Aguilar vs. Commission on Audit

Gratuity benefits granted to directors and senior officers of a non-chartered government-owned or controlled corporation constitute additional compensation that must comply with Section 6 of Presidential Decree No. 1597 (requiring prior presidential approval through the DBM), and with Section 30 of the Corporation Code (limiting total yearly compensation of directors to ten percent of the preceding year’s net income); approving officers who authorize such benefits despite the corporation’s negative net worth and in disregard of known legal requirements act in bad faith and are solidarily liable for the disallowed amount, while payee-recipients are liable to return the amounts they respectively received on the principle of unjust enrichment, regardless of good faith.

PNCC, originally the Construction Development Corporation of the Philippines, was incorporated as a stock corporation and later granted a franchise under Presidential Decree No. 1113 to operate toll facilities in the North and South Luzon Expressways until May 1, 2007. Following a debt-to-equity conversion in 1983, the government acquired 76.8% of its capital stock, and PNCC became an acquired-asset corporation slated for privatization under Proclamation No. 50 (1986) and Administrative Order No. 59. In anticipation of the turnover of its tollway operations to private entities and the resulting retrenchment or retirement of its personnel, the PNCC Board of Directors passed a series of resolutions from 2005 to 2009 authorizing gratuity pay to directors and senior officers in addition to retirement benefits. Pursuant to those resolutions, PNCC disbursed a total of PHP 90,748,975.21 from 2007 to 2010. After a post-audit, the COA Audit Team issued Notice of Disallowance No. 11-002-(2007-2010) on July 8, 2011, finding the disbursements illegal, excessive, and extravagant.

• Nature and Ownership of PNCC: PNCC was incorporated as a stock corporation and granted a 30-year franchise under PD 1113 to operate NLEX and SLEX, expiring on May 1, 2007. After a government-led debt-to-equity conversion in 1983, the government held 76.8% of PNCC’s equity, which later rose to 90.3%. Under Proclamation No. 50 and Administrative Order No. 59, PNCC was classified as an acquired-asset corporation set for privatization.

• Anticipation of Turnover and Board Resolutions: In expectation of transferring its tollway operations to private entities and the consequent retrenchment or retirement of personnel, the PNCC Board passed a series of resolutions between 2005 and 2009 authorizing gratuity pay to directors and senior officers. Resolution No. BD-028-2005 granted outgoing directors one-month gross remuneration per year of service. Resolution No. BD-031-2007 created a Retirement/Resignation/Gratuity Benefit Program for executive directors and senior officers, providing retirement gratuity in addition to existing retirement benefits. Subsequent resolutions established a Board of Trustees for the retirement fund, authorized cash gratuity to specific former presidents, and granted the Board power to realign savings to the trust fund.

• Disbursements: On the strength of these resolutions, PNCC paid gratuity benefits totaling PHP 90,748,975.21 to 17 directors and senior officers during the years 2007 to 2010. Among the recipients were petitioners Aguilar, Defensor, Parulan, Lusung, Vilar, Cuejilo, Jr., Hernandez, Macasaet, and Cu, who served variously as Chairman, President/CEO, Executive Vice-President, members of the Board, or former directors.

• COA Disallowance: In ND No. 11-002-(2007-2010) dated July 8, 2011, the COA Audit Team disallowed the entire amount. The ND stated that the payments violated COA Circular No. 85-55-A, DBM Circular Letter No. 2002-2, and were excessive, extravagant, and unreasonable because PNCC had been incurring losses from 2003 to 2006. The ND also found that the Board lacked authority to create the retirement fund. The COA identified 19 individuals as liable, designating their roles as approving officers, signatories, or payees.

