SC) has been attempting
to strike a balance between corporate rehabilitation and protection of creditors’ rights.
A recent case in point is BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc. [G.R. No.
205469, March 25, 2015], penned by Associate Justice Estela Perlas-Bernabe. The magistrate also
happened to co-chair the Supreme Court committee that drafted the FR Rules.

Briefly, spouses Virgilio and Yolanda Rodil, sole proprietors of the St. Michael Diagnostic and Skin Care
Laboratory Services and Hospital (St. Michael Hospital), planned on upgrading their hospital into a full
service 11-story hospital. In line with this, the spouses Rodil incorporated the St. Michael Medical Center
Inc. (SMMCI), where they intended to consolidate the operations of the hospital.

Using their personal funds and a mortgage loan from the BPI Family Savings Bank (BPI Savings Bank),
the spouses commenced construction of a new hospital building. Unfortunately, only several floors were
constructed and the 11-story hospital building was never completed as envisioned. As of May 2006,
SMMCI was neither operational nor earning revenues.

On Aug. 11, 2010, SMMCI filed a petition for corporate rehabilitation. In its petition, SMMCI claimed that
St. Michael Hospital, although operating profitably, was weighed down by its loan obligations.

SMMCI further claimed that while several persons signified interest in investing in SMMCI, they needed
enough time for audit and due diligence.

In its proposed rehabilitation plan, SMMCI wanted BPI Savings Bank to: (a) defer foreclosing on the
mortgage constituted to secure the loan extended to SMMCI; and (b) agree to a moratorium of at least
two years before SMMCI would start servicing its loan obligation to the bank.

A regional trial court approved the plan, which was later affirmed by the Court of Appeals. Consequently,
BPI Savings Bank appealed.

In resolving BPI Savings Bank’s appeal, the SC reversed the lower courts’ rulings and laid down some
important doctrines in rehabilitation law for the guidance of the bench and the bar in the future.

First, for a rehabilitation petition to be granted, there must be a viable business to be

restored. This is because rehabilitation “contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful operation and solvency,
the purpose being to enable the company to gain a new lease of life and allow its creditors to be paid
their claims out of its earnings.”

The SC said that while SMMCI had indeed “commenced business” by opening a credit line with BPI Family
Bank to finance the construction of the new hospital building, it neither formally operated nor earned any
income since its incorporation.

Second, the high court said the petitioner must comply with the requirement of material
financial commitment. A mere negotiation with investors is not enough.

Third, there must be a liquidation analysis submitted as part of a rehabilitation plan. The
failure of SMMCI to comply with this requirement “prevent[ed] the Court from ascertaining if the
petitioning debtor’s creditors can recover by way of the present value of payments projected in the
plan…”

What is admirable about the BPI Savings Bank case is that it strikes the right balance between the needs
of the parties.

Indeed, “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.”