3. Central Bank of the Phils. vs. C.A, G.R. No.

7618, March 30, 1993, 220 SCRA

Doctrine

A previous hearing is nowhere required in Sec. 29 of the General Banking Act nor does
the constitutional requirement of due process demand that the correctness of the Mone-
tary Board's resolution to stop operation and proceed to liquidation be first adjudged be-
fore making the resolution effective. It is enough that a subsequent judicial review be
provided.

Hence, Sec. 29 of R.A. 265 does not require a previous hearing before the Monetary
Board can implement its resolution closing a bank, since its action is subject to judicial
scrutiny as provided by law.

Facts

In this case, based on examination reports submitted by the Supervision and Examina -
tion Sector (SES), Department II, of the Central Bank (CB) "that the financial condition
of Triumph Savings Bank (TSB) is one of insolvency and its continuance in business
would involve probable loss to its depositors and creditors," the Monetary Board (MB)
issued a Resolution ordering the closure of TSB, forbidding it from doing business in the
Philippines, placing it under receivership, and appointing Ramon V. Tiaoqui as receiver.

Thereafter, TSB filed a complaint with the Regional Trial Court of Quezon City, against
Central Bank and Ramon V. Tiaoqui to annul MB Resolution with prayer for injunction,
challenging in the process the constitutionality of Sec. 29 of R.A. 269, otherwise known
as "The Central Bank Act," as amended, insofar as it authorizes the Central Bank to
take over a banking institution even if it is not charged with violation of any law or regu-
lation, much less found guilty thereof.

The trial court temporarily restrained petitioners from implementing MB Resolution (No.
596) "until further orders", thus prompting the petitioners to move for the quashal of the
restraining order (TRO) on the ground that it did not comply with said Sec. 29 , i.e., that
TSB failed to show convincing proof of arbitrariness and bad faith on the part of petition-
ers;' and, that TSB failed to post the requisite bond in favor of Central Bank.

RULING OF THE RTC

Acting on the motion to quash the restraining order, the trial court granted the relief
sought by the petitioner and denied the application of TSB for injunction.

Central Bank and Ramon Tiaoqui filed a motion to dismiss the complaint before the
RTC for failure to state a cause of action,  i.e., it did not allege ultimate facts showing
that the action was plainly arbitrary  and made in bad faith, which are the only grounds
for the annulment of Monetary Board resolutions placing a bank under conservatorship,
and that TSB was without legal capacity to sue except through its receiver.

On the other hand, TSB filed an urgent motion in the RTC to direct receiver Ramon V.
Tiaoqui to restore TSB to its private management. However, the RTC denied petitioners'
motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its
elected board of directors and officers, subject to CB comptrollership.

RULING OF THE CA - It upheld the orders of the trial court.

Petitioners allege that the Court of Appeals erred —

(1) in affirming that an insolvent bank that had been summarily closed by the Monetary
Board should be restored to its private management supposedly because such sum-
mary closure was "arbitrary and in bad faith" and a denial of "due process";

(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a
complaint to annul a Monetary Board receivership resolution under Sec. 29 of R.A. 265
"may be taken as allegations of arbitrariness and bad faith"; and

(3) in holding that the owners and former officers of an insolvent bank may still act or
sue in the name and corporate capacity of such bank, even after it had been ordered
closed and placed under receivership.

(4) that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases in-
volving bank closures should not be required since in all probability a hearing would not
only cause unnecessary delay but also provide bank "insiders" and stockholders the op-
portunity to further dissipate the bank's resources, create liabilities for the bank up to the
insured amount of P40,000.00, and even destroy evidence of fraud or irregularity in the
bank's operations to the prejudice of its depositors and creditors. Petitioners further ar-
gue that the legislative intent of Sec. 29 is to repose in the Monetary Board exclusive
power to determine the existence of statutory grounds for the closure and liquidation of
banks, having the required expertise and specialized competence to do so.

The respondents, on the other hand, allege that

 CB violated the rule on administrative due process which requires that prior no-
tice and hearing be afforded to all parties in administrative proceedings. Since
MB Resolution No. 596 was adopted without TSB being previously notified and
heard, according to respondents, the same is void for want of due process; con -
sequently, the bank's management should be restored to its board of directors
and officers.

ISSUE: whether absence of prior notice and hearing may be considered acts of arbi-
trariness and bad faith sufficient to annul a Monetary Board resolution enjoining a bank
from doing business and placing it under receivership. Otherwise stated, is absence of
prior notice and hearing constitutive of acts of arbitrariness and bad faith?

