Chapter 5: Prohibited Transactions and Cessation of Banking Business I. Prohibited Transactions A. Prohibition To Act As Insurer

Chapter 5: PROHIBITED TRANSACTIONS AND CESSATION OF
BANKING BUSINESS
I. Prohibited Transactions
A. Prohibition to Act as Insurer
-A bank shall not directly engage in insurance business as the insurer.
The term “doing insurance business” or “transacting an insurance
business”,shall include:
a. making or promising to make, as insurer, any insurance contract;
b. making or proposing any contract of suretyship as a vocation
c. doing any kind of business, including a reinsurance business
d. doing or proposing to do any business in substance
B. Prohibited Acts
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
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
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 ban or any bank; or
e. Outsource inherent banking functions. (Sec.55, GBL)
2. No borrower of a bank shall—
a. Fraudulently overvalue property offered as security for a

loan, etc
b. Furnish fake or make misrepresentation of material facts
c. Attempt to defraud the said bank
d. Offer any director, officer, employee or agent of a bank, any

gift, fee, commission etc in order to influence such persons in
approving loan and the like.
3. No examiner, officer or employee of the BSP shall commit any of

the foregoing act or aid in the commission of the same.
4. Consistent with the Banks Secrecy Law, no bank shall employ

casual or nonregular personnel or too lengthy probationary personnel
in the conduct of its business involving bank deposits.
C. Prohibition Against Outsourcing Certain Banking Function

(Section 55, GBL)
II. Conducting Business In an Unsafe or Unsound Manner

III. Prohibition on Dividend Declaration
-No bank or quasi-bank shall declare dividends greater than its
accumulated net profits then on hand, deducting therefrom its losses
and bad debts.
Note: (Section 43 of the Corporation Code)
IV. Unauthorized Advertisement or Business Representation

V. Placement Under Conservatorship
A. (Section 67 of the GBL)
B. Grounds for Appointment of Conservator
-Whenever on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board
(MB) finds that a bank or a quasi-bank is in a state of:
1. continuing inability, or
2. unwillingness to maintain a condition of liquidity deemed

adequate to protect the interest of depositors and creditors,
MB shall appoint a conservator as the MB shall deem necessary

to:
1. take charge of the assets, liabilities and management thereof;
2. reorganize management;
3. collect all monies and debts due said institution, and
Exercise all powers necessary to restore its viability.
 LIQUIDITY- the ability of an asset to be converted into

cash quickly and without any price discount. A
corporation is liquid if it has ready access to cash.
 SOLVENCY- the condition that exists when liabilities
amount to less tan total assets, thus providing the ability
to pay debts. The test of insolvency is measured by
determining whether the realizable assets of a bank are
less than its liabilities.
C. Qualifications of Conservator
-competent
-konowledgeable in bank operations and management
D. Period of Conservatorship
-does not exceed one (1) year
E. Expenses of Conservatorship
-shall be borne by the bank or the quasi-bank concerned
F. Terminations of Conservatorship
-MB is satisfied that the institution can continue to operate on its
own
-MB shall, on the basis of the report of the C or its own findings,
determine that the continuance thereof would involve probable loss
to its depositors or creditors
G. Final and Executory

-actions of MB; except on petition for certiorari
H. Exclusive Power to Appoint

-vested exclusively with the MB
I. Not a Precondition
J. Powers of Conservatorship cannot Impair the Obligations of
Contracts
VI. Cessation of Banking Business

A. Voluntary Liquidation
-written notice of L shall be sent to MBB before such liquidation is
undertaken, and the MB has the right to intervene and take such
steps as may be necessary to protect the interests of creditors
-voluntary L may be undertaken by the bank itself through its board

of directors, by a trustee appointed by the bank, or by a receiver
appointed to the bank upon voluntary dissolution of a bank pursuant
to the Corporation Code
-no voluntary dissolution of a bank shall be undertake without prior

approval of the MB (accompanied by a L plan, written notice shall
be sent to MB before actual L)
B. Receivership and Involuntary Liquidation

(Section 69 of the GBL)
1. Grounds for Receivership and Liquidation

- if the MB finds that the institution:
a. is unable to pay its liablities as they become due in the
ordinary course of business
b. has insufficient realizable assets, as determined by the
BSP, to meet its liabilities
c. cannot continue in business without involving probable
losses to its depositors or creditrs, or
d. has willfully violated a cease and desist order that has
become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution.
-For a quasi-bank, any person of recognized competence in
banking or finance may be desinated as receiver.
2. Current and Complete Examination Not Necessary

