BANKING INSTITUTIONS

BANKS

Definition

Sec. 3.1, RA No. 8791 [General Banking Law of 2000(GBL)]

Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits.

BDO-EPCI, Inc. v. JAPRL Dev’t. CorporationGR No. 179901, 14 April 2008

CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 95659 and its resolution[3] denying reconsideration.

After evaluating the financial statements of respondent JAPRL Development Corporation (JAPRL) for fiscal years 1998, 1999 and 2000,[4] petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it amounting to P230,000,000[5] on March 28, 2003. Respondents Rapid Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL's sureties.

Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after the approval of its loan.[6] Petitioner later learned from MRM Management, JAPRL's financial adviser, that JAPRL had altered and falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment.[7]The information alarmed petitioner. Citing relevant provisions of the Trust Receipt Agreement,[8] it demanded immediate payment of JAPRL's outstanding obligations amounting to P194,493,388.98.[9]

SP Proc. No. Q-03-064

On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City, Branch 90 (Quezon City RTC).[10] It disclosed that it had been experiencing a decline in sales for the three preceding years and a staggering loss in 2002.[11]

Because the petition was sufficient in form and substance, a stay order[12] was issued on September 28, 2003.[13] However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC in an order dated May 9, 2005.[14]

Civil Case No. 03-991

Because JAPRL ignored its demand for payment, petitioner filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against respondents in the RTC of Makati City, Branch 145 (Makati RTC) on August 21, 2003.[15] Petitioner essentially asserted that JAPRL was guilty of fraud because it (JAPRL) altered and falsified its financial statements.[16]

The Makati RTC subsequently denied the application (for the issuance of a writ of preliminary attachment) for lack of merit as petitioner was unable to substantiate its allegations. Nevertheless, it ordered the service of summons on respondents.[17]Pursuant to the said order, summonses were issued against respondents and were served upon them.

Respondents moved to dismiss the complaint due to an allegedly invalid service of summons.[18] Because the officer's return stated that an "administrative assistant" had received the summons,[19] JAPRL and RFC argued that Section 11, Rule 14 of the Rules of Court[20] contained an exclusive list of persons on whom summons against a corporation must be served.[21] An "administrative assistant" was not one of them. Arollado, on the other hand, cited Section 6, Rule 14 thereof[22] which mandated

personal service of summons on an individual defendant.[23]

The Makati RTC, in its October 10, 2005 order,[24] noted that because corporate officers are often busy, summonses to corporations are usually received only by administrative assistants or secretaries of corporate officers in the regular course of business. Hence, it denied the motion for lack of merit.

Respondents moved for reconsideration[25] but withdrew it before the Makati RTC could resolve the matter.[26]

RTC SEC Case No. 68-2008-C

On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba RTC). Finding JAPRL's petition sufficient in form and in substance, the Calamba RTC issued a stay order[27] on March 13, 2006.

In view of the said order, respondents hastily moved to suspend the proceedings in Civil Case No. 03-991 pending in the Makati RTC.[28]

On July 7, 2006, the Makati RTC granted the motion with regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that, because he was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should continue.[29]Respondents moved for reconsideration[30] but it was denied.[31]

On August 11, 2006, respondents filed a petition for certiorari[32] in the CA alleging that the Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7, 2006 orders.[33] They asserted that the court did not acquire jurisdiction over their persons due to defective service of summons. Thus, the Makati RTC could not hear the complaint for sum of money.[34]

In its June 7, 2007 decision, the CA held that because the summonses were served on a mere administrative assistant, the Makati RTC never acquired jurisdiction over respondents. Thus, it granted the petition.[35]

Petitioner moved for reconsideration but it was denied.[36] Hence, this petition.

Petitioner asserts that respondents maliciously evaded the service of summonses to prevent the Makati RTC from acquiring jurisdiction over their persons. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid the payment of their obligations.[37]

We grant the petition.

Respondents, in their petition for certiorari in the CA, questioned the jurisdiction of the Makati RTC over their persons (i.e., whether or not the service of summons was validly made). Therefore, it was only the October 10, 2005 order of the said trial court which they in effect assailed.[38] However, because they withdrew their motion for reconsideration of the said order, it became final. Moreover, the petition was filed 10 months and 1 day after the assailed order was issued by the Makati RTC,[39] way past the 60 days allowed by the Rules of Court. For these reasons, the said petition should have been dismissed outright by the CA.

More importantly, when respondents moved for the suspension of proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis of the March 13, 2006 order of the Calamba RTC), they waived whatever defect there was in the service of summons and were deemed to have submitted themselves voluntarily to the jurisdiction of the Makati RTC.[40]

We withhold judgment for the moment on the July 7, 2006 order of the Makati RTC suspending the proceedings in Civil Case No. 03-991 insofar as JAPRL and RFC are concerned. Under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against the corporation seeking rehabilitation[41]from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings.[42]

The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation.[43]

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their legitimate obligations. Their reprehensible

scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy.[44]

Banks are entities engaged in the lending of funds obtained through deposits[45] from the public.[46] They borrow the public's excess money (i.e., deposits) and lend out the same.[47] Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments.

Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] Since banks deal with the public's money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.[50]

Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same.

In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accomodation.

A finding of fraud will change the whole picture. In this event, petitioner can use the finding of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC.

The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.

Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which states:Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating the rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. (emphasis supplied)Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194,493,388.98 and other appropriate damages.[51]

Finally, considering that respondents failed to pay the four trust receipts, the Makati City Prosecutor should investigate whether or not there is probable cause to indict respondents for violation of Section 13 of the Trust Receipts Law.[52]

ACCORDINGLY, the petition is hereby GRANTED. The June 7, 2007 decision and August 31, 2007 resolution of the Court of Appeals in CA-G.R. SP No. 95659 areREVERSED and SET ASIDE.

The Regional Trial Court of Makati City, Branch 145 is ordered to proceed expeditiously with the trial of Civil Case No. 03-991 with regard to respondent Jose U. Arollado, and the other respondents if warranted.

SO ORDERED.

The Essence of Banking

Republic v. Security Credit and Acceptance Corp.19 SCRA 58 (1967)

CONCEPCION, C.J.:

This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance Corporation for allegedly engaging in banking operations without the authority required therefor by the General Banking Act (Republic Act No. 337). Named as respondents in the petition are, in addition to said corporation, the following, as alleged members of its Board of Directors and/or Executive Officers, namely:

NAMEPOSITION

Rosendo T. Resuello President & Chairman of the Board

Pablo Tanjutco Director

Arturo Soriano Director

Ruben Beltran Director

Bienvenido V. Zapa Director & Vice-President

Pilar G. Resuello Director & Secretary-Treasurer

Ricardo D. Balatbat Director & Auditor

Jose R. Sebastian Director & Legal Counsel

Vito Tanjutco Jr. Director & Personnel Manager

The record shows that the Articles of Incorporation of defendant corporation1 were registered with the Securities and Exchange Commission on March 27, 1961; that the next day, the Board of Directors of the corporation adopted a set of by-laws,2 which were filed with said Commission on April 5, 1961; that on September 19, 1961, the Superintendent of Banks of the Central Bank of the Philippines asked its legal counsel an opinion on whether or not said corporation is a banking institution, within the purview of Republic Act No. 337; that, acting upon this request, on October 11, 1961, said legal counsel rendered an opinion resolving the query in the affirmative; that in a letter, dated January 15, 1962, addressed to said Superintendent of Banks, the corporation through its president, Rosendo T. Resuello, one of defendants herein, sought a reconsideration of the aforementioned opinion, which reconsideration was denied on March 16, 1962; that, prior thereto, or on March 9, 1961, the corporation had applied with the Securities and Exchange Commission for the registration and licensing of its securities under the Securities Act; that, before acting on this application, the Commission referred it to the Central Bank, which, in turn, gave the former a copy of the above-mentioned opinion, in line with which, the Commission advised the corporation on December 5, 1961, to comply with the requirements of the General Banking Act; that, upon application of members of the Manila Police Department and an agent of the Central Bank, on May 18, 1962, the Municipal Court of Manila issued Search Warrant No. A-1019; that, pursuant thereto, members of the intelligence division of the Central Bank and of the Manila Police Department searched the premises of the corporation and seized documents and records thereof relative to its business operations; that, upon the return of said warrant, the seized documents and records were, with the authority of the court, placed under the custody of the Central Bank of the Philippines; that, upon examination and evaluation of said documents and records, the intelligence division of the Central Bank submitted, to the Acting Deputy Governor thereof, a memorandum dated September 10, 1962, finding that the corporation is:

1. Performing banking functions, without requisite certificate of authority from the Monetary Board of the Central Bank, in violation of Secs. 2 and 6 of Republic Act 337, in that it is soliciting and accepting deposit from the public and lending out the funds so received;

2. Soliciting and accepting savings deposits from the general public when the company's articles of incorporation authorize it only to engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in buying and selling stocks and bonds of any corporation, thereby exceeding the scope of its powers and authority as granted under its charter; consequently such acts are ultra-vires:

3. Soliciting subscriptions to the corporate shares of stock and accepting deposits on account thereof, without prior registration and/or licensing of such shares or securing exemption therefor, in violation of the Securities Act; and

4. That being a private credit and financial institution, it should come under the supervision of the Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, duties and functions of the Secretary of Finance, Bank Commissioner and the defunct Bureau of Banking, to the said Board, pursuant to Secs. 139 and 140 of Republic Act 265 and Secs. 88 and 89 of Republic Act 337." (Emphasis Supplied.) that upon examination and evaluation of the same records of the corporation, as well as of other documents and pertinent pipers obtained elsewhere, the Superintendent of Banks, submitted to the Monetary Board of the Central Bank a memorandum dated August 28, 1962, stating inter alia.

11. Pursuant to the request for assistance by the Chief, Intelligence Division, contained in his Memorandum to the Governor dated May 23, 1962 and in accordance with the written instructions of Governor Castillo dated May 31, 1962, an examination of the books and records of the Security Credit and Loans Organizations, Inc. seized by the combined MPD-CB team was conducted by this Department. The examination disclosed the following findings:

a. Considering the extent of its operations, the Security Credit and Acceptance Corporation, Inc.,receives deposits from the public regularly. Such deposits are treated in the Corporation's financial statements as conditional subscription to capital stock. Accumulated deposits of P5,000 of an individual depositor may be converted into stock subscription to the capital stock of the Security Credit and Acceptance Corporation at the option of the depositor. Sale of its shares of stock or subscriptions to its capital stock are offered to the public as part of its regular operations.

b. That out of the funds obtained from the public through the receipt of deposits and/or the sale of securities, loans are made regularly to any person by the Security Credit and Acceptance Corporation.

A copy of the Memorandum Report dated July 30, 1962 of the examination made by Examiners of this Department of the seized books and records of the Corporation is attached hereto.

12. Section 2 of Republic Act No. 337, otherwise known as the General Banking Act, defines the term, "banking institution" as follows:

Sec. 2. Only duly authorized persons and entities may engage in the lending of funds obtained from the public through the receipts of deposits or the sale of bonds, securities, or obligations of any kind and all entities regularly conducting operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws. ...

13. Premises considered, the examination disclosed that the Security Credit and Acceptance Corporation isregularly lending funds obtained from the receipt of deposits and/or the sale of securities. The Corporation therefore is performing 'banking functions' as contemplated in Republic Act No. 337, without having first complied with the provisions of said Act.

Recommendations:

In view of all the foregoing, it is recommended that the Monetary Board decide and declare:

1. That the Security Credit and Acceptance Corporation is performing banking functions without having first complied with the provisions of Republic Act No. 337, otherwise known as the General Banking Act, in violation of Sections 2 and 6 thereof; and

2. That this case be referred to the Special Assistant to the Governor (Legal Counsel) for whatever legal actions are warranted, including, if warranted criminal action against the Persons criminally liable and/or quo warranto proceedings with preliminary injunction against the Corporation for its dissolution. (Emphasis supplied.)that, acting upon said memorandum of the Superintendent of Banks, on September 14, 1962, the Monetary Board promulgated its Resolution No. 1095, declaring that the corporation is performing banking operations, without having first complied with the provisions of Sections 2 and 6 of Republic Act No. 337;3 that on September 25, 1962, the corporation was advised of the aforementioned resolution, but, this notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, have been and still are performing the functions and activities which

had been declared to constitute illegal banking operations; that during the period from March 27, 1961 to May 18, 1962, the corporation had established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous campaign undertaken by the corporation, the same had managed to induce the public to open 59,463 savings deposit accounts with an aggregate deposit of P1,689,136.74; that, in consequence of the foregoing deposits with the corporation, its original capital stock of P500,000, divided into 20,000 founders' shares of stock and 80,000 preferred shares of stock, both of which had a par value of P5.00 each, was increased, in less than one (1) year, to P3,000,000 divided into 130,000 founders' shares and 470,000 preferred shares, both with a par value of P5.00 each; and that, according to its statement of assets and liabilities, as of December 31, 1961, the corporation had a capital stock aggregating P1,273,265.98 and suffered, during the year 1961, a loss of P96,685.29. Accordingly, on December 6, 1962, the Solicitor General commenced this quo warranto proceedings for the dissolution of the corporation, with a prayer that, meanwhile, a writ of preliminary injunction be issued ex parte, enjoining the corporation and its branches, as well as its officers and agents, from performing the banking operations complained of, and that a receiver be appointed pendente lite.

Upon joint motion of both parties, on August 20, 1963, the Superintendent of Banks of the Central Bank of the Philippines was appointed by this Court receiver pendente lite of defendant corporation, and upon the filing of the requisite bond, said officer assumed his functions as such receiver on September 16, 1963.

In their answer, defendants admitted practically all of the allegations of fact made in the petition. They, however, denied that defendants Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and Sebastian, are directors of the corporation, as well as the validity of the opinion, ruling, evaluation and conclusions, rendered, made and/or reached by the legal counsel and the intelligence division of the Central Bank, the Securities and Exchange Commission, and the Superintendent of Banks of the Philippines, or in Resolution No. 1095 of the Monetary Board, or of Search Warrant No. A-1019 of the Municipal Court of Manila, and of the search and seizure made thereunder. By way of affirmative allegations, defendants averred that, as of July 7, 1961, the Board of Directors of the corporation was composed of defendants Rosendo T. Resuello, Aquilino L. Illera and Pilar G. Resuello; that on July 11, 1962, the corporation had filed with the Superintendent of Banks an application for conversion into a Security Savings and Mortgage Bank, with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano, Beltran and Sebastian as proposed directors, in addition to the defendants first named above, with defendants Rosendo T. Resullo, Zapa, Pilar G. Resuello, Balatbat and Sebastian as proposed president, vice-president, secretary-treasurer, auditor and legal counsel, respectively; that said additional officers had never assumed their respective offices because of the pendency of the approval of said application for conversion; that defendants Soriano, Beltran, Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had subsequently withdrawn from the proposed mortgage and savings bank; that on November 29, 1962 — or before the commencement of the present proceedings — the corporation and defendants Rosendo T. Resuello and Pilar G. Resuello had instituted Civil Case No. 52342 of the Court of First Instance of Manila against Purificacion Santos and other members of the savings plan of the corporation and the City Fiscal for a declaratory relief and an injunction; that on December 3, 1962, Judge Gaudencio Cloribel of said court issued a writ directing the defendants in said case No. 52342 and their representatives or agents to refrain from prosecuting the plaintiff spouses and other officers of the corporation by reason of or in connection with the acceptance by the same of deposits under its savings plan; that acting upon a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the Court of First Instance of Manila had appointed Jose Ma. Ramirez as receiver of the corporation; that, on December 12, 1962, said Ramirez qualified as such receiver, after filing the requisite bond; that, except as to one of the defendants in said case No. 52342, the issues therein have already been joined; that the failure of the corporation to honor the demands for withdrawal of its depositors or members of its savings plan and its former employees was due, not to mismanagement or misappropriation of corporate funds, but to an abnormal situation created by the mass demand for withdrawal of deposits, by the attachment of property of the corporation by its creditors, by the suspension by debtors of the corporation of the payment of their debts thereto and by an order of the Securities and Exchange Commission dated September 26, 1962, to the corporation to stop soliciting and receiving deposits; and that the withdrawal of deposits of members of the savings plan of the corporation was understood to be subject, as to time and amounts, to the financial condition of the corporation as an investment firm.

In its reply, plaintiff alleged that a photostat copy, attached to said pleading, of the anniversary publication of defendant corporation showed that defendants Pablo Tanjutco, Arturo Soriano, Ruben Beltran, Bienvenido V. Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr. are officers and/or directors thereof; that this is confirmed by the minutes of a meeting of stockholders of the corporation, held on September 27, 1962, showing that said defendants had been elected officers thereof; that the views of the legal counsel of the Central Bank, of the Securities and Exchange Commission, the Intelligence Division, the Superintendent of Banks and the Monetary Board above

referred to have been expressed in the lawful performance of their respective duties and have not been assailed or impugned in accordance with law; that neither has the validity of Search Warrant No. A-1019 been contested as provided by law; that the only assets of the corporation now consist of accounts receivable amounting approximately to P500,000, and its office equipment and appliances, despite its increased capitalization of P3,000,000 and its deposits amounting to not less than P1,689,136.74; and that the aforementioned petition of the corporation, in Civil Case No. 52342 of the Court of First Instance of Manila, for a declaratory relief is now highly improper, the defendants having already committed infractions and violations of the law justifying the dissolution of the corporation.

Although, admittedly, defendant corporation has not secured the requisite authority to engage in banking, defendants deny that its transactions partake of the nature of banking operations. It is conceded, however, that, in consequence of a propaganda campaign therefor, a total of 59,463 savings account deposits have been made by the public with the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. It is clear that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank has been defined as:

... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, 348] founded to facilitate the borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46).

Moreover, it has been held that:

An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.)

... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised. (MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.)

Accordingly, defendant corporation has violated the law by engaging in banking without securing the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

It is urged, however, that this case should be remanded to the Court of First Instance of Manila upon the authority of Veraguth vs. Isabela Sugar Co. (57 Phil. 266). In this connection, it should be noted that this Court is vested with original jurisdiction, concurrently with courts of first instance, to hear and decide quo warranto cases and, that, consequently, it is discretionary for us to entertain the present case or to require that the issues therein be taken up in said Civil Case No. 52342. The Veraguth case cited by herein defendants, in support of the second alternative, is not in point, because in said case there were issues of fact which required the presentation of evidence, and courts of first instance are, in general, better equipped than appellate courts for the taking of testimony and the determination of questions of fact. In the case at bar, there is, however, no dispute as to the principal facts or acts performed by the corporation in the conduct of its business. The main issue here is one of law, namely, the legal nature of said facts or of the aforementioned acts of the corporation. For this reason, and because public interest demands an early disposition of the case, we have deemed it best to determine the merits thereof.

Wherefore, the writ prayed for should be, as it is hereby granted and defendant corporation is, accordingly, ordered dissolved. The appointment of receiver herein issued pendente lite is hereby made permanent, and the receiver is, accordingly, directed to administer the properties, deposits, and other assets of defendant corporation and wind up the affairs thereof conformably to Rules 59 and 66 of the Rules of Court. It is so ordered.

Bañas v. Asia-Pacific Finance Corporation18 October 2000

BELLOSILLO, J.:

C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the reversal of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for lack of merit and affirming in toto the decision of the trial court holding them liable to Asia Pacific Finance Corporation in the amount of P87,637.50 at 14% interest per annum in addition to attorney's fees and costs of suit, as well as its 21 March 1997 Resolution denying reconsideration thereof.[2]

On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a complaint for a sum of money with prayer for a writ of replevin against Teodoro Bañas, C. G. Dizon Construction and Cenen Dizon. Sometime in August 1980 Teodoro Bañas executed a Promissory Note in favor of C. G. Dizon Construction whereby for value received he promised to pay to the order of C. G. Dizon Construction the sum of P390,000.00 in installments of "P32,500.00 every 25th day of the month starting from September 25, 1980 up to August 25, 1981."[3]

Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA PACIFIC, and to secure payment thereof, C. G. Dizon Construction, through its corporate officers, Cenen Dizon, President, and Juliette B. Dizon, Vice President and Treasurer, executed a Deed of Chattel Mortgage covering three (3) heavy equipment units of Caterpillar Bulldozer Crawler Tractors with Model Nos. D8-14A, D8-2U and D8H in favor of ASIA PACIFIC.[4] Moreover, Cenen Dizon executed on 25 August 1980 a Continuing Undertaking wherein he bound himself to pay the obligation jointly and severally with C. G. Dizon Construction.[5]

In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made the following installment payments to ASIA PACIFIC:P32,500.00 on 25 September 1980, P32,500.00 on 27 October 1980 and P65,000.00 on 27 February 1981, or a total of P130,000.00. Thereafter, however, C. G. Dizon Construction defaulted in the payment of the remaining installments, prompting ASIA PACIFIC to send a Statement of Account to Cenen Dizon for the unpaid balance of P267,737.50 inclusive of interests and charges, and P66,909.38 representing attorney's fees. As the demand was unheeded, ASIA PACIFIC sued Teodoro Bañas, C. G. Dizon Construction and Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due execution of the Promissory Note, the Deed of Chattel Mortgage and theContinuing Undertaking, they nevertheless maintained that these documents were never intended by the parties to be legal, valid and binding but a mere subterfuge to conceal the loan of P390,000.00 with usurious interests.

Defendants claimed that since ASIA PACIFIC could not directly engage in banking business, it proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to them without violating banking laws: first, Cenen Dizon would secure a promissory note from Teodoro Bañas with a face value of P390,000.00 payable in installments; second, ASIA PACIFIC would then make it appear that the promissory note was sold to it by Cenen Dizon with the 14% usurious interest on the loan or P54,000.00 discounted and collected in advance by ASIA PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to answer for the loan in case of default in payment and execute a continuing guaranty to assure continuous and prompt payment of the loan. Defendants also alleged that out of the loan of P390,000.00 defendants actually received only P329,185.00 after ASIA PACIFIC deducted the discounted interest, service handling charges, insurance premium, registration and notarial fees.

Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed in meeting his monthly amortization on account of business reverses and promised to pay instead in February 1981. Cenen Dizon made good his promise and tendered payment to ASIA PACIFIC in an amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC attempted to impose a 3% interest for every month of delay, which he flatly refused to pay for being usurious.

Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender to it the ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the former's account as closed and the loan fully paid. Cenen Dizon supposedly agreed and accepted the offer. Defendants averred that the value of the bulldozer crawler tractors was more than adequate to cover their obligation to ASIA PACIFIC.

Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G. Dizon Construction for the surrender of the bulldozer crawler tractors subject of the Deed of Chattel Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned over by defendants - D8-14A and D8-2U - which units were subsequently foreclosed by ASIA PACIFIC to

satisfy the obligation. D8-14A was sold for P120,000.00 and D8-2U forP60,000.00 both to ASIA PACIFIC as the highest bidder.

During the pendency of the case, defendant Teodoro Bañas passed away, and on motion of the remaining defendants, the trial court dismissed the case against him. On the other hand, ASIA PACIFIC was substituted as party plaintiff by International Corporate Bank after the disputed Promissory Note was assigned and/or transferred by ASIA PACIFIC to International Corporate Bank. Later, International Corporate Bank merged with Union Bank of the Philippines. As the surviving entity after the merger, and having succeeded to all the rights and interests of International Corporate Bank in this case, Union Bank of the Philippines was substituted as a party in lieu of International Corporate Bank.[6]

On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding the defendants jointly and severally liable for the unpaid balance of the obligation under the Promissory Note in the amount of P87,637.50 at 14% interest per annum, and attorney's fees equivalent to 25% of the monetary award.[7]

On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus -

Defendant-appellants' contention that the instruments were executed merely as a subterfuge to skirt banking laws is an untenable defense. If that were so then they too were parties to the illegal scheme. Why should they now be allowed to take advantage of their own knavery to escape the liabilities that their own chicanery created?

Defendant-appellants also want us to believe their story that there was an agreement between them and the plaintiff-appellee that if the former would deliver their 2 bulldozer crawler tractors to the latter, the defendant-appellants' obligation would fully be extinguished. Again, nothing but the word that comes out between the teeth supports such story.Why did they not write down such an important agreement? Is it believable that seasoned businessmen such as the defendant-appellant Cenen G. Dizon and the other officers of the appellant corporation would deliver the bulldozers without a receipt of acquittance from the plaintiff-appellee x x x x In our book, that is not credible.

The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and ASIA PACIFIC violated banking laws, hence, null and void; and (b) Whether the surrender of the bulldozer crawler tractors to respondent resulted in the extinguishment of petitioners' obligation.

On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment house which could not engage in the lending of funds obtained from the public through receipt of deposits. The disputed Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking were not intended to be valid and binding on the parties as they were merely devices to conceal their real intention which was to enter into a contract of loan in violation of banking laws.

We reject the argument. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities.[8] As defined in Sec. 2, par. (a), of the Revised Securities Act,[9] securities "shall include x x x x commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes x x x x" Clearly, the transaction between petitioners and respondent wasone involving not a loan but purchase of receivables at a discount, well within the purview of "investing, reinvesting or trading in securities" which an investment company, like ASIA PACIFIC, is authorized to perform and does not constitute a violation of the General Banking Act.[10] Moreover, Sec. 2 of theGeneral Banking Act provides in part -

Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws (underscoring supplied).

Indubitably, what is prohibited by law is for investment companies to lend funds obtained from the public through receipts of deposit, which is a function of banking institutions. But here, the funds supposedly "lent" to petitioners have not been shown to have been obtained from the public by way of deposits, hence, the inapplicability of banking laws.

On petitioners' submission that the true intention of the parties was to enter into a contract of loan, we have examined the Promissory Note and failed to discern anything therein that would support

such theory. On the contrary, we find the terms and conditions of the instrument clear, free from any ambiguity, and expressive of the real intent and agreement of the parties. We quote the pertinent portions of the Promissory Note -

FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon Construction, Inc. the sum of THREE HUNDRED NINETY THOUSAND ONLY (P390,000.00), Philippine Currency in the following manner:

P32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25, 1981.

I/We agree that if any of the said installments is not paid as and when it respectively falls due, all the installments covered hereby and not paid as yet shall forthwith become due and payable at the option of the holder of this note with interest at the rate of 14% per annum on each unpaid installment until fully paid.

If any amount due on this note is not paid at its maturity and this note is placed in the hands of an attorney for collection, I/We agree to pay in addition to the aggregate of the principal amount and interest due, a sum equivalent to TEN PERCENT (10%) thereof as Attorney's fees, in case no action is filed, otherwise, the sum will be equivalent to TWENTY FIVE (25%) of the said principal amount and interest due x x x x

Makati, Metro Manila, August 25, 1980.

(Sgd) Teodoro Bañas

ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON CONSTRUCTION, INC.

By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. DizonPresident VP/Treasurer

Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly acknowledged before a notary public and, as such, have in their favor the presumption of regularity. To contradict them there must be clear, convincing and more than merely preponderant evidence. In the instant case, the records do not show even a preponderance of evidence in favor of petitioners' claim that the Deed of Chattel Mortgage and Continuing Undertaking were never intended by the parties to be legal, valid and binding. Notarial documents are evidence of the facts in clear and unequivocal manner therein expressed.[11]

Interestingly, petitioners' assertions were based mainly on the self-serving testimony of Cenen Dizon, and not on any other independent evidence. His testimony is not only unconvincing, as found by the trial court and the Court of Appeals, but also self-defeating in light of the documents presented by respondent, i.e., Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking, the accuracy, correctness and due execution of which were admitted by petitioners. Oral evidence certainly cannot prevail over the written agreements of the parties. The courts need only rely on the faces of the written contracts to determine their true intention on the principle that when the parties have reduced their agreements in writing, it is presumed that they have made the writings the only repositories and memorials of their true agreement.

The second issue deals with a question of fact. We have ruled often enough that it is not the function of this Court to analyze and weigh the evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court.[12] At any rate, while we are not a trier of facts, hence, not required as a rule to look into the factual bases of the assailed decision of the Court of Appeals, we did so just the same in this case if only to satisfy petitioners that we have carefully studied and evaluated the case, all too mindful of the tenacity and vigor with which the parties, through their respective counsel, have pursued this case for nineteen (19) years.

Petitioners contend that the parties already had a verbal understanding wherein ASIA PACIFIC actually agreed to consider petitioners' account closed and the principal obligation fully paid in exchange for the ownership of the two (2) bulldozer crawler tractors.

We are not persuaded. Again, other than the bare allegations of petitioners, the records are bereft of any evidence of the supposed agreement. As correctly observed by the Court of Appeals, it is unbelievable that the parties entirely neglected to write down such an important agreement. Equally incredulous is the fact that petitioner Cenen Dizon, a seasoned businessman, readily consented to

deliver the bulldozers to respondent without a corresponding receipt of acquittance. Indeed, even the testimony of petitioner Cenen Dizon himself negates the supposed verbal understanding between the parties -

Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of the seizure order?

A: There was no seizure order. Atty. Carag during that time said if I surrender the two equipment, we might finally close a deal if the equipment would come up to the balance of the loan. So I voluntarily surrendered, I pulled them from the job site and returned them to APCOR x x x x

Q: You mentioned a certain Atty. Carag, who is he?

A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked with Atty. Carag, we have a verbal agreement if I surrender the equipmentit might suffice to pay off the debt so I did just that (underscoring ours).[13]

In other words, there was no binding and perfected contract between petitioners and respondent regarding the settlement of the obligation, but only a conditional one, a mere conjecture in fact, depending on whether the value of the tractors to be surrendered would equal the balance of the loan plus interests. And since the bulldozer crawler tractors were sold at the foreclosure sale for only P180,000.00,[14] which was not enough to cover the unpaid balance of P267,637.50, petitioners are still liable for the deficiency.

Barring therefore a showing that the findings complained of are totally devoid of support in the records, or that they are so glaringly erroneous as to constitute serious abuse of discretion, we see no valid reason to discard them. More so in this case where the findings of both the trial court and the appellate court coincide with each other on the matter.

With regard to the computation of petitioners' liability, the records show that petitioners actually paid to respondent a total sum of P130,000.00 in addition to the P180,000.00 proceeds realized from the sale of the bulldozer crawler tractors at public auction. Deducting these amounts from the principal obligation of P390,000.00 leaves a balance of P80,000.00, to which must be added P7,637.50 accrued interests and charges as of 20 March 1981, or a total unpaid balance of P87,637.50 for which petitioners are jointly and severally liable. Furthermore, the unpaid balance should earn 14% interest per annum as stipulated in the Promissory Note, computed from 20 March 1981 until fully paid.

On the amount of attorney's fees which under the Promissory Note is equivalent to 25% of the principal obligation and interests due, it is not, strictly speaking, the attorney's fees recoverable as between the attorney and his client regulated by the Rules of Court. Rather, the attorney's fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that so long as such stipulation does not contravene the law, morals and public order, it is strictly binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment by execution.[15]

Nevertheless, it appears that petitioners' failure to fully comply with their part of the bargain was not motivated by ill will or malice, but due to financial distress occasioned by legitimate business reverses. Petitioners in fact paid a total of P130,000.00 in three (3) installments, and even went to the extent of voluntarily turning over to respondent their heavy equipment consisting of two (2) bulldozer crawler tractors, all in a bona fide effort to settle their indebtedness in full. Article 1229 of the New Civil Code specifically empowers the judge to equitably reduce the civil penalty when the principal obligation has been partly orirregularly complied with. Upon the foregoing premise, we hold that the reduction of the attorney's fees from 25% to 15% of the unpaid principal plus interests is in order.

Finally, while we empathize with petitioners, we cannot close our eyes to the overriding considerations of the law on obligations and contracts which must be upheld and honored at all times. Petitioners have undoubtedly benefited from the transaction; they cannot now be allowed to impugn its validity and legality to escape the fulfillment of a valid and binding obligation.

WHEREFORE, no reversible error having been committed by the Court of Appeals, its assailed Decision of 24 July 1996 and its Resolution of 21 March 1997 are AFFIRMED. Accordingly, petitioners C.G. Construction Inc. and Cenen Dizon are ordered jointly and severally to pay respondent Asia Pacific Finance Corporation, substituted by International Corporate Bank (now known as Union Bank of the Philippines), P87,637.50 representing the unpaid balance on the Promissory Note, with interest at fourteen percent (14%) per annum computed from 20 March 1981 until fully paid, and fifteen percent (15%) of the principal obligation and interests due by way of attorney's fees. Costs against petitioners.

SO ORDERED.

Banks and Financial Intermediaries

First Planters Pawnshop, Inc. v. CIR560 SCRA 606 (2008)

AUSTRIA-MARTINEZ, J.: First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. The core of petitioner's argument is that it is not a lending investor within the purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and therefore not subject to value-added tax (VAT). Petitioner also contends that a pawn ticket is not subject to documentary stamp tax (DST) because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a documentary stamp tax is levied on the document issued and not on the transaction. The facts: In a Pre-Assessment Notice dated July 7, 2003, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and DST liabilities for the year 2000. The deficiency assessment was at P541,102.79 for VAT and P23,646.33 for DST.[1] Petitioner protested the assessment for lack of legal and factual bases.[2]

Petitioner subsequently received a Formal Assessment Notice on December 29, 2003, directing payment of VAT deficiency in the amount of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive of surcharge and interest.[3] Petitioner filed a protest,[4]which was denied by Acting Regional Director Anselmo G. Adriano per Final Decision on Disputed Assessment dated January 29, 2004.[5]

Petitioner then filed a petition for review with the Court of Tax Appeals (CTA). [6] In a Decision dated May 9, 2005, the 2nd Division of the CTA upheld the deficiency assessment.[7] Petitioner filed a motion for reconsideration[8] which was denied in a Resolution dated October 7, 2005.[9]

Petitioner appealed to the CTA En Banc which rendered a Decision dated June 7, 2006, the dispositive portion of which reads as follows: WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. The assailed Decision dated May 9, 2005 and Resolution dated October 7, 2005 are hereby AFFIRMED. SO ORDERED.[10]

Petitioner sought reconsideration but this was denied by the CTA En Banc per Resolution dated August 14, 2006.[11]

Hence, the present petition for review under Rule 45 of the Rules of Court based on the following grounds:

ITHE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN FINDING PETITIONER LIABLE FOR VAT.

II

THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN RULING THAT PETITIONER IS LIABLE FOR DST ON PAWN TICKETS.[12]

The determination of petitioner's tax liability depends on the tax treatment of a pawnshop business. Oddly, there has not been any definitive declaration in this regard despite the fact that pawnshops have long been in existence. All that has been stated is what pawnshops are not, but not what pawnshops are. The BIR itself has maintained an ambivalent stance on this issue. Initially, in Revenue Memorandum Order No. 15-91 issued on March 11, 1991, a pawnshop business was considered as “akin to lending investor’s business activity” and subject to 5% percentage tax beginningJanuary 1, 1991, under Section 116 of the Tax Code of 1977, as amended by E.O. No. 273.[13] With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in 1994,[14] the BIR abandoned its earlier position and maintained that pawnshops are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95. This was complemented by Revenue Memorandum Circular No. 45-01 dated October 12, 2001, which provided that pawnshop operators are liable to the 10% VAT based on gross receipts beginning January 1, 1996,

while pawnshops whose gross annual receipts do not exceed P550,000.00 are liable for percentage tax, pursuant to Section 109(z) of the Tax Code of 1997. CTA decisions affirmed the BIR's position that pawnshops are subject to VAT. In H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue,[15] the CTA ruled that the petitioner therein was subject to 10% VAT under Section 108 of the Tax Code of 1997. AntamPawnshop Corporation v. Commissioner of Internal Revenue[16] reiterates said ruling. It was the CTA's view that the services rendered by pawnshops fall under the general definition of “sale or exchange of services” under Section 108(A) of the Tax Code of 1997. On July 15, 2003, the Court rendered Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.[17] in which it was categorically ruled that while pawnshops are engaged in the business of lending money, they are not considered “lending investors” for the purpose of imposing percentage taxes. [18] The Court gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were subjected to different tax treatments; second, Congress never intended pawnshops to be treated in the same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273. In view of said ruling, the BIR issued Revenue Memorandum Circular No. 36-2004 dated June 16, 2004, canceling the previous lending investor's tax assessments on pawnshops. Said Circular stated, inter alia: In view of the said Supreme Court decision, all assessments on pawnshops for percentage taxes as lending investors are hereby cancelled. This Circular is being issued for the sole purpose of resolving the tax liability of pawnshops to the 5% lending investors tax provided under the then Section 116 of the NIRC of 1977, as amended, and shall not cover issues relating to their other tax liabilities. All internal revenue officials are enjoined from issuing assessments on pawnshops for percentage taxes on lending investors, under the then Section 116 of the NIRC of 1977, as amended. For purposes of the gross receipt tax provided for under Republic Act No. 9294, the pawnshops are now subject thereof. This shall however, be covered by another issuance.[19]

Revenue Memorandum Circular No. 37-2004 was issued on the same date whereby pawnshop businesses were allowed to settle their VAT liabilities for the tax years 1996-2002 pursuant to a memorandum of agreement entered into by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of the Philippines, Inc. The Circular likewise instructed all revenue officers to ensure that “all VAT due from pawnshops beginning January 1, 2003, including increments thereto, if any, are assessed and collected from pawnshops under its jurisdiction.” In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on February 5, 2004 entitled, “An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-banking Functions and Other Non-bank Financial Intermediaries beginning January 01, 2004.”[20] Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin No. 2004-01 on February 10, 2004 advising all banks and non-bank financial intermediaries that they shall remain liable under the VAT system. When R.A. No. 9238 took effect on February 16, 2004, the Department of Finance issued Revenue Regulations No. 10-2004 datedOctober 18, 2004, classifying pawnshops as Other Non-bank Financial Intermediaries. The BIR then issued Revenue Memorandum Circular No. 73-2004 on November 25, 2004, prescribing the guidelines and policies on the assessment and collection of 10% VAT for gross annual sales/receipts exceeding P550,000.00 or 3% percentage tax for gross annual sales/receipts not exceeding P550,000.00 of pawnshops prior to January 1, 2005. In fine, prior to the EVAT Law, pawnshops were treated as lending investors subject to lending investor's tax. Subsequently, with the Court's ruling in Lhuillier, pawnshops were then treated as VAT-able enterprises under the general classification of “sale or exchange of services” under Section 108(A) of the Tax Code of 1997, as amended. R.A. No. 9238 finally classified pawnshops as Other Non-bank Financial Intermediaries. The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law, thus – Under the National Internal Revenue Code of 1977,[21] pawnshops should have been levied the 5% percentage tax on gross receipts imposed on bank and non-bank financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997);

With the imposition of the VAT under R.A. No. 7716 or the EVAT Law,[22] pawnshops should have been subjected to the 10% VAT imposed on banks and non-bank financial intermediaries and financial institutions under Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of 1997);[23]

This was restated by R.A. No. 8241,[24] which amended R.A. No. 7716, although the levy, collection and assessment of the 10% VAT on services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions, were made effective January 1, 1998;[25]

R.A. No. 8424 or the Tax Reform Act of 1997[26] likewise imposed a 10% VAT under Section 108 but the levy, collection and assessment thereof were again deferred until December 31, 1999;[27]

The levy, collection and assessment of the 10% VAT was further deferred by R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002; With no further deferments given by law, the levy, collection and assessment of the 10% VAT on banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were finally made effective beginning January 1, 2003; Finally, with the enactment of R.A. No. 9238, the services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were specifically exempted from VAT,[28] and the 0% to 5% percentage tax on gross receipts on other non-bank financial intermediaries was reimposed under Section 122 of the Tax Code of 1997.[29]

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10% VAT under the general provision on “sale or exchange of services” as defined under Section 108(A) of the Tax Code of 1997, which states: “'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration x x x.” Instead, due to the specific nature of its business, pawnshops were then subject to 10% VAT under the category of non-bank financial intermediaries, as provided in the same Section 108(A), which reads: SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including x x x services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: x x x (Emphasis and underscoring supplied) The tax treatment of pawnshops as non-bank financial intermediaries is not without basis. R.A. No. 337, as amended, or the General Banking Act characterizes the terms banking institution and bank as synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage banks, development banks, rural banks, stock savings and loan associations, and branches and agencies in the Philippines of foreign banks.[30] R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. [31] R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks.[32] Financial intermediaries, on the other hand, are defined as “persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others.”[33]

It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of their business activities partakes that of a financial intermediary in that its principal function is lending. A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as “a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage.” That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. The Manual includes pawnshops in the list of non-bank financial intermediaries, viz.: § 4101Q.1 Financial Intermediaries

x x x Non-bank financial intermediaries shall include the following: (1) A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker x x x. (Emphasis supplied) Revenue Regulations No. 10-2004, in fact, recognized these bases, to wit: SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of Rev. Regs No. 9-2004 defining “Non-bank Financial Intermediaries, the term “pawnshop” as defined under Presidential Decree No. 114 which authorized its creation, to be a person or entity engaged in the business of lending money, all fall within the classification of Non-bank Financial Intermediaries and therefore, covered by Sec. 4 of R.A. No. 9238. This classification is equally supported by Subsection 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Intermediaries and reiterated in BSP Circular No. 204-99, classifying pawnshops as one of Non-bank Financial Intermediaries within the supervision of the Bangko Sentral ng Pilipinas. Ultimately, R.A. No. 9238 categorically confirmed the classification of pawnshops as non-bank financial intermediaries. Coming now to the issue at hand - Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law,[34] then petitioner is not liable for VAT during these tax years. But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be. Lastly, petitioner is liable for documentary stamp taxes. The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue,[35] in which it was ruled that the subject of DST is not limited to the document alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST, thus – x x x the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of Appeals, it was held that: x x x x Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. This is essentially the business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property delivered as security for loans. Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For Pawnshops issued by the Central Bank to implement the Act, require every pawnshop or pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed by the pawnbroker and containing the following details: (1) name and residence of the pawner; (2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or his authorized agent; and (9) such other terms and conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central Bank Circular No. 445, prescribed a standard form of pawn tickets with entries for the required details on its face and the mandated terms and conditions of the pledge at the dorsal portion thereof. Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows: x x x x True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshop’s obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioner’s assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket. The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose. Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section 195 unqualifiedly subjects all pledges to DST. It states that “[o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x.” It is clear, categorical, and needs no further interpretation or construction. The explicit tenor thereof requires hardly anything than a simple application.

x x x x In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and express; it cannot be made to rest on doubtful implications. Under the principle of stare decisis et non quieta movere (follow past precedents and do not disturb what has been settled), once a case has been decided one way, any other case involving exactly the same point at issue, as in the case at bar, should be decided in the same manner.[36]

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated June 7, 2006 and Resolution dated August 14, 2006 of the Court of Tax Appeals En Banc is MODIFIED to the effect that the Bureau of Internal Revenue assessment for VAT deficiency in the amount of P541,102.79 for the year 2000 is REVERSED and SET ASIDE, while its assessment for DST deficiency in the amount ofP24,747.13, inclusive of surcharge and interest, is UPHELD. SO ORDERED.

Authority to Engage in Banking

Sec. 6, GBL

Authority to Engage in Banking and Quasi-Banking Functions. - No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may; through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking function and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws.

The department head and the examiners of the appropriate supervising and examining department are hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act.

Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws.

Requisites/Conditions to Engage in Banking

Sec. 8, GBL

Organization. - The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:

8.1. That the entity is a stock corporation;

8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons; and

8.3. That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied.

No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.

The SEC and Banks

Sec. 14, GBL

Certificate of Authority to Register. - The Securities and Exchange Commission shall no register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it:

14.1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

14.2. That the public interest and economic conditions, both general and local, justify the authorization; and

14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest.

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral.

Minimum Capital Stock Requirement

BSP Circular No. 257, 15 August 2000

The Monetary Board, in its Resolution Nos. 943 and 1159 dated 9 June 2000 and 14 July 2000, respectively, universal banks, commercial banks, thrift banks and rural banks are advised that:

1. The target level of capitalization prescribed for banks as of end-2000 has been set aside;

2. The level of required capitalization as of end-2000 shall be the same as that prescribed as of end-1999;

3. For new entrants in the banking system, the minimum level of capitalization, unless otherwise prescribed by the Monetary Board, shall be as follows:

Bank Category Minimum Capital (In Millions)

Expanded Commercial Banks P 4,950

Non-expanded Commercial Banks 2,400

Thrift BanksWith Head Office within Metro ManilaWith Head Office outside Metro Manila

32552

Rural BanksWithin Metro ManilaCities of Cebu and Davao1st/2nd/3rd class cities and 1st classmunicipalities4th/5th/6th class cities and 2nd/3rd/4th classmunicipalities5th and 6th class municipalities

P 26136.5

3.9

2.6

4. For banks that have executed a Memoranda of Understanding (MOU) with the Bangko Sentral ng Pilipinas (BSP), in compliance with Circular No. 181 dated 14 November 1998, the following guidelines shall apply:

a. For banks with capital deficiency but with capital-to-risk assets ratio within the minimum prescribed and with no weaknesses (i.e. high past due loans, DOSRI violations, etc.), the MOU may be set aside; provided, that the bank will be able to comply with the minimum capital requirements as herein prescribed; and

b. For banks with capital deficiency but with significant weaknesses (i.e. deficiency in capital-to-risk assets ratio, liquidity problems, high past due loans, etc.), the MOU, as executed, shall continue to be in full force and in effect until such time it shall be amended by mutual consent of the parties thereto; waived and/or terminated by the BSP.

Non-compliance with the above capital requirements shall subject the bank to sanctions / penalties provided under existing banking laws and BSP rules and regulations.

The Activities and Services of Banks

Sec. 53, GBL

Other Banking Services. - In addition to the operations specifically authorized in this Act, a bank may perform the following services:

53.1. Receive in custody funds, documents and valuable objects;

53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;

53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business;

53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and

53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under Subsections 53.1., 53.2., 53.3. and 53.4. as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities:

The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation.

Sec. 29, GBL

Powers of a Commercial Bank. - A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.

May Banks Acquire Real Estates

Sec. 51, GBL

Ceiling on Investments in Certain Assets. - Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary Board.

Sec. 52, GBL

Acquisition of Real Estate by Way of Satisfaction of Claims. - Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the preceding Section.

CLASSIFICATION OF BANKS

Sec. 3.2, GBL

Banks shall be classified into:

(a) Universal banks;

(b) Commercial banks;

(c) Thrift banks, composed of:

(i) Savings and mortgage banks;

(ii) Stock savings and loan associations; and

(iii) Private development banks, as defined in the Republic Act No. 7906 (hereafter the "Thrift Banks Act");

(d) Rural banks, as defined in Republic Act No. 73S3 (hereafter the "Rural Banks Act");

(e) Cooperative banks, as defined in Republic Act No 6938 (hereafter the "Cooperative Code");

(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and

(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

Development Bank of the Philippines (EO No. 81, as amended)

Land Bank of the Philippines (RA No. 3844, Sec. 74-100)

Thrift Banks

Thrift Banks Act (RA No. 7906)

AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF THRIFT BANKS, AND FOR OTHER PURPOSESFebruary 23, 1995

AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIZATION AND OPERATIONS OF THRIFT BANKS, AND FOR OTHER PURPOSES

CHAPTER I DECLARATION OF POLICY AND DEFINITIONS

Sec. 1. Title. This Act shall be known and cited as the "Thrift Banks Act of 1995."

Sec. 2. Declaration of Policy. It is hereby declared the policy of the State to:

Recognize the indispensable role of the private sector, to encourage private enterprise, and to provide incentives to needed investments;

Promote economic development pursuant to the socio economic program of the government, to expand industrial and agricultural growth, to encourage the establishment of more private thrifts banks in order to meet the needs for capital, personal and investment credit or medium and long-term loans for Filipino entrepreneurs;

(c ) Encourage and assist the establishment of thrift bank system which will promote agriculture and industry and at the same time place within easy reach of the people the medium and long-term credit facilities at reasonable cost;

(d) Encourage industry, frugality and the accumulation of savings among the public, and the members and stockholders of thrift banks; and

(e) Regulate and supervise the activities of thrift banks in order to place their operations on a sound, stable and efficient basis and to curtail or prevent acts or practices which are prejudicial to the public interest.

Sec. 3. Definition of Terms. For purposes of implementing this Acts, the following definitions shall apply:

"Thrift banks" shall include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporations that may be organized for the following purposes:

Accumulating the saving of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for home-building and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives;

Providing short-term working capital, medium - and long-term financing, to businesses engaged in agriculture, services, industry and housing; and

Providing diversified financial and allied service for its chosen market and constituencies specially for small and medium enterprises and individuals.

"Monetary Board" shall mean the Monetary Board of the Bangko Sentral ng Pilipinas.

(c ) "Bangko Sentral" shall refer to the Bangko Sentral ng Pilipinas created under Republic Act No. 7653.

CHAPTER II ORGANIZATION

Sec. 4. Organization. A thrift bank shall be organized in the form of stock corporation. The Monetary Board shall fix the minimum paid-up capital of thrift banks in such amount as the Board may consider necessary for the safe and sound operation of thrift banks taking into account the development thrusts of this Act and due protection of the general public. No thrift banks shall be organized without a certificate of authority from the Monetary Board.

Sec. 5. Establishment of Thrift Banks. The articles of incorporation of any bank, or any amendment thereto, shall not be registered by the Securities and Exchange Commission unless accompanied by a certificate of authority issued by the Monetary Board, under its official seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it: (a) that all the requirements of the existing laws and regulations to engage in business for which the applicant is proposed to be incorporated have been complied with; (b) that public interest and the economic conditions, both general and local, justify the authorization; and (c) that the amount of capital, the financing organization, direction and administration, as well as the integrity and the responsibility of the organizers and administrators reasonably assure the safety of the interest which the public may entrust to them.

The bylaws of any thrift bank, or any amendment thereto, shall not be registered by the Securities and Exchange Commission unless accompanied by a certificate of the Monetary Board to the effect that such by-laws or amendments thereto are in accordance with law.

Sec. 6. Bank Management. In order to maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board may pass upon and review the qualifications of persons who are elected or appointed bank directors and officers and disqualify those unfit. The Monetary Board shall prescribe the qualifications of bank directors and officers for purposes of this Section.

Sec. 7. Directors and Officers. At least a majority of the members of the board of directors of any thrift bank which may be established after the effectivity of this Act shall be citizens of the Philippines: Provided, however, That no appointive or elective official, whether full-time or part-time, shall at the same time serve as officer of any thrift bank, except in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank: Provided, further, That in the case of merger or consolidation duly approved by the Monetary Board, the limitation on the number of directors in a corporation, as provided in Section 14 of the Corporation Code of the Philippines, shall not be applied so that membership in the new board may include up to the total number of directors provided for in the respective articles of incorporation of the merging or consolidating banks.

CHAPTER III OWNERSHIP AND CAPITAL REQUIREMENTS

Sec. 8. Ownership. At least forty percent (40%) of the voting stock of a thrift bank which may be established after the approval of this Act shall be owned by citizens of the Philippines, except where a new bank may be established as a result of a merger or consolidation of existing thrift banks with foreign holdings in which case, the resulting foreign holdings shall not be increased but may be reduced and, once reduced, shall be increased thereafter beyond sixty percent (60%) of the voting stock of thrifts banks. The percentage of the foreign-owned voting stocks shall be determined by the citizenship of individual stockholders and in case of corporations owning shares, by the citizenship of each stockholder in the said corporations.