HELD:

No. The Supreme Court held that contrary to the notion of private respondent, Sec. 29
does not contemplate prior notice and hearing before a bank may be directed to stop
operations and placed under receivership. When par. 4 (now par. 5, as amended by
E.O. 289) provides for the filing of a case within ten (10) days after the receiver takes
charge of the assets of the bank, it is unmistakable that the assailed actions should pre-
cede the filing of the case. Plainly, the legislature could not have intended to authorize
"no prior notice and hearing" in the closure of the bank and at the same time allow a suit
to annul it on the basis of absence thereof.

the Central Bank, through the Monetary Board, is vested with exclusive authority to as-
sess, evaluate and determine the condition of any bank, and finding such condition to
be one of insolvency, or that its continuance in business would involve probable loss to
its depositors or creditors, forbid the bank or non-bank financial institution to do busi-
ness in the Philippines; and shall designate an official of the CB or other competent per-
son as receiver to immediately take charge of its assets and liabilities

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank fi -
nancial institution placed under receivership of the opportunity to be heard and present
evidence on arbitrariness and bad faith because within ten (10) days from the date the
receiver takes charge of the assets of the bank, resort to judicial review may be had by
filing an appropriate pleading with the court. Respondent TSB did in fact avail of this
remedy by filing a complaint with the RTC of Quezon City on the 8th day following the
takeover by the receiver of the bank's assets on 3 June 1985.

This "close now and hear later" scheme is grounded on practical and legal considera-
tions 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.

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 conse-
quences 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.

Section 29 of R.A. 265 should be viewed in this light; otherwise, it would be subscribing
to a situation where the procedural rights invoked by private respondent would take
precedence over the substantive interests of depositors, creditors and stockholders over
the assets of the bank.

Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a
bank run and drain its assets in days or even hours leading to insolvency even if the
bank be actually solvent. The procedure prescribed in Sec. 29 is designed to protect the
interest of all concerned, i.e., the depositors, creditors and stockholders, the bank itself,
and the general public, and the summary closure pales in comparison to the protection
afforded public interest. At any rate, the bank is given full opportunity to prove  arbitrari-
ness  and bad faith  in placing the bank under receivership, in which event, the resolution
may be properly nullified and the receivership lifted as the trial court may determine.

prerequisite to the action of the Monetary Board to forbid the institution to do business in
the Philippines and to appoint a receiver to immediately take charge of the bank's as -
sets and liabilities. They are:

(a) an examination made by the examining department of the Central Bank;

(b) report by said department to the Monetary Board; and

(c) prima facie showing that its continuance in business would involve probable loss to
its depositors or creditors.

In sum, appeal to procedural due process cannot just outweigh the evil sought to be
prevented; hence, The Supreme Court ruled that Sec. 29 of R.A. 265 is a sound legisla-
tion promulgated in accordance with the Constitution in the exercise of police power of
the state. Consequently, the absence of notice and hearing is not a valid ground to an -
nul a Monetary Board resolution placing a bank under receivership. The absence of
prior notice and hearing cannot be deemed acts of arbitrariness and bad faith. Thus, an
MB resolution placing a bank under receivership, or conservatorship for that matter,
may only be annulled after a determination has been made by the trial court that its is -
suance was tainted with arbitrariness and bad faith. Until such determination is made,
the status quo shall be maintained, i.e., the bank shall continue to be under receiver-
ship.

Other matters for consideration

As regards the second ground, to rule that only the receiver may bring suit in behalf of
the bank is, to echo the respondent appellate court, "asking for the impossible, for it
cannot be expected that the master, the CB, will allow the receiver it has appointed to
question that very appointment." Consequently, only stockholders of a bank could file an
action for annulment of a Monetary Board resolution placing the bank under receiver-
ship and prohibiting it from continuing operations. In requiring that only the stockholders
of record representing the majority of the capital stock may bring the action to set aside
a resolution to place a bank under conservatorship is to ensure that it be not frustrated
or defeated by the incumbent Board of Directors or officers who may immediately resort
to court action to prevent its implementation or enforcement. It is presumed that such a
resolution is directed principally against acts of said Directors and officers which place
the bank in a state of continuing inability to maintain a condition of liquidity adequate to
protect the interest of depositors and creditors. Indirectly, it is likewise intended to pro-
tect and safeguard the rights and interests of the stockholders. Common sense and
public policy dictate then that the authority to decide on whether to contest the resolu-
tion should be lodged with the stockholders owning a majority of the shares for they are
expected to be more objective in determining whether the resolution is plainly arbitrary
and issued in bad faith.

any party in interest could institute court proceedings to question a Monetary Board res -
olution placing a bank under receivership. Consequently, since the instant complaint
was filed by parties representing themselves to be officers of respondent Bank (Officer-
in-Charge and Vice President), the case before the trial court should now take its natu -
ral course.