BANK CONSERVATORSHIP

,
RECEIVERSHIP AND
LIQUIDATION
By Dr. Cheselden George V. Carmona

PHILJA Pre-judicature Training Seminar
May 25, 2012
The case of FALLACY Bank
FALLACY Bank started operations in 2000. After
almost 9 years of operations, it appeared to be one
of the success stories in the banking industry. From
one branch, it was able to put up 12 branches by
2009, attracted almost 100,000 depositors and an
estimated P15 billion in deposits contained in about
125,000 accounts.
Much of its success is attributed to Mr. Jose Angeles,
a minority stockholder on record but is said to be
the real owner. He is the current President of the
bank.
The case of FALLACY Bank
By 2010, however, the regulator started to receive
complaints about its business practices, which
seemed to be unsafe and might compromise the
interest of depositors. It was also found out that the
bank has not been submitting reports or had been
delayed in submitting the same.
It initially refused requests for examination of its
operations and even threatened the filing of cases
against PDIC.
The case of FALLACY Bank
When the Monetary Board eventually ordered it to
institute some measures to address complaints of
depositors, FALLACY Bank initially refused but
eventually submitted falsified reports to MB to cover
up its non-compliance.
What is legal and regulatory framework governing
similarly situated banks?
Importance of Banks to Economy
BANKS
• Entities engaged in the lending of funds obtained in the
form of deposits.

QUASI-BANKS
• Entities engaged in the borrowing of funds through the
issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of relending
or purchasing of receivables and other obligations.
Classes of Banks
Banks
Universal
Banks
General
Banking Law
(RA 8791)
Commercial
Banks
General
Banking Law
(RA 8791)
Rural Banks
Rural Banking
Act
(RA 7353)
Cooperative
Banks
Cooperative
Act
(RA 6938)
Islamic
Banks
Charter of Al
Amanah
Islamic
Investment
Bank of the
Philippines
(RA 6848)
Private
Development
Banks
Stock Savings
And Loan
Associations
Savings and
Mortgage
Banks
Thrift
Banks
Thrift Banks
Act
(RA 7906)
Importance of Banks to Economy
• our financial system is dominated by banks which
has almost P 5 Trillion assets as of September 2007
or about 78 percent of the country’s GDP.

NUMBER OF BANKS UNDER BSP
SUPERVISION / REGULATION
I. Universal and Commercial Banks 4,545
A. Universal Banks 4,019
1. Private Domestic Banks 3,578
2. Government Banks 424
3. Branches of Foreign Banks 17
B. Commercial Banks 526
1. Private Domestic Banks 441
2. Subsidiaries of Foreign Banks 71
3. Branches of Foreign Banks 14
II. Thrift Banks 1,339
III. Rural and Cooperative Banks 2,779
1. Rural Banks 2,617
2. Cooperative Banks 162
TOTAL NUMBER OF BANKS 8,663
Importance of Banks to Economy
―The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce,
banks have become an ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and, most
of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his life's savings to the bank of his choice, knowing
that they will be safe in its custody and will even earn some interest
for him.‖

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


Regulation of the Banking Industry
• Law seeks to ensure the protection of the public
from potential abuses of banks and their owners.
• Rule is no person or entity shall engage in banking
operations or quasi-banking functions without
authority from the BSP.
• There are instances of abuse by the banks and their
owners in the past.

Regulation of the Banking Industry
• To addresses weaknesses, bank regulators across
the region have set out to improve the practice of
banking supervision in their respective
jurisdictions.
Regulation of the Banking Industry
Prudential Measures
1. Capitalization
 Minimum capitalization
 Risk-based capital
2. Fit and Proper Rule
 Rules to govern directors and officers
3. Reserves
 Reserve requirements
 Provision for losses and write offs
Regulation of the Banking Industry
Required Minimum Capital
Type Bank Minimum
Capitalization
Universal Commercial Banks P 5.4 Billion
Regular Commercial Banks P 2.8 Billion
Thrift Bank with head office in Metro Manila P 650 Million
Thrift Bank with head office outside Metro Manila P 64 Million
Rural Bank P 2.6-20 Million
Cooperative Bank P 2.6-20 Million