Any provision of existing laws to the contrary notwithstanding, stockholdings in a thrift bank shall be exempt from any ownership ceiling for a period of ten (10) years from the effectivity of this Act.

Sec. 9. Combined Capital Accounts of Thrift Banks. The combined capital accounts of each thrift bank shall not be less than an amount equal to ten percent (10%) of its risk assets which is defined as its total assets minus the following assets:

Cash on hand;

Amounts from the Bangko Sentral;

(c ) Evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral, and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines;

(d) Loans to the extent covered by hold-out on, or assignment of deposits maintained in the lending bank and held in the Philippines; and

(e) Other non-risk items as the Monetary Board may, from time to time, authorize to be deducted from total assets.

The Monetary Board shall prescribe the manner of determining the total assets of banking institutions for purposes of this Section.

Whenever the capital accounts of a bank are deficient with respect to the requirements of the preceding paragraph, the Monetary Board, after considering the report of the appropriate supervising department on the state of solvency of the institution, shall limit or prohibit the distribution of net profits and shall require that part or all of net profits be used to increase the capital accounts of the institution until the minimum requirement has been met. The Monetary Board may, after considering the aforesaid report of the appropriate supervising department and if the amount of the deficiency justifies it, restrict or prohibit the making of new investments of any sort by the bank with the exception of purchases of evidences of indebtedness included under subsection (c) of this Section, until the minimum required capital ratio has been restored.

Where in the process of a bank merger or consolidation, the merged or constituent bank may not be able to comply fully with the net worth to risk asset ratio herein prescribed, the Monetary Board may, at its discretion, temporarily relieve the bank from full compliance with this requirement under such conditions it may prescribed.

CHAPTER IV POWERS

Sec. 10. Powers of Thrift Banks. In addition to powers granted it by this Act and existing laws, any thrift bank may:

Accept savings and time deposits;

Open current or checking accounts: Provided, That the thrift bank has net assets of at least Twenty million pesos (P20,000,000) subject to such guidelines as may be established by the Monetary Board; and shall be allowed to directly clear its demand deposit operations with the Bangko Sentral and the Philippine Clearing House Corporation;

(c ) Act as correspondent for other financial institutions;

(d) Act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue, Social Security System, and the Bureau of Customs;

(e) Act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the thrift bank is located, subject to such guidelines as may be established by the Monetary Board;

(f) Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the Philippines, and other government-owned or-controlled corporations. Said institutions shall specify the nature of paper deemed acceptable for rediscount, as well as rediscounting rate to be charged by any of these institutions; and

(g) Issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan.

Such mortgage and chattel mortgage certificates shall be issued exclusively in national currency and exclusively for the financing of equipment loans, mortgage loans for the acquisition of machinery and other fixed installations, conservation, enlargement or improvement of productive properties and real estate mortgage loans for: (1) the construction, acquisition, expansion or improvement of rural and urban properties; (2) the refinancing of similar loans and mortgages; and (3) such other purposes as may be authorized by the Monetary Board.

A thrift bank shall coordinate the amount and maturities of its certificates with those of its loans, so as to ensure adequate cash receipts for the payment of principal and interest at the time they become due. The bank shall accept its own certificates at least at the actual price of issue, in any prepayment of loans which mortgage or chattel mortgage debtors may wish to make: Provided, That the date of maturity of the certificates is not later than the date on which the payment would otherwise become due, in the absence of the aforesaid prepayment;

(h) Purchase, hold and convey real estate under the same conditions as those governing commercial banks as specified under Section 25 of Republic Act No. 337;

Engage in quasi-banking and money market operations;

Open domestic letters of credit;

Extend credit facilities to private and government employees: Provided, That in the case of a borrower who is a permanent employee or wage earner, the treasurer, cashier or paymaster of the office employing him is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from his salary, wage or income pursuant to the terms of his loan, to remit deductions to the thrift bank concerned, and collect such reasonable fee for his services;

Extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribed; and

Offer other banking services as provided in Section 72 of Republic Act No. 337 and Republic Act No. 6426, as amended.

Thrift banks may perform the services under subsections (b), (d), (e), (g) and (i) only upon prior approval of the Monetary Board.

Nothing in this Section shall be construed as precluding a thrift bank from performing, with prior approval of the Monetary Board, commercial banking services, or from operating under an expanded banking authority, nor from exercising, whenever applicable and not inconsistent with the provisions of this Act and Bangko Sentral regulations, and such other powers incident to a corporation.

Sec. 11. Limitations on Lending Authority. Except as the Monetary Board may otherwise prescribe, the direct indebtedness to thrift banks of any person, company, corporation, or firm, including the indebtedness of members of a partnership and association, for money borrowed, excluding: (a) loans secured by obligations of the Bangko Sentral; (b) loans fully guaranteed by the government as to the payment of principal and interest; (c) loans to the extent covered by the hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines; and (d) other loans or credits as the Monetary Board may, from time to time, specify as non-risk assets, which shall in no time exceed fifteen percent (15%) of unimpaired capital and surplus of the bank.

Notwithstanding the provisions of the preceding paragraph and subject to such regulations as the Monetary Board may prescribe, the total indebtedness of any borrower to the bank may amount to a further fifteen percent (15%) of the unimpaired capital and surplus of such bank provided the additional indebtedness is for the purpose of financing subdivision or housing development, medium - and low-income borrowers and agriculture on a fully secured basis.The term "indebtedness" as used herein, shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such bank and liability of the endorser, drawer or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such bank; and shall include in the case of liabilities of a partnership or association the liabilities of the several members thereof; and shall include in the case of liabilities of a corporation, all liabilities of all the subsidiaries thereof in which such corporation owns or controls a majority interest: Provided, That even if the parent corporation, partnership or association has no liability to the bank, the Monetary Board may prescribe the combination of liabilities of subsidiary corporations or members of the partnership or association under certain circumstances, including but need not be limited to any of the following situations: (a) the parent corporation, partnership or association guarantees the repayment of liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association; or (c) the subsidiaries through separate entities operate merely as departments or divisions of a single entity: Provided, further, That the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial and business paper actually owned by the person negotiating the same, shall not be considered as money borrowed for the purpose of this Section: Provided, finally, That certain types of contingent liabilities of borrower may be included among the total liabilities as may be determined by the Monetary Board.

Loan accommodations granted by thrift banks to any other bank, as well as deposits maintained by them in any bank licensed to do business in the Philippines, shall be subject to the loan limit of any single borrower as herein prescribed.

Sec. 12. Investment in Allied Undertakings. Subject to such guidelines as may be established by the Monetary Board, thrift banks may invest in equities of allied undertakings as hereinafter enumerated: Provided, That: (a) the total investment in equities shall not exceed twenty-five (25%) of the worth of

the thrift bank; (b) the equity investment in any single enterprise shall be limited to fifteen percent (15%) of the net worth of the thrift bank; (c) the equity investment of the thrift bank in any single enterprise shall remain a minority holding in that enterprise; and (d) the equity investment in other banks shall be subject to the same provisions governing similar investments of commercial banks and shall be deducted from the investing bank's net worth for the purpose of computing of the prescribed ratio as provided in Section 9 hereof: Provided, further, That equity investments shall not be permitted in non-related activities. Where the allied activity is a wholly-or majority-owned subsidiary of the thrift bank, the Bangko Sentral may subject it to examination.

Investment in allied undertaking shall include institutions engaged in the following activities:

Banking and financing;Warehousing and other post-harvesting activities;(c ) Fertilizer and agricultural chemical and pesticides distribution;(d) Form equipment distribution;(e) Trucking and transportation of agricultural products;(f) Marketing of agricultural products;(g) Leasing; and(h) Other undertakings as may be determined by the Monetary Board.

CHAPTER V SUPERVISION

Sec. 13. Supervisory Powers of the Monetary Board. The power to supervise the operation of any thrift bank by the Monetary Board shall consist in placing limits to the maximum credit allowed to any individual borrower; in indicating the manner in which technical assistance shall be extended to thrift banks; in imposing a uniform accounting system and manner of keeping the accounts and records of thrift banks; in instituting periodic surveys of loans and lending procedures, audits, test-check of cash and other transactions of the thrift banks; in instituting periodic surveys of loans and lending procedures, audits, test-check of cash and other transactions of the thrift banks; in conducting training courses for personnel of thrift banks; and, in general, in supervising the business operations of the thrift banks.

The Bangko Sentral shall have the power to enforce the laws, orders, instructions, rules and regulations promulgated by the Monetary Board applicable to thrift banks; to require thrift banks, their directors, officers and agents to conduct and manage the affairs of the thrift bank in a lawful and orderly manner; and upon proof that the thrift bank or its board of directors or officers are conducting and managing the affairs of the bank in a manner contrary to laws, orders instructions, rules and regulations promulgated by the Monetary Board or in a manner substantially prejudicial to the interest of the government, depositors, creditors, or the general public, to appoint a conservator pursuant to Section 29 of Republic Act No. 7653 without prejudice to the prosecution of persons responsible for such violations under the provisions of Sections 36 and 37 of Republic Act No. 7653.

The director and examiners of the department of Bangko Sentral charged with the supervision of thrift banks are hereby authorized to administer oaths to any director, officer or employee of any thrift bank or to any voluntary witness and to compel the presentation of all books, documents, papers or records necessary in his or their judgment to ascertain the facts relative to the true conditions of any thrift bank or to any loan.

CHAPTER VI INCENTIVES

Sec. 14. Reserve Requirement Differential. Reserve requirement imposed on thrift banks by the Monetary Board shall enjoy equitable preferential terms over those imposed on commercial banks: Provided, That the Monetary Board may change reserve differentials for the purpose of stimulating economic growth in the countryside, thereby promoting national economic development.

Sec. 15. Liberalized Branching Rules. Thrift banks shall have unrestricted branching right within the region, free from any assessment or surcharges required in setting up a branch, but under coordination with the Bangko Sentral which will have to assess that there are qualified personnel, control and procedures to operate the branch.

Sec. 16. Notices of Statement of Condition. Subject to Monetary Board approval, a thrift bank may publish its statement of condition in a newspaper of general circulation, or post it in the most conspicuous area of its premises, municipal public market, barangay hall and barangay public market it there be any, where the thrift bank concerned is located.

CHAPTER VII EXEMPTIONS

Sec. 17. Tax Exemptions. All thrift banks, whether created or organized under this Act or in operation as of the date of effectivity of this Act, shall be exempt from payment of all taxes, fees and charges of whatever nature and description, except the corporate income taxes and local taxes, fees and charges for a period of five (5) years, counted from the date of commencement of operations for thrift banks created under this Act and from the date of the effectivity of this Act for existing thrift banks.

Sec. 18. Exemption from Publication Requirement. The foreclosure of mortgage covering loans granted by thrift banks and executions of judgments thereon involving real properties and levied upon by a sheriff shall be exempt from publication requirements where the total amount of the loan, excluding interest due and unpaid, does not exceed One hundred thousand pesos (P100,000) or such amount as the Monetary Board may prescribe, as may be warranted by the prevailing economic conditions and by the nature of service of customers served by each category of the thrift bank. It shall be sufficient publication in such cases if the notice of foreclosure and execution of judgment are posted in the conspicuous area of a thrift bank's premises, municipal building, the municipal public market, the barangay hall, and the barangay public market, if there by any, where the land mortgaged is situated within a period of sixty (60) days immediately preceding the public auction of the execution of judgment. Proof of publication as required herein shall be accomplished by an affidavit of the sheriff or officer conducting the foreclosure sale or execution of judgment and shall be attached with the records of the case.

A thrift bank shall be allowed to foreclose lands mortgaged to it: Provided, That said lands shall be covered under Republic Act No. 6657.

Sec. 19. Exemption from Notarial Charges. Any metropolitan, municipal, or municipal circuit trial court judge in his capacity as notary public ex officio shall administer the oath to or acknowledge the instrument of any thrift bank and its borrowers or mortgagor free from all charges, fees and documentary stamp tax, collectible under existing laws, relative to any loan or transaction not exceeding Fifty thousand pesos (P50,000) or such amount as the Secretary of Finance, upon recommendation of the Monetary Board, may prescribe as may be necessary to promote and expand the economy.

Sec. 20. Exemption from Registration Fees. Any register of deeds shall accept from any thrift bank and its borrowers and mortgagors for registration, free from all charges, fees and documentary stamp tax, collectible under existing laws, any instrument, whether voluntary or involuntary, relating to loans or transactions extended by any thrift bank in an amount not exceeding Fifty thousand pesos (P50,000): Provided, however, That charges, if any shall be collectible on the amount in excess of Fifty thousand pesos (P50,000); and that an instrument related to assignments of several mortgages consolidated in a single deed, if any, shall be levied only on the amount in excess of Fifty thousand pesos (P50,000) of the consideration in the assignment of each mortgage, or such amount as the Secretary of Finance, upon recommendation of the Monetary Board, may prescribe as may be necessary to promote and expand the economy.

CHAPTER VIII PROHIBITIONS

Sec. 21. Prohibited Acts. Without prejudice to any prosecution under any law which may have been violated, a fine of not more than Ten thousand pesos (P10,000) or imprisonment for not less than six (6) months but not more than ten (10) years, or both, at the discretion of the court, shall be imposed upon:

Any officer, employee, or agent of a thrift bank who shall:

Make false entries in any bank report or statement thereby affecting the financial interest of, or causing damage to, the bank or any person; or

Without order of a court of competent jurisdiction, disclose any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; or

Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan from said bank; or

Overvalue or aid in the overvaluing any security for the purpose of influencing in any way the action of the bank on any loan; or

Appear and sign as guarantor, indorser, or surety for loans granted; or

Violate any provision of this Act.

Any applicant for a loan from, or borrower of a thrift bank who shall:

Misuse, misapply or divert the proceeds of the loan obtained by him from its declared purpose; or

Fraudulently overvalue property offered as security for a loan from said bank; or

Give out or furnish false or willful misinterpretation of material facts for the purpose of obtaining, renewing, or increasing a loan extending the period thereof; or

Attempt to defraud the said bank in the event of court action to recover the loan; or

Offer any officer, employee or agent of a thrift bank a gift, fee, commission or other forms of compensation in order to influence such bank personnel into approving a loan application; or

Dispose or encumber the property offered as security for the loan.

(c ) Any examiner, or officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the government who is assigned to examine, supervise, assist or render technical service to thrift banks and who shall connive or aid in the commission of the same.

(d) Any metropolitan, municipal, or municipal circuit trial court judge or register of deeds who shall demand or accept, directly or indirectly, any gift, fee, commission, or any other form of compensation in connection with the service, or shall arbitrarily and without reasonable cause delay the acknowledgment or administration of oath or the registration of documents required to be performed by said judge or by said register of deeds shall be punished with a fine of not more than One thousand pesos (P1,000) or by imprisonment of not more than one (1) year, or both, at the discretion of the court.

(e) Any bank not organized under this Act and any person, association, or corporation doing the business of banking, not authorized under this Act or existing laws which shall use the words "Development Bank," "Savings Bank," "Mortgage Bank," "Savings and Mortgage Bank," or "Savings and Loan Association," as part of the name or title of such bank or of such person, association, or corporation, shall be punished by a fine of not less than One hundred pesos (P100), but in no case to exceed Thirty thousand pesos (P30,000), for each day during which the said words are so used.

CHAPTER IX GENERAL PROVISIONS

Sec. 22. Minors as Depositors. Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interest: Provided, however, That if any guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.

Sec. 23. Return of Deposits. Deposits shall be returned to the depositors or to their legal representatives in the manner and at the time and under the conditions which shall be determined by the board of directors and stipulated in regulations which shall be in conformity with laws and with such regulations as the Monetary Board may prescribe.

Sec. 24. Deposit Insurance. Deposit in thrift banks shall be eligible for insurance coverage under Republic Act No. 3591, as amended.

Sec. 25. Annual Fees. Consistent with the provisions of Section 28 of Republic Act No. 7653, any thrift bank organized under this Act may, pursuant to regulations promulgated for the purpose by the Monetary Board, be required to contribute to the Bangko Sentral an annual fee in an amount to be determined by the Monetary Board.

Sec. 26. Implementation. For the purpose of carrying the objectives of this Act, the Bangko Sentral is authorized to require the services and facilities of any department or instrumentality of the government or any officer or employee of any such department or government instrumentality.

Sec. 27. Annual Report. The Monetary Board shall submit a report to the Congress of the Philippines at the end of each calendar year of all the rules and regulations promulgated by it in accordance with

the provisions of this Act, as well as its other actuations in connection with thrift banks together with an explanation of its reasons therefor and recommendations on legislative actions.

Sec. 28. Parity Clause Under the Same Circumstances. The incentives granted shall be enjoyed by financial institutions giving the same services for countryside lending and development under such terms as may be equitable and as may be defined by the Monetary Board.

Sec. 29. Separability Clause. If any provision of this Act or the application thereof to any person or circumstances is held invalid, the other provisions of this Act and the application of such provisions to other persons and circumstances, shall not be affected thereby.

Sec. 30. Repealing Clause. Republic Act No. 4093, Republic Act No. 3779 to the extent that it applies to thrift banks, and Chapter 5 of Republic Act No. 337 are hereby repealed. Any law or parts of any law inconsistent with the provisions of this Act are hereby repealed. In all matters affecting the price stability of the peso, the provisions of Republic Act No. 7653 shall prevail.

Sec. 31. Applicability of Other Laws. The provisions of Republic Act No. 7653 and Republic Act No. 337, as amended, insofar as they are applicable and not in conflict with any provision of this Act, shall apply to thrift banks organized hereunder.

Sec. 32. Effectivity. This Act shall take effect fifteen (15) days following the completion of its publication in the Official Gazette or in two (2) national newspapers of general circulation.

Rural Banks

Rural Banks Act (RA No. 7353)

AN ACT PROVIDING FOR THE CREATION, ORGANIZATION AND OPERATION OF RURAL BANKS, AND FOR OTHER PURPOSESApril 2, 1992

AN ACT PROVIDING FOR THE CREATION, ORGANIZATION AND OPERATION OF RURAL BANKS, AND FOR OTHER PURPOSES

Sec. 1. This Act shall be known and cited as the ''Rural Banks Act of 1992."

Sec. 2. The State hereby recognizes the need to promote comprehensive rural development with the end in view of attaining a more equitable distribution of opportunities, income and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and in expanding productivity as a key to raising the quality of life for all, especially the under-privileged.

Towards these ends, the State hereby encourages and assists in the establishment of a rural banking system designed to make needed credit available and readily accessible in the rural areas on reasonable terms.

Sec. 3. In furtherance of this policy, the Monetary Board of the Central Bank of the Philippines shall formulate the necessary rules and regulations governing the establishment and operation of rural banks for the purpose of providing adequate credit facilities to farmers and merchants, or to cooperatives of such farmers and merchants, or to cooperates of such farmers and merchants and, in general, to the people of the rural communities, and to supervise the operation of such banks.

Sec. 4. No rural bank shall be operated without a Certificate of Authority from the Monetary Board of the Central Bank. Rural banks shall be organized in the form of stock corporations. Upon consultation with the rural banks in the area, duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize a rural bank and/or subscribe to the shares of stock of any rural bank: Provided, That a cooperative or corporation owning or controlling the whole or majority of the voting stock of the rural bank shall be subject to special examination and to such rules and regulations as the Monetary Board may prescribe. With the exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act No. 337, as amended, and of Filipino-controlled domestics banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or, cooperatives qualified under Philippine laws to own and hold such capital stock: Provided, That any provisions of existing laws to the contrary notwithstanding, stockholdings in a rural bank shall be exempt from any ownership ceiling for a period of ten (10) years from the approval of this Act: Provided, further, That any such exemption shall require the approval of the Monetary Board. If subscription of private shareholders to the capital stock of a rural bank cannot, be secured or is not available, or insufficient to meet the normal credit needs of the locality, the Land Bank of the Philippines, the Development Bank of the Philippines, or any government-owned or controlled bank or financial institution, on representation of the said private share-holders but subject to the investment guidelines, policies and procedures of the bank or financial institution and upon approval of the Monetary Board of the Central Bank, shall subscribe to the capital stock of such rural bank, which shall be paid in full at the time of subscription, in an amount equal to the fully paid subscribed and unimpaired capital of the private stockholders or such amount as the Monetary Board may prescribe as may be necessary to promote and expand rural economic development: Provided, however, That such shares of stock subscribed by the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution may be sold at any time at market value to private individuals who are citizens of the Philippines: Provided, finally, That in the sale of shares of stock subscribed by the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution, the registered stockholders shall have the right of pre-emption within one (1) year from the date of offer in proportion to their respective holdings, but in the absence such buyer, preference, however, shall be given to residents of the locality or province where the rural bank is located.

Sec. 5. All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to office: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank.

No director or officer of any rural bank shall, either directly or indirectly, for himself or as the representative or agent of another, borrow any of the deposits or funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank to others, or in any manner be an obligor for money borrowed from the bank or loaned by it except with the written approval of the majority of the directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be transmitted forthwith to the appropriate supervising department. The director/officer of the bank who violates the provisions of this section shall be immediately dismissed from office and shall be penalized in accordance with Section 26 of this Act.

The Monetary Board may regulate the amount of credit accommodations that may be extended directly to the directors, officers or stockholders or rural bank of banking institutions. However, the outstanding credit accommodations which a rural bank may extend to each of its stock-holders owning two percent (2%) or more of the subscribed capital stock, its directors, or officers shall be limited to an amount equivalent to the respective outstanding deposits and book value of the paid-in capital contributions in the bank.

Sec. 6. Loans or advances extended by rural banks organized and operated under this Act shall be primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families owning or cultivating land dedicated to agricultural production as well as the normal credit needs of cooperatives and merchants. In the granting of loans, the rural bank shall give preference to the application of farmers and merchants whose cash requirements are small.

Loans may be granted by rural banks on the security of lands without Torrens Title where the owner of private property can show five (5) years or more of peaceful, continuous and uninterrupted possession in concept of owner; or of portions of friar land estates or other lands administered by the Bureau of Lands that are covered by sales contracts and the purchasers have paid at least five (5) years installment thereon, without the necessity of prior approval and consent by the Director of Lands or of portions of other estates under the administration of the Department of Agrarian Reform or other governmental agency which are likewise covered by sales contracts and the purchasers have paid at least five (5) years installment thereon, without the necessity of prior approval and consent of the Department of Agrarian Reform or corresponding governmental agency; or of homesteads or free patent lands pending the issuance of titles but already approved, the provisions or any law or regulations to the contrary notwithstanding: Provided, That when the corresponding titles are issued, the same shall be delivered to the Register of Deeds of the province where such lands are situated for the annotation of the encumbrance: Provided, further, That in the case of lands pending homestead or free patent titles, copies of notices for the presentation of the final proof shall also be furnished the creditor rural bank and, if the borrower applicants fail to present the final proof within thirty (30) days from date of notice, the creditor rural bank may do so for them at their expense: Provided, furthermore, That the applicant for homestead or free patent has already improvements on the land and the loan applied for is to be used for further development of the same or for other productive economic activities: Provided, finally, That the appraisal and verification of the status of a land is a full responsibility of the rural bank and any loan granted on any land which shall be found later to be within the forest zone shall be for the sole account of the rural bank.

The foreclosure of mortgages covering loans granted by rural banks and executions of judgment thereon involving real properties levied upon by a sheriff shall be exempt from the publications in newspapers now required by law where the total amount of loan, excluding interests due and unpaid, does not exceed One hundred thousand pesos (P100,000) or such amount as the Monetary Board may prescribed as may be warranted by prevailing economic conditions, It shall be sufficient publication in such cases if the notices of foreclosure and execution of judgment are posted in the most conspicuous area of the municipal building, the municipal public market, the rural bank, the barangay hall, and the barangay public market, if any, where the land mortgaged is situated during the period of sixty (60) days immediately preceding the public auction of execution of judgment. Proof of publication as required herein shall be accomplished by an affidavit of the sheriff or officer conducting the foreclosure sale or execution of judgment and shall be attached with the records of the case: Provided, That when a homestead or free patent is foreclosed, the homesteader or free patent holder, as well as his heirs shall have the right to redeem the same within one (1) year from the date of foreclosure in the case of land not covered by a Torrens Title or one (1) year from the date of the registration of the foreclosure in the case of land covered by a Torrens Title: Provided, finally, That in any case, borrowers, especially those who are mere tenants, need only to secure their loans with the produce corresponding to their share.

A rural bank shall be allowed to foreclose lands mortgaged to it: Provided, That said lands shall be covered under Republic Act No. 6057.

Sec. 7. With the view to ensuring the balanced rural economic growth and expansion, rural banks may, within limits and conditions fixed by the Monetary Board, devote a portion of their loan able funds to meeting the normal credit needs of small business enterprises: Provided, That loans shall not exceed fifteen percent (15%) of the net worth of a rural bank or such amount as the Monetary Board may prescribe as may be warranted by prevailing economic conditions, and of essential enterprises or industries, other than those which are strictly agricultural in nature.

Sec. 8. To provide supplemental capital to any rural bank until it has accumulated enough capital of its own or stimulate private investments in rural banks, the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank, or financial institution shall subscribe within thirty (30) days to the capital stock of any rural bank from time to time in an amount equal to the total equity investment of the private shareholders which shall be paid in full at the time of the subscription or such amount as may be necessary to promote and expand rural economic development: Provided, however, That shares of stock issued to the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution, may, pursuant to this section, at any time, be paid off at par and retired in whole or in part if the rural bank has accumulated enough capital strength to permit retirement of such shares; or if an offer is received from private sources to replace the equity investment of the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution with an equivalent investment or more in the equity of such bank. In case of retirement of stock or replacement of equity investments of the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution, the registered private shareholders of the rural bank shall have the right of preemption within one (1) year from the date of offer in proportion to their respective holdings.

Stocks held by the Land Bank of the Philippines, the Development Bank of the Philippines or by any government-owned or controlled bank or financial institution, under the terms of this section, shall be made preferred only as to assets upon liquidation and without the power to vote and shall share in dividend distributions from the date of issuance in the amount of four percent (4%) on the first and second years, six percent (6%) on the third and fourth years, eight percent (8%) on the fifth and sixth years, ten percent (10%) on the seventh and eighth years and twelve percent (12%) on the ninth to the fifteenth years without preference: Provided, however, That if such stock of the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution is sold to private share holders, the same may be converted into common stock of the class provided for in Section 10 hereof: Provided, further, That pending the amendment of the Articles of Incorporation of the rural bank, if necessary, for the purpose of reflecting the conversion into common stock of preferred stock sold to private stockholders, the transfer shall be recorded by the rural bank in the stock and transfer book and such shareholders shall thereafter enjoy all the rights and privileges of common stockholders. The preferred stocks so transferred shall be surrendered and canceled and the corresponding common stocks shall be issued.

The corporate secretary of the rural bank shall submit to the Central Bank and the Securities and Exchange Commission a report on every transfer of preferred stock to private shareholders; and such report received by the Securities and Exchange Commission shall form part of the corporate records of the rural bank. When all the preferred shares of stock of a rural bank have been sold to private shareholders, the Articles of Incorporation of the rural bank shall be amended to reflect the conversion of the preferred shares of stock into common stock. For this purpose, the President, the corporate secretary, and a majority of the Board of Directors shall issue a certificate that all preferred shares have been sold to private shareholders which, together with a copy of the Articles of Incorporation, as amended, duly certified correct by the President, corporation, as amended, duly certified correct by the President, corporate secretary, and a majority of the Board of Directors, shall be filed with the Securities and Exchange Commission, which shall attach the same to the same to the original Articles of Incorporation on file with said office.

The Securities and Exchange Commission shall not register the amended Articles of Incorporation unless accompanied by the Certificate of Authority required under Section 9 of Republic Act No. 337, as amended.

All supervised past due and restructured past due loans, including those covered under existing rehabilitation programs of the Central Bank, and fifty percent (50%) of non-supervised past due and restructured past due loans including accrued interest thereon of rural banks organized under Republic Act No. 720, as amended, as of December 31, 1986, shall be converted into preferred stocks of the rural bank and issued in favor of the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution;; Provided, That penalties thereon are hereby waived except accrued interest on arrearages: Provided, further, That the

equivalent penalties due from corresponding farmers are likewise waived: Provided, further, That rural banks that prefer to settle their arrearages under a plan of payment or a combination of both plan of payment and conversion may do so in accordance with existing regulations and provisions of this Act: Provided, furthermore, That rural banks shall match these preferred stocks with private equity in equal annual installments over a period of fifteen (15) years to begin three (3) years after conversion: Provided, finally, That the Central Bank, the Land Bank of the Philippines, the Development Bank of the Philippines and any government-owned or controlled bank or financial institution shall continue to rediscount subject to their respective programs, policies and guidelines against papers evidencing a loan granted by a rural bank in order to achieve the declared policy and promote the objectives of this Act.

Sec. 9. The Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution may obtain from any source as may be authorized under existing laws and regulations such amounts as it may require for the purpose of subscribing to the shares of stock of rural banks, and of granting loans to such banks as provided in Section 13 of this Act.

Sec. 10. Stock certificates shall be issued to represent the contributions to capital stock of the rural bank by the Government through the Land Bank of the Philippines, the Development Bank of the Philippines or through any government-owned or controlled bank or financial institution, and by qualified persons under such terms and conditions as the Monetary Board may prescribe. The powers of the Monetary Board over rural banks shall extend to prescribing the amount, value and class of stock issued by any rural bank, organized under this Act.

Sec. 11. The power to supervise the operation of any rural bank by the Monetary Board as herein indicated shall consist in placing limits to the maximum credit allowed to any individual borrower; in prescribing the interest rate; in determining the loan period and loan procedures; in indicating the manner in which technical assistance shall be extended to rural banks; in imposing a uniform accounting system and manner of keeping the accounts and records of rural banks; in instituting periodic surveys of loan and lending procedures, audits, test-check of cash and other transactions of the rural banks; in conducting training courses for personnel of rural banks; and, in general in supervising the business of operations of the rural banks.

The Central Bank shall have the power to enforce the laws, orders, instructions, rules and regulations promulgated by the Monetary Board applicable to rural banks; to require rural banks, their directors, officers and agents to conduct and manage the affairs of the rural banks in a lawful and orderly manner; and, upon proof that the rural bank or its Board of Directors, or officers are conducting and managing the affairs of the bank in a manner contrary to laws, order, instructions, rules and regulations promulgated by the Monetary Board or in a manner substantially prejudicial to the interest of the Government, depositors or creditors, to take over the management of such bank when specifically authorized to do so by the Monetary Board after due hearing process until a new board of directors and officers are elected and qualified without prejudice to the prosecution of the persons responsible for such violations under the provisions of Sections 32, 33 and 34 of Republic Act No. 265, as amended.

The management of the rural bank by the Central Bank shall be without expense to the rural bank, except such as is actually necessary for its operation, pending the election and qualification of a new board of directors and officers to take place of those responsible for the violations or acts contrary to the interest of the Government, depositors or creditors.The director and the examiners of the department of the Central Bank charged with the supervision of rural banks are hereby authorized to administer oaths to any director, officer or employee of any rural bank or to any voluntary witness and to compel the presentation of all books, documents, papers or records necessary in his or their judgment to ascertain the facts relative to the true condition of any rural bank or to any loan.

Sec. 12. In addition to the operations specifically authorized in this Act, any rural bank may:

Accept saving and time deposits;Open current or checking accounts, provided the rural bank has net assets of at least Five million pesos(P5,000,000) subject to such guidelines as may be established by the Monetary Board;Act as corresponding for other financial institutions;Act as a collection agent;Act as official depository of municipal, city or provincial funds in the municipality, city or province where it is located, subject to such guidelines as may be established by the Monetary Board;Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the Philippines, or any other banking institution, including its branches and

agencies. Said institution shall specify the nature of paper deemed acceptable for rediscount, as well as the rediscount rate to be charged by any of these institutions;Offer other banking services as provided in Section 72 of Republic Act No. 337, as amended; andExtend financial assistance to private and public employees in accordance with the provisions of Section 5 of Republic Act No. 3778, as amended.

With written permission of the Monetary Board of the Central Bank, any rural bank may act as trustee over estates or properties of farmers and merchants.

Nothing in this section shall be construe as precluding a rural bank from performing with prior approval of the Monetary Board, all the services authorized for savings and mortgage banks, or for commercial bank, under Republic Act No. 337, as amended, or from operating under an expanded banking authority as provided in Section 21-B of the same Act.

Sec. 13. Subject to such guidelines as may be established by the Monetary Board, rural banks may invest in equities of allied undertakings is hereinafter enumerated: Provided, That: (a) the total investment in equities shall not exceed twenty-five percent (25%) of the worth of the rural bank; (b) the equity investment in any single enterprise shall be limited to fifteen percent (15%) of the net worth of the rural bank; and (c) the equity investment holding in that enterprise: Provided, further, That equity investment shall not be permitted in non-related activities.

Allied undertakings shall include:

Banks, financial institutions and non-bank financial intermediaries;Warehousing and other post-harvest facilities;Fertilizer and agricultural chemical and pesticides distribution;Farm equipment distribution;Trucking and transportation of agricultural products;Marketing of agricultural products;Leasing; andOther undertakings as may be determined by the Monetary Board.

Sec. 14. The Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution shall, within sixty (60) days of certification of the Monetary Board, which shall be final, extend to a rural bank a loan or loans from, time to time repayable in ten (10) years, with concessional rates of interest, against security which may be offered by any stock or stockholders of the rural bank: Provided:

That the Monetary Board is convinced that the resources of the rural bank are inadequate to meet the legitimate credit requirements of the locality wherein the rural bank is established;That there is a dearth of private capital in the locality; andThat it is not possible for the stockholders of the rural bank to increase the paid-up capital thereof.

Sec. 15. All rural banks created and organized under the provisions of this Act shall be exempt from the payment of all taxes, fees and charges of whatever nature and description, except the corporate income tax and local taxes, fees and charges, for a period of five (5) years from the date of commencement of operations.

All rural banks in operations as of the date of approval of this Act shall be exempt from the payment of all taxes, fees and charges of whatever nature and description, except the corporate income tax and local taxes, fees and charges, for a period of five (5) years from the approval of this Act.

Sec. 16. In an emergency or when a financial crisis is imminent, the Central Bank may give a loan to any rural bank against assets of the rural bank which may be considered acceptable by a concurrent vote of at least four (4) members of the Monetary Board.

In normal times, the Central Bank may rediscount against paper evidencing a loan granted by a rural bank to any of its customers which can be liquefied within a period of three hundred sixty (360) days: Provided, however, That for the purpose of implementing a nationwide program of agricultural and industrial development, rural banks are hereby authorized, under such terms and conditions as the Central Bank shall prescribe, to borrow, on a medium-or long-terms basis, funds that the Central Bank or any other government financing institution shall borrow from the Development Bank of the Philippines or other international or foreign-lending institutions for the specific purpose of financing the abovestated agricultural and industrial program. Repayment of loans obtained by the Central Bank of the Philippines or any other government financing institution from said foreign-lending institutions under this section shall be guaranteed by the Republic of the Philippines.

Sec. 17. Deposits of rural banks with government-owned or controlled financial institutions like the Land Bank of the Philippines, the Development Bank of the Philippines, and the Philippine National Bank are exempted from Single Borrower's Limit imposed by the General Banking Act.In areas where there are no government banks, rural banks may deposit in private banks more than the amount prescribed by the Single Borrower's Limit, subject to Monetary Board regulations.

Sec. 18. To encourage consolidation and merges of rural banks, if there are five (5) or more rural banks within the region that merge and consolidate within three (3) years from the enactment of this Act, the merged or consolidated entity will be given the following incentives for a period of seven (7) years:

Its deposits liabilities shall be subjected to only one-third (1/3) of reserves normally, required for rural banks:

Its reserve requirement can all be maintained under interest bearing government securities but kept unencumbered with government financial institutions or the Central Bank; and

It shall have unrestricted branching right within the region, free from any assessment or surcharges required in setting up a branch but under coordination with the Central Bank which will have to assess that there are qualified personnel, control and procedures to operate the branch.

Sec. 19. The Central Bank of the Philippines shall extend technical assistance to any rural bank in the process of organization or during the course of operations whenever it is requested to do so or whenever the Monetary Board deems it necessary to preserves, protect and promote the objectives of this Act: Provided, however, That said assistance shall be without cost or obligation on the part of the rural bank.

Sec. 20. Any city or municipal trial court judge in his capacity as notary public ex officio shall administer the oath to or acknowledge the instruments of any rural bank and its borrowers or mortgagors, free from all charges, fees and documentary stamp tax, collectible under existing laws, relative to any loan or transaction not exceeding Fifty thousand (P50,000), or such amount as the Secretary of Finance, upon recommendation of the Monetary Board may prescribe as may be necessary to promote and expand the rural economy.

Sec. 21. Any Register of Deeds shall accept from any rural bank and its borrowers and mortgagors for registration free from, all charges, fees and documentary stamp tax, collectible under existing laws, any instruments, whether voluntary or involuntary, relating to loans or transaction extended by a rural bank in an amount not exceeding Fifty thousand pesos (P50,000): Provided, however, That charges, if any shall be collectible on the amount in excess of Fifty thousand pesos (P50,000); and an instruments related to assignments of several mortgages consolidated in a single deed, if any, shall be devied only on the amount in excess of Fifty thousand pesos (P50,000) of the consideration in the assignment of each mortgage, or such amount as the Secretary of Finance, upon recommendation of the Monetary Board, may prescribe as may be necessary to promote and expand the rural economy.

Sec. 22. Any rural bank organized under this Act may, pursuant to regulations promulgated for the purpose by the Monetary Board, be required to contribute to the Central Bank an annual fee to help defray the cost of maintaining the appropriate supervising within the Central Bank in an amount to be determined by the Monetary Board but in no to exceed one-fortieth of one percent (1/40 of 1%) of its average total assets during the preceding year, as shown on its end-of-month balance sheets after deducting its cash on hand and amounts due from banks, including the Central Bank.

Sec. 23. Every individual acting as officer or employee of a rural bank and handling funds or securities amounting to Five thousand pesos (P5,000) or more, in any one (1) year, shall be covered by an adequate bond as determined by the Monetary Board; and the bylaws of the rural bank may also provide for the bonding of other employees or officers of rural banks.

Sec. 24. For the purpose of carrying out the objectives of this Act, the Central Bank is authorized to require the services and facilities of any department or instrumentality of the Government or any officer or employee of any such department or government instrumentality.

Sec. 25. Rural banks organized and operated under the provisions of this Act shall acts agent of the Philippine National Bank, the Land Bank of the Philippines and the Development Bank of the Philippines in places where these banks have no offices, subject to accreditation guidelines.

Sec. 26. Without prejudice to any prosecution under any law which may have been violated, a fine of not more than Ten thousand pesos (P10,000) or imprisonment for not less than six (6) months but more than ten (10) years, or both, at the discretion of the court, shall be imposed upon:

Any officer, employee, or agent of a rural bank who shall:

Make false entries in any bank report or statement thereby affecting the financial interest of, or causing damage to, the bank or any without person; or

Without order of a court of competent jurisdiction, disclose any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; or

Accept gifts, fees or commission or any other form of renumeration in connection with the approval of a loan from said bank; or

Overvalue or aid in overvaluing any security for the purpose of influencing in any way the action of the bank on any loan; or

Appear and sign as guarantor, indorser, or surety for loans granted; or

Violate any of the provisions of this Act.

Any applicant for a loan from, or borrower of a rural bank who shall:

Misuse, misapply, or divert the proceeds of the loan obtained by him from its declared purpose; or

Fraudulently overvalue property offered as security for a loan from said bank; or

Give out or furnish or willfull mispresentation of materials facts for the purpose of obtaining, renewing, or increasing a loan or extending the period thereof; or

Attempt to defraud the said bank in the event of court action to recover a loan; or

Offer any officer, employee or agent of a rural bank as a gift, fee, commission or other form of compensation in order to influence such bank personnel into approving a loan application; or

Dispose or encumber the property or the crops offered as security for the loan.

Any examiner, or officer or employee of the Central Bank of the Philippines or any department, bureau, office, branch or agency of the Government who is assigned to examine, supervise, assist or render technical service to rural banks and who has shall connive or aid in the commission of the same.

Sec. 27. Any municipal trial court judge or register of deeds who shall demand or accept, directly or indirectly, any gift, fee, commission or other form of compensation in connection with the service, or shall arbitrarily or without reasonable cause delay the acknowledgment or administration of oath or the registration of documents required to be performed by said judge as provided in Section 20 and by said register of deeds as provided in Section 21 of this Act, shall be punished by a fine of not more than One thousand pesos (P1,000) or by imprisonment for not more than one (1) year, or both, at the discretion of the court.

Sec. 28. Any bank not organized under this Act and any person, association or corporation doing the business of banking, not authorized under this Act which use the words "Rural Bank" as part of the name or title of such bank or of such person, association, or corporation, shall be punished by a fine of not less than Fifty pesos (P50) for each day during which said words are so used.

Sec. 29. The Monetary Board of the Central Bank submit a report to the Congress of the Philippines as of the end of each calendar year of all the rules and regulations promulgated by it in accordance with the provisions of this Act, as well as its other actuations in connection with rural banks, together with an explanation of its reasons therefor.

Sec. 30. If any provision or section of this Act or the application thereof to any person or circumstances is held invalid, the other provisions or sections of this Act, and the application of such provision or section to other persons or circumstances, shall not be affected thereby.

Sec. 31. Republic Act No. 720 as amended, is hereby repealed: The provisions of Republic Act No. 265, as amended, and Republic Act No. 337, as amended, insofar as they are applicable and not in conflict with any provision of this Act, are hereby made a part of this Act.

Sec. 32. This Act shall take effect upon its approval.

Cooperative Banks

Cooperative Code (RA No. 6938)

AN ACT TO ORDAIN A COOPERATIVE CODE OF THE PHILIPPINESMarch 10, 1990

AN ACT TO ORDAIN A COOPERATIVE CODE OF THE PHILIPPINES.

CHAPTER I GENERAL CONCEPTS AND PRINCIPLES

Art. 1. Title. This Act shall be known as the "Cooperative Code of the Philippines."

Art. 2. Declaration of Policy. It is the declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. The state shall encourage the private sector to undertake the actual formation and organization of cooperatives and shall create an atmosphere that is conducive to the growth and development of these cooperatives.

Toward this end, the Government and all its branches, subdivisions, instrumentalities and agencies shall ensure the provision of technical guidance, financial assistance and other services to enable said cooperatives to develop into viable and responsive economic enterprises and thereby bring about a strong cooperative movement that is free from any conditions that might infringe upon the autonomy or organizational integrity of cooperatives.

Further, the State recognizes the principle of subsidiarity under which the cooperative sector will initiate and regulate within its own ranks the promotion and organization, training, and research, audit and support services relating to cooperatives with government assistance where necessary.

Art. 3. General Concepts. A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.

Art. 4. Cooperative Principles. Every cooperative shall conduct its affairs in accordance with Filipino culture and experience and the universally accepted principles of cooperation which include the following:

Open and Voluntary Membership Membership in a cooperative shall be voluntary and available to all individuals regardless of their social, political, racial or religious background or beliefs.

Democratic Control Cooperatives are democratic organizations. Their affairs shall be administered by persons elected or appointed in a manner agreed upon the members. Members of primary cooperatives shall have equal voting rights on a one-member-one-vote principle: Provided, however, That, in the case of secondary and tertiary cooperatives, the provisions of Article 37 of this Code shall apply.

Limited Interest in Capital Share capital shall receive a strictly limited rate of interest.

Division of Net Surplus Net surplus arising out of the operations of a cooperative belongs to its members and shall be equitably distributed for cooperative development, common services, indivisible reserve fund, and for limited interest on capital and/or patronage refund in the manner provided in this Code and in the articles of cooperation and bylaws.

Cooperative Education All cooperatives shall make provision for the education of their members, officers and employees and of the general public based on the principles of cooperation.

Cooperation Among Cooperatives All cooperatives in order to best serve the interest of their members and communities, shall actively cooperate with other cooperatives at local, national, and international levels.

Art. 5. Definition of Terms. The following terms shall mean:

Member includes a person either natural or juridical who, adhering to the principles set forth in this Code and in the articles of cooperation, has been admitted by the cooperative as member;

General Assembly shall mean the full membership of the cooperative duly assembled for the purpose of exercising all the rights and performing all the obligations pertaining to cooperatives, as provided by this Code, its articles of cooperation and bylaws;

Board of Directors shall mean that body entrusted with the management of the affairs of the cooperative under its articles of cooperation and bylaws;

Committee shall refer to any body entrusted with specific functions and responsibilities under the bylaws or resolution of the general assembly or the board of directors;

Articles of Cooperation means the articles of cooperation registered under this Code and includes a registered amendment thereof;

Bylaws means the bylaws registered under this Code and includes any registered amendment thereof;

Registration means the operative act granting juridical personality to a proposed cooperative and is evidenced by a certificate of registration;

Cooperative Development Authority means the government agency in charge of the registration and regulation of cooperatives as such, hereinafter referred to as the Authority; and

Universally Accepted Principles means that body of cooperative principles adhered to worldwide by cooperatives in other jurisdictions.

CHAPTER II ORGANIZATION AND REGISTRATION

Art. 6. Organization of Cooperatives. A cooperative may be organized and registered by at least fifteen (15) persons for any or all of the following purposes:

To encourage thrift and savings mobilization among the members;To generate funds and extend credit to the members for productive and provident purposes;To encourage among members systematic production and marketing;To provide goods and services and other requirements to the members;To develop expertise and skills among its members;To acquire lands and provide housing benefits for the members;To insure against losses of the members;To promote and advance the economic, social and educational status of the members;To establish, own, lease or operate cooperative banks, cooperative wholesale and retail complexes, insurance and agricultural/industrial processing enterprises, and public markets;To coordinate and facilitate the activities of cooperatives; andTo undertake any and all other activities for the effective and efficient implementation of the provisions of this Code.

Art. 7. Objectives of Cooperative. The primary objective of every cooperative is to provide goods and services to its members and thus enable them to attain increased income and savings, investments, productivity, and purchasing power and promote among them equitable distribution of net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing without, however, conducting the affairs of the cooperative for eleemosynary or charitable purposes.

A cooperative shall provide maximum economic benefits to its members, teach them efficient ways of doing things in a cooperative manner, and propagate cooperative practices and new ideas in business and management and allow the lower income groups to increase their ownership in the wealth of this nation.

Art. 8. Cooperatives Not in Restraint of Trade. No cooperative or method or act thereof which complies with this Code shall be deemed a conspiracy or combination in restraint of trade or an illegal monopoly, or an attempt to lessen competition or fix prices arbitrarily in violation of any of the laws of the Philippines.

Art. 9. Cooperative Powers and Capacities. A cooperative registered under this Code shall have the following powers and capacities:

To sue and be sued in its cooperative name;Of succession;To amend its articles of cooperation in accordance with the provisions of this Code;

To adopt bylaws not contrary to law, morals or public policy, and to amend and repeal the same in accordance with this Code;To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property as the transaction of the lawful affairs of the cooperative may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution:To enter into division, merger or consolidation, as provided in this Code;To join federations or unions, as provided in this Code;To accept and receive grants, donations and assistance from foreign and domestic sources; andTo exercise such other powers granted by this Code or necessary to carry out its purpose or purposes as stated in its articles of cooperation.

Art. 10. Organizing a Primary Cooperative. Fifteen (15) or more natural persons, who are citizens of the Philippines, having a common bond of interest and are residing or working in the intended area of operation may organize a cooperative under this Code.

Art. 11. Economic Survey. Every group of individuals or cooperatives intending to form a cooperative under this Code shall submit to the Cooperative Development Authority a general statement describing the structure, purposes and economic feasibility of the proposed cooperative, indicating therein the area of operation, the size of membership and other pertinent data.

Art. 12. Liability. A cooperative shall be registered under this Code, with limited liability.

Art. 13. Term. A cooperative shall exist for a period not exceeding fifty (50) years from the date of registration unless sooner dissolved or unless said period is extended. The cooperative term, as originally stated in the articles of cooperation, may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of cooperation, in accordance with this Code: Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date/dates unless there are justifiable reasons for an earlier extension as may be determined by the Cooperative Development Authority.

Art. 14. Articles of Cooperation. (1) All operatives applying for registration shall file with the Cooperative Development Authority the articles of cooperation which shall be signed by each of the organizers and acknowledged by them if natural persons, and by the presidents or secretaries, if juridical persons, before a notary public.

(2) The articles of cooperation shall set forth:

The name of the cooperative which shall include the word "cooperative";The purpose or purposes and scope of business for which the cooperative is to be registered;(c ) The term of existence of the cooperative;(d) The area of operation and the postal address of its principal office;(e) The names, nationality, and the postal addresses of the registrants;(f) The common bond of membership;(g) The list of names of the directors who shall manage the cooperative; and(h) The amount of its share capital, the names and residences of its contributors and a statement of whether the cooperative is primary, secondary or tertiary in accordance with Article 23 hereof.

(3) The articles of cooperation may also contain any other provisions not inconsistent with this Code or any related law.

(4) Four (4) copies each of the proposed articles of cooperation, bylaws, and the general statement required under Article 11 of this Code shall be submitted to the Cooperative Development Authority.

(5) No cooperative shall be registered unless the articles of cooperation is accompanied with the bonds of the accountable officers and a sworn statement of the treasurer elected by the subscribers showing that at least twenty-five per centum (25%) of the authorized share capital has been subscribed and at least twenty-five per centum (25%) of the total subscription has been paid: Provided, That in no case shall the paid-up share capital shall be less than Two thousand pesos (P2,000.00).

Art. 15. Bylaws. (1) Each cooperative to be registered under this Code shall adopt bylaws not inconsistent with the provisions of this Code. The bylaws shall be filed at the same time as the articles of cooperation.

(2) The bylaws of each cooperative shall provide:

The qualifications for admission to membership and the payment to be made or interest to be acquired as a condition for the exercise of the right of membership;

The rights and liabilities of membership;

(c ) The circumstances under which membership is acquired, maintained and lost;

(d) The procedure to be followed in cases of termination of membership;

(e) The conditions under which the transfer of a share or interest of the members shall be permitted;

(f) The rules and procedures on the agenda, time, place and manner of calling, convening, conducting meetings, quorum requirements, voting systems, and other matters relative to the business affairs of the general assembly, board of directors, and committees;

(g) The general conduct of the affairs of the cooperative, including the powers and duties of the general assembly, the board of directors, committees and the officers, and their qualifications and disqualifications;

(h) The manner in which the capital may be raised and the purposes for which it can be utilized;

The mode of custody and of investment of net surplus;

The accounting and auditing systems;

The manner of loaning and borrowing, limitations thereof;

The method of distribution of net surplus;

The manner of adopting, amending, repealing, and abrogating bylaws;

A conciliation or mediation mechanism for the amicable settlement of disputes among members, directors, officers and committee members of the cooperative; and

Other matters incident to the purposes and activities of the cooperative.

