Lecture 2 (Banking)

BANK CONSERVATORSHIP, RECEIVERSHIP AND

LIQUIDATIONBy Dr. Cheselden George V. Carmona

PHILJA Pre-judicature Training SeminarMay 25, 2012

The case of FALLACY BankFALLACY Bank started operations in 2000. After almost 9 years of operations, it appeared to be one of the success stories in the banking industry. From one branch, it was able to put up 12 branches by 2009, attracted almost 100,000 depositors and an estimated P15 billion in deposits contained in about 125,000 accounts. Much of its success is attributed to Mr. Jose Angeles, a minority stockholder on record but is said to be the real owner. He is the current President of the bank.

The case of FALLACY BankBy 2010, however, the regulator started to receive complaints about its business practices, which seemed to be unsafe and might compromise the interest of depositors. It was also found out that the bank has not been submitting reports or had been delayed in submitting the same. It initially refused requests for examination of its operations and even threatened the filing of cases against PDIC.

The case of FALLACY BankWhen the Monetary Board eventually ordered it to institute some measures to address complaints of depositors, FALLACY Bank initially refused but eventually submitted falsified reports to MB to cover up its non-compliance.What is legal and regulatory framework governing similarly situated banks?

Importance of Banks to EconomyBANKS•Entities engaged in the lending of funds obtained in the form of deposits.

QUASI-BANKS•Entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations.

Classes of BanksBanks

UniversalBanks

General Banking Law

(RA 8791)

CommercialBanks

General Banking Law

(RA 8791)

Rural Banks

Rural Banking Act(RA 7353)

CooperativeBanks

Cooperative Act

(RA 6938)

IslamicBanks

Charter of Al Amanah

Islamic Investment

Bank of the

Philippines (RA 6848)Private

DevelopmentBanks

Stock SavingsAnd Loan

Associations

Savings and Mortgage

Banks

ThriftBanks

Thrift Banks Act

(RA 7906)

Importance of Banks to Economy• our financial system is dominated by banks which

has almost P 5 Trillion assets as of September 2007 or about 78 percent of the country’s GDP.

NUMBER OF BANKS UNDER BSP SUPERVISION / REGULATION

I. Universal and Commercial Banks 4,545

A. Universal Banks 4,019

1. Private Domestic Banks 3,578

2. Government Banks 424

3. Branches of Foreign Banks 17

B. Commercial Banks 526

1. Private Domestic Banks 441

2. Subsidiaries of Foreign Banks 71

3. Branches of Foreign Banks 14

II. Thrift Banks 1,339

III. Rural and Cooperative Banks 2,779

1. Rural Banks 2,617

2. Cooperative Banks 162

TOTAL NUMBER OF BANKS 8,663

Importance of Banks to Economy“The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him.”

Simex International (Manila), Inc. vs. CA 183 SCRA 360 (1990)

Regulation of the Banking Industry• Law seeks to ensure the protection of the

public from potential abuses of banks and their owners.

• Rule is no person or entity shall engage in banking operations or quasi-banking functions without authority from the BSP.

• There are instances of abuse by the banks and their owners in the past.

Regulation of the Banking Industry

• To addresses weaknesses, bank regulators across the region have set out to improve the practice of banking supervision in their respective jurisdictions.


Prudential Measures1.Capitalization

Minimum capitalization Risk-based capital

2. Fit and Proper Rule Rules to govern directors and officers

3.Reserves Reserve requirements Provision for losses and write offs



Prudential Measures4. Investments

Restriction on equity investments in allied undertakings

Restrictions on direct investments

5.Loan Restrictions Single Borrower’s Limit Rules on DOSRI Loans


Importance of Banks to Economy Protection of

Depositors

Regulation of the Banking IndustryAdministrative violations committed by banks/quasi-bank•Conducting business in an unsafe or unsound manner

•Willful violation of the charter or bylaws

•Willful delay in submission of required reports or publications

•Refusal to permit examination into the affairs of the institution


Administrative violations committed by banks/quasi-banks•Willful making of false or misleading statement to board or BSP

•Commission of irregularities

•Willful non-compliance with, or violation of, any banking law or any MB order, instruction or regulation by the MB or the BSP

The case of FALLACY BankBy 2010, however, the regulator started to receive complaints about its business practices, which seemed to be unsafe and might compromise the interest of depositors. It was also found out that the bank has not been submitting reports or had been delayed in submitting the same. It initially refused requests for examination of its operations and even threatened the filing of cases against PDIC.

