CESSATION OF BANKING BUSINESS

Nature of a liquidation proceeding:

A liquidation proceeding 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 the 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. In both instances, the liability of the corporation and
the estate is not disputed. The court's concern is with the declaration of creditors and their
rights and the determination of their order of payment

A liquidation proceeding is a single proceeding which consists of a number of cases

properly classified as "claims." It is basically a two-phased proceeding. 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 claims 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.1

Grounds and procedures for placing a bank under receivership or liquidation:

Sections 68 and 69 of the GBL provide:

Section 68. Voluntary Liquidation. - In case of voluntary

liquidation of any bank organized under the laws of the
Philippines, or of any branch or office in the Philippines of a
foreign bank, written notice of such liquidation shall be sent to the
Monetary Board before such liquidation shall be sent to the
Monetary Board before such liquidation is undertaken, and the
Monetary Board shall have the right to intervene and take such
steps as may be necessary to protect the interests of creditors. (86)
1
Pacific Banking Corporation Employees Organization, et al. vs. Honorable Court of Appeals, et al., GR No.
109373, March 20, 1995.
 Section 69. Receivership and Involuntary Liquidation. -
The grounds and procedures for placing a bank under receivership
or liquidation, as well as the powers and duties of the receiver or
liquidator appointed for the bank shall be governed by the
provisions of Sections 30, 31, 32, and 33 of the New Central Bank
Act: Provided, That the petitioner or plaintiff files with the clerk or
judge of the court in which the action is pending a bond, executed
in favor of the Bangko Sentral, in an amount to be fixed by the
court. This Section shall also apply to the extent possible to the
receivership and liquidation proceedings of quasi-banks. (n)

Sections 30, 31, 32 and 33 of the NCBA state:

Section 30. Proceedings in Receivership and

Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds
that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the

ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;

(b) has insufficient realizable assets, as determined by the Bangko

Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses

to its depositors or creditors; or

(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.

For a quasi-bank, any person of recognized competence in

banking or finance may be designed as receiver.

The receiver shall immediately gather and take charge of

all the assets and liabilities of the institution, administer the same
for the benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution: Provided, That the receiver may deposit or place the
funds of the institution in non-speculative investments. The
receiver shall determine as soon as possible, but not later than
ninety (90) days from takeover, 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: Provided, That any determination
for the resumption of business of the institution shall be subject to
prior approval of the Monetary Board.

If the receiver determines that the institution cannot be

rehabilitated or permitted to resume business in accordance with
the next preceding paragraph, the Monetary 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 regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of
quasi-banks, the liquidation plan shall be adopted by the Monetary
Board. Upon acquiring jurisdiction, the court shall, upon motion by
the receiver after due notice, adjudicate disputed claims against the
institution, 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
receiver shall pay the cost of the proceedings from the assets of the
institution.

(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 and he may, in the name of the institution, and with the
assistance of counsel as he may retain, institute such actions as
may be necessary to collect and recover accounts and assets of, or
defend any action against, the institution. The assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and shall, from the
moment the institution was placed under such receivership or
liquidation, be exempt from any order of garnishment, levy,
attachment, or execution.
 The actions of the Monetary Board taken under this section
or under Section 29 of this Act shall be final and executory, 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. The petition for certiorari may only
be filed by the stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership,
liquidation or conservatorship.

The designation of a conservator under Section 29 of this

Act or the appointment of a receiver under this section shall be
vested exclusively with the Monetary Board. Furthermore, the
designation of a conservator is not a precondition to the
designation of a receiver.

Section 31. Distribution of Assets. - In case of liquidation

of a bank or quasi-bank, after payment of the cost of proceedings,
including reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the 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.

Section 32. 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
within the purview of this Act shall be used to pay the costs, fees
and expenses mentioned in the preceding section, salaries of such
personnel whose employment is rendered necessary in the
discharge of the liquidation together with other additional expenses
caused thereby. The balance of revenues and earnings, after the
payment of all said expenses, shall form part of the assets available
for payment to creditors.

Section 33. 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.
Exclusive jurisdiction of the Monetary Board:

On the strength of these provisions, it is the Monetary Board that exercises exclusive
jurisdiction over proceedings for receivership of banks.

Crystal clear in Section 30 is the provision that says the appointment of a receiver under
this section shall be vested exclusively with the Monetary Board. The term exclusively connotes
that only the Monetary Board can resolve the issue of whether a bank is to be placed under
receivership and, upon an affirmative finding, it also has authority to appoint a receiver. This is
further affirmed by the fact that the law allows the Monetary Board to take action summarily and
without need for prior hearing.