Art. 16. Registration. A cooperative formed or organized under this Code requires juridical personality from the date the Cooperative Development Authority issues a certificate of registration under its official seal. All applications for registration shall be finally disposed of by the Cooperative Development Authority within a period of thirty (30) days from the filing thereof, otherwise the application is deemed approved unless the cause of the delay is attributable to the applicant: Provided, That, in case of a denial of the application for registration, an appeal shall lie with the Office of the President within ninety (90) days from receipt of notice of such denial: Provided, further, That failure of the Office of the President to act on the appeal within ninety (90) days from the filing thereof shall mean approval of said application.

Art. 17. Certificate of Registration. A certificate of registration issued by the Cooperative Development Authority under its official seal shall be conclusive evidence that the cooperative therein mentioned is duly registered unless it is proved that the registration thereof has been canceled.

Art. 18. Amendment of Articles of Cooperation and Bylaws. Unless otherwise prescribed by this Code and for legitimate purposes, any provision or matter stated in the articles of cooperation may be amended by two-thirds (2/3) vote of all the members with voting rights, without prejudice to the right of the dissenting members to exercise their right to withdraw their membership under Articles 31 and 32.

The original and amended articles together shall contain all provisions required by law to be set out in the articles of cooperation. Amendments shall be indicated by underscoring or otherwise appropriately indicating the change or changes made and a copy thereof duly certified under oath by the cooperative secretary and a majority of the directors stating the fact that said amendment or amendments have been duly approved by the required vote of the members. All amendments to the articles of cooperation shall be submitted to the Cooperative Development Authority. The amendments shall take effect upon its approval by the Cooperative Development Authority or within thirty (30) days from the date of filing thereof if not acted upon by the Authority for a cause not attributable to the cooperative.

Art. 19. Contracts Executed Prior to Registration and Effects Thereof. Contracts executed between private persons and cooperatives prior to the registration of the cooperative shall remain valid and

binding between the parties and upon registration of the cooperative. A formal written contract shall be adopted and made in the cooperative's name or on its behalf prior to its registration.

Art. 20. Division of Cooperatives. Any registered cooperative may, by a resolution approved by a vote of two-thirds (2/3) of the members eligible to vote at a general assembly meeting, resolve to divide itself into two (2) or more cooperatives. The procedure for such division shall be prescribed in the regulations of the Cooperative Development Authority. The new cooperatives shall become legally established upon registration with the Authority: Provided, That all the requirements set forth in this Code have been complied with by the new cooperatives : Provided, further, That no division of a cooperative in fraud of creditors shall be valid.

Art. 21. Merger and Consolidation of Cooperatives.

Two (2) or more cooperatives may merge into a single cooperative which shall be one of the constituent cooperatives or may consolidate into a new single cooperative which shall be the consolidated cooperative.

No merger or consolidation shall be valid unless approved by two-thirds (2/3) of all the members eligible to vote of each of the constituent cooperatives at separate general assembly meetings. The dissenting members shall have the right to exercise their right to withdraw their membership pursuant to Articles 31 and 32.

The Cooperative Development Authority shall issue the guidelines governing the procedure of merger or consolidation of cooperatives. In any case, the merger or consolidation shall be effective upon the issuance of the certificate of merger or consolidation by the Cooperative Development Authority.

Art. 22. Effects of Merger and Consolidation. The merger or consolidation of cooperatives shall have the following effects:

The constituent cooperatives shall become a single cooperative which, in case of merger, shall be the surviving cooperative, and, in case of consolidation, shall be the consolidated cooperative;

The separate existence of the constituent cooperatives shall cease, except that of the surviving or the consolidated cooperative;

The surviving or the consolidated cooperative shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a cooperative organized under this Code;

The surviving or the consolidated cooperative shall possess all the assets, rights, privileges, immunities and franchises of each of the constituent cooperatives; and

The surviving or the consolidated cooperative shall be responsible for all the liabilities and obligations of each of the constituent cooperatives in the same manner as if such surviving or consolidated cooperative had itself incurred such liabilities or obligations. Any claim, action or proceeding pending by or against any such constituent cooperatives may be prosecuted by or against the surviving or consolidated cooperative, as the case may be. Neither the rights of creditors nor any lien upon the property of any of such constituent cooperatives shall be impaired by such merger or consolidation.

Art. 23. Types and Categories of Cooperatives.

Types of Cooperatives Cooperative may fall under any of the following types:

Credit Cooperative is one which promotes thrift among its members and creates funds in order to grant loans for productive and provident purposes;Consumers Cooperative is one the primary purpose of which is to procure and distribute commodities to members and nonmembers;(c ) Producers Cooperative is one that undertakes joint production whether agricultural or industrial;Marketing Cooperative is one which engages in the supply of production inputs to members and markets their products;Service Cooperative is one which engages in medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and power, communication and other services; andMultipurpose Cooperative is one which combines two (2) or more of the business activities of these different types of cooperatives.

Categories of Cooperatives Cooperatives shall be categorized according to membership and territorial considerations as follows:

In terms of membership, cooperative shall be categorized into:

Primary The members of which are natural persons;Secondary The members of which are primaries, andTertiary The members of which are secondaries upward to one (1) or more apex organizations.

Those cooperatives the members of which are cooperatives shall be known as federations or unions, as the case may be; and

In terms of territory, cooperatives shall be categorized according to areas of operations which may or may not coincide with the political subdivisions of the country.

Art. 24. Federation of Cooperatives.

A federation of cooperatives whose members are primary and/or secondary cooperatives with single line or multipurpose business activities may be registered under this Code for any or all of the following purposes:

Primary Purpose To carry on any cooperative enterprise authorized under Article 6;

Secondary Purpose To carry on, encourage, and assist educational and advisory work relating to its member cooperatives;

To render services designed to encourage simplicity, efficiency, and economy in the conduct of the business of its member cooperatives and to facilitate the implementation of their bookkeeping, accounting, and other systems and procedures;

To print, publish, and circulate any newspaper or other publication in the interest of its member cooperatives and enterprises;

To coordinate and facilitate the activities of its member cooperatives;

To enter into joint ventures with national or international cooperatives of other countries in the manufacture and sale of products and or services in the Philippines and abroad; and

To perform such other functions as may be necessary to attain its objectives.

A federation of cooperatives may be registered by carrying out the formalities for registration of a cooperative.

(2) Registered cooperatives may organize a federation at the provincial, city, regional, and national levels according to the type of business carried on.

Art. 25. Cooperative Unions. Registered cooperatives and federations at the appropriate levels may organize or join cooperative unions to represent the interest and welfare of all types of cooperatives at the provincial, city, regional, and national levels. Cooperative unions may have the following purposes:

To represent its member organizations;

To acquire, analyze, and disseminate economic, statistical, and other information relating to its members and to all types of cooperatives within its area of operation;

(c ) To sponsor studies in the economic, legal, financial, social and other phases of cooperation, and publish the results thereof;

To promote the knowledge of cooperative principles and practices;

To develop the cooperative movement in their respective jurisdictions;

To advise the appropriate authorities on all questions relating to cooperatives;

To raise funds through membership fees, dues and contributions, donations, and subsidies from local and foreign sources whether private or government; and

To do and perform such other activities as may be necessary to attain the foregoing objectives.

Cooperative unions may assist the national and local governments in the latter's development activities in their respective jurisdictions.

CHAPTER III MEMBERSHIP

Art. 26. Who May Be Members of Cooperatives. Any natural person, who is a citizen of the Philippines, a cooperative, or nonprofit organization with juridical personality shall be eligible for membership in a cooperative if the applicant meets the qualifications prescribed in the bylaws: Provided, That only natural persons may be admitted as members of a primary cooperative.

Art. 27. Kinds of Membership. A cooperative may have two (2) kinds of members, to wit: (1) regular members and (2) associate members. A regular member is one who is entitled to all the rights and privileges of membership. An associate member is one who has no right to vote nor be voted upon and shall be entitled only to such rights and privileges as the bylaws may provide.

A cooperative organized by minors shall be considered a laboratory cooperative and must be affiliated with a registered cooperative. A laboratory cooperative shall be governed by special guidelines to be promulgated by the Cooperative Development Authority.

Art. 28. Government Officers and Employees.

Any officer or employee of the Cooperative Development Authority shall be disqualified to be elected or appointed to any position in a cooperative; (2) Elective officials of the Government, except barangay officials, shall be ineligible to become officers and directors of cooperatives; and (3) Any government employee may, in the discharge of his duties as member in the cooperative, be allowed by the head of office concerned to use official time for attendance at the general assembly, board and committee meetings of cooperatives as well as cooperative seminars, conferences, workshops, technical meetings, and training courses locally or abroad: Provided, That the operations of the office concerned are not adversely affected.

Art. 29. Application. An applicant for membership shall be deemed a member after approval of his membership by board of directors and shall exercise the rights of member after having made such payments to the cooperative in respect to membership or acquired interest in the cooperative as may be prescribed in the bylaws. In case membership is refused or denied by the board of directors, an appeal may be made to the general assembly and the latter's decision shall be final.

Art. 30. Liability of Members. A member shall be liable for the debts of the cooperative to the extent of his contribution to the share capital of the cooperative.

Art. 31. Termination of Membership.

A member of a cooperative may, for any reason, withdraw his membership from the cooperative by giving a sixty (60) day notice to the board of directors. The withdrawing member shall be entitled to a refund of his share capital contribution and all other interests in the cooperative: Provided, That such refund shall not be made if upon such payment the value of the assets of the cooperative would be less than the aggregate amount of its debts and liabilities exclusive of his share capital contribution.

The death, insanity, insolvency or dissolution of a member shall be considered an automatic termination of membership.

A member may be terminated by a vote of the majority of all the members of the board of directors for any of the following causes:

When a member has not patronized the services of the cooperative for an unreasonable period of time as may be fixed by the board of directors;

When a member has continuously failed to comply with his obligations;

(c ) When a member has acted in violation of the bylaws and the rules of the cooperative; and

For any act or omission injurious or prejudicial to the interest or the welfare of the cooperative.

A member whose membership the board of directors may wish to terminate shall be informed of such intended action in writing and shall be given an opportunity to be heard before the said board makes

its decision. The decision of the board shall be in writing and shall be communicated in person or by registered mail to the member and shall be appealable, within thirty (30) days after the decision is promulgated, to the general assembly whose decision therein, whether in a general or special session, shall be final. Pending a decision by the general assembly, the membership remains in force.

Art. 32. Refund of Interests. All sums computed in accordance with the bylaws to be due from a cooperative to a former member shall be paid to him either by the cooperative or by the approved transferee, as the case may be, in accordance with this Code.

CHAPTER IV ADMINISTRATION

Art. 33. Composition of the General Assembly. The general assembly shall be composed of such members who are entitled to vote under the articles of cooperation and bylaws of the cooperative.

Art. 34. Powers of the General Assembly. The general assembly shall be the highest policy-making body of the cooperative and shall exercise such powers as are stated in this Code, in the articles of cooperation and in the bylaws of the cooperative. The general assembly shall have the following exclusive powers which cannot be delegated:

To determine and approve amendments to the articles of cooperation and bylaws;

To elect or appoint the members of the board of directors, and to remove them for cause;

To approve developmental plans of the cooperative; and

Such other matters requiring a two-thirds (2/3) vote of all the members of the general assembly, as provided in this Code.

Art. 35. Meetings.

A regular meeting shall be held annually by the general assembly on a date fixed in the bylaws, or if not so fixed, on any date within ninety (90) days after the close of each fiscal year: Provided, That written notice of regular meetings shall be sent to all members of record at their official addresses at least two (2) weeks prior to the meeting, unless a different period is required in the bylaws.

Whenever necessary, a special meeting of the general assembly may be called at any time by a majority vote of the board of directors or in the cases specified in the bylaws: Provided, That at least one (1) week written notice shall be sent to all members. However, a special meeting shall be called by the board of directors after compliance with the required notice within one (1) month after receipt of a request in writing from at least ten per centum (10%) of the total members to transact specific business covered by the call.

If the board fails to call a regular or a special meeting within the given period, the Cooperative Development Authority, upon petition of ten per centum (10%) of all the members of the cooperative, and for good cause shown, may issue an order to the petitioners directing them to call a meeting of the general assembly by giving proper notice required by this Code or by the bylaws.

(3) In the case of a newly approved cooperative, a special general assembly shall be called within ninety (90) days from such approval.

(4) The Authority may call a special meeting of the cooperative:

For the purpose of reporting to the members the result of any audit, examination, or other investigation of the cooperative affairs ordered or made by him; or

When the cooperative fails to hold an annual general assembly during the period required for the purpose of enabling the members to secure any information regarding the affairs of the cooperative and benefits that they are entitled to receive pursuant to this Code.

(5) Notice of any meeting may be waived, expressly or impliedly, by any member.

Art. 36. Quorum. Unless otherwise provided in the bylaws, a quorum shall consist of twenty-five per centum (25%) of all the members entitled to vote.

Art. 37. Voting System.

Each member of a primary cooperative shall have only one (1) vote. A secondary or tertiary cooperative shall have voting rights as delegate of members-cooperatives, but such cooperatives shall have only five (5) votes. The votes cast by the delegates shall be deemed as votes cast by the members thereof.

No voting agreement or other device to evade the one-member-one-vote provision except as provided under subsection (1) hereof shall be valid.

No member of a primary cooperative shall be permitted to vote by proxy unles s provided for specifically in the bylaws of the cooperative. However, the bylaws of a cooperative other than a primary may provide for voting by proxy. Voting by proxy means allowing a delegate of a cooperative to represent or vote in behalf of another delegate of the same cooperative.

Art. 38. Composition of the Board of Directors. The conduct and management of the affairs of a cooperative shall be vested in a board of directors which shall be composed of not less than five (5) nor more than fifteen (15) members elected by the general assembly for a term fixed in the bylaws but not exceeding a term of two (2) years and shall hold office until their successors are duly elected and qualified, or until duly removed. However, no director shall serve for more than three (3) consecutive terms.

Art. 39. Powers of the Board of Directors. The board of directors shall direct and supervise the business, manage the property of the cooperative and may, by resolution, exercise all such powers of the cooperative as are not reserved for the general assembly under this Code and the bylaws.

Art. 40. Directors.

Any member of a cooperative who, under the bylaws of the cooperative, has the right to vote and who possesses all the qualifications and none of the disqualifications provided in the laws or the bylaws shall be eligible for election as director.

The cooperative may, by resolution of its board of directors, admit as director, or committee member one appointed by any financing institution from which the cooperative received financial assistance solely to provide technical knowledge not available within its membership. Such director or committee member need not be a member of the cooperative and shall have no powers, rights nor responsibilities except to provide technical assistance as required by the cooperative.

Art. 41. Meeting of the Board, Quorum.

Regular meetings of the board of directors of every cooperative shall be held monthly, unless the bylaws provide otherwise.

Special meetings of the board of directors may be held at any time upon the call of the President or as provided in the bylaws.

A majority of the members of the board shall constitute a quorum for the conduct of business, unless the bylaws provide otherwise.

Directors cannot attend or vote by proxy at board meetings.

Art. 42. Vacancy in the Board of Directors. Any vacancy in the board of directors, other than by expiration of term, may be filled by the vote of at least a majority of the remaining directors, if still constituting a quorum; otherwise, the vacancy must be filled by the general assembly in a regular or special meeting called for the purpose. A director so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

Art. 43. Officers of the Cooperative. The board of directors shall elect from among themselves only the chairman and vice-chairman, and elect or appoint other officers of the cooperative from outside of the board in accordance with their bylaws. All officers shall serve during good behavior and shall not be removed except for cause after due hearing. Loss of confidence shall not be a valid ground for removal unless evidenced by acts or omission causing loss of confidence in the honesty and integrity of such officer. No two (2) or more persons with relationships up to the third civil degree of consanguinity or affinity shall serve as elective or appointive officers in the same board.

Art. 44. Committees of Cooperatives.

The bylaws may create an executive committee to be appointed by the board of directors with such powers and duties as may be delegated to it in the bylaws or by a majority vote of all the members of the board of' directors.

The bylaws shall provide for the creation of an audit committee and such other committees as may be necessary for the proper conduct of the affairs of the cooperative.

Unless otherwise provided in the bylaws, the board, in case of vacancy in said committees, may cause an election to fill the vacancy or appoint a person to fill the same subject to the provision that the person elected or appointed shall serve only for the unexpired portion of the term.

Art. 45. Functions and Responsibilities of Directors, Officers and Committee Members. The functions and responsibilities of the directors, officers and committee members shall be as prescribed in detail in the bylaws of a cooperative.

Art. 46. Liability of Directors, Officers and Committee Members. Directors, officers and committee members, who willfully and knowingly vote for or assent to patently unlawful acts or who are guilty of gross negligence or bad faith in directing the affairs of the cooperative or acquire any personal or pecuniary interest in conflict with their duty as such directors, officers or committee members shall be liable jointly and severally for all damages or profits resulting therefrom to the cooperative, members and other persons.

When a director, officer or committee member attempts to acquire of acquires, in violation of his duty, any interest or equity adverse to the cooperative in respect to any matter which has been reposed in him in confidence, he shall, as a trustee for the cooperative, be liable for damages and for double the profits which otherwise would have accrued to the cooperative.

Art. 47. Compensation.

In the absence of any provision in the bylaws fixing their compensation, the directors shall not receive any compensation except for reasonable per diems: Provided, That any compensation other than per diems may be granted to directors by a majority vote of the members with voting rights at a regular or special general assembly meeting specifically called for the purpose: Provides, further, That no additional compensation other than per diems shall be paid during the first year of existence of any cooperative.

The compensation of officers of the cooperative as well as the members of the committees created pursuant to this Code or its bylaws may be fixed in the bylaws.

Unless already fixed in the bylaws, the compensation of all other employees shall be determined by the board of directors.

Art. 48. Dealings of Directors, Officers or Committee Members. A contract of the cooperative with one (1) or more of its directors, officers, committee members is voidable, at the option of such cooperative, unless all the following conditions are present:

That the presence of such director in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

That the vote of such director was not necessary for the approval of the contract;

That the contract is fair and reasonable under the circumstances; and

That in the case of an officer or committee member, the contract with the officer or committee member has been previously authorized by the general assembly or by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director, such contract may be ratified by a two thirds (2/3) vote of all the members with voting rights in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors involved is made at such meeting, and that the contract is fair and reasonable under the circumstances.

Art. 49. Disloyalty of a Director. A director who, by virtue of his office, acquires for himself an opportunity which should belong to the cooperative shall be liable for damages and must account for double the profits that otherwise would have accrued to the cooperative by refunding the same, unless

his act has been ratified by a two-thirds (2/3) vote of all the members with voting rights. This provision shall be applicable, notwithstanding the fact that the director used his own funds in the venture.

Art. 50. Illegal Use of Confidential Information.

A director or officer, or an associate of a director or officer, who, in connection with a transaction relating to shares of a cooperative or a debt obligation of a cooperative and for his benefit or advantage or that of an associate, makes use of confidential information that, if generally known, might reasonably be expected to affect materially the value of the share or the debt obligation, shall be held:

Liable to compensate any person for a direct loss suffered by that person as a result of the transaction, unless the information was known or reasonably should have been known to the person at the time of the transaction; and

Accountable to the cooperative for any direct benefit or advantage received or yet to be received by him or his associate, as a result of the transaction.

The cooperative shall take the necessary steps to enforce the liabilities described in subsection (a).

Art. 51. Removal. An elective officer, director, or committee member may be removed by a vote of two-thirds (2/3) of the voting members present and constituting a quorum, in a regular or special general assembly meeting called for the purpose. The person involved shall be given an opportunity to be heard at said assembly.

Art. 52. Address. Every cooperative shall have an official postal address to which all notices and communications shall be sent. Such address and every change thereof shall be registered with the Cooperative Development Authority.

Art. 53. Books to be Kept Open.

Every cooperative shall have the following open to its members and representatives of the Authority for inspection during reasonable office hours at its official address:

A copy of this Code and all other laws pertaining to cooperatives;A copy of the regulations of the Cooperative Development Authority;(c ) A copy of the articles of cooperation and bylaws of the cooperative;A register of members;The books of the minutes of the meetings of the general assembly, board of directors and committees;Share books, where applicable;Financial statements; andSuch other documents as may be prescribed by laws or the bylaws.

(2) The chairman of the audit committee of a cooperative shall be responsible for books and records of account of the cooperative in accordance with generally accepted accounting practices. He shall also be responsible for the production of the same at the time of audit or inspection.

(3) Each cooperative shall maintain records of accounts such that the true and correct condition and the results of the operation of the cooperative may be ascertained therefrom at any time. The financial statements, audited according to generally accepted auditing standards, principles and practices, shall be published annually.

(4) Subject to the pertinent provisions of the National Internal Revenue Code and other laws, a cooperative may dispose by way of burning or other method of complete destruction any document, record or book pertaining to its financial and non-financial operations which are already more than five (5) years old except those relating to transactions which are the subject of civil, criminal, and administrative proceedings. An inventory of the audited documents, records, and books to be disposed of shall be drawn up and certified to by the cooperative secretary and the chairman of the audit committee of the cooperative and presented to the board of directors which may thereupon approve the disposition of said records.

Art. 54. Annual Reports.

Every cooperative shall draw up an annual report of its affairs as of the end of every fiscal year, and publish the same furnishing copies to all its members of record. A copy thereof shall be filed with the Cooperative Development Authority within sixty (60) days from the end of every fiscal year. The form and contents of the annual report shall be prescribed by the rules of the Authority. Failure to file the

required annual report shall be a ground for revocation of authority of the cooperative to operate as such. The fiscal year of every cooperative shall be the calendar year except as may be otherwise provided in the bylaws.

If any cooperative fails to make, publish and file the report required herein, or fails to include therein any matter required by this Code, the Cooperative Development Authority shall, within fifteen (15) days from the expiration of the prescribed period, send such cooperative a registered notice, directed to its official postal address stating the delinquency and its consequences. If the cooperative fails to make, publish or file a copy of the report within thirty (30) days from receipt of such notice, any member of the cooperative or the Government may petition the court for mandamus to compel the cooperative and its officers to make, publish, and file such report, as the case may be, and require the cooperative or the officers at fault to pay all the expenses of the proceeding, including counsel fees when the filing is made by a member.

Art. 55. Register of Members as Prima Facie Evidence. Any register or list of members or shares kept by any registered cooperative shall be prima facie evidence of the following particulars entered therein:

The date on which the name of any person was entered in such register or list as member; and

The date on which any such person ceased to be a member.

Art. 56. Probative Value of Certified Copies of Entries.

A copy of any entry in any book, register or list regularly kept in the course of business in the possession of a cooperative shall, if duly certified in accordance with the rules of evidence, be admissible as evidence of the existence of the entry and prima facie evidence of the matters and transactions therein recorded.

No person or a cooperative in possession, of the books of such cooperative shall, in any legal proceedings to which the cooperative is not a party, be compelled to produce any of the books of the cooperative, the contents of which can be proved and the matters, transactions and accounts therein recorded, unless by order of a competent court.

Art. 57. Bonding of Accountable Officer. Every director, officer, and employee handling funds, securities or property on behalf of any cooperative shall execute and deliver adequate bonds for the faithful performance of his duties and obligations. The board of directors shall determine the adequacy of such bonds.

Art. 58. Preference of Claims.

Notwithstanding the provisions of existing laws, rules and regulations to the contrary, but subject to the prior claim of the Cooperative Development Authority, any debt due a cooperative from a member shall be first lien upon any raw materials, production inputs, and products produced; or any land, building, facilities, equipment, goods or services acquired and held, by such member through the proceeds of the loan or credit granted by the cooperative to him for as long as the same is not fully paid.

No property or interest on property which is subject to a lien under paragraph (1) shall be sold nor conveyed to third parties without the prior permission of the cooperative. The lien upon the property or interest shall continue to exist even after the sale or conveyance thereof until such lien has been duly extinguished.

Notwithstanding the provisions of any law to the contrary, any sale or conveyance made in contravention of paragraph (2) hereof shall be void.

Art. 59. Instrument for Salary or Wage Deduction. (1) A member of a cooperative may, notwithstanding the provisions of existing laws to the contrary, execute an instrument in favor of the cooperative authorizing his employer to deduct from the salary or wages payable to him by the employer and pay to the cooperative such amount as may be specified in satisfaction of any debt or other demand due from the member to the cooperative.

(2) Upon the execution of such instrument and as may be required by the cooperative contained in a written request, the employer shall make the deduction in accordance with the agreement and remit forthwith the amount so deducted to the cooperative. The employer shall make the deduction for as long as such debt or other demand or any part of it remains unpaid by the employee.

(3) The term "employer" as used in this article shall include all private firms and the national and local governments and government-owned or controlled corporations who have under their employ a member of a cooperative and have agreed to carry out the terms of the instrument mentioned in paragraphs (1) and (2) of this article.

(4) The provision of this article shall also apply to all such agreements of the nature referred to in paragraph (1) as were in force on the date of the approval of this Code.

Art. 60. Primary Lien. Notwithstanding the provisions of any law to the contrary, a cooperative shall have a primary lien upon the capital, deposits or interest of a member for any debt due to the cooperative from such a member.

Art. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this Code which do not transact any business with nonmembers or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.

Art. 62. Tax and Other Exemptions. Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members.

Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions:

Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall he exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon.

Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos P(10,000,000.00) shall pay the following taxes at the full rate:

Income Tax On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members;

Sales Tax On sales to nonmembers: Provided, however, That all cooperatives, regardless of classification, are exempt from the payment of income and sales taxes for a period of ten (10) years.

For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from the effectivity date of said executive order. Cooperatives created after the approval of this Code shall be granted the same exemptions, the period of which shall be reckoned from the date of registration with the Authority: Provided, That at least twenty-five per centum (25%) of the net income of the cooperatives is returned to the members in the form of interest and/or patronage refunds;

All other taxes unless otherwise provided herein; and

Donations to charitable, research and educational institutions and reinvestment to socioeconomic projects within the area of operation of the cooperative may be tax deductible.

(3) All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided, further, That nothing in this article shall preclude the examination of the books of accounts or other accounting records of the cooperative by duly authorized internal avenue officers for internal revenue tax purposes only, after previous authorization by the Authority.

(4) Any judge in his capacity as notary public, ex officio, shall render service, free of charge, to any person or group of persons requiring either the administration of oath or the acknowledgment of articles of cooperation of a cooperative applicant for registration and instruments of loan from cooperative not exceeding Fifty thousand pesos (P50,000.00).

(5) Any register of deeds shall accept; for registration free of charge, any instrument relative to a loan made under this Code which does not exceed Fifty thousand pesos (P50,000.00) or the deeds of title of any property acquired by the cooperative or any paper or document drawn in connection with any action brought by the cooperative or with any court judgment rendered in its favor or any instrument relative to a bond of any accountable officer of a cooperative for the faithful performance of his duties and obligations.

(6) Cooperatives shall be exempt from the payment of all court and sheriff's fees payable to the Philippine Government for and in connection with all actions brought under this Code, or where such, action is brought by the Cooperative Development Authority before the court, to enforce the payment of obligations contracted in favor of the cooperative.

(7) All cooperatives shall be exempt from putting-up a bond for bringing an appeal against the decision of an inferior court or for seeking to set aside any third party claim: Provided, That a certification of the Authority showing that the net assets of the cooperative are in excess of the amount of the bond required by the court in similar cases shall be accepted by the court as a sufficient bond.

(8) Any security issued by cooperatives shall be exempt from the provisions of the Securities Act provided such security shall not be speculative.

Art. 63. Privileges of Cooperatives. Cooperatives registered under this Code shall, notwithstanding the provisions of any law to the contrary, be also accorded the following privileges:

Cooperatives shall enjoy the privilege of depositing their sealed cash boxes or containers documents or any valuable papers in the safes of the municipal or city treasurers and other government offices free of charge, and the custodian of such articles shall issue a receipt acknowledging the articles received duly witnessed by another person;

Cooperatives organized among government employees, notwithstanding any law or regulation to the contrary, shall enjoy the free use of any available space in their agency, whether owned or rented by the Government;

Cooperatives rendering special types of services and facilities such as cold storage, ice plant, electricity, transportation, and similar services and facilities shall secure a franchise therefor, and such cooperatives shall open their membership to all persons qualified in their areas of operation;

In areas where appropriate cooperatives exist, the preferential right to supply government institutions and agencies rice, corn and other grains, fish and other marine products, meat, eggs, milk, vegetables, tobacco and other agricultural commodities produced by their members shall be granted to the cooperatives concerned;

Preferential treatment in the allocation of fertilizers and in rice distribution shall be granted to cooperatives by the appropriate government agencies;

Preferential and equitable treatment in the allocation or control of bottomries of commercial shipping vessels in connection with the shipment of goods and products of cooperatives;

Cooperatives and their federations, such as market vendor cooperatives, shall have preferential rights in management of public markets and/or lease of public market facilities, stall or spaces;

Credit cooperatives and/or federations shall be entitled to loans, credit lines, rediscounting of their loan notes, and other eligible papers with the Development Bank of the Philippines, the Philippine National Bank, the Land Bank of the Philippines, and other financial institutions except the Central Bank of the Philippines;

Cooperatives transacting business with the Government of the Philippines or any of its political subdivisions or any of its agencies or instrumentalities, including government-owned and controlled corporations shall be exempt from prequalification bidding requirements; and

Cooperatives shall enjoy the privilege of being represented by the provincial or city fiscal or the Office of the Solicitor General, free of charge, except when the adverse party is the Republic of the Philippines.

CHAPTER VI INSOLVENCY OF COOPERATIVES

Art. 64. Proceedings Upon Insolvency. In case a cooperative is unable to fulfill its obligations to creditors due to insolvency, such cooperative may apply for such remedies as it may deem fit under the provisions of the Insolvency Law (Act No. 1956, as amended).

Nothing in this article, however, precludes creditors from seeking protection from said insolvency law.

CHAPTER VII DISSOLUTION OF COOPERATIVES

Art. 65. Voluntary Dissolution Where no Creditors are Affected. If the dissolution of a cooperative does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by a majority vote of the board of directors, and by a resolution duly adopted by the affirmative vote of at least two-thirds (2/3) of all the members with voting rights at a meeting to be held upon call of the directors: Provided, That notice of time, place and object of the meeting shall be published for three (3) consecutive weeks in a newspaper published in the place where the principal office of said cooperative is located, or if no newspaper is published in such place, in a newspaper of general circulation in the Philippines: Provided, further, That notice of such meeting is sent to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors and countersigned by the secretary of the cooperative. The Cooperative Development Authority shall thereupon issue the certificate of dissolution.

Art. 66. Voluntary Dissolution Where Creditors Are Affected. Where the dissolution of a cooperative may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Cooperative Development Authority. The petition shall be signed by a majority of its board of directors or other officers managing its affairs, shall be verified by its president or secretary or one of its directors and shall set forth all claims and demands against it and that its dissolution was resolved upon by the affirmative vote of at least two-thirds (2/3) of all the members with voting rights, at a meeting called for that purpose.

If the petition is sufficient in form and substance, the Cooperative Development Authority shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the cooperative is situated, or in the absence of such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in the municipality or city.

Upon five (5) days notice, given after the date on which the right to file objections as fixed in the order has expired, the Cooperative Development Authority shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall issue an order dissolving the cooperative and directing such disposition of its assets as justice requires. The order of dissolution shall set forth therein:

The assets and liabilities of the cooperative;The claim of any creditor;The number of members; andThe nature and extent of the interests of the members of the cooperative.

Art. 67. Involuntary Dissolution. A cooperative may be dissolved by order of a competent court after due hearing on the grounds of:

violation of any law, regulation, or provisions of its bylaws; or insolvency.

Art. 68. Dissolution by Order of the Authority. The Authority may suspend or revoke, after due notice and hearing, the certificate of registration of a cooperative on any of the following grounds:

Having obtained its registration by fraud;

Existing for an illegal purpose;

Willful violation, despite notice by the Authority, of the provisions of this Code or its bylaws;

Willful failure to operate on a cooperative basis; and

Failure to meet the required minimum number of members in the cooperative.

Art. 69. Dissolution by Failure to Organize and Operate. If a cooperative has not commenced business and operation within two (2) years after the date shown on its certificate of registration or has not carried on business for two (2) consecutive years, the Authority shall send formal inquiry to the said cooperative as to the status of its operation. Failure of the cooperative to promptly provide justifiable cause for its failure to operate shall warrant the Authority to strike off its name from the register and, for all intents and purposes, the cooperative shall be deemed dissolved.

Art. 70. Cooperative Liquidation. Every cooperative, whose charter expires by its own limitation or whose cooperative existence is terminated by voluntary dissolution or is terminated by appropriate judicial proceedings shall nevertheless be continued as a body cooperative for three (3) years after the time when it would have been so dissolved for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said cooperative is authorized and empowered to convey all of its property to trustees for the benefit of members, creditors, and other persons in interest. From and after any such conveyance by the cooperative of its property in trust for the benefit of its members, creditors and others in interest, all interest which the cooperative had in the property terminates the legal interest vests in the trustees and the beneficial interest vests in the members, creditors or other persons in interest.

Upon the winding up of the cooperative affairs, any asset distributable to any creditor or shareholder or member who is unknown or cannot be found shall be given to the federation, union or association to which the cooperative is affiliated or to the movement.

Except by decrease of share capital and as otherwise allowed by this Code, no cooperative shall distribute any of its assets or property except upon lawful dissolution and after :payment of all its debts and liabilities.

Art. 71. Rules and Regulations on Liquidation. The Authority shall issue the appropriate implementing guidelines for the liquidation of cooperatives.

CHAPTER VIII CAPITAL, PROPERTY, AND FUNDS

Art. 72. Capital. The capitalization of cooperatives and the accounting therefor shall be governed by the provisions of this Code and the regulations issued thereunder.

Art. 73. Capital Sources. Cooperation registered under this Code may derive their capital from any or all of the following sources:

Members' share capital;

Loans and borrowing including deposits;

Revolving capital which consists of the deferred payment of patronage refunds, or interest on share capital; and

Subsidies, donations, legacies, grants, aids and such other assistance from any local or foreign institution whether public or private.

Art. 74. Limitation on Share Capital Holdings. No member of a cooperative other than a cooperative shall own or hold more than twenty per centum (20%) of the share capital of the cooperative.

Where a member of a cooperative dies, his heir shall be entitled to the shares of the decedent: Provided, That the total share holding of the heir does not exceed twenty per centum (20%) of the share capital of the cooperative: Provided, further, That the heir qualify and is admitted as member of the cooperative: Provided, finally, That where the heir fails to qualify as such member or where his total share holding exceeds twenty per centum (20%) of the share capital, the share or shares in excess will revert to the cooperative upon payment to the heir of the value of such shares.

Art. 75. Assignment of Share Capital Contribution or Interest. Subject to the provisions of this Code, no member shall transfer his shares or interest in the cooperative or any part thereof unless:

He has held such share capital contribution or interest for not less than one (1) year.

The assignment is made to the cooperative or to a member of the cooperative or to a person who falls within the field of membership of the cooperative; and

The board of directors has approved such assignment;

Art. 76. Interest on Share Capital. Interest on share capital shall not exceed the normal rate of return on investments as determined by the Cooperative Development Authority and such interest shall be non-cumulative.

Art. 77. Shares. The term "share" refers to a unit of capital the par value of which may be fixed at any figure but not less than One peso (P1.00). The Share capital of a cooperative is the money paid or required to be paid for to conduct its operations. The method of issuing the share certificates may be prescribed in the bylaws of the cooperative.

Art. 78. Fines. The bylaws of a cooperative may prescribe a fine on unpaid subscribed share capital subject to the guidelines which the Cooperative Development Authority may issue.

Art. 79. Investment of Capital. A cooperative may invest its capital in any of the following:

In shares or debentures or securities of any other cooperative;In any reputable bank in the locality, or any cooperative;In securities issued or guaranteed by the Government;In real estate primarily for the use of the cooperative or its members; orIn any other manner authorized in the bylaws.

Art. 80. Revolving Capital. The general assembly of any cooperative may authorize the board of directors to raise a revolving capital to strengthen its capital structure by deferring the payment of patronage refunds and interest on share capital or by the authorized deduction of a percentage from the proceeds of products sold or per unit of product handled. The board of directors shall issue revolving capital certificates with serial number, name, amount, and rate of interest to be paid and shall distinctly set forth that the time of retirement by such certificates and the amounts to be returned are at the discretion of the board of directors.

CHAPTER IX AUDIT, INQUIRY AND MEMBERS' RIGHT TO EXAMINE

Art. 81. Annual Audit. Cooperatives under this Code shall be subject to an annual audit by an auditor who satisfies all of the following qualifications:

He is independent of the cooperative being audited and of any subsidiary of the cooperative; and

He is a member of any recognized professional accounting or cooperative auditors' association with similar qualifications.

Art. 82. Audit Report. The auditor shall submit to the audit committee a report of the audit which shall contain a statement of the assets and liabilities of the cooperative, including earnings and expenses, amount of net surplus as well as losses and bad debts, if any.

The audit committee shall forthwith furnish the board of directors a copy of the audit report. Thereafter, the board of directors shall present the complete audit report to the general assembly in its next meeting.

Art. 83. Non-liabitity for Defamation. An auditor is not liable to any person in an action for defamation based on any act done, or any statement made by him in good faith in connection with any matter he is authorized or required to do pursuant to this Code.

Art. 84. Right to Examine. A member shall have the right to examine the records required to be kept by the cooperative under Article 51 of this Code during reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records without charge except the cost of reproduction.

Any officer of the cooperative who shall refuse to allow any member of the cooperative to examine and copy excerpts from its records shall be liable to such member for damages and shall be guilty of an offense which shall be punishable under Article 106 of this Code: Provided, That if such refusal is pursuant to a resolution or order of the board of directors, the liability under this article shall be

imposed upon the directors who voted for such refusal: Provided, further, That it shall be a defense to any action under this article that the member demanding to examine and copy excerpts from the cooperative records has improperly used any information secured through any prior examination of the records of such cooperative or was not acting in good faith or for a legitimate purpose in making his demand.

Art. 85. Safety of Records. Every cooperative shall, at its principal office, keep and carefully preserve the records required by this Code to be prepared and maintained. It shall take all necessary precaution to prevent its loss, destruction or falsification.

CHAPTER X ALLOCATION AND DISTRIBUTION OF NET SURPLUS

Art. 86. Net Surplus. Notwithstanding the provisions of existing laws, the net surplus of cooperatives shall be determined in accordance with its bylaws. Every cooperative shall determine its net surplus at the close of every fiscal year and at such other time as maybe prescribed by the bylaws.

The net surplus shall not be construed as profit but as excess of payments made by the members for the loans borrowed, or the goods and services bought by them from the cooperative and which shall be deemed to have been returned to them if the same is distributed as prescribed herein.

Art. 81. Order of Distribution. The net surplus of every cooperative shall be distributed as follows:

An amount for the reserve fund, which shall be at least ten per centum (10%) of net surplus:

The reserve fund shall be used for the stability of the cooperative and to meet net losses in its operations.

The general assembly may decrease the amount allocated to the reserve fund when reserve fund already exceeds the share capital.Any sum recovered on items previously charged to the reserve fund shall be credited to such fund.

The reserve fund shall not be utilized for investment, other than those allowed in the Code. Such sum of the reserve fund in excess of the share capital may be used at anytime for any project that would expand the operations of the cooperative upon the resolution of the general assembly.

Upon the dissolution of the cooperative, the reserve fund shall not be distributed among the members. The general assembly may resolve:

To establish a usufructuary trust fund for the benefit of any federation or union to which the cooperative is affiliated; and

(ii) To donate, contribute, or otherwise dispose of the amount for the benefit of the community where the cooperative operates. If the members cannot decide upon the disposal of the reserve fund, the same shall go to the federation or union to which the cooperative is affiliated.

An amount for the education and training fund, which shall be not more than ten per centum (10%) of net surplus. The bylaws may provide that certain fees or fines or a portion thereof be credited to such fund:

Half of the amounts transferred to the education and training fund annually under this subsection may be spent by the cooperative for education and training and other purposes; while the other half shall be credited to the cooperative education and training fund of the respective apex organization of which the cooperative is a member. An apex organization may be a federation or union.

Upon the dissolution of the cooperative, the unexpended balance of the education and training fund appertaining to the cooperative shall be credited to the cooperative education and training fund of the above-mentioned apex organization.

An optional fund, a land and building, community development, and any other necessary fund the total of which may not exceed ten per centum (10%).

The remaining net surplus shall be made available to the members in the form of interest not to exceed the normal rate of return on investments and patronage refunds.

The sum allocated for patronage refunds shall be made available at the same rate to all patrons of the cooperative in proportion to their individual patronage: Provided, That:

In the case of a member patron with paid up share capital contribution, his proportionate amount of patronage refund shall be paid to him unless he agrees to credit the amount to his account as additional share capital contribution;

In the case of a member patron with unpaid share capital contribution, his Proportionate amount of patronage refund shall be credited to his account until his share capital contribution has been fully paid;

In the case of a nonmember patron, his proportionate amount of patronage refund shall be set aside in a general fund for such patrons and shall be allocated to individual nonmember patrons only upon request and presentation of evidence of the amount of his patronage. The amount so allocated shall be credited to such patron toward payment of the minimum capital contribution for membership. When a sum equal to this amount has accumulated at any time within a period specified in the bylaws, such patron shall be deemed and become a member of the cooperative if he so agrees or requests and complies with the provisions of the bylaws for admission to membership; and

If within any period of time specified in the bylaws, any subscriber who has not fully paid his subscribed share capital or any nonmember patron who has accumulated the sum necessary for membership but who does not request nor agree to become a member or fails to comply with the provisions of the bylaws for admission to membership, the amount so accumulated or credited to their account together with any part of the general fund for nonmember patrons shall be credited to the reserve fund or to the education and training fund of the co-operative, at the option of the cooperative.

Art. 88. Coverage. The provisions of this Chapter shall primarily govern agrarian reform cooperatives: Provided, That the provisions of other chapters of this Code shall apply suppletorily except insofar as this Chapter otherwise provides.

Art. 89. Definition and Purpose. An agrarian reform cooperative within the meaning of this Code is one where the majority of the members are agrarian reform beneficiaries and marginal farmers and organized for any or all of the following purposes:

To develop an appropriate system of land tenure, land development, land consolidation or land management in areas covered by agrarian reform;

To coordinate and facilitate the dissemination of scientific methods of production, and provide assistance in the storage, transport, and marketing of farm products for agrarian reform beneficiaries and their immediate family, hereinafter referred to as "beneficiaries";

To provide financial facilities to beneficiaries for provident or productive purposes at reasonable costs;

To arrange and facilitate the expeditious transfer of appropriate and suitable technology to beneficiaries and marginal farmers at the lowest possible cost;

To provide social security benefits, health, medical and social insurance benefits and other social and economic benefits that promote the general welfare of the agrarian reform beneficiaries and marginal farmers;

To provide non-formal education, vocational/technical training, and livelihood programs to beneficiaries and marginal farmers;

To act as channels for external assistance and services to the beneficiaries and marginal farmers;

To undertake a comprehensive and integrated development program in agrarian reform and resettlement areas with special concern for the development of agro-based, marine-based, and cottage-based industries:

To represent the beneficiaries on any or all matters that affect their interest; and

To undertake such other economic or social activities as may be necessary or incidental in the pursuit of the foregoing purposes.

Art. 90. Cooperative Estates. Landholdings like plantations, estates or haciendas acquired by the State for the benefit of the workers in accordance with the Comprehensive Agrarian Reform Program shall be owned collectively by the workers-beneficiaries who shall form a cooperative at their option.

Art. 91. Infrastructure. In agrarian reform and resettlement areas, the Government shall grant agrarian reform cooperatives preferential treatment, if necessary, the authority to construct, maintain, and manage with government funding roads, bridges, canals, wharves, ports, reservoirs, irrigation systems, waterworks systems, and other infrastructures. For this purpose, government technical assistance, facilities and equipment shall be made available to such agrarian reform cooperatives for their use.

Art. 92. Lease of Public Lands. The Government may lease public lands to any agrarian reform cooperative for a period not exceeding twenty-five (25) years, subject to renewal for another twenty-five (25) years only: Provided, That the application for renewal shall be made one (1) year before the expiration of the lease: Provided, further, That such lease shall be for the exclusive use and benefit of the beneficiaries and marginal farmers subject to the provisions of the Comprehensive Agrarian Reform Program.

Art. 93. Preferential Right. In agrarian reform areas, an agrarian reform cooperative shall have the preferential right in the grant of franchise and certificate of public convenience and necessity for the operation of public utilities and services: Provided, That it meets the requirements and conditions imposed by the appropriate government agency granting the franchise or certificate of public convenience and necessity.

Electric service agencies shall, upon request of agrarian reform cooperatives, immediately provide electric services to agrarian reform areas. If the electric service agencies concerned fails for any reason to provide the services requested within a period of one (1) year from receipt thereof, the agrarian reform cooperative concerned may provide the electric services in the agrarian reform area directly through its own resources and shall continue to do so until such time that the electric service agency concerned purchases all the investments made by the agrarian reform cooperative in the electrification of the agrarian reform areas.

Art. 94. Privileges. Subject to such reasonable terms and conditions as the Department of Agrarian Reform and the Authority may impose, agrarian reform cooperatives may be given the exclusive right to do any or all of the following economic activities in agrarian reform and resettlement areas.

Supply and distribution of consumer, agricultural, aquacultural, and industrial goods, production inputs, and raw materials and supplies, machinery, equipment, facilities and other services and requirements of the beneficiaries and marginal farmers in the agrarian reform areas at reasonable prices;

Marketing of the products and services of the beneficiaries on the local and foreign markets;

Processing of the members' products into finished consumer or industrial goods for domestic consumption or for export;

Provision of essential public services at cost such as power, irrigation, potable water, passenger and/or cargo transportation by land, sea, or air, communication services, and public health and medical care services;

Management, conservation, and commercial development of marine, forestry, mineral, water and other natural resources subject to compliance with the laws and regulations on environmental and ecological controls;

Provision of financial, technological, and other services and facilities required by the beneficiaries in their daily lives and livelihood.

The Government shall provide the necessary financial and technical assistance to agrarian reform cooperatives to enable them to discharge effectively their purposes under this article. The Department of Agrarian Reform, the cooperative Development Authority and the Central Bank of the Philippines shall draw up a joint program for the organization and financing of the agrarian reform cooperatives subject to this Chapter. The joint program shall be geared towards the beneficiaries' gradual assumption of full ownership and management control of the agrarian reform cooperatives within ten (10) years from the date of registration of said cooperatives.

Art. 95. Organization and Registration. Agrarian reform cooperatives may be organized and registered under this Code only upon prior written verification by the Department of Agrarian Reform to the effect that the same is needed and desired by the beneficiaries; results of a study that has been conducted fairly indicate the economic feasibility of organizing the same and that it will be economically viable in its operations; and that the same may now be organized and registered in accordance with the requirements of this Code.

CHAPTER XII SPECIAL PROVISIONS ON PUBLIC SERVICE COOPERATIVES

Art. 96. Definition and Coverage. A public service cooperative, within the meaning of this Code, is one organized to render public services as authorized under a franchise or certificate of public convenience and necessity duly issued by the appropriate government agency. Such services may include the following:

Power generation, transmission and/or distribution;

Ice plants and cold storage services. Electric co-operatives created under Presidential Decree No. 269 shall be governed by this Chapter if they qualify as cooperatives under the provisions of this Code;

Communications services including telephone, telegraph, and telecommunications;

Land, sea, and air transportation cooperatives for passenger and/or cargo. Transport cooperatives organized under the provisions of Executive Order No. 898, Series of 1983, shall be governed by this Chapter;

Public markets, slaughterhouses and other similar services; and

Such other types of public service as may be engaged in by any cooperative. Such cooperative shall be primarily governed by this Chapter and the general provisions of this Code insofar as they may be applicable unless they are inconsistent herewith.

Art. 97. Registration Requirements. No public service cooperative shall be registered unless it satisfies the following requirements:

It has the favorable endorsement of the proper government agency authorized to issue the franchise or certificates of public convenience and necessity;

Its articles of cooperation and bylaws provide for the membership of the users and/or producers of the service of such cooperatives; and

It satisfies such other requirements as may be imposed by the other pertinent government agencies concerned. In case there are two (2) or more applicants for the same public service franchise or certificate of public convenience and necessity, all things being equal, preference shall be given to a public service cooperative.

Art. 98. Regulation of Public Service Cooperatives.

The internal affairs of public-service-cooperatives such as the rights and privileges of members, the rules and procedures for meetings of the general assembly, board of directors and committees; for the election and qualifications of officers, directors, and committee members; allocation and distribution of surpluses; and all other matters relating to their internal affairs shall be governed by this Code.

All matters relating to the franchise or certificate of public convenience and necessity of public service cooperatives such as capitalization and investment requirements, equipment and facilities, frequencies, rate-fixing and such other matters affecting their public service operations shall be governed by the government agency concerned.

The Cooperative Development Authority and the proper government agency concerned shall jointly issue the necessary rules and regulations to implement this Chapter.

CHAPTER XIII SPECIAL PROVISIONS RELATING TO COOPERATIVE BANKS

Art. 99. Governing Law.

The provisions of this Chapter shall primarily govern cooperative banks registered under this Code and the other provisions of this Code shall apply to them only insofar as they are not inconsistent with the provisions contained in this Chapter.

Cooperatives duly established and registered under the provisions of this Code may organize among themselves a cooperative bank which shall likewise be considered a cooperative registerable under the provisions of this Code subject to the requirements of and requisite authorization from the Central Bank.

Art. 100. Definition, Classification and Functions. A cooperative bank is one organized by, the majority shares of which is owed and controlled by, cooperatives primarily to provide financial and credit services to cooperatives. The term "cooperative bank" shall include cooperative rural banks.A cooperative bank may perform the following functions:

To carry on banking and credit services for the cooperatives;

To receive financial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in business and to supervise the lending and collection of loans;

To mobilize savings of its members for the benefit of the cooperative movement;

To act as a balancing medium for the surplus funds of cooperatives and their federations;

To discount bills and promissory notes issued and drawn by cooperatives;

To issue negotiable instruments to facilitate the activities of cooperatives;

To issue debentures subject to the approval of and under conditions and guarantees to be prescribed by the Government;

To borrow money from banks and other financial institutions within the limit to be prescribed by the Central Bank; and

To carry out all other functions as may be prescribed by the Authority: Provided, That the performance of any banking function shall be subject to prior approval by the Central Bank of the Philippines.

Art. 101. Registration Requirements. No entity shall be registered by the Cooperative Development Authority as a cooperative bank unless the articles of cooperations and bylaws thereof as well as its establishment and operation as a cooperative bank have been approved by the Central Bank of the Philippines and it satisfies all requirements for registration as a cooperative.

Art. 102. Membership. Membership of cooperative bank shall include only cooperatives and federations of cooperatives.