Regulation of the Banking Industry
Prudential Measures
4. Investments
 Restriction on equity investments in allied
undertakings
 Restrictions on direct investments
5.Loan Restrictions
 Single Borrower’s Limit
 Rules on DOSRI Loans
Regulation of the Banking Industry
Importance of
Banks to Economy Protection of
Depositors
Regulation of the Banking Industry
Administrative violations committed by
banks/quasi-bank
• Conducting business in an unsafe or unsound manner
• Willful violation of the charter or bylaws
• Willful delay in submission of required reports or
publications
• Refusal to permit examination into the affairs of the
institution
Regulation of the Banking Industry
Administrative violations committed by
banks/quasi-banks
• Willful making of false or misleading statement to
board or BSP
• Commission of irregularities
• Willful non-compliance with, or violation of, any
banking law or any MB order, instruction or
regulation by the MB or the BSP


The case of FALLACY Bank
By 2010, however, the regulator started to receive
complaints about its business practices, which
seemed to be unsafe and might compromise the
interest of depositors. It was also found out that the
bank has not been submitting reports or had been
delayed in submitting the same.
It initially refused requests for examination of its
operations and even threatened the filing of cases
against PDIC.
Banks in Distress
How do we know that a bank is in
distress?
Examination of live bank by BSP or PDIC (Sec. Sec. 25, RA
7653, “The New Central Bank Act;” Sec. 8 (eighth), RA 3591,
as amended, “PDIC Charter”)
Declaration of bank holiday or suspension of payment of
deposits continuously for 30 days (Sec. 53, RA 8791, “The
General Banking Law of 2000”)

Options of Monetary Board over
distressed bank
Order the placement
of bank under
conservatorship
(Sec. 29, RA 7653)
Order the
placement of bank
under receivership
(Sec. 30, RA 7653)
Addressing Bank Distress


Conservatorship




Receivership



Liquidation


Rehabilitation


Resumption
of Business

The case of FALLACY Bank
FALLACY Bank started operations in 2000. After almost 9
years of operations, it appeared to be one of the success
stories in the banking industry. From one branch, it was
able to put up 12 branches by 2009, almost 100,000
depositors and an estimated P15 billion in deposits
contained in about 125,000 accounts.
By start of 2010, however, the regulator started to
receive complaints about its business practices.
The case of FALLACY Bank
By middle of 2010, FALLACY showed signs illiquidity
problems preventing it from promptly paying its
obligations to its depositors as they fall due.
Despite orders of the MB, FALLACY Bank refuses or
fails to come up with solutions to address its
liquidity problems.

HOW IS THE INTEREST OF THE DEPOSITORS
PROTECTED IN INSTANCES LIKE THIS?
The Remedy of Conservatorship
The Remedy of Conservatorship
Ground for conservatorship
• State of continuing inability or unwillingness of
bank/QB to maintain a condition of liquidity
adequate to protect the interest of depositors and
creditors, as found by the Supervising and
Examination Department (SED). (Sec. 29, R.A.
7653)

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

The Remedy of Conservatorship
Mandate of conservator

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

2. Reorganize management
• Take over management
• Overrule or revoke actions of previous board and
officers.
• Conservator cannot repudiate perfected transactions
post facto

The case of FALLACY BANK
Let us assume MB issued an Order placing FALLACY
Bank under conservatorship and a conservator was
appointed.
Within 15 days and before conservator could
assume, the Bank’s President, Jose Angeles, with
authority from Board of Directors, filed a case with
the CA against MB alleging grave abuse of
discretion, illegal taking of private property and
violations of his right to due process.

The case of FALLACY BANK
Case should be dismissed
• only stockholders of record representing majority of the
capital stock may bring petition for certiorari to question MB
order of conservatorship. The bank president, by himself,
cannot file petition.
• petition must be filed within 10 days from receipt by the
board of the institution of the order.
• Actions of the MB placing a bank under conservatorship are
final and executory and thus cannot be restrained or set
aside by courts except on jurisdictional grounds by way of a
petition for certiorari.

