Rehabilitation Plans and Contractual Rights: Dacion en Pago in Corporate Recovery

When a company undergoes corporate rehabilitation, its creditors may be asked to accept payment arrangements they never agreed to. One such arrangement is dacion en pago — offering property to settle a debt. But can a rehabilitation plan force a secured creditor into this mode of payment? The Supreme Court addressed this in Bank of the Philippine Islands v. Securities and Exchange Commission (G.R. No. 164641, December 20, 2007).

The Case: BPI vs. the ASB Group Rehabilitation Plan

The ASB Group of Companies owed Bank of the Philippine Islands (BPI) P86.8 million, secured by a real estate mortgage over two properties in Greenhills, San Juan. When ASB filed for rehabilitation, its proposed plan included a dacion en pago: ASB would transfer one mortgaged property to BPI at a selling value of P84 million, with the balance waived as full payment. In return, ASB asked BPI to release the other property for the creditors' asset pool.

BPI objected, arguing the plan compelled it to accept the arrangement, violating its freedom to contract. The SEC approved the plan anyway, and the Court of Appeals affirmed. BPI elevated the case to the Supreme Court.

The Issue: Does a Rehabilitation Plan Impair Contractual Rights?

BPI argued that the dacion en pago provision was coercive. It claimed the plan forced secured creditors to accept payment at ASB-dictated selling prices, rendering their preferred status illusory. BPI also invoked the constitutional non-impairment clause, which protects contracts from being altered by law.

The Supreme Court disagreed and denied BPI's petition.

The Ruling: No Compulsion, No Impairment

The Court made three key points.

First, the non-impairment clause limits legislative power, not judicial or quasi-judicial power. The SEC, when approving a rehabilitation plan, acts as a quasi-judicial body. Its approval therefore cannot constitute an impairment of contract.

Second, dacion en pago is a special mode of payment that requires the creditor's consent. It partakes of the nature of a sale, which needs consent, a determinate object, and cause or consideration. Without BPI's agreement, no dacion en pago could be perfected.

Third, the plan itself provided alternatives. If secured creditors refused the dacion en pago, ASB proposed to settle obligations with mortgaged properties at selling prices. If BPI still refused, it could assert its rights in liquidation, retaining preference over unsecured creditors.

The Court cited its earlier ruling in Metropolitan Bank & Trust Company v. ASB Holdings (G.R. No. 166197, February 27, 2007), which involved the same rehabilitation plan. There, the Court held that approval of a plan merely suspends claims; it does not extinguish a secured creditor's preference.

Why This Matters

Rehabilitation proceedings serve equitable and rehabilitative purposes. They aim to distribute an insolvent debtor's assets fairly while giving the debtor a "fresh start." The rationale of Presidential Decree No. 902-A, as amended, is to preserve a foundering business as a going concern, since its assets are often more valuable that way than in liquidation.

This policy explains why courts and administrative agencies may approve plans that propose payment arrangements creditors find unpalatable. The key safeguard is that creditors are never forced to accept a specific mode of payment. They always retain the right to reject and pursue their preference in liquidation.

Practical Takeaways

• A rehabilitation plan cannot compel a secured creditor to accept dacion en pago. The creditor's consent is essential for this mode of payment to be valid.

• Secured creditors retain their preference. Even if a plan is approved, secured creditors keep their priority over unsecured creditors in the eventual distribution of assets.

• The non-impairment clause does not apply to quasi-judicial approvals. It limits legislative power, not the SEC's adjudicatory functions.

• Review rehabilitation plans carefully. A plan may propose terms you find unfavorable, but you are not bound to accept them. Know your options: reject the proposal, negotiate, or await liquidation.

• Document your objections. In this case, BPI's failure to submit its own property valuation weakened its position. Substantiated objections carry more weight.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.