THE CENTRAL BANK OF THE PHILIPPINES and RAMON V.

TIAOQUI, petitioners,  vs. COURT OF

APPEALS and TRIUMPH SAVINGS BANK, respondents.
G.R. No. 76118 March 30, 1993

Facts:

Based on examination reports submitted by the Supervision and Examination 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,”3 the Monetary Board (MB) issued Resolution No. 596 ordering the closure of TSB, forbidding it
from doing business in the Philippines, placing it under receivership, and appointing Ramon V. Tiaoqui as
receiver. Tiaoqui assumed office on 3 June 1985.

TSB then filed a complaint with the Regional Trial Court of Quezon City against Central Bank and Ramon
V. Tiaoqui to annul MB Resolution No. 596, 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 regulation, much less found guilty thereof.  5
×××

Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases
involving 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 opportunity to further dissipate
the bank's resources, create liabilities for the bank up to the insured amount of P40,000. , and even
destroy evidence of fraud or irregularity in the bank's operations to the prejudice of its depositors and
creditors. 14 Petitioners further argue 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.

Issue:
May a Monetary Board resolution placing a private bank under receivership be annulled on the ground of
lack of prior notice and hearing?

Ruling:
(GR:) NO.

Under Sec. 29 of R.A. 265,  15 the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, 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 business in the Philippines; and shall
designate an official of the CB or other competent person as receiver to immediately take charge of its
assets and liabilities. The fourth paragraph,  16 which was then in effect at the time the action was
commenced, allows the filing of a case to set aside the actions of the Monetary Board which are tainted
with arbitrariness and bad faith.

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 precede 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.

In the early case of Rural Bank of Lucena, Inc. v. Arca [1965],  17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that
the correctness of the Monetary Board's resolution to stop operation and proceed to liquidation
be first adjudged before making the resolution effective. It is enough that a subsequent judicial
review be provided.

Even in Banco Filipino, 18 We reiterated that 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.

It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial 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 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.
In Rural Bank of Buhi, Inc.  v. Court of Appeals, 19 We stated that —
. . . 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.

We stressed in Central Bank of the Philippines v. Court of Appeals 20 that —

. . . the banking business is properly subject to reasonable regulation under the police
power of the state because of its nature and relation to the fiscal affairs of the people and
the revenues of the state (9 CJS 32). Banks are affected with public interest because
they receive funds from the general public in the form of deposits. Due to the nature of
their transactions and functions, a fiduciary relationship is created between the banking
institutions and their depositors. Therefore, banks are under the obligation to treat with
meticulous care and utmost fidelity the accounts of those who have reposed their trust
and confidence in them (Simex International [Manila], Inc., v. Court of Appeals, 183
SCRA 360 [1990]).
It is then the Government's responsibility to see to it that the financial interests of those
who deal with the banks and banking institutions, as depositors or otherwise, are
protected. In this country, that task is delegated to the Central Bank which, pursuant to its
Charter (R.A. 265, as amended), is authorized to administer the monetary, banking and
credit system of the Philippines. Under both the 1973 and 1987 Constitutions, the Central
Bank is tasked with providing policy direction in the areas of money, banking and credit;
corollarily, it shall have supervision over the operations of banks (Sec. 14, Art. XV, 1973
Constitution, and Sec. 20, Art. XII, 1987 Constitution). Under its charter, the CB is further
authorized to take the necessary steps against any banking institution if its continued
operation would cause prejudice to its depositors, creditors and the general public as
well. This power has been expressly recognized by this Court. In Philippine Veterans
Bank Employees Union-NUBE v. Philippine Veterans Banks (189 SCRA 14 [1990], this
Court held that:
. . . [u]nless 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. The government cannot simply cross its arms while the
 assets of a bank are being depleted through mismanagement or
irregularities. It is the duty of the Central Bank in such an event to step in
and salvage the remaining resources of the bank so that they may not
continue to be dissipated or plundered by those entrusted with their
management.

Section 29 of R.A. 265 should be viewed in this light; otherwise, We 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 truly 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 arbitrariness  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.

The heavy reliance of respondents on the Banco Filipino  case is misplaced in view of factual
circumstances therein which are not attendant in the present case. We ruled in  Banco Filipino  that the
closure of the bank was arbitrary and attendant with grave abuse of discretion, not because of the
absence of prior notice and hearing, but that the Monetary Board had no sufficient basis to arrive at a
sound conclusion of insolvency to justify the closure. In other words, the arbitrariness, bad faith and
abuse of discretion were determined only after the bank was placed under conservatorship and evidence
thereon was received by the trial court. As this Court found in that case, the Valenzuela, Aurellano and
Tiaoqui Reports contained unfounded assumptions and deductions which did not reflect the true financial
condition of the bank. For instance, the subtraction of an uncertain amount as valuation reserve from the
assets of the bank would merely result in its net worth or the unimpaired capital and surplus; it did not
reflect the total financial condition of Banco Filipino.

Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate the
bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be. Clearly, there
was in that case a manifest arbitrariness, abuse of discretion and bad faith in the closure of  Banco
Filipino  by the Monetary Board. But, this is not the case before Us. For here, what is being raised as
arbitrary by private respondent is the denial of prior notice and hearing by the Monetary Board, a matter
long settled in this jurisdiction, and not the arbitrariness which the conclusions of the Supervision and
Examination Sector (SES), Department II, of the Central Bank were reached.

Once again We refer to Rural Bank of Buhi, Inc.  v. Court of Appeals, 21 and reiterate Our pronouncement
therein that —
. . . the law is explicit as to the conditions 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 assets 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,
We rule that Sec. 29 of R.A. 265 is a sound legislation 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 annul 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 issuance 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 receivership.

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 receivership and prohibiting it from continuing operations.  22 In Central Bank v. Court of
Appeals, 23 We explained the purpose of the law —
. . . 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 protect 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 resolution 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.

PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 is AFFIRMED,
except insofar as it upholds the Order of the trial court of 11 November 1985 directing petitioner RAMON
V. TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its elected Board of Directors
and Officers, which is hereby SET ASIDE.

Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to determine
whether the issuance of Resolution No. 596 of the Monetary Board was tainted with arbitrariness and bad
faith and to decide the case accordingly.