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

The Remedy of Conservatorship
Conservatorship is an exercise of police
power
Banks are affected with public interest because they
receive funds from the general public in the form of
deposits, creating a fiduciary relationship with their
depositors. Thus, banks are obligated to treat with
meticulous care and utmost fidelity the accounts of
those who have reposed their trust and confidence in
them.
Central Bank v. CA (G.R. No. 76118 March 30, 1993)

The Remedy of Conservatorship
Conservatorship is an exercise of police
power
The government cannot simply cross its arms while
the assets of a bank are being depleted through
mismanagement or irregularities. It is the duty of
the BSP to step in and salvage the remaining
resources of the bank so that they may not continue
to be dissipated or plundered by those entrusted
with their management.
- PVB Employees Union v. PVB G.R. No. 76118 March 30, 1993.
The Remedy of Conservatorship
Termination of Conservatorship
When MB is satisfied
that the institution
can continue to
operate on its own
and the conservator-
ship is no longer
necessary. (Sec. 29,
R.A. 7653)
When MB determines
that the continuance in
business of the bank
would involve probable
loss to its depositors or
creditors. In which case,
bank will be placed
under receivership.
(Sec. 29, R.A. 7653)
The case of FALLACY Bank
Twelve months have lapsed and FALLACY Bank
continues to be hounded by liquidity problems
forcing it to declare bank holiday for 2 months.
Suppose MB finds that continuance in business of
the bank/QB would involve probable loss to
depositors or creditors, what will now be the
remedy of the regulators?

The Remedy of Receivership
The Remedy of Receivership
 The placement of a bank under
conservatorship is not a precondition to its
placement under receivership. (Sec. 30,
R.A. 7653)
The Remedy of Receivership
Grounds for Receivership
1. Insolvency
 Illiquidity: Bank/QB is unable to pay its liabilities as
they fall due in the ordinary course of business, except
if due to bank runs induced by financial panic in the
banking community.
 Insolvency: Bank/QB has insufficient realizable assets
to meet its liabilities
2. Probable Loss to Depositors
• Bank/QB cannot continue in business without involving
probable losses to depositors or creditors

The Remedy of Receivership
Grounds for Receivership
3. Dissipation of Assets
 Bank/QB willfully violated a final cease-and-
desist order for a violation involving fraud or
dissipation of assets.
4. Prolonged Bank Holiday
 Declaration of bank holiday or suspension of
payment of deposits for 30 days.

The case of FALLACY Bank
Suppose MB summarily placed FALLACY Bank under
receivership because, among others, the examination of its
books showed that there were irregularities in operations
consisting of loans to unknown fictitious borrowers and
refusal of FALLACY to obey CDO. The SED report detailed the
facts and an extensive chronology of events revealing the
multitude of problems facing the FALLACY Bank.
The Remedy of Receivership
The MB’s closure order need not arise from
an examination under RA 7653 (the new
Central Bank Act). MB could rely on the 50-
page report of the head of SED, which
detailed the facts and an extensive
chronology of events revealing the multitude
of problems facing the rural bank.
- Rural Bank of San Miguel v. Monetary Board, G.R. No.
150886, February 16, 2007.
The case of FALLACY Bank
Immediately upon receipt of Order of
receivership, Jose Angeles, together with
the majority stockholder on record, filed a
certiorari petition alleging grave abuse of
discretion on the part of the MB since his
side was not properly heard and merely
relied on the SED Report. He prays that he
be given his day in court to explain the
findings of the SED.
The Remedy of Receivership
MB resolution is summary in nature
• Prior hearing will defeat the purpose and efficacy of receivership.
• Prior hearing will result in bank runs, panic and hysteria. (Rural Bank of
Buhi v. CA, G.R. No. L-61689 June 20, 1988)








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

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

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


The Remedy of Receivership
MB receivership order is “ final and
executory”
•thus cannot be restrained or set aside by the courts
except on jurisdictional grounds by way of a
petition for certiorari
• Can only be set aside if there is convincing proof
that the action is plainly arbitrary and made in bad
faith or is capricious, discriminatory, whimsical,
unjust, or a denial of due process and equal
protection.