-The absence of an examination before the closure of a
bank did not mean that there was no basis for the closure
order. Needless to say, the decision of the MB and BSP,
like any other administrative body, must have something to
support itself and its findings of fact must be supported by
substantial evidence. But it is clear under R.A. No 7653
that the basis need not arise from an examination as
required by the old law. (Rural Bank of San Miguel, Inc.
vs. Monetary Board)
3. Procedures
-The receiver shall immediately:
a. Gather and take charge of all the assets and liabilities of

the institution,
b. Administer the same for the benefit of its creditors, and
c. Exercise the general powers of a receiver under the
Revise Rules of Court, but
d. Shall not, with the exception of the administrative
expenditures, pay or commit any act that will involve the
transfer or disposition of any asset of the institution.
-The receiver may deposit or place the funds of the
institution in non-speculative investments.
-The receiver shall determine ASAP but not later than

ninety (90) days from take over, whether the institution
may be rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general
public.
-Any determination for the resumption of business of the

institution shall be subject to the approval of the MB.
4. PROHIBITED ACTS:
Any director or officer of bank declared insolvent or plaed under

receivership by the Monetary Board shall not commit any of the ff. acts:
a. Refusing to turn over the bank’s record and assets to the designated
receivers;
b. Tampering with bank records;
c. Appropriating for himself or another party, or destroying or causing
misappropriation and destruction of the bank’s assets;
d. Paying out or permitting or causing to be paid out any fund of said
bank; and
e. Transferring or permitting or causing to be transferred any securities
or property of said bank.
5. WHEN INSTITUTION CANNOT BE REHABILITATED
 If the receiver determines that the institution cannot be rehabilitated or

permitted to resume business, the Monetory Board shall notify in
writing the board of directors of its findings and direct the receiver to
proceed with the liquidation of the institution.
 The receiver shall:
1. File ex parte with the proper RTC, and without requirement of
prior notice or any other action, a petition for assistance in the
liquidation plan adopted by the Philippine Deposit Insurance Corp.
for general application to all closed banks.
a. In case of quasi banks, the liquidation plan shall be adopted
by the Monetory Board.
2. Convert the assets of the institutions to money, dispose of the same
to creditors and other parties, for the purpose of paying the debts of
such institution in accordance with the rules on concurrence and
preference of credit under the Civil Code of the Philippines.
3.
6. FINAL AND EXECUTORY
As in the case of conservatorship:
 The actions of the Monetary Board shall be final and executor, and
may not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction.
 WHO WILL FILE: Stockholders of record representing the majority
of the capital stock within 10 days from the receipt by the board of
directors of the institution of the order directing receivership,
liquidation or conservatorship.
7. EXCLUSIVE POWER TO APPOINT – vested exclusively with the
Monetory Board.
C. CLOSE NOW HEAR LATER SCHEME
 The law does not contemplate prior notice and hearing before a bank
may be directed to stop operations and placed under receivership.
 A previous hearing nor due process demand that the correctness of
Monetary Board’s Resolution to stop operation and proceed to
liquidation of first adjudged before making the resolution effective.
 CLOSE NOW HEAR LATER SCHEME – is grounded on practical
and legal considerations to prevent unwarranted dissipation of the
bank’s assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders and the general public.
D. EFFECT OF FILING FOR PETITION FOR REVIEW
 The bank’s liquidator is allowed to continue receiving collectibles and

receivables or paying off’s creditor’s claims and other transactions
pertaining to normal operations of a bank. i.e. prosecution of suits
against debtors for collection and for foreclosure of mortgages.
E. REASON BEHIND RECEIVERSHIP AND INVOLUNTARY
LIQUIDATION
 It is a valid exercise of police power to protect the depositors,

creditors, stockholders and the general public. Due to the nature of
bank’s transactions and functions, a fiduciary relationship is created
between the banking institutions and their depositors.
F. EFFECTS OF RECEIVERSHIP AND LIQUIDATION

1. Retention of Juridical Personality
- which can sue and be sued through its liquidator.
LIMITATION: The prosecution and action must be done through the
liquidator.
2. Not liable to Pay interest
- a banking institution has been declared insolvent and subsequently closed
by the BSP cannot be held liable to pay interest on bank deposits which
accrued during the period when bank is actually closed and non-operational.
3. Assets are deemed under Custodia Legis

- and shall, from the moment of such receivership or liquidation, be exempt
from any order or garnishment, levy, attachment or execution.
4. Stay of execution
- is warranted if a bank was placed under receivership. The assets of the
insolvent banking institution are held in trust for equal benefit of all
creditors, and after its insolvency, one cannot obtain an advantage or a
preference over another by an attachment, execution or otherwise.
5. Restriction of Bank’s Capacity to act