And, as a clincher, the law explicitly provides that actions of the Monetary Board taken
under this section or under Section 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on a 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.2

There is no doubt that the Central Bank Act vests authority upon the Central Bank and
Monetary Board to take charge and administer the monetary and banking system of the country
and this authority includes the power to examine and determine the financial condition of banks
for purposes provided for by law, such as for the purpose of closure on the ground of insolvency
stated in Section 29 of the Central Bank Act. But express grants of power to public officers
should be subjected to a strict interpretation, and will be construed as conferring those powers
which are expressly imposed or necessarily implied (Floyd Mechem, Treatise on the Law of
Public Offices and Officers, p. 335).3

Due Process: “Close now, hear later.”

Sec. 30. Proceedings in Receivership and Liquidation. –

Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or
quasi-bank:
(a) is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not include
inability to pay caused by extraordinary demands induced by
financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko
Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses
to its depositors or creditors; or
(d) has wilfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which

2
Ana Maria A. Koruga vs. Teodoro O. Arcenas, Jr., et al., GR Nos. 168332 and 169053, June 19, 2009.
3
Banco Filipino Savings and Mortgage Bank, supra.
 cases, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit Insurance
Corporation as receiver of the banking institution.

The Court, in several cases, upheld the power of the MB to take over banks without need
for prior hearing. It is not necessary inasmuch as the law entrusts to the MB the appreciation and
determination of whether any or all of the statutory grounds for the closure and receivership of
the erring bank are present. The MB, under R.A. No. 7653, has been invested with more power
of closure and placement of a bank under receivership for insolvency or illiquidity, or because
the bank’s continuance in business would probably result in the loss to depositors or creditors. In
the case of Bangko Sentral Ng Pilipinas Monetary Board v. Hon. Antonio-Valenzuela, the Court
reiterated the doctrine of "close now, hear later," stating that it was justified as a measure for the
protection of the public interest. Thus:

The "close now, hear later" doctrine has already been justified as a measure for the
protection of the public interest. Swift action is called for on the part of the BSP when it finds
that a bank is in dire straits. Unless adequate and determined efforts are taken by the government
against distressed and mismanaged banks, public faith in the banking system is certain to
deteriorate to the prejudice of the national economy itself, not to mention the losses suffered by
the bank depositors, creditors, and stockholders, who all deserve the protection of the
government.

Due process does not necessarily require a prior hearing; a hearing or an opportunity to
be heard may be subsequent to the closure. 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 the gamut of the entire banking
community.

The doctrine is founded on practical and legal considerations to obviate 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. Swift, adequate and determined actions must be
taken against financially distressed and mismanaged banks by government agencies lest the
public faith in the banking system deteriorate to the prejudice of the national economy.

Accordingly, the MB can immediately implement its resolution prohibiting a banking

institution to do business in the Philippines and, thereafter, appoint the PDIC as receiver. The
procedure for the involuntary closure of a bank is summary and expeditious in nature. Such
action of the MB shall be final and executory, but may be later subjected to a judicial scrutiny
via a petition for certiorari to be filed by the stockholders of record of the bank representing a
majority of the capital stock. Obviously, this procedure is designed to protect the interest of all
concerned, that is, the depositors, creditors and stockholders, the bank itself and the general
public. The protection afforded public interest warrants the exercise of a summary closure. 4

Concept of insolvency:
4
Alfeo D. Vivas vs. The Monetary Board of the BSP, et al. G.R. No. 191424, August 7, 2013 (citations omitted).
In Banco Filipino Savings and Mortgage Bank case, supra, the Supreme Court held:

In this case, there can be no clearer explanation of the

concept of insolvency than what the law itself states. Sec. 29 of the
Central Bank Act provides that insolvency under the Act, shall be
understood to mean that "the realizable assets of a bank or a non-
bank financial intermediary performing quasi-banking functions as
determined by the Central Bank are insufficient to meet its
liabilities."

Hence, the contention of the Central Bank that a bank's true

financial condition is synonymous with the terms "unimpaired
capital and surplus," "combined capital accounts" and net worth
after deducting valuation reserves from the capital, surplus and
unretained earnings, citing Sec. 5 of RA 337 is misplaced.