• COA Proper’s Findings: The COA Proper, in Resolution No. 2020-479, ruled that PNCC is a government-owned or controlled corporation without original charter, subject to the audit jurisdiction of the COA. It held that the gratuity benefits required prior approval of the Office of the President under Section 6, PD 1597 and Section 9, Joint Resolution No. 4, and that the Board’s authority to grant additional benefits was suspended by OP Memorandum Order No. 20 (2001) and AO No. 103 (2004). The COA also pointed to DBM Circular Letter No. 2002-2, which provides that board members are non-salaried officials not entitled to retirement benefits unless expressly provided by law. It found no good faith, concluding the Board could not feign ignorance of the governing regulations. However, Vice-President Ogan was excluded from liability because her check-signing was ministerial.

• Status of PNCC as a Private Corporation: Petitioners argued that PNCC is a private corporation, not a GOCC, because Section 2(a) of Administrative Order No. 59 expressly excludes acquired-asset corporations from the definition of a GOCC. They relied on Philippine National Construction Corp. v. Pabion and Cuenca v. Hon. Atas, where the Court allegedly treated PNCC as a private entity, and maintained that the COA erroneously applied laws, circulars, and issuances that govern only government agencies and GOCCs.

• Corporate Authority under the Corporation Code: Petitioners contended that the PNCC Board validly created the Retirement Fund under Section 36(10) of the Corporation Code, which empowers a corporation to establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees.

• Retroactivity of Radstock and Operative Fact Doctrine: Petitioners insisted that Strategic Alliance Dev’t Corp. v. Radstock Securities Limited (2009) cannot be retroactively applied to board resolutions passed as early as 2005 because Pabion was the prevailing case law at the time they acted. They invoked the Doctrine of Operative Fact to preclude retroactive application of Radstock.

• Good Faith and Civil Liability: Petitioners averred that they acted in good faith in creating and approving the Retirement Fund, relying on Pabion and Cuenca. Citing Madera v. Commission on Audit, they argued that the approving and certifying officers who acted in good faith cannot be held civilly liable under the ND. They further claimed that the gratuity benefits were given in consideration of past meritorious services.

• PNCC as a GOCC Subject to PD 1597 and Presidential Issuances: The COA, through the Office of the Solicitor General, maintained that PNCC is a GOCC without original charter under Section 2(13) of Executive Order No. 292 because the government owns at least 51% of its capital stock. Consequently, any grant of additional benefits to directors and senior officers required prior presidential approval under Section 6 of PD 1597 and was suspended by OP Memorandum Order No. 20 and AO No. 103.

• Inapplicability of Pabion: The COA argued that Pabion is not a valid basis for the benefits because that case involved an intra-corporate dispute over the election of board members and did not resolve the board’s power to grant gratuity pay. Moreover, Pabion itself recognized that PNCC may be a GOCC and merely applied AO No. 59’s exclusion of acquired-asset corporations solely within the context of that administrative order.

• Lack of Board Authority under PNCC By-Laws: The COA stressed that Section 5.09 of the PNCC By-Laws only authorizes the Board to fix a PHP 1,000 per diem for meeting attendance and cannot serve as the legal basis for creating a retirement fund or granting gratuity benefits.

• Finality of ND as to Aguilar and Lusung: Whether ND No. 11-002-(2007-2010) had become final and executory against petitioners Aguilar and Lusung for their failure to appeal the ND to the COA-CGS Director within the prescribed period.

• Status of PNCC: Whether PNCC is a government-owned or controlled corporation without original charter governed by Section 6 of PD 1597 and related presidential issuances.

• Retroactivity of Radstock: Whether the ruling in Strategic Alliance Dev’t Corp. v. Radstock Securities Limited that PNCC is a GOCC applies retroactively to the board resolutions passed before the decision was promulgated.

• Validity of the Gratuity Benefits: Whether the gratuity benefits paid to PNCC’s directors and senior officers from 2007 to 2010 were properly disallowed by the COA for lack of presidential approval and non-compliance with Section 30 of the Corporation Code.

• Civil Liability: Whether petitioners, as approving officers and payee-recipients, are civilly liable to return the disallowed amounts under the Madera Rules on Return, and whether any exceptions excuse such return.

• Finality of ND as to Aguilar and Lusung: The ND had become final and executory against Aguilar and Lusung because they failed to appeal to the COA-CGS Director within six months from receipt