Upholding COA Authority: PDIC Condonation of Bank Debts Disallowed

The Supreme Court has affirmed the Commission on Audit's (COA) power to disallow improper condonations and write-offs by government-owned or controlled corporations (GOCCs), even when those corporations claim charter-based authority to release claims. In Philippine Deposit Insurance Corporation v. Commission on Audit (G.R. No. 218068, March 15, 2022), the Court En Banc upheld notices of disallowance totaling approximately P1.98 billion against the Philippine Deposit Insurance Corporation (PDIC) for financial assistance it condoned and wrote off for two distressed banks.

Background of the Case

The case involved two sets of transactions. First, PDIC granted financial assistance to Westmont Bank (formerly Associated Bank, now United Overseas Bank of the Philippines) between 1989 and 1999, condoning portions totaling P1,656,830,000.00. The condoned amounts included a waived buyback agreement, early buyback incentives, deferred and refunded regular interest, and abolished interest spreads.

Second, PDIC purchased P1.5 billion worth of non-performing loans from Keppel Monte Savings Bank (KMSB) as rehabilitation assistance. From June 1997 to June 1998, PDIC reclassified P325,000,000.00 of these loans as an expense account, claiming they were uncollectible.

The COA Corporate Auditor found these transactions irregular, and the COA Proper eventually denied the condonation and write-off, directing the issuance of notices of disallowance.

The Core Legal Issue

The central question was whether PDIC could unilaterally condone or write off these obligations under its charter, or whether it needed COA approval and, for amounts exceeding P100,000.00, Congressional authorization.

PDIC argued that its charter empowered its Board of Directors to compromise, condone, or release claims regardless of amount, and that its actions were approved by the Bangko Sentral ng Pilipinas Monetary Board.

The Court's Ruling

The Supreme Court dismissed PDIC's petition, affirming the COA's disallowances. The Court held that while PDIC's charter grants the power to condone claims, that power is not absolute.

The Court applied the provisions of the Administrative Code of 1987 (Executive Order No. 292) governing the power to compromise claims. Under these provisions, which superseded the earlier framework under Presidential Decree No. 1445, claims exceeding P100,000.00 require the recommendation of the COA and the President, with final approval from Congress. The Court noted that the earlier provision allowing GOCC governing boards to exercise exclusive power to compromise claims was deleted by the Administrative Code.

The Court cited its earlier ruling in Binga Hydroelectric Plant, Inc. v. Commission on Audit, which established that this requirement applies to all GOCCs, with or without original charters. A GOCC cannot invoke its autonomy to circumvent the mandatory approval process.

No Grave Abuse of Discretion

The Court also rejected PDIC's procedural arguments:

• No inordinate delay: While the COA took considerable time, the Court noted the complexity of auditing transactions dating back to the 1990s involving substantial amounts. The 60-day constitutional period for deciding cases applies only from the date a case is submitted for decision, not during the auditing process.
• No prejudice shown: PDIC was apprised of the COA's observations as early as 1998 and 2000 but never corrected the questioned entries.
• Factual findings respected: The COA found the condonation included principal loans, not just interest and penalties, and that the KMSB loans were "merely difficult to collect" rather than uncollectible, given that P2.4 million was collected during the relevant period.

Liability of the PDIC Board

Significantly, the Court held the PDIC Board of Directors solidarily liable for the disallowed amounts. Citing Madera v. Commission on Audit, the Court ruled that solidary liability attaches upon a clear showing of bad faith, malice, or gross negligence. The Board's "palpable disregard" of the mandatory requirements of the Administrative Code amounted to gross negligence, negating any presumption of good faith.

Practical Takeaways

• Charter powers are not unlimited: A GOCC's statutory power to condone or release claims does not override the Administrative Code's requirement for COA recommendation and Congressional approval for amounts exceeding P100,000.00.
• COA's role is mandatory: The COA must review condonations and write-offs to protect government interest, and its factual findings in technical auditing matters are given great weight and finality.
• Document collection efforts: Before writing off receivables, agencies must show the accounts have been outstanding for a considerable period and that all collection efforts were exhausted.
• Board members face personal liability: Directors and officers who approve improper condonations or write-offs may be held solidarily liable to settle disallowed amounts, especially where the illegality is patent.
• Timely correction matters: Entities that receive audit observations should promptly correct questioned entries rather than wait for formal disallowance proceedings.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.