Small Business Corporation vs. Commission on Audit (COA)

Salary increases actually granted by a GOCC/GFI during the effectivity of the EO No. 7 moratorium are disallowed regardless of when the salary structure was approved. For civil liability, approving/certifying officers are solidarily liable only upon a clear showing of bad faith, malice, or gross negligence, while payee-recipients are individually liable under solutio indebiti unless a Madera/Abellanosa exception applies.

Small Business Corporation (SBC), also known as the Small Business Guarantee and Finance Corporation, is a government financial institution created under RA 6977, as amended by RA 8289 and RA 9501. Executive Order No. 7, issued on September 8, 2010, imposed a moratorium on increases in salary rates and new increases in allowances, incentives, and other benefits for GOCCs and GFIs until specifically authorized by the President. RA 10149, the GOCC Governance Act of 2011, created the Governance Commission for GOCCs attached to the Office of the President and authorized it to fix compensation frameworks, subject to the President’s ultimate authority.

Small Business Corporation (SBC), also known as the Small Business Guarantee and Finance Corporation, is a government financial institution created under RA 6977, as amended by RA 8289 and RA 9501. On June 1, 2009, its Board of Directors (SBC-BOD), acting pursuant to RA 6977, issued Board Resolution No. 1610 approving the revision of SBC’s organizational structure, staffing pattern, qualification standards, and salary structure. SBC then sought confirmation of its revised salary structure from former Department of Trade and Industry (DTI) Secretary Peter B. Favila, who approved it on February 8, 2010. On September 8, 2010, President Benigno S. Aquino III issued Executive Order (EO) No. 7, Section 9 of which imposed a moratorium on increases in the rates of salaries and the grant of new increases in allowances, incentives, and other benefits of GOCCs and GFIs until specifically authorized by the President, except salary adjustments pursuant to EO No. 811 and EO No. 900.

Notwithstanding the moratorium, on October 28, 2011, the SBC-BOD issued Board Resolution No. 1863 approving the guidelines and procedure for the administration of SBC’s revised salary structure. These guidelines included the grant of step increments to qualified employees based on merit and length of service as assessed by a Performance Evaluation Review Committee (PERC). A step increment was defined as a lateral adjustment of an employee’s basic salary from one salary step to the next higher salary step. Merit increments were to be given annually to deserving employees based on individual performance and contribution, while a one-step increment was to be given for every three years of continuous satisfactory service in the present position, provided that only those who had not received a merit increase for the last three years were entitled to the length-of-service increment.

Upon the PERC’s recommendation, salary increases for qualified SBC personnel in the aggregate amount of P4,489,002.09 were approved and paid on various dates within the period from September 1, 2012 to September 30, 2014. Meanwhile, on June 25, 2014, SBC wrote the Governance Commission for GOCCs (GCG) requesting confirmation of its payment of salary increases for the year 2013. The GCG denied the request in a Memorandum dated July 8, 2014 because of the continued effectivity of the moratorium imposed by Section 9 of EO No. 7.

Subsequently, on various dates in October 2014, the COA Audit Team Leader and Supervising Auditor issued six notices of disallowance against the payment of the salary increases for violation of EO No. 7. The notices were: ND No. 14-002-401000-(12) dated October 9, 2014 for P2,483,863.24; ND No. 14-003-401000-(12) dated October 9, 2014 for P180,660.00; ND No. 14-004-401000-(13) dated October 10, 2014 for P450,166.64; ND No. 14-005-401000-(13) dated October 10, 2014 for P723,336.63; ND No. 14-006-401000-(13) dated October 13, 2014 for P562,055.58; and ND No. 14-007-401000-(13) dated October 14, 2014 for P88,920.00. The persons held liable were the approving and certifying officers as well as the payee-recipients. These included SBC President and Chief Operating Officer Benel P. Lagua and SBC Strategy, Policy and Communications Office Head Melvin E. Abanto as approving officers; Controllership Group Head Alfredo S. Dimaculangan as certifying officer; and various SBC personnel as payee-recipients.