Banks in DistressHow do we know that a bank is in distress?Examination of live bank by BSP or PDIC (Sec. Sec. 25, RA 7653, “The New Central Bank Act;” Sec. 8 (eighth), RA 3591, as amended, “PDIC Charter”)

Declaration of bank holiday or suspension of payment of deposits continuously for 30 days (Sec. 53, RA 8791, “The General Banking Law of 2000”)

Options of Monetary Board over distressed bankOrder the placement of bank under conservatorship (Sec. 29, RA 7653)

Order the placement of bank under receivership (Sec. 30, RA 7653)

Addressing Bank DistressConservatorship

Receivership

Liquidation

Rehabilitation

Resumption of

Business

The case of FALLACY BankFALLACY Bank started operations in 2000. After almost 9 years of operations, it appeared to be one of the success stories in the banking industry. From one branch, it was able to put up 12 branches by 2009, almost 100,000 depositors and an estimated P15 billion in deposits contained in about 125,000 accounts.By start of 2010, however, the regulator started to receive complaints about its business practices.

The case of FALLACY BankBy middle of 2010, FALLACY showed signs illiquidity problems preventing it from promptly paying its obligations to its depositors as they fall due. Despite orders of the MB, FALLACY Bank refuses or fails to come up with solutions to address its liquidity problems.

HOW IS THE INTEREST OF THE DEPOSITORS PROTECTED IN INSTANCES LIKE THIS?

The Remedy of Conservatorship

The Remedy of ConservatorshipGround for conservatorship•State of continuing inability or unwillingness of bank/QB to maintain a condition of liquidity adequate to protect the interest of depositors and creditors, as found by the Supervising and Examination Department (SED). (Sec. 29, R.A. 7653)

Basic effect of conservatorship•Bank/QB continues to operate as such, but the conservator takes over the board and management.

The Remedy of ConservatorshipMandate of conservator

1.Preserve the assets of the bank/QB• Take charge of assets• Collect all monies and debts• Foreclose mortgages

2. Reorganize management• Take over management• Overrule or revoke actions of previous board

and officers.• Conservator cannot repudiate perfected

transactions post facto

The case of FALLACY BANKLet us assume MB issued an Order placing FALLACY Bank under conservatorship and a conservator was appointed.

Within 15 days and before conservator could assume, the Bank’s President, Jose Angeles, with authority from Board of Directors, filed a case with the CA against MB alleging grave abuse of discretion, illegal taking of private property and violations of his right to due process.

The case of FALLACY BANKCase should be dismissed•only stockholders of record representing majority of the capital stock may bring petition for certiorari to question MB order of conservatorship. The bank president, by himself, cannot file petition.

•petition must be filed within 10 days from receipt by the board of the institution of the order.

•Actions of the MB placing a bank under conservatorship are final and executory and thus cannot be restrained or set aside by courts except on jurisdictional grounds by way of a petition for certiorari.

The Remedy of ConservatorshipWhy only majority stockholders may assail MB action?•So the order is not frustrated or defeated by the incumbent board or officers, against whose acts the order is presumed to be principally directed. •majority shareholders are expected to be more objective in determining whether the resolution is plainly arbitrary and issued in bad faith.

The Remedy of ConservatorshipConservatorship is an exercise of police powerBanks are affected with public interest because they receive funds from the general public in the form of deposits, creating a fiduciary relationship with their depositors. Thus, banks are obligated to treat with meticulous care and utmost fidelity the accounts of those who have reposed their trust and confidence in them.

Central Bank v. CA (G.R. No. 76118 March 30, 1993)

The Remedy of ConservatorshipConservatorship is an exercise of police powerThe government cannot simply cross its arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty of the BSP to step in and salvage the remaining resources of the bank so that they may not continue to be dissipated or plundered by those entrusted with their management.

