G.R. No. 199420 & G.R. No. 199432, August 27, 2014.
PHILNICO INDUSTRIAL CORPORATION, Petitioner, vs. PRIVATIZATION AND MANAGEMENT OFFICE, Respondent. / PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner, vs. PHILNICO INDUSTRIAL CORPORATION, Respondent.

FACTS

On May 10, 1996, Philnico Industrial Corporation (PIC) and the Privatization and Management Office (PMO, successor to the Asset Privatization Trust) executed an Amended and Restated Definitive Agreement (ARDA). Under the ARDA, PIC agreed to purchase from PMO 22,500,000 shares (90%) of Philnico Processing Corporation (PPC) for US$333,762,000.00, payable in installments. As security for the purchase price, PIC pledged the PPC shares to PMO under a separate Pledge Agreement dated May 2, 1997. Section 8.02 of the ARDA stated that in case of a specific payment default, “the title to the Existing Shares and the Converted Shares shall ipso facto revert to the Seller without need of demand.” Due to financial difficulties, the parties executed an Amendment Agreement on September 27, 1999, restructuring the payment terms. On November 6, 2002, PMO notified PIC that it had defaulted on its payments and demanded settlement within 90 days, threatening to enforce the automatic reversion of shares under Section 8.02 of the ARDA. PIC requested PMO to set aside the notice and allow it to conclude fund-raising efforts. PMO reiterated its intent to enforce Section 8.02. PIC filed a Complaint for injunction with the Regional Trial Court (RTC) to restrain PMO from cancelling the ARDA and automatically reverting the shares. The RTC initially issued a Temporary Restraining Order and later a Writ of Preliminary Injunction. PMO filed a Motion to Dismiss, which was denied. The RTC, in its Order dated August 25, 2009, ruled that the automatic reversion clause in Section 8.02 of the ARDA was a pactum commissorium, a prohibited pact, and was therefore void. The Court of Appeals affirmed the RTC’s Order. Both parties filed Petitions for Review before the Supreme Court.

ISSUE

Whether Section 8.02 of the Amended and Restated Definitive Agreement (ARDA), which provides for the automatic reversion of the shares to the seller upon the buyer’s default without need of demand, constitutes pactum commissorium and is therefore null and void.

RULING

Yes. The Supreme Court affirmed the decisions of the lower courts, ruling that Section 8.02 of the ARDA constitutes pactum commissorium and is null and void. Pactum commissorium is a stipulation authorizing the creditor to appropriate the thing given as security in the event of non-payment of the principal obligation, and is expressly prohibited under Article 2088 of the Civil Code. The Court held that the automatic reversion clause, which triggers the transfer of title of the pledged shares back to PMO “ipso facto” and “without need of demand” upon PIC’s default, is precisely the kind of stipulation the law prohibits. It allows PMO, as creditor/pledgee, to automatically appropriate the pledged shares upon default, bypassing the public sale required under the law on pledge. The fact that the Pledge Agreement contained provisions for a proper foreclosure sale did not cure the defect, as the ARDA and the Pledge Agreement constituted one integrated transaction, and the void stipulation in the ARDA could not be validated by the separate agreement. The Court denied PMO’s petition and granted PIC’s petition, declaring Section 8.02 void. The RTC was directed to resolve the main case with dispatch.