G.R. No. 165887 and G.R. No. 165929, June 6, 2011
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioners, vs. MIGUEL LIM, in his personal capacity as Stockholder of Ruby Industrial Corporation and representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, Respondents.

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G.R. No. 165929
CHINA BANKING CORPORATION, Petitioner, vs. MIGUEL LIM, in his personal capacity as a stockholder of Ruby Industrial Corporation and representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Respondent.

FACTS

Ruby Industrial Corporation (RUBY), a domestic corporation engaged in glass manufacturing, filed a petition for suspension of payments with the Securities and Exchange Commission (SEC) in 1983 due to severe liquidity problems. The SEC placed RUBY under suspension of payments and created a management committee (MANCOM). Two rehabilitation plans were submitted: the BENHAR/RUBY Plan from the majority stockholders and the Alternative Plan from the minority stockholders represented by Miguel Lim. The BENHAR/RUBY Plan involved Benhar International, Inc. (BENHAR), a corporation owned by the Yu family (who also controlled RUBY), lending its credit line to RUBY, purchasing RUBY’s creditors’ credits, and managing RUBY for a fee. This plan was opposed by minority stockholders and some creditors. The SEC Hearing Panel initially approved the BENHAR/RUBY Plan in 1988, but the SEC En Banc enjoined its implementation. This Court upheld the injunction. Despite the injunction, BENHAR paid off some of RUBY’s secured creditors and obtained assignments of their credits. The SEC Hearing Panel nullified these deeds of assignment and held the parties in contempt, a ruling affirmed by the Court of Appeals and this Court. RUBY later submitted a Revised BENHAR/RUBY Plan. Over 90% of RUBY’s creditors objected to this revised plan and endorsed the minority’s Alternative Plan. Nevertheless, the SEC Hearing Panel approved the Revised BENHAR/RUBY Plan in 1991, dissolved the original MANCOM, and created a new management committee that included BENHAR. The SEC En Banc affirmed this approval in 1993 but imposed a condition that BENHAR could not use RUBY’s assets as collateral. On motion for reconsideration, the SEC lifted this condition. The original MANCOM, Miguel Lim, and Allied Leasing and Finance Corporation (ALFC) appealed to the Court of Appeals. The CA nullified the SEC’s orders approving the Revised BENHAR/RUBY Plan and creating the new management committee, and reinstated the original MANCOM. The CA also ruled that the SEC had no jurisdiction to allow BENHAR to use RUBY’s assets as collateral. The majority stockholders (in G.R. No. 165887) and China Banking Corporation (in G.R. No. 165929) appealed to the Supreme Court.

ISSUE

The core issue is whether the Court of Appeals erred in nullifying the Securities and Exchange Commission’s orders which: (1) approved the Revised BENHAR/RUBY Rehabilitation Plan; (2) dissolved the original management committee and created a new one that included BENHAR; and (3) allowed BENHAR to use RUBY’s assets as collateral for loans extended to RUBY.

RULING

The Supreme Court DENIED the petitions and AFFIRMED the decision of the Court of Appeals.
1. On the Approval of the Revised BENHAR/RUBY Plan: The Court held that the SEC committed grave abuse of discretion in approving the Revised BENHAR/RUBY Plan. The plan was not feasible and was contrary to the interests of RUBY, its creditors, and minority stockholders. It essentially legitimized BENHAR’s previous void payments to RUBY’s creditors, which had been declared illegal by final judgment. The plan would make BENHAR, a stranger to the corporation, the controlling creditor and manager, thereby placing RUBY’s assets beyond the reach of its unsecured creditors and prejudicing the minority stockholders. The approval also disregarded the overwhelming objection of over 90% of RUBY’s creditors who endorsed the minority’s Alternative Plan. The SEC’s action violated the basic purpose of rehabilitation, which is to assist a distressed corporation for the benefit of all stakeholders, not just the majority owners.
2. On the Dissolution of the Original MANCOM and Creation of a New One: The Court ruled that the SEC gravely abused its discretion in dissolving the original MANCOM and creating a new committee that included BENHAR. The original MANCOM was performing its functions, and its dissolution was not justified. Appointing BENHAR, an interested party with a clear conflict of interest, as a member of the new management committee was improper. A management committee must act with neutrality and independence for the benefit of the corporation and all its stakeholders. Including BENHAR, which stood to benefit from the approval of its own rehabilitation plan, violated this principle.
3. On the Authority to Allow BENHAR to Use RUBY’s Assets as Collateral: The Court affirmed the CA’s ruling that the SEC had no jurisdiction to authorize BENHAR to use RUBY’s assets as collateral. Under the law (P.D. 902-A), a management committee is tasked with preserving the corporation’s assets. Allowing a creditor like BENHAR to mortgage corporate assets for its own loans constitutes a disposition of property, which is prohibited under a suspension of payments order unless necessary for ordinary operations. Such an act would prefer one creditor (BENHAR) over others, contravening the essence of suspension of payments which aims for an equitable distribution of assets among creditors. The SEC’s order lifting the condition against using RUBY’s assets as collateral was therefore void.