- PVB Employees Union v. PVB G.R. No. 76118 March 30, 1993.

The Remedy of ConservatorshipTermination of Conservatorship

When MB is When MB is satisfied that the satisfied that the institution can institution can continue to operate continue to operate on its own and the on its own and the conservator-ship is conservator-ship is no longer no longer necessary. necessary. (Sec. (Sec. 29, R.A. 7653)29, R.A. 7653)

When MB determines When MB determines that the continuance that the continuance in business of the in business of the bank would involve bank would involve probable loss to its probable loss to its depositors or depositors or creditors. In which creditors. In which case, bank will be case, bank will be placed under placed under receivershipreceivership. . (Sec. (Sec. 29, R.A. 7653)29, R.A. 7653)

The case of FALLACY BankTwelve months have lapsed and FALLACY Bank continues to be hounded by liquidity problems forcing it to declare bank holiday for 2 months. Suppose MB finds that continuance in business of the bank/QB would involve probable loss to depositors or creditors, what will now be the remedy of the regulators?

The Remedy of Receivership

The Remedy of ReceivershipThe placement of a bank under

conservatorship is not a precondition to its placement under receivership. (Sec. 30, R.A. 7653)

The Remedy of ReceivershipGrounds for Receivership1. Insolvency

Illiquidity: Bank/QB is unable to pay its liabilities as they fall due in the ordinary course of business, except if due to bank runs induced by financial panic in the banking community.

Insolvency: Bank/QB has insufficient realizable assets to meet its liabilities

2. Probable Loss to Depositors• Bank/QB cannot continue in business without

involving probable losses to depositors or creditors

The Remedy of ReceivershipGrounds for Receivership

3.Dissipation of AssetsBank/QB willfully violated a final cease-

and-desist order for a violation involving fraud or dissipation of assets.

4. Prolonged Bank HolidayDeclaration of bank holiday or

suspension of payment of deposits for 30 days.

The case of FALLACY BankSuppose MB summarily placed FALLACY Bank under receivership because, among others, the examination of its books showed that there were irregularities in operations consisting of loans to unknown fictitious borrowers and refusal of FALLACY to obey CDO. The SED report detailed the facts and an extensive chronology of events revealing the multitude of problems facing the FALLACY Bank.

The Remedy of ReceivershipThe MB’s closure order need not arise from an examination under RA 7653 (the new Central Bank Act). MB could rely on the 50-page report of the head of SED, which detailed the facts and an extensive chronology of events revealing the multitude of problems facing the rural bank. - Rural Bank of San Miguel v. Monetary Board, G.R. No. 150886, February 16, 2007.

The case of FALLACY BankImmediately upon receipt of Order of receivership, Jose Angeles, together with the majority stockholder on record, filed a certiorari petition alleging grave abuse of discretion on the part of the MB since his side was not properly heard and merely relied on the SED Report. He prays that he be given his day in court to explain the findings of the SED.


MB resolution is summary in nature• Prior hearing will defeat the purpose and efficacy of receivership.• Prior hearing will result in bank runs, panic and hysteria. (Rural Bank

of Buhi v. CA, G.R. No. L-61689 June 20, 1988)

• Procedural rights of the bank should not take precedence over the substantive interests of depositors, creditors, and stockholders over the assets of the bank, as well as interest of the public and even the bank itself. (Central Bank v. CA and Triumph Savings Bank, G.R. No. 76118 March 30, 1993)

The Remedy of ReceivershipRationaleThe mere filing of a case for receivership can trigger a bank run.

“One can just imagine the dire consequences of a prior hearing; bank runs would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out and disillusionment will run gamut of the entire banking community.” (Republic Bank of Buhi v. CA, G.R. No. L-61689 June 20, 1988)

The Remedy of ReceivershipMB receivership order is “final and executory” •thus cannot be restrained or set aside by the courts except on jurisdictional grounds by way of a petition for certiorari• Can only be set aside if there is convincing

proof that the action is plainly arbitrary and made in bad faith or is capricious, discriminatory, whimsical, unjust, or a denial of due process and equal protection.

