SC: ‘Rehab courts’ have arbitration clauses enforcement power
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The Supreme Court (SC) has affirmed that lower courts handling corporate rehabilitation have the authority to compel parties into arbitration if the move is necessary for a company’s financial recovery.
In an 11-page decision authored by Associate Justice Antonio Kho Jr., the Court’s Second Division upheld a Court of Appeals ruling involving an insurance claim by Philippine Phosphate Fertilizer Corp. (PhilPhos).
The ruling directs that the company’s claim against MAPFRE Insular Insurance Corp. and other insurers be referred to arbitration.
The legal dispute originated from damages PhilPhos sustained during typhoon "Yolanda" in 2013. The company had insured its machinery and buildings with several firms, including MAPFRE.
While the insurers made partial payments, they declined to settle a remaining balance of more than P6.5 billion, citing a lower valuation from their loss adjusters.
PhilPhos sought to resolve the valuation gap through an arbitration clause in its policy while simultaneously entering voluntary rehabilitation proceedings. The Regional Trial Court, acting as a rehabilitation court, subsequently ordered the insurers to participate in arbitration to safeguard the company’s assets.
MAPFRE challenged the jurisdiction of the rehabilitation court, arguing that such courts cannot compel third parties to arbitrate claims initiated by a debtor.
The Supreme Court rejected that argument, citing the Financial Rehabilitation and Insolvency Act of 2010. The Court clarified that rehabilitation courts are empowered to refer disputes to arbitration if they are closely connected to a rehabilitation plan.
The justices stressed that “rehabilitation” aims to restore a distressed company to solvency. In this case, the recovery of the insurance proceeds was deemed essential because the approved rehabilitation plan for PhilPhos relied on those funds to pay creditors and finance operations.
The ruling reinforces the judiciary’s support for mechanisms that facilitate corporate recovery, particularly when contractual obligations like arbitration align with the goal of restoring a company’s viability.
