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GENERAL BANK AND TRUST COMPANY v. that a rehabilitation program instead be immediately
G.R. No. 152551, June 15, 2006
Subsequently, finding the report of Director Antonio Castro of
Garcia, J. Department of Commercial and Savings Banks [DCSB] that
Genbank was insolvent within the meaning of Section 29 of R.A.
Digest by Luke Morgan Codilla 265 (Central Bank Act), as amended, and that Genbank's
continuance in business would involve losses to its depositors
Based on the 2018 TSN, the discussion about this case was and creditors, the Monetary Board adopted Resolution No. 675
more on “Insolvency” in relation to the occurrence of a bank run, on March 25, 1977 forbidding Genbank to do business in the
which is Issue No. 3 of my digest. However, I included the issue Philippines and designating Arnulfo B. Aurellano as receiver.
relating to the retroactivity of the amendment to the law on 1984
vis-à-vis the CB Resolution dated 1977. Pursuant to the Memorandum of the Director of DCSB, dated
March 28, 1977 stating that - "As of March 24, 1977, the Bank's
FACTS: General Bank and Trust Company (Genbank) incurred liquid assets of P28 million, together with collections from its
overdrafts in its current account with the Central Bank. loan portfolio, will not be enough to meet expected further
withdrawal of deposits and deposit substitutes of P235.4 million.
A verification of the accounts showed that the overdrawings of The Bank's operation may be expected to result into losses of at
Genbank were due to the all-out financial support it extended to least P2.9 million per month and these loans will dissipate the
Filcapital Development Corporation (a related interest of the Bank's remaining capital accounts of P10.9 million. The Bank
Yujuico Family Group and the directors and officers of Genbank) therefore may not be permitted to resume business with safety
to meet maturing obligations. to its depositors, creditors, and the general public" and
recommending certain actions, the Monetary Board adopted
On December 14, 1976, the CB required Genbank to stop its Resolution No. 677 on March 29, 1977 determining and
unsound banking practice of incurring daily overdrawings. The confirming that Genbank was insolvent and could not resume
Monetary Board in its Resolution No. 2553 also decided to grant business with safety to its depositors, creditors and general
Genbank an emergency loan. public, and ordering the liquidation of Genbank, the designation
of Arnulfo B. Aurellano as Liquidator and the approval of a
Dr. Clarencio Yujuico, Chairman of the Board and President of liquidation plan whereby all the assets of Genbank should be
Genbank, reported that the bank was experiencing heavy purchased by the Lucio Tan Group which should also assume
withdrawals and its liquidity position had continuously all the liabilities under certain terms and conditions.
deteriorated. On January 10, 1977, at a meeting of the Board of
Directors Dr. Yujuico advised that the controlling stockholders ARGUMENT 1: Petitioner Genbank claims that it was not
were negotiating for the sale of their stockholdings. insolvent when Resolution No. 675 was issued on March 25,
1977, its assets at that time standing at P599,743,639.00, while
On January 14, 1977, the CB Governor created a Special its total liabilities only amounted to P586,640,450.00, thus
Committee to act as observers and advisers in the negotiations having surplus assets over liabilities in the amount of
for the proposed purchase of the outstanding shares of P13,103,189.00.
Genbank or all its assets and assumption of all its liabilities.
ISSUE 1: Was Genbank properly declared as insolvent?
The Committee held meetings with all the interested groups and
advised them that the CB emergency advances must be amply HELD: YES.
protected. The Special Committee submitted its report on the
evaluation of the offers to buy Genbank shares indicating that Genbank was ordered closed by the CB on March 25, 1977,
the Lucio Tan offer was the most advantageous. when "insolvency" was defined under Section 29 of RA 265, as
amended on September 22, 1976 by PD 1007, where and
The Lucio Tan group and the sellers' representatives continued when the insolvency concept carried a slightly different but
their negotiations on March 4 to 5, 1977 but could not reach an contextually significant connotation. As thus then defined,
agreement. insolvency was understood to mean as "the inability of a banking
institution to pay its liabilities as they fall due in the ordinary
In view of the non-acceptance by the sellers' group of the offer course of business." Respondent CB found Genbank
of the Lucio Tan group, the Governor informed the undoubtedly incapable to generate liquid funds by itself in order
representatives of the sellers' group that they may consider the to meet drawdowns on its deposits and deposit substitutes and
offer of Paramount Finance Corporation. to pay for other maturing obligations, as well as advances from
the Central Bank. Respondent CB, therefore, concluded that
However, in a letter dated March 20, 1977, Paramount advised Genbank was insolvent under the obtaining definition of said
that collateralizing the emergency advances (as required by the term, with the CA eventually sustaining the posture of
MB) with standby letters credit would be too heavy a financial respondent CB.
burden for the bank to bear, the hold-out on the concessional
loan of their foreign partner met with resistance from the investor This Court finds no reversible error committed by the Court of
as being unusual and onerous on them, and the proxies to be Appeals when it sustained the validity of the MB resolutions
held by Land Bank was difficult to explain to prospective resolving the issue of insolvency against petitioner Genbank.