Effect of ReceivershipMonetary Board will Summarily forbid bank from doing business in the Philippines“… a continuity of commercial dealings and arrangements, and contemplates to that extent, the performance of acts or words or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization (Provident Savings Bank vs. CA, May 17, 1993)

Effect of Receivership

Effect of ReceivershipReceivership is equivalent to an injunction to restrain

the bank officers from intermeddling with the property of the bank in any way.” (Villanueva vs. CA, 244 SCRA 396)

Articles of Incorporation/By-Laws of bank are suspended. (Sec. 10 [b], RA 3591, as amended)

The powers, functions and duties, as well as all allowances, remunerations and perquisites of the directors, officers and stockholders are suspended. (Sec. 10 [b], ibid)

Effect of ReceivershipThe assets of the bank are

considered under custodia legis. (Sec. 30, RA 7653; Sec. 10 (b) R.A. 3591, as amended)

Assets of bank are exempt from any order of garnishment, levy, attachment, or execution. (Ibid.)

Effect of ReceivershipStay of execution against the assets of bank. Lipana vs. Development Bank of Rizal, G.R. No. 73884 September 24, 1987.

Execution would unduly deplete the assets of the bank to the obvious prejudice of other depositors and creditors, including depositors. (Lipana, supra.)

One of the reasons of placing a bank under receivership is to prevent creditors from having advantage over the assets of the bank. (Lipana, supra.)

The Remedy of ReceivershipWho may contest MB resolution? • Only stockholders of record

representing majority of the capital stock may bring petition for certiorari, within 10 days from receipt by the board of the institution of the order.

The Remedy of ReceivershipWhat can the majority stockholders assail?

•Receivership, being admittedly a harsh remedy, should be granted with extreme caution. Sound reasons for receivership must appear of record, and there should be a clear showing of necessity. The court must consider the consequences or effects in order to avoid irreparable injustice or injury.

The case of FALLACY BankBecause of the inability of FALLACY Bank to serve its depositors, a petition for receivership is filed before your sala praying to put FALLACY Bank under receivership and appoint a well-respected member of the community as Receiver in order to protect the depositors from its management

Fallacy Bank

The Remedy of Receivership• Only the MB can place a bank under

receivership and appoint receiver.• for Banks: PDIC• for QBs: One who has recognized

competence in banking or finance• Receivership is for 90 days from take

over of the bank or QB.

The Remedy of ReceivershipDuties of Receiver1.Immediately gather and take charge of all asset and liabilities.2.Administer assets and liabilities for the benefit of creditors3.Exercise general powers of a receiver under the Rules of Court

• Bring and defend actions in his own name• Keep possession of property• Receive rents and other income• Collect debts; compound for and compromise debts.

The Remedy of ReceivershipSpecific powers of PDIC as bank receiver1.Bring suits to enforce liabilities or recoveries2.Hire experts as deputies and assistants3.Suspend or terminate officers and employees4.Pay accrued, utilities, rental and salaries for 3 months

The Remedy of ReceivershipSpecific powers of PDIC as bank receiver5.Collect or restructure loans and claims6.Reduce unusually high interest rates for unpaid interest7.Retain private counsel8.Borrow money and encumber asset to prevent dissipation, redeem foreclosed assets, or minimize losses to depositors and creditors

The Remedy of ReceivershipLimitation to powers of PDIC as bank receiver•Receiver cannot pay, transfer, or dispose of any asset of bank/QB, except

• place the funds in non-speculative investments • pay for administrative expenses of liquidation • pay accrued utilities, rentals and salaries of

closed bank from available funds for up to 3 months

The Remedy of ReceivershipEffect of receivership on bank’s directors and officers•The authority of the bank and its directors and officers over its property and effects is suspended, such authority being reposed in the receiver. • Allowances and remunerations are also suspended.

•In this respect, the receivership is equivalent to an injunction to restrain the bank officers from meddling with the property of the bank in any way.