SBC appealed to the COA Cluster Director, arguing that the grants were lawful because they were paid pursuant to its revised salary structure approved before EO No. 7 and that EO No. 7 had been retroactively applied to the prejudice of the payees’ vested rights. The COA Cluster Director affirmed the disallowances, holding that the payment contravened EO No. 7 and that the DTI Secretary’s approval was subject to the President’s ultimate authority. SBC elevated the matter to the COA Proper, which affirmed the COA Cluster Director and found that the disputed salary increases were implemented, approved, and granted during the effectivity of EO No. 7. The COA Proper denied SBC’s motion for reconsideration, prompting SBC to file the present petition.

• Prior Approval of Salary Structure: Petitioner argued that the grants of salary increases were lawful because they were paid pursuant to its revised salary structure, which was duly approved by the DTI Secretary prior to the issuance of EO No. 7.
• Retroactive Application / Vested Rights: Petitioner claimed that EO No. 7 had been retroactively applied to the undue prejudice of the vested rights of the payees.
• Statutory Authority to Fix Salaries: Petitioner maintained that it is empowered by RA 6977, as amended, to fix the salaries of its personnel.
• Good Faith and Civil Liability: Petitioner argued that even assuming the payment of salary increases was properly disallowed, the approving and certifying officers, as well as the respective recipients, cannot be held civilly liable since the amounts were paid and received in good faith.

• Grave Abuse of Discretion / Propriety of Disallowance: Whether the COA gravely abused its discretion in affirming the disallowances of salary increases granted by SBC to its various personnel during the period from September 1, 2012 to September 30, 2014.
• Effect of Prior Approval of Salary Structure: Whether salary increases paid pursuant to a revised salary structure approved before EO No. 7 are valid despite the moratorium imposed by EO No. 7.
• SBC’s Authority to Fix Salaries: Whether SBC’s authority under RA 6977, as amended, to fix the salaries of its personnel exempts it from EO No. 7, RA 10149, the GCG, and the President’s ultimate authority.
• Civil Liability: Whether the approving and certifying officers, as well as the payee-recipients, may be held civilly liable for the disallowed amounts despite their claim of good faith.

• Grave Abuse of Discretion / Propriety of Disallowance: No. The COA did not gravely abuse its discretion in affirming the disallowances; the salary increases were illegally disbursed in violation of the moratorium under Section 9 of EO No. 7.
• Effect of Prior Approval of Salary Structure: No. Approval of the salary structure before EO No. 7 did not exempt the increases; the moratorium prohibited the actual giving of increased salary rates during its effectivity.
• SBC’s Authority to Fix Salaries: No. SBC’s authority under RA 6977, as amended, remained subject to RA 10149, the GCG, and the President’s ultimate authority over GOCC/GFI compensation.
• Civil Liability: Yes, with distinctions. Approving and certifying officers were solidarily liable due to gross negligence under Sections 38 and 43 of the Administrative Code; payee-recipients were individually liable under solutio indebiti, no exception having been shown.

