Tayug Rural Bank vs. Central Bank of the Philippines

An administrative agency cannot impose a penalty not provided in the law authorizing the promulgation of its rules and regulations, much less one that is applied retroactively. Where the basic law does not grant the agency the power to impose penalties, any rule or regulation imposing such penalty is void for exceeding the agency's rule-making authority, and cannot be given retroactive effect to contracts executed before its issuance.

Tayug Rural Bank, Inc. is a banking corporation in Tayug, Pangasinan, which obtained loans from the Central Bank of the Philippines through rediscounting. The Central Bank's authority to extend such loans to rural banks is derived from Section 13 of Republic Act No. 720, as amended, which authorizes the Central Bank to rediscount papers evidencing loans granted by rural banks to their customers. The Monetary Board's supervisory authority over rural banks is spelled out in Section 10 of the same Act, which enumerates specific supervisory powers but does not include the power to impose penalties. The Rules and Regulations Governing Rural Banks, promulgated by the Monetary Board on September 5, 1958, under authority of Section 3 of Republic Act No. 720, as amended, were published in the Official Gazette on June 13, 1959.

Tayug Rural Bank, Inc. is a banking corporation in Tayug, Pangasinan. During the period from December 28, 1962 to July 30, 1963, it obtained thirteen loans from the Central Bank of the Philippines by way of rediscounting, at the rate of 1/2 of 1% per annum from 1962 to March 28, 1963, and thereafter at the rate of 2-1/2% per annum. The loans, amounting to P813,000.00 as of July 30, 1963, were all covered by corresponding promissory notes prescribing the terms and conditions of the loans. As of July 15, 1969, the outstanding balance was P444,809.45.

On December 23, 1964, the Central Bank, through the Director of the Department of Loans and Credit, issued Memorandum Circular No. DLC-8, informing all rural banks that an additional penalty interest rate of ten per cent (10%) per annum would be assessed on all past due loans beginning January 4, 1965. The memorandum circular was issued pursuant to Monetary Board Resolution No. 1813 dated December 18, 1964, and in consonance with Sections 147 and 148 of the Rules and Regulations Governing Rural Banks. The memorandum circular was actually enforced on all rural banks effective July 4, 1965. The memorandum circular stated that rural banks which shall default in their loan obligations, thus incurring past due accounts with the Central Bank, shall be assessed an additional penalty interest rate of ten per cent (10%) per annum on such past due accounts over and above the customary interest rate(s) at which such loans were originally secured from the Central Bank.

On June 27, 1969, Tayug Rural Bank sued the Central Bank in the Court of First Instance of Manila, Branch III, to recover the 10% penalty imposed by the Central Bank amounting to P16,874.97 as of September 27, 1968, and to restrain the Central Bank from continuing the imposition of the penalty. The Central Bank filed a counterclaim for the outstanding balance and overdue accounts of the rural bank in the total amount of P444,809.45 plus accrued interest and penalty at 10% per annum on the outstanding balance until full payment. The Central Bank justified the imposition of the penalty, stating that it was legally imposed under the provisions of Sections 147 and 148 of the Rules and Regulations Governing Rural Banks promulgated by the Monetary Board on September 5, 1958, under authority of Section 3 of Republic Act No. 720, as amended.

In its answer to the counterclaim, Tayug Rural Bank prayed for the dismissal of the counterclaim, denying the Central Bank's allegations and stating that if it had any unpaid obligations with the Central Bank, it was due to the latter's fault on account of its flexible and double standard policy in the granting of rediscounting privileges and its subsequent arbitrary and illegal imposition of the 10% penalty. In its Memorandum filed on November 11, 1970, the rural bank also asserted that the Central Bank had no basis to impose the penalty interest inasmuch as the promissory notes covering the loans executed by the rural bank in favor of the Central Bank do not provide for penalty interest rate of 10% per annum on past due loans beginning January 4, 1965.