EFFECTS of ReceivershipOn right to foreclose•Receiver is obliged to collect pre-existing debts due to the bank and to foreclose mortgages securing the debts. Provident Savings Bank v CA, G.R. No. 97218, May 17, 1993•receivership does not interrupt the running of the prescriptive period for the collection of debts. Larrobis v. Philippine Veterans Bank, G.R. No. 135706, October 1, 2004.•However, the time when the bank was prevented from enforcing its right to collect by an order of the MB is deemed a fortuitous event that interrupts prescription. Provident Savings Bank v. CA, G.R. No. 97218, May 17, 1993

EFFECTS of ReceivershipOn unpaid time deposit in the bank

•An unpaid time deposit in a bank is not a preferred claim against the bank. Central Bank v. Morfe, (G.R. No. L-20119 June 30, 1967.

On bank’s deposit liabilities to depositors•When a bank’s operations are suspended by the BSP, the bank is not liable for interest accrued during the period of suspension, and this should be deemed read into every contract of deposit with a bank. Overseas Bank of Manila v. CA, 105 SCRA 49 (1981).

The case of FALLACY BankWhen Jose Angeles learned about the order of MB placing FALLACY Bank under receivership, he •Refused to turn over the bank’s records and assets to the receivers•tampered with the bank’s records•Appropriated the bank’s assets for himself or another party•Destroyed the bank’s assets

The case of FALLACY BankWhen Jose Angeles learned about the order of MB placing FALLACY Bank under receivership, he •Continued to receive deposits as well payments from banks’ debtors •Paid a favored supplier from funds of the bank •Transferred to his son’s name title to a car owned by the bank•Asked an officer of the bank to perform any of the foregoing acts

OUTCOME of ReceivershipWithin 90 days from take-over of the

bank/QB, the receiver must determine and recommend to the MB if

• the bank/QB may resume business with safety to depositors, creditors, and the general public.

• may be rehabilitated.• cannot be rehabilitated or

permitted to resume business notify the board of the bank/QB in

writing of findings direct the receiver to proceed with

liquidation.

Possible Outcome of Receivership

Receiver Receiver recommends to recommends to the MB the the MB the rehabilitation of rehabilitation of the bank.the bank. (Sec. 30, (Sec. 30, R.A. 7653)R.A. 7653)

Receiver Receiver recommends recommends to the MB the to the MB the liquidation of liquidation of the bank.the bank. (Sec. (Sec. 30, R.A. 7653)30, R.A. 7653)


Rehabilitation remedyNature of rehabilitation•Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.Not all enterprises which fail in a competitive market place should necessarily be liquidated. A corporation with a reasonable prospect of survival should be given the opportunity to rehabilitate.there is greater value and greater benefit for creditors in the long term in keeping essential business and other component parts of such a corporation together.

Rehabilitation remedyEffect on management and control of the bank•RA 7653: Silent on rehabilitation, although conservatorship by analogy mandates the conservator to take over management and control of the bank.

• Under the Rules of Procedure on Corporate Recovery: the rehabilitation receiver shall not take over management and control of the debtor but shall only closely oversee and monitor the operators of the debtor during the pendency of the proceedings

Rehabilitation remedyEffect on pending receivership or liquidation

Rehabilitation suspends a pending liquidation. To allow the liquidation proceedings to continue when rehabilitation has already been mandated by RA 7169 would seriously hinder the rehabilitation of the subject bank. Philippine Veterans Bank v. Vega, GR 105364, 28 June 2001)

The case of FALLACY BankUpon examination of the books and records of FALLACY Bank, PDIC immediately arrived at the conclusion that the bank cannot be rehabilitated. By then, the depositors of the bank have camped outside its branches, creditors have demanded payment of outstanding obligations, suppliers threatened to discontinue provision of supplies, etc.

The Remedy of Liquidation

The Remedy of Liquidation When a person, bank, partnership,

association, corporation or other legal entity can no longer pay its debts as they come due and when rehabilitation is not a feasible option

Institution of insolvency proceeding Liquidation of its assets Settlement of claims Distribution of remaining assets

The Remedy of LiquidationGeneral Objectives and Features of

Insolvency Proceedings

First Overall Objective the allocation of risk among participants in a

market economy in a predictable, equitable, and transparent manner.