Art. 103. Board of Directors. The number, composition, and voting rights of the board of directors shall be defined in the articles of cooperation and bylaws of the cooperative bank, notwithstanding provisions of this Code to the contrary.

Art. 104. Loans. Cooperatives may obtain loans from a cooperative bank. Loans granted by a cooperative bank shall be reported to the Central Bank of the Philippines.

Art. 105. Supervision. The cooperative banks registered under this Code shall be under the supervision of the Central Bank. The Central Bank upon consultation with the agency and the cooperative movement shall formulate guidelines regarding the operations and banking transactions of cooperative banks, These guidelines shall give due recognition to the unique cooperative nature and character of cooperative banks. To this end, cooperative banks may be exempted from Central Bank rules and regulations, applicable to other types of banks, which would impede the cooperative rural bank from performing legitimate financial and banking services to its members.

Art. 106. Capitalization.

A national cooperative bank shall have a minimum authorized share capital of Two hundred million pesos (P200,000,000.00) in relation to Article 14(5). The authorized share capital shall be divided into such number of shares with a minimum par value of One thousand pesos (P1,000.00) per share. For the purpose primarily of determining the permanency Of equity, the types of share a cooperative bank may issue, including the terms thereof and the rights appurtenant thereto, shall be subject to such rules and regulations as the Central bank may prescribe;

A local cooperative bank shall have a minimum authorized share capital of Twenty million pesos (P20,000,000.00) divided into such number of shares with a minimum par value of One hundred pesos (P100.00) per share.

Art. 107. Distribution of Net Surplus. The provisions of this Code on the allocation and distribution of net surplus shall apply.

Art. 108. Privileges. Cooperative banks shall have the following privileges subject to the approval of the Central Bank and compliance with applicable banking laws, rules and regulations:

The cooperative banks registered under this Code shall be given the same privilege granted to the rural banks, private development banks, commercial banks, and all other banks to rediscount notes with the Central Bank, the Land Bank of the Philippines, and other government banks without affecting in any way the provisions of this Code; and

To act as a depository of government funds. For this purpose, all government departments, agencies and units of the national and local governments, including government-owned and controlled corporations are hereby authorized to deposit their funds in any cooperative bank.

Art. 109. Assistance to Cooperative Bank. Whenever a cooperative bank organized under this Code is distressed or may need assistance in the rehabilitation of its financial condition or to avoid bankruptcy, the Monetary Board of the Central Bank of the Philippines shall designate an official of the Central Bank or a person of recognized competence in banking or finance as receiver or conservator of the said bank pursuant to the provisions of Section 29 of Republic Act No. 265, as amended.

CHAPTER XIVSPECIAL PROVISIONS RELATING TO CREDIT COOPERATIVE

Art. 110. Coverage. This Chapter shall apply only to credit cooperatives and the rest of the provisions of this Code shall apply to them insofar as the same are not inconsistent with the provisions of this Chapter.

Art. 111. Definition and Objectives. A credit cooperative is a financial organization owned and operated by its members with the following objectives:

To encourage savings among its members;

To create a pool of such savings for which loans for productive or provident purposes may be granted to its members; and

To provide related services to enable its members to maximize the benefit from such loans.

Art. 112. Organization and Registration. Credit cooperatives shall be organized and registered in accordance with the general provisions of this Code.

Art. 113. Organizational Linkage. Credit cooperatives may organize chapter or subsidiaries, or join leagues and federations for the purpose of providing commonly needed essential services including but not limited to the following:

Interlending of surplus fund;Mutual benefits;Deposit guarantee;Bonding;Education and training;Professional and technical assistance;Research and development;Representation; andOther services needed to improve their performance.

Existing support organizations such as federations of credit cooperatives, credit cooperatives at the provincial, regional and national levels may continue as such under this Code.

Art. 114. Prohibition. The term "credit cooperative" shall be used exclusively by those who are duly registered under this Chapter, and no person or group of persons, or organizations shall use the said term unless duly registered herein.

CHAPTER XV SPECIAL PROVISIONS RELATING TO COOPERATIVE INSURANCE SOCIETIES

Art. 115. Cooperative Insurance Societies. Existing cooperatives may organize themselves into a cooperative insurance entity for the purpose of covering the insurance requirements of the cooperative members including their properties and assets.

Art. 116. Types of Insurance Provided. Under the cooperative insurance program established and formed by virtue of the provisions of this Code, the cooperative insurance societies shall provide its constituting members different types of insurance coverage consisting of, but not limited to, life insurance with special group coverage, loan protection, retirement plans, endowment with health and accident coverage, fire insurance, motor vehicle coverage, bonding, crop and livestock protection and equipment insurance.

Art. 117. Applicability of Insurance Laws. The provisions of the Insurance Code and all other laws and regulations relative to the organization and operation of an insurance company shall apply to cooperative insurance entities organized under this Code. The requirements on capitalization, investments and reserves of insurance firms may be liberally modified upon consultation with the Cooperative Development Authority and the cooperative sector. But in no case may the requirements be reduced to less than half of those provided for under the Insurance Code and other related laws.

Art. 118. Implementing Rules. The Insurance Commission, upon consultation with the Cooperative Development Authority and the cooperative sector, shall formulate the rules and regulations implementing these provisions.

CHAPTER XVI MISCELLANEOUS PROVISIONS

Art. 119. Compliance with Other Laws.

The Labor Code and all other labor laws shall apply to all cooperatives.

The Social Security Act, the Medical Care Act, and all other social legislations shall apply to all cooperatives.

All other laws and executive orders applicable to cooperatives duly registered under this Code.

Art. 120. Register of Cooperatives. The Cooperative Development Authority shall establish a register which shall contain a chronological entry of the name of every cooperative registered or dissolved under this Code together with the basic information required for registration or dissolution and any other information considered useful. The Cooperative Development Authority shall publish every year a list of cooperatives in existence, under dissolution and whose registration is canceled during the year together with such information on each of them as may be prescribed in the regulations.

Art. 121. Settlement of Disputes. Disputes among members, officers, directors, and committee members, and intra-cooperative disputes shall, as far as practicable, be settled amicably in accordance with the conciliation or mediation mechanisms embodied in the bylaws of the cooperative, and in applicable laws.

Should such a conciliation/mediation proceeding fail, the matter shall be settled in a court of competent jurisdiction.

Art. 122. Electric Cooperatives. Electric cooperatives shall be covered by this Code. However, there shall be a transaction period of three (3) years within which the Cooperative Development Authority and the National Electrification Administration shall help and assist electric cooperatives to qualify under this Code. The Cooperative Development Authority and the National Electrification Administration shall jointly promulgate rules and regulations to the end that the provisions of this law are harmonized with the provisions of Presidential Decree No. 269.

Art. 123. Regulations.

The Cooperative Development Authority may issue regulations to implement those provisions of this Code which expressly call for the issuance thereof. This paragraph shall not apply to those cases wherein a specific provision of this Code expressly designates particular government agencies which shall issue the regulations called for by any provision of this Code.

Where a provision of this Code does not expressly call for nor authorize the issuance of a regulation, no regulation shall be issued thereon. Any regulation issued in violation of this paragraph shall be null and void ab initio.

No regulation shall be issued nor become effective under this Code unless the following requirements are satisfied:

Public announcement on the intention to issue regulations describing the subject to be dealt on with a copy of the proposed regulations attached, inviting the public to make known their views thereon and submit their positions with respect thereof. The announcement shall be published in a daily newspaper of national general circulation at least once a week for four (4) consecutive weeks prior to the intended date of commencement of the public hearing thereon, specifying the date, time and place of the public hearing;

Public hearings may be conducted separately in Luzon, Visayas and Mindanao by the Authority and the proceedings thereof shall be duly recorded. Minutes of a public hearing shall be made available to the public at cost. The public hearing may be held in several sessions: Provided, That no session shall be conducted unless the minutes of all other previous sessions have been published beforehand;

The proceed regulations shall be supported by a memorandum of justification for every provision thereof which shall include citation of the legal bases therefor, the reasons for such provision, and the expected results therefrom; and

The regulations shall be recommended by the Authority and approved by the Office of the President, and the same shall take effect thirty (30) days after publication in the Official Gazette.

Art. 124. Penal Provisions. The following acts or omissions affecting cooperatives are hereby prohibited:

The use of the word "cooperative" by any person or of persons or organizations, domestic or foreign, unless duly registered as a cooperative under this Code. In case of violation hereof, the individual or individuals concerned, or in the case of an organization, its officers and directors shall, upon conviction, each suffer the penalty of imprisonment for one (1) year and a fine not exceeding One thousand pesos (P1,000.00), or both at the discretion of the court;

Direct or indirect interference or intervention by any public official or employee into the internal affairs of cooperative of which he is not a member, such as, but not limited to, the following.

Influencing the election or appointment of officers, directors, committee members and employees through public or private endorsement or campaign for or against any person or group of persons;

Requiring prior clearance for any policy or decision within the cooperative;

Requesting or demanding for the creation of positions or organizational units, or recommending any person for appointment, transfer, or removal from his position; or

Any other acts inimical or adverse to the autonomy and independence of cooperatives.

In case of violation of any provision of this subsection, the individual or individuals, and in the case of organizations, its officers and directors shall, upon conviction by a court, each suffer a penalty of not less than one (1) year but not more than five (5) years imprisonment or a fine in the amount of not less than Five thousand pesos (P5,000.00), or both at the discretion of the court;

(3) A director, officer or committee member who violated the provisions of Article 47 (liability of directors, officers committee members), Article 50 (disloyalty of a director) and Article 51 (illegal use of confidential information), shall upon conviction suffer a fine of not less than Five thousand pesos (P5,000.00) nor more than Five hundred thousand pesos (P500,000.00) or imprisonment of not less than five (5) years but not more than ten (10) years or both at the court's discretion;

(4) Any violation of any provision of this Code for which no penalty is imposed shall be punished by imprisonment of not less than six (6) months nor more than one (1) year and a fine of not less than One thousand pesos (P1,000.00), or both at the discretion of the court.

Art. 125. Printing and Distribution.

The National Printing Office shall publish this Code in the Official Gazette in full within sixty (60) days from the date of approval thereof. Copies of this Code shall be given to every department, agency and instrumentality of the National Government, including regional, provincial offices and local governments including government-owned and controlled corporations.

All duly registered cooperatives and their federations, unions and associations, and cooperative corporations shall be given one (1) copy each at cost. Thereafter, every newly registered cooperative or cooperative corporations shall be issued at cost a copy of this Code and the regulations promulgated thereon together with its certificate of registration.

Art. 126. Interpretation and Construction. In case of doubt as to the meaning of any provision of this Code or the regulations issued in pursuance thereof, the same shall be resolved liberally in favor of the cooperatives and their members.

Art. 127. Repeals. Except as expressly provided by this Code, Presidential Decree No. 175 and all other laws, or parts thereof, inconsistent with any provision of this Code shall be deemed repealed: Provided, however, That nothing in this Code shall be interpreted to mean the amendment or repeal of any provision of Presidential Decree No. 269: Provided, further, That the electric cooperatives which qualify as such under this Code shall fall under the coverage thereof.

Art. 128. Transitory Provisions. All cooperatives registered under Presidential Decree Nos. 175 and 775 and Executive Order No. 898, and all other laws shall be deemed registered with the Cooperative Development Authority: Provided however, That they shall submit to the nearest Cooperative Development Authority office their certificate of registration, copies of the articles of cooperation and bylaws and their latest duly audited financial statements within one (1) year from the effectivity of this Act, otherwise their registration shall be canceled: Provided, further, That cooperatives created under Presidential Decree No. 269, as amended by Presidential Decree No. 1645, shall be given three (3) years within which to qualify and register with the Authority: Provided, finally, That after these cooperatives shall have qualified and registered, the provisions of Sections 3 and 5 of Presidential Decree No. 1645 shall no longer be applicable to said cooperatives.

Art. 129. Separability. Should any part of this Code be declared unconstitutional, the rest of the provisions shall not be affected thereby.

Art. 130. Effectivity. This Code shall take effect fifteen (15) days from its publication in a newspaper of general circulation.

Islamic Banks

RA No. 6848

AN ACT PROVIDING FOR THE 1989 CHARTER OF THE AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILIPPINES, AUTHORIZING ITS CONDUCT OF ISLAMIC BANKING BUSINESS, AND REPEALING FOR THIS PURPOSE PRESIDENTIAL DECREE NUMBERED TWO HUNDRED AND SIXTY-FOUR AS AMENDED BY PRESIDENTIAL DECREE NUMBERED FIVE HUNDRED AND FORTY-TWO (CREATING THE PHILIPPINE AMANAH BANK)January 26, 1990

WHEREAS, the State, in Section 20, Article II of the Constitution, encourages private enterprise and provides incentives to needed investments;

WHEREAS, under the Constitution, the use of property bears a social function, so that the consequences in law also must be defined by policy objectives related to property rights in productive enterprises;

WHEREAS, toward this end, the Government has committed itself to the establishment of an Islamic bank that operates within a legal framework permitting the investors or participants the rights to equitable or beneficial share in the profits realized from financing productive activities and other operations: Now, therefore,

THE CHARTER OF THE AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILIPPINES

TITLE

Sec. 1. Title. This Act shall be known as "The Charter of the Al-Amanah Islamic Investment Bank of the Philippines."

ESTABLISHMENT AND FUNCTIONS

Sec. 2. Name, Domicile and Place of Business. There is hereby created the Al-Amanah Islamic Investment Bank of the Philippines, which shall be hereinafter called the Islamic Bank. Its principal domicile and place of business shall be in Zamboanga City. It may establish branches, agencies or other offices at such places in the Philippines or abroad subject to the laws, rules and regulations of the Central Bank.

Sec. 3. Purpose and Basis. The primary purpose of the Islamic Bank shall be to promote and accelerate the socioeconomic development of the Autonomous Region by performing banking, financing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking.

All business dealings and activities of the Islamic Bank shall be subject to the basic principles and rulings of Islamic Shari'a within the purview of the aforementioned declared policy. Any zakat or "tithe" paid by the Islamic Bank on behalf of its shareholders and depositors shall be considered as part of compliance by the Islamic Bank with its obligation to appropriate said zakat fund and to disburse it in legitimate channels to be ascertained first by the Shari'a Advisory Council.

Sec. 4. Shari'a Advisory Council. There is hereby created a Shari'a Advisory Council of the Islamic Bank which shall be composed of not more than five (5) members, selected from among Islamic scholars and jurists of comparative law.

The members shall be elected at a general shareholders meeting of the Islamic Bank every three (3) years from a list of nominees prepared by the Board of Directors of the Islamic Bank. The Board is hereby authorized to select the members of the first Shari'a Advisory Council and to determine their remunerations.

Sec. 5. Functions of the Shari'a Advisory Council. The functions of the Shari'a Advisory Council shall be to offer advice and undertake reviews pertaining to the application of the principles and rulings of the Islamic Shari'a to the Islamic Bank's transactions, but it shall not directly involve itself in the operations of the Bank.

Any member of the Shari'a Advisory Council may be invited to sit in the regular or special meetings of the Board of Directors of the Islamic Bank to expound his views on matters of the Islamic Shari'a

affecting a particular transaction but he shall not be entitled to vote on the question presented before the board meetings.

CORPORATE POWERS

Sec. 6. Islamic Bank's Powers. The Al-Amanah Islamic Investment Bank of the Philippines, upon its organization, shall be a body corporate and shall have the power:

To prescribe its bylaws and its operating policies;To adopt, alter and use a corporate seal;To make contracts, to sue and be sued;To borrow money; to own real or personal property and to introduce improvements thereon, and to sell, mortgage or otherwise dispose of the same;To employ such officers and personnel, preferably from the qualified Muslim sector, as may be necessary to carry Islamic banking business;To establish such branches and agencies in provinces and cities in the Philippines, particularly where Muslims are predominantly located, and such correspondent offices in other areas in the country or abroad as may be necessary to carry on its Islamic banking business, subject to the provisions of Section 2 hereof;To perform the following banking services:

Open current or checking accounts;Open savings accounts for safekeeping or custody with no participation in profit and losses except unless otherwise authorized by the account holders to be invested;Accept investment account placements and invest the same for a term with the Islamic Bank's funds in Islamically permissible transactions on participation basis;Accept foreign currency deposits from banks, companies, organizations and individuals, including foreign governments;Buy and sell foreign exchange;Act as correspondent of banks and institutions to handle remittances or any fund transfers;Accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness under the universally accepted Islamic financial instruments;Act as collection agent insofar as the payment orders, bills of exchange or other commercial documents are exclusive of riba, or interest prohibitions;Provide financing with or without collateral by way of leasing, sale and leaseback, or cost plus profit sales arrangement;Handle storage operations for goods or commodity financing secured by warehouse receipts presented to the Bank;Issue shares for the account of institutions and companies assisted by the Bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law;Undertake various investments in all transactions allowed by the Islamic Shari'a in such a way that shall not permit the haram (forbidden), nor forbid the halal (permissible);

To act as an official government depository, or its branches, subdivisions and instrumentalities and of government-owned or controlled corporations, particularly those doing business in the autonomous region;

To issue investment participation certificates, muquaradah (non-interest-bearing bonds), debentures, collaterals and/or the renewal or refinancing of the same, with the approval of the Monetary Board of the Central Bank of the Philippines, to be used by the Bank in its financing operations for projects that will promote the economic development primarily of the Autonomous Region;

To carry out financing and joint investment operations by way of mudarabah partnership, musharaka joint venture or by decreasing participation, murabaha purchasing for others on a cost-plus financing arrangement, and to invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the Islamic Bank on a joint mudarabah basis;

To invest in equities of the following allied undertakings:

Warehousing companies;Leasing companies;Storage companies;Safe deposit box companies;Companies engaged in the management of mutual funds but not in the mutual funds themselves; andSuch other similar activities as the Monetary Board of the Central Bank of the Philippines has declared or may declare as appropriate from time to time, subject to existing limitations imposed by law;

To exercise the powers granted under this Charter and such incidental powers as may be necessary to carry on its business, and to exercise further the general powers mentioned in the Corporation Law and the General Banking Act, insofar as they are not inconsistent or incompatible with the provisions of this Charter.

CAPITAL RESOURCES OF THE BANK

Sec. 7. Authorized Capital Stock. The authorized capital stock of the Islamic Bank shall be One billion pesos (P1,000,000,000) divided into ten million par value shares of One hundred pesos each. All shares are nominative and indivisible. The subscription to and ownership of such shares, including the transfer thereof to third parties, shall be limited to persons and entities who subscribe to the concept of Islamic banking.

Sec. 8. Classification of Shares: Its Features. The Islamic Bank's authorized capital stock shall have the following classifications and features in relation to its Islamic banking operation:

Series "A'' shares shall comprise five million one hundred thousand shares equivalent to Five hundred ten million pesos (P510,000,000) to be made available for subscription by the present stockholders of the Philippine Amanah Bank namely: the National Government, and such other financial entities as it may designate.

Series "B" shares shall comprise nine hundred thousand shares equivalent to Ninety million pesos (P90,000,000) to be made available for subscription by the Filipino individuals and institutions.

Series "C" shares shall comprise four million shares equivalent to Four hundred million pesos (P400,000,000) to be made available for subscription by Filipino and foreign individuals and/or institutions or entities.

Anyone of the shareholders may exercise its preemptive right to consolidate ownership of the outstanding shares as hereinafter increased: Provided, That the common shares of the Philippine Amanah Bank which have been issued and outstanding shall form part of the increased capitalization of the Islamic Bank, subject to the concurrence of the existing shareholders of the Philippine Amanah Bank.

The Islamic Bank is authorized to reacquire its common shares that are held privately.

The Islamic Bank may take the necessary steps to have its series "B'' shares listed in any duly registered stock exchange.

Sec. 9. Board of Arbitration. The Board of Directors, acting as an arbitrator, shall settle by the majority decision of its members any dispute between and among shareholders of the Islamic Bank, whether individuals or entities, where such dispute arises from their relations as shareholders in the Islamic Bank. The Board shall not be bound in this respect to the procedures of laws on civil and commercial pleadings, except in regard to the basic principles of due process.

If the dispute is between the Islamic Bank and any of the investors or the shareholders, a Board of Arbitration shall settle such dispute. In this case, the Board of Arbitration, consisting of three (3) members, shall be formed by two (2) parties to the dispute within forty-five (45) days from receipt of written notice by either party to the dispute. The three (3) members shall be selected as follows: one (1) arbitrator from each party who shall then select a casting arbitrator as the third member of the board. The three (3) shall select one of them to preside over the Board of Arbitration. The selection by each party of its arbitrator shall be deemed as an acceptance of the arbitrator's decision and of its finality.

In the event that one of the two parties shall fail to select its arbitrator or in the case of nonagreement on the selection of the casting arbitrator or the presiding member of the Board of Arbitration within the period specified in the preceding paragraph, the matter shall be submitted to the Shari'a Advisory Council to select the arbitrator, the casting arbitrator or the presiding member, as the case may be.

The Board of Arbitration shall meet at the Islamic Bank's principal office and shall set up the procedure of arbitration which it shall follow in hearing and deciding the dispute. The decision shall include the method of its execution and the party that shall incur the costs of arbitration. The final judgment shall be deposited with the office of the Corporate Secretary of the Bank and the Securities and Exchange Commission.

The Board of Arbitration's decision, shall in all cases, be final and executory. It shall be valid for execution in the same manner as final judgments are effected under Republic Act No. 876 otherwise known as the Arbitration Law.

Sec. 10. Incentives to Islamic Banking. Subject to the provisions of Section 74 of the Central Bank Act, the provisions of the Omnibus Investment Code on the basic rights and guarantees of investors are made applicable to the commercial operations of the Islamic Bank in respect to repatriation or remittance of profits from investments, and to protection against nationalization, sequestrations, or expropriation proceedings. Any proceedings of judicial or administrative seizure may not be taken against the said property or investment except upon a final court judgment.

Sec. 11. Grants and Donations. The Islamic Bank shall accept grants, donations, endowments, and subsidies, or funds and/or property offered by individuals and organizations, who may earmark such grants for a specific purpose or for such other purposes beneficial to the Muslim communities, without prejudice to the general objectives of the Islamic Bank.The financial statement and books of accounts of such funds shall be maintained separately but may be supplemented to the Islamic Bank's balance sheet.

Under special circumstances in which the Board of Directors considers it advisable to promote or facilitate Islamic banking business and commercial operations, the Islamic Bank may seek financing from governments, organizations, individuals or banks always without prejudice to the provisions of Section 43 of this Charter.

PLACEMENTS AND INVESTMENTS OF FUNDS

Sec. 12. Non-Interest Bearing Placements. The Islamic Bank is authorized to accept deposits from governments, banks, organizations or other entities and individuals from within the Philippines or abroad which shall form under any of the following non-interest bearing placements:

Savings accountsInvestment participation accountsCurrent accounts and other deposit liabilities.

Any deposit received by the Islamic Bank without authorization to invest shall be treated as current accounts and savings accounts and may be withdrawn wholly or partly at any time.All deposits received with authorization to invest for a given period of time shall form part of the general pool of placements allocated for the investment portfolios of the Islamic Bank and may be added to its working capital to be invested in any special projects or in general areas of investments or commercial operations of the Bank.

Sec. 13. Investment of Funds. The Islamic Bank shall have the capacity of agent or attorney and shall act with full authority on behalf of the group of depositors in general in investing their co-mingled deposits without prejudice to the following sections and shall ensure a degree of liquidity to be determined by the Board of Directors to meet the current obligations of the Islamic Bank including drawings from savings accounts and current accounts: Provided, That such degree of liquidity shall be subject to the reserve requirement as may be determined by the Central Bank. The Board of Directors shall determine the period for an investment participation account. Investment of funds shall be undertaken by the Islamic Bank acting on behalf of the group of depositors or investors in selected areas of investment under such terms and conditions as the Board of Directors may determine by way of mudarabah or other forms of joint investment permitted by Islamic Shari'a principle.

Sec. 14. Return on Investment Funds. The depositors or investors in joint investment participation accounts shall be entitled to a portion of the return on investment according to the deposit balances and its period. The profits on participation account with authorization to invest in specific transaction shall be calculated on the same basis as on the capital funds invested as determined by the Board of Directors pursuant to Section 35 of this Act.

Sec. 15. Allocation of Resources. Any provision of law to the contrary notwithstanding, the Islamic Bank may allocate part of its own investible funds or of the deposits on hand to finance investment projects and carry on its Islamic banking business directly or indirectly under its own supervision. For this purpose, it may create and finance investment companies or affiliates which shall manage investment projects on behalf of and under the supervision of the Islamic Bank and for its own account.

The Islamic Bank shall ascertain the viability and soundness of investment projects which it may directly supervise and those in which it may participate with part of its own funds, with the general pool

of investors funds with authorization. The Islamic Bank shall have the right to inspect and supervise the projects which it shall finance or in which it is the majority shareholder. The original capital and related profits shall be remitted in the same currency it was originally contributed or in one of the convertible currencies, as the Board of Directors shall determine in accordance with this Charter.

ISLAMIC BANK OPERATIONS IN GENERAL

Sec. 16. Authorized Banking Services. The Islamic Bank shall exercise all the powers and perform all the services of a bank, except as otherwise prohibited by this Act: Provided, That no transactions by any customer, company, corporation or firm with the said Islamic Bank shall be permitted for discounts by the Central Bank of the Philippines.

Sec. 17. Authorized Commercial Operations. Notwithstanding the provisions of any law to the contrary, the Islamic Bank is hereby authorized to operate an Investment House pursuant to Presidential Decree No. 129, as amended, and as a Venture Capital Corporation pursuant to Presidential Decree No. 1688 and, by virtue thereof, carry on the following types of commercial operations:

The Islamic Bank may have a direct interest as a shareholder, partner, owner or any other capacity in any commercial, industrial, agricultural, real estate or development project under mudarabah form of partnership or musharaka joint venture agreement or by decreasing participation, or otherwise invest under any of the various contemporary Islamic financing techniques or modes of investment for profit sharing;

The Islamic Bank may carry on commercial operations for the purpose of realizing its investment banking objectives by establishing enterprises or financing existing enterprises, or otherwise by participating in any way with other companies, institutions or banks performing activities similar to its own or which may help accomplish its objectives in the Philippines or abroad, under any of the contemporary Islamic financing techniques or modes of investment for profit sharing; and

The Islamic Bank may perform all business ventures and transactions as may be necessary to carry out the objectives of its charter within the framework of the Islamic Bank's financial capabilities and technical considerations prescribed by law and convention: Provided, That these shall not involve any riba or other activities prohibited by the Islamic Shari'a principles.

Sec. 18. Employee Share Schemes. The Board of Directors may adopt an employee profit sharing scheme under any of the following ways:

Any arrangement under which the directors, officers and employees of the Islamic Bank receive in addition to their salaries and wages a share, fixed beforehand, in the profits realized by the Islamic Bank or by affiliate companies of the Islamic Bank to which the profit sharing scheme relates; and

Any arrangement under which the Islamic Bank facilitates the acquisition by its directors, officers and employees of common shares of stock either as share-incentives, share-bonus options, or any other share-saving schemes as the Board of Directors may determine.

No scheme shall be approved by the Board of Directors under this section unless it is satisfied that the participant in the profit sharing scheme is bound by a contract with the Islamic Bank by virtue of which an appropriation of shares has been made for the purpose. The shares so purchased or appropriated shall be deposited in escrow with the Bank.

The Islamic Bank shall then constitute the trustees of an approved scheme, whose functions with respect to the common shares held by them are regulated by Chapter VII of the General Banking Act and other pertinent laws, and terms of which are embodied in a deed of instrument as the Board may require.

Sec. 19. Investment Ceilings; Business Limits. The Islamic Bank shall observe the following investment ceilings and business limits in its operations:

The aggregate credit facilities or any other liabilities of any customer of the Islamic Bank shall not exceed at all times fifteen per centum (15%) of the unimpaired capital and surplus of the Bank;

The aggregate amount of investment portfolios for any single industry shall at no time exceed thirty per centum (30%) of the Islamic Bank's investment capacity. Investment capacity of the Islamic Bank being the Islamic equivalent of commercial lending and overall credit ceilings shall be defined as the maximum expansion for investments and credits that the Islamic Bank is authorized to grant or extend

as may be determined and computed by the Central Bank in relation to the unimpaired capital and surplus of the Bank;

The outstanding unsecured loans or credit accommodations which the Islamic Bank may extend at any time without security, or in respect of any advance, loan or credit facility made with the security wholly or partly, whenever at any time it exceeds the aggregate market value of the assets constituting the security, shall be limited to Fifty thousand pesos (P50,000.00) to any person, company, corporation or firm. The term loan whenever used in this paragraph shall represent qard hasan benevolent loan; and

The Islamic Bank shall not grant any credit facility to any person for the purpose of financing the acquisition of the holding of shares in any company, corporation or firm in excess of fifty percent (50%) of the appraised value of the shares at the time the credit facility is granted.

Sec. 20. Loans to Directors, Officers or Employees Restrictions. Subject to the limitations provided herein, the Islamic Bank may grant to any of its officers or employees a loan as provided under its scheme of service and, whenever the Islamic Bank is satisfied that special circumstances exist, a loan not exceeding at any one time an amount equivalent to six (6) months remuneration of each officer or employee on such terms and conditions as the Islamic Bank deems fit. The Islamic Bank shall not, directly or indirectly, grant an advance loan or credit facility to any of its directors, officers or employees, or any other person for whom any of them is a guarantor or in any manner to be an obligor for money granted by the Islamic Bank. No loan or credit facility shall be granted by the Islamic Bank to a company, corporation, partnership or firm wherein any member of the Board of Directors or auditors is a shareholder, partner, manager, agent or employee in any manner, except with the written approval of and by the unanimous vote of no less than two-thirds (2/3) of all the members of the Board of Directors excluding the director concerned: Provided, That the total liabilities to the Islamic Bank shall be limited to the director or auditor's outstanding deposits or the book value of his or her paid-in capital in the Islamic Bank. Any such approval shall be entered upon the records of the Islamic Bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising department of the Central Bank of the Philippines.

The office of any director, officer or auditor of the Islamic Bank who violates the provisions of this section shall automatically become vacant and the persons who acted in contravention thereof shall be subject to criminal prosecution and suffer the penalties provided by law.

Sec. 21. Special Cash Account. The Islamic Bank shall open a special cash account with the Central Bank in which its liquid funds shall be deposited. Any transfer of funds from this account to other accounts shall be made only upon prior consultation with the Islamic Bank.

Sec. 22. Capital Funds Requirement. The Islamic Bank shall maintain its combined capital accounts in proportion to its assets as prescribed by the General Banking Act and subject to the rules and regulations of the Central Bank.

Sec. 23. Investment Risk Fund. The Islamic Bank shall maintain general reserves and appropriations pursuant to the profit and loss distributions made under Section 35 of this Act. All amounts appropriated for the Investment Risk Fund out of the net profits of each year shall be invested for the benefit of the Islamic Bank only in safe non-interest-bearing transactions by authority of the Board of Directors.

Sec. 24. Periodic Reports. The Islamic Bank shall, in addition to periodic reports which may be required pursuant to the provisions of any other law, be required to submit to the Central Bank a report of any changes relating to the Islamic Bank's employee profit sharing scheme approved by the Board of Directors.

The Islamic Bank shall likewise make a report to the Central Bank whenever a change is about to take place in relation to the ownership or control of the Islamic Bank. The approval of the Monetary Board shall be required in the following changes:

Any proposal for the sale or disposal of its share or business, or other matters related thereto, which will result in a change of the control or management of the Islamic Bank; and

Any scheme for reconstruction or for consolidation or merger, or otherwise, between the Islamic Bank and any other company wherein the whole or any part of the undertaking or the property of the Islamic Bank is to be transferred to another corporation.

BANK MANAGEMENT AND GENERAL MEETING

Sec. 25. Board of Directors. The Board of Directors composed of nine (9) members duly elected by the General Shareholders Meeting, as provided for in this Act, shall convene at the principal office once every three (3) months at the most upon due notice by the Chairman or, whenever the need arises, upon the request of three (3) members of the Board of Directors. The Board may convene outside the Islamic Bank's principal office as the members shall determine in the bylaws of the Islamic Bank.

Sec. 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic Bank, except such matters as are explicitly reserved for the general shareholders meeting. The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter as well as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration.

The Board of Directors shall have the power to appoint managers, authorize agents or legal representatives and shall vest them with signing authority on behalf of the Bank either severally or jointly in accordance with the operational procedures of the Bank.

The Board shall cause the preparation of the Islamic Bank's balance sheet for each financial year within three (3) months at the latest from the end of each accounting period as well as the profit and loss statement according to accounting rules established and based on Islamic criteria. Copies of the audited annual balance sheet, profit and loss account, together with any note thereon, and the report of the auditor and the directors own report shall he provided to the shareholders before the date of the general meeting.

Sec. 27. Chief Executive Officer; Other Officers and Employees. The Chief Executive Officer of the Islamic shall be the Chairman who shall be chosen by the Board of Directors from among themselves. All other officers and employees of the Islamic Bank shall be appointed and removed by the Board upon recommendation of the Chief Executive Officer which shall not be subject to Civil Service Law.

The Chief Executive Officer of the Islamic Bank shall, among others, execute and administer the policies, measures, orders and resolutions approved by the Board of Directors. In particular, he shall have the power and duty: to execute all contracts in behalf of the Islamic Bank and to enter into all necessary obligations by this Charter required or permitted; to report weekly to the Board of Directors the main facts concerning the operations of the Islamic Bank during the preceding week and suggest changes in policy or policies which will serve the best interest of the Islamic Bank.

Sec. 28. Business Development Office. The Islamic Bank shall have a Business Development Office which shall be responsible for the following:

To conduct periodic economic surveys and studies of the investment climate and opportunities in the Islamic Bank's sphere of operations and identify the viable projects which may be sponsored by the people of the Autonomous Region;

To offer technical consultancy services in the preparation of project studies and in meeting other technical credit requirements of the Islamic Bank, including the provision of the management consultants at rates to be determined by the Board of Directors to projects financially assisted by the Islamic Bank; and

To perform such other functions as may be directed by the Board of Directors.

Sec 29. General Shareholders Meeting. The general shareholders meeting shall convene annually at the latest within six (6) months following the end of the financial year of the Bank at the place, date and time fixed in the notice for the meeting. The attendance of shareholders representing at least sixty per centum (60%) of the capital of the Islamic Bank shall constitute a quorum to do business.

Sec. 30. Purpose of General Meeting. The general shareholders meeting shall convene purposely to hear the Board of Directors' report on the activities of the Islamic Bank, its financial condition, the auditor's report and to approve the balance sheet for the financial year ended and the profit and loss statement, to determine the portion of dividends to be distributed to the shareholders and the method of distribution, to appoint the auditors, and to elect the members of the Shari'a Advisory Council.

Sec. 31. Ordinary and Extraordinary Sessions. The general shareholders meeting shall be presided over by the Chairman of the Board of Directors. All resolutions adopted by the general meeting in ordinary session assembled shall be taken by a vote of majority of the shareholders represented therein and in case of votes being equal, the Chairman shall cast his vote to break the tie. The

resolutions of the general meeting adopted in accordance therewith shall be binding on all shareholders including those not in attendance or opposing the resolution.

An extraordinary general meeting shall be required to pass resolutions related to the increase or decrease of capital of the Bank, the extension of its legal existence or matters affecting amendment of the Charter. Resolutions of the extraordinary general meeting shall be deemed adopted when a majority vote of at least sixty-six and two-thirds plus one per centum (66 & 2/3 + 1%) of the capital shares shall have been cast.

In no case shall the general meeting resolve to modify the object of the Bank as an Islamic Investment Bank.

Sec. 32. Bank Auditor: Reports. Notwithstanding the provisions of any existing law to the contrary, the Islamic Bank is hereby authorized to appoint an external auditor approved by the general shareholders meeting whose qualifications and remunerations shall be fixed by the Board of Directors. The external auditor appointed under this section shall assume his functions from the date of his appointment until the date of the next general shareholders meeting. In case a vacancy occurs at any time during the year for any reason, the Board of Directors shall immediately appoint a replacement.

The duties of the auditor shall be to conduct an audit of the accounts of the Bank and to make a report to the Board of Directors.

In the exercise of his auditing functions, all Bank books, accounts and documents shall be made available to the auditor for inspection to ascertain the Bank's asset and obligations. Copies of the latest audited balance sheet, profit and loss statement, together with any note thereon, and the reports of the auditor to the Board of Directors shall be forwarded by the Islamic Bank, within the prescribed time to the Central Bank.

CONFIDENTIAL INFORMATION

Sec. 33. Confidential Information. Banking transactions relating to all deposits of whatever nature are confidential and may not be examined, inquired or looked into by any person, government official, bureau or office except as provided in the preceding section, or upon written permission by the depositor, or in cases where the money deposited or the transaction concerned is the subject of a court order.

It shall be unlawful for any official or employee of the Islamic Bank or any person as may be designated by the Board of Directors to examine or audit the books of the Bank to disclose or reveal to any person any confidential information except under the circumstances mentioned in the preceding paragraph.

PROFIT AND LOSS POLICY

Sec. 34. Accounting Period. The Financial Year of the Islamic Bank shall be based on the Gregorian calendar, but the corresponding Islamic Hijra date shall be mentioned on all correspondence, contracts, printed materials, forms and records of the Islamic Bank. The accounting period shall commence from the first day of January and close at the end of December each year.

Sec. 35. Determination of Profits and Losses. At the close of each financial year, the Islamic Bank shall determine the results of its operation, in the determination of which the portion of profits due to the Islamic Bank and the investors shall be allocated pursuant to the provisions of this Act.

The Board of Directors shall, after deducting the general and administrative expenses of the Bank and all its operating expenses including remunerations of the Board of Directors and the Shari'a Advisory Council, determine annually what part of the income shall be appropriated to reserves, investors and shareholders.

All accounts relating to financing and joint investment operations shall be kept separately from the accounts from that of the other banking activities and services offered by the Islamic Bank. The same rule in respect to the accounts of specific investments shall apply where such specific projects may have a separate account.

Allocation of joint investment profits shall be made after deducting an amount equal to ten per centum (10%) of the profits realized from various operations during the financial year to be transferred to a reserve account known as Investment Risk Fund for the purpose of meeting any losses exceeding the total profits derived from investments of that year: Provided, however, That should the accumulated

reserves equal the authorized capital of the Islamic Bank, the Board of Directors may reduce the amount of the annual deduction to a minimal percentage until the aggregate reserves become double the amount of the capital after which the herein authorized deduction shall cease to accrue to the reserve account.

Losses incurred, if any, shall be deducted from the total profits realized for the financial year in which such losses are incurred but any excess of losses over the profits which have been actually realized during that year may be deducted from the Investment Risk Fund opened for covering the risks of investment: Provided, That should the total profits realized in the year together with the reserves accumulated from previous years be insufficient to cover the losses incurred, the Islamic Bank shall carry out a comprehensive assessment to arrive at estimated profit and loss based on market rates, from operations which are financed by mudarabah funds and which have not reached the stage of final settlement by the end of the financial year.

Sec. 36. Sharing Between the Bank and the Investors. Not later than the end of the first month of each financial year, the Board of Directors shall determine and publish the general percentages of profit to be allocated to the total funds participating in joint investments of the Islamic Bank.

The Islamic Bank as a joint venturer (mudarib) shall be entitled to certain percentage after deducting the amount allocated to investors. The Bank shall likewise be entitled to a share in the profits of joint investments in proportion to its own invested funds.

For the purpose of calculating funds employed in financing operations, priority shall be given to joint investment accounts and the holders of muquaradah bonds.All zakat due on the shareholder's capital and reserves represented by the pecuniary value of shares and the zakat due on the investor's funds or profits accruing to every depositor shall be paid to the zakat fund, subject to their instructions.

Sec. 37. Tax Exemption. The Islamic Bank assets, profits, distributions and all contracts, deeds, documents and transactions related to the conduct of business of the Islamic Bank shall be exempted from all taxes under the National Internal Revenue Code to commence from the first taxable year, following its actual Islamic banking operation as certified by the Central Bank, to the extent as herein made allowable:

One hundred per centum (100%) for the first five (5) years; andSeventy-five per centum (75%) for the sixth through the eighth years: Provided, however, That said exemption shall apply only to such taxes, fees, charges and assessments for which the Islamic Bank would otherwise be liable, and shall not apply to the taxes, fees, charges or assessments payable by persons or other entities doing business with the Islamic Bank.

An investment in Islamic banking business to the extent of actual participation in profit and loss sharing scheme, paid in cash or property, shall be granted an exemption from all taxes under the National Internal Revenue Code, except income tax: Provided, That an investment tax allowance shall be permitted as a deduction from taxable income under such transactions to the extent that the Islamic Bank pays out zakat on the income of investors capital and surplus reserves for the duration of the joint investment period.

Sec. 38. Exemption from Customs Duties. Within the first five (5) years of operation of the Islamic Bank, all importations by the Bank of machinery, equipment, calculators and computers and the accompanying spare parts, as may be necessary for its operation, shall be exempted from customs duties and compensating taxes payable thereon: Provided, however, That the same shall not be disposed of domestically unless payment is made of all duties thereof at the tariff rates and according to their condition at the time of disposal and upon compliance with all import and exchange procedures.

Sec. 39. Non-Applicability of Selected Acts. In order to achieve the international and domestic objectives of Islamic banking business, the provisions of the following acts and laws shall not apply to the Islamic Bank to the extent as herein rendered inoperative:

The provisions of the Central Bank Act and the General Banking Act with particular reference to the determination of bank interest rates, loans and discounts, and any interest-bearing instruments or charge: Provided, That nothing contained herein shall be construed to impair the powers of the Central Bank to supervise and regulate the activities of the Islamic Bank;

The General Auditing Act and any other enactments thereon inconsistent with this Act; and

The provisions of Republic Act Numbered Three thousand five hundred ninety-one, as amended, and all laws regulating insurance companies: Provided however, That nothing contained herein shall preclude the Islamic Bank from the establishment of contemporary Islamic tafakul (solidarity services) free of riba premiums or interests.

Sec. 40. Employment of Foreign Nationals. Subject to the provisions of Section 29 of Commonwealth Act No. 613, and the Anti-Dummy Law, as amended, the Islamic Bank may employ foreign nationals in supervisory, technical or advisory positions for a period not exceeding five (5) years extendible for limited periods upon the recommendation of the Governor of the Central Bank.

Foreign nationals under employment contract within the purview of this Act, their spouses and unmarried children under twenty-one (21) years of age, who are not excluded by Section 29 of Commonwealth Act No. 613, shall be permitted to enter and reside in the Philippines during the period of employment of such foreign nationals.

Sec. 41. Training of Technical Personnel. The Islamic Bank shall promote and sponsor the training of technical personnel in the field of Islamic banking, finance and insurance. Towards this end, the Islamic Bank is hereby authorized to defray the costs of study, at home or abroad, of outstanding employees of the Islamic Bank, of promising university graduates or of any other qualified persons who shall be determined by proper competitive examinations. The Board of Directors shall prescribe rules and regulations to govern the training program of the Islamic Bank.

LEGAL EXISTENCE

Sec. 42. Terms of Legal Existence. The legal existence of the Islamic Bank shall be for a period of fifty (50) years, from and after the date of the approval of this Act, renewable upon resolution of the general shareholders meeting called for said purpose.

At the expiration of the Islamic Bank's corporate existence or in the event of its dissolution before this date, the general shareholders meeting shall, upon the request of the Board of Directors, define the method of dissolution as provided for in its bylaws.

GENERAL PROVISIONS

Sec. 43. Application of the Islamic Shari'a. The Monetary Board of the Central Bank of the Philippines shall formulate the necessary rules and regulations to carry out the provisions of this Charter for the purpose of providing adequate credit facilities primarily to the people of the Autonomous Region, and to supervise the operation of the Islamic Bank in accordance with the universal principle of the Islamic Shari'a.

Sec. 44. Definition of Terms. For purposes of this Act, the following definition of terms is hereby adopted:

Islamic Bank means the bank created under this Act;

Islamic banking business means banking business whose aims and operations do not involve interest (riba) which is prohibited by the Islamic Shari'a principles;

Shari'a has the meaning assigned to it by Islamic law and jurisprudence as expounded by authoritative sources; in the context of this Act, it is construed by reference to pertinent Quranic ordinances and applicable rules in Islamic jurisprudence on business transactions;

Riba has the meaning assigned to it by Islamic law and jurisprudence as expounded by authoritative sources; in the context of banking activities, the term includes the receipt and payment of interest in the various types of lending and borrowing and in the exchange of currencies on forward basis;

Zakat has the meaning assigned to it by Islamic law and jurisprudence as expounded by authoritative sources; in the context of this Act, it represents an annual "tithe" payable by the Bank on behalf of its shareholders and investors in compliance with Islamic Shari'a principles;

Depositor means a person or entity who has an account at an Islamic Bank, whether the account is a current account, a savings account, an investment account or any other deposit account; unless the context requires another meaning, a depositor corresponds to an investor in joint investment of the Islamic Bank;

(7) Current account liabilities in relation to Islamic banking services means the total deposits at the bank which are repayable on demand;

(8) Savings account liabilities in relation to Islamic banking services means the total deposits at the Islamic Bank which normally require the presentation of passbooks or such other legally acceptable documents in lieu of passbooks as approved by the Central Bank for the deposit or withdrawal of money;

(9) Investment account liabilities in relation to Islamic banking services means the total deposit liabilities at the Islamic Bank in respect of funds placed by a depositor with that bank for a fixed period of time under an agreement to share the profits and losses of that bank on the investment of such funds;

(10) Other deposit liabilities in relation to an Islamic Bank means the deposit liabilities at that bank other than savings account, investment account, current account liabilities and deposit liabilities from any Islamic Bank or any other licensed bank;

(11) Participation in relation to Islamic banking and commercial operations means any agreement or arrangement under which the mode of joint investments or specific transactions shall not involve the element of interest charge other than as percentage share in profits and losses of business;

(12) Share means share in the capital of the Bank or a corporation and includes a stock, except where a distinction between stock and share is expressed or implied.

PENALTIES

Sec. 45. Penalties for Violation. Any director, officer, employee, auditor or agent of the Islamic Bank who violates or permits the violation of any provision of this Act shall be punished by a fine not exceeding Ten thousand pesos (P10,000.00) or an imprisonment of not more than five (5) years, or both, at the discretion of the court.

TRANSITORY AND MISCELLANEOUS PROVISIONS

Sec. 46. Supervision and Regulation by the Central Bank. The Islamic Bank shall be under the supervision and regulation of the Central Bank. All provisions of this Act, except those which pertain to the principles of Islamic Shari'a, shall be subject to all banking and pertinent laws of the Philippines and Central Bank Rules and Regulations which shall include proper safeguards to depositors and investors in the investments, partnerships, agencies and other operations of the bank.

Sec. 47. Privatization. Nothing in this Act shall be construed to preclude the Islamic Bank from privatizing its ownership. For this purpose, any limitation on the transfer of shares shall not be applicable with respect to the shareholdings of the National Government, Social Security System, Government Service Insurance System, Philippine National Bank and Development Bank of the Philippines.

Sec. 48. Transformation to Islamic Banking Business. Upon approval of this Act, all the assets, liabilities and capital accounts of the Philippine Amanah Bank are hereby transferred to the Al-Amanah Islamic Investment Bank.

Nothing in this Act shall be construed to preclude the Islamic Bank from transforming its investment portfolios, accounts or assets for the conduct of Islamic banking business. If, for any reason, such portfolios, accounts or assets granted under the authority of the Philippine Amanah Bank Charter are not eligible for this purpose, the same may be transferred, swapped, sold or otherwise disposed of in any manner deemed feasible following the effectivity of this Act.

Sec. 49. Reorganization of the Bank. The Islamic Bank shall commence its reorganization within six (6) months from the date this Act takes effect. The present personnel complement of the Philippine Amanah Bank shall in the interim continue to discharge their respective functions. Officials and personnel whose services may be dispensed with as a result of this reorganization shall be paid the usual gratuities to which they may be entitled under the existing laws.

Sec. 50. Statutory Articles of Incorporation. This Act upon its effectivity, shall be deemed accepted for all legal intents and purposes as the Statutory Articles of Incorporation of the Al-Amanah Islamic Investment Bank of the Philippines; and that notwithstanding the provision of any existing law to the contrary, said Islamic Bank shall be deemed registered and duly authorized to do business and operate as an Islamic Bank as of the date of approval of this Act.

Sec. 51. Bylaws. Within sixty (60) days upon effectivity of this Act, the bylaws of the Islamic Bank for its organizational, functional and operational government and procedure shall be adopted by affirmative vote at the general shareholders meeting representing a majority of all the subscribed capital stock entitled to vote, whether paid or unpaid, subject to certification by the Monetary Board pursuant to Section Ten of the General Banking Act.

The bylaws, duly certified by the Monetary Board as aforesaid, shall be signed by the shareholders voting for them and shall be kept in the principal office of the Islamic Bank, subject to the inspection of the shareholders during office hours, and a copy thereof, duly certified by a majority of the directors and countersigned by the Corporate Secretary of the Islamic Bank, shall be filed and registered with the Securities and Exchange Commission.

Sec. 52. Repealing and Separability Clauses. Presidential Decree No. 264, as amended by Presidential Decree No. 542, creating the Philippine Amanah Bank is hereby repealed.All acts, executive orders, administrative orders, proclamations, rules and regulations or parts thereof inconsistent with any of the provisions of this Act are hereby repealed or modified accordingly.

If any provision or section of this Act or the application thereof to any person, association or circumstances is held invalid, the other pertinent provisions or section of this Act and their application to such person, association or circumstances shall not be affected thereby.

Sec. 53. Effectivity. This Act shall take effect fifteen (15) days after its publication in at least two (2) newspapers of general circulation.

Other Classifications of Banks as Determined by the Monetary Board of the Bangko Sentral ng Pilipinas

Development Bank of the PhilippinesEO No. 81, as amendedDecember 3, 1986

PROVIDING FOR THE 1986 REVISED CHARTER OF THE DEVELOPMENT BANK OF THE PHILIPPINESWHEREAS, it is the policy of the State that the national interest in both the maintenance of economic stability and the promotion of economic development is best served by a system of financial intermediation that places primary reliance on the private sector, on the maintenance of conditions of competition, and on the market mechanism for its effective operations.

WHEREAS, within the context of the general policy there nevertheless exists a clear role for direct government participation in the banking system through a government development bank, particularly in servicing the medium and long term requirements of agriculture, and small and medium scale industry, export development, and the government sector;

WHEREAS, in pursuit of this national policy there is need to restructure the government financial institutions, particularly the Development Bank of the Philippines, to achieve a more efficient and effective use of available resources, to improve their viability, and avoid unfair competition with the private sector; and

NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order.

Sec. 1. This Executive Order shall be known as " THE 1986 REVISED

CHARTER OF THE DEVELOPMENT BANK OF THE PHILIPPINES".

Sec. 2. Name, Purpose and Domicile. The Development Bank of the Philippines, hereinafter called the Bank, operating under the provisions of Republic Act No. 85, as amended, shall henceforth operate under the provisions of this 1986 Revised Charter. The Bank shall be a body corporate and shall exist for a period of fifty years.

