BANKS IN DISTRESS

NEW CENTRAL BANK ACT

1. CONSERVATORSHIP
One appointed if the bank is in the state of illiquidity or the bank fails or
refuses to maintain a state of liquidity adequate to protect its depositors and
creditors. The bank still has more assets than its liabilities but its assets are
not liquid or not in cash thus it cannot pay its obligation when it falls due. The
bank, not the BSP, pays for fees.

Powers of a conservator (CARE BEAr)

1. Collect all monies and debts due to the said bank

2. To take charge of the Assets, liabilities, and the management thereof

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3. REorganize, the management thereof
4. And such other powers as the monetary Board deems necessary

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5. Exercise all powers necessary to restore its viability, with the power to
overrule or revoke the actions of the previous management and board of
directors of the bank or quasi-bank
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6. To bring court actions to Assail or Repudiate contracts entered into by the
bank (First Philippine International Bank v. CA, G.R. No. 115849, Jan. 24, 1996).
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Powers of a conservator do not extend to the revocation of valid and

perfected contracts -
The powers of a conservator cannot extend to post facto repudiation of valid
and perfected transactions. Thus, the law merely gives the conservator power
to revoke contracts that are deemed to be defective- void, voidable,
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unenforceable or rescissible. Hence, the conservator merely takes the place of

the bank's board (First Philippine International Bank v. CA, supra.)

2. CLOSURE
Grounds for closure of a bank or a quasi-bank
1. Cash Flow test - Inability to pay liabilities as they become due in the
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ordinary course of business (NCBA, Sec. 30 [a]).

2. Balance sheet test - Insufficiency of realizable assets to meet its liabilities
(NCBA, Sec 30 [b]).
3. Inability to continue business without involving probable losses to its
depositors and creditors (NCBA, Sec 30 [c]).
BANGKO SENTRAL NG PILIPINAS
4. Willful violation of 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 (NCBA, Sec 30 [d]).
5. Notification to the BSP or public announcement of a bank holiday (GBL,
Sec 53).

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6. Suspension of payment of its deposit liabilities continuously for more than
30 days (GBL, Sec 53).
7. Persisting in conducting its business in an unsafe or unsound manner (GBL,
Sec 56).

Close now-hear later doctrine

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. The law does not contemplate prior notice and hearing before the
bank may be directed to stop operations and placed under receivership
(Central Bank of the Philippines v. CA, G.R. No. 76118 Mar. 30, 1993).

Swift, adequate and determined actions must be taken against financially

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distressed and mismanaged banks by government agencies lest the public
faith in the banking system deteriorate to the prejudice of the national
economy (Vivas v. The Monetary Board of the Bangko Sentral ng Pilipinas, G.R.

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No. 191424, August 07, 2013).

BSP may order the closure of the bank even without prior hearing. BSP may
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rely on the report of either the conservator, receiver or the head of the
supervising and examining department. It is not required to conduct a
thorough audit of the bank before ordering its closure. The "close now, hear
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later" doctrine justifies BSP in ordering bank closures even without prior
hearing. Thus, injunction does not lie against BSP in the exercise of the power
and function. A contrary rule may lead to dissipation of assets and trigger
bank run. Judicial review comes only after action of the Monetary Board if the
was attended with bad faith and grave abuse of discretion (BSP v. Valenzuela,
G.R. No. 184778, October 2, 2009).
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3. RECEIVERSHIP
Receiver
One appointed if the bank is already insolvent which means that its liabilities
are greater than its assets. The Court has no authority to appoint a receiver for
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a bank if the latter will function as such under BSP law. The power to appoint
belongs to BSP.

NOTE: For banks, the receiver would be the Philippine Deposit Insurance
Corporation; for quasi-banks, it could be any person of recognized
competence in banking or finance (NCBA, Sec. 30).

Duties of a receiver
The receiver shall: (IAN-WIDE)
1. Immediately gather and take charge of all the assets and liabilities of the
institution;
2. Administer the same for the benefit of the creditors, and exercise the
general powers of a receiver under the Revised Rules of Court;

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3. 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;
4. Within 90 days from the take-over, the receiver shall determine whether
the institution may be rehabilitated or otherwise placed in such a condition
that it may be permitted to resume business with safety to its depositors and
creditors and the general public; and
5. If the receiver determines that the institution cannot be rehabilitated or
permitted to resume business, then the Monetary Board shall notify in writing
the board of ****** directors of the institution of its findings and direct the
receiver to proceed with liquidation of the institution (NCBA, Sec 30).