Second Overall Objective to protect and maximize value for the benefit of

all interested parties and the economy in general


Economic Theory Behind Liquidation

in a competitive market economy, an enterprise that is unable to compete has no place in and should be removed from the market place.

Insolvency is the principal identifying mark of an uncompetitive enterprise.

The Remedy of LiquidationLegal Theory Behind Liquidation Liquidation process can only function

effectively if it is regarded as a collective process, from the time of its inception.

Follows that an ordered, civilized administration is necessary under which all creditors (of varying ranks and classes) should be bound and treated equally.

The Remedy of LiquidationRole of Liquidator•A liquidator assumes the role of the receiver. His task is to dispose of all the assets of the bank and effect partial payments of the bank's obligations in accordance with legal priority, for the benefit of the bank and its creditors. Larrobis v. Philippine Veterans Bank, G.R. No. 135706, October 1, 2004.


Nature of Liquidation Proceedings•Not an ordinary civil action but a special proceeding•Not an interpleader•Akin to settlement of estate of a deceased person•In rem in nature•A single proceeding but admitting of multiple appeals


“Liquidation does not seek the enforcement or protection of a right nor the prevention or redress of a wrong against a party, and does not pray for affirmative relief for injury arising from a party's wrongful act or omission nor state a cause of action that can be enforced against any person. What it seeks is merely a declaration by the trial court of the corporation's insolvency so that its creditors may be able to file their claims in the settlement of the corporation's debts and obligations.” PBCEO v. CA, G.R. No. 109373 October 13, 1995.

The Remedy of LiquidationLiquidation is different from interpleader

“Liquidation does not involve claims on a subject matter against a person who has no interest therein. The liquidator, as representative of the corporation, takes charge of its assets and liabilities for the benefit of the creditors. He is charged with insuring that the assets of the corporation are paid only to rightful claimants and in the order of payment provided by law.”

- PBCEO v. CA, G.R. No. 109373 October 13, 1995.

The Remedy of LiquidationLiquidation is akin to settlement of estate “Liquidation resembles the proceeding for the settlement of estate of deceased persons under Rules 73 to 91 of the Rules of Court. The two have a common purpose: the determination of all the assets and payment of all the debts and liabilities of the insolvent corporation or the estate. The Liquidator and the administrator or executor are both charged with the assets for the benefit of the claimants. The court's concern is with the declaration of creditors and their rights and the determination of their order of payment. ”

- PBCEO v. CA, G.R. No. 109373 October 13, 1995.

Liquidation StepsPetition for Assistance in

Liquidation

Adjudication of “disputed claims”

Approval of Project of Distribution of Assets

Payment of claims and distribution of assets

Termination of proceedings

The Remedy of Liquidation1. Petition for Assistance in Liquidation The receiver is mandated to file an ex parte

Petition for Assistance in the Liquidation (PAL) of closed bank in the proper RTC pursuant to a liquidation plan adopted by PDIC. (Sec. 30, RA 7653)

When the proper RTC gives due course to the PAL, it is constituted as the Liquidation Court (LC) of the closed bank. (Sec. 30, RA 7653)

The Remedy of LiquidationJurisdiction of Liquidation Court (LC)The court shall adjudicate disputed claims against the closed bank.The court shall assist in the enforcement of individual liabilities of the stockholders, directors and officers of the bank.The court shall decide on issues as may be material in the implementation of the liquidation plan adopted. (Sec. 30, RA 7653)

The Remedy of Liquidation1. Petition for Assistance in Liquidation Goal of Liquidation• Convert the assets of the institution to money and for

this purpose, with assistance of counsel, institute actions to collect and recover accounts and defend any action against the institution

• Dispose of the proceeds to creditors, depositors, other parties to pay for the debts and disputed claims owing them according to the rules on concurrence and preference of credits


2. Adjudication of “Disputed Claims”Upon acquiring jurisdiction, RTC will, on motion:• adjudicate “disputed claims” against the bank• assist the enforcement of individual liabilities

of the stockholders, directors and officers, and• decide on other issues as may be material to

implement the liquidation plan adopted.

The Remedy of Liquidation2. Adjudication of “Disputed Claims”• Disputed claims refer to all claims, whether

against the assets of the insolvent bank, for specific performance, breach of contract, damages, or whatever.

