REPUBLIC VS SECURITY CREDIT

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. It is conceded that 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
therefore. 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.

Facts: The Solicitor General filed a petition for quo warranto to dissolve the Security and Acceptance
Corporation, alleging that the latter was engaging in banking operations without the authority required
therefor by the General Banking Act (Republic Act No. 337). Pursuant to a search warrant issued by MTC
Manila, members of Central Bank intelligence division and Manila police seized documents and records
relative to the business operations of the corporation. After examination of the same, the intelligence
division of the Central Bank submitted a memorandum to the then Acting Deputy Governor of Central
Bank finding that the corporation is engaged in banking operations. It was found that Security and
Acceptance Corporation 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;
Accordingly, 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. Superintendent of Banks of the
Central Bank was then appointed by the Supreme Court as receiver pendente lite of defendant
corporation.

In their defense, Security and Acceptance Corporation averred that the 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.

Issue: Whether or not defendant corporation was engaged in banking operations.

Held. 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. It is conceded that 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 therefore. 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. Hence, 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.
Banas vs. Asia Pacific Finance Corporation G.R. No. 128703, October 18, 2000
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. As defined in Revised
Securities Act, securities “shall include 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. Clearly, the transaction
between petitioners and respondent was one 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.

Facts: 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.”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 heavy equipment units of Caterpillar Bulldozer Crawler Tractors Moreover, Cenen Dizon
executed a Continuing Undertaking wherein he bound himself to pay the obligation jointly and severally
with C. G. Dizon Construction.

In compliance thereof, C. G. Dizon Construction made three installment payments to ASIA PACIFIC for 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 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. The trial court issued
a writ of replevin against defendant C. G. Dizon Construction for the surrender of the bulldozer crawler
tractors. Of the three bulldozer crawler tractors, only two were actually turned over by defendants which
units were subsequently foreclosed by ASIA PACIFIC to satisfy the obligation. The two bulldozers were
sold both to ASIA PACIFIC as the highest bidder.

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. 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.
The Court of Appeals affirmed the decision of the trial court

Issues: Whether the disputed transaction between ASIA PACIFIC was engaged in banking activities.

Held: 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. As defined
in Revised Securities Act, securities “shall include 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” Clearly, the
transaction between petitioners and respondent was one 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.

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. Wherefore, the assailed decision of the Court of Appeals was affirmed.

