We create our own stumbling blocks

There’s a story of woe involving a legitimate business enterprise that’s going around, which have caught my attention simply because it has made me wonder whether some parts of our judicial system, or probably even some members of our judiciary, wittingly or unwittingly stand as deterrents to the development of legitimate business and consequently to our country’s progress and economic advancement.

The story centers on questionable or refutable judicial decisions in a rehabilitation case and the undue haste with which court decisions involving the case were dispensed off. The aggrieved party feels that what happened and presently happening to their business enterprise can be made into a case study if only to determine what changes can be introduced to the present system with the end view of encouraging businessmen to continue doing business in the country and for foreign investors to find a business-friendly community in our judicial system.

For a brief backgrounder, the company in question here is Steel Corp. of the Philippines (SCP). It is a big player in steel production in the Philippines. It has an integrated plant in Balayan, Batangas capable of producing cold-rolled coils and coated steel products. Those in the know have heard of the globally famous GALVALUME 55 which is favored by international builders because it conforms to the highest international building standards. Well, SCP produces these.

It was in 1994, during the incumbency of President Fidel V. Ramos that the company was established. The sitting President then was pushing for rapid industrialization, and along this line, the Iron and Steel Industry Act was created. The plant took five years to complete, and along this time, in 1997, the Asian financial fiasco hit the region. This, plus the peso devaluation, caused the company to suffer losses even before it began commercial operations in 1999. The project, which was to have cost P3.2 billion, ran to P6.5 billion.

Understandably, the company was in distress because of foreign exchange losses and escalating costs of equipment and construction materials. According to SCP, they still managed to pay off the amortizations on their obligations to their creditor-banks despite these, and had in fact “paid back to the creditors the total amount of P1.1 billion in principal and P4 billion in interest.” Total obligation from banks is P3.1 billion.

The drain on its financial resources prompted SCP to rethink its financial viability, so that the company and its creditor-banks agreed on a restructuring of the existing loans. So, in December 2002, they executed an Omnibus Agreement to reschedule the debts, retain the existing working capital and establish a P500 million Revolving Trade Financing Line (RTFL) for the company.

The foregoing was narrated entirely by SCP in a position paper as I had no inside knowledge of the goings-on, nor do I personally know anyone from SCP or the creditor-banks. Lest I be misread, I will quote where I feel needed for the sake of clarity.

To continue, SCP wrote that “Unfortunately, the creditor-banks reneged on their commitment to provide the P500 million RTFL; only 100 million was provided. Furthermore, three creditor-banks withdrew P275 million of then existing working capitals. Effectively, the creditor-banks withdrew the total amount of P675 million from the approved financial plan.”

SCP continued its precarious position until 2006 when it could no longer afford the amortizations. By this time, P147 million was due on the first principal amortization.  They then requested for a review of their debt-service plan from their creditors.

In the midst of negotiations, however, the major creditor-bank “pre-empted and aborted the restructuring negotiations by surreptitiously filing all by itself on  Sept. 11, 2006 a petition to place SCP under corporate rehabilitation in the Batangas Special Commercial Court. This not only took SCP and its other creditors by complete surprise but more unfortunately, scuttled the parties’ efforts to arrive at a consensual restructuring plan. “The proposal was a debt-to-equity conversion that would force the takeover by the banks of over 90 percent ownership of SSP.”

Naturally, SCP objected to the ‘debt-to-90%’ equity conversion. It claims that its unsustainable debt is only P2 billion, which translates to only 30 percent equity.

To make a long story short, SCP requested that the presiding judge and the receiver be disqualified. They cited conflicts of interest as “the receiver and his law firm was counsel for a number of the creditor banks, more seriously, of the proponent of the rehabilitation.” It also cited familial ties of the court-appointed receiver with executives of the major creditor bank.

Before SCP could submit a Counter Rehabilitation Plan and submit its 2006 audited Financial Statements, SCP claims that a haste decision was made, which prematurely dictated the major discretionary terms and parameters incorporated in the approved rehabilitation plan. “This included ceding a minimum of 50 percent ownership of SCP to the creditor banks and dictating the business value of SCP as a very low value of P1.1 billion and suggesting the creation of a management committee to replace SCP’s Board of Directors.”  Incidentally, the company’s audited financial statement was done by a reputable auditing company, SGV.

In all the talks about rehabilitation, I gathered information that no baseline assumptions on total debt, sustainable debt and interests/penalties were ever made. SCP asks, “How can anyone proceed with a rehab plan if these figures are absent?”

What I also found quite disconcerting, if true, was SCP’s allegation that the judge assigned to handle the case supposedly appointed the financial adviser of the receiver as her own adviser. How true is this?

Anyway, SCP claims the judge subsequently approved the rehabilitation plan submitted by the receiver, even while the company was questioning the same.

This has led to a series of suits and complaints with the Office of the Ombudsman, the Court of Appeals, and the Supreme Court’s Office of the Court Administrator. They filed a Petition for Certiorari, Prohibition and Mandamus with Prayer for TRO and Injunction. The case has been re-raffled several times, bouncing off one justice after another. Interestingly, SCP cites that, of the several cases filed, and despite several justices inhibiting themselves, three of the SCP cases landed in only one justice’s lap.

They have asked for intervention at the highest levels of the Court of Appeals and the Supreme Court. They have also, in fact, requested for a Senate investigation in aid of legislation to “correct the flaws and deficiencies of the Interim Rules of Procedure on Corporate Rehabilitation...”

An interesting saga, don’t you think? Now tell me, are we ourselves creating our own stumbling blocks to deter own progress?

Mabuhay!!!  Be proud to be a Filipino.

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