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The insolvency of a bank and the consequent appointment of a receiver
restrict the bank's capacity to act, especially in relation to its property.

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Where upon the insolvency of a bank, a receiver therefor is appointed, the
assets of the bank pass beyond its control into the possession and control of
the receiver whose duty it is to administer the assets for the benefit of the
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creditors of the bank. Thus, the appointment of a receiver operates to
suspend the authority of the bank and of its directors and officers over its
property and effects, such authority being reposed in the receiver (Villanueva
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v. CA, G.R. No. 114870, May 26, 1995).

The receiver is not authorized to transact business in connection with the

bank's assets and property A receiver can only perform acts of administration
and not acts of dominion. The receiver cannot approve an option to purchase
real property. He has only the authority to administer the same for the benefit
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of its creditors (Abacus Real Estate Development Center, Inc. v. Manila

Banking Corp, G.R. No. 162270, Apr. 6, 2005).

Nature of order of receivership

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While resolutions of the Monetary Board forbidding a bank to do business on

account of a condition of insolvency and appointing a receiver to take charge
of the bank's assets or determining whether the bank may be rehabilitated or
should be liquidated are by law "final and executory." However, they can be
set aside by the court on one specific ground - if the action is plainly arbitrary
and made in bad faith. Such contention can be *** asserted as an affirmative
defense or a counterclaim in the proceeding for assistance in liquidation
(Salud v. Central Bank, G.R. No. L-17630, August 19, 1986)

4. LIQUIDATION
Liquidation of a bank

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Acts of liquidation are those which constitute the conversion of the assets of
the banking institution to money or the sale, assignment or disposition of the
same to creditors and other parties for the purpose of paying debts of such
institution (Banco Filipino v. Central Bank, G.R. No. 70054, December 11, 1991).

Liquidator of a distressed bank can prosecute and defend suits against

the bank

Prosecution of suits, collection and the foreclosure of mortgages against

debtors of the bank by the liquidator are among the usual and ordinary
transactions pertaining to the administration of a bank (Banco Filipino v.
Central Bank, ibid).

Liquidation proceedings may be carried out with or without tax clearance

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Unlike in a voluntary dissolution of a corporation under the Corporation Code,
BSP can liquidate the bank with or without tax clearance (GBL).

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Banks under liquidation by the PDIC as ordered by the **** Monetary Board
constitute a special case governed by the special rules and procedures
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provided under Section 30 of the New Central Bank Act, which does not
require that a tax clearance be secured from the BIR. Only a final tax return is
required to satisfy the interest of the BIR in the liquidation of a closed bank. It
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is unreasonable for the liquidation court to require that a tax clearance be first
secured as a condition for the approval of project of distribution of a bank
under liquidation (PDIC v. BIR, G.R. No. 172892, June 13, 2013)

Filing of the claims against the insolvent bank

GR: All claims against the insolvent bank should be filed in the liquidation
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proceeding. It is not necessary that a claim be initially disputed in a court or

agency before it is filed with the liquidation court (Ong v. CA, G.R. No. 112830,
Feb. 1, 1996).

XPN: Where it is the bank that files a claim against another person or legal
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entity, the claim should be filed in the regular courts.

Reason: The judicial liquidation is intended to provide an orderly mode for

payment of all claims. In addition, such petition is not in the nature of a
disputed claim against the bank.

Liquidation proceedings may be carried out with or without tax clearance

Unlike in a voluntary dissolution of a corporation under the Corporation Code,

BSP can liquidate the bank with or without tax clearance (GBL).

Banks under liquidation by the PDIC as ordered by the Monetary Board

constitute a special case governed by the special rules and procedures

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provided under Section 30 of the New Central Bank Act, which does not
require that a tax clearance be secured from the BIR. Only a final tax return is
required to satisfy the interest of the BIR in the liquidation of a closed bank. It
is unreasonable for the liquidation court to require that a tax clearance be first
secured as a condition for the approval of project of distribution of a bank
under liquidation (PDIC v. BIR, G.R. No. 172892, June 13, 2013).

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SECRECY OF BANK DEPOSITS

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Purpose:
1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may lend such funds and assist
in the economic development of the country.