Effect of Receivership
Monetary Board will Summarily forbid
bank from doing business in the
Philippines
―… a continuity of commercial dealings and
arrangements, and contemplates to that extent, the
performance of acts or words or the exercise of
some of the functions normally incident to, and in
progressive prosecution of, the purpose and object
of its organization (Provident Savings Bank vs. CA, May 17, 1993)
Effect of Receivership
Forbidding a bank from “ doing
business”means
• it cannot accept new deposits
• it cannot grant new loans

Effect of Receivership
 Receivership is equivalent to an injunction to
restrain the bank officers from intermeddling with
the property of the bank in any way.” (Villanueva vs.
CA, 244 SCRA 396)

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

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


Effect of Receivership
The assets of the bank are considered
under custodia legis. (Sec. 30, RA 7653; Sec. 10
(b) R.A. 3591, as amended)

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


Effect of Receivership
Stay of execution against the assets of
bank. Lipana vs. Development Bank of Rizal, G.R. No.
73884 September 24, 1987.
 Execution would unduly deplete the assets of the
bank to the obvious prejudice of other depositors
and creditors, including depositors. (Lipana, supra.)
 One of the reasons of placing a bank under
receivership is to prevent creditors from having
advantage over the assets of the bank. (Lipana, supra.)

The Remedy of Receivership
Who may contest MB resolution?
• Only stockholders of record representing
majority of the capital stock may bring
petition for certiorari, within 10 days
from receipt by the board of the
institution of the order.

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

The case of FALLACY Bank
Because of the inability of
FALLACY Bank to serve its
depositors, a petition for
receivership is filed before
your sala praying to put
FALLACY Bank under
receivership and appoint a
well-respected member of
the community as Receiver
in order to protect the
depositors from its
management
The Remedy of Receivership
• Only the MB can place a bank under
receivership and appoint receiver.
• for Banks: PDIC
• for QBs: One who has recognized
competence in banking or finance
• Receivership is for 90 days from take over
of the bank or QB.

The Remedy of Receivership
Duties of Receiver
1. Immediately gather and take charge of all asset
and liabilities.
2. Administer assets and liabilities for the benefit
of creditors
3. Exercise general powers of a receiver under the
Rules of Court
• Bring and defend actions in his own name
• Keep possession of property
• Receive rents and other income
• Collect debts; compound for and compromise debts.
The Remedy of Receivership
Specific powers of PDIC as bank receiver
1. Bring suits to enforce liabilities or recoveries
2. Hire experts as deputies and assistants
3. Suspend or terminate officers and employees
4. Pay accrued, utilities, rental and salaries for 3
months
The Remedy of Receivership
Specific powers of PDIC as bank receiver
5. Collect or restructure loans and claims
6. Reduce unusually high interest rates for unpaid
interest
7. Retain private counsel
8. Borrow money and encumber asset to prevent
dissipation, redeem foreclosed assets, or minimize
losses to depositors and creditors
The Remedy of Receivership
Limitation to powers of PDIC as bank
receiver
• Receiver cannot pay, transfer, or dispose of any
asset of bank/QB, except
• place the funds in non-speculative investments
• pay for administrative expenses of liquidation
• pay accrued utilities, rentals and salaries of
closed bank from available funds for up to 3
months
The Remedy of Receivership
Effect of receivership on bank’s directors
and officers
•The authority of the bank and its directors and officers
over its property and effects is suspended, such
authority being reposed in the receiver.
• Allowances and remunerations are also suspended.
•In this respect, the receivership is equivalent to an
injunction to restrain the bank officers from meddling
with the property of the bank in any way.
EFFECTS of Receivership
On right to foreclose
• Receiver is obliged to collect pre-existing debts due to
the bank and to foreclose mortgages securing the
debts. Provident Savings Bank v CA, G.R. No. 97218, May 17,
1993
• receivership does not interrupt the running of the
prescriptive period for the collection of debts. Larrobis
v. Philippine Veterans Bank, G.R. No. 135706, October 1, 2004.
• However, the time when the bank was prevented from
enforcing its right to collect by an order of the MB is
deemed a fortuitous event that interrupts
prescription. Provident Savings Bank v. CA, G.R. No. 97218,
May 17, 1993