The primary purpose of the Bank shall be to provide banking services principally to service the medium and long term needs of agricultural and industrial enterprises, particularly in the country-side and preferably for small and medium scale enterprises; Provided, however, that the pursuit of these objectives shall be undertaken within the context of a financially viable and stable banking institutions; Provided, further that the Bank shall continue to be classified as a development Bank, Provided, finally, that unless otherwise provided herein, the Bank may perform all other functions of a thrift bank.

The Bank's principal office and place of business shall be in the National Capital Region, also known as Metro Manila. It may open and maintain branches, agencies or other offices at such places in the Philippines as its Board of Directors may deem advisable, with the prior approval of the Monetary Board of the Central Bank of the Philippines.

Sec. 3. Corporate Powers. The Development Bank of the Philippines shall have the power.

To accept such deposits as are allowed thrift banks under existing law and Central Bank regulations, including but not limited to demand, savings, and time deposits.

To grant loans for the establishment, development or expression of any agricultural or industrial enterprise;

(c ) To accept and manage trust funds and properties and carry on the business of a trust corporation;

To act as official government depository with authority to maintain deposits of the government, its subdivisions, branches, and instrumentalities, and of government-owned or controlled corporations, subject to such rules and regulations as the Monetary Board may prescribe;

To acquire, assign, or otherwise dispose of marketable securities and other debt instruments which are essential to the effective conduct of its general banking activities;

To enter into such contracts of guaranty on suretyship as are generally allowed domestic banking institutions under the General Banking Act; and

To adopt, amend, or charge its By-laws; to adopt, alter and use a seal; to make contracts; to sue and be sued; and to exercise the general powers of a corporation mentioned in the Corporation Code of the Philippines, and of a thrift bank under the General Banking Act, insofar as such powers are not inconsistent or incompatible with the provisions of this Charter.

Unless otherwise provided in this Charter, the exercise of the above-mentioned powers on banking shall be subject to applicable law, as well as regulations promulgated by the Central Bank of the Philippines.

Sec. 4. Loans and other Investments. Loans and other investments of the Bank shall be subject to the same limits and ceilings applicable to thrift banks under existing provisions of law and regulations promulgated by the Monetary Board, including but not limited to prescribed limits and ceilings; Provided, that loans and investments existing as of the date of the effectivity of this Charter and which loans and investments would exceed the prescribed limits as a result of the implementation of its rehabilitation program, as well as those investment authorized under Section 6 hereof which are in excess of the prescribed limits shall be reduced within five years in accordance with such program of reduction as may be approved by the Monetary Board. The period of reduction may be extended up to another five years by the President of the Philippines upon recommendation by the Monetary Board.

Sec. 5. Issuance of Bonds. The Bank may issue all kinds of bonds, debentures, and securities, and/or the renewal or refunding thereof (hereinafter called "Bonds"), within and/or outside the Philippines, at such terms, rates, and conditions as the Board of Directors of the Bank may determine, subject to compliance with the provisions of applicable law, and rules and regulations promulgated by the Monetary Board.

The Bank shall provide for appropriate reserves for the redemption or retirement of the bonds. These bonds and other obligations shall be redeemable at the option of the Bank at or before maturity and in such manner as may be stipulated therein and shall bear such rate of interest as may be fixed by the Bank.

Such obligations shall be secured by the assets of the Bank, including the stocks, bonds, debentures, and other securities purchased or held by it under the provisions of this Charter. These bonds and debentures may be long-term, medium, or short-term, with fixed interest rate or floating interest rate.

Sec. 6. Private Development Banks, Other Thrift Banks and Rural Banks. The Bank may assist private development banks and other privately owned banks in the thrift bank category, as well as rural banks, through general credit accommodations including but not limited to conduit lending and rediscounting operations, and extension of technical and managerial assistance; Provided, That the Bank may likewise make equity investments in private development banks and other private owned banks in the thrift bank category, as well as rural banks, if such investment is in connection with the privatization of certain branches of the Bank; Provided, further, That the extent of such equity investment may, with the prior approval of the Monetary Board, exceed the ceilings prescribed in Section 4 hereof; and, Provided, finally, That after five years from effectivity of this Charter, any equity investment shall not exceed thirty (30%) per cent of the equity in any such bank nor shall its total equity investments exceed the prescribed aggregate ceiling on such investments.

Sec. 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per share. These are available for subscription by the National Government. Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof.

Sec. 8. Board of Directors Composition Tenure Per Diems. The affairs and business of the Bank shall be directed and its properties managed and preserved and its corporate powers exercised, unless otherwise provided in this Charter, by a Board of Directors consisting of nine members, to be appointed by the President of the Philippines. The term of office of the Chairman, Vice-Chairman, and the members of the Board of Directors shall be for a period of one year or until such time as their successors are appointed.

The Chairman and the Vice Chairman of the Board shall be appointed by the President of the Philippines. The Vice Chairman of the Board shall assist the Chairman and act in his stead in case of

absence or incapacity. In case of incapacity or absence of both the chairman and vice-chairman, the Board of Directors shall designate a temporary chairman from among its members. No person shall be elected director of the Bank unless he is a natural-born citizen of the Philippines, not less than thirty-five years of age, of good moral character and has attained proficiency, expertise and recognized competence in one or more of the following: banking, finance, economics, law, agriculture, business management, public utility or government administration.

At least four of the members of the Board shall come from the private sector.

Except for the Chairman and the Vice Chairman of the Board, no officer or employee of the Bank may be appointed as a member of the Board of Directors of the Bank; nor shall any director, officer, or employee of any other bank be eligible as a member of the Board of Directors of the Bank.

Unless otherwise set by the Board and approved by the President of the Philippines, members of the Board shall be paid a per diem of one thousand pesos for each meeting of the Board of Directors actually attended: Provided, that the total amount of per diems for every single months shall not exceed the sum of Five Thousand Pesos.

Sec. 9. Powers and Duties of the Board of Directors. The Board of Directors shall have, among others, the following duties, powers and authority:

To formulate policies necessary to carry out effectively the provisions of this Charter and to prescribe, amend, and repeal by-laws, rules and regulations for the effective operation of the Bank, and the manner in which the general business of the Bank may be conducted and the powers granted by law to the Bank exercised;

To approve loans, to fix rates of interest on loans and to prescribe such terms and conditions for loans and credits as may be deemed necessary, consistent with the provisions of this Charter; Provided, that the Board may delegate the authority to approve loans to such officers as may be deemed necessary;

(c ) To adopt an annual budget for the effective operation and administration of the Bank;

To create and establish a "Provident Fund" which shall consist of contributions, made both by the Bank and its officers or employees, to a common fund for the payment of benefits to such officers or employees, or their heirs, under such terms and conditions as the Board of Directors may fix;

To compromise or release, in whole or in part, any claim or settled liability to the Bank regardless of the amount involved, under such terms and conditions it may impose to protect the interests of the Bank. This authority to compromise shall extend to claims against the Bank; and

To appoint, promote or remove officers from the rank of Vice President or its equivalent, and other more senior officer positions, excluding the Chairman and the Vice Chairman.

Sec. 10. Chairman and Chief Executive Officer. The Chairman shall be the Chief Executive Officer of the Bank and, as such, shall, on behalf of the Board, have the direction and control of the business affairs and properties of the Bank in all matters which are not by this Charter or by the By-Laws of the Bank specifically reserved to be done by the Board or other officers of the Bank. For this purpose, he shall, among other powers and duties, execute, carry out, and administer the policies, measures, orders, and resolutions approved by the Board; direct and supervise the operation and administration of the Bank; and exercise such other powers and perform such other functions or duties as may be directed or assigned to him by law or by the Board from time to time.

Particularly, he shall have the power and duty:

To sign and execute all contracts concluded by the Bank and enter into all necessary obligations required or permitted by this Charter, upon proper authorization by the Board; and sign all notes, securities certificates, and other major documents of the Bank;

To exercise, as Chief Executive Officer of the Bank, the powers of control and supervision over decisions and actions of subordinate officers and all other powers that may be granted by the Board;

(c ) To report to the Board the main facts concerning the operations of the Bank and to recommend changes in policies which he may deem advisable;

To submit an annual report to the President of the Philippines on the result of the operations of the Bank;

To recommend to the Board the appointment, promotion, or removal of all officers of the Bank, with the rank of at least vice-president or its equivalent;

To appoint, promote or remove employees and officers below the rank of vice-president or its equivalent; Provided, that promotions, transfers, assignments or reassignments of officers and personnel of the Bank are personnel actions deemed made in the interest of the service and not disciplinary, any provision of the Civil Service Law to contrary notwithstanding; and

As required by circumstances, to delegate any of his powers, duties or functions to any officer or director of the Bank, with the approval of the Board.

Sec. 11. Vice Chairman and Chief Operating Officer. The Vice Chairman shall be the Chief Operating Officer of the Bank and shall assume and exercise such specific duties and responsibilities as may be delegated to him by the Chairman.

Sec. 12. Legal Matters and Cases. The Bank shall have its own Legal Department, the head of which shall be appointed by the Board of Directors of the Bank upon recommendation of the Chairman.

In appropriate cases, the Bank may avail also of the legal services of any government legal office authorized to render such services to government-owned or controlled corporations.

The Bank may, upon the recommendation of its Chief Legal Counsel, deputize any member of its legal staff to act as special sheriff in foreclosure cases, in the sale or attachment of the debtor's properties and in the enforcement of court writs and processes in cases involving the Bank. The special sheriff of the Bank shall make a report to the proper court after any action taken by him, which shall treat such action as if it were an act of its own sheriffs in all respects.

Sec. 13. Other Officers and Employments. The Board of Directors shall provided for an organization and staff of officers and employees of the Bank and upon recommendation of the Chairman of the Board, fix their remunerations and other emoluments.

No Officer or employee of the Bank subject to Civil Service Law shall be dismissed except as provided by law.

Sec. 14. Exemption from Attachment. The provisions of any law to the contrary notwithstanding, securities on loans and/or other accommodation granted by the Bank or its predecessors-in-interest shall not be subject to attachment, execution or any other court process, nor shall they be included in the property of insolvent persons or institutions, unless all debts and obligations of the debtor to the Bank and its predecessors-in-interest have been previously paid, including accrued interest, penalties, collection expenses, and other charges, subject to the provisions of paragraph (e) of Section 9 of this Charter.

Sec. 15. Officer to Conduct Sale. In case of sale of mortgaged properties under the provisions of existing laws or of this Charter, such sale shall be conducted under the direction of the sheriff of the Province or any special sheriff of the Bank, or of a municipal judge or notary public of the City or Municipality where the sale is to be made, who shall be entitled to collect the fees provided for in the Rules of the Court with respect to sale of properties under execution.

Sec. 16. Right of Redemption. Any mortgagor of the Bank whose real property has been extrajudicially sold at public auction shall, within one (1) year counted from the date of registration of the certificate of sale, have the right to redeem the real property by paying to the Bank all of the latter's claims against him, as determined by the Bank.

The Bank may take possession of the foreclosed property during the redemption period. When the Bank takes possession during such period, it shall be entitled to the fruits of the property with no obligation to account for them, the same being considered compensation for the interest that would otherwise accrue on the account. Neither shall the Bank be obliged to post a bond for the purpose of such possession.

Sec. 17. Inhibition from Board Meeting of Member with Personal Interest. Whenever any member attending a meeting of the Board of Directors has a direct personal interest in the discussion or resolution of any given matter, or any of his relatives within the second civil degree or consanguinity or second civil degree of affinity has such an interest, said member shall not participate in the discussion or resolution of the matter and must retire from the meeting during the deliberation thereon. The

minutes of the meeting, which shall note the subject matter, when resolve, the fact that a member had a personal interest in it, and the withdrawal of the member concerned, may be made available to the public.

For this purpose, the member of the Board shall, at the beginning of their respective terms, disclose to the board any and all interests they may have in any corporation, partnership. or association and shall, thereafter, disclosed to the Board, any charges thereto.

Sec. 18. Prohibition on Persons with Personal Interest. No member of the Board, officer, attorney, agent, or employee of the Bank shall in any manner, directly participate in the deliberation upon or the determination of any question affecting his direct personal interest or the personal interests of his relatives within the second civil degree of consanguinity or second civil degree of affinity, or of any corporation, partnership, or association in which he has a direct interest. Any person violating the provisions of this section shall be summarily removed from office and shall upon conviction be punished with a not less than one thousand pesos nor more than ten thousand pesos or with imprisonment of not less than one year nor more than five years, or by both fine and imprisonment at the discretion of the court.

Sec. 19. Borrowing by Directors, Officer and Employees Restriction and Limitation. No director or officer or employees of the Bank or any corporation, partnership, or company wherein any member of the Board of Directors, officer or employee, and/or their respective immediate family is a controlling shareholder, or wherein he is a director or officer shall, either directly or indirectly, for himself or as representative or agent of others, borrow any of the deposits of funds from the bank, nor shall he become a guarantor, or in any manner be an obligator for money borrowed from the bank or loaned by it: Provided, That this prohibition on loans to directors, officers and employees shall not include loans allowed in the form of fringe benefits granted in accordance with rules and regulations as may be prescribed by the Monetary Board of the Central Bank.

Sec. 20. Rules and Regulations on Conflict of Interest. The foregoing provisions notwithstanding and in addition thereto, the Board of Directors is hereby authorized to issue rules and regulations for the purposes of determining and resolving conflict of interest questions, which rules shall, in particular, include the requirement on all officers and employees of the Bank to disclose any shareholdings they, or their relatives within the second civil degree of consanguinity or second civil degree of affinity, may have in any corporation, partnership, or company in excess of 2% of the equity of said corporation, partnership, or company.

Sec. 21. Examination of the Bank. The Bank shall be subject to supervision and examination by the appropriate department of the Central Bank of the Philippines.

Sec. 22. Prohibition on Officers and Employees of the Bank. Except as required by law, or upon order of a court of competent jurisdiction, or the express order of the President of the Philippines or written permission of the client, no officer or employee of the Bank shall reveal to, nor allow to be examined, inquired or looked into, by any third person, government official, bureau or office any information relative to details of individual accounts or specific banking transactions: Provided, that in respect to deposits or whatever nature, the provisions of existing law shall apply.

This prohibition shall not apply to the exchange of confidential credit information among government financial institutions or among banks, in accordance with established banking practices or as may be allowed by law.

Sec. 23. Exaction of Fee, Commission, Gift or Charge. No authorized fee, commission, gift, or charge of any kind shall be exacted, demanded, or paid, for obtaining loans from the Bank, and any officer, employee, or agent of the Bank found guilty of exacting, demanding, or receiving any fee services in obtaining a loan, shall be punished by a fine of not less than one thousand nor more than twenty thousand pesos, imprisonment for not less than one year nor more than ten years, and perpetual disqualification from public office.

Sec. 24. Penal Provisions of General Banking Act. The penal provisions of Section 87-A of the General Banking Act shall be applicable to officers, employees and borrowers of the Bank.

Sec. 25. General Penal Provisions. Any officer or employee of the Bank who violates, or permits any of the officers, employees or agents of said Banks or any other person to violate, any of the provision of this Chapter not specifically punished in the preceding section and any person violating any provision of this Charter or aiding and abetting the violation thereof, shall be punished with a fine not less than one thousand nor more than ten thousand pesos and with imprisonment not less than one year nor more than five years.

Sec. 26. Other Liability of Guilty Officer or Employee. Any member of the Board of Directors or officer or employee of the Bank who willfully violates any of the provisions of this Charter shall in, addition to the criminal and administrative liability resulting from such act, be held liable for any loss or injury suffered by the Bank as a result of such violation.

Sec. 27. Liability of Directors, Officers or Partners of Offending Corporation or Partnership. If the violation of the provisions of this Charter is committed by a corporation or partnership, the directors, officers or partners hereof who participated in the violation shall be criminally liable for such violation.

Sec. 28. Applicability of Banking Laws. The provisions of Republic Act No. 265, as amended, and Republic Act No. 337, as amended, insofar as applicable and not in conflict with any provision of this Charter, shall apply to the Bank.

TRANSITORY PROVISIONS

Sec. 29. Preparatory Work. Upon the effectivity of this Charter, the Board of Directors and management of the Bank shall undertake the appropriate steps to establish its current financial condition for the purpose of determining its net asset values and the book value of shares thereof. The shares of stock held by the Government of the Philippines in the Bank are deemed cancelled and exchange for common voting shares of the Bank.

Sec. 30. Transfer of Assets and Liabilities of the Development Bank of the Philippines. The Bank shall transfer to the National Government such of its assets and liabilities as may be necessary to rehabilitate the bank and to start its operations under the Revised Charter on a viable basis, as determined by the appropriate authorities, such assets to include but need not be limited to its acquired assets and non-performing accounts and such liabilities to include real as well as contingent liabilities. The National Government is hereby authorized to accept the same under terms and conditions as may be mutually acceptable to the Bank and the National Government.

Sec. 31. Maintenance, Care and Preservation of Assets Transferred to the National Government. The Bank is hereby authorized to enter into an agreement with the National Government as transferee of assets from the Bank as hereinabove provided, either as an interim arrangement or otherwise and under such terms and conditions as may be necessary to preserve and/or to maintain and/or to dispose of such assets transferred to the National Government.

Sec. 32. Authority to Reorganize. In view of the new scope of operations of the Bank, a reorganization of the Bank and a reduction in force are hereby authorized to achieve simplicity and economy in operations, including adopting a new staffing pattern to suit the reduced operations envisioned. The formulation of the program of reorganization shall be completed within six months after the approval of this Charter, and the full implementation of the reorganization program within thirty months thereafter.

Sec. 33. Implementing Details; Organization and Staffing of the Bank. Upon the effectivity of this Charter, the Board of Directors of the Bank shall be constituted and its Chairman appointed. The Chairman is hereby authorized, subject to the approval of the Board of Directors as appropriate, to issue such orders, rules and regulations as may be necessary to implement the provisions of this Charter including those relative to the financial aspects, if any, and to the reorganization of the Bank as hereinabove authorized which will involve the determination and adoption of (1) the new internal structure of the Bank as reorganized down to the divisional section or lowest organizational levels, including such appropriate units as may be needed to handle caretaking activities such as the disposition of certain assets and the collection of certain accounts; (2) a new staffing pattern including appropriate salary rates, and (3) the initial operating budget.

In the implementation of the reorganization of the Bank, as authorized under the preceding section, qualified personnel of the Bank may be appointed to appropriate positions in the new staffing pattern thereof and those not so appointed are deemed separated from the service. No preferential or priority rights shall be given to or enjoyed by any officer or personnel of the Bank for appointment to any position in the new staffing pattern nor shall any officer or personnel be considered as having prior or vested rights with respect to retention in the Bank or in any position as may have been created in its new staffing pattern, even if he should be the incumbent of a similar position thereon.

Pending the completion of the personnel actions above provided and the issuance of the appropriate implementing orders, all present remaining incumbents of position in the Bank shall continue to exercise their usual functions, duties and responsibilities.

Sec. 34. Separation Benefits. All those who shall retire from the service or are separated therefrom on account of the reorganization of the Bank under the provisions of this Charter shall be entitled to all gratuities and benefits provided for under existing laws and/or supplementary retirement plans adopted by and effective in the Bank: Provided, that any separation benefits and incentives which may be granted by the Bank subsequent to June 1, 1986, which may be in addition to those provided under existing laws and previous retirement programs of the Bank prior to the said date, for those personnel referred to in this section shall be funded by the National Government; Provided, further, that, any supplementary retirement plan adopted by the Bank after the effectivity of this Chapter shall require the prior approval of the Minister of Finance.

Sec. 35. Banking Operations under 1986 Revised Charter, Government Laws. The banking operations of the Bank shall be governed by the provisions of the 1986 Revised Charter beginning on January 2, 1987 on such subsequent date as may be determined by the President of the Philippines upon the recommendation of the Minister of Finance.

Sec. 36. Separability Clause. In the event that any provision of this Charter or the applicability of such provisions to any person or circumstances is declared invalid, the remainder of the Charter or the application of said provision to other persons or circumstances shall not be affected by such declaration.

Sec. 37. Repealing Clause. All acts, executive, orders, administrative orders, proclamations, rules and regulations or parts thereof inconsistent with any of the provisions of this charter are hereby repealed or modified accordingly.

Sec. 38. Effectivity. This Charter shall take effect upon its approval.

Land Bank of the PhilippinesAgricultural Land Reform CodeRA No. 3844, Secs. 74 – 100

Sec. 74. Creation. To finance the acquisition by the Government of landed estates for division and resale to small landholders, as well as the purchase of the landholding by the agricultural lessee from the landowner, there is hereby established a body corporate to be known as the "Land Bank of the Philippines", hereinafter called the "Bank", which shall have its principal place of business in Manila. The legal existence of the Bank shall be for a period of fifty years counting from the date of the approval hereof. The Bank shall be subject to such rules and regulations as the Central Bank may from time to time promulgate.

Sec. 75. Powers in General. To carry out this main purpose, the Bank shall have the power:

To prescribe, repeal, and alter its own by laws, to determine its operating policies, and to issue such rules and regulations as may be necessary to achieve the main purpose for the creation of the Bank;

To adopt, alter and use a corporate seal;

To acquire and own real and personal property and to sell, mortgage or otherwise dispose of the same;

To sue and be sued, make contracts, and borrow money from both local and foreign sources. Such loans shall be subject to approval by the President of the Philippines and shall be fully guaranteed by the Government of the Philippines;

Upon recommendation of the Committee on Investments, to hold, own, purchase, acquire, sell or otherwise invest, or reinvest in stocks, bonds or other securities capable of giving the Bank a reasonably assured income sufficient to support its financing activities and give its private stockholders a fair return on their holdings: Provided, however, That pending the organization of the Committee on Investments, the Bank may exercise the powers herein provided without the recommendation of said Committee on Investments: Provided, further, That in case of the dissolution of the Land Bank all unsold public lands transferred to it which may be allocated to the Government of the Philippines in the course of liquidation of the business of the Bank shall revert to the Department of Agriculture and Natural Resources; and

To provide, free of charge, investment counselling and technical services to landowners whose lands have been acquired by the Land Bank. For this purpose, the Land Bank may contract the services of private consultants.

Sec. 76. Issuance of Bonds. The Land Bank shall, upon recommendation by the Board of Trustees and approval of the Monetary Board of the Central Bank, issue bonds, debentures and other evidences of indebtedness at such terms, rates and conditions as the Bank may determine up to an aggregate amount not exceeding, at any one time, five times its unimpaired capital and surplus. Such bonds and other obligations shall be secured by the assets of the Bank and shall be fully tax exempt both as to principal and income. Said income shall be paid to the bondholder every six (6) months from the date of issue. These bonds and other obligations shall be fully negotiable and unconditionally guaranteed by the Government of the Republic of the Philippines and shall be redeemable at the option of the Bank at or prior to maturity, which in no case shall exceed twenty-five years. These negotiable instruments of indebtedness shall be mortgageable in accordance with established banking procedures and practices to government institutions not to exceed sixty per centum of their face value to enable the holders of such bonds to make use of them in investments in productive enterprises. They shall also be accepted as payments for reparation equipment and materials.

The Board of Trustees shall have the power to prescribe rules and regulations for the registration of the bonds issued by the Bank at the request of the holders thereof.

Sec. 77. Issuance of Preferred Shares of Stock to Finance Acquisition of Landed Estates. The Land Bank shall issue, from time to time, preferred shares of stock in such quantities not exceeding six hundred million pesos worth of preferred shares as may be necessary to pay the owners of landed estates in accordance with Sections eighty and eighty-one of this Code. The amount of shares that the Bank may issue shall not exceed the aggregate amount need to pay for acquired estates in the proportions prescribed in said Section eighty of this Code. The Board of Trustees shall include as a necessary part of the by-laws that it shall issue under Section seventy-five of this Code, such formula as it deems adequate for determining the net asset value of its holdings as a guide and basis for the

issuance of preferred shares. The shares of stock issued under the authority of this provision shall be guaranteed a rate of return of six per centum per annum. In the event that the earnings of the Bank for any single fiscal year are not sufficient to enable the Bank, after making reasonable allowance for administration, contingencies and growth, to declare dividends at the guaranteed rate, the amount equivalent to the difference between the Bank's earnings available for dividends and that necessary to pay the guaranteed rate shall be paid by the Bank out of its own assets but the Government shall, on the same day that the Bank makes such payment, reimburse the latter in full, for which purpose such amounts as may be necessary to enable the Government to make such reimbursements are hereby appropriated out of any moneys in the National Treasury not otherwise appropriated. The Bank shall give sufficient notice to the Budget Commissioner and the President of the Philippines in the event that it is not able to pay the guaranteed rate of return on any fiscal period. The guaranteed rate of return on these shares shall not preclude the holders thereof from participating at a percentage higher than six per centum should the earnings of the Bank for the corresponding fiscal period exceed the guaranteed rate of return. The Board of Trustees shall declare and distribute dividends within three months after the close of each fiscal year at the guaranteed rate unless a higher rate of return in justified by the Bank's earnings after making reasonable allowance for administration, contingencies and growth, in which case dividends shall be declared and distributed at a higher rate. The capital gains derived from the sale or transfer of such shares and all income derived therefrom in the form of dividends shall be fully exempt from taxes.

Sec. 78. Special Guaranty Fund. In the event that the Bank shall be unable to pay the bonds, debentures, and other obligations issued by it, a fixed amount thereof shall be paid from a special guaranty fund to be set up by the Government, to guarantee the obligation of the Land Bank, and established in accordance with this Section, and thereupon, to the extent of the amounts so paid, the Government of the Republic of the Philippines shall succeed to all the rights of the holders of such bonds, debendures or other obligations: Provided, however, That for the next four years after the establishment of the Bank, the payment to the special guaranty fund should not exceed one million pesos per year, after which period, the Government shall pay into the guaranty fund the sum of five hundred thousand pesos each year until the cumulative total of such guaranty fund is no less than twenty percent of the outstanding net obligation of the Land Bank at the end of any single calendar year.

The guaranty fund shall be administered by the Central Bank of the Philippines in the manner most consistent with its charter. For the purpose of such fund, there shall be appropriated annually the sum of one million pesos out of any moneys in the National Treasury not otherwise appropriated, until the total amount of twenty million pesos shall have been attained.

Sec. 79. Receiving Payments and Time Deposits. The Bank, under the supervision of the Monetary Board and subject to the provisions of the General Banking Act, shall receive savings and time deposits from the small landholders in whose favor public lands or landed estates acquired by the Land Authority have been sold and, for this purpose, establish, and maintain branches and offices in such areas as may be necessary to service such deposits. The Monetary Board shall supervise and authorize the Bank to receive savings and time deposits from the public in areas where facilities for such a service do not exist or cannot be adequately provided by other deposit institutions.

Sec. 80. Making Payment to Owners of Landed Estates. The Land bank shall make payments in the form herein prescribed to the owners of land acquired by the Land Authority for division and resale under this Code. Such payment shall be made in the following manner: ten per centum in cash and the remaining balance in six percent, tax-free, redeemable bonds issued by the Bank in accordance with Section seventy-six, unless the landowner desires to be paid in shares of stock issued by the Land Bank in accordance with Section seventy-seven in an amount not exceeding thirty per centum of the purchase price.

In the event there is an existing lien on encumbrance on the land in favor of any Government institution at the time of acquisition by the Land Bank, the bonds and/or shares, in that order, shall be accepted as substitute collaterals to secure the indebtedness.

The profits accruing from payment shall be exempt from the tax on capital gains.

Sec. 81. Capital. The authorized capital stock of the Bank shall be one billion five hundred million pesos divided into ninety million shares with a par value of ten pesos each, which shall be fully subscribed by the Government and sixty million preferred shares with a par value of ten pesos each which shall be issued in accordance with the provisions of Sections seventy-seven and eighty-three of this Code. Of the total capital subscribed by the Government, two hundred million pesos shall be paid by the Government within one year from the approval of this Code, and one hundred million pesos every year thereafter for two years for which purpose the amount of two hundred million pesos is

hereby appropriated upon the effectivity of this Code, and one hundred million pesos every year for the next two years thereafter, out of the funds in the National Treasury not otherwise appropriated for the purpose: Provided, That if there are not enough funds in the National Treasury for the appropriation herein made, the Secretary of Finance, with the approval of the President of the Philippines, shall issue bonds or other evidence of indebtedness to be negotiated either locally or abroad in such amount as may be necessary to cover any deficiency in the amount above-appropriated but not exceeding four hundred million pesos, the proceeds of which are hereby appropriated: Provided, further, That the bonds to be issued locally shall not be supported by the Central Bank: Provided, finally, That there is automatically appropriated out of the unappropriated funds in the National Treasury such amounts as is necessary to cover the losses which shall include among other things loss of earnings occasioned by the limitation of the resale cost herein provided such that said amount together with the administrative expenses mentioned in Section ninety hereof shall not exceed in the aggregate the equivalent of two and one-half per centum of its assets limited therein.

Sec. 82. Government Shares. All shares of stock in the Bank subscribed or owned by the Government shall not be entitled to participate in the income earned by the Bank from its investments and other operations, whether in the form of cash or stock dividends or otherwise. Amounts expended for the administration of the Bank shall not be deemed as a participation of the Government in income.

Sec. 83. Preferred Shares. All preferred shares of stock issued under Section seventy-seven of this Code shall be entitled to the income earned by the Bank on its investments and other operations and shall have a limited right to elect annually one member of the Board of Trustees and one member of the Committee on Investments: Provided, That the holders of such preferred shares of stock shall not bring derivative suits against the Bank. Such preferred shares shall be fully transferable: Provided, further, That upon the liquidation of the Bank, the redemption of such preferred shares shall be given priority and shall be guaranteed at par value.

Sec. 84. Voting of Shares. The voting power of all the shares of stock of the Land Bank owned or controlled by the Government shall be vested in the President of the Philippines or in such person or persons as he may from time to time designate.

Sec. 85. Use of Bonds. The bonds issued by the Land Bank may be used by the holder thereof and shall be accepted in the amount of their face value as any of the following:

Payment for agricultural lands or other real properties purchased from the Government;

Payment for the purchase of shares of stock of all or substantially all of the assets of the following Government owned or controlled corporations: The National Development Company; Cebu Portland Cement Company; National Shipyards and Steel Corporation; Manila Gas Corporation; and the Manila Hotel Company.

Upon offer by the bondholder, the corporation owned or controlled by the Government shall, through its Board of Directors, negotiate with such bondholder with respect to the price and other terms and conditions of the sale. In case there are various bondholders making the offer, the one willing to purchase under terms and conditions most favorable to the corporation shall be preferred. If no price is acceptable to the corporation, the same shall be determined by a Committee of Appraisers composed of three members, one to be appointed by the corporation, another by the bondholder making the highest or only offer, and the third by the two members so chosen. The expenses of appraisal shall be borne equally by the corporation and the successful purchaser.

Should the Government offer for sale to the public any or all of the shares of stock or the assets of any of the Government owned or controlled corporations enumerated herein, the bidder who offers to pay in bonds of the Land Bank shall be preferred provided that the various bids be equal in every respect except in the medium of payment.

(3) Surety or performance bonds in all cases where the Government may require or accept real property as bonds; and

(4) Payment for, reparations goods.

Sec. 86. Board of Trustees. The affairs and business of the Bank shall be directed, its powers exercised and its property managed and preserved by a Board of Trustees. Such Board shall be composed of one Chairman and four members, one of whom shall be the head of the Land Authority who shall be an ex-officio member of such Board and another to be elected by the holders of preferred shares. The Chairman and two members of the Board of Trustees shall serve on full-time basis with the Bank. With the exception of the head of the Land Authority and the member elected by the holders

of preferred shares, the Chairman and all members of the Board shall be appointed by the President with the consent of the Commission on Appointments for a term of seven years, except that the first Chairman and members to be appointed under this Code shall serve for a period of three, five and seven years, such terms to be specified in their respective appointments. Thereafter the Chairman and members, with the exception of the ex-officio member, appointed after such initial appointment shall serve for a term of seven years including any Chairman or member who is appointed in place of one who resigns or is removed or otherwise vacates his position before the expiration of his seven-year term. The Chairman and the two full-time members of the Board shall act as the heads of such operating departments as may be set up by the Board under the authority granted by Section eighty-seven of this Code. The Chairman shall have authority, exerciseable at his discretion, to determine from time to time the organizational divisions to be headed by each member serving full time and to make the corresponding shifts in designations pursuant thereto. The compensation of the Chairman and the members of the Board of Trustees serving full time shall be twenty-four thousand and eighteen thousand pesos, respectively. The other members of the Board shall receive a per diem of one hundred pesos for each session of the Board that they attend.

Sec. 87. The Chairman and Vice-Chairman. The Chairman of the Board shall be the chief executive officer of the Bank. He shall have direct control and supervision of the business of the Bank in all matters which are not by this Code or by the by-laws of the Bank specifically reserved to be done by the Board of Trustees. He shall be assisted by an Executive Vice-Chairman and one or more vice-chairman who shall be chosen and may be removed by the Board of Trustees. The salaries of the Vice-Chairmen shall be fixed by the Board of Trustees with the approval of the President of the Philippines.

Sec. 88. Qualifications of Members. No person shall be appointed Chairman or member of the Board unless he is a man of accepted integrity, probity, training and experience in the field of banking and finance, at least thirty-five years of age and possessed of demonstrated administrative skill and ability.

Sec. 89. Committee on Investments. There shall be a Committee on Investments composed of three members; the member of the Board of Trustees elected by the holders of preferred shares as Chairman, one member to be appointed by the President of the Philippines from among the government members of the Board of Trustees, and another member to be selected by the holders of preferred shares under Section eighty-three of this Code. The Committee on Investments shall recommend to the Board of Trustees the corporations or entities from which the Land Bank shall purchase shares of stock.

The Land Bank shall not invest in any corporation, partnership or company wherein any member of the Board of Trustees or of the Committee on Investments or his spouse, direct descendant or ascendant has substantial pecuniary interest or has participation in the management or control of the enterprise except with the unanimous vote of the members of the Board of Trustees and of the Committee on Investments, excluding the member interested, in a joint meeting held for that purpose where full and fair information of the extent of such interest or participation has been adequately disclosed in writing and recorded in the minutes of the meeting: Provided, That such interested member shall not in any manner participate in the deliberations and shall refrain from exerting any pressure or influence whatever on any official or member of the Bank whose functions bear on or relate to the investment of the funds of the Bank in the enterprise: Provided, further, That the total investment in any single corporation, partnership, company, or association shall not exceed five per centum of the total investible funds.

Sec. 90. Personnel; Cost of Administration. The Administrative expenses of the Bank during any single fiscal year shall not in any case exceed two and one-half per centum of its total assets. The Board of Trustees shall provide for an organization and staff of officers and employees necessary to carry out the functions of the Bank, fix their compensation, and appoint and remove such officers and employees for cause. The Bank officers and employees shall be subject to the rules and regulations issued by the Civil Service Commission but shall not fall under the Wage and Position Classification Office. The Board of Trustees shall recommend to the Civil Service Commission rules and regulations for the recruitment, appointment, compensation, administration, conduct, promotion and removal of all Bank officers and employees under a strict merit system and prepare and conduct examinations under the supervision of said Commission.

Sec. 91. Legal counsel. The Secretary of Justice shall be ex-officio legal adviser of the Bank. Any provision of law to the contrary notwithstanding, the Land Bank shall have its own Legal Department, the chief and members of which shall be appointed by the Board of Trustees. The composition, budget and operating expenses of the Office of the Legal Counsel and the salaries and traveling expenses of its officers and employees shall be fixed by the Board of Trustees and paid by the Bank.

Sec. 92. Auditor. The Auditor General shall be the ex-officio auditor of the Bank and shall appoint a representative, who shall be the auditor in charge of the auditing office of the Bank. The Auditor General shall, upon the recommendation of the auditor of the Bank, appoint or remove the personnel of the auditing office. The compensation, budget and operating expenses of the auditing office and the salaries and traveling expenses of the officers and employees thereof shall be fixed by the Board of Trustees and paid by the Bank notwithstanding any provision of law to the contrary.

Sec. 93. Report on Condition of Bank. The representative of the Auditor General shall make a quarterly report on the condition of the Bank to the President of the Philippines, to the Senate through its President, to the House of Representatives through its Speaker, to the Secretary of Finance, to the Auditor General and to the Board of Trustees of the Bank. The report shall contain, among other things, a statement of the resources and liabilities including earnings and expenses, the amount of capital stock, surplus, reserve and profits, as well as losses, bad debts, and suspended and overdue paper carried in the books as assets of the Bank, and a plantilla of the Bank.

Sec. 94. Auditing Rules and Regulations. The Auditor General shall, with respect to the Bank, formulate improved and progressive auditing rules and regulations designed to expedite the operations of the Bank and prevent the occurrence of delays and bottlenecks in its work.

Sec. 95. Removal of Members. The President of the Philippines may, at any time, remove the Chairman or any member of the Board appointed by him if the interest of the Bank so requires, for any of the following causes:

Mismanagement, grave abuse of discretion, infidelity in the conduct of fiduciary relations, or gross neglect in the performance of duties;

Dishonesty, corruption, or any act involving moral turpitude; and

Any act or performance tending to prejudice or impair the substantial rights of the stockholders.

Conviction of the Chairman or a member for a crime carrying with it a penalty greater than arresto mayor shall cause the removal of such Chairman or member without the necessity of Presidential action.

The Chairman or member may, in any of the above cases, be civilly liable for any damage that may have been suffered by the stockholders.

Sec. 96. Transfer of Claims and Liabilities. The assets of the former Land Tenure Administration and the National Resettlement and Rehabilitation Administration in the form of claims and receivables arising from the sale or transfer of private and public lands, agricultural equipment, machinery, tools and work animals, but excluding advances made for subsistence, to small landholders shall, after an exhaustive evaluation to determine their true asset value, be irrevocably transferred to the Bank under such arrangements as the Land Authority and the Bank shall agree upon. Thereafter, the Bank shall have authority and jurisdiction to administer the claims, to collect and make adjustments on the same and, generally, to do all other acts properly pertaining to the administration of claims held by a financial institution. The Land Authority, upon request of the Bank, shall assist the latter in the collection of such claims. The Land Authority shall be entitled to collect from the Bank no more than the actual cost of such collection services as it may extend. The claims transferred under this Section shall not be considered as part of the Government's subscription to the capital of the Bank.

Sec. 97. Regulation. The Bank shall not be subject to the laws, rules and regulations governing banks and other financial institutions of whatever type except with respect to the receipt of savings and time deposits in accordance with Section seventy-nine of this Code, in which case the legal reserve and other requirements prescribed by the Central Bank for such deposits shall apply. The Bank shall be operated as an autonomous body and shall be under the supervision of the Central Bank.

Sec. 98. Tax Exemption. The operations, as well as holdings, equipment, property, income and earnings of the Bank from whatever sources shall be fully exempt from taxation.

Sec. 99. Organization of Bank. The Bank shall be organized within one year from the date that this Code takes effect.

Sec. 100. Penalty for Violation of the Provisions of this Chapter. Any trustee, officer, employee or agent of the Bank who violates or permits the violation of any of the provisions of this Chapter, or any person aiding or abeting the violations of any of the provisions of this Chapter, shall be punished by a

fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment at the discretion of the Court.

Universal Bank vs. Commercial Bank

Universal bank

Primarily governed by the General Banking Law (GBL), can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement.

Commercial bank

Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and can neither exercise the powers of an investment house nor invest in non-allied enterprises.

A universal bank can exercise all the powers and functions of a commercial bank. In addition, a universal bank can perform the functions of an investment house as well as in non-allied enterprises without prior approval of the Monetary Board of the BSP, unlike commercial bank which needs prior BSP approval.

Unibank as Investment House?

Sec. 23, GBL

Powers of a Universal Bank - A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act.

Sec. 29, GBL

Powers of a Commercial Bank. - A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.

Unibank and Investment in Allied and Non-allied Enterprises

Sec. 24, GBL

Equity Investments of a Universal Bank. - A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Commercial Bank and Investment in Allied and Non-allied Enterprises

Sec. 30, GBL

Equity Investments of a Commercial Bank. - A commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:

30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bank; and

30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of tile net worth of the bank.

The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investment.

OTHER BANKING SERVICES

Sec. 53. GBL

In addition to the operations specifically authorized in this Act, a bank may perform the following services:

53.1. Receive in custody funds, documents and valuable objects;

53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;

53.3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business;

53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and

53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under Subsections 53.1., 53.2., 53.3. and 53.4. as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities:

The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation.

Security Broker?

Sec. 53.2, GBL

Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities;

Insurance?

Sec. 54, GBL

Prohibition to Act as Insurer. - A bank shall not directly engage in insurance business as the insurer.

PROHIBITED TRANSACTIONS/ACTS

Sec. 55, GBL

Prohibited Transactions. -

55.1. No director, officer, employee, or agent of any bank shall -

(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; (b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail;

(c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or

(e) Outsource inherent banking functions.

55.2. No borrower of a bank shall -

(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts enumerated in this Section or aid in the commission of the same.

The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sental ng Pilipinas shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act.

55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

Disclosure of Funds and Properties in the Custody of Banks

Sec. 55.1 b, GBL

(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail.

Outsourcing of Inherent Banking Functions

Sec. 55.1 e, GBL

(e) Outsource inherent banking functions.

BSP Circular No. 268, 05 December 2000

Pursuant to Monetary Board Resolution No. 2076 dated November 24, 2000, the following rules and regulations are hereby issued to implement Section 55.1(e) of Republic Act (R.A.) No. 8791, the General Banking Law of 2000.

Section 1. Duties and Responsibilities of Banks and their Directors/Officers in All Cases of Outsourcing of Banking Functions. When outsourcing of banking functions is allowed by law and under this circular, all banks concerned shall:

(1) carry out the same in accordance with proper standards, ensuring the integrity of the data, systems and controls of the banks and subject to the supervisory, regulatory and administrative authority of the Bangko Sentral ng Pilipinas (BSP) over the banks and their directors/officers;

(2) be responsible for the performance thereof in the same manner and to the same extent as it was before the outsourcing;

(3) comply with all laws and regulations governing the banking activities/services performed by the qualified service providers in its behalf such as but not limited to keeping of records and preparation of reports, signing authorities, internal control and clearing regulations; and

(4) manage, monitor and review on an ongoing basis the performance by the qualified service providers of the outsourced banking activities/services.

Section 2. Prohibition Against Outsourcing Certain Banking Functions.

Section 2.1 No bank or any director, officer, employee, or agent thereof shall outsource inherent banking functions. For purposes of this circular, outsourcing of inherent banking functions shall refer to any contract between the bank and a service provider for the latter to supply, or any act whereby the latter supplies, the manpower to service the deposit transactions of the former.

Section 2.2 Banks cannot outsource management functions except as may be authorized by the Monetary Board when circumstances justify.

Section 3. Outsourcing of Information Technology Systems/Processes. Subject to prior approval of the Monetary Board, banks may outsource all information technology systems and processes except for functions excluded in Section 3.1.

Section 3.1 Certain functions affecting the ability of the bank to ensure the fit of technology services deployed to meet its strategic and business objectives and to comply with all pertinent banking laws and regulations, such as but not limited to strategic planning for the use of information technology; determination of system functionalities; change management inclusive of quality assurance and testing; service level and contract management; and security policy and administration, may not be outsourced. Subject to prior approval of the Monetary Board and submission of the same documentary requirements in Section 3.2 hereof, consultants and/or service providers may be engaged to provide assistance/support to the bank personnel assigned to perform such functions.

Section 3.2 A bank intending to outsource information technology systems and processes shall submit the following documents to BSP which shall treat the same as strictly confidential:

(1) Proposed contract between the bank and the service provider which should, at a minimum, include all the following:

a. Complete description of the work to be performed or services to be provided; b. Fee structure; c. Provisions regarding on-line communication availability, transmission line security, and transaction authentication; d. Responsibilities regarding hardware, software and infrastructure upgrades; e. Provisions governing amendment and pretermination of contract; f. Mandatory notification by the service provider of all systems changes that will affect the bank; g. Details of all security procedures and standards; h. Responsibility, fines, penalties and accountability of the service provider for errors, omissions and frauds; i. Confidentiality clause covering all data and information; solidary liability of service provider and bank for any violation of R.A. No. 1405, the Bank Deposits Secrecy Law; actions that the bank may take against the service provider for breach of confidentiality or any form of disclosure of confidential information; and the applicable penalties; j. Segregation of the data of the bank from that of the service provider and its other clients; k. Disaster recovery/business continuity contingency plans and procedures; l. Adequate insurance for fidelity and fire liability;m. Ownership/maintenance of the computer hardware, software (program source code), user and system documentation, master and transaction data files; n. Guarantee that the service provider will provide necessary levels of transition assistance if the bank decides to convert to other service providers or other arrangements; o. Access to the financial information of the service provider; p. Access of internal and external auditors to information regarding the outsourced activities/services which they need to fulfill their respective responsibilities; q. Access of BSP to the operations of the service provider in order to review the same in relation to the outsourced activities/services; r. Provision which requires the service provider to immediately take the necessary corrective measures to satisfy the findings and recommendations of BSP examiners and those of the internal and/or external auditors of the bank and/or the service provider; and s. (Remedies for the bank in the event of change of ownership, assignment, attachment of assets, insolvency, or receivership of the service provider.

(2) Minutes of Meetings of the Board of Directors of the bank concerned signed by majority thereof, certified by the Secretary and attested by the President documenting their discussions on the following:

a. The benefits and advantages of outsourcing with respect to, among others, its role and contribution to the accomplishment of the strategic and business plans of the bank as well as the economy, efficiency and quality of its over-all operations; b. The careful and diligent evaluation, prior to selecting the service provider with which it is entering into an outsourcing contract, by the bank of various service providers and their proposals,

including their reputation, financial condition, cost for development, maintenance and support, internal controls, recovery processes, service level agreements, availability of competent, technically qualified and experienced personnel, strategic or convenient location of support services and such similar other considerations; c. The creation, organization and membership of a senior management oversight committee to handle and oversee the efficient implementation and monitoring of the applications/operations of the service provider to ensure that the same is in accordance with the existing information technology initiatives, policies and guidelines of the bank; the list of the members of such committee, its organizational chart, and a detailed description of the roles and responsibilities of its members must be included in the Minutes of the Meeting or submitted as attachments thereto; d. The creation, organization and membership of a help desk to resolve all queries, problems and other concerns arising from the applications/operations rendered by the service provider; and e. The systems and user acceptance tests that will be conducted by the service provider before full implementation of the outsourced systems/processes and the unsatisfactory results of which shall be valid ground to rescind the contract with the service provider.

(3) Profile of the selected service provider or the non-bank partner, in case of joint ventures and other similar arrangements, which should include:

a. Most recent and complete financial and operational information; b. Track record; c. List of clientele, particularly banks and the services provided thereto by the service provider; and d. At the option of the service provider or non-bank partner, other documents demonstrative of its competence and reputation in the field of information technology as applied to banking operations.

Section 4. Outsourcing of Other Banking Functions.

Section 4.1 Subject to prior approval of the Monetary Board, banks may outsource data imaging, storage, retrieval and other related systems; clearing and processing of checks not included in the Philippine Clearing House System; printing of bank deposit statements; and such other activities as may be determined by the Monetary Board. The bank concerned must submit the same documentary requirements listed in Section 3.2 hereof, except where they exclusively pertain to information technology operations.

Section 4.2. Banks may outsource credit card services; printing of bank loan statements and other non-deposit records, bank forms and promotional materials; credit investigation and collection; processing of export, import and other trading transactions; transfer agent services for debt and equity securities; property appraisal; property management services; messenger, courier and postal services; security guard services; vehicle service contracts; janitorial services; and such other activities as may be determined by the Monetary Board.

Section 5. Service Providers. When allowed by law and under this circular, banks may enter into outsourcing contracts only with service providers with demonstrable technical and financial capability commensurate to the services to be rendered.

Section 6. Review of Subsisting Outsourcing Contracts. Within six (6) months from the effectivity of this circular:

(1) all banks should submit a list of all their existing contracts with service providers, detailing the:

a. Services/activities being outsourced; b. Terms of the contracts; c. Measures, if any, undertaken by the bank and/or service provider to ensure the secrecy of bank

deposits and confidentiality of all other data and information; and d. Such other information as may be necessary to show compliance with the pertinent provisions of this

circular or be required by the Monetary Board; and (2) for outsourcing contracts not in accordance with this circular, the following alternative courses of action are available to the bank concerned:a. preterminate said contracts; b. renegotiate or remedy the same to comply with this circular and submit the amendments thereto or new contracts to the BSP; or

c. submit a program of compliance to the BSP.

Section 7. Penalties. Violation of this circular shall be subject to Sections 34, 35, 36 and 37 of R.A. No. 7653, the New Central Bank Act. If the offender is a director or officer or a bank, the Monetary Board may also suspend or remove such director or officer.

Section 8. Repeal of Section X169 of the Manual of Regulations for Banks (MORB). This circular supersedes the provisions of Section X169 of the MORB.

Section 9. Effectivity. This circular shall take effect immediately.

Employment of Casual or Non-regular Personnel

Sec. 55.4, GBL

55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

Prohibited Transactions and Republic Act No. 9510 (An Act Establishing the Credit Information System and Other Purposes: Approved 31 October 2008)

RA No. 9510 which aims to provide a credit information system to directly address the needs for reliable credit information concerning the credit standing and track record of borrowers, shall not impair SBD, FCDA, GBL and AMLA and/or client funds and investments in government securities and funds. (Secs. 1 and 12)

RA No. 951031 October 2008

Section 1. Title. - This Act shall be known as the "Credit Information System Act".

Section 2. Declaration of Policy. - The State recognizes the need to establish a comprehensive and centralized credit information system for the collection and dissemination of fair and accurate information relevant to, or arising from, credit and credit-related activities of all entities participating in the financial system. A credit information system will directly address the need for reliable credit information concerning the credit standing and track record of borrowers.

The operations and services of a credit information system can be expected to: greatly improve the overall availability of credit especially to micro, small and medium-scale enterprises; provide mechanisms to make credit more cost-effective; and reduce the excessive dependence on collateral to secure credit facilities.

The State shall endeavor to have credit information provided at the least cost to all participants and shall ensure the protection of consumer rights and the existence of fair competition in the industry at all times.

An efficient credit information system will also enable financial institutions to reduce their over-all credit risk, contributing to a healthier and more stable financial system.

Section 3. Definition of Terms. - For purposes of this Act:

(a) "Accessing Entity" refers to any submitting entity or any other entity authorized by the Corporation to access basic credit data from the Corporation.

(b) "Basic Credit Data" refers to positive and negative information provided by a borrower to a submitting entity in connection with the application for and availment of a credit facility and any information on the borrower’s creditworthiness in the possession of the submitting entity and other factual and objective information related or relevant thereto in the submitting entity’s data files or that of other sources of information: Provided, that in the absence of a written waiver duly accomplished by the borrower, basic credit data shall exclude confidential information on bank deposits and/or clients funds under Republic Act No. 1405 (Law on Secrecy of Bank Deposits), Republic Act No. 6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The General Banking Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law) and their amendatory laws.