The following are the prohibited acts in RA 1405:

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1. Examination/inquiry/looking into all deposits of whatever nature with banks

or banking institutions in the Philippines (including investment in bonds
issued by the government) by any person, government official or office (RA
1405, Sec. 2).
2. Disclosure by any official or employee of any banking institution to any
unauthorized person of any information concerning said deposit (RA 1405,
Sec. 3).

Acts not covered by the prohibition

Non-bank officials or employees are not covered by the prohibition. Neither is
disclosure by a bank official or employee of information about bank deposit in

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favor of a co-employee in the course of the performance of his duties covered
by the prohibition.

Question: Manosa, a newspaper columnist, while making a deposit in a bank,

overheard a pretty bank teller informing a co-employee that Gigi, a
well-known public official, has just a few hundred pesos in her bank account
and that her check will in all probability bounce. Manosa wrote this
information in his newspaper column. Thus, Gigi filed a complaint with the
City Fiscal of Manila for unlawfully disclosing information about her bank
account.

a. Will the said suit prosper? Explain your

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NO. The suit will not prosper. It is clear as provided in section 3 of R.A.
1405 that it shall be unlawful for any official or employee of a banking
institution to disclose to any person other than those mentioned in

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section two of the said law any information concerning said deposits.
Manosa, as a columnist, is not one of those persons contemplated
under the law. Furthermore, he merely overheard what appeared to be
Ra vague remark of the bank teller therefore is not in a sense an inquiry
or a disclosure.
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Question: Manosa, a newspaper columnist, while making a deposit in a bank,

overheard a pretty bank teller informing a co-employee that Gigi, a
well-known public official, has just a few hundred pesos in her bank account
and that her check will in all probability bounce. Manosa wrote this
information in his newspaper column. Thus, Gigi filed a complaint with the
City Fiscal of Manila for unlawfully disclosing information about her bank
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account.

b. Supposing that Gigi is charged with unlawfully acquiring wealth under R.A.
1379 and that the fiscal issued a subpoena duces tecum for the records of the
bank account of Gigi. May Gigi validly oppose the said issuance on the gro
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that the same violated the law on secrecy of bank deposits? Explain your
answer.

NO. Gigi cannot oppose the said issuance because the law provides as
an exception from the coverage of R.A. 1405 that upon order of a
competent court in cases of anti-graft and corruption cases, the
examination of the deposits may be allowed.

Deposits Covered
1. All deposits of whatever nature with banks or banking institutions found in
the Philippines.
2. Investments in bonds issued by the Philippine government, its branches,
and institutions (R.A. 1405, Sec. 2).

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3. Trust accounts

Meaning of the phrase "of whatever nature and kind"

R.A.1405 is no longer limited to deposits governed by the law on loans giving
rise to creditor-debtor relationship but it covers fund of whatever nature so
long as the bank may use and utilize it in authorized loans.

Deposits in the context of the Secrecy of Philippine currency deposits include

deposits of whatever nature and kind. They include funds deposited in the
bank giving rise to creditor-debtor relationship, as well as funds invested in
the bank like trust acconts (Ejercito v. Sandiganbayan, G.R. No. 157294-95,
November 30, 2006).

The money deposited under the trust agreement ("Trust account") is

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intended not merely to remain with the bank but to be invested by it
elsewhere. To hold that this type of account is not protected by R.A. 1405
would encourage private hoarding of funds that could otherwise be invested

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by banks in other ventures, contrary to the policy behind the law (Ejercito v.
Sandiganbayan, G.R. No. 157294-95, November 30, 2006).
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NOTE: Despite such pronouncement that trust funds are considered deposits,
trust funds remain not covered by PDIC.
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Instances where examination or disclosure of information about deposits

can be allowed (WICS)
1. Upon written consent of the depositor (RA 1405, Sec. 2)
2. In cases of impeachment (lbid)
3. Upon order of competent court in cases of bribery or dereliction of duty of
public officials (Ibid)
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4. In cases where the money deposited or invested is the subject matter of

the litigation (Ibid)

Other Instances:
a. Upon order of the Commissioner of Internal Revenue in respect of the bank
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deposits of a decedent for the purpose of determining such decedent's gross

estate (NIRC, Sec. 6[F][1])
b. Upon the order of the Commissioner of Internal Revenue in respect of bank
deposits of a taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability (lbid)
c. The Commissioner of Internal Revenue is authorized to inquire into bank
deposits of a specific taxpayer upon request for tax information from a foreign
tax authority pursuant to an international convention or agreement on tax
matters to which the Philippines is a party (Ibid)
d. In case of dormant accounts/deposits for at least 10 years under the
Unclaimed Balances Act (Act No. 3936, Sec. 2)