A claim need not be initially disputed in a court or agency before it is filed with the liquidation court. “Disputed claim” simply connotes that in the course of liquidation, contentious cases might arise which require a full-dress hearing where legal issues have to be resolved. Ong v. CA, G.R. No. 112830. February 1, 1996.

The Remedy of Liquidation2. Adjudication of “Disputed Claims”

A liquidation court has exclusive jurisdiction to resolve all claims against an insolvent bank on considerations of practicality and necessity, and to prevent multiplicity of suits. Indeed, it will be burdensome on the liquidator to appear before several courts to litigate claims against the insolvent bank. Star Forwarders, Inc. v. Navarro; and Hernandez vs. Rural Bank of Lucena , G.R. No. L-29791 January 10, 1978.


2. Adjudication of “Disputed Claims”

The exclusive jurisdiction of the liquidation court pertains only to claims against the bank, not the reverse situation where the bank is the one filing a claim against another person. Manalo v PAIC (G.R. No. 141297 October 8, 2001.


2. Adjudication of “Disputed Claims”

Disputed claims must be proven in court. Liquidation requires the holding of hearings and presentation of evidence of the parties concerned, i.e., creditors who must prove and substantiate their claims, and the liquidator disputing the same. Rural Bank of Bokod v. BIR, G.R. No. 158261, December 18, 2006.

The Remedy of Liquidation2. Adjudication of “Disputed Claims”Although the claims are litigated in the same proceeding, the treatment is individual.

Each claim is heard separately. And, the Order issued relative to a particular claim applies only to said claim, leaving the other claims unaffected, as each claim is considered separate and distinct from the others.” PBCEO v. CA, G.R. No. 109373 October 13, 1995.

The Remedy of Liquidation2. Adjudication of “Disputed Claims”

By virtue of disputed claims, liquidation admits multiple appeals. A liquidation proceeding is a single proceeding consisting of a number of cases properly classified as claims. As such, multiple appeals are allowed. The period for appeal is 30 days. To perfect an appeal, in addition to a notice of appeal, a record on appeal is required. PBCEO v. CA, G.R. No. 109373 October 13, 1995.

The Remedy of Liquidation“The first phase is concerned with the approval and disapproval of claims. Upon the approval of the petition seeking the assistance of the proper court in the liquidation of a closed entity, all money claims against the bank are required to be filed with the liquidation court. This phase may end with the declaration by the liquidation court that the claim is not proper or without basis. On the other hand, it may also end with the liquidation court allowing the claim. In the latter case, the claim shall be classified whether it is ordinary or preferred, and thereafter included Liquidator. In either case, the order allowing or disallowing a particular claim is final order, and may be appealed by the party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan prepared by the duly appointed liquidator. The distribution plan specifies in detail the total amount available for distribution to creditors whose claim were earlier allowed. The Order finally disposes of the issue of how much property is available for disposal. Moreover, it ushers in the final phase of the liquidation proceeding - payment of all allowed claims in accordance with the order of legal priority and the approved distribution plan.”

- Rural Bank of Bokod vs. BIR, G.R. No. 158261, December 18, 2006.

The Remedy of Liquidation3. Project of Distribution•specify in detail all the assets available for distribution•identify the creditors whose claims were earlier allowed by the liquidation court•specify the order of preference and concurrence of credits under the Civil Code

• Rule on concurrence and preference of credit applicable only if the assets of the bank are not enough to pay all creditors.


3. Project of Distribution

•Assets available for distribution• Includes all assets belonging to the bank

or QB in its own right• But excludes assets held in trust, on which

the bank only holds legal (but not beneficial) title.

The Remedy of Liquidation3. Project of DistributionFiling of motion for approval of POD with the liquidation court

•The distribution plan specifies in detail the total amount available for distribution to creditors whose claims were earlier allowed. Moreover, it ushers in the final phase of the liquidation proceeding—payment of all allowed claims in accordance with the order of legal priority and the approved distribution plan. (PaBCEO vs. CA, ibid.)