- Restriction in relation to its property.
- The bank would not be able to do NEW BUSINESS, i.e. to grant new
loans or to accept new deposits.
However, the receiver of the bank is obliged to collect debts owing to the
bank which debts form part of the assets of the bank.
6. Exclusive Jurisdiction of Liquidation Court

- pertains only to the adjudication of claims against the bank. It does not
cover the reverse situation where it is the bank which files a claim against
another person or legal entity.
VII. DISPOSITION AND DISTRIBUTION OF ASSETS

A. Distribution of Assets
In case of liquidation of a bank or quasi-bank, after payment of the
cost of proceedings, including a reasonable expenses and fees of the
receiver to be allowed by the court, the receiver shall pay debts of
such institution, under order of the court, in accordance with the rules
on concurrence and preference of credit as provided in the Civil Code.
B. DISPOSITION OF REVENUES AND EARNINGS
All revenues and earnings realized by the receiver in winding up the
affairs and administering the assets of any bank or quasi-bank shall be
used to pay the costs, expenses mentioned in ITEM A above salaries
of such personnel whose employment is rendered necessary in the
discharge of the liquidation together with the other additional
expenses caused by.
C. DISPOSITION OF BANKING FRANCHISE

The Bangko Sentral may, if public interest so requires, award to an
institution, upon such terms and conditions as the Monetary Board
may approve, the banking franchise of a bank under liquidation to
operate in the area where said bank or its branches were previously
operating. Provided, that whatever proceeds may be realized from
such award shall be subject to the appropriate exclusive disposition of
the Monetary Board.
D. LIABILITIES
The bank is bound by the acts, or failure to act of the receiver. At the
same time, the receiver is liable to the bank for the culpable or
negligent failure to collect the assets of such bank and to safeguard
said assets.

Chapter 5: Prohibited Transactions and Cessation of Banking Business I. Prohibited Transactions A. Prohibition To Act As Insurer

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Chapter 5: Prohibited Transactions and Cessation of Banking Business I. Prohibited Transactions A. Prohibition To Act As Insurer

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Chapter 5: PROHIBITED TRANSACTIONS AND CESSATION OF

a. making or promising to make, as insurer, any insurance contract;

b. making or proposing any contract of suretyship as a vocation

c. doing any kind of business, including a reinsurance business

d. doing or proposing to do any business in substance

a. Make false entries in any bank report or statement or

b. Without order of a court of competent jurisdiction, disclose

c. Accept gifts, fees or commissions or any other form of

d. Overvalue or aid in overvaluing any security for the purpose

e. Outsource inherent banking functions. (Sec.55, GBL)

2. No borrower of a bank shall—

a. Fraudulently overvalue property offered as security for a

c. Attempt to defraud the said bank

d. Offer any director, officer, employee or agent of a bank, any

3. No examiner, officer or employee of the BSP shall commit any of

4. Consistent with the Banks Secrecy Law, no bank shall employ

C. Prohibition Against Outsourcing Certain Banking Function

II. Conducting Business In an Unsafe or Unsound Manner

Note: (Section 43 of the Corporation Code)

IV. Unauthorized Advertisement or Business Representation

2. unwillingness to maintain a condition of liquidity deemed

MB shall appoint a conservator as the MB shall deem necessary

3. collect all monies and debts due said institution, and

Exercise all powers necessary to restore its viability.

 LIQUIDITY- the ability of an asset to be converted into

-konowledgeable in bank operations and management

G. Final and Executory

H. Exclusive Power to Appoint

VI. Cessation of Banking Business

-voluntary L may be undertaken by the bank itself through its board

-no voluntary dissolution of a bank shall be undertake without prior

B. Receivership and Involuntary Liquidation

1. Grounds for Receivership and Liquidation

2. Current and Complete Examination Not Necessary

a. Gather and take charge of all the assets and liabilities of

-The receiver shall determine ASAP but not later than

-Any determination for the resumption of business of the

Any director or officer of bank declared insolvent or plaed under

 If the receiver determines that the institution cannot be rehabilitated or

As in the case of conservatorship:

C. CLOSE NOW HEAR LATER SCHEME

 The bank’s liquidator is allowed to continue receiving collectibles and

 It is a valid exercise of police power to protect the depositors,

F. EFFECTS OF RECEIVERSHIP AND LIQUIDATION

3. Assets are deemed under Custodia Legis

5. Restriction of Bank’s Capacity to act

6. Exclusive Jurisdiction of Liquidation Court

VII. DISPOSITION AND DISTRIBUTION OF ASSETS

C. DISPOSITION OF BANKING FRANCHISE

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