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e. The prohibition against examination of bank deposit does not preclude its
garnishment to satisfy a judgment against the depositor (Oñate v. Abrogar,
G.R. No. 107303, February 21, 1994)
f. Presidential Commission on Good Government (PCGG) may require the
production of bank records material to its investigation (Opinion of the
Secretary of Justice, February 27, 1987)
g. The Anti-Money Laundering Council (AMLC) may inquire into any deposit
with any bank in case of violation of the RA 9160 or the AMLA if there is
probable cause that it is related to an unlawful activity (RA 9160, as amended,
Sec. 11)
h. The PDIC and the BSP may examine deposit accounts and all information
related to them in case of a finding of unsafe or unsound banking practices
(RA 3591, as amended, Sec. 8)
i. With court order:

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a. In cases of unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt
Practices Act (PNB v. Gancayco, L-18343, September 30, 1965)
b. In cases filed by the Ombudsman and upon the latter's authority to

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examine and have access to bank accounts and records (Marquez v. Desierto,
GR 138569, September 11, 2003)
j. Without court order: If the AMLC determines that a particular deposit or
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investment with any banking institution is related to the following
(HK-MADS):
a. Hijacking,
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b. Kidnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of Human Security Act.
k. In case the law is repealed, superseded or modified by any law to the
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contrary

Foreign currency deposits

Foreign currency deposits are covered by R.A. 6426 otherwise known as the
"Foreign Currency Deposits Act". Secrecy of foreign currency deposits
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GR: Foreign currency deposits cannot be inquired or looked into. All foreign
currency deposits are absolutely confidential (RA 6426, Sec. 8).

RA 6426 is a special law designed especially for foreign currency deposits in

the Philippines. RA 1405 which covers all bank deposits in the Philippines is
the general law which does not nullify the special law on foreign currency
deposits. The surety which issued a bond to secure the obligation of the
principal debtor cannot inquire into the foreign currency deposits of the
debtor even if its purpose is to determine whether or not the loan proceeds
were used for the purpose specified in the surety agreement. The foreign
currency deposits cannot be examined without the written consent of the
depositor. The subpoena issued by the bank should be quashed because

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foreign currency deposits are not subject to court order except for violation of
the anti-money laundering law (GSIS v. Court of Appeals GR 189206, June 8,
2011, in Divina, 2014).

Exceptions to secrecy of foreign currency deposits

XPNs:
1. The depositor has given his written permission.
2. Where the funds deposited in a joint foreign currency savings account
belonged exclusively to one of the depositors and were held in trust for him
by the other depositor and the other depositor unilaterally closed the joint
account and transferred the funds to her personal account, the latter cannot
invoke the exemption from court processes under RA 6426 because she is not
the owner of the deposit in the account. Consequently, the depositor who
owned the funds can have her enjoined from making withdrawals from her

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personal account (Van Twest v. Court of Appeals, G.R. No. 106235, February 10,
1994).

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3. A father who sued his daughter for illegally withdrawing funds from his
foreign currency deposit and transferring to another bank in the name of her
sister, can inquire into the deposit of the sister, because the money deposited
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belongs to him (China Banking Corp. v. CA, G.R. No. 140687, December 18,
2006).
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4. The exemption from court process of foreign currency deposits under RA

6426 cannot be invoked by a foreign transient who raped a minor, escaped
and was held liable for damages to the victim. The garnishment of his foreign
currency deposit should be allowed to prevent an injustice and for equitable
grounds. The law was enacted to encourage foreign currency deposit and not
to benefit a wrongdoer (Salvacion v. Central Bank of the Philippines, G.R. No.
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94723, August 21, 1997).

5. The Commissioner of Internal Revenue is authorized to inquire into bank

deposits of the following:
a. A decedent to determine his estate; and
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b. Any taxpayer who has filed for an application for compromise of his
tax liability
c. A specific taxpayer upon request for tax information from a foreign
tax authority pursuant to an international convention or agreement on
tax matters to which the Philippines is a party (NIRC, Sec. 6 [f]).

6. AMLC may inquire into any deposit with a bank or financial institution in
case of violation of RA 9160 if there is probable cause that it is related to an
unlawful activity (RA 9160, Sec. 11).