BDO vs. REPUBLIC OF THE PHILIPPINES, G.R. No. 198756,

The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term
'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) 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, or financing
their own needs or the needs of their agent or dealer.Under the 1997 National Internal Revenue Code,
Congress specifically defined “public” to mean “twenty (20) or more individual or corporate lenders at any
one time.” Hence, the number of lenders is determinative of whether a debt instrument should be
considered a deposit substitute and consequently subject to the 20% final withholding tax.20-lender
rulePetitioners contend that “there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds.”169On the other hand, respondents theorize that the word “any” “indicates that the
period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]”170such that if the debt instruments “were subsequently sold in secondary markets and so
on, in such a way that twenty (20) or more buyers eventually own the instruments, then it becomes
indubitable that funds would be obtained from the “public” as defined in Section 22(Y) of the
NIRC.”171Indeed, in the context of the financial market, the words “at any one time” create an
ambiguity.Meaning of “at any one time”Thus, from the point of view of the financial market, the phrase
“at any one time” for purposes of determining the “20 or more lenders” would mean every transaction
executed in the primary or secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of
“20 or more lenders/investors” is made at any transaction in connection with the purchase or sale of the
Government Bonds.
DEVELOPMENT BANK OF PHILIPPINES v. COA, GR No. 88435, 2002-01-16
Facts:
In 1986, the Philippine government, under the administration of then President Corazon C. Aquino,
obtained from the World Bank an Economic Recovery Loan
The ERL was intended to support the recovery of the Philippine economy
As a condition for granting the loan, the World Bank required the Philippine government to
rehabilitate the DBP which was then saddled with huge non-performing loans.
he DBP was expected to continue "providing principally medium and long-term financing to projects
with risks higher than the private sector may be willing to accept under reasonable... terms.
he Monetary Board adopted Resolution No. 1079 amending the Central Bank's Manual of
Regulations for Banks and other Financial Intermediaries, in line with the government's
commitment to the World Bank to require a private external auditor for
DBP.
he Audit of a Government-owned or controlled bank by an external independent auditor shall be in
addition to and without prejudice to that conducted by the Commission on Audit in the discharge of
its mandate under existing law.
pursuant to Central Bank Circular No. 1124 and the government's commitment to the World Bank,
DBP Chairman Jesus Estanislao wrote the COA seeking approval of the DBP's engagement of a
private external auditor in addition to the COA.
he COA Chairman's reply stated that:
"x x x the Commission on Audit (COA) will interpose no objection to your engagement of a private
external auditor as required by the Economic Recovery Program Loan Agreements... owever, a
change in the leadership of the COA suddenly reversed the course of events.
Howe... wrote the Central Bank Governor protesting the Central Bank's issuance of Circular No.
1124 which allegedly encroached upon the
COA's constitutional and statutory power to audit government agencies.
hat the COA resident auditors were under instructions to disallow any payment to the private
auditor whose... services were unconstitutional, illegal and unnecessary.[15]... the DBP paid the
billings of the private auditor in the total amount of P487,321.14[17] despite the objection of the
COA.
To allow private firms to interfere in this governmental audit domain would be to derogate the
Constitutional supremacy of State audit as the Government's guardian of the people's treasury, and
as... the prime advocate of economy in the use of government resources.'
Issues:
whether or not the constitutional power of the COA to examine and audit the DBP is exclusive and
precludes a concurrent... audit of the DBP by a private external auditor.
The DBP's petition raises the following issues:
Does the Constitution vest in the COA the sole and exclusive power to examine and audit
government banks so as to prohibit concurrent audit by private external auditors under any
circumstance?
Is there an existing statute that prohibits government banks from hiring private auditors in addition
to the COA? If there is none, is there an existing statute that authorizes government banks to hire
private auditors in addition to the COA?
If there is no legal impediment to the hiring by government banks of a private auditor, was the
hiring by the DBP of a private auditor in the case at bar necessary, and were the fees paid by DBP to
the private auditor reasonable, under the circumstances?
Ruling:
The DBP's petition is meritorious.
First Issue: Power of COA to Audit under the Constitution
The resolution of the primordial issue of whether or not the COA has the sole and exclusive power
to examine and audit government banks involves an interpretation of Section 2, Article IX-D of the
1987 Constitution.
The COA vigorously asserts that under the first paragraph of Section 2, the COA enjoys the sole and
exclusive power to examine and audit all government agencies, including the DBP. The COA
contends this is similar to its sole and exclusive authority, under the second paragraph... of the
same Section, to define the scope of its audit, promulgate auditing rules and regulations, including
rules on the disallowance of unnecessary expenditures of government agencies. The bare language
of Section 2, however, shows that the COA's power under the first paragraph... is not declared
exclusive, while its authority under the second paragraph is expressly declared "exclusive." There is
a significant reason for this marked difference in language.
The clear and unmistakable conclusion from a reading of the entire Section 2 is that the COA's
power to examine and audit is non-exclusive. On the other hand, the COA's authority to define the
scope of its audit, promulgate auditing rules and regulations, and disallow... unnecessary
expenditures is exclusive.
as the constitutionally mandated auditor of all government agencies, the COA's findings and
conclusions necessarily prevail over those of private auditors, at least insofar as government
agencies and officials are concerned.
The mere fact that private auditors may audit government agencies does not divest the COA of its
power to examine and audit the same government agencies. The COA is neither by-passed nor
ignored since even with a private audit the COA will still conduct its usual... examination and audit,
and its findings and conclusions will still bind government agencies and their officials. A concurrent
private audit poses no danger whatsoever of public funds or assets escaping the usual scrutiny of a