EFFECTS of Receivership
On unpaid time deposit in the bank
•An unpaid time deposit in a bank is not a preferred
claim against the bank. Central Bank v. Morfe, (G.R. No. L-
20119 June 30, 1967.
On bank’s deposit liabilities to depositors
•When a bank’s operations are suspended by the BSP,
the bank is not liable for interest accrued during the
period of suspension, and this should be deemed read
into every contract of deposit with a bank. Overseas Bank of
Manila v. CA, 105 SCRA 49 (1981).
The case of FALLACY Bank
When Jose Angeles learned about the order of MB
placing FALLACY Bank under receivership, he
•Refused to turn over the bank’s records and assets
to the receivers
•tampered with the bank’s records
•Appropriated the bank’s assets for himself or
another party
•Destroyed the bank’s assets
The case of FALLACY Bank
When Jose Angeles learned about the order of MB
placing FALLACY Bank under receivership, he
•Continued to receive deposits as well payments
from banks’ debtors
•Paid a favored supplier from funds of the bank
•Transferred to his son’s name title to a car owned
by the bank
•Asked an officer of the bank to perform any of the
foregoing acts
OUTCOME of Receivership
 Within 90 days from take-over of the
bank/QB, the receiver must determine
and recommend to the MB if
• the bank/QB may resume
business with safety to
depositors, creditors, and the
general public.
• may be rehabilitated.
• cannot be rehabilitated or
permitted to resume business
 notify the board of the bank/QB in
writing of findings
 direct the receiver to proceed with
liquidation.

Possible Outcome of Receivership
Receiver
recommends to
the MB the
rehabilitation of
the bank. (Sec. 30,
R.A. 7653)
Receiver
recommends to
the MB the
liquidation of
the bank. (Sec. 30,
R.A. 7653)
The Remedy of Receivership
Rehabilitation remedy
Nature of rehabilitation
• Rehabilitation contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the
corporation to its former position of successful operation
and solvency.
 Not all enterprises which fail in a competitive market place
should necessarily be liquidated. A corporation with a
reasonable prospect of survival should be given the opportunity
to rehabilitate.

 there is greater value and greater benefit for creditors in the
long term in keeping essential business and other component
parts of such a corporation together.

Rehabilitation remedy
Effect on management and control of the
bank
• RA 7653: Silent on rehabilitation, although
conservatorship by analogy mandates the
conservator to take over management and control
of the bank.
• Under the Rules of Procedure on Corporate Recovery:
the rehabilitation receiver shall not take over
management and control of the debtor but shall only
closely oversee and monitor the operators of the debtor
during the pendency of the proceedings
Rehabilitation remedy
 Effect on pending receivership or liquidation

 Rehabilitation suspends a pending liquidation. To
allow the liquidation proceedings to continue
when rehabilitation has already been mandated
by RA 7169 would seriously hinder the
rehabilitation of the subject bank. Philippine Veterans
Bank v. Vega, GR 105364, 28 June 2001)
The case of FALLACY Bank
Upon examination of the books and records of
FALLACY Bank, PDIC immediately arrived at the
conclusion that the bank cannot be rehabilitated.
By then, the depositors of the bank have camped
outside its branches, creditors have demanded
payment of outstanding obligations, suppliers
threatened to discontinue provision of supplies, etc.