• Grave Abuse of Discretion / Propriety of Disallowance: The COA is constitutionally endowed with latitude to determine, prevent, and disallow illegal, irregular, unnecessary, excessive, extravagant, or unconscionable expenditures of government funds. Courts generally sustain COA decisions absent grave abuse of discretion. Here, the COA correctly ruled that the disputed salary increases were illegally disbursed in violation of Section 9 of EO No. 7, which imposed a moratorium on increases in rates of salaries and the grant of new increases in allowances, incentives, and other benefits until specifically authorized by the President. Although SBC’s revised salary structure was approved on February 8, 2010, before EO No. 7 was issued on September 8, 2010, its implementation commenced only on October 28, 2011 when SBC issued the procedural rules and guidelines under Board Resolution No. 1863; the recipients were determined later, and the increases were approved and actually granted from September 1, 2012 to September 30, 2014. The disallowed increases therefore fell within the ambit of EO No. 7. EO No. 7 contains no exemption for previous revisions of a GOCC/GFI salary structure, and the only exceptions—salary adjustments under EO No. 811 and EO No. 900—were not shown to obtain. The issue was also conclusively settled in the related October 2017 SBC Case, where the Court held that the date of actual giving of the increased salary rate is material, irrespective of when the salary structure was approved.
• Effect of Prior Approval of Salary Structure: The moratorium under EO No. 7 is imposed on the actual grant of increased salary rates, allowances, incentives, and other benefits, regardless of the date of approval of the salary structure. The prior SBC Case explained that EO No. 7 did not prohibit merely the grant of increased salary rates in corporate salary structures; it also intended to halt the actual giving of increased salary rates. Thus, the issue was not one of retroactive application but of which acts were prohibited. Because SBC actually granted the increases during the effectivity of EO No. 7, the disallowance was proper.
• SBC’s Authority to Fix Salaries: Notwithstanding prior laws enabling certain GOCCs/GFIs to fix their own salary schemes, such power remains subject to standards laid down by applicable laws, which grant the President ultimate authority to approve salary increases of GOCCs/GFIs exempt from the salary standardization law. Under RA 10149, the GCG, attached to the Office of the President, is authorized to fix the compensation frameworks of all GOCCs, including GFIs, to prevent or deter unconscionable and excessive remuneration packages. Galicto vs. Aquino III held that RA 10149 empowered the President to establish the compensation systems of GOCCs and GFIs and amended laws enabling certain GOCCs/GFIs to fix their own compensation frameworks. SBC itself recognized the GCG’s authority when it requested confirmation of its salary increases on June 25, 2014. Sections 59 of RA 9970 and 56 of RA 10147 likewise require that any grant of or increase in salaries, allowances, and other fringe benefits be subject to approval by the President upon favorable recommendation of the DBM.
• Civil Liability: Under Madera vs. COA, if a notice of disallowance is upheld, approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of a family are not civilly liable under Section 38 of the Administrative Code. Those clearly shown to have acted in bad faith, malice, or gross negligence are solidarily liable to return only the net disallowed amount under Section 43. Recipients, whether approving or certifying officers or mere passive recipients, are liable to return the amounts respectively received unless they show the amounts were genuinely given in consideration of services rendered; the Court may also excuse return based on undue prejudice, social justice considerations, and other bona fide exceptions. Abellanosa vs. COA clarified that Rule 2c requires (a) proper basis in law but disallowance due to merely procedural irregularities, and (b) a clear, direct, and reasonable connection to the actual performance of the payee-recipient’s official work and functions. Rule 2d applies only in highly exceptional circumstances. Here, the approving and certifying officers clearly acted with gross negligence because EO No. 7 plainly imposed the moratorium and made no exception for salary increases stemming from a prior reorganization of a GOCC/GFI salary structure; they nevertheless implemented, approved, and granted the disallowed amounts. They are therefore solidarily liable under Sections 38 and 43 of the Administrative Code. The payee-recipients cannot invoke Rule 2c because the disbursements lacked proper basis in law and were not disallowed merely for procedural infirmities, and no equitable basis under Rule 2d was shown. Following the general rule, each payee-recipient, regardless of good faith, is individually liable to return the amounts received under solutio indebiti.

• EO No. 7 Moratorium on Salary Increases — Section 9 of EO No. 7 imposed a moratorium on increases in the rates of salaries and the grant of new increases in allowances, incentives, and other benefits of GOCCs and GFIs until specifically authorized by the President, except salary adjustments under EO No. 811 and EO No. 900. The Court applied it to prohibit the actual giving of increased salary rates during the moratorium, regardless of when the salary structure was approved.
• COA Audit Power and Grave Abuse of Discretion — The COA is constitutionally endowed with latitude to determine, prevent, and disallow illegal, irregular, unnecessary, excessive, extravagant, or unconscionable expenditures of government funds. Courts generally sustain COA decisions absent grave abuse of discretion; no such abuse was found.
• Madera Rules on Return — When a notice of disallowance is upheld: (a) approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of a family are not civilly liable under Section 38 of the Administrative Code; (b) approving and certifying officers clearly shown to have acted in bad faith, malice, or gross negligence are solidarily liable to return only the net disallowed amount under Section 43; (c) recipients, whether approving or certifying officers or mere passive recipients, are liable to return the amounts respectively received unless they show the amounts were genuinely given in consideration of services rendered; and (d) the Court may excuse return based on undue prejudice, social justice considerations, and other bona fide exceptions on a case-to-case basis.
• Solutio Indebiti and Good Faith — When civil liability of a payee-recipient is based on solutio indebiti, good faith is inconsequential. The general rule is that recipients, regardless of good faith, are civilly liable to return the disallowed amounts they individually received, unless a Madera exception applies.
• Abellanosa Refinements to Rule 2c and Rule 2d — Rule 2c requires (a) proper basis in law but disallowance due to merely procedural irregularities, and (b) a clear, direct, and reasonable connection to the actual performance of the payee-recipient’s official work and functions. Rule 2d applies only in highly exceptional circumstances after considering all relevant factors.
• Conclusiveness of Judgment — A right, fact, or matter in issue directly adjudicated on the merits in a previous action by a competent court, or necessarily involved in its determination, is conclusively settled and cannot again be litigated between identical or substantially the same parties and their privies. The propriety of the disallowance was settled by the prior SBC vs. COA case, but civil liability was separately determined due to different factual peculiarities.
• President’s Ultimate Authority over GOCC/GFI Compensation — Notwithstanding prior laws enabling certain GOCCs/GFIs to fix their own salary schemes, such power remains subject to applicable standards, RA 10149, the GCG, and the President’s ultimate authority to approve salary increases of GOCCs/GFIs exempt from the salary standardization law.