It cannot be overemphasized that Resolution No. 675 prohibiting
On March 23, 1977, the Governor together with other CB Genbank to do business in the Philippines and designating
officials and Genbank directors, had a meeting with the Arnulfo B. Aurellano as receiver was issued in March 1977,
stockholders of Genbank. The stockholders were advised by the when the definition of the term "insolvency" under the last
Governor that public interest required that the CB should not paragraph of Section 29, of RA 265, as amended by PD No.
continuously extend further credit assistance to Genbank and 1007, was as follows:

“Insolvency, under this Act, shall be understood to mean the action could not have run counter to a legal provision inexistent
inability of a banking institution to pay its liabilities as they at the time when it issued the resolution in question.
fall due in the usual and ordinary course of business, ARGUMENT 3: Petitioner Genbank now cites the definition of
provided, however, that this shall not include the inability to insolvency under PD No. 1007 faulting the CA for allegedly
pay of an otherwise non-insolvent bank caused by truncating the same by glossing over the proviso portion which
extraordinary demands induced by financial panic contextually excluded from the coverage of the term
commonly evidenced by a run on the bank in the banking "insolvency" "the inability to pay of an otherwise non-insolvent
community.” bank caused by extraordinary demands induced by financial
panic commonly evidenced by a run on the bank in the banking
And by the terms of the same Section 29 of RA 265, as amended community." Genbank argues that it did not fall within the
by PD No. 1007, Resolution No. 675 is deemed final and concept of insolvency contemplated in the PD No. 1007 since
executory, to wit: what it was then experiencing was a liquidity problem attributed
to a bank run.
“The provisions of any law to the contrary notwithstanding,
the actions of the Monetary Board under this Section and ISSUE 3: Will the exclusionary clause on insolvency apply
the second paragraph of Section 34 of this Act shall be final to Genbank?
and executory, and can be set aside by the court only if
there is convincing proof that the action is plainly arbitrary HELD: NO.
and made in bad faith. No restraining order or injunction
shall be issued by the court enjoining the Central Bank from The aforementioned proviso relied upon by petitioner Genbank
implementing its actions under this section and the second excludes from the definition of insolvency, "the inability to pay of
paragraph of Section 34 of this Act, unless there is an otherwise non- insolvent bank caused by extraordinary
convincing proof that the action of the Monetary Board is demands induced by financial panic commonly evidenced by a
plainly arbitrary and made in bad faith and the petitioner or run on the bank in the banking community."
plaintiff files with the clerk of court or judge of the court in
which the action is pending a bond executed in favor of the As it were, the applicability of that proviso presupposes that the
Central Bank, in an amount to be fixed by the court.” struggling bank, Genbank in this case, should, in the first place
be "an otherwise non-insolvent bank" and the existence of a
The burden thus rests upon petitioner Genbank to prove the bank run is the sole and exclusive cause of its inability to pay its
mala fides of the Monetary Board in issuing Resolution No. 675. obligations.
The present petition cites no concrete proof to convincingly
show that the pertinent findings and recommendation of Antonio In other words, the existence of a bank run is not, without more,
Castro, then Director of CB's DCSB whence Resolution No. 675 a saving grace for any bank, absolutely preventing the CB or the
emanated were factually infirm. Monetary Board from ordering its closure due to insolvency. If
the bank is not "non-insolvent" in contemplation of the definition
ARGUMENT 2: In this case, Genbank was saying that it was under Section 29 of RA 265, as amended by PD No. 1007,
solvent based on Section 29 of RA 265, as amended by PD because it cannot pay its liabilities as they fall due in the ordinary
1937, which took effect in 1984. This leads us to another issue course of business, the presence or absence of a bank run is of
which is — no determinative moment on the issue of the justifiability of an
order of closure. The CB had, as it were, ample basis other than
ISSUE 2: WON PD 1937 should be applied to Genbank’s the bank run to consider petitioner Genbank insolvent. Upon the
case. issuance of an order of closure, which by express provision of
law is final and executory, the burden of proving non-insolvency
HELD: NO. is upon the bank which challenges the validity of such closure.

Instead of directly controverting the factual basis of the MB To close, it must be stressed that Genbank's financial
resolutions, Genbank would simply insist on owning more predicament did not crop up overnight, nor is it a product of a
realizable assets than liabilities and ergo essentially solvent per single financial indiscretion, so to speak. The root of its problem
the definition of "insolvency" under the PD 1937 amendment and eventual downfall is traceable to unsound banking practices
which, to stress, took effect only in 1984. To a redundant point, employed by management. Mentioned in this regard may be
the PD 1937 amendment defines "insolvency" as follows: made of the all-out financial support given to Filcapital
Development Corporation (a related interest of the Yujuico
Insolvency, under this Act shall be understood to mean that Family Group and directors and officers of Genbank) and the
the realizable assets of a bank or a non-bank financial standing practice of extending DOSRI loans which, at one point,
intermediary performing quasi-banking functions as reached a peak of P172.3 million or 26% of the total loan
determined by the Central Bank are insufficient to meet its portfolio of P666.78 million. Of the final figure, 59.4% thereof
liabilities. was classified as doubtful and P0.505 million as uncollectible.
And 91.7% of such DOSRI accounts were unsecured leaving
Petitioner's recourse of insisting on the meaning of insolvency only 8% thereof secured. All these unsound practices occurred
other than the current definition thereof is, at the minimum, a way before their resulting crippling effects became manifest
recognition, plain and simple, that under the applicable sometime in December 1976, further leading the bank to resort
definition of the term "insolvency" under the last paragraph of to other unsound banking practices, like incurring daily
Section 29, of RA 265, as amended in 1976 by PD No. 1007, overdrafts.
the Monetary Board could not have erred in ruling that
petitioner Genbank was indeed insolvent, justifying its closure
under the same Section 29, of RA 265, as amended. Petitioner
Genbank cannot plausibly be allowed to adopt a statutory
definition of "insolvency" which was not set forth in the law
when Resolution No. 675 was issued. The Monetary Board's