Firstly, it is clear from the law that a solvent bank is one in

which its assets exceed its liabilities. It is a basic accounting
principle that assets are composed of liabilities and capital. The
term "assets" includes capital and surplus" (Exley v. Harris, 267 p.
970, 973, 126 Kan., 302).

On the other hand, the term "capital" includes common and

preferred stock, surplus reserves, surplus and undivided profits.
(Manual of Examination Procedures, Report of Examination on
Department of Commercial and Savings Banks, p. 3-C). If
valuation reserves would be deducted from these items, the result
would merely be the networth or the unimpaired capital and
surplus of the bank applying Sec. 5 of RA 337 but not the total
financial condition of the bank.

Secondly, the statement of assets and liabilities is used in

balance sheets. Banks use statements of condition to reflect the
amounts, nature and changes in the assets and liabilities. The
Central Bank Manual of Examination Procedures provides a
format or checklist of a statement of condition to be used by
examiners as guide in the examination of banks. The format
enumerates the items which will compose the assets and liabilities
of a bank. Assets include cash and those due from banks, loans,
discounts and advances, fixed assets and other property owned or
acquired and other miscellaneous assets. The amount of loans,
discounts and advances to be stated in the statement of condition as
provided for in the manual is computed after deducting valuation
reserves when deemed necessary.
 On the other hand, liabilities are composed of demand
deposits, time and savings deposits, cashier's, manager's and
certified checks, borrowings, due to head office, branches; and
agencies, other liabilities and deferred credits (Manual of
Examination Procedure, p. 9). The amounts stated in the balance
sheets or statements of condition including the computation of
valuation reserves when justified, are based however, on the
assumption that the bank or company will continue in business
indefinitely, and therefore, the networth shown in the statement is
in no sense an indication of the amount that might be realized if the
bank or company were to be liquidated immediately (Prentice Hall
Encyclopedic Dictionary of Business Finance, p. 48). Further,
based on respondents' submissions, the allowance for probable
losses on loans and discounts represents the amount set up against
current operations to provide for possible losses arising from non-
collection of loans and advances, and this account is also referred
to as valuation reserve (p. 9, Objections to Santiago report).

Clearly, the statement of condition which contains a

provision for recommended valuation reserves should not be used
as the ultimate basis to determine the solvency of an institution for
the purpose of termination of its operations.

Respondents acknowledge that under the said CB manual,

CB examiners must recommend valuation reserves, when
warranted, to be set up against the corresponding asset account (p.
8, Objections to Santiago report). Tiaoqui himself, as author of the
report recommending the closure of petitioner bank admits that the
valuation reserves should still be discussed with the petitioner bank
in compliance with standard examination procedure. Hence, for the
Monetary Board to unilaterally deduct an uncertain amount as
valuation reserves from the assets of a bank and to conclude
therefrom without sufficient basis that the bank is insolvent, would
be totally unjust and unfair.

Liquidation under the Corporation Code and New Central Bank Act:

Section 30 of the New Central Bank Act lays down the proceedings for receivership and
liquidation of a bank. The said provision is silent as regards the securing of a tax clearance from
the BIR. The omission, nonetheless, cannot apply by analogy the tax clearance requirement of
the SEC, as stated in Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1,
since, again, the dissolution of a corporation by the SEC is a totally different proceeding from the
receivership and liquidation of a bank by the BSP.
 It should be noted that there are substantial differences in the procedure for involuntary
dissolution and liquidation of a corporation under the Corporation Code, and that of a banking
corporation under the New Central Bank Act, so that the requirements in one cannot simply be
imposed in the other.

Under the Corporation Code, the SEC may dissolve a corporation, upon the filing of
a verified complaint and after proper notice and hearing, on grounds provided by existing laws,
rules, and regulations. Upon receipt by the corporation of the order of suspension from the SEC,
it is required to notify and submit a copy of the said order, together with its final tax return, to the
BIR.The SEC is also required to furnish the BIR a copy of its order of suspension. The BIR is
supposed to issue a tax clearance to the corporation within 30 days from receipt of the foregoing
documentary requirements. The SEC shall issue the final order of dissolution only after the
corporation has submitted its tax clearance; or in case of involuntary dissolution, the SEC may
proceed with the dissolution after 30 days from receipt by the BIR of the documentary
requirements without a tax clearance having been issued. The corporation is allowed to continue
as a body corporate for three years after its dissolution, for the purpose of prosecuting and
defending suits by or against it, to settle and close its affairs, and to dispose of and convey its
property and distribute its assets, but not for the purpose of continuing its business. The
corporation may undertake its own liquidation, or at any time during the said three years, it may
convey all of its property to trustees for the benefit of its stockholders, members, creditors, and
other persons in interest.