7. Upon ex parte application by a law enforcer authorized by the

Anti-Terrorism Council, the justices of the CA designated as special court to
handle anti-terrorism cases may authorize the examination of deposits in a

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financial institution upon finding probable cause of the commission of
terrorism or conspiracy to commit terrorism (RA 9372, Sec. 27-28).

8. PDIC and BSP may examine deposit accounts and all information related to
them in case of a finding of unsafe or unsound banking practices (RA 3591, as
amended, Sec. 8).

9. AMLC can investigate (a) any property of funds related to financing

terrorism; (b) property or funds of any person if there is probable cause to
believe he is committing or attempting or conspiring to commit terrorism or
financing terrorism (RA 10168, Sec. 10).

GARNISHMENT
Bank accounts may be garnished by the creditors of the depositor. There is no

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violation of the Law on Secrecy of Bank Deposits if the accounts are
garnished (China Bank v. Ortega, 49 SCRA 356 [1973]). The amount of deposit
is actually not disclosed and the intent of the legislature does not cover

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garnishment (Philippine Commercial and Industrial Bank, et al. v. The Hon.
CA, et al., 193 SCRA 452).
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→ Deposits that are exempt from garnishment
1) Foreign Currency Deposits (Sec. 8, FCDA).
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Note: The Supreme Court ruled in Salvacion, et al. v. Central Bank of the
Philippines, et al. (August 21, 1997), by way of exception. that foreign
currency deposits of an American tourist who was found guilty of
repeatedly raping a twelve (12)-year old child is subject to garnishment.

2) Those exempt under the Rules of Civil Procedure like provision for the
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family for four months (Sec. 13 of Rule 39 of the 1997 Rules of Civil
Procedure).

GENERAL BANKING LAW

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BANKS entities engaged in the lending of funds obtained in the form of

deposits from the public (Sec. 3.1, General Banking Law, GBL for short).

● It is required that banks are stock corporations and that its funds are
obtained from the public, meaning deposits of 20 or more persons

Quasi-Banks are 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.

CLASSIFICATION OF BANKS

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 1. Universal Banks - banks that have authority to exercise, in addition to
the powers and functions of commercial banks, powers of an
investment house and the power to invest in non-allied enterprises.
2. Commercial Banks - banks that are given all such power necessary to
engage in commercial banking in addition to general corporate powers;
commercial banking includes the power to accept drafts, issue letters of
credits, discounting and negotiation of negotiable instruments, and
evidence of debt, accept and create demand deposits and the like.
3. Rural Banks - banks that are created to make needed credit available
and readily accessible in the rural areas for the purpose of promoting
com-prehensive rural development (R.A. No. 7353).
4. Thrift banks - include savings and mortgage banks, private
development banks, and stock savings and loan associations (R.A. No.
7906)

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5. Cooperative banks - banks that primarily provide financial, banking
and credit services to cooperative organizations and their members
(Sec. 100, R.A. No. 6938, as amended by R.A. No. 9520)

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6. Islamic Banks (R.A. No. 6848).
7. Other classification of banks as determined by the MB of the BSP
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DEGREE OF DILIGENCE REQUIRED OF BANKS
Banking business is impressed with public interest. Of paramount
importance is the trust and confidence of the public in general in the banking
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industry. Consequently, the diligence required of banks is more than that of a

Roman pater familias or a good father of a family. The highest degree of
diligence is expected. (Far East Bank & Trust Company v. Tentmakers Group,
Inc., 675 SCRA 546)

Explain single borrower's limit.

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The total amount of loan that may be extended to a person shall not exceed
20% of the net worth of the bank. The basis for determining compliance with
the single borrower limit is the total credit commitment of the bank to the
borrower. The total amount of loans may be increased by 10% of the net worth
of such bank, provided additional liabilities of the borrower are adequately
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secured.

What do you understand by DOSRI accounts?

Restrictions (not prohibition) are imposed on borrowings and security
arrangements extended to directors, officers, and stockholders of the bank
and their related interests.
The requisites thereunder are:
1. The borrower is a DOSRI.
2. He applies for loan or financial accommodation.
3. The loan is from:
(a) his bank or
(b) a bank that is a subsidiary of a bank holding company of which both
his bank and lending bank are subsidiaries,

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 (c) a bank in which the controlling proportion of the shares is owned by
the same interest that owns the controlling proportion of the shares of
his bank.
4. The loan is in excess of 5% of the capital and surplus of the lending bank or
in the maximum amount permitted by law, whichever is lower.

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