(c) "Borrower" refers to a natural or juridical person, including any local government unit (LGU), its subsidiaries and affiliates, that applies for and/or avails of a credit facility.

(d) "BSP" refers to the Bangko Sentral ng Pilipinas, created under Republic Act No.7653.

(e) "Corporation" refers to the Credit Information Corporation established under Section 5 of this Act.

(f) "Credit facility" refers to any loan, credit line, guarantee or any other form of financial accommodation from a submitting entity: Provided, That for purposes of this Act, deposits in banks shall not be considered a credit facility extended by the depositor in favor of the bank.

(g) "Credit Rating" refers to an opinion regarding the creditworthiness of a borrower or of an issuer of debt security, using an established and defined ranking system.

(h) "Credit Report" refers to a summary of consolidated and evaluated information on creditworthiness, credit standing, credit capacity, character and general reputation of a borrower.

(i) "Government Lending Institutions" refers to existing and future government (GFIs), government-owned and controlled corporations (GOCCs) primarilly engaged in lending activities.

(j) "Negative Credit Information" refers to information/data concerning the poor credit performance of borrowers such as, but not limited to, defaults on loans, adverse court judgments relating to debts and reports on bankruptcy, insolvency, petitions or orders on suspension of payments and corporate rehabilitation.

(k) "Non-Accessing Entity" refers to an entity other than a Submitting Entity, Special Accessing Entity or Borrower that is authorized by the Corporation to access credit information from a Special Accessing Entity.

(l) "Outsource entity" refers to any accredited third party provider to whom the Corporation may outsource the processing and consolidation of basic credit data pertaining to a borrower or issuer of debt or convertible securities under such qualifications, criteria and strict confidentiality guidelines that the Corporation shall prescribe and duly publish.

(m) "Positive credit information" refers to information/data concerning the credit performance of a borrower such as, but not limited to, information on timely repayments or non-delinquency.

(n) "Relevant Government Agencies" refers to the Department of Finance, Department of Trade and Industry, Bangko Sentral ng Pilipinas, Insurance Commission and the Cooperative Development Authority.

(o) "SEC" refers to the Securities and Exchange Commission.

(p) "Special Accessing Entity" refers to a duly accredited private corporation engaged primarily in the business of providing credit reports, ratings and other similar credit information products and services.

(q) "Submitting Entity" refers to any entity that provides credit facilities such as, but not limited to, banks, quasi-banks, trust entities, investment houses, financing companies, cooperatives, nongovernmental, micro-financing organizations, credit card companies, insurance companies and government lending institutions.

Section 4. Establishment of the Credit Information System. - In furtherance of the policy set forth in Section 2 of this Act, a credit information system is hereby established.

(a) Banks, quasi-banks, their subsidiaries and affiliates, life insurance companies, credit card companies and other entities that provide credit facilities are required to submit basic credit data and updates thereon on a regular basis to the Corporation.

(b) The Corporation may include other credit providers to be subject to compulsory participation: Provided, That all other entities qualified to be submitting entities may participate subject to their acceptance by the Corporation: Provided, further, That, in all cases, participation under the system shall be in accordance with such standards and rules that the SEC in coordination with the relevant government agencies my prescribe.

(c) Participating submitting entities are required to submit to the Corporation any negative and positive credit information that tends to update and/or correct the credit status of borrowers. The Corporation shall fix the time interval for such submission: Provided, That such interval shall not be less than fifteen (15) working days but not more than thirty (30) working days.

(d) The Corporation should regularly collect basic credit data of borrowers at least on a quarterly basis to correct/update the basic credit data of said borrowers.

(e) The Corporation may also access credit and other relevant information from government offices, judicial and administrative tribunals, prosecutorial agencies and other related offices, as well as pension plans administered by the government.

(f) Each submitting entity shall notify its borrowers of the former’s obligation to submit basic credit data to the Corporation and the disclosure thereof to the Corporation, subject to the provisions of this Act and the implementing rules and regulations.

(g) The Corporation is in turn authorized to release consolidated basic credit data on the borrower, subject to the provisions of Section 6 of this Act.

(h) The negative information on the borrower as contained in the credit history files of borrowers should stay in the database of the Corporation unless sooner corrected, for not more than three (3) years from and after the date when the negative credit information was rectified through payment or liquidation of the debt, or through settlement of debts through compromise agreements or court decisions that exculpate the borrower from liability. Negative information shall be corrected and updated within fifteen (15) days from the time of payment, liquidation or settlement of debts.

(i) Special Accessing Entities shall be accredited by the Corporation in accordance with such standards and rules as the SEC in coordination with the relevant government agencies, may prescribe.

(j) Special accessing entities shall be entitled access to the Corporation’s pool of consolidated basic credit data, subject to the provisions of Section s 6 and 7 of this Act and related implementing rules and regulations.

(k) Special accessing entities are prohibited from releasing basic credit data received from the Corporation or credit reports and credit ratings derived from the basic credit data received from the Corporation, to non-accessing entities unless the written consent or authorization has been obtained from the Borrower:Provided, however, That in case the borrower is a local government unit (LGU) or its subsidiary or affiliate, the special accessing entity may release credit information on the LGU, its subsidiary or affiliate upon written request and payment of reasonable fees by a constituent of the concerned LGU.

(l) Outsource Entities, which may process and consolidate basic credit data, are absolutely prohibited from releasing such data received from the Corporation other than to the Corporation itself.

(m) Accessing Entities shall hold strictly confidential any credit information they receive from the Corporation.

(n) The borrower has the right to know the causes of refusal of the application for credit facilities or services from a financial institution that uses basic credit data as basis or ground for such a refusal.

(o) The borrower, for a reasonable fee, shall have, as a matter of right, ready and immediate access to the credit information pertinent to the borrower. In case of erroneous, incomplete or misleading credit information, the subject borrower shall have the right to dispute the erroneous, incomplete, outdated or misleading credit information before the Corporation. The Corporation shall investigate and verify the disputed information within five (5) working days from receipt of the complaint. If its accuracy cannot be verified and cannot be proven, the disputed information shall be deleted. The borrower and the accessing entities and special accessing entities who have received such information shall be informed of the corresponding correction or removal within five (5) working days. The Corporation should use a simplified dispute resolution process to fast track the settlement/resolution of disputed credit information. Denial of these borrowers’ rights, without justifiable reason, shall entitle the borrower to indemnity.

Section 5. Establishment of the Central Credit Information Corporation. - There is hereby created a Corporation which shall be known as the Credit Information Corporation, whose primary purpose shall be to receive and consolidate basic credit data, to act as a central registry or central repository of credit information, and to provide access to reliable, standardized information on credit history and financial condition of borrowers.

(a) The Corporation is hereby authorized to adopt, alter, and use a corporate seal which shall be judicially noticed; to enter into contracts; to incur liabilities; to lease or own real or personal property, and to sell or otherwise dispose of the same; to sue and be sued; to compromise, condone or release any liability and otherwise to do and perform any and all things that may be necessary or proper to carry out the purposes of this Act.

(b) The authorized capital stock of the Corporation shall be Five hundred million pesos (P500,000,000.00) which shall be divided into common and preferred shares which shall be non-voting. The National Government shall own and hold sixty percent (60%) of the common shares while the balance of forty percent (40%) shall be owned by and held by qualified investors which shall be limited to industry associations of banks, quasi-banks and other credit related associations including associations of consumers. The amount of Seventy-five million pesos (PhP75,000,000.00) shall be appropriated in the General Appropriations Act for the subscription of common shares by the National Government to represent its sixty percent (60%) equity share and the amount of Fifty million pesos (PhP50,000,000.00) shall be subscribed and paid up by such qualified investors in accordance with Section 5(d) hereof.

(c) The National Government may subscribe or purchase securities or financial instrument that may be issued by the Corporation as a supplement to capital.

(d) Equal equity participation in the Corporation shall be offered and held by qualified private sector investors but in no case shall each of the qualified investor represented by an association of banks, quasi-banks and other credit-related associations including the associations of consumers have more than ten percent (10%) each of the total common shares issued by the Corporation.

(e) The SEC in coordination with relevant government agencies, shall prescribe additional requirements for the establishment of the Corporation, such as industry representation, capital structure, number of independent directors, and the process for nominating directors, and such other requirements to ensure consumer protection and free, fair and healthy competition in the industry.

(f) The Chairman of the SEC shall be the Chairman of the Board of Directors of the Corporation. Whenever the Chairman of the SEC is unable to attend a meeting of the Board, he/she shall designate an Associate Commissioner of the SEC to act as his/her alternate.

The powers and functions of the Corporation shall be exercised by a board of directors composed of fifteen (15) members. The directors representing the government shares shall be appointed by the President of the Philippines.

(g) The directors and principal officers of the Corporation, shall be qualified by the "fit and proper" rule for bank directors and officers. To maintain the quality of management of the Corporation and afford better protection to the system and the public in general, the SEC in coordination with the relevant government agencies, shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed directors of the Corporation and disqualify those found unfit. After due notice to the board of directors of the Corporation, the SEC may disqualify, suspend or remove any director who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director of the Corporation, due regard shall be given to his integrity, experience, education, training and competence.

The members of the Board of Directors must be Filipino citizens and at least thirty (30) years of age. In addition, they shall be persons of good moral character, of unquestionable integrity, of known probity, and have attained competence in the fields of law, finance, economics, computer science or information technology. In addition to the disqualifications imposed by the Corporation Code, as amended, no person shall be nominated by the national government

if he has been connected directly with a banking or financial institution as a director or officer, or has substantial interest therein within three (3) years prior to his appointment.

(h) The Board of Directors may appoint such officers and employees as are not otherwise provided for in this Act, define their duties, fix their compensations and impose disciplinary sanctions upon such officers and employees, for cause. The salaries and other compensation of the officers and employees of the Corporation shall be exempt from the Salary Standardization Law. Appointments in the Corporation, except to those which are policy-determining, primarily confidential or highly technical in nature, shall be made only according to the Civil Service Law.

(i) The Corporation shall acquire and use state-of-the-art technology and facilities in its operations to ensure its continuing competence and capability to provide updated negative and positive credit information; to enable the Corporation to relay credit information electronically as well as in writing to those authorized to have access to the credit information system; and to insure accuracy of collected, stored and disseminated credit information. The Corporation shall implement a borrower’s identification system for the purpose of consolidating credit information.

(j) The provisions of any general or special law to the contrary notwithstanding, the importation by the Corporation of all equipment, hardware or software, as well as all other equipment needed for its operations shall be fully exempt from all customs duties and from all other taxes, assessments and charges related to such importation.

(k) The Corporation shall have its principal place of business in Metro Manila, but may maintain branches in such other places as the proper conduct of its business may require.

(l) Any and all acquisition of goods and services by the Corporation shall be subject to Procurement Laws.

(m) The national government shall continue to hold sixty percent (60%) of the common shares for a period not to exceed five (5) years from the date of commencement of operations of the Corporation. After the said period, the national government shall dispose of at least twenty percent (20%) of its stockholdings in the Corporation to qualified investors which shall be limited to industry associations of banks, quasi-banks and other credit-related associations, including associations of consumers. The national government shall offer equal equity participation in the Corporation to all qualified investors. When the ownership of the majority of the common voting shares of the Corporation passes to private investors, the stockholders shall cause the adoption and registration with the SEC of the amended articles of incorporation within three (3) months from such transfer of ownership.

Section 6. Confidentiality of Credit Information. - The Corporation, the submitting entities, the accessing entities, the outsource entities, the special accessing entities and the duly authorized non-accessing entities shall hold the credit information under strict confidentiality and shall use the same only for the declared purpose of establishing the creditworthiness of the borrower. Outsource entities which may process and consolidate basic credit data are absolutely prohibited from releasing such data received from the Corporation other than to the Corporation.

The accreditation of an accessing entity, a special entity and/or an outsource entity which violates the confidentiality of, or which misuses, the credit information accessed from the Corporation, may be suspended or revoked. Any entity which violates this section may be barred access to the credit information system and penalized pursuant to Section 11 of this Act.

The Corporation shall be authorized to release and disclose consolidated basic credit data only to the Accessing Entities, the Special Accessing Entities, the Outsource Entities and Borrowers. Basic Consolidated basic credit data released to Accessing Entities shall be limited to those pertaining to existing Borrowers or Borrowers with pending credit applications. Credit information shall not be released to entities other than those enumerated under this Section except upon order of the court.

Section 7. Educational Campaign. - A continuing nationwide educational campaign shall be developed and undertaken by the Corporation to promote the benefits of a credit information system to the economy; to create awareness on the rights of consumers/borrowers to access their credit reports collected, stored and disseminated by the Corporation; to disseminate the rights of the borrowers to

dispute any incorrect/inaccurate credit information in the database file of the Corporation; to familiarize consumers of the procedure in collecting, storing and disseminating credit information of borrowers by the Corporation; and to brief consumers of other related information.

Section 8. Rules and Regulations. - For purposes of creating a healthy balance between the need for reliable credit information and safeguarding consumer protection, ensuring free and healthy competition in the industry, the SEC, in coordination with relevant government agencies and existing industry stakeholders, shall issue the implementing rules and regulations (IRRs), which shall be reviewed, revised and approved by the Oversight Committee to ensure consistency and compliance with the provisions of this Act, embodying among others:

(a) The basic credit data shall be limited or confined in form and content to an objective and factual information and shall exclude any subjective information or opinion;

(b) Restrictions on the use and transfer of credit information;

(c) Rights of the borrowers to access their respective credit information and to dispute the factual accuracy of such credit information;

(d) Requirements and standards for the establishment of the Corporation including, but not limited to, ownership, industry representation, independent directors and process of nomination of directors;

(e) Accreditation standards for submitting entities and special accessing entities and non-accessing entities;

(f) Sanctions to be imposed by the Corporation on:

(i) The submitting entities for non-submission of reports and for delayed and/or erroneous reporting;

(ii) Accessing entities, special accessing entities, outsource entities and duly authorized non-accessing entities, for breaches of the confidentiality of misuse of, the credit information obtained from the credit information system; and

(iii) Violations of other applicable rules and regulations: Provided, That these administrative sanctions shall be in the form of fines in amounts as may be determined by the Corporation but in no case to exceed Thirty thousand pesos (PhP30,000.00) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity. Imposition of administrative sanctions shall be without prejudice to any criminal and other sanctions as may be applicable under this Act and relevant laws;

(g) Suspension or cancellation of the rights of any Accessing Entity or Special Accessing Entity to access Credit Information from the Corporation; Provided, That the SEC in coordination with relevant government agencies and existing industry stakeholders, may issue subsequent regulations consistent with the IRR as approved by the Congressional Oversight Committee.

In addition, the SEC may regulate access to the credit information system as well as the fees that shall be collected by the Corporation from the Accessing and Special Accessing Entities, taking into consideration the policy of lowering the cost of credit, promoting fair competition, and the need of the Corporation to employ state-of-the-art technology; and

(h) The basic credit data about a borrower shall be limited to credit information existing on the date of the enactment of this Act and thereafter.

Section 9. Congressional Oversight Committee. - There is hereby created a congressional oversight committee, composed of seven (7) members from the Senate and seven (7) members from the House of Representatives. The Members from the Senate shall be appointed by the Senate President with at least three (3) Senators representing the minority. The Members of the House of

Representatives shall be appointed by the Speaker with at least three (3) members representing the minority.

After the Oversight Committee approved the implementing rules and regulations, it shall thereafter become functus officio, and therefore cease to exist: Provided, That the Congress may revive the Congressional Oversight Committee in case of a need for any major revision/s in the implementing rules and regulations.

Section 10. Indemnity in Favor of the Corporation, its Officers and Employees. - Unless the Corporation or any of its officers and employees is found liable for any willful violation of this Act, bad faith, malice and/or gross negligence, the Submitting Entities, Accessing Entities, Special Accessing Entities, Outsource Entities and duly authorized non-accessing entities shall hold the Corporation, its directors, officers and employees free and harmless to the fullest extent permitted by law and shall indemnify them from any and all liabilities, losses, claims, demands, damages, deficiencies, costs and expenses of whatsoever kind and nature that may arise in connection with the performance of their functions without prejudice to any criminal liability under existing laws.

Section 11. Penalties. - Any person who willfully violates any of the provisions of this Act or the rules and regulations promulgated by the SEC in coordination with the relevant government agencies shall, upon conviction, suffer a fine of not less than Fifty thousand pesos (PhP50,000.00). nor more than One million pesos (PhP1,000,000.00) or imprisonment of not less than one (1) year nor more than five (5) years, or both, at the discretion of the court.

Section 12. Inviolable Nature of the Secrecy of Bank Deposits and/or Client Funds. -Pursuant to Republic Act No. 1405 (Law on Secrecy of Bank Deposits), Republic Act No. 6426 (The Foreign Currency Deposit Act), Republic Act No. 8791 (The General Banking Law of 2000), Republic Act No. 9160 (Anti-Money Laundering Law) and their amendatory laws, nothing in this Act shall impair the secrecy of bank deposits and and/or client funds and investments in government securities or funds.

Section 13. Annual Report. - The SEC shall submit an annual report to Congress on the status of the implementation of this Act.

Sec. 14. Principal Government Agency. - The SEC shall be the lead government agency to implement and enforce this Act. As lead agency, the SEC shall consult and coordinate with other relevant government agencies in the adoption of all rules and regulations for the full and effective implementation and enforecement of this Act, taking into account the policy objectives contained in Section 2 hereof.

Section 15. Separability Clause. - Should any provision of this Act or the application thereof to any person or circumstance be held invalid, the other provisions or sections of this Act shall not be affected thereby.

Section 16. Repealing Clause. - This Act repeals Presidential Decree No. 1941 in its entirety. All laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent with this Act are hereby repealed, amended or modified accordingly.

Section 17. Effectivity Clause. - This Act shall take effect fifteen (15) days following its publication in the Official Gazette or in at least two (2) newspapers of general circulation.

THE SIGNIFICANCE OF BANKS IN THE ECONOMIC LIFE OF THE COUNTRY

Simex v. CA183 SCRA 3601997

CRUZ, J.:

We are concerned in this case with the question of damages, specifically moral and exemplary damages. The negligence of the private respondent has already been established. All we have to ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts.

The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit.

The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. 1 Subsequently, the petitioner issued several checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds.

The dishonored checks are the following:

1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for P16,480.00:

2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount of P3,386.73:

3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreño in the amount of P7,080.00;

4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P42,906.00:

5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P12,953.00:

6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of P27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount of P4,385.02: and

8. Check No. 215480 dated June 9, 1981, in favor of Enriqueta Bayla in the amount of P6,275.00. 2

As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers whose checks were dishonored was also deferred.

The petitioner complained to the respondent bank on June 10, 1981. 3 Investigation disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The

error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-deposited. 4

In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs.

After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not called for under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the defendant to pay nominal damages in the amount of P20,000.00 plus P5,000.00 attorney's fees and costs. 5 This decision was affirmed in toto by the respondent court. 6

The respondent court found with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said:

The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant.

It is this ruling that is faulted in the petition now before us.

This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the lower courts. It seems to us that the negligence of the private respondent had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the private respondent rectified its records and credited the deposit in less than a month as if this were sufficient repentance. The error should not have been committed in the first place. The respondent bank has not even explained why it was committed at all. It is true that the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner.

We also note that while stressing the rectification made by the respondent bank, the decision practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not required." 7 Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have suffered. 8 In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be

adjudicated." That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court, according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. 9

We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was ultimately settled. 10 It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00.

Now for the exemplary damages.

The pertinent provisions of the Civil Code are the following:

Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.

Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

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. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship. What is especially deplorable is that,

having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages.

After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indefference that has been displayed here, lest the confidence of the public in the banking system be further impaired.

ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs.

SO ORDERED.

Sandejas v. Ignacio, Jr.541 SCRA 612007

AUSTRIA-MARTINEZ, J.: Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 62404 promulgated on August 27, 2002, which affirmed with modification the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 158, in Civil Case No. 65146 dated December 18, 1998. The facts of the case, as summarized by the RTC, are as follows: It appears from the plaintiffs' [petitioners] evidence that Arturo [respondent] is the elder brother of Alice [petitioner] and Rosita [petitioner], Benjamin [petitioner] and Patricia [petitioner] are Arturo's nephew and niece. Arturo and his wife Evelyn [respondent] are residents of the United States. In October 1993, Arturo leased from Dr. Borja a condominium unit identified as Unit 28-C Gilmore Townhomes located at Granada St., Quezon City. The lease was for the benefit of Benjamin who is the occupant of the unit. The rentals were paid by Ignacio. The term of the lease is for one (1) year and will expire on October 15, 1994. It appears that Arturo was intending to renew the lease contract. As he had to leave for the U.S., Arturo drew up a check, UCPB Check No. GRH-560239 and wrote on it the name of the payee, Dr. Manuel Borja, but left blank the date and amount. He signed the check. The check was intended as payment for the renewal of the lease. The date and the amount were left blank because Arturo does not know when it will be renewed and the new rate of the lease. The check was left with Arturo's sister-in-law, who was instructed to deliver or give it to Benjamin. The check later came to the possession of Alice who felt that Arturo cheated their sister in the amount of three million pesos (P3,000,000.00). She believed that Arturo and Rosita had a joint “and/or” money market placement in the amount of P3 million with the UCPB branch at Ortigas Ave., San Juan and that Ignacio preterminated the placement and ran away with it, which rightfully belonged to Rosita. Alice then inquired from UCPB Greenhills branch if Arturo still has an account with them. On getting a confirmation, she together with Rosita drew up a scheme to recover the P3 million from Arturo. Alice filled up the date of the check with “March 17, 1995” and the amount with “three million only.” Alice got her driver, Kudera, to stand as the payee of the check, Dr. Borja. Alice and Rosita came to SBC[2] Greenhills Branch together with a man (Kudera) who[m] they introduced as Dr. Borja to the then Assistant Cashier Luis. After introducing the said man as Dr. Borja, Rosita, Alice and the man who was later identified as Kudera opened a Joint Savings Account No. 271-410554-7. As initial deposit for the Joint Savings Account, Alice, Rosita and Kudera deposited the check. No ID card was required of Mr. Kudera because it is an internal policy of the bank that when a valued client opens an account, an identification card is no longer required (TSN, April 21, 1997, pp. 15-16). SBC also allowed the check to be deposited without the endorsement of the impostor Kudera. SBC officials stamped on the dorsal portion of the check “endorsement/lack of endorsement guaranteed” and sent the check for clearing to the Philippine Clearing House Corporation. On 21 March 1995, after the check had already been cleared by the drawer bank UCPB, Rosita withdrew P1 million from Joint Savings Account and deposited said amount to the current account of Alice with SBC Greenhills Branch. On the same date, Alice caused the transfer of P2 million from the Joint Savings Account to two (2) Investment Savings Account[s] in the names of Alice, Rosita and/or Patricia. ... On April 4, 1995, a day after Evelyn and Atty. Sanz inquired about the identity of the persons and the circumstances surrounding the deposit and withdrawal of the check, the three million pesos in the two investment savings account[s] and in the current account just opened with SBC were withdrawn by Alice and Rosita.[3]

On June 18, 1995, Arturo Ignacio, Jr. and Evelyn Ignacio (respondents) filed a verified complaint for recovery of a sum of money and damages against Security Bank and Trust Company (SBTC) and its officers, namely: Rene Colin D. Gray, Manager; and Sonia Ortiz-Luis, Cashier. The complaint also impleaded herein petitioner Benjamin A.I. Espiritu (Benjamin), a “John Doe,” representing himself as Manuel N.Borja; and a “Jane Doe.”

On November 7, 1995, the complaint was amended by additionally impleading herein petitioners Alice A.I. Sandejas (Alice), Rosita A.I.Cusi (Rosita) and Patricia A.I. Sandejas (Patricia) as defendants who filed their respective answers and counterclaims. After trial, the RTC rendered judgment dated December 18, 1998 with the following dispositive portion: WHEREFORE, in view of the foregoing, judgment is rendered in favor of plaintiffs as against defendants Security Bank and Trust Co., Rene Colin Gray, Sonia Ortiz Luis, Alice A.I. Sandejas and Rosita A.I. Cusi, ordering them to pay jointly and severally the plaintiffs the following amounts:

(1) P3,000,000.00 plus legal interest on it from March 17, 1995 until the entire amount is fully paid;

(2) P500,000.00 as moral damages; (3) P200,000.00 as exemplary damages; (4) P300,000.00 as attorney's fees; plus (5) the cost of suit.

In turn, plaintiffs are directed to pay Benjamin A.I. Espiritu the amount of P100,000.00 as moral damages, P50,000.00 as exemplary damages and anotherP50,000.00 as attorney's fees. The counterclaims of Patricia A.I. Sandejas are dismissed. SO ORDERED.[4]

Both parties appealed the RTC Decision to the CA. On August 14, 1999, during the pendency of the appeal with the CA, herein respondent Arturo Ignacio, Jr. (Arturo) died.[5]

On August 27, 2002, the CA promulgated the presently assailed Decision, disposing as follows: WHEREFORE, in view of the foregoing, the assailed decision of the trial court is hereby AFFIRMED with the MODIFICATION that the judgment shall read as follows: The defendants-appellants Security Bank and Trust Company, Rene Colin D. Gray, Sonia Ortiz-Luis, Alice A.I. Sandejas, and Rosita A.I. Cusi, are hereby ordered to jointly and severally pay the plaintiffs the following amounts:

1. P3,000,000.00 plus legal interest computed from March 17, 1995 until the entire amount is fully paid;

2. P200,000.00 as moral damages; 3. P100,000.00 as exemplary damages; 4. P50,000.00 as attorney's fees; plus 5. the costs of suit.

The award of moral damages, exemplary damages, and attorney's fees in favor of Benjamin Espiritu is DELETED. SO ORDERED.[6]

Petitioners and SBTC, together with Gray and Ortiz-Luis, filed their respective petitions for review before this Court. However, the petition filed by SBTC, Gray and Ortiz-Luis, docketed as G.R. No. 155038, was denied in a Resolution[7] issued by this Court on November 20, 2002, for their failure to properly verify the petition, submit a valid certification of non-forum shopping, and attach to the petition the duplicate original or certified true copy of the assailed CA Decision. SaidResolution became final and executory on April 9, 2003.[8]

On the other hand, the instant petition was given due course. Petitioners enumerated the following grounds in support of their petition: I. THE COURT OF APPEALS HAD DECIDED A QUESTION OF SUBSTANCE NOT HERETOFORE DECIDED BY THIS COURT AND/OR HAD DECIDED IT IN A WAY PROBABLY NOT

IN ACCORD WITH EQUITY, THE LAW AND THE APPLICABLE DECISIONS OF THIS COURT, SUCH AS: (a) IN NOT HOLDING THAT AS BETWEEN SIBLINGS, THE AGGRIEVED SIBLING HAS THE RIGHT TO TAKE MEASURES OR STEPS TO PROTECT HIS OWN INTEREST OR PROPERTY RIGHTS FROM AN ACT OF THE GUILTY SIBLING; (b) IN NOT HOLDING THAT THE ACT OF ROSITA AND ALICE IN FILLING OUT THE BLANK PORTIONS OF THE CHECK TO RECOVER WHAT ARTURO, JR. TOOK FROM AND DUE ROSITA, DID NOT GIVE RISE TO AN ACTIONABLE TORT; (c) IN NOT HOLDING THAT THE CRIMINAL ACT OF ARTURO, JR. IN SUBMITTING AN AFFIDAVIT OF LOSS OF THE CERTIFICATE OF TIME DEPOSIT FOR P3,000,000 THAT RIGHTFULLY BELONGED TO ROSITA JUST TO BE ABLE TO PRE-TERMINATE THE TIME DEPOSIT AND GET ITS FACE VALUE, WHEN HE KNEW IT WAS NOT LOST BUT IN FACT INTACT AND IN THE POSSESSION OF ROSITA, IS A DISHONEST AND REPREHENSIBLE ACT THAT JUSTIFIED ROSITA AND ALICE IN TAKING MEANS TO REGAIN THE MONEY AND TO DENY ARTURO, JR. ANY RIGHT TO RECOVER THE SAID AMOUNT AS WELL AS TO AN AWARD OF DAMAGES; (d) IN NOT HOLDING THAT THE CRIMINAL ACT OF ARTURO, JR. IN SUBMITTING AN AFFIDAVIT OF LOSS OF THE OWNER'S COPY OF THE TITLE IN MORAYTA AND IN TESTIFYING IN COURT AS TO SUCH, WHEN THAT IS NOT THE TRUTH AS HE KNEW THAT THE ORIGINAL OWNER'S COPY OF THE TITLE WAS WITH ROSITA, IS ANOTHER DISHONEST AND REPREHENSIBLE ACT THAT SHOULD NOT HAVE ENTITLED HIM TO ANY AWARD OF DAMAGES; AND (e) IN NOT APPLYING THE RULE ON PARI DELICTO UNDER ART. 1412 OF THE CIVIL CODE. II. THE COURT OF APPEALS HAD DEPARTED FROM THE USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT FAILED TO RESOLVE IN THE APPEAL THE COUNTERCLAIM OF ROSITA AGAINST ARTURO, JR. FOR THE RECOVERY OF THE AMOUNTS LEGALLY HERS THAT SHOULD JUSTIFY ALICE'S BEING ABSOLVED FROM ANY LIABILITY FOR USING THE CHECK IN RECOVERING THE AMOUNT RIGHTFULLY BELONGING TO ROSITA; III. THE COURT OF APPEALS HAD DEPARTED FROM THE USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT REVERSED THE TRIAL COURT'S FINDING THAT RESPONDENT WAS GUILTY OF BAD FAITH AND MALICE THAT ENTITLED PETITIONER BENJAMIN A.I. ESPIRITU TO THE AWARD OF DAMAGES NOTWITHSTANDING THAT THERE WAS AMPLE EVIDENCE SHOWN THAT SUCH BAD FAITH AND MALICE WAS MADE AS A LEVERAGE TO COMPEL ARTURO'S SIBLINGS TO RETURN TO HIM THE P3,000,000 WHICH WAS NOT HIS; and, IV. THE COURT OF APPEALS HAD DECIDED THE CASE NOT IN ACCORD WITH LAW WHEN IT DELETED THE AWARD OF DAMAGES TO PETITIONER ESPIRITU AND IN NOT HAVING RULED THAT HE WAS ENTITLED TO A HIGHER AWARD OF DAMAGES CONSIDERING THE CIRCUMSTANCES OF THE CASE AS WELL AS IN NOT HAVING RULED THAT PATRICIA WAS ENTITLED TO AN AWARD OF DAMAGES.[9]

Petitioners argue that the CA overlooked and ignored vital pieces of evidence showing that the encashment of the subject check was not fraudulent and, on the contrary, was justified under the circumstances; and that such encashment did not amount to an actionable tort and that it merely called for the application of the civil law rule on pari delicto. In support of these arguments, petitioners contend that the principal adversaries in the present case are full blooded siblings; that the law recognizes the solidarity of family which is why it is made a condition that earnest efforts towards a compromise be exerted before one family member can institute a suit against the other; that even if Arturo previously defrauded Rosita and deprived her of her lawful share in the sale of her property, petitioners Rosita and Alice did not precipitately file suit against him and instead took extra-legal measures to protect Rosita's property rights and at the same time preserve the solidarity of their family and save it from public embarrassment. Petitioners also aver that Rosita's and Alice's act of encashing the subject check is not fraudulent because they did not have any unlawful intent and that they merely took from Arturo what rightfully belonged to Rosita. Petitioners contend that even granting that the act of Rosita and Alice amounted to an actionable tort, they could not be adjudged liable to return the amount to respondents or to pay damages in their favor, because the civil law rule on paridelicto dictates that, when both parties are at

fault, neither of them could expect positive relief from courts of justice and, instead, are left in the state where they were at the time of the filing of the case. Petitioners also contend that the CA erred in failing to award damages to Patricia even if the appellate court sustained the trial court's finding that she was not a party to the fraudulent acts committed by Rosita and Alice. Petitioners argue that even if Patricia did not bother to know the details of the cases against her and left everything to her mother, she did not even know the nature of the case against her, or her superiors in the bank where she worked did not know whether she was the plaintiff or defendant, these were not reasons to deny her award of damages. The fact remains that she had been maliciously dragged into the case, and that the suit had adversely affected her work and caused her mental worries and anguish, besmirched reputation, embarrassment and humiliation. As to Benjamin, petitioners aver that the CA also erred in deleting the award of damages and attorney's fees in his favor. Petitioners assert that the trial court found that Benjamin suffered mental anguish, wounded feelings and moral shock as a result of the filing of the present case. Citing the credentials and social standing of Benjamin, petitioners claim that the award of damages and attorney's fees in his favor should be increased. Lastly, petitioners contend that the award of damages and attorney's fees to respondents should be deleted for their failure to establish malice or bad faith on the part of petitioners Alice and Rosita in recovering the P3,000,000.00 which Arturo took from Rosita; and that it is Rosita who is entitled to damages and attorney's fees for Arturo's failure and refusal to give her share in the sale of her property in Morayta. In their Memorandum, respondents simply contend that the issues raised by petitioners are factual in nature and that the settled rule is that questions of fact are not subject to review by the Supreme Court in a petition for review on certiorari under Rule 45 of the Rules of Court. While there are exceptions to this rule, respondents assert that petitioners failed to show that the instant case falls under any of these exceptions.

The Court’s Ruling

The Court finds the petition bereft of merit. There is no compelling reason for the Court to disturb the findings of facts of the lower courts. The trial court's findings are as follows: (1) Rosita failed to establish that there is an agreement between her and Arturo that the latter will give her one-third of the proceeds of the sale of the Morayta property; (2) petitioners were not able to establish by clear and sufficient evidence that the P3,000,000.00 which they took from Arturo when they encashed the subject check was part of the proceeds of the sale of the Moraytaproperty; (3) Rosita's counterclaim is permissive and she failed to pay the full docket and filing fees for her counterclaim.[10]

Petitioners challenge the findings of the RTC and insist that they should not be held liable for encashing the subject check because Arturo defrauded Rosita and that he committed deceitful acts which deprived her of her rightful share in the sale of her building in Morayta; that the amount of P3,000,000.00 represented by the check which they encashed formed part of the proceeds of the said sale; that Alice and Rosita were merely moved by their desire to recover from Arturo, Rosita's supposed share in the sale of her property. However, the Court agrees with respondents that only questions of law are entertained in petitions for review on certiorari under Rule 45 of the Rules of Court.[11] The trial court’s findings of fact, which the Court of Appeals affirmed, are generally binding and conclusive upon this court. [12] There are recognized exceptions to this rule, among which are: (1) the conclusion is grounded on speculations, surmises or conjectures; (2) the inference is manifestly mistaken, absurd or impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a misapprehension of facts; (5) the findings of facts are conflicting; (6) there is no citation of specific evidence on which the factual findings are based; (7) the finding of absence of facts is contradicted by the presence of evidence on record; (8) the findings of the CA are contrary to the findings of the trial court; (9) the CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify a different conclusion; (10) the findings of the CA are beyond the issues of the case; and (11) such findings are contrary to the admissions of both parties.[13] In the instant case, petitioners failed to demonstrate that their petition falls under any one of the above exceptions. Petitioners' assignments of errors boil down to the basic issue of whether or not Alice and Rosita are justified in encashing the subject check given the factual circumstances established in the present case.

Petitioners' posture is not sanctioned by law. If they truly believe that Arturo took advantage of and violated the rights of Rosita, petitioners should have sought redress from the courts and should not have simply taken the law into their own hands. Our laws are replete with specific remedies designed to provide relief for the violation of one's rights. In the instant case, Rosita could have immediately filed an action for the nullification of the sale of the building she owns in light of petitioners' claim that the document bearing her conformity to the sale of the said building was taken by Arturo from her without her knowledge and consent. Or, in the alternative, as the CA correctly held, she could have brought a suit for the collection of a sum of money to recover her share in the sale of her property in Morayta. In a civilized society such as ours, the rule of law should always prevail. To allow otherwise would be productive of nothing but mischief, chaos and anarchy. As a lawyer, who has sworn to uphold the rule of law, Rosita should know better. She must go to court for relief. It is true that Article 151 of the Family Code requires that earnest efforts towards a compromise be made before family members can institute suits against each other. However, nothing in the law sanctions or allows the commission of or resort to any extra-legal or illegal measure or remedy in order for family members to avoid the filing of suits against another family member for the enforcement or protection of their respective rights. Petitioners invoke the rule of pari delicto to support their contention that respondents do not deserve any relief from the courts. The principle of pari delicto provides that when two parties are equally at fault, the law leaves them as they are and denies recovery by either one of them.[14] Indeed, one who seeks equity and justice must come to court with clean hands.[15] However, in the present case, petitioners were not able to establish that respondents are also at fault. Thus, the principle of pari delicto cannot apply. In any case, the application of the pari delicto principle is not absolute, as there are exceptions to its application.[16] One of these exceptions is where the application of the pari delicto rule would violate well-established public policy.[17] The prevention of lawlessness and the maintenance of peace and order are established public policies. In the instant case, to deny respondents relief on the ground of pari delictowould put a premium on the illegal act of petitioners in taking from respondents what the former claim to be rightfully theirs. Petitioners also question the trial court's ruling that their counterclaim is permissive. This Court has laid down the following tests to determine whether a counterclaim is compulsory or not, to wit: (1) Are the issues of fact or law raised by the claim and the counterclaim largely the same? (2) Would res judicata bar a subsequent suit on defendant’s claims, absent the compulsory counterclaim rule? (3) Will substantially the same evidence support or refute plaintiff’s claim as well as the defendant’s counterclaim? and (4) Is there any logical relation between the claim and the counterclaim, such that the conduct of separate trials of the respective claims of the parties would entail a substantial duplication of effort and time by the parties and the court?[18]

Tested against the above-mentioned criteria, this Court agrees with the view of the RTC that Rosita's counterclaim for the recovery of her alleged share in the sale of the Morayta property is permissive in nature. The evidence needed to prove respondents' claim to recover the amount of P3,000,000.00 from petitioners is different from that required to establish Rosita's demands for the recovery of her alleged share in the sale of the subject Morayta property. The recovery of respondents' claim is not contingent or dependent upon the establishment of Rosita's counterclaim such that conducting separate trials will not result in the substantial duplication of the time and effort of the court and the parties. In Sun Insurance Office, Ltd., (SIOL) v. Asuncion,[19] this Court laid down the rules on the payment of filing fees, to wit: 1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within a reasonable time but in no case beyond the applicable prescriptive or reglementary period. 2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may allow payment of said fee within a reasonable time but also in no case beyond its applicable prescriptive or reglementaryperiod.

3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee but, subsequently, the judgment awards a claim not specified in the pleading, or if specified the same has been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the Clerk of Court or his duly authorized deputy to enforce said lien and assess and collect the additional fee.[20]

In order for the trial court to acquire jurisdiction over her permissive counterclaim, Rosita is bound to pay the prescribed docket fees.[21]Since it is not disputed that Rosita never paid the docket and filing fees, the RTC did not acquire jurisdiction over her permissive counterclaim. Nonetheless, the trial court ruled on the merits of Rosita's permissive counterclaim by dismissing the same on the ground that she failed to establish that there is a sharing agreement between her and Arturo with respect to the proceeds of the sale of the subject Morayta property and that the amount of P3,000,000.00 represented by the check which Rosita and Alice encashed formed part of the proceeds of the said sale. It is settled that any decision rendered without jurisdiction is a total nullity and may be struck down at any time, even on appeal before this Court.[22]

In the present case, considering that the trial court did not acquire jurisdiction over the permissive counterclaim of Rosita, any proceeding taken up by the trial court and any ruling or judgment rendered in relation to such counterclaim is considered null and void. In effect, Rosita may file a separate action against Arturo for recovery of a sum of money. However, Rosita's claims for damages and attorney's fees are compulsory as they necessarily arise as a result of the filing by respondents of their complaint. Being compulsory in nature, payment of docket fees is not required.[23] Nonetheless, since petitioners are found to be liable to return to respondents the amount of P3,000,000.00 as well as to pay moral and exemplary damages and attorney's fees, it necessarily follows that Rosita's counterclaim for damages and attorney's fees should be dismissed as correctly done by the RTC and affirmed by the CA. As to Patricia's entitlement to damages, this Court has held that while no proof of pecuniary loss is necessary in order that moral damages may be awarded, the amount of indemnity being left to the discretion of the court, it is nevertheless essential that the claimant should satisfactorily show the existence of the factual basis of damages and its causal connection to defendant’s acts.[24] This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer.[25] Moreover, additional facts must be pleaded and proven to warrant the grant of moral damages under the Civil Code, these being, social humiliation, wounded feelings, grave anxiety, etc. that resulted from the act being complained of.[26] In the present case, both the RTC and the CA were not convinced that Patricia is entitled to damages. Quoting the RTC, the CA held thus: With respect to Patricia, she did not even bother to know the details of the case against her, she left everything to the hands of her mother Alice. Her attitude towards the case appears weird, she being a banker who seems so concerned of her reputation. Aside from the parties to this case, her immediate superiors in the BPI knew that she is involved in a case. They did not however know whether she is the plaintiff or the defendant in the case. Further, they did not know the nature of the case that she is involved in. It appears that Patricia has not suffered any of the injuries enumerated in Article 2217 of the Civil Code, thus, she is not entitled to moral damages and attorney's fees.[27]

This Court finds no cogent reason to depart from the above-quoted findings as Patricia failed to satisfactorily show the existence of the factual basis for granting her moral damages and the causal connection of such fact to the act of respondents in filing a complaint against her. In addition, and with respect to Benjamin, the Court agrees with the CA that in the absence of a wrongful act or omission, or of fraud or bad faith, moral damages cannot be awarded. [28] The adverse result of an action does not per se make the action wrongful, or the party liable for it.[29] One may err, but error alone is not a ground for granting such damages.[30] In the absence of malice and bad faith, the mental anguish suffered by a person for having been made a party in a civil case is not the kind of anxiety which would warrant the award of moral damages.[31]

A resort to judicial processes is not, per se, evidence of ill will upon which a claim for damages may be based.[32]

In China Banking Corporation v. Court of Appeals,[33] this Court held:

Settled in our jurisprudence is the rule that moral damages cannot be recovered from a person who has filed a complaint against another in good faith, or without malice or bad faith (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [1988]; R & B Surety and Insurance v. Intermediate Appellate Court, 129 SCRA 736 [1984]). If damage results from the filing of the complaint, it is damnum absque injuria (Ilocos Norte Electrical Company v. Court of Appeals, 179 SCRA 5 [1989]).[34]

In the present case, the Court agrees with the RTC and the CA that petitioners failed to establish that respondents were moved by bad faith or malice in impleading Patricia and Benjamin. Hence, Patricia and Benjamin are not entitled to damages. The Court sustains the award of moral and exemplary damages as well as attorney's fees in favor of respondents. As to moral damages, Article 20 of the Civil Code provides that every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. In addition, Article 2219 (10) of the Civil Code provides that moral damages may be recovered in acts or actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35 of the same Code. More particularly, Article 21 of the said Code provides that any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs, or public policy shall compensate the latter for the damage. In the present case, the act of Alice and Rosita in fraudulently encashing the subject check to the prejudice of respondents is certainly a violation of law as well as of the public policy that no one should put the law into his own hands. As to SBTC and its officers, their negligence is so gross as to amount to a willfull injury to respondents. The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society.[35] Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained a ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of all, confidence.[36] For this reason, banks should guard against injury attributable to negligence or bad faith on its part.[37]

There is no hard-and-fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar facts.[38] The yardstick should be that it is not palpably and scandalously excessive.[39] Moreover, the social standing of the aggrieved party is essential to the determination of the proper amount of the award.[40] Otherwise, the goal of enabling him to obtain means, diversions, or amusements to restore him to the status quo ante would not be achieved.[41] In the present case, the Court finds no cogent reason to modify the amount of moral damages granted by the CA. Likewise, the Court finds no compelling reason to disturb the modifications made by the CA on the award of exemplary damages and attorney's fees. Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. In the instant case, the award of exemplary damages in favor of respondents is in order for the purpose of deterring those who intend to enforce their rights by taking measures or remedies which are not in accord with law and public policy. On the part of respondent bank, the public relies on a bank's sworn profession of diligence and meticulousness in giving irreproachable service.[42] Hence, the level of meticulousness must be maintained at all times by the banking sector.[43] In the present case the award of exemplary damages is justified by the brazen acts of petitioners Rosita and Alice in violating the law coupled with the gross negligence committed by respondent bank and its officers in allowing the subject check to be deposited which later paved the way for its encashment. As to attorney's fees, Article 2208 of the same Code provides, among others, that attorney's fees may be recovered when exemplary damages are awarded or when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest. WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals dated August 27, 2002 in CA-G.R. CV No. 62404 is AFFIRMED. Costs against the petitioners. SO ORDERED.

Security and Trust Co. v. RCBC577 SCRA 40730 January 2009

QUISUMBING, Acting C.J.:

Before us are opposing parties’ petitions for review of the Decision1 dated March 29, 2005 and Resolution2 dated December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387. The two petitions are herein consolidated as they stem from the same set of factual circumstances.

The facts, as found by the trial and appellate courts, are as follows:

On January 9, 1981, Security Bank and Trust Company (SBTC) issued a manager’s check for P8 million, payable to "CASH," as proceeds of the loan granted to Guidon Construction and Development Corporation (GCDC). On the same day, the P8-million check, along with other checks, was deposited by Continental Manufacturing Corporation (CMC) in its Current Account No. 0109-022888 with Rizal Commercial Banking Corporation (RCBC). Immediately, RCBC honored the P8-million check and allowed CMC to withdraw the same.3

On the next banking day, January 12, 1981, GCDC issued a "Stop Payment Order" to SBTC, claiming that the P8-million check was released to a third party by mistake. Consequently, SBTC dishonored and returned the manager’s check to RCBC. Thereafter, the check was returned back and forth between the two banks, resulting in automatic debits and credits in each bank’s clearing balance.4

On February 13, 1981, RCBC filed a complaint5 for damages against SBTC with the then Court of First Instance of Rizal, Branch XXII. Said case was docketed as Civil Case No. 1081 and later transferred to the Regional Trial Court (RTC) of Makati City, Branch 143.

Meanwhile, following the rules of the Philippine Clearing House, RCBC and SBTC stopped returning the checks to each other. By way of a temporary arrangement pending resolution of the case, the P8-million check was equally divided between, and credited to, RCBC and SBTC.6

On May 9, 2000, the RTC of Makati City, Branch 143, rendered a Decision7 in favor of RCBC. The dispositive portion of the decision reads:

PREMISES CONSIDERED, the Court renders judgment in favor of plaintiff [RCBC] and finds defendant SBTC justly liable to [RCBC] and sentences [SBTC] to pay [RCBC] the amount of:

1. PhP4,000,000.00 as and for actual damages;

2. PhP100,000.00 as and for attorney’s fees; and,

3. the costs.

SO ORDERED.8

On appeal, the Court of Appeals affirmed with modification the above Decision, to wit:

WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant Security Bank and Trust Co. shall pay appellee Rizal Commercial Banking Corporation not only the principal amount of P4,000,000.00 but also interest thereon at (6%) per annum covering appellee’s unearned income on interest computed from the time of filing of the complaint on February 13, 1981 to the date of finality of this Decision. For lack of factual and legal basis, the award of attorney’s fees is DELETED.

SO ORDERED.9

Now for our resolution are the opposing parties’ petitions for review on certiorari of the abovecited decision. On its part, SBTC alleges the following to support its petition:

I.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN REFUSING TO APPLY THE LAW BECAUSE, IN ITS OPINION, TO DO SO WOULD "RESULT IN AN INJUSTICE."

II.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT TO DETERMINE WHETHER OR NOT A BANK IS A HOLDER IN DUE COURSE, ONLY THE NEGOTIABLE INSTRUMENTS LAW NEED BE APPLIED TO THE EXCLUSION OF CENTRAL BANK RULES AND REGULATIONS.

III.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO NOTE THAT THE MANAGER’S CHECK IN QUESTION WAS ACCEPTED FOR DEPOSIT BY THE RCBC AND WAS NOT ENCASHED BY THE PAYEE.

IV.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT PRIOR TO THE DEPOSIT OF THE CHECKS WORTH PhP53 MILLION, RCBC WAS HOLDING 43 CHECKS TOTALING P49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING CORPORATION AGAINST ITS CURRENT ACCOUNT WHEN THE BALANCE OF THAT ACCOUNT WAS A MERE P573.62.

V.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT THE CHECKS DEPOSITED WITH RCBC THE PROCEEDS OF WHICH WERE IMMEDIATELY WITHDRAWN TO HONOR THE 43 CHECKS TOTALING P49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING CORPORATION ON ITS CURRENT ACCOUNT WERE NOT ALL MANAGER’S CHECK[S] BUT INCLUDED ORDINARY CHECKS IN THE TOTAL AMOUNT OF PhP15,436,140.81.

VI.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT EACH OF THE 43 CHECKS DRAWN BY THE CONTINENTAL MANUFACTURING CORPORATION WERE ALL HONORED BY RCBC ON THE BASIS OF A MIXTURE OF ALL THE MANAGER’S AND ORDINARY CHECKS DEPOSITED ON THAT DAY OF 9 JANUARY 1981.

VII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE RCBC IS A HOLDER IN DUE COURSE.

VIII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC WAITED FOR THREE (3) DAYS TO NOTIFY THE RCBC OF THE STOP PAYMENT ORDER.

IX.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC SHOULD HAVE FIRST ACQUIRED PERSONAL KNOWLEDGE OF THE FACTS WHICH GAVE RISE TO THE REQUEST FOR THE STOP PAYMENT ORDER BEFORE HONORING SUCH REQUEST.

X.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN REFUSING TO HOLD SBTC LIABLE FOR DAMAGE CLAIMS BASED SOLELY ON SPECULATION, CONJECTURE AND GUESSWORK.

XI.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN HOLDING THAT RCBC IS NOT ENTITLED TO EXEMPLARY DAMAGES.

XII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING SBTC LIABLE FOR THE ATTORNEY’S FEES OF RCBC [SIC].10

On RCBC’s part, the following issues are submitted for resolution:

I.

WHETHER OR NOT SBTC IS LIABLE FOR THE MANAGER’S CHECK IT ISSUED.

II.

WHETHER OR NOT RCBC IS ENTITLED TO COMPENSATORY DAMAGES EQUIVALENT TO THE INTEREST INCOME LOST AS A RESULT OF THE ILLEGAL REFUSAL OF SBTC TO HONOR ITS OWN MANAGER’S CHECK, AS WELL AS FOR EXEMPLARY DAMAGES AND ATTORNEY’S FEES.11

Simply stated, we find that in these consolidated petitions, the legal issues for our resolution are: (1) Is SBTC liable to RCBC for the remaining P4 million? and (2) Is SBTC liable to pay for lost interest income on the remaining P4 million, exemplary damages and attorney’s fees?