• "It is the date of the actual giving of the increased salary rate that is material insofar as determining whether the moratorium imposed by EO No. 7 is applicable or not." — The Court adopted this ruling from the prior SBC vs. COA case to hold that the disallowance depends on when the increase was actually granted, not when the salary structure was approved.
• "Approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of a family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987." — This states the Madera rule on the civil liability of approving and certifying officers, which the Court applied before finding gross negligence in this case.
• "Recipients — whether approving or certifying officers or mere passive recipients — are liable to return the disallowed amounts respectively received by them, unless they are able to show that the amounts they received were genuinely given in consideration of services rendered." — This is the general rule and Rule 2c exception under Madera, which the Court applied to deny excusal of the payee-recipients’ liability.
• "the general rule is that recipients, regardless of their good faith, are civilly liable to return the disallowed amounts they had individually received on the basis of solutio indebiti." — This articulates the Court’s holding that good faith does not excuse payee-recipients from returning disallowed amounts when no Madera exception applies.

• SBC vs. COA, 819 Phil. 233 (2017); G.R. No. 230628, October 3, 2017 — Related case; the Court affirmed a notice of disallowance against salary increases under the same revised salary structure for violating EO No. 7, holding that the date of actual giving of the increased salary rate is material regardless of when the salary structure was approved. The present Court applied conclusiveness of judgment on the propriety of the disallowance.
• Madera vs. COA, G.R. No. 244128, September 8, 2020 — Established the Rules on Return for disallowed personnel incentives and benefits; applied to classify and determine the civil liabilities of approving/certifying officers and payee-recipients.
• Abellanosa vs. Commission on Audit, G.R. No. 185806, November 17, 2020 — Clarified the requisites for the Rule 2c and Rule 2d exceptions to the return of disallowed amounts; applied to deny excusal of the payee-recipients’ liability.
• Galicto vs. Aquino III, 683 Phil. 141 (2012) — Held that RA 10149 authorized the President to fix the compensation framework of GOCCs and GFIs and amended laws enabling certain GOCCs/GFIs to fix their own compensation frameworks; relied upon to reject SBC’s claimed autonomy under RA 6977.
• Delos Santos vs. Commission on Audit, 716 Phil. 322 (2013) — Cited on the COA’s constitutional audit power and the check-and-balance function of audit.
• Miralles vs. Commission on Audit, 818 Phil. 380 (2017) — Cited on judicial deference to COA decisions absent grave abuse of discretion.
• Philippine Health Insurance Corp. vs. COA, 801 Phil. 427 (2016) — Cited for the rule that prior laws enabling certain GOCCs/GFIs to fix their own salary schemes remain subject to applicable standards.
• Philippine National Bank vs. Court of Appeals, 291 Phil. 356 (1993) — Cited for the rule that good faith cannot be appreciated as a defense against an obligation under solutio indebiti.
• Ramie Textiles, Inc. vs. Mathay, Sr., 178 Phil. 482 (1979) — Cited on the principle that no one shall enrich himself unjustly at the expense of another.
• Power Commercial and Industrial Corp. vs. Court of Appeals, 340 Phil. 705 (1997) — Cited for the principle that solutio indebiti finds no application where recipients were not unjustly enriched.
• Presidential Anti-Graft Commission vs. Pleyto, 661 Phil. 643 (2011) — Cited for the definition of conclusiveness of judgment.
• Wycoco vs. Aquino, G.R. Nos. 237874 and 239036, February 16, 2021 — Cited for the rule that the separate issue on civil liability must still be determined despite conclusiveness of judgment on the disallowance’s propriety.

