NextGen Day

The Supreme Court (SC) has declared the foreclosure proceedings on two sister corporations’ mortgaged properties null and void because the bank from which the loans were obtained failed to follow through on its promise of a credit line facility for its working capital requirement.

The Supreme Court’s Third Division granted the petition filed against the Union Bank of the Philippines (UBP) and reinstated a 2012 ruling of the Makati City Regional Trial Court (RTC) Branch 62 in a resolution posted on the SC website on Nov. 11.

The Supreme Court declared the bank’s foreclosure proceedings and sheriff’s sale on the mortgaged properties of sister companies Richardson Steel Corp. (RSC), Ayala Integrated Steel Manufacturing Co. Inc. (AISMC), and East Development Corp. and its principal stockholders, spouses Ricardo and Eleanor S. Cheng, null and void.

The SC also ordered UBP to release and deliver PHP150 million to RSC for working capital requirements under its credit line agreement, as well as PHP30 million to AISMC for working capital requirements.

The high court also declared that all interests assessed by the bank on the firms from December 3, 1999, to the present in connection with the non-release of credit availments covered by the Credit Line Availments (CLA) are null and void, and that interests on the corporations’ obligations shall accrue and commence only upon the release of the working capital.

The high court also awarded PHP5.3 million in damages and attorney’s fees.

UBP proposed a special financing arrangement in 1996 to fund the sister companies’ business venture to operate a “Continuous Galvanizing Line.”

UBP proposed a credit facility of PHP240 million to finance the construction of a new plant, as well as the purchase of machinery and working capital of PHP600 million to keep operations running.

The petitioners claimed that, while the PHP240 million credit accommodation was released, the bank did not release the promised PHP600 million working capital.

With mounting debts and no ability to pay due to the failure to fully operate its new venture, the petitioners negotiated a loan restructuring and applied for an additional credit line of PHP150 million for RSC and PHP30 million for AISMC in December 2000.

The firms then requested the use of the agreed credit line of PHP600 million to supplement their working capital, but UBP refused, instead of applying the proceeds of the credit line unilaterally and without the consent of the borrowers to the payment of the monthly interest on the restructured loans, prompting the firms to sue in 2001.

During the course of the proceedings, UBP filed a petition in 2003 for the foreclosure of the mortgaged real estate offered by the firm to secure the loans.

The Supreme Court ruled against the bank, saying that the “automatic application of the proceeds of the credit line to the payment of interest payables on the restructured loans as they come due, without giving petitioners the choice and opportunity to use its discretion on how to manage the proceeds of the credit line, is a clear circumvention of the agreement.”

“By failing to manage the proceeds of the credit line to fund its overall operations, the petitioners were unfairly deprived of profits that could have been used to augment their working capital and pay the current liabilities, including the current interest payables on the restructured loans,” the Supreme Court stated.

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