It is undisputed that no penal clause has been included in the promissory notes. The records show that DLC Form No. 11 was revised December 23, 1964 to include the penal clause, which was not a part of the promissory notes executed by the rural bank to secure its loans. The Central Bank inserted the clause in the revised DLC Form No. 11 to make it a part of the contractual obligation of rural banks securing loans from the Central Bank after December 23, 1964. On March 31, 1970, the Monetary Board in its Resolution No. 475 effective April 1, 1970, revoked its Resolution No. 1813, dated December 18, 1964, imposing the questioned 10% per annum penalty rate on past due loans of rural banks.

• Authority of the Monetary Board: The Central Bank maintained that it is pursuant to Section 3 of R.A. No. 720, as amended, that the Monetary Board adopted the set of Rules and Regulations Governing Rural Banks, and that Sections 147 and 148 of said Rules authorized the Central Bank to impose additional reasonable penalties on defaulting rural banks.
• Knowledge of Rules as Part of Agreement: The Central Bank contended that when the promissory notes were signed by the rural bank, it was chargeable with knowledge of Sections 147 and 148 of the rules and regulations authorizing the Central Bank to impose additional reasonable penalties, which became part of the agreement.
• Attorney's Fees and Costs of Collection: The Central Bank contended that it is entitled to the 10% cost of collection in case of suit, as provided in all the promissory notes signed by the rural bank, which stipulated that in case of suit for the collection of the amount of the note or any unpaid balance thereof, the rural bank shall pay the Central Bank a sum equivalent to ten per cent of the amount unpaid, not in any case less than P500.00, as attorney's fees and costs of suit and collection.

• Lack of Statutory Authority: Tayug Rural Bank argued that the Central Bank had no basis to impose the penalty interest inasmuch as the promissory notes covering the loans executed by the rural bank in favor of the Central Bank do not provide for penalty interest rate of 10% per annum on past due loans.
• Fault of the Central Bank: The rural bank stated that if it had any unpaid obligations with the Central Bank, it was due to the latter's fault on account of its flexible and double standard policy in the granting of rediscounting privileges to the rural bank and its subsequent arbitrary and illegal imposition of the 10% penalty.

• Validity of the Penalty Imposition: Whether the Central Bank can validly impose the 10% penalty on the rural bank's past due loans beginning July 4, 1965, by virtue of Memorandum Circular No. DLC-8 dated December 23, 1964.
• Impairment of Obligation of Contract: Whether the retroactive imposition of the 10% penalty impairs the obligation of contract and deprives the rural bank of its property without due process of law.
• Attorney's Fees and Costs of Collection: Whether the Central Bank is entitled to the 10% cost of collection in case of suit as provided in the promissory notes.

• Validity of the Penalty Imposition: No. The Central Bank cannot validly impose the 10% penalty on the rural bank's past due loans because nowhere in the pertinent provisions of R.A. 720 is the Monetary Board authorized to mete out on rural banks an additional penalty rate on their past due accounts, and the promissory notes executed before the issuance of the memorandum circular did not contain a penal clause.
• Impairment of Obligation of Contract: Yes, the retroactive imposition of the penalty constitutes an impairment of the obligation of contract. The rule cannot be given retroactive effect because the penal clause was not a part of the promissory notes executed by the rural bank to secure its loans, the last of which was on July 30, 1963, while the memorandum circular was issued on December 23, 1964.
• Attorney's Fees and Costs of Collection: Yes. The Central Bank is entitled to the 10% cost of collection in case of suit, as it is provided in all the promissory notes signed by the rural bank that in case of suit for the collection of the amount of the note or any unpaid balance thereof, the rural bank shall pay the Central Bank a sum equivalent to ten per cent of the amount unpaid, not in any case less than P500.00, as attorney's fees and costs of suit and collection.

• Validity of the Penalty Imposition: The Court examined the pertinent provisions of R.A. 720, including Section 3, which authorizes the Monetary Board to formulate rules and regulations governing the establishment and operation of rural banks; Section 13, which authorizes the Central Bank to rediscount papers evidencing loans granted by rural banks; and Section 10, which spells out the supervising authority of the Monetary Board over rural banks. The Court found that nowhere in any of these provisions, nor in any other provision of R.A. 720, is the Monetary Board authorized to mete out on rural banks an additional penalty rate on their past due accounts. As correctly stated by the trial court, while the Monetary Board possesses broad supervisory powers, the retroactive imposition of administrative penalties cannot be taken as a measure supervisory in character. The Court further noted that the Monetary Board's Resolution No. 475, which revoked Resolution No. 1813 imposing the questioned penalty rate, clearly shows an admission that it has no power to impose the 10% penalty interest through its rules and regulations but only through the terms and conditions of the promissory notes executed by the borrowing rural banks.