The Remedy of Liquidation4. Payment of Claims (accdg to POD)All revenues and earnings realized in winding up the affairs and administering the assets of the bank/QB shall be used.

The Remedy of Liquidation4. Payment of Claims

First to be paid: Administrative expenses• Cost, fees, and expenses of liquidation

proceedings• Reasonable expenses and fees of the receiver• Salaries of such personnel whose employment

is rendered necessary in discharge of the liquidation,

• and other additional expenses caused thereby

The Remedy of Liquidation4. Payment of Claims•Next for payment are claims of creditors according to the rules on concurrence and preference of credit under the Civil Code.

The case of FALLACY BankBIR raised an issue before the RTC claiming that its claims for taxes should be prioritized over and above the other claims.It cited Arts. 2241 (1) and 2242 (1) of the Civil Code in support of its argument.

The Remedy of LiquidationThose provisions may be seen to classify credits against a particular insolvent into three general categories, namely:a.special preferred credits listed in Articles 2241 and 2242;b.ordinary preferred credits listed in Article 2244; andc.common credits under Article 2245.”

The Remedy of LiquidationSpecially Preferred Credits (Art. 2241 & 2242, CC)

These credits constitute liens or encumbrances on the specific movable or immovable property to which they relate.

mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. (Art. 2243, CC)

The Remedy of LiquidationSpecially Preferred Credits (Art. 2241 & 2242, CC)Arts. 2241 and 2242 jointly with Arts. 2246 to 2249 establish a two-tier order of preference.

The first tier includes only taxes, duties and fees due on specific movable or immovable property.

All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.

The Remedy of LiquidationRepublic vs. Peralta (G.R. No. L-56568, May 20, 1987)Arts. 2241 and 2242 jointly with Arts. 2246 to 2249 establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.

The Remedy of LiquidationRepublic vs. Peralta (G.R. No. L-56568, May 20, 1987)Ordinary Preferred Credits, Article 2244 CCArt. 2244 creates no liens on determinate property which follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority.


Republic vs. Peralta (G.R. No. L-56568, May 20, 1987)

Ordinary Preferred Credits, Article 2244 CCOnly in respect of the insolvent's "free property" is an order of priority established by Article 2244.

The Remedy of Liquidation4. Payment of Claims (preference of taxes)Duties, taxes, and fees due the Government enjoy priority only when they are with reference to a specific movable property under Article 2241(1), or immovable property under Article 2242(1), of the Civil Code. But with reference to the other real and personal property of the debtor, sometimes referred to as “free property”, taxes and assessment due the National Government, other than those in Articles 2241(1) and 2242(1), will come only in ninth place in the order of preference under Article 2244. Rural Bank of Bokod v. BIR, G.R. No. 158261, December 18, 2006.

The Remedy of Liquidation4. Payment of Claims (preference of taxes)All payments by PDIC of insured deposits in closed banks partake of the nature of public funds and, as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the Civil Code.


4. Payment of Claims (preference of taxes) Depositors are not considered preferred

creditors within the meaning of Article 2244. A general depositor is merely a general creditor who does not enjoy any preference over other general creditors. Judgment for payment of time deposit only seeks to fix the amount of debt and does not establish its preference. Central Bank vs. Morfe (G.R. No. L-20119 June 30, 1967.

The Remedy of Liquidation4. Payment of Claims (preference of

taxes) PDIC, upon payment of any depositor, shall be

subrogated to all rights of the depositor against the closed bank to the extent of such payment. Such subrogation shall include the right to receive the same dividends and payments from the proceeds of the assets of such closed bank and recoveries on account of stockholders’ liability as would have been payable to the depositor on a claim for the insured deposits.

The Remedy of Liquidation4. Payment of Claims (preference of

taxes)• Creditors have 3 years from date of last notice

to claim payment.• After the lapse of the 3-year period, unclaimed

payments are escheated to the Republic.

BANK CONSERVATORSHIP, RECEIVERSHIP AND

LIQUIDATION

Cheselden George V. CarmonaMember, Commercial Law Department – PHILJA

27 October 2010Waterfront Hotel, Davao City

Date post:	09-May-2017
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Lecture 2 (Banking)

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