The Remedy of Liquidation
The Remedy of Liquidation
 When a person, bank, partnership,
association, corporation or other legal
entity can no longer pay its debts as they
come due and when rehabilitation is not a
feasible option
 Institution of insolvency proceeding
 Liquidation of its assets
 Settlement of claims
 Distribution of remaining assets
The Remedy of Liquidation
General Objectives and Features of
Insolvency Proceedings

First Overall Objective
 the allocation of risk among participants in a market
economy in a predictable, equitable, and transparent
manner.

Second Overall Objective
 to protect and maximize value for the benefit of all
interested parties and the economy in general

The Remedy of Liquidation
Economic Theory Behind Liquidation
 in a competitive market economy, an enterprise that
is unable to compete has no place in and should be
removed from the market place.
 Insolvency is the principal identifying mark of an
uncompetitive enterprise.
The Remedy of Liquidation
Legal Theory Behind Liquidation
 Liquidation process can only function
effectively if it is regarded as a collective
process, from the time of its inception.
 Follows that an ordered, civilized
administration is necessary under which all
creditors (of varying ranks and classes)
should be bound and treated equally.
The Remedy of Liquidation
Role of Liquidator
• A liquidator assumes the role of the receiver. His
task is to dispose of all the assets of the bank and
effect partial payments of the bank's obligations
in accordance with legal priority, for the benefit
of the bank and its creditors. Larrobis v. Philippine
Veterans Bank, G.R. No. 135706, October 1, 2004.
The Remedy of Liquidation
Nature of Liquidation Proceedings

• Not an ordinary civil action but a special
proceeding
• Not an interpleader
• Akin to settlement of estate of a deceased person
• In rem in nature
• A single proceeding but admitting of multiple
appeals
The Remedy of Liquidation
―Liquidation does not seek the enforcement or
protection of a right nor the prevention or redress
of a wrong against a party, and does not pray for
affirmative relief for injury arising from a party's
wrongful act or omission nor state a cause of action
that can be enforced against any person. What it
seeks is merely a declaration by the trial court of
the corporation's insolvency so that its creditors
may be able to file their claims in the settlement of
the corporation's debts and obligations.‖ PBCEO v.
CA, G.R. No. 109373 October 13, 1995.


The Remedy of Liquidation
Liquidation is different from interpleader

―Liquidation does not involve claims on a subject matter
against a person who has no interest therein. The
liquidator, as representative of the corporation, takes
charge of its assets and liabilities for the benefit of the
creditors. He is charged with insuring that the assets of
the corporation are paid only to rightful claimants and in
the order of payment provided by law.‖
- PBCEO v. CA, G.R. No. 109373 October 13, 1995.

The Remedy of Liquidation
Liquidation is akin to settlement of estate

―Liquidation resembles the proceeding for the settlement
of estate of deceased persons under Rules 73 to 91 of the
Rules of Court. The two have a common purpose: the
determination of all the assets and payment of all the
debts and liabilities of the insolvent corporation or the
estate. The Liquidator and the administrator or executor
are both charged with the assets for the benefit of the
claimants. The court's concern is with the declaration of
creditors and their rights and the determination of their
order of payment. ‖
- PBCEO v. CA, G.R. No. 109373 October 13, 1995.

Liquidation Steps
Petition for Assistance in
Liquidation
Adjudication of “disputed
claims”
Approval of Project of
Distribution of Assets
Payment of claims and
distribution of assets
Termination of proceedings
The Remedy of Liquidation
1. Petition for Assistance in Liquidation

 The receiver is mandated to file an ex parte
Petition for Assistance in the Liquidation (PAL) of
closed bank in the proper RTC pursuant to a
liquidation plan adopted by PDIC. (Sec. 30, RA 7653)

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

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

The Remedy of Liquidation
1. Petition for Assistance in Liquidation

Goal of Liquidation
• Convert the assets of the institution to money and for this
purpose, with assistance of counsel, institute actions to
collect and recover accounts and defend any action against
the institution
• Dispose of the proceeds to creditors, depositors, other
parties to pay for the debts and disputed claims owing them
according to the rules on concurrence and preference of
credits

The Remedy of Liquidation
2. Adjudication of “Disputed Claims”

Upon acquiring jurisdiction, RTC will, on
motion:
• adjudicate “disputed claims” against the bank
• assist the enforcement of individual liabilities of the
stockholders, directors and officers, and
• decide on other issues as may be material to
implement the liquidation plan adopted.