• Impairment of Obligation of Contract: The Court held that administrative rules and regulations have the force and effect of law, but there are limitations to the rule-making power of administrative agencies. When Congress authorizes promulgation of administrative rules and regulations to implement given legislation, all that is required is that the regulation be not in contradiction with it, but conform to the standards that the law prescribes. In case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law. Rules that subvert the statute cannot be sanctioned. An administrative agency cannot impose a penalty not so provided in the law authorizing the promulgation of the rules and regulations, much less one that is applied retroactively. The Court noted that the penal clause was not a part of the promissory notes executed by the rural bank to secure its loans, and the Central Bank inserted the clause in the revised DLC Form No. 11 to make it a part of the contractual obligation of rural banks securing loans from the Central Bank after December 23, 1964. Thus, while there is now a basis for the imposition of the 10% penalty rate on overdue accounts of rural banks, there was none during the period that the rural bank contracted its loans from the Central Bank, the last of which was on July 30, 1963. The rule cannot be given retroactive effect.

• Attorney's Fees and Costs of Collection: The Court found the Central Bank's contention that it is entitled to the 10% cost of collection in case of suit to be well taken. It is provided in all the promissory notes signed by the rural bank that in case of suit for the collection of the amount of the note or any unpaid balance thereof, the rural bank shall pay the Central Bank a sum equivalent to ten per cent of the amount unpaid, not in any case less than P500.00, as attorney's fees and costs of suit and collection. The rural bank cannot be allowed to come to Court seeking redress for a wrong done against it and then be allowed to renege on its corresponding obligations.

• Limitations on Administrative Rule-Making Power — When Congress authorizes promulgation of administrative rules and regulations to implement given legislation, all that is required is that the regulation be not in contradiction with it, but conform to the standards that the law prescribes. A rule is binding on the courts so long as the procedure fixed for its promulgation is followed and its scope is within the statute granted by the legislature. An administrative agency cannot impose a penalty not so provided in the law authorizing the promulgation of the rules and regulations, much less one that is applied retroactively. The Court applied this doctrine to hold that the Monetary Board exceeded its rule-making authority under R.A. 720 when it imposed the 10% penalty on past due loans of rural banks, since no provision of the law authorized such penalty.

• Supremacy of the Basic Law over Implementing Rules — In case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law. Rules that subvert the statute cannot be sanctioned. The Court applied this doctrine to invalidate the penalty provision in Memorandum Circular No. DLC-8, which went beyond the authority granted by R.A. 720.

• Retroactive Application of Administrative Rules — An administrative agency cannot impose a penalty not so provided in the law authorizing the promulgation of the rules and regulations, much less one that is applied retroactively. The Court applied this doctrine to hold that the penal clause inserted in the revised DLC Form No. 11 could not be applied to promissory notes executed before December 23, 1964, the last of which was on July 30, 1963.

• "Nowhere in any of the above-quoted pertinent provisions of R.A. 720 nor in any other provision of R.A. 720 for that matter, is the monetary Board authorized to mete out on rural banks an additional penalty rate on their past due accounts with Appellant. As correctly stated by the trial court, while the Monetary Board possesses broad supervisory powers, nonetheless, the retroactive imposition of administrative penalties cannot be taken as a measure supervisory in character." — This passage states the core ratio decidendi: the Monetary Board lacked statutory authority to impose the penalty, and the retroactive imposition of administrative penalties is not a supervisory measure.

• "Hence an administrative agency cannot impose a penalty not so provided in the law authorizing the promulgation of the rules and regulations, much less one that is applied retroactively." — This passage articulates the canonical formulation of the limitation on administrative rule-making power, frequently cited in subsequent jurisprudence.