RCBC avers that the manager’s check issued by SBTC is substantially as good as the money it represents because by its peculiar character, its issuance has the effect of an advance acceptance. RCBC claims that it is a holder in due course when it credited the P8-million manager’s check to CMC’s account. Accordingly, RCBC asserts that SBTC’s refusal to honor its obligation justifies RCBC claim for lost interest income, exemplary damages and attorney’s fees.

On the other hand, SBTC contends that RCBC violated Monetary Board Resolution No. 2202 of the Central Bank of the Philippines mandating all banks to verify the genuineness and validity of all checks before allowing drawings of the same. SBTC insists that RCBC should bear the consequences of allowing CMC to withdraw the amount of the check before it was cleared.12

We shall rule on the issues seriatim.

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a manager’s check. A manager’s check is one drawn by a bank’s manager upon the bank itself. It stands on the same footing as a certified check,13 which is deemed to have been accepted by the bank that certified it.14 As the bank’s own check, a manager’s check becomes the primary obligation of the bank and is accepted in advance by the act of its issuance.15

In this case, RCBC, in immediately crediting the amount of P8 million to CMC’s account, relied on the integrity and honor of the check as it is regarded in commercial transactions. Where the questioned check, which was payable to "Cash," appeared regular on its face, and the bank found nothing unusual in the transaction, as the drawer usually issued checks in big amounts made payable to cash, RCBC cannot be faulted in paying the value of the questioned check.16

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No. 2202 dated December 21, 1979, prohibiting drawings against uncollected deposits. For we must point out that the Central Bank at that time issued a Memorandum dated July 9, 1980, which interpreted said Monetary Board Resolution No. 2202. In its pertinent portion, said Memorandum reads:

"MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979 prohibiting, as a matter of policy, drawing against uncollected deposit effective July 1, 1980,uncollected deposits representing manager’s cashier’s/ treasurer’s checks, treasury warrants, postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank, covers drawings against demand deposits as well as withdrawals from savings deposits." 17

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow immediate drawings on uncollected deposits of manager’s checks, among others. Consequently, RCBC, in allowing the immediate withdrawal against the subject manager’s check, only exercised a prerogative expressly granted to it by the Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the extraordinary nature of the manager’s check and the relative rights of the parties thereto. SBTC’s liability as drawer remains the same − by drawing the instrument, it admits the existence of the payee and his then capacity to indorse; and engages that on due presentment, the instrument will be accepted, or paid, or both, according to its tenor.18

Concerning RCBC’s claim for lost interest income on the remaining P4 million, this is already covered by the amount of damages in the form of legal interest of 6%, based on Article 220019 and 220920 of the Civil Code of the Philippines, as awarded by the Court of Appeals in its decision.

In addition to the above-mentioned award of compensatory damages, we also find merit in the need to award exemplary damages in order to set an example for the public good. The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, above all, trust and confidence. In this connection, it is important that banks should guard against injury attributable to negligence or bad faith on its part. As repeatedly emphasized, since the banking business is impressed with public interest, the trust and confidence of the public in it is of paramount importance. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are required of it. SBTC having failed in this respect, the award of exemplary damages to RCBC in the amount of P50,000.00 is warranted.21

Pursuant to current jurisprudence, with the finding of liability for exemplary damages, attorney’s fees in the amount of P25,000.0022 must also be awarded against SBTC and in favor of RCBC.

WHEREFORE, the assailed Decision dated March 29, 2005 and Resolution dated December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387 is hereby AFFIRMED with MODIFICATION. Security Bank and Trust Company is ordered to pay Rizal Commercial Banking Corporation: (1) the remaining P4,000,000.00, with legal interest thereon at six percent (6%) per annum from the time of filing of the complaint on February 13, 1981 to the date of finality of this Decision; (2) exemplary damages of P50,000.00; and (3) attorney’s fees of P25,000.00.

No pronouncement as to costs.

SO ORDERED.

THE BUSINESS OF BANKING IS IMBUED WITH PUBLIC INTEREST

Omengan v. PNB512 SCRA 3052007

CORONA, J.:

This petition for review on certiorari1 seeks a review and reversal of the Court of Appeals (CA) decision2 and resolution3 in CA-G.R. CV No. 71302.

In October 1996, the Philippine National Bank (PNB) Tabuk (Kalinga) Branch approved petitioners-spouses’ application for a revolving credit line of P3 million. The loan was secured by two residential lots in Tabuk, Kalinga-Apayao covered by Transfer Certificate of Title (TCT) Nos. 12954 and 12112. The certificates of title, issued by the Registry of Deeds of the Province of Kalinga-Apayao, were in the name of Edgar4 Omengan married to Dinah Omengan.

The first P2.5 million was released by Branch Manager Henry Montalvo on three separate dates. The release of the final half million was, however, withheld by Montalvo because of a letter allegedly sent by Edgar’s sisters. It read:

Appas, Tabuk Kalinga

7 November 1996

The ManagerPhilippine National BankTabuk BranchPoblacion, TabukKalinga

Sir:

This refers to the land at Appas, Tabuk in the name of our brother, Edgar Omengan, which was mortgaged to [the] Bank in the amount of Three Million Pesos (P3,000,000.00), the sum of [P2.5 Million] had already been released and received by our brother, Edgar.

In this connection, it is requested that the remaining unreleased balance of [half a million pesos] be held in abeyance pending an understanding by the rest of the brothers and sisters of Edgar. Please be informed that the property mortgaged, while in the name of Edgar Omengan, is owned in co-ownership by all the children of the late Roberto and Elnora Omengan. The lawyer who drafted the document registering the subject property under Edgar’s name can attest to this fact. We had a prior understanding with Edgar in allowing him to make use of the property as collateral, but he refuses to comply with such arrangement. Hence, this letter. (emphasis ours)

Very truly yours,

(Sgd.) Shirley O. Gamon (Sgd.) Imogene O. Bangao

(Sgd.) Caroline O. Salicob (Sgd.) Alice O. Claver5

Montalvo was eventually replaced as branch manager by Manuel Acierto who released the remaining half million pesos to petitioners on May 2, 1997. Acierto also recommended the approval of a P2 million increase in their credit line to the Cagayan Valley Business Center Credit Committee in Santiago City.

The credit committee approved the increase of petitioners’ credit line (from P3 million to P5 million), provided Edgar’s sisters gave their conformity. Acierto informed petitioners of the conditional approval of their credit line.

But petitioners failed to secure the consent of Edgar’s sisters; hence, PNB put on hold the release of the additional P2 million.

On October 7, 1998, Edgar Omengan demanded the release of the P2 million. He claimed that the condition for its release was not part of his credit line agreement with PNB because it was added without his consent. PNB denied his request.

On March 3, 1999, petitioners filed a complaint for breach of contract and damages against PNB with the Regional Trial Court (RTC), Branch 25 in Tabuk, Kalinga. After trial, the court decided in favor of petitioners.

Accordingly, judgment is hereby rendered finding in favor of [petitioners.] [PNB is ordered]:

1) To release without delay in favor of [petitioners] the amount of P2,000,000.00 to complete the P5,000,000.00 credit line agreement;

2) To pay [petitioners] the amount of P2,760,000.00 representing the losses and/or expected income of the [petitioners] for three years;

3) To pay lawful interest, until the amount aforementioned on paragraphs 1 and 2 above are fully paid; and

4) To pay the costs.1awphi1.net

SO ORDERED.6

The CA, however, on June 18, 2003, reversed and set aside the RTC decision dated April 21, 2001.7

Petitioners now contend that the CA erred when it did not sustain the finding of breach of contract by the RTC. 8

The existence of breach of contract is a factual matter not usually reviewed in a petition filed under Rule 45. But since the RTC and the CA had contradictory findings, we are constrained to rule on this issue.

Was there a breach of contract? There was none.

Breach of contract is defined as follows:

[It] is the "failure without legal reason to comply with the terms of a contract." It is also defined as the "[f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract."9

In this case, the parties agreed on a P3 million credit line. This sum was completely released to petitioners who subsequently applied10 for an increase in their credit line. This was conditionally approved by PNB’s credit committee. For all intents and purposes, petitioners sought an additional loan.

The condition attached to the increase in credit line requiring petitioners to acquire the conformity of Edgar’s sisters was never acknowledged and accepted by petitioners. Thus, as to the additional loan, no meeting of the minds actually occurred and no breach of contract could be attributed to PNB. There was no perfected contract over the increase in credit line.

"[T]he business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper [information] regarding its debtors."11 Any investigation previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering new information on the same property as security for a subsequent loan. The credit and property investigation for the original loan of P3 million did not oblige PNB to grant and release any additional loan. At the time the original P3 million credit line was approved, the title to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had reason to suspect petitioners’ claim of exclusive ownership.1avvphi1.net

A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. xxx

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. xxx Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.12 (emphasis supplied)

Here, PNB had acquired information sufficient to induce a reasonably prudent person to inquire into the status of the title over the subject property. Instead of defending their position, petitioners merely insisted that reliance on the face of the certificate of title (in their name) was sufficient. This principle, as already mentioned, was not applicable to financial institutions like PNB.

In truth, petitioners had every chance to turn the situation in their favor if, as they said, they really owned the subject property alone, to the exclusion of any other owner(s). Unfortunately, all they offered were bare denials of the co-ownership claimed by Edgar’s sisters.

PNB exercised reasonable prudence in requiring the above-mentioned condition for the release of the additional loan. If the condition proved unacceptable to petitioners, the parties could have discussed other terms instead of making an obstinate and outright demand for the release of the additional amount. If the alleged co-ownership in fact had no leg to stand on, petitioners could have introduced evidence other than a simple denial of its existence.

Since PNB did not breach any contract and since it exercised the degree of diligence expected of it, it cannot be held liable for damages.

WHEREFORE, the decision and resolution of the Court of Appeals in CA-G.R. CV No. 71302 are hereby AFFIRMED.

Costs against petitioners.

SO ORDERED.

BPI v. CA512 SCRA 6202007

AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for damages and attorney’s fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and herein also a private respondent,demanded from the former payment of the amount of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50) representing the aggregate value of three (3) checks, which were allegedly payable to him, but which were deposited with the petitioner bank to private respondent Salazar’s account (Account No. 0203-1187-67) without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were deposited, since this account was already closed by private respondent Salazar or had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by the checks which were deposited and accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashier’s check. The difference between the value of the checks (P267,692.50) and the amount actually debited from her account (P267,707.70) represented bank charges in connection with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him of P267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the matter was violative of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the reimbursed amount from the account of private respondent Salazar by petitioner BPI was a matter exclusively between said parties and may be pursuant to banking rules and regulations, but did not in any way affect him. The debiting from another account of private respondent Salazar, considering that her other account was effectively closed, was not his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows:

1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said amount is fully paid;

2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;

4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney’s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise DISMISSED for lack of factual basis.

SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading5 actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the Civil Code in favor of BPI.

III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate and distinct personality.

IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to this agreement.

V.

The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI and dismissing SALAZAR’s complaint.

VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-party complaint of BPI.7

The issues center on the propriety of the deductions made by petitioner from private respondent Salazar’s account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally from such depositor’s account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the possession of a person who is neither a payee nor the indorsee thereof, has been lawfully transferred for value. Hence, the CA should not have presumed that Salazar was a transferee for value within the contemplation of Section 49 of the Negotiable Instruments Law,8 as the latter applies only to a holder defined under Section 191of the same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks was lawful despite her allegations that these checks were deposited pursuant to a prior internal arrangement with Templonuevo and that petitioner was privy to the arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in deducting the subject amount from Salazar’s account, petitioner was merely rectifying the undue payment it made upon the checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering Services was proper even though the value of the checks had been originally credited to the personal account of Salazar because A.A. Salazar Construction and Engineering Services, an unincorporated single proprietorship, had no separate and distinct personality from Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have dismissed petitioner’s third-party complaint against Templonuevo because the latter would have the legal duty to return to petitioner the proceeds of the checks which he previously received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CA’s conclusion that the deductions from the bank account of A.A. Salazar Construction and Engineering Services were improper stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of petitioner’s right to set off against the former’s bank deposits. This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and upon the admissions and stipulations of fact made during the pre-trial, most significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and,

(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the order of JRT Construction and Trading, the name and style under which Templonuevo does business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was able to deposit the checks in her personal savings account with petitioner and encash the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of eight months in 1990; and

(e) That Templonuevo only protested the purportedly unauthorized encashment of the checks after the lapse of one year from the date of the last check.10

Petitioner concedes that when it credited the value of the checks to the account of private respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the designated payee. The CA, however, did not lend credence to this claim and concluded that petitioner’s actions were deliberate, in view of its admission that the "mistake" was committed three times on three separate occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three times she deposited them to her account and three times the amounts borne by these checks were credited to the same. And in those separate occasions, the bank did not return the checks to her so that she could have them indorsed. Neither did the bank question her as to why she was depositing the checks to her account considering that she was not the payee thereof, thus allowing us to come to the conclusion that defendant-appellant BPI was fully aware that the proceeds of the three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three separate times nary any question. Banks are most finicky over accepting checks for deposit without the corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for deposit if the depositor is not one they know very well.11

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo pursuant to an internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned checks, it baffles us why it was only on August 31, 1991 or more than a year after the third and last check was deposited that he demanded for the refund of the total amount of P267,692.50.

A prudent man knowing that payment is due him would have demanded payment by his debtor from the moment the same became due and demandable. More so if the sum involved runs in hundreds of thousand of pesos. By and large, every person, at the very moment he learns that he was deprived of a thing which rightfully belongs to him, would have created a big fuss. He would not have waited for a year within which to do so. It is most inconceivable that Templonuevo did not do this.12

Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the CA affirms the factual findings of the trial court.14 Such questions on whether certain items of evidence should be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the proofs on one side or the other are clear and convincing and adequate to establish a proposition in issue, are questions of fact. The same holds true for questions on whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary evidence submitted by the adverse party may be said to be strong, clear and convincing, or whether or not inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight – all these are issues of fact which are not reviewable by the Court.15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when the

judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when the CA, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial court; h) when the findings of fact are conclusions without citation of specific evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. 17

It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The underlying premise of this provision, however, is that a valid transfer of ownership of the negotiable instrument in question has taken place.

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred.18

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for the proceeds of the same. To the Court’s mind, however, such period of delay is not of such unreasonable length as to estop Templonuevo from asserting ownership over the checks especially considering that it was readily apparent on the face of the instruments19 that these were crossed checks.

In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1) that the check may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one who has an account with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that such holder must inquire if the check has been received pursuant to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in their own right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar because the term "given" does not pertain merely to a transfer of physical possession of the instrument. The phrase "given or indorsed" in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. Negotiable instruments are negotiated by "transfer to one person or another in such a

manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by delivery."22 The present case involves checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder.23 Salazar failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated payee cannot be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks it previously credited in her favor. It is of no moment that the account debited by petitioner was different from the original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no separate and distinct personality from her, and the latter being her personal account.

The right of set-off was explained in Associated Bank v. Tan:24

A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter.25 As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship.26 In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their

genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct.27 The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank.28

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the account would remain untouched, pending the resolution of the controversy between her and Templonuevo.29 In this connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that her account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an unexpected move, in less than two weeks (eleven days to be precise) from the time that letter was written, [petitioner] bank issued a cashier’s check in the name of Julio R. Templonuevo of the J.R.T. Construction and Trading for the sum ofP267,692.50 (Exhibit "8") and debited said amount from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless disregard of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawn against the account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being served. The CA sustained private respondent Salazar’s claim of damages in this regard:

The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances, she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above amount from her account without informing her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.32

WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion is REVERSEDand SET ASIDE. In all other respects, the same are AFFIRMED.

No costs.

SO ORDERED.

BDO-EPCI, Inc. v. JAPRL Dev’t. Corp.GR No. 17990114 April 2008

CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 95659 and its resolution[3] denying reconsideration.

After evaluating the financial statements of respondent JAPRL Development Corporation (JAPRL) for fiscal years 1998, 1999 and 2000,[4] petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it amounting to P230,000,000[5] on March 28, 2003. Respondents Rapid Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL's sureties.

Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after the approval of its loan.[6] Petitioner later learned from MRM Management, JAPRL's financial adviser, that JAPRL had altered and falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment.[7]The information alarmed petitioner. Citing relevant provisions of the Trust Receipt Agreement,[8] it demanded immediate payment of JAPRL's outstanding obligations amounting to P194,493,388.98.[9]

SP Proc. No. Q-03-064

On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City, Branch 90 (Quezon City RTC).[10] It disclosed that it had been experiencing a decline in sales for the three preceding years and a staggering loss in 2002.[11]

Because the petition was sufficient in form and substance, a stay order[12] was issued on September 28, 2003.[13] However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC in an order dated May 9, 2005.[14]

Civil Case No. 03-991

Because JAPRL ignored its demand for payment, petitioner filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against respondents in the RTC of Makati City, Branch 145 (Makati RTC) on August 21, 2003.[15] Petitioner essentially asserted that JAPRL was guilty of fraud because it (JAPRL) altered and falsified its financial statements.[16]

The Makati RTC subsequently denied the application (for the issuance of a writ of preliminary attachment) for lack of merit as petitioner was unable to substantiate its allegations. Nevertheless, it ordered the service of summons on respondents.[17]Pursuant to the said order, summonses were issued against respondents and were served upon them.

Respondents moved to dismiss the complaint due to an allegedly invalid service of summons.[18] Because the officer's return stated that an "administrative assistant" had received the summons,[19] JAPRL and RFC argued that Section 11, Rule 14 of the Rules of Court[20] contained an exclusive list of persons on whom summons against a corporation must be served.[21] An "administrative assistant" was not one of them. Arollado, on the other hand, cited Section 6, Rule 14 thereof[22] which mandated personal service of summons on an individual defendant.[23]

The Makati RTC, in its October 10, 2005 order,[24] noted that because corporate officers are often busy, summonses to corporations are usually received only by administrative assistants or secretaries of corporate officers in the regular course of business. Hence, it denied the motion for lack of merit.

Respondents moved for reconsideration[25] but withdrew it before the Makati RTC could resolve the matter.[26]

RTC SEC Case No. 68-2008-C

On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba RTC). Finding JAPRL's petition sufficient in form and in substance, the Calamba RTC issued a stay order[27] on March 13, 2006.

In view of the said order, respondents hastily moved to suspend the proceedings in Civil Case No. 03-991 pending in the Makati RTC.[28]

On July 7, 2006, the Makati RTC granted the motion with regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that, because he was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should continue.[29]Respondents moved for reconsideration[30] but it was denied.[31]

On August 11, 2006, respondents filed a petition for certiorari[32] in the CA alleging that the Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7, 2006 orders.[33] They asserted that the court did not acquire jurisdiction over their persons due to defective service of summons. Thus, the Makati RTC could not hear the complaint for sum of money.[34]

In its June 7, 2007 decision, the CA held that because the summonses were served on a mere administrative assistant, the Makati RTC never acquired jurisdiction over respondents. Thus, it granted the petition.[35]

Petitioner moved for reconsideration but it was denied.[36] Hence, this petition.

Petitioner asserts that respondents maliciously evaded the service of summonses to prevent the Makati RTC from acquiring jurisdiction over their persons. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid the payment of their obligations.[37]

We grant the petition.

Respondents, in their petition for certiorari in the CA, questioned the jurisdiction of the Makati RTC over their persons (i.e., whether or not the service of summons was validly made). Therefore, it was only the October 10, 2005 order of the said trial court which they in effect assailed.[38] However, because they withdrew their motion for reconsideration of the said order, it became final. Moreover, the petition was filed 10 months and 1 day after the assailed order was issued by the Makati RTC,[39] way past the 60 days allowed by the Rules of Court. For these reasons, the said petition should have been dismissed outright by the CA.

More importantly, when respondents moved for the suspension of proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis of the March 13, 2006 order of the Calamba RTC), they waived whatever defect there was in the service of summons and were deemed to have submitted themselves voluntarily to the jurisdiction of the Makati RTC.[40]

We withhold judgment for the moment on the July 7, 2006 order of the Makati RTC suspending the proceedings in Civil Case No. 03-991 insofar as JAPRL and RFC are concerned. Under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against the corporation seeking rehabilitation[41]from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceedings.[42]

The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation.[43]

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy.[44]

Banks are entities engaged in the lending of funds obtained through deposits[45] from the public.[46] They borrow the public's excess money (i.e., deposits) and lend out the same.[47] Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments.

Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] Since banks deal with the public's money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.[50]

Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same.

In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accomodation.

A finding of fraud will change the whole picture. In this event, petitioner can use the finding of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC.

The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.

Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which states:Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating the rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral. (emphasis supplied)Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194,493,388.98 and other appropriate damages.[51]

Finally, considering that respondents failed to pay the four trust receipts, the Makati City Prosecutor should investigate whether or not there is probable cause to indict respondents for violation of Section 13 of the Trust Receipts Law.[52]

ACCORDINGLY, the petition is hereby GRANTED. The June 7, 2007 decision and August 31, 2007 resolution of the Court of Appeals in CA-G.R. SP No. 95659 areREVERSED and SET ASIDE.

The Regional Trial Court of Makati City, Branch 145 is ordered to proceed expeditiously with the trial of Civil Case No. 03-991 with regard to respondent Jose U. Arollado, and the other respondents if warranted. SO ORDERED.

BANKING AND COMMON CARRIERS

Solidbank/Metrobank v. Tan520 SCRA 1232007

CORONA, J.:

Assailed in this petition for review by certiorari under Rule 45 of the Rules of Court are the decision1 and resolution2 of the Court of Appeals (CA) dated November 26, 2004 and March 1, 2005, respectively, in CA-G.R. CV No. 58618,3 affirming the decision of the Regional Trial Court (RTC) of Manila, Branch 31.4

On December 2, 1991, respondents’ representative, Remigia Frias, deposited with petitioner ten checks worth P455,962. Grace Neri, petitioner’s teller no. 8 in its Juan Luna, Manila Branch, received two deposit slips for the checks, an original and a duplicate. Neri verified the checks and their amounts in the deposit slips then returned the duplicate copy to Frias and kept the original copy for petitioner.

In accordance with the usual practice between petitioner and respondents, the latter’s passbook was left with petitioner for the recording of the deposits on the bank’s ledger. Later, respondents retrieved the passbook and discovered that one of the checks, Metropolitan Bank and Trust Company (Metrobank) check no. 403954, payable to cash in the sum of P250,000 was not posted therein.

Immediately, respondents notified petitioner of the problem. Petitioner showed respondent Peter Tan a duplicate

copy of a deposit slip indicating the list of checks deposited by Frias. But it did not include the missing check. The deposit slip bore the stamp mark "teller no. 7" instead of "teller no. 8" who previously received the checks.

Still later, respondent Peter Tan learned from Metrobank (where he maintained an account) that Metrobank check no. 403954 had cleared after it was inexplicably deposited by a certain Dolores Lagsac in Premier Bank in San Pedro, Laguna. Respondents demanded that petitioner pay the amount of the check but it refused, hence, they filed a case for collection of a sum of money in the RTC of Manila, Branch 31.

In its answer, petitioner averred that the deposit slips Frias used when she deposited the checks were spurious. Petitioner accused respondents of engaging in a scheme to illegally exact money from it. It added that, contrary to the claim of respondents, it was "teller no. 7" who received the deposit slips and, although respondents insisted that Frias deposited ten checks, only nine checks were actually received by said teller. By way of counterclaim, it sought payment of P1,000,000 as actual and moral damages and P500,000 as exemplary damages.

After trial, the RTC found petitioner liable to respondents:

Upon examination of the oral, as well as of the documentary evidence which the parties presented at the trial in support of their respective contentions, and after taking into consideration all the circumstances of the case, this Court believes that the loss of Metrobank Check No. 403954 in the sum ofP250,000.00 was due to the fault of [petitioner]…[It] retained the original copy of the [deposit slip marked by "Teller No. 7"]. There is a presumption in law that evidence willfully suppressed would be adverse if produced.

Art. 1173 of the Civil Code states that "the fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person of the time and of the place"; and that "if the law or contract does not state the diligence which is to be observed in the performance, the same as expected of a good father of a family shall be required."

…For failure to comply with its obligation, [petitioner] is presumed to have been at fault or to have acted negligently unless they prove that they observe extraordinary diligence as prescribed in Arts. 1733 and 1735 of the Civil Code (Art. 1756)…

xxx xxx xxx

WHEREFORE, premises considered, judgment is hereby rendered in favor of [respondents], ordering [petitioner] to pay the sum of P250,000, with legal interest from the time the complaint [for collection of a sum of money] was filed until satisfied; P25,000.00 moral damages; P25,000.00 exemplary damages plus 20% of the amount due [respondents] as and for attorney’s fees. With costs.

SO ORDERED.5

Petitioner appealed to the CA which affirmed in toto the RTC’s assailed decision:

Serious doubt [was] engendered by the fact that [petitioner] did not present the original of the deposit slip marked with "Teller No. 7" and on which the entry as to Metrobank Check No. 403954 did not appear. Even the most cursory look at the handwriting thereon reveal[ed] a very marked difference with that in the other deposit slips filled up [by Frias] on December 2, 1991. Said circumstances spawn[ed] the belief thus, the said deposit slip was prepared by [petitioner] itself to cover up for the lost check.6

Petitioner filed a motion for reconsideration but the CA dismissed it. Hence, this appeal.1a\^/phi1.net

Before us, petitioner faults the CA for upholding the RTC decision. Petitioner argues that: (1) the findings of the RTC and the CA were not supported by the evidence and records of the case; (2) the award of damages in favor of respondents was unwarranted and (3) the application by the RTC, as affirmed by the CA, of the provisions of the Civil Code on common carriers to the instant case was erroneous.7

The petition must fail.

On the first issue, petitioner contends that the lower courts erred in finding it negligent for the loss of the subject check. According to petitioner, the fact that the check was deposited in Premier Bank affirmed its claim that it did not receive the check.

At the outset, the Court stresses that it accords respect to the factual findings of the trial court and, unless it overlooked substantial matters that would alter the outcome of the case, this Court will not disturb such findings.8 We meticulously reviewed the records of the case and found no reason to deviate from the rule. Moreover, since the CA affirmed these findings on appeal, they are final and conclusive on us.9 We therefore sustain the RTC’s and CA’s findings that petitioner was indeed negligent and responsible for respondents’ lost check.

On the issue of damages, petitioner argues that the moral and exemplary damages awarded by the lower courts had no legal basis. For the award of moral damages to stand, petitioner avers that respondents should have proven the existence of bad faith by clear and convincing evidence. According to petitioner, simple negligence cannot be a basis for its award. It insists that the award of exemplary damages is justified only when the act complained of was done in a wanton, fraudulent and oppressive manner.10

We disagree.

While petitioner may argue that simple negligence does not warrant the award of moral damages, it nonetheless cannot insist that that was all it was guilty of. It refused to produce the original copy of the deposit slip which could have proven its claim that it did not receive respondents’ missing check. Thus, in suppressing the best evidence that could have bolstered its claim and confirmed its innocence, the presumption now arises that it withheld the same for fraudulent purposes.11

Moreover, in presenting a false deposit slip in its attempt to feign innocence, petitioner’s bad faith was apparent and unmistakable. Bad faith imports a dishonest purpose or some moral obliquity or conscious doing of a wrong that partakes of the nature of fraud.12

As to the award of exemplary damages, the law allows it by way of example for the public good. The business of banking is impressed with public interest and great reliance is made on the bank’s sworn profession of diligence and meticulousness in giving irreproachable service.13 For petitioner’s failure to

carry out its responsibility and to account for respondents’ lost check, we hold that the lower courts did not err in awarding exemplary damages to the latter.

On the last issue, we hold that the trial court did not commit any error.1awphi1.nét A cursory reading of its decision reveals that it anchored its conclusion that petitioner was negligent on Article 1173 of the Civil Code.14

In citing the different provisions of the Civil Code on common carriers,15 the trial court merely made reference to the kind of diligence that petitioner should have performed under the circumstances. In other words, like a common carrier whose business is also imbued with public interest, petitioner should have exercised extraordinary diligence to negate its liability to respondents.

Assuming arguendo that the trial court indeed used the provisions on common carriers to pin down liability on petitioner, still we see no reason to strike down the RTC and CA rulings on this ground alone.

In one case,16 the Court did not hesitate to apply the doctrine of last clear chance (commonly used in transportation laws involving common carriers) to a banking transaction where it adjudged the bank responsible for the encashment of a forged check. There, we enunciated that the degree of diligence required of banks is more than that of a good father of a family in keeping with their responsibility to exercise the necessary care and prudence in handling their clients’ money.

We find no compelling reason to disallow the application of the provisions on common carriers to this case if only to emphasize the fact that banking institutions (like petitioner) have the duty to exercise the highest degree of diligence when transacting with the public. By the nature of their business, they are required to observe the highest standards of integrity and performance, and utmost assiduousness as well.17

WHEREFORE, the assailed decision and resolution of the Court of Appeals dated November 26, 2004 and March 1, 2005, respectively, in CA-G.R. CV No. 58618 are hereby AFFIRMED. Accordingly, the petition is DENIED.

Costs against petitioner. SO ORDERED.

QUASI-BANKS

Sec. 4 last par., GBL

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of re-lending or purchasing of receivables and other obligations.

Deposit Substitutes

Sec. 95, RA No. 7653, The New Central Bank Act (NCBA)

Definition of Deposit Substitutes. — The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. The Monetary Board shall determine what specific instruments shall be considered as deposit substitutes for the purposes of Section 94 of this Act: Provided, however, That deposit substitutes of commercial, industrial and other non-financial companies for the limited purpose of financing their own needs or the needs of their agents or dealers shall not be covered by the provisions of Section 94 of this Act.

Sec. 94, RA No. 7653, The New Central Bank Act (NCBA)

Reserve Requirements. — In order to control the volume of money created by the credit operations of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities: Provided, That the Monetary Board may, at its discretion, also require all banks and/or quasi-banks to maintain reserves against funds held in trust and liabilities for deposit substitutes as defined in this Act. The required reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly and without discrimination.

Reserves against deposit substitutes, if imposed, shall be determined in the same manner as provided for reserve requirements against regular bank deposits, with respect to the imposition, increase, and computation of reserves.

The Monetary Board may exempt from reserve requirements deposits and deposit substitutes with remaining maturities of two (2) years or more, as well as interbank borrowings.

Since the requirement to maintain bank reserves is imposed primarily to control the volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances.

THE ORGANIZATION AND OWNERSHIP OF BANKS

Secs. 8 – 19, GBL

SEC.8. Organization. - The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:

8.1 That the entity is a stock corporation;

8.2 That its funds are obtained from the public, which shall mean twenty (20) or more persons; and

8.3 That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied.

No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.

SEC.9. Issuance of Stocks. - The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks; Provided, That banks shall issue par value stocks only.

SEC.10. Treasury Stocks. - No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale.

SEC.11. Foreign Stockholdings - Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

SEC.12. Stockholdings of Family Groups of Related Interests. - Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank.

SEC. 13. Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank.

SEC.14. Certificate of Authority to Register. - The Securities and Exchange Commission shall no register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it:

14.1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

14.2. That the public interest and economic conditions, both general and local, justify the authorization; and

14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest.

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral.

SEC. 15. Board of Directors. - The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing.

SEC. 16. Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

SEC. 17. Directors of Merged or Consolidated Banks. - In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21).

SEC. 18. Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or

18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.

SEC. 19. Prohibition on Public Officials. - Except as otherwise provided in the Rural Banks Act, no appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws.

Stockholdings

Secs. 12 – 14, GBL

SEC.12. Stockholdings of Family Groups of Related Interests. - Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank.

SEC. 13. Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank.

SEC.14. Certificate of Authority to Register. - The Securities and Exchange Commission shall no register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it:

14.1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

14.2. That the public interest and economic conditions, both general and local, justify the authorization; and

14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest.

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral.

The Required Number of Board of Directors

Secs. 15 – 18, GBL

SEC. 15. Board of Directors. - The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing.

SEC. 16. Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

SEC. 17. Directors of Merged or Consolidated Banks. - In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21).

SEC. 18. Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or

18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.

Independent DirectorsSec. 15, GBL

Board of Directors. - The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing.

Foreigner as Member of the BoardSec. 15 2nd Par., GBL

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank.

Ownership of Individuals within the 4th degree of Consanguinity or Affinity

Sec. 12, GBL

Stockholdings of Family Groups of Related Interests. - Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank.

Sec. X141.1, Manual of Regulations for Banks (MORB)

Definition/limits

a. Definition of directors. Directors shall include:

(1) directors who are named as such in the articles of incorporation;

(2) directors duly elected in subsequent meetings of the stockholders; and

(3) those elected to fill vacancies in the board of directors.

b. Limits on the number of the members of the board of directors. Pursuant to Sections 15 and 17 of the R.A. No. 8791, there shall be at least five (5), and a maximum of fifteen(15) members of the board of directors of a bank at least two (2) of whom shall be independent directors: Provided, That in case of a bank/quasi-bank/trust entity merger or consolidation, the number of directors may be increased up to twenty-one (21).

An independent director shall mean a person who –

(1) Is not or has not been an officer or employee of the bank its subsidiaries or affiliates or related interests during the past three (3) years counted from the date of his election;

(2) Is not a director or officer of the related companies of the institution’s majority stockholder;

(3) Is not a majority stockholder of the institution, any of its related companies, or of its majority shareholders;

(4) Is not a relative within the fourth degree of consanguinity or affinity, legitimate or common-law of any director, officer or majority shareholder of the bank or any of its related companies;

(5) Is not acting as a nominee or representative of any director or substantial shareholder of the bank, any of its related companies or any of its substantial shareholders; and,

(6) Is not retained as professional adviser, consultant, agent or counsel of the institution, any of its related companies or any of its substantial shareholders, either in his personal capacity or through his firm; is independent of management and free from any business or other relationship, has not engaged and does not engage in any transaction with the institution or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial

shareholder, other than transactions which are conducted at arms length and could not materially interfere with or influence the exercise of his judgment.

An independent director of a bank can be elected as an independent director of its: (a) parent or holding company; (b) subsidiary or affiliate; (c) substantial shareholder; or (d) other related companies, or vice-versa: Provided, That he is not a substantial shareholder of the bank or any of the said concerned entities.

The foregoing terms and phrases used in Items “(1) to (6)” of this Section shall have the following meaning:

(a) Parent is a corporation which has control over another corporation directly or indirectly through one (1) or more intermediaries.

(b) Subsidiary means a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one (1) or more intermediaries by a bank.

(c) Affiliate is a juridical person that directly or indirectly, through one (1) or more intermediaries, is controlled by, or is under common control with the bank or its affiliates.

(d) Related interests as defined under Sections 12 and 13 of R. A. No. 8791 shall mean individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common law, and two (2) or more corporations owned or controlled by a single individual or by the same family group or the same group of persons.

(e) Control exists when the parent owns directly or indirectly through subsidiaries more than one-half of the voting power of an enterprise unless, in exceptional circumstance, it can be clearly demonstratedthat such ownership does not constitute control. Control may also exist even whenownership is one-half or less of the voting power of an enterprise when there is:

i. power over more than one-half of the voting rights by virtue of an agreement with other stockholders; or

ii. power to govern the financial and operating policies of the enterprise under a statute or an agreement; or

iii. power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or

iv. power to cast the majority votes at meetings of the board of directors or equivalent governing body; or

v. any other arrangement similar to any of the above.

(f) Related company means another company which is: (a) its parent or holding company; (b) its subsidiary or affiliate; or (c) a corporation where a bank or its majority stockholder own such number of shares that will allow/enable him to elect at least one (1) member of the board of directors or a partnership where such majority stockholder is a partner.

(g) Substantial or major shareholder shall mean a person, whether natural or juridical, owning such number of shares that will allow him to elect at least one (1) member of the board of directors of a bank or who is directly or indirectly the registered or beneficial owner of more than ten percent (10%) of any class of its equity security.

(h) Majority stockholder or majority shareholder means a person, whether natural or juridical, owning more than fifty percent (50%) of the voting stock of a bank.

Non-Filipino citizens may become members of the board of directors of a bankto the extent of the foreign participation in the equity of said bank: Provided, Thatpursuant to Section 23 of the Corporation Code of the Philippines (BP Blg. 68), amajority of the directors must be residents of the Philippines.

The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and videoconferencing as long as the director who is taking part in said meetings can actively participate in the deliberations on matters taken up therein: Provided, That every member of the board shall participate in at least fifty percent (50%) and shall physically attend at least twentyfive percent (25%) of all board meetings every year: Provided, further, That in the case of a director who is unable to physically attend or participate in board meetings via teleconferencing or videoconferencing, the corporate secretary shall execute a notarized certification attesting that said director was given the agenda materials prior to the meeting and that his/her comments/decisions thereon were submitted for deliberation/ discussion and were taken up in the actual board meeting, and that the submission of said certification shall be considered compliance with the required fifty percent (50%) minimum attendance in board meetings.

The BSP and Bank Officials/Employees

Prescription and review of qualificationsSec. 16, GBL

Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

Regulation of compensation benefitsSec. 18, GBL

Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or

18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.

Prohibition on Public Officials

Sec. 19, GBL

Prohibition on Public Officials. - Except as otherwise provided in the Rural Banks Act, no appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws.

Sec. 5, Rural Bank Act (RBA)

All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to office: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank.

No director or officer of any rural bank shall, either directly or indirectly, for himself or as the representative or agent of another, borrow any of the deposits or funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank to others, or in any manner be an obligor for money borrowed from the bank or loaned by it except with the written approval of the majority of the directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of such entry shall be transmitted forthwith to the appropriate supervising department. The director/officer of the bank who violates the provisions of this section shall be immediately dismissed from office and shall be penalized in accordance with Section 26 of this Act.

The Monetary Board may regulate the amount of credit accommodations that may be extended directly to the directors, officers or stockholders or rural bank of banking institutions. However, the outstanding credit accommodations which a rural bank may extend to each of its stock-holders owning two percent (2%) or more of the subscribed capital stock, its directors, or officers shall be limited to an amount equivalent to the respective outstanding deposits and book value of the paid-in capital contributions in the bank.

Sec. 10, Guidelines for the Organizations of Cooperative Banks

Foreign Ownership of Banks and Foreign Banks

Foreign individuals and non-bank corporationsSec. 11, GBL

Foreign Stockholdings - Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

Foreign banks and ownership of local banksSec. 7 3, GBL

Acquisition of Voting Stock in a Domestic Bank. - Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines.

Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.

In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos.

Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines.

Grandfather Rule

The Controlling Stockholders RuleBSP Circular No. 256

Pursuant to Monetary Board Resolution No. 1233 dated July 21, 2000, the following rules and regulations are hereby issued to implement Section 11 of Republic Act No. 8791, "The General Banking Law of 2000".

Section 1. Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank: Provided, That the aggregate foreign owned voting stocks owned by foreign individuals and non-bank corporations in a domestic bank shall not exceed forty percent (40%) of the outstanding voting stock of the bank. The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank.

Section 2. A Filipino individual and a domestic non-bank corporation may each own up to forty percent (40%) of the voting stock of a domestic bank. There shall be no aggregate ceiling on the ownership by such individuals and corporations in a domestic bank.

Section 3. The citizenship of the corporation which is a stockholder of a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. For purposes hereof, the term "controlling stockholders" shall refer to individuals holding more than fifty percent (50%) of the voting stock of the corporate stockholder of the bank.

Section 4. The right of Philippine corporations, however, under Section 8 of Republic Act No. 7721 (Act Liberalizing the Entry of Foreign Banks), to wit:

"x x xAny right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed by and extended under the same conditions to Philippine banks. Philippine corporations whose shares of stocks are listed in the Philippine Stock Exchange or are of long standing for at least ten (10) years shall have the right to acquire, purchase or own up to sixty percent (60%) of the voting stock of a domestic bank."

shall continue to be in force and effect.

Section 5. This circular supersedes the provisions of Subsection X126.1 of the Manual of Regulations for Banks insofar as inconsistent herewith.

Foreign ownership in thrift banksSec. 8, Thrift Banks Act

Ownership. At least forty percent (40%) of the voting stock of a thrift bank which may be established after the approval of this Act shall be owned by citizens of the Philippines, except where a new bank may be established as a result of a merger or consolidation of existing thrift banks with foreign holdings in which case, the resulting foreign holdings shall not be increased but may be reduced and, once reduced, shall be increased thereafter beyond sixty percent (60%) of the voting stock of thrifts banks. The percentage of the foreign-owned voting stocks shall be determined by the citizenship of individual stockholders and in case of corporations owning shares, by the citizenship of each stockholder in the said corporations.

Any provision of existing laws to the contrary notwithstanding, stockholdings in a thrift bank shall be exempt from any ownership ceiling for a period of ten (10) years from the effectivity of this Act.

Foreign ownership in rural banksSec. 4, Rural Banks Act

No rural bank shall be operated without a Certificate of Authority from the Monetary Board of the Central Bank. Rural banks shall be organized in the form of stock corporations. Upon consultation with the rural banks in the area, duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize a rural bank and/or subscribe to the shares of stock of any rural bank: Provided, That a cooperative or corporation owning or controlling the whole or majority of the voting stock of the rural bank shall be subject to special examination and to such rules and regulations as the Monetary Board may prescribe. With the exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act No. 337, as amended, and of Filipino-controlled domestics banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or, cooperatives qualified under Philippine laws to own and hold such capital stock: Provided, That any provisions of existing laws to the contrary notwithstanding, stockholdings in a rural bank shall be exempt from any ownership ceiling for a period of ten (10) years from the approval of this Act: Provided, further, That any such exemption shall require the approval of the Monetary Board. If subscription of private shareholders to the capital stock of a rural bank cannot, be secured or is not available, or insufficient to meet the normal credit needs of the locality, the Land Bank of the Philippines, the Development Bank of the Philippines, or any government-owned or controlled bank or financial institution, on representation of the said private share-holders but subject to the investment guidelines, policies and procedures of the bank or financial institution and upon approval of the Monetary Board of the Central Bank, shall subscribe to the capital stock of such rural bank, which shall be paid in full at the time of subscription, in an amount equal to the fully paid subscribed and unimpaired capital of the private stockholders or such amount as the Monetary Board may prescribe as may be necessary to promote and expand rural economic development: Provided, however, That such shares of stock subscribed by the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution may be sold at any time at market value to private individuals who are citizens of the Philippines: Provided, finally, That in the sale of shares of stock subscribed by the Land Bank of the Philippines, the Development Bank of the Philippines or any government-owned or controlled bank or financial institution, the registered stockholders shall have the right of pre-emption within one (1) year from the date of offer in proportion to their respective holdings, but in the absence such buyer, preference, however, shall be given to residents of the locality or province where the rural bank is located.

Bulos, Jr. v. Yasuma527 SCRA 7272007

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure seeking to set aside and to declare null and void (1) the Decision, dated 5 January 2004, of the Court of Appeals in CA-G.R. CV No. 54969, which affirmed the Decision, dated 30 August 1996, of the Makati City Regional Trial Court (RTC), Branch 148, in Civil Case No. 90-1053; and (2) the Resolution of the Court of Appeals, dated 11 June 2004, which denied the petitioner’s Motion for Reconsideration.

Herein petitioner Honorio C. Bulos (petitioner) was one of the defendants in a Complaint for collection of sum of money plus damages with prayer for a writ of preliminary attachment, docketed as Civil Case No. 90-1053, entitled, “Koji Yasuma v. Ramon R. Lim,

Honorio C. Bulos and Bede S. Tabalingcos,” filed with the RTC by herein respondent Koji Yasuma, a Japanese national.

The controversy in the present case arose from the following antecedents:

Petitioner, together with Dr. Ramon R. Lim (Dr. Lim) and Atty. Bede S. Tabalingcos (Atty. Tabalingcos), obtained a loan from Koji Yasuma (respondent) in the amount of P2,500,000.00, as evidenced by a promissory note, dated 11 October 1988, signed solely by Dr. Lim per agreement among the petitioner, Dr. Lim and Atty. Tabalingcos. The said promissory note provides for the following conditions: (1) payment of interest at the rate of 4% for a period of three months or until 10 January 1989; (2) in case of a “roll over” for failure of the borrowers to pay on the agreed period, the extension will be considered running monthly under the same terms and rate of interest until the principal amount has been fully paid; and (3) should the said promissory note be brought to court for collection, the borrowers agree to pay an additional amount equivalent to 10% of the principal amount plus attorney’s fee, which in no case shall be less than P10,000.00. As a security for the said loan, both petitioner and Dr. Lim executed Real Estate Mortgages over their respective properties.

On 16 December 1988, petitioner and Dr. Lim executed a Deed of Assumption, to the effect that petitioner assumed the loan obligation of Dr. Lim due respondent with the condition that Dr. Lim shall first secure the respondent’s consent to and approval of the said Deed of Assumption. However, the conformity of respondent to the said Deed of Assumption was not obtained by Dr. Lim. When the loan obligation became due and demandable on 10 January 1989, respondent demanded payment from the petitioner, Dr. Lim and Atty. Tabalingcos, but they failed and refused to pay the same. Respondent then made a demand in writing and through telephone calls to Atty. Tabalingcos. Atty. Tabalingcos just told respondent that he would talk first to the petitioner and Dr. Lim and he will then inform the respondent of their response, but Atty. Tabalingcos never called back.

After painstaking efforts to collect the loan from the petitioner, Dr. Lim and Atty. Tabalingcos, respondent requested Atty. Tabalingcos, who happened to be his legal adviser at that time, to foreclose the Real Estate Mortgages executed by the petitioner and Dr. Lim over their respective properties. Atty. Tabalingcos failed to do so. Instead, he made a proposal to respondent that the petitioner had certain properties in Parañaque City which he was willing to sell to the respondent to cover the obligation of the petitioner, Dr. Lim and Atty. Tabalingcos. Out of respondent’s desperation to collect the loan that he had extended to the petitioner, Dr. Lim and Atty. Tabalingcos, respondent agreed to the aforesaid proposal. Thus, on 24 February 1989, a Deed of Sale, over certain parcels of land located in Parañaque City and covered by Transfer Certificates of Title (TCTs) No. 467734 and 332355 in the name of petitioner, was executed in favor of the respondent for a total consideration of P1,630,750.00, paid via a dacion en pago arrangement.

After the execution of the Deed of Sale, all the parties agreed that there was still a balance of P2,240,000.00 owed to the respondent. In a Certification dated 27 February 1989, which the petitioner and Dr. Lim considered as another Deed of Assumption, petitioner assumed the P1,500,000.00 obligation of Dr. Lim. The consideration for the said assumption of obligation is the transfer of the shares of stocks of the Rural Bank of Parañaque to the respondent to offset the obligation. Petitioner thus offered the said shares of stocks to the respondent. Atty. Tabalingcos, for his part and in his capacity as Chairman of the Board of the said bank, issued a certification to the effect that the respondent holds P1,250,000.00 worth of shares of stocks, equivalent to 20% shareholdings in the Rural Bank of Parañaque. However, during that time, the Rural Bank of Parañaque must first increase its authorized capital stock subject to the approval of the Securities and Exchange Commission (SEC) because the original shares had already been fully subscribed and fully paid. Because of this and of the information provided by his then counsel, the late Atty. Bayani M. Timario, Jr. (Atty. Timario, Jr.), that a foreigner cannot be a stockholder of a rural bank, the respondent absolutely refused to accept the shares of stocks and demanded instead an outright payment of the loan obligation. As the shares of stocks were already assigned to the respondent via a certification issued by Atty. Tabalingcos, the latter then issued a check in the amount of P2,240,000.00 to the order of the respondent, dated 25 December 1989, to buy the said shares in behalf of an interested buyer. When the respondent presented the check to the bank, it was dishonored for having been drawn against insufficient funds.

Subsequently, the respondent sent a demand letter to each of the borrowers -- the

petitioner, Dr. Lim and Atty. Tabalingcos -- for the full payment of their outstanding obligation; but, to no avail. This prompted the respondent to file with the RTC a Complaint for Sum of

Money with Damages and with Prayer for a Writ of Preliminary Attachment against the petitioner, Dr. Lim and Atty. Tabalingcos. On 23 April 1990, the trial court issued an Order granting the writ of preliminary attachment applied for by the respondent upon his filing of a bond fixed at P2,240,000.00. By virtue of the said writ, several lots of the petitioner, and the house and lot of Dr. Lim located in Quezon City, were attached. Petitioner filed a Motion to Dissolve Writ of Attachment which was granted by the trial court in its Order dated 7 October 1992 conditioned upon petitioner’s posting of a counter-bond in the amount of P2,240,000.00. Petitioner moved for the reduction of his counter-bond to P770,000.00 considering that the respondent made an admission that the petitioner partially paid the loan obligation in the amount of P1,630,750.00. The said motion was granted by the court a quo in its Order dated 1 August 1995.

On 30 August 1996, the trial court rendered a Decision in favor of the respondent and against the petitioner, Dr. Lim and Atty. Tabalingcos, the decretal portion of which reads as follows:

WHEREFORE, premises considered, and finding that [herein respondent] has fully established not only by preponderance of evidence by competent proof of his entitlement to his claims in the [C]omplaint, judgment is hereby rendered in favor of [respondent] and against [herein petitioner, together with Dr. Lim and Atty. Tabalingcos]. Ordering [the petitioner, Dr. Lim and Atty. Tabalingcos] to jointly and severally pay the [respondent] the following:

(1) The amount of P2,240,000.00 plus interest of 21% per annum as of April, 1990, the time of the filing of the [C]omplaint;(2) The sum equivalent to 20% of P2,240,000.00 plus P500.00 per appearance in the case, for and as attorney’s fees.(3) Costs of the suit.

The cross-claim filed by [Atty. Tabalingcos] against the [petitioner] is hereby DISMISSED for reasons stated above.

Costs against [petitioner, Dr. Lim and Atty. Tabalingcos].

Aggrieved by the aforesaid Decision of the trial court, the petitioner, Dr. Lim and Atty. Tabalingcos appealed to the Court of Appeals. However, Atty. Tabalingcos did not file his appellant’s brief. On 5 January 2004, the Court of Appeals rendered a Decision affirming in toto the Decision of the trial court. The petitioner moved for its reconsideration, but it was denied in a Resolution dated 11 June 2004 issued by the appellate court.

Hence, this petition by petitioner. However, Dr. Lim and Atty. Tabalingcos did not appeal before this Court.

Petitioner submits the following issues for this Court’s resolution:

I. Whether or not the obligation of petitioner to pay respondent has already (sic) fully extinguished.

II. Whether or not the offer to purchase shares of stock of Rural Bank of Parañaque amounting to P1,250,000.00 extinguished petitioner Bulos’ obligation to pay the balance of the loan with (sic) respondent.

III. Whether or not petitioner Bulos is entitled to claim for damages.

IV. Whether or not [the] imposition of 21% interest on P2,240,000.00 and 20% of the said amount as attorney’s fees has no legal and factual basis (sic).