The Remedy of Liquidation
2. Adjudication of “Disputed Claims”

• Disputed claims refer to all claims, whether
against the assets of the insolvent bank, for
specific performance, breach of contract,
damages, or whatever.

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

The Remedy of Liquidation
2. Adjudication of “Disputed Claims”

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

The Remedy of Liquidation
2. Adjudication of “Disputed Claims”

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

The Remedy of Liquidation
2. Adjudication of “Disputed Claims”

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

Although the claims are litigated in the same
proceeding, the treatment is individual.

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

By virtue of disputed claims, liquidation admits
multiple appeals. A liquidation proceeding is a
single proceeding consisting of a number of cases
properly classified as claims. As such, multiple
appeals are allowed. The period for appeal is 30
days. To perfect an appeal, in addition to a notice
of appeal, a record on appeal is required. PBCEO v.
CA, G.R. No. 109373 October 13, 1995.
The Remedy of Liquidation
―The first phase is concerned with the approval and disapproval of claims.
Upon the approval of the petition seeking the assistance of the proper court in
the liquidation of a closed entity, all money claims against the bank are
required to be filed with the liquidation court. This phase may end with the
declaration by the liquidation court that the claim is not proper or without
basis. On the other hand, it may also end with the liquidation court allowing the
claim. In the latter case, the claim shall be classified whether it is ordinary or
preferred, and thereafter included Liquidator. In either case, the order allowing
or disallowing a particular claim is final order, and may be appealed by the
party aggrieved thereby.

The second phase involves the approval by the Court of the distribution plan
prepared by the duly appointed liquidator. The distribution plan specifies in
detail the total amount available for distribution to creditors whose claim were
earlier allowed. The Order finally disposes of the issue of how much property is
available for disposal. Moreover, it ushers in the final phase of the liquidation
proceeding - payment of all allowed claims in accordance with the order of legal
priority and the approved distribution plan.‖
- Rural Bank of Bokod vs. BIR, G.R. No. 158261, December 18, 2006.

The Remedy of Liquidation
3. Project of Distribution
• specify in detail all the assets available for
distribution
• identify the creditors whose claims were earlier
allowed by the liquidation court
• specify the order of preference and concurrence
of credits under the Civil Code
• Rule on concurrence and preference of credit applicable
only if the assets of the bank are not enough to pay all
creditors.


The Remedy of Liquidation
3. Project of Distribution

• Assets available for distribution
• Includes all assets belonging to the bank or QB
in its own right
• But excludes assets held in trust, on which the
bank only holds legal (but not beneficial) title.
The Remedy of Liquidation
3. Project of Distribution
Filing of motion for approval of POD with the
liquidation court
•The distribution plan specifies in detail the total amount
available for distribution to creditors whose claims were
earlier allowed. Moreover, it ushers in the final phase of the
liquidation proceeding—payment of all allowed claims in
accordance with the order of legal priority and the approved
distribution plan. (PaBCEO vs. CA, ibid.)


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

First to be paid: Administrative expenses
• Cost, fees, and expenses of liquidation proceedings
• Reasonable expenses and fees of the receiver
• Salaries of such personnel whose employment is
rendered necessary in discharge of the liquidation,
• and other additional expenses caused thereby
The Remedy of Liquidation
4. Payment of Claims
• Next for payment are claims of creditors
according to the rules on concurrence and
preference of credit under the Civil Code.
The case of FALLACY Bank
BIR raised an issue before the RTC claiming that its
claims for taxes should be prioritized over and
above the other claims.
It cited Arts. 2241 (1) and 2242 (1) of the Civil Code
in support of its argument.
The Remedy of Liquidation
Those provisions may be seen to classify
credits against a particular insolvent into
three general categories, namely:
a.special preferred credits listed in Articles 2241
and 2242;
b.ordinary preferred credits listed in Article 2244;
and
c.common credits under Article 2245.”
The Remedy of Liquidation
Specially Preferred Credits (Art. 2241 & 2242, CC)