COA audit.
the COA's power to examine and audit government banks must be reconciled with the Central
Bank's power to supervise the same banks.
The inevitable conclusion is that the COA and the Central Bank have concurrent jurisdiction, under
the Constitution, to examine and audit government banks.
However, despite the Central Bank's concurrent jurisdiction over government banks, the COA's
audit still prevails over that of the Central Bank since the COA is the constitutionally mandated
auditor of government banks
Second Issue: Statutes Prohibiting or Authorizing Private Auditors
The COA argues that Sections 26, 31 and 32 of PD No. 1445, otherwise known as the Government
Auditing Code of the Philippines, prohibit the hiring of private auditors by government agencies.
Section 26 is a definition of the COA's "general jurisdiction." Jurisdiction may be exclusive or
concurrent. Section 26 of PD No. 1445 does not state that the COA's jurisdiction is exclusive, and
there are other laws providing for concurrent jurisdiction. Thus,... Section 26 must be applied in
harmony with Section 58[32] of the General Banking Law of 2000 (RA No. 8791) which authorizes
unequivocally the Monetary Board to require banks to hire independent auditors. S
Third Issue: Necessity of Private Auditor and Reasonableness of the Fees... he hiring of a private
auditor was not only necessary based on the government's loan covenant with the World Bank, it
was also necessary because it was... mandated by Central Bank Circular No. 1124 under pain of
administrative and penal sanctions.
Principles:
During the deliberations of the Constitutional Commission, Commissioner Serafin Guingona
proposed the addition of the word "exclusive" in the first paragraph of Section 2, thereby granting
the COA the sole and exclusive power to examine and audit all government agencies.
However, the Constitutional Commission rejected the addition of the word "exclusive" in the first
paragraph of Section 2 and Guingona was forced to withdraw his proposal. Commissioner Christian
Monsod explained the rejection in this manner:
"MR. MONSOD. Earlier Commissioner Guingona, in withdrawing his amendment to add
"EXCLUSIVE" made a statement about the preponderant right of COA.
"For the record, we would like to clarify the reason for not including the word. First, we do not want
an Article that would constitute a disincentive or an obstacle to private investment. There are
government institutions with private investments in them, and some of these... investors
- Filipinos, as well as in some cases, foreigners - require the presence of private auditing firms, not
exclusively, but concurrently. So this does not take away the power of the Commission on
Audit. Second, there are certain instances... where private auditing may be required, like the listing
in the stock exchange. In other words, we do not want this provision to be an unnecessary obstacle
to privatization of these companies or attraction of investments."[22] (Emphasis... supplied)... the
Central Bank has been conducting periodic and special examination and audit of banks to determine
the soundness of their operations and the safety of the deposits of the public. Undeniably, the
Central Bank's power of "supervision" includes the... power to examine and audit banks, as the
banking laws have always recognized this power of the Central Bank.[31] Hence, the COA's power
to examine and audit government banks must be reconciled with the Central Bank's power to
supervise the same banks.
The inevitable conclusion is that the COA and the Central Bank have concurrent jurisdiction, under
the Constitution, to examine and audit government banks.
However, despite the Central Bank's concurrent jurisdiction over government banks, the COA's
audit still prevails over that of the Central Bank since the COA is the constitutionally mandated
auditor of government banks. And in matters falling under the second... paragraph of Section 2,
Article IX-D of the Constitution, the COA's jurisdiction is exclusive. Thus, the Central Bank is devoid
of authority to allow or disallow expenditures of government banks since this function belongs
exclusively to the COA.
The Bangko Sentral ng Pilipinas, which succeeded the Central Bank, retained under the 1987
Constitution and the General Banking Law of 2000 (RA No. 8791) the same constitutional and
statutory power the Central Bank had under the Freedom Constitution... and the General Banking
Act (RA No. 337) with respect to the independent audit of banks.
this Court has held consistently that the rules and regulations issued by the Central Bank pursuant
to its supervisory and regulatory powers have the force and effect of... law.
Busuego vs. CA [304 SCRA 473 (March 11 1999)]Power of Monetory Board
Facts: The 16th regular examination of the books and records of PAL Employees Savings and Loan
Association (PESALA) was conducted by a team of CB Examiners. Several irregularities were found
to have been committed by the PESALA officers. Hence, CB sent a letter to petitioners for them to
be present at a meeting specifically for the purpose of investigating said anomalies. Petitioners did
not respond. Hence, the Monetary Board adopted a resolution including the names of the officers of
PESALA in the watchlist to prevent them from holding responsible positions in any institution under
CB supervision.Petitioners filed a petition for injunction against the MB in order to prevent their
names from being added in the said watchlist. RTC issued the TRO. The MB appealed to the CA
which reversed RTC. Hence, this petition for certiorari with the SC.Petitioners contend that the MB
resolution was null and void for being violative of their right to due process by imposing
administrative sanctions where the MB is not vested with authority to disqualify persons from
occupying positions in institutions under the supervision of CB.
Issue: Whether or not the MB resolution was null and void.
Held: NO. The CB, through the MB, is the government agency charged with the responsibility of
administering the monetary, banking and credit system of the country and is granted the power of
supervision and examination over banks and non-bank financial institutions performing quasi-
banking functions of which savings and loan associations, such as PESALA, form part of.The special
law governing savings and loan associations is R.A. 3779, the Savings and Loan Association Act.
Said law authorizes the MB to conduct regular yearly examinations of the books and records of
savings and loan associations, to suspend a savings and loan association for violation of law, to
decide any controversy over the obligations and duties of directors and officers, and to take remedial
measures. Hence, the CB, through the MB, is empowered to conduct investigations and examine the
records of savings and loan associations. If any irregularity is discovered in the process, the MB may
impose appropriate sanctions, such as suspending the offender from holding office or from being
employed with the CB, or placing the names of the offenders in a watchlist.