Petitioner argues that despite the partial payment made by him in the amount P1,630,750.00, and in spite of the respondent’s unequivocal admission of the same, still, the respondent did not deduct the said amount from the total amount of the obligation due him. Instead, the respondent continuously claimed the amount of P2,240,000.00 as of 25

December 1989, plus interest at the rate of 4% per month from 25 December 1989 when he filed his Complaint on 7 April 1990.

The petitioner likewise avers that his obligation to pay the balance of the loan to the respondent had already been extinguished when he offered to the respondent the shares of stocks of the Rural Bank of Parañaque amounting to P1,250,000.00. Respondent’s assertion that he did not accept the offer of the shares of stocks because of his nationality deserves scant consideration as in fact, he had religiously followed up with petitioner and Atty. Tabalingcos the issuance of the certificate for the said shares of stocks.

Petitioner further alleges that he is entitled to claim damages for he had been subjected to ridicule, mental anguish, besmirched reputation, and extreme anxiety as a result of the respondent’s unfounded and malicious suit. Petitioner lost business opportunities as a consequence of the attachment made on his real properties in Tarlac; thus, respondent should be made liable for the payment of damages for all that he had suffered. As to the imposition of 21% interest on the P2,240,000.00 outstanding loan obligation and 20% of the said amount as attorney’s fees, petitioner asserts that the same has no legal and factual bases. The imposition of the said interest is highly excessive and exorbitant in light of the dacion en pago arrangement and the assignment of shares of stocks of the Rural Bank of Parañaque.

It is well-settled that the findings of fact of the trial court, especially when affirmed by the Court of Appeals, are accorded the highest degree of respect, and generally will not be disturbed on appeal. Such findings are binding and conclusive to the Court. Furthermore, it is not the Court’s function under Rule 45 of the 1997 Revised Rules of Civil Procedure to review, examine and evaluate or weigh the probative value of the evidence presented. The jurisdiction of the Court in a Petition for Review under Rule 45 is limited to reviewing only errors of law. Unless the case falls under the recognized exceptions, the rule shall not be disturbed.

The following findings of fact, properly supported by evidence, made by both the trial court and the appellate court can no longer be modified and are binding on this Court: (1) the original loan obtained by the petitioner, together with Dr. Lim and Atty. Tabalingcos, from the respondent amounted to P2,500,000.00 with 4% interest for three months, or from 11 October 1988 up to 10 January 1989, and in case of extension of the loan, the interest of 5% per month will be imposed; (2) the obligation of the petitioner, Dr. Lim and Atty. Tabalingcos was joint and solidary as evidenced by the following acts:

(a) the promissory note was solely signed by Dr. Lim per agreement among the parties;

(b) the act of Dr. Lim in executing a Deed of Real Estate Mortgage in

favor of respondent to cover the amount of the promissory note;

(c) the act of the petitioner in executing a second Deed of Real Estate Mortgage as additional security to the loan; and

(d) the act of Atty. Tabalingcos in issuing a check in the amount of P2, 240,000.00 to cover the balance of the obligation;

(3) petitioner failed to pay the loan by 10 January 1989; thus, from 11 October 1988 up to February 1989, the loan obligation, including interest, reached a total amount of P2,700,000.00; (4) petitioner made a partial payment via a dacion en pago, amounting to P1,630,750.00, which was deducted from the total loan obligation of P2,700,000.00 leaving a balance of P1,069,000.00 as of 24 February 1989; (5) by March 1989, the balance of the loan began earning a 5% interest per month after all the parties agreed to an increase in the interest rate during the extended period; (6) taking into consideration the outstanding loan balance of P1,069,000.00, plus interest, and minus a discount granted by respondent, the amount still due respondent was determined by the parties to be P2,240,000.00; and (7) to pay the remaining indebtedness, Atty. Tabalingcos issued a check covering the amount but it was dishonored, therefore, the indebtedness remains at P2,240,000.00.

When the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such defense. The debtor has the burden of showing with legal certainty

that the obligation has been discharged by payment. In the present case, the petitioner failed to prove that indeed, his liability to pay the remaining balance of his obligation with the respondent had been extinguished by his offer to transfer to respondent his shares of stocks in the Rural Bank of Parañaque.

The defense of the petitioner that the offer he made to respondent of his shares of stocks in Rural Bank of Parañaque amounting to P1,250,000.00 had already extinguished his obligation to pay the balance of the loan stands on hollow ground.

Section 4, Republic Act No. 7353, otherwise known as “The Rural Banks Act of 1992,” provides:

Section. 4. x x x. With the exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act No. 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock: x x x. (Emphasis supplied.)

Given the foregoing provision of law, this Court agrees with the Court of Appeals that the respondent, being a foreigner, is not qualified to own capital stock in the Rural Bank of Parañaque. This renders the assignment of shares of stocks in the Rural Bank of Parañaque in favor of respondent void. As previously stated, the assignment of the shares of stocks in the rural bank was not accepted by the respondent precisely because of the prohibition stated under Republic Act No. 7353, which was explained to him by his counsel, the late Atty. Timario, Jr.

Moreover, petitioner mentioned in his testimony before the trial court that all the shares of stocks of the Rural Bank of Parañaque had already been fully subscribed and, for shares to be made available, additional capital should be infused and the SEC should approved the additional shares for subscription. Here we quote that part of the petitioner’s testimony:

Q: Now, you have stated a while ago Mr. Witness, that the balance be paid by shares of stocks and as a matter of fact the [respondent] has accepted that preposition, what happened if any, afterwards?

A: In my case, I transferred 330 something shares of stocks in the name of [the respondent] and I believe [Atty.] Tabalingcos have done the same.

Q: Did you find out for yourselves what happened afterwards if any?

A: However we have transferred in their name however there are technicalities in the issuance, Central Bank technicalities.

Q: What are these Central Bank technicalities?

A: Issuance of shares of stocks certificate, during that period we have to increase our authorized capital stock with the [SEC] because the original one were already fully subscribed and fully paid. [Emphasis supplied].

Q: Then what happened?

A: The only way for us, for the bank to issue additional shares of stocks certificate is to wait for the approval of the increase of capitalization from the [SEC] so that these assigned shares to [Atty.] Tabalingcos can be lodge.

Q: What did you do if any afterwards?

A: We informed the [respondent] about that.

x x x x.

Q: What was his reply if any?

A: He started complaining and said, “just return to me my money” that is how it all started.

From the aforesaid testimony of the petitioner, it is highly impossible for respondent to have acquired by assignment any shares of stocks in the Rural Bank of Parañaque. Thus, the obligation of the petitioner to pay the balance of the loan remains subsisting.

In the face of all of the above, this Court nevertheless sustains the assertion of the petitioner that the imposition of 21% interest on the outstanding loan obligation of P2,240,000.00 has no legal and factual bases.

According to the promissory note executed by Dr. Lim, and agreed to by all the parties, in case of the borrower’s failure to pay the loan obligation within the stipulated period, the extended period shall be considered running monthly under the same terms and rate of interest, which is 4% per month, until the principal has been fully paid. Thus, the remaining balance of P2,240,000.00 is still subject to the interest rate of 4% per month or 48% per annum. To our mind such rate of interest is highly unconscionable and inordinate.

In the case of Ruiz v. Court of Appeals, citing the cases of Medel v. Court of Appeals, Garcia v. Court of Appeals, Spouses Bautista v. Pilar Development Corporation and the recent case of Spouses Solangon v. Salazar, this Court considered the 3% interest per month or 36% interest per annum as excessive and unconscionable. Thereby, the Court, in the said case, equitably reduced the rate of interest to 1% interest per month or 12% interest per annum. The Court also held that while the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and parties to a loan agreement have been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Surely, it is more consonant with justice that the rate of interest in the present case, which is 4% per month or 48% per annum, be reduced equitably. We find, that the reduction of the interest rate by the trial court, pegged at 21% per annum, was not proper.

In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court formulated the following rules of thumb to guide the lower courts in the imposition of the proper interest on the amounts due, to wit:

I. x x x x.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. x x x x.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or

paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. [Emphasis supplied].

The agreed interest rate of 4% per month or 48% per annum is unconscionable and must be mitigated. Following established jurisprudence, the legal interest rate of 12% should apply, computed from the date of judicial demand, that is, 7 April 1990. The aforequoted paragraph 3 of the guidelines is also appropriate herein, and a 12% interest per annum is imposed on petitioner’s monetary liability to respondent from the date of the finality of this Decision until it is fully paid.

As regards the argument of the petitioner that the award of attorney’s fees equivalent to 20% of P2,240,000.00 is excessive, this Court finds the same specious. The lower courts found that by reason of the acts of the petitioner and his cohorts, the respondent had to secure the services of counsel in order to preserve and protect his rights. If not for the refusal of the petitioner to settle his obligation, the respondent would not have incurred expenses in filing a case which dragged on for more than a decade in order to recover the loan which he extended to the petitioner, Dr. Lim and Atty. Tabalingcos. Hence, the award of 20% of P2,240,000.00 as attorney’s fees is only reasonable. Conspicuously, there appears to be a variation as to the percentage of attorney’s fees awarded in the dispositive portion and in the body of the RTC decision. In the dispositive portion of the RTC decision, the attorney’s fees awarded was 20% of P2,240,000.00; while in the body of the same decision, the rate referred to 10% of P2,240,000.00.

The general rule is that, where there is conflict between the dispositive portion or the fallo and the body of a decision, the fallo controls. This rule rests on the theory that the fallo is the final order while the opinion in the body is merely a statement ordering nothing. However, where the inevitable conclusion from the body of the decision is so clear as to show that there was a mistake in the dispositive portion, the body of the decision prevails. In his complaint before the RTC, the respondent prayed for 20% of P2,240,000.00 as attorney’s fees. In the body of the RTC decision, the trial court awarded outright respondent’s prayer for attorney’s fees without any discussion that it found the 20% respondent prayed for as excessive and that it was reducing the percentage of the attorney’s fees to 10%. This court is more inclined to believe that the 10% attorney’s fees in the body of the RTC decision is merely a typographical error. Consequently, the general rule applies to this case, and the 20% attorney’s fees ordered paid by the fallo of the RTC decision controls.

WHEREFORE, premises considered, the instant Petition is PARTIALLY GRANTED. The Decision and Resolution of the Court of Appeals dated 5 January 2004 and 11 June 2004, respectively, in CA-G.R. CV No. 54969, which affirmed the Decision, dated 30 August 1996, of the Makati City RTC, Branch 148, in Civil Case No. 90-1053, are hereby AFFIRMED with the MODIFICATION that an interest rate of 12% per annum shall be applied to the balance of the loan amounting to P2,240,000.00, computed from the date of judicial demand, i.e., 7 April 1990; and of 12% interest per annum on the amount due from the date of the finality of this Decision until fully paid. Costs against the petitioner.

SO ORDERED.

Nunga, Jr v. Nunga III574 SCRA 76018 December 2008

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision[1] dated 31 January 2007 and Resolution[2] dated 4 June 2007 of the Court of Appeals in CA-G.R. CV No. 78424. The appellate court, in its assailed decision, reversed the Decision[3] dated 25 October 2002 of the Regional Trial Court (RTC) of the City of San Fernando, Pampanga, Branch 42, in Commercial Case No. 018, which ordered the registration of the transfer of ownership of the disputed shares of stock in the Rural Bank of

Apalit, Inc. (RBA) in favor of petitioners; and in its resolution, denied the Motion for Reconsideration of the aforementioned decision.

Presented hereunder are the factual antecedents of the case. On 30 January 1996, the RBA conducted its Annual Stockholders’ Meeting at its

principal office in San Vicente, Apalit, Pampanga. Attending the said meeting were stockholders representing 28,150 out of the 35,956 total outstanding shares of stock of RBA.[4] Petitioner Francisco R. Nunga, Jr. (Francisco Jr.), his son petitioner Victor D. Nunga (Victor), and his nephew respondent Francisco N. Nunga III (Francisco III) were among the stockholders of RBA. However, petitioner Francisco Jr. was not present at the meeting, as he was then in theUnited States of America where he is a naturalized citizen.

Quorum having been established at the meeting, the stockholders proceeded with the

election of the RBA Board of Directors to serve for the fiscal year 1996. Francisco III was voted the Chairman of the Board; with Ma. Elena Rueda, Ma. Rosario Elena Nacario, Cecilia Viray and Dwight Nunga, the Members. In the same meeting, stockholder Jesus Gonzalez (Gonzalez) made known his intention to sell his shareholdings.

Victor, thereafter, informed his father, Francisco Jr., of Gonzalez’s intention to sell his

shares. Francisco Jr. then instructed Victor to inquire from Gonzalez the terms of the sale. After a series of negotiations, Gonzalez ultimately agreed to sell his shares of stock to Francisco Jr.

On 19 February 1996, Gonzalez executed a Contract to Sell[5] in favor of Francisco

Jr., which pertinently provided:

CONTRACT TO SELL KNOW ALL MEN BY THESE PRESENTS: This CONTRACT TO SELL, executed this 19th day of February, 1996, at Quezon City, by: JESUS J. GONZALE[Z], of legal age, Filipino citizen, married to Cristina D. Gonzale[z], residing at No. 10 2nd Ave., Crame, Quezon City, hereinafter referred to as the VENDOR;

in favor of FRANCISCO D. (sic) NUNGA, JR., of legal age, single, residing at Poblacion, Masantol, Pampanga[,] hereinafter referred to as the “PURCHASER”;

WITNESSETH:

That the VENDOR is the absolute registered owner of several shares of stocks of the RURAL BANK OF APALIT, INC. located at Apalit, Pampanga, more particularly described as follows:

That the VENDOR has offered to sell the abovestated (sic) shares of stocks and the PURCHASER has agreed to purchase the same for a total consideration of P 200,000 ;

Stock Cert. No.

No. of SharesRepresented

Date of Issue

Journal Folio No.

5 250 May, 1978 136 122 Jan., 1991 1105 264 Feb., 1991 5152 487 Nov., 1993 7166 8 Feb., 1994 7181 525 July, 1994 8213 336

That it is hereby agreed that out of the total consideration or contract

price, the purchaser will pay the amount of FIFTY THOUSAND PESOS (P50,000.00), receipt of which is herein acknowledged by the purchaser, at the date and place below stated and the remaining balance of P 150,000 will be paid in full on February, (sic) 28, 1996;

That it is further agreed that the VENDOR will execute an

authorization in favor of the herein purchaser or his representative, Victor D. Nunga[,] to retrieve all the corresponding Stocks (sic) Certificates as above indicated from the Apalit Rural Bank, Inc.

WHEREFORE, for and in consideration of the total amount

of P 200,000 (sic) receipt in part of which is herein acknowledged in the amount ofP50,000.00, the vendor hereby agrees to sell, cede and transfer all the above stated shares of stocks to the PURCHASER, his heirs[,] successors, and assigns, absolutely free from any encumbrance and lien whatsoever.

IN WITNESS WHEREOF, I have hereunto set my signature

this 19th day of FEBRUARY, (sic) 1996, at Quezon City, Philippines. (signed) JESUS J. GONZALES Vendor

On even date, Victor gave the initial payment of P50,000.00 to Gonzalez, who duly acknowledged the same.[6] In exchange, Gonzalez handed Victor RBA Stock Certificates No. 105, No. 152 and No. 166. As to the four other certificates that were in the possession of the RBA, Gonzalez issued a letter[7] addressed to Isabel Firme (Firme), the RBA Corporate Secretary, which instructed the latter to turn over to Victor the remaining stock certificates in Gonzalez’s name. Upon being presented with Gonzalez’s letter, Firme gave Victor Stock Certificate No. 181, but alleged that Stock Certificates No. 5 and No. 36 could no longer be located in the files of RBA. Firme advised Victor to merely reconstitute the missing stock certificates.[8] A reading of the said Contract to Sell would reveal, however, that the same was only notarized on 28 February 1996.

Before Francisco Jr. and Victor could pay the balance of the contract price for

Gonzalez’s RBA shares of stock, Gonzalez entered into another contract involving the very same shares. It would appear that on 27 February 1996, Gonzalez executed a Deed of Assignment[9] of his RBA shares of stock in favor of Francisco III, the relevant terms of which recite:

DEED OF ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS: For value (sic) consideration received, the undersigned ASSIGNOR JESUS GONZALE[Z], of legal age, Filipino and resident of #10 2ND AVENUE, CUBAO, QUEZON CITY, METRO MANILA hereby sells, assigns and transfers unto FRANCISCO N. NUNGA III (AS ASSIGNEE), Filipino, of legal age and with postal address at 1122 Alhambra St., Ermita 1000 Metro Manila, his assigns and successors, all their rights, titles and interests to the following shares of stocks owned by the ASSIGNOR in Apalit Rural Bank, Inc., with par value of one hundred pesos only (P100.00) per share, free from all liens and encumbrances.

Date SC. No. No. of Shares AmountMay 24, 1969 4 (sic) 250 P 25,000.00January 02, 1975 36 122 12,200.00February 19, 1991 105 264 26,400.00November 10, 1993 152 487 48,700.00February 22, 1994 166 8 800.00July 25, 1994 181 525 52,500.00February 2, 1996 213 336 33,600.00

IN WITNESS WHEREOF, the ASSIGNOR have (sic) cause (sic) these presents to be signed at Quezon City, this 27 day of February, 1996.

(signed)JESUS J. GONZALE[Z] Assignor

At the same time the afore-quoted Deed was executed, Francisco III paid in full the

agreed purchase price of P300,000.00 using a BPI (Bank of the Philippine Islands) Family Bank Check No. 0347505 issued in favor of Gonzalez. An acknowledgment receipt signed by Gonzalez and witnessed by his wife Cristina D. Gonzalez evidenced the payment.[10] Since the stock certificates covering the shares were already in Victor’s possession, Gonzalez immediately wrote Victor a letter,[11] demanding that Victor hand over the said stock certificates to Francisco III, the supposed new owner of the shares.

The next day, on 28 February 1996, Francisco Jr. arrived from the United States of

America. He and Victor then promptly proceeded to the residence of Gonzalez in order to pay the balance of P150,000.00 of the purchase price stated in their Contract to Sell with Gonzalez. Gonzalez, however, informed them that he already sold his shares of stock to Francisco III.[12] After discussing the matter, Gonzalez was somehow convinced to accept the balance of the purchase price and sign his name at the dorsal portion of the stock certificates to endorse the same to Francisco Jr. Gonzalez also executed a Deed of Absolute Sale[13] in favor of Francisco Jr., which states:

DEED OF ABSOLUTE SALE

KNOW ALL MEN BY THESE PRESENTS: This DEED OF ABSOLUTE SALE, executed this 28th day of

February, 1996, at SAN JUAN, M.M. by:

JESUS J. GONZALE[Z], of legal age, Filipino citizen, married to Cristina D. Gonzale[z], residing at No. 10 2nd Ave., Crame, Quezon City, hereinafter referred to as the VENDOR;

in favor of FRANCISCO R. NUNGA, JR., of legal age, married, residing at Poblacion, Masantol, Pampanga[,] hereinafter referred to as the “PURCHASER”[;]

WITNESSETH:

That the VENDOR is the absolute registered owner of several shares of stocks of the RURAL BANK OF APALIT, INC. located at Apalit, Pampanga, more particularly described as follows:

Stock Cert. No.

No. of SharesRepresented

Date of Issue

Journal Folio No.

5 250 May, 1978 136 122 Jan., 1991 1105 264 Feb., 1991 5152 487 Nov., 1993 7166 8 Feb., 1994 7181 525 July, 1994 8213 336

That Stock Certificate Nos. 5 and 36 respectively representing 250

and 122 shares of the Rural Bank of Apalit[,] Inc. were lost and is (sic) currently in the process of reconstitution;

That the VENDOR has offered to sell the abovestated (sic) shares of stocks and the PURCHASER has agreed to purchase the same.

WHEREFORE, for and in consideration of the total amount of TWO

HUNDRED THOUSAND PESOS (P 200,000.00), receipt of which in full is herein acknowledged, the VENDOR hereby sells, cedes and transfers all the above stated shares of stocks to the PURCHASER, his heirs, successors, and assigns, absolutely free from any encumbrance and lien whatsoever.

IN WITNESS WHEREOF, I have hereunto set my signature

this 28 day of FEB (sic), 1996, at SAN JUAN, MM, Philippines.

(signed) JESUS J. GONZALE[Z]Vendor

Incidentally, on that same day, Francisco III delivered to Firme the Deed of Assignment which Gonzalez executed in his favor, and a copy of Gonzalez’s letter to Victor dated 27 February 1996 demanding the latter to surrender the stock certificates in his possession to Francisco III. Accordingly, on 1 March 1996, Firme wrote Victor a letter[14] requesting that the latter immediately comply with the enclosed 27 February 1996 letter of Gonzalez.

Victor refused to comply with Firme’s request and instead demanded that the sale of

shares of stock by Gonzalez in favor of Francisco Jr. on 28 February 1996 be entered into the Corporate Book of Transfer of RBA. Firme, in turn, rejected Victor’s demand, alleging that Francisco III already bought Gonzalez’s shares.[15]

Consequently, on 14 March 1996, Victor filed a Petition[16] with the Securities and

Exchange Commission (SEC) against Francisco III and Firme, which was docketed as SEC Case No. 03-96-5288. Victor prayed that the SEC declare null and void the Stockholders’ Meeting held on 30 January 1996 for lack of the required majority quorum; as well as the votes cast for the shares of the deceased stockholders, namely, Teodorico R. Nunga, Carmencita N. Nunga and Jesus Enrico N. Nunga. Victor additionally requested that the transfer of Gonzalez’s RBA shareholdings to Francisco Jr. be annotated on the RBA Corporate Transfer Book and new stock certificates be issued in favor of Francisco Jr. Victor finally pleaded that Francisco III and Firme be ordered to jointly pay him P50,000.00 as attorney’s fees, damages and litigation expenses.

On the same date, Francisco III likewise filed a Complaint[17] against Gonzalez,

Francisco Jr., and Victor before the SEC, which was docketed as SEC Case No. 03-96-5292. Francisco III sought the issuance of a Temporary Restraining Order (TRO) against Francisco Jr. and Victor, who were allegedly conspiring to oust him and the other members of the RBA Board of Directors. Francisco III also prayed, inter alia, for judgment ordering (a) Victor to surrender Gonzalez’s stock certificates in order that the same may be transferred to Francisco III’s name; and (b) Francisco Jr. and Victor to desist from attempting to register the purported sale by Gonzales of his RBA shares of stock to Francisco Jr., who had already become a naturalized American citizen and was, thus, disqualified from owning shares in RBA.

Francisco III and Firme filed their joint Answer[18] in SEC Case No. 03-96-5288, while

Francisco Jr. and Victor filed their Answer[19]in SEC Case No. 03-96-5292. Gonzalez, however, was considered in default in both SEC cases for failure to file his answers despite notice.

Eventually, Francisco Jr.[20] and Victor filed a Motion for Consolidation[21] of the two

cases pending before the SEC, alleging that they involved common questions of fact and law, which required the presentation of similar evidence. Said Motion was granted in an Order[22]dated 30 September 1996. Thereafter, SEC Cases No. 03-96-5288 and No. 03-96-5292 were jointly heard.

After the parties submitted their respective Offers of Evidence, but before the

SEC could rule on the same, the cases were eventually turned over to the RTC pursuant to Administrative Circular AM No. 00-11-03[23] of the Supreme Court dated 21 November 2000.[24]

In the RTC, SEC Cases No. 03-96-5288 and No. 03-96-5292 were docketed as Commercial Cases No. 001 and No. 018, respectively.

Francisco Jr. and Victor subsequently filed a Motion to Resolve their Formal

Offer of Exhibits, which the SEC was not able to act upon. In an Order[25] dated 30 April 2002, the RTC admitted the formal offers of evidence in both cases.

On 25 October 2002,[26] the RTC promulgated its Decision. With respect

to Commercial Case No. 001, Victor’s Petition, the RTC ruled:

The Court, after a careful study on the evidences on record finds that [herein petitioner Victor] failed to substantiate the allegation in the petition. [Victor] failed to controvert the documentary evidences presented by [herein respondent Francisco III] to wit: Minutes of the Stockholders Meeting, showing the number of shares present in person or in proxy[;] written Proxy in favor of Dwight N. Nunga in (sic) behalf of deceased Teodorico R. Nunga by virtue of the Extrajudicial Settlement of estate in (sic) behalf of Carmencita Noel Nunga proxy executed by Ma. Del Carmen N. Leveriza in her capacity as the Judicial Administratrix duly appointed by the RTC Branch 60, Makati[,] Metro Manila in Special Proceedings No. M-1461[27]; Affidavit of respondent Isabel C. Firme stating thereat the fact that the certificate of stock delivered for registration in the Corporate Transfer Book were mere xerox copies thus, the refusal. Thus further, proved [Victor’s] lack of cause of action against [Francisco III] and as a result of which damages on the part of [Francisco III] and Isabel C. Firme who were constrained to hire the services of their counsel to protect their right (sic). (Emphasis ours.)

As regards Commercial Case No. 018,[28] Francisco III’s Complaint, the RTC decreed:

The Court[,] after a careful study on the aforementioned

evidences (sic) on record[,] finds and holds that [herein petitioner Francisco Jr.] has a better right over the subject shares considering that the Contract to Sell was executed prior to the Deed of Assignment presented by the [herein respondent Francisco III]. The Court gleaned also from the evidences (sic) that the Deed of Assignment was executed in bad faith as [Francisco III] is aware of the transaction between [herein petitioner Victor] in (sic) behalf of his father and [Gonzalez], thus, the conclusion that the Deed of Assignment was executed with malice. The Contract to Sell may not be a public instrument[29] but being a consensual contract it is, therefore, valid there being a meeting of the mind (sic) between the parties. Further, there being no contention on (sic) the contrary, on the validity of the Deed of Absolute Sale interposed by [Gonzalez] coupled with the proof of full payment and the endorsement of the Stock Certificate at the back by the owner[,] which is the only operative act of valid transfer of shares of stock certificate provided for by law and jurisprudence, clearly convinced the Court that the latter honored the transaction between him and [Victor] in (sic) behalf of his father [Francisco Jr.] and[,] to bind third parties, the fact of transfer should be registered with the transfer book of the corporation. x x x x Further, with respect to the issue on the citizenship of [Francisco Jr.], not being qualified to own such share (sic), the Court is inclined to give credence on (sic) the contention of the latter[,] it being supported by R.A. 8179[,] known as “An Act to Further Liberalize Foreign Investment,[”] to wit:

"SEC. 9. Investment Rights of Former Natural-born Filipinos. – For purposes of this Act, former natural born citizens of the Philippinesshall have the same investment rights of a Filipino citizen in Cooperatives under Republic Act No. 6938, Rural Banks under Republic Act No. 7353, Thrift Banks and Private Development Banks

under Republic Act No. 7906, and Financing Companies under Republic Act No. 5980.”

Furthermore, insofar as (sic) [Gonzalez], the same was (sic)

considered as in default for failure to appear and participate despite notice. (Emphasis ours.)

In the end, the RTC disposed of the two cases in this wise: WHEREFORE, in view of the foregoing, judgment is hereby

rendered in Commercial Case No. 001 ordering the dismissal of the Petition filed by [herein petitioner Victor] against [herein respondent Francisco III] and Isabel C. Firme. Insofar as Commercial Case No. 018[,] judgment is hereby rendered in favor of the [herein petitioners Victor and Francisco Jr.] and against [Francisco III] ordering the following: 1) Ordering the Corporate Secretary of the Rural Bank of Apalit, Inc, (sic) to register the fact of the transfer of ownership in favor of [Francisco Jr.] and to cancel Stock certificate (sic) in the name of Jesus [Gonzalez] and to issue a new one (sic) in the name of [Francisco Jr.] upon presentation of Stock Certificate Nos. 105, 152, 166, 181, 213, 5 and 36 duly endorsed by Jesus [Gonzalez]; 2) The [respondent Francisco III] to pay the [petitioners Victor and Francisco Jr.] the amount of P100,000.00 [for] moral damages[;] 3) The amount of P100,000.00 [for] exemplary damages[;] 4) The amount of P50,000.00 [for] attorneys (sic) fees and the cost of suit.[30]

Francisco III filed a Motion for Partial Reconsideration[31] of the afore-quoted Decision, but it was denied by the RTC in an Order[32]dated 31 January 2003. Thus, Francisco III filed with the RTC a Notice of Appeal. [33] His appeal before the Court of Appeals was docketed as CA-G.R. CV No. 78424.

Before the Court of Appeals, Francisco III argued that the RTC erred in: (1) ruling

that Francisco Jr. had a better right over the disputed shares of stock, considering that the prior contract which he had entered into with Gonzalez was a mere contract to sell; (2) finding that the Deed of Assignment in Francisco III’s favor was executed in bad faith, inasmuch as it was not supported by any of the evidence presented by all the parties; and (3) giving retroactive effect to Republic Act No. 8179,[34] which grants former natural born citizens (such as Francisco Jr.) equal investment rights in rural banks of the Philippines as Philippine citizens. In relation to his third assignment of error, Francisco III pointed out that Republic Act No. 8179 took effect only on 16 April 1996, after Francisco Jr. entered into the questionable contracts with Gonzalez; hence, the said statute cannot benefit Francisco Jr.

On 31 January 2007, the Court of Appeals rendered its assailed Decision

favoring Francisco III. It held that Francisco Jr. cannot invoke the provisions of Republic Act No. 8179 based on the following ratiocination:

In the instant case, there is nothing in Republic Act No. 8179

[An Act to Further Liberalize Foreign Investment] which provides that it should retroact to the date of effectivity of Republic Act No. 7353 [The Rural Banks Act of 1992]. Neither is it necessarily implied from Republic Act No. 8179 that it or any of its provisions should be given a retroactive effect. On the contrary, there is an express provision in Republic Act No. 8179 that it “shall take effect fifteen (15) days after publication in two (2) newspapers of general circulation in the Philippines.” Being crystal clear on its prospective application, it must be given its literal meaning and applied without further interpretation (BPI Leasing Corporation vs. Court of Appeals, 416 SCRA 4, 13

[2003]). Republic Act No. 8179 was published on March 31, 1996 at the Manila Times and Malaya; hence, it took effect on April 15, 1996. x x x.

Republic Act No. 7353 specifically states that “the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines xxx.” It bears stressing that the use of the word “shall” alone, applying the rule on statutory construction, already underscores the mandatory nature of the law, and hence; (sic) requires adherence thereto. xxx Therefore, it is Our considered view that the sale and the subsequent transfer on February 28, 1996 of the shares of stock of JESUS [Gonzalez] to FRANCISCO, JR., a naturalized American citizen, were made in patent violation of Republic Act No. 7353. Considering that Republic Act No. 7353 did not contain any provision authorizing the validity of the sale and transfer of the shares of stock to a foreigner, specifically to a former natural-born citizen of the Philippines, the same should be deemed null and void pursuant to Article 5 of the Civil Code of the Philippines, which reads:

“ART. 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.” x x x The fact that Republic Act No. 8179 expressly granted to

former natural-born citizens of the Philippines investment rights similar to those of citizens of the Philippines bolsters the view that Republic Act No. 7353 indeed prohibited foreign nationals from owning shares of stock in rural banks. Had it been necessarily implied from the provisions of Republic Act No. 7353 that foreign nationals could own shares of stock in rural banks, the legislature would not have wasted time and effort in inserting a new provision granting to former natural-born citizens of the Philippines equal investment rights in Republic Act No. 8179.

Furthermore, there is no merit in the assertion of FRANCISCO JR.

and VICTOR that Republic Act No. 8179 should be given a retroactive effect in accordance with the following rule:

“The principle that a new law shall not have retroactive effect only governs rights arising from acts done under the rule of the former law; but if a right be declared for the first time by a new law it shall take effect from the time of such declaration, even though it has arisen from acts subject to the former laws, provided that it does not prejudice another acquired right of the same origin.” x x x.

Republic Act No. 8179 cannot be applied retroactively insofar as the

instant case is concerned, as its application would prejudice the (sic) FRANCISCO III who had acquired vested right over the shares of stock prior to the effectivity of the said law. Such right was vested to him when the Deed of Assignment was executed by Jesus in his favor on February 27, 1996. Undoubtedly, FRANCISCO III had a better right over the shares of stock of JESUS inasmuch as the validity of the Deed of Assignment was not affected despite the prior execution of the Contract to Sell in favor of FRANCISCO JR. on February 19, 1996. As previously adverted to, the said Contract, as well as the Deed of Absolute Sale and the subsequent transfer of the shares of stock to FRANCISCO JR., was null and void for violating a mandatory provision of Republic Act No. 7353. x x x.[35]

The Court of Appeals, however, decided to award Francisco III only attorney’s fees and cost of suit, but not moral and exemplary damages:

We hold that FRANCISCO III is not entitled to moral

damages. FRANCISCO III made no mention in his Complaint and during the hearing that he sustained mental anguish, serious anxiety, wounded feelings and other emotional and mental sufferings by reason of the double sale. x x x.

Likewise, FRANCISCO III is not entitled to exemplary damages. x x x In the instant case, FRANCISCO III failed to sufficiently prove his entitlement to moral, temperate or compensatory damages. Hence, his claim for exemplary damages must similarly fail.

However, as to his claim for attorney’s fees and cost of suit, We find it to be tenable as the records of the case clearly reveal that FRANCISCO III was compelled to litigate or to incur expenses to protect his interest because of the double sale. x x x. Under the circumstances obtaining in the instant case, We deem that the award of P20,000.00 as attorney’s fees is reasonable.[36]

The fallo of the Court of Appeals Decision thus reads:

WHEREFORE, the foregoing premises considered, the Decision dated October 25, 2002 of Branch 42 of the Regional Trial Court of San Fernando, Pampanga with respect to Commercial Case No. 018 is hereby REVERSED and SET ASIDE. A new one is hereby rendered ORDERING the following:

1) Victor Nunga to surrender the stock certificates of Jesus Gonzalez to the Corporate Secretary of Rural Bank of Apalit, Inc.;

2) [T]he Corporate Secretary of Rural Bank of Apalit, Inc. to register the assignment of shares of stock in favor of Francisco Nunga III, to cancel the stock certificates of Jesus Gonzale[z], and to issue new ones in the name of Francisco Nunga III; and,

3) Jesus Gonzale[z], Francisco Nunga, Jr., and Victor Nunga to pay, jointly and severally, the sum of P20,000.00 as attorney’s fees, plus the cost of suit.[37]

Francisco Jr. and Victor, together with Gonzalez, filed a Motion for Reconsideration[38] of the foregoing Decision. Their Motion, however, was denied by the Court of Appeals in its assailed Resolution dated 4 June 2007.

Refusing to concede, Francisco Jr. and Victor filed the instant Petition,[39] which

they anchor on the following assignment of errors: I.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DECLARING THE SALE OF THE SHARES OF STOCK OF GONZALE[Z] TO FRANCISCO JR., NULL AND VOID AB INITIO ON THE BASIS OF THE ALLEGED DISQUALIFICATION OF FRANCISCO JR. UNDER REPUBLIC ACT NO. 7353?

II.

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT FRANCISCO III HAS A VESTED RIGHT TO THE SHARES OF STOCK OF GONZALE[Z], WHICH WOULD BE IMPAIRED BY THE RETROACTIVE APPLICATION OF REPUBLIC ACT NO. 8179?

III. WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED [IN] AWARDING DAMAGES TO FRANCISCO III AND WITHDRAWING THE AWARD OF NOMINAL DAMAGES TO PETITIONERS BY THE TRIAL COURT?

Essentially, the fundamental issue that this Court is called upon to resolve is who among the parties to this case has a better right to the disputed RBA shares of stock.

Francisco Jr. and Victor contend that the consummated sale of the RBA shares

of stock by Gonzalez to Francisco Jr. gives the latter a superior right over the same, since the transaction complied with all the elements of a valid sale. Contrary to the ruling of the Court of Appeals, Francisco Jr. and Victor claim that there was no provision in Republic Act No. 7353, prior to its amendment, which explicitly prohibited any transfer of shares to individuals who were not Philippine citizens, or which declared such a transfer void. Hence, there was an implied recognition by the legislature that to declare the nullity of such acts would be more disadvantageous and harmful to the purposes of the law. Moreover, Francisco Jr. and Victor contend that the passage of Republic Act No. 8179, An Act to Further Liberalize Foreign Investment, cured whatever legal infirmity there may have been in the purchase by Francisco Jr. of the RBA shares of stock from Gonzalez. As Republic Act No. 8179 expressly creates and declares for the first time a substantive right, then it may be given retroactive effect. The Deed of Assignment between Francisco III and Gonzalez did not confer upon Francisco III a vested interest that could be impaired by the retroactive application of Republic Act No. 8179. The Deed was not only executed later in time, but the check issued for its payment was also never encashed. There was, therefore, a total absence of consideration, making the said contract between Francisco III and Gonzalez inexistent.

The Court finds the Petition devoid of merit. As the Court of Appeals declared, Francisco Jr. was disqualified from acquiring

Gonzalez’s shares of stock in RBA. The argument of Francisco Jr. and Victor that there was no specific provision in Republic Act No. 7353 which prohibited the transfer of rural bank shares to individuals who were not Philippine citizens or declared such transfer void, is both erroneous and unfounded.

Section 4 of Republic Act No. 7353 explicitly provides:

Section 4. x x x With exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock: x x x. (Emphasis ours.)

Otherwise stated, the afore-quoted provision categorically provides that only citizens of the Philippines can own and hold, directly or indirectly, the capital stock of a rural bank, subject only to the exception also clearly stated in the same provision. This was the very interpretation of Section 4 of Republic Act No. 7353 made by this Court in Bulos, Jr. v. Yasuma,[40] on the basis of which the Court disqualified therein respondent Yasuma, a foreigner, from owning capital stock in the Rural Bank of Parañaque. In the instant case, it is undisputed that when Gonzalez executed the Contract to Sell and the Deed of Absolute Sale covering his RBA shares of stock in favor of Francisco Jr., the latter was already a naturalized citizen of the United States of America. Consequently, the acquisition by Francisco Jr. of the disputed RBA shares by virtue of the foregoing contracts is a violation of the clear and mandatory dictum of Republic Act No. 7353, which the Court cannot countenance.

Even the subsequent enactment of Republic Act No. 8179 cannot benefit

Francisco Jr. It is true that under the Civil Code of thePhilippines, laws shall have no retroactive effect, unless the contrary is provided.[41] But there are settled exceptions to this general rule, such as when the statute is CURATIVE or REMEDIAL in nature, or when it CREATES NEW RIGHTS.[42] Francisco Jr. and Victor assert that, as an exception to the cardinal rule of prospective application of laws, Republic Act No. 8179 may be retroactively applied, since it creates for the first time a substantive right in favor of natural-born citizens of the Philippines. Francisco Jr. and Victor, however, overlooked the vital exception to the exception. While it is true that a law creating new rights may be given retroactive effect, the same can only be made possible if the new right does not prejudice or impair any vested right.[43]

The Court upholds the finding of the Court of Appeals that Republic Act No. 8179

cannot be applied retroactively to the present case, as to do so would prejudice the

vested rights of Francisco III to the disputed RBA shares of stock. Francisco III, who is undeniably a citizen of the Philippines, and who is fully qualified to own shares of stock in a Philippine rural bank, had acquired vested rights to the disputed RBA shares of stock by virtue of the Deed of Assignment executed in his favor by Gonzalez.

It would not matter that Gonzalez executed the Contract to Sell in favor of

Francisco Jr. prior to the Deed of Assignment in favor of Francisco III. As established in the previous discussion, the Contract to Sell between Gonzalez and Francisco Jr. was void and without force and effect for being contrary to law. It intended to effect a transfer, which was prohibited by Republic Act No. 7353. It is even irrelevant that the terms of said Contract to Sell had been fully complied with and performed by the parties thereto, and that a Deed of Absolute Sale was already executed by Gonzalez in favor of Francisco Jr. A void agreement will not be rendered operative by the parties' alleged performance (partial or full) of their respective prestations. A contract that violates the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal effect at all.[44]

With respect to the award of damages, the Court agrees in the findings of the Court

of Appeals that Francisco III failed to establish his entitlement to moral damages in view of the absence of proof that he endured physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, or any similar injury.[45] As regards the grant of exemplary damages, we likewise uphold the ruling of the appellate court that the same was not warranted under the circumstances, as FRANCISCO III was not able to prove that he was entitled to moral, temperate or compensatory damages. Exemplary damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory damages.[46] In contracts and quasi-contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.[47] It cannot, however, be considered as a matter of right; the court has to decide whether or not such damages should be adjudicated.[48] Before the court may consider an award for exemplary damages, the plaintiff must first show that he is entitled to moral, temperate or compensatory damages; but it is not necessary that he prove the monetary value thereof.[49]

As to the contention that the Court of Appeals erred in withdrawing the award of

nominal damages to the petitioners by the RTC, the Court finds the same to be utterly misleading. The appellate court did not decree any such withdrawal, as the RTC had not awarded any nominal damages in favor of the petitioners in the first place.

However, as Francisco III was indeed compelled to litigate and incur expenses to

protect his interests,[50] the Court sustains the award by the Court of Appeals of P20,000.00 as attorney’s fees, plus costs of suit.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the

Rules of Court is hereby DENIED. The assailed Decision dated 31 January 2007 and Resolution dated 4 June 2007 of the Court of Appeals in CA-G.R. CV No. 78424 are hereby AFFIRMEDin toto. No costs.

SO ORDERED.

Foreign banks

Secs. 72 – 78, GBL

SEC. 72. Transacting Business in the Philippines. - The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act. The conduct of offshore banking business in the Philippines shall be governed by the provisions of the Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."

SEC. 73. Acquisition of Voting Stock in a Domestic Bank. - Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines.

Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.

In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos.

Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines.

SEC. 74. Local Branches of Foreign Banks. - In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units.

SEC. 75. Head Office Guarantee. - In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws.

SEC. 76. Summons and Legal Process. - Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to the courts over such bank, and service of

notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself.

Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent.

In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head.

In case of service for the bank upon the Bangko Sentral Deputy Governor In-charge of the supervising and examining departments, the said deputy Governor shill register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made.

SEC. 77. Laws Applicable. - In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation.

SEC. 78. Revocation of License of a Foreign Bank - The Monetary Board may revoke the license to transact business in the Philippines of, any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.

RA No. 7721Foreign Banks Liberalization Act (FBLA)

AN ACT LIBERALIZING THE ENTRY AND SCOPE OF OPERATIONS OF FOREIGN BANKS IN THE PHILIPPINES AND FOR OTHER PURPOSES

Sec. 1. Declaration of Policy. - The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos and encourage, promote, and maintain a stable, competitive, efficient, and dynamic banking and financial system that will stimulate economic growth, attract foreign investments, provide a wider variety of financial services to Philippine enterprises, households and individuals, strengthen linkages with global financial centers, enhance the country's competitiveness in the international market and serve as a channel for the flow of funds and investments into the economy to promote industrialization.

Pursuant to this policy, the Philippine banking and financial system is hereby liberalized to create a more competitive environment and encourage greater foreign participation through increase in ownership in domestic banks by foreign banks and the entry of new foreign bank branches.

In allowing increased foreign participation in the financial system, it shall be the policy of the State that the financial system shall remain effectively controlled by Filipinos.

Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

Sec. 3. Guidelines for Approval. - In approving entry applications of foreign banks, the Monetary Board shall: (i) ensure geographic representation and complementation; (ii) consider strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign bank; (iii) study the demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant; (iv) see to it that reciprocity rights are enjoyed by Philippine banks in the applicant's country; and (v) consider willingness to fully share their technology.

Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof.

In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines.

To qualify to establish a branch or a subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin.

Sec. 4. Capital Requirements. - (i) For Locally Incorporated Subsidiaries. - The minimum capital required for locally incorporated subsidiaries of foreign banks shall be equal to that prescribed by the Monetary Board for domestic banks of the same category.

(ii) For Foreign Bank Branches. - Foreign banks seeking entry pursuant to Section 2 (iii) of this Act shall permanently assign capital of not less than the U.S. dollar equivalent of Two hundred

ten million pesos (P210,000,000.00) at the exchange rate on the date of the effectivity of this Act, as ascertained by the Monetary Board. The permanently assigned capital shall be inwardly remitted and converted into Philippine currency. The foreign bank shall be entitled to three (3) branches.

The foreign bank may open three (3) additional branches in locations designated by the Monetary Board by inwardly remitting and converting into Philippine currency as permanently assigned capital, the U.S. dollar equivalent of Thirty-five million pesos (P35,000,000.00) per additional branch at the exchange rate on the date of the effectivity of this Act, as ascertained by the Monetary Board. The total number of branches for each new foreign bank entrant shall not exceed six (6).

For purposes of meeting the prescribed capital ratios, the term "capital" shall include permanently assigned capital plus "net due to head office, branches and subsidiaries and offices outside the Philippines" in the ratio prescribed by law or as may be prescribed by the Monetary Board: Provided, That in all cases, the permanently assigned capital and fifteen percent (15%) of "net due to" required to comply with prescribed capital ratios shall be inwardly remitted and converted to Philippine currency: Provided, further, That amounts invested in productive enterprises or utilized by Philippine companies for export activities, shall not be subject to conversion into Philippine currency: Provided, finally, That the Monetary Board shall monitor the effective use of the "net due to" funds. Whenever there results "net due from head office" outside the Philippines, this shall be deducted from the capital accounts for purposes of determining the required capital ratios.

Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine branches.

Sec. 6. Entrants under Section 2(iii). - Foreign banks shall be allowed entry under Section 2 (iii) within five (5) years from the effectivity of this Act. During this period, six (6) new foreign banks shall be allowed entry under Section 2(iii) upon the approval of the Monetary Board. An additional four (4) foreign banks may be allowed entry on recommendation of the Monetary Board, subject to compliance with Sections 2, 3, 4, and 5 of this Act, upon approval of the President as the national interest may require.

Sec. 7. Board of Directors. - Non-Filipino citizens may become members of the Board of Directors of a bank to the extent of the foreign participation in the equity of said bank.

Sec. 8. Equal Treatment. - Foreign banks authorized to operate under Section 2 of this Act, shall perform the same functions, enjoy the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category. These limits include, among others, the single borrower's limit and capital to risk asset ratio as well as the capitalization required for expanded commercial banking activities under the General Banking Act and other related laws of the Philippines.

The basis for computing the ratio shall be the capital of the foreign bank branch in the Philippines.

The foreign banks shall guarantee the observance of the rights of their employees under the Constitution.

Any right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed by and extended under the same conditions to Philippine banks. Philippine corporations whose shares of stocks are listed in the Philippine Stock Exchange or are of long standing for at least ten (10) years shall have the right to acquire, purchase or own up to sixty percent (60%) of the voting stock of a domestic bank.

Sec. 9. Development Loans Incentives. - Loans extended by a foreign bank's majority-owned subsidiary incorporated under the laws of the Philippines and/or a Philippine bank sixty percent (60%) of the voting stock of which is held by a foreign bank, to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, and to local government units without national government guarantee, shall be included for purposes of determining compliance with the provisions of Presidential Decree No. 717, as amended.

Sec. 10. Transitory Provisions. - Foreign banks operating through branches in the Philippines upon the effectivity of this Act, shall be eligible for the privilege of establishing up to six (6)

additional branches under the same terms and conditions required by Section 4 (ii) hereof: Provided, That for any branch additional to what is existing at the time of the effectivity of this Act, the prescribed permanently assigned capital shall be complied with immediately: Provided, further, That a foreign bank may open three (3) branches in the location of its choice and the next three (3) branches in locations designated by the Monetary Board to insure balanced economic development in all the regions.

The existing Philippine branches of foreign banks shall be given one-and-a-half (1 1/2) years from the effectivity of this Act to comply with the minimum capital requirements as prescribed under Section 4 (ii) of this Act.

Sec. 11. Separability Clause. - If any provision of this Act is declared unconstitutional, the same shall not affect the validity of the other provisions not affected thereby.

Sec. 12. Applicability of Other Banking Laws. - The provisions of Republic Act No. 337, as amended, otherwise known as the General Banking Act, insofar as they are applicable and not in conflict with any provision of this Act, shall apply to banks authorized pursuant to this Act.

Sec. 13. Delegation of Rule-Making Powers and Compliance Reports. - The Monetary Board is hereby authorized to issue such rules and regulations as may be needed to implement the provisions of this Act after consultation with the chairpersons of the Banks Committee of the House of Representatives and the Senate of the Philippines. On or before May 30 of each year, the Monetary Board shall file a written report to Congress and its respective Banks Committees, on the developments in the implementation of this Act.

Sec. 14. Amendment and Repeal of Inconsistent Laws. - Sections 11, 12, 12-A, 12-B, 13, 14-A, 21-B, and 68 of Republic Act No. 337, as amended, otherwise known as the General Banking Act: Sections 4 and 5 of Republic Act No. 7353, otherwise known as the Rural Banks Act; Sections 4 and 14 of Republic Act No. 3779, as amended, otherwise known as the Savings and Loan Association Act; and Section 4 of Republic Act No. 4093, as amended, otherwise known as the Private Development Banks Act insofar as they are inconsistent with this Act, are hereby repealed or modified accordingly.

Sec. 15. Effectivity Clause. - This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in two (2) national newspapers of general circulation.

The license of foreign banksSec. 78, GBL

Revocation of License of a Foreign Bank - The Monetary Board may revoke the license to transact business in the Philippines of, any foreign bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. After the revocation of its license, it shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued. After the revocation of such license, the Bangko Sentral shall take the necessary action to protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.

Laws governing foreign banksSec. 77, GBL

Laws Applicable. - In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation,

organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation.

Summons and other legal processes against a foreign bankSec. 76, GBL

Summons and Legal Process. - Summons and legal process served upon the Philippine agent or head of any foreign bank designated to accept service thereof shall give jurisdiction to the courts over such bank, and service of notices on such agent or head shall be as binding upon the bank which he represents as if made upon the bank itself.

Should the authority of such agent or head to accept service of summons and legal processes for the bank or notice to it be revoked, or should such agent or head become mentally incompetent or otherwise unable to accept service while exercising such authority, it shall be the duty of the bank to name and designate promptly another agent or head upon whom service of summons and processes in legal proceedings against the bank and of notices affecting the bank may be made, and to file with the Securities and Exchange Commission a duly authenticated nomination of such agent.

In the absence of the agent or head or should there be no person authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising and examining departments and such service shall be as effective as if made upon the bank or its duly authorized agent or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-charge of the supervising and examining departments, the said deputy Governor shill register and transmit by mail to the president or the secretary of the bank at its head or principal office a copy, duly certified by him, of the summons, process, or notice. The sending of such copy of the summons, process, or notice shall be a necessary part of the services and shall complete the service. The registry receipt of mailing shall be prima facie evidence of the transmission of the summons, process or notice. All costs necessarily incurred by the said Deputy Governor for the making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank at its head or principal office shall be paid in advance by the party at whose instance the service is made.

The branches of a foreign bankSec. 74, GBL

Local Branches of Foreign Banks. - In the case of a foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be held to refer to such units.

OFFSHORE BANKING UNIT

Section 1b, PD 1034

"Offshore Banking Unit" shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines.

Offshore bankingSec. 1a, PD 1034

"Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds as provided in this Decree.