In contrast, the Monetary Board may summarily and without need for prior hearing,
forbid the banking corporation from doing business in the Philippines, for causes enumerated in
Section 30 of the New Central Bank Act; and appoint the PDIC as receiver of the bank. PDIC
shall immediately gather and take charge of all the assets and liabilities of the closed bank and
administer the same for the benefit of its creditors. The summary nature of the procedure for the
involuntary closure of a bank is especially stressed in Section 30 of the New Central Bank Act,
which explicitly states that the actions of the Monetary Board under the said Section or Section
29 shall be final and executory, and may not be restrained or set aside by the court except on a
Petition for Certiorari filed by the stockholders of record of the bank representing a majority of
the capital stock. PDIC, as the appointed receiver, shall file ex parte with the proper RTC, and
without requirement of prior notice or any other action, a petition for assistance in the
liquidation of the bank. The bank is not given the option to undertake its own liquidation.5

It was also ruled that Section 52(C) of the Tax Code of 1997 is not applicable to banks
ordered placed under liquidation by the Monetary Board, and a tax clearance is not a
prerequisite to the approval of the project of distribution of the assets of a bank under
liquidation by the PDIC.6

5
In Re: Petition for Assistance in the Liquidation of the Rural Bank of Bokod (Benguet), Inc. Philippine Deposit
Insurance Corporation vs. Bureau of Internal Revenue, GR No. 158261, December 18, 2006, 540 Phil. 142
(2006).
D. LIQUIDATION -from the determination of receiver if institution cannot be rehabilitated or permitted
to resume business

Duties of the Receiver/Liquidator

(1) File ex parted with the RTC a petition for assistance in the liquidation of the institution pursuant
to a liquidation plan adopted by the PDIC for banks, and by MB for quasi-banks
(2) Upon motion by receiver, upon RTC’s acquisition of jurisdiction, RTC shall assist enforcement of
the individual liabilities of the stockholders, directors, and officers and decide on other issues as
may be material to the liquidation plan adopted
(3) Receiver shall convert the assets to money and proceeds shall be applied in paying the debts of
the institution in accordance with rules on concurrence and preference of credit
(4) Receiver shall institute such actions as may be necessary
 The assets under receivership or liquidation deemed in custodia legis, in the hands of the
receiver and shall be exempt from any order of garnishment, levy, attachment or execution

Phases of Liquidation Proceeding

First: Approval and disapproval of claims

(a) all money claims against the bank are required to be filed with the liquidation court
(b) phase may end with the declaration by the court whether claim is with basis or not; if with basis,
classified whether ordinary or preferred
(c) order by court is final and may be appealed by the party aggrieved

Second: Approval by the court of the distribution plan prepared by the duly appointed liquidator

(a) order disposes of the issue of how much property is available for disposal
(b) (b) payment of all allowed claims

DISTINGUISH BETWEEN LIQUIDATION AND REHABILITATION

LIQUIDATION- Is a winding up of settling with creditors and debtors. It is the winding up of a corporation
so that assets are distributed to those entitled to receive them. It is the process of reducing assets to
cash, discharging liabilities and dividing surplus or loss

REHABILITATION- Connotes a reopening or reorganization. It 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.

Effects of Liquidation of a Bank or a Quasi-Bank

(a) After payment of the cost of the proceedings, including reasonable expenses and fees of the
receiver to be allowed by the court, the receiver shall pay the 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. (Sec. 31)
(b) All revenues and earnings realized by the receiver in winding up the affairs and administering
the assets of any bank or quasi-bank within the purview of this Act shall be used to pay the
costs, fees and expenses mentioned in the preceding section, salaries of such personnel whose
employment is rendered necessary in the discharge of the liquidation together with the other
additional expenses caused thereby. (Sec.32)
The balance of revenues and earnings, after the payment of all said expenses, shall form part of
the assets available for payment of creditors

A liquidation proceeding is a single proceeding

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

The exclusive jurisdiction of the liquidation courts pertains only to the adjudication of claims against the
bank, and does not cover the reverse situation where it is the bank which files a claim against another
person. (Manalo vs. CA, 366 SCRA 752)

The actions of the MB under Sec. 29 (appointing a conservator) and Sec. 30 (closing a bank) are final and
executory and may not be restrained or set aside by a court