 These credits constitute liens or encumbrances on
the specific movable or immovable property to
which they relate.
 mortgages or pledges of real or personal property, or liens
within the purview of legal provisions governing
insolvency. (Art. 2243, CC)

The Remedy of Liquidation
Specially Preferred Credits (Art. 2241 & 2242, CC)
 Arts. 2241 and 2242 jointly with Arts. 2246 to 2249 establish
a two-tier order of preference.
 The first tier includes only taxes, duties and fees due on
specific movable or immovable property.
 All other special preferred credits stand on the same second
tier to be satisfied, pari passu and pro rata, out of any residual
value of the specific property to which such other credits
relate.

The Remedy of Liquidation
Republic vs. Peralta (G.R. No. L-56568, May 20,
1987)
 Arts. 2241 and 2242 jointly with Arts. 2246 to
2249 establish a two-tier order of preference.
 The first tier includes only taxes, duties and
fees due on specific movable or immovable
property.
 All other special preferred credits stand on the
same second tier to be satisfied, pari passu and
pro rata, out of any residual value of the
specific property to which such other credits
relate.
The Remedy of Liquidation
Republic vs. Peralta (G.R. No. L-56568, May 20,
1987)
 Ordinary Preferred Credits, Article 2244 CC
 Art. 2244 creates no liens on determinate
property which follow such property. What
Article 2244 creates are simply rights in favor of
certain creditors to have the cash and other
assets of the insolvent applied in a certain
sequence or order of priority.

The Remedy of Liquidation
Republic vs. Peralta (G.R. No. L-56568, May 20,
1987)
 Ordinary Preferred Credits, Article 2244 CC
 Only in respect of the insolvent's "free property" is an
order of priority established by Article 2244.
The Remedy of Liquidation
4. Payment of Claims (preference of taxes)
Duties, taxes, and fees due the Government enjoy priority
only when they are with reference to a specific movable
property under Article 2241(1), or immovable property under
Article 2242(1), of the Civil Code. But with reference to the
other real and personal property of the debtor, sometimes
referred to as “free property”, taxes and assessment due
the National Government, other than those in Articles 2241(1)
and 2242(1), will come only in ninth place in the order of
preference under Article 2244. Rural Bank of Bokod v. BIR, G.R.
No. 158261, December 18, 2006.
The Remedy of Liquidation
4. Payment of Claims (preference of taxes)
All payments by PDIC of insured deposits in closed
banks partake of the nature of public funds and, as
such, must be considered a preferred credit similar
to taxes due to the National Government in the
order of preference under Article 2244 of the Civil
Code.
The Remedy of Liquidation
4. Payment of Claims (preference of taxes)
 Depositors are not considered preferred
creditors within the meaning of Article 2244. A
general depositor is merely a general creditor
who does not enjoy any preference over other
general creditors. Judgment for payment of
time deposit only seeks to fix the amount of
debt and does not establish its preference.
Central Bank vs. Morfe (G.R. No. L-20119 June 30, 1967.
The Remedy of Liquidation
4. Payment of Claims (preference of taxes)
 PDIC, upon payment of any depositor, shall be subrogated
to all rights of the depositor against the closed bank to
the extent of such payment. Such subrogation shall
include the right to receive the same dividends and
payments from the proceeds of the assets of such closed
bank and recoveries on account of stockholders’ liability
as would have been payable to the depositor on a claim
for the insured deposits.
The Remedy of Liquidation
4. Payment of Claims (preference of taxes)
• Creditors have 3 years from date of last notice to
claim payment.
• After the lapse of the 3-year period, unclaimed
payments are escheated to the Republic.
BANK CONSERVATORSHIP,
RECEIVERSHIP AND
LIQUIDATION


Cheselden George V. Carmona
Member, Commercial Law Department – PHILJA


27 October 2010
Waterfront Hotel, Davao City