• Section 9, Executive Order No. 7 (2010) — Imposed the moratorium on increases in salary rates and new increases in allowances, incentives, and other benefits for GOCCs/GFIs until specifically authorized by the President, except salary adjustments under EO No. 811 and EO No. 900. The Court applied it to disallow the salary increases actually granted from September 1, 2012 to September 30, 2014.
• Section 11-A(f), Republic Act No. 6977, as amended by RA 8289 and RA 9501 — Authorized the SBC Board to provide for the organizational structure and staffing pattern and to extend salaries, allowances, and fringe benefits similar to other GFIs. The Court held this authority remained subject to RA 10149 and the President’s ultimate authority.
• Section 5, Republic Act No. 10149 (GOCC Governance Act of 2011) — Created the GCG as a central advisory, monitoring, and oversight body attached to the Office of the President. Cited to show GCG authority over SBC’s compensation framework.
• Sections 8 and 9, Republic Act No. 10149 — Authorized the GCG to fix compensation frameworks of GOCCs. Applied to reject SBC’s claim of exclusive authority under RA 6977.
• Section 4, Republic Act No. 10149 — Made the law applicable to all GOCCs, GFIs, and government financial institutions, including their subsidiaries. Applied to SBC as a GFI.
• Section 2(f), Republic Act No. 10149 — Stated the policy to prevent or deter unconscionable and excessive remuneration packages. Cited in support of GCG and presidential authority.
• Section 38(1), Chapter 9, Book I, Administrative Code of 1987 — Provides that a public officer shall not be civilly liable for acts done in the performance of official duties unless there is a clear showing of bad faith, malice, or gross negligence. Applied to hold approving/certifying officers liable only upon a showing of gross negligence.
• Section 43, Chapter 5, Book VI, Administrative Code of 1987 — Declares illegal expenditures void and makes every official or employee authorizing or making the payment, or taking part therein, and every person receiving such payment jointly and severally liable to the Government for the full amount paid or received. Applied to impose solidary liability on approving/certifying officers.
• Section 6, Presidential Decree No. 1597 — Provides that agencies exempted from OCPC coverage shall observe guidelines and policies issued by the President governing position classification, salary rates, allowances, and other compensation. Cited by the COA in upholding the disallowances.
• Section 9, Congressional Joint Resolution No. 4 — Provides that exempt entities shall observe policies, parameters, and guidelines prescribed by the President, and any increase in salary rates or grant of new allowances, benefits, and incentives shall be subject to approval by the President upon recommendation of the DBM. Cited to support presidential approval requirement.
• Section 59, Republic Act No. 9970 — Requires GOCCs/GFIs exempt from or enjoying special compensation to observe policies and guidelines prescribed by the President, and any grant of or increase in salaries, allowances, and other fringe benefits shall be subject to approval by the President upon favorable recommendation of the DBM. Applied to SBC’s salary increases.
• Section 56, Republic Act No. 10147 — Contains the same requirement that any grant of or increase in salaries, allowances, and other fringe benefits of GOCCs/GFIs shall be subject to approval by the President upon favorable recommendation of the DBM. Applied to SBC’s salary increases.
• Rule 64 in relation to Rule 65, Rules of Court — Governed SBC’s petition for certiorari assailing the COA Decision and Resolution. The Court entertained the petition but found no grave abuse of discretion.
• Section 6(f)(f.2), Rule 10, DTI Administrative Order No. 09-08 — Requires that salaries, allowances, and fringe benefits of SBC personnel be based on a survey and subject to review of the DTI Secretary before presentation to the Board for approval. Cited to show SBC sought DTI confirmation.
• Executive Order No. 811 and Executive Order No. 900 — The only salary adjustments excepted from the EO No. 7 moratorium. The Court noted these were not shown to obtain.

Gesmundo, C.J., Leonen, Caguioa, Hernando, Carandang, Lazaro-Javier, Inting, Zalameda, M. Lopez, Delos Santos, Gaerlan, Rosario, and J. Lopez, JJ.