• "Thus, while there is now a basis for the imposition of the 10% penalty rate on overdue accounts of rural banks, there was none during the period that Appellee contracted its loans from Appellant, the last of which loan was on July 30, 1963. Surely, the rule cannot be given retroactive effect." — This passage explains why the penal clause in the revised DLC Form No. 11 could not apply to loans contracted before its issuance.

• Teoxon vs. Member of the Board of Administrators, 33 SCRA 588 — Cited for the rule delineating the extent of the binding force to be given to administrative rules and regulations, including the principle that a rule is binding on the courts so long as the procedure fixed for its promulgation is followed and its scope is within the statute granted by the legislature, and that administrative interpretation of the law is at best merely advisory.
• Bautista vs. Junio, L-50908, January 31, 1984, 127 SCRA 342 — Cited as the latest restatement of the rule that administrative agencies are bound to observe the constitutional mandate and must strictly comply with the legislative enactment.
• People vs. Lim, 108 Phil. 1091 — Cited for the rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law.
• University of St. Tomas vs. Board of Tax Appeals, 93 Phil. 376 — Cited for the rule that rules that subvert the statute cannot be sanctioned.
• Del Mar vs. Phil. Veterans Administration, 51 SCRA 340 — Cited for the rule that rules that subvert the statute cannot be sanctioned.
• Radio Communications of the Philippines, Inc. vs. Santiago, L-29236, August 21, 1974, 58 SCRA 493 — Cited for the rule that a public official must locate in the statute relied upon a grant of power before he can exercise it, and that department zeal may not be permitted to outrun the authority conferred by statute.
• Victorias Milling Co., Inc. vs. Social Security Commission, 114 Phil. 555 — Cited for the rule that when promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law, the rules and regulations partake of the nature of a statute, and compliance therewith may be enforced by a penal sanction provided in the law.
• People vs. Maceren, L-32166, October 18, 1977, 79 SCRA 462 — Cited for the rule that rules and regulations promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law partake of the nature of a statute.
• Daza vs. Republic, L-43276, September 28, 1984, 132 SCRA 267 — Cited for the rule that rules and regulations promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law partake of the nature of a statute.

• Section 3, Republic Act No. 720, as amended — Authorizes the Monetary Board of the Central Bank of the Philippines to formulate the necessary rules and regulations governing the establishment and operation of Rural Banks for the purpose of providing adequate credit facilities to small farmers and merchants, or to cooperatives of such farmers or merchants, and to supervise the operation of such banks. The Court held that this provision does not authorize the Monetary Board to impose penalties on rural banks.
• Section 10, Republic Act No. 720, as amended — Spells out the supervising authority of the Monetary Board over Rural Banks, consisting of placing limits to the maximum credit allowed any individual borrower, prescribing the interest rate, determining the loan period and loan procedure, indicating the manner in which technical assistance shall be extended, imposing a uniform accounting system, undertaking regular credit examination, instituting periodic surveys, conducting training courses, and in general supervising the business operation of the Rural Banks. The Court held that the retroactive imposition of administrative penalties cannot be taken as a measure supervisory in character.
• Section 13, Republic Act No. 720, as amended — Authorizes the Central Bank to give a loan to any Rural Bank against assets acceptable to the Monetary Board in an emergency or when a financial crisis is imminent, and in normal times to rediscount against papers evidencing a loan granted by a Rural Bank to any of its customers which can be liquefied within a period of two hundred and seventy days. The Court held that this provision does not authorize the imposition of penalties.
• Sections 147 and 148, Rules and Regulations Governing Rural Banks — Section 147 imposes the duty of a Rural Bank to turn over payment received for papers discounted or used for collateral, and authorizes the Central Bank to impose additional reasonable penalties, including curtailment or withdrawal of financial assistance, for failure to comply. Section 148 provides that a Rural Bank becomes in default upon the expiration of the maturity period of its note, and shall suffer the consequences provided in the second paragraph of the preceding section. The Court held that these provisions, being mere administrative rules, cannot go beyond the terms of R.A. 720, which does not authorize the imposition of penalties.

Feria (Chairman), Fernan, Alampay, and Gutierrez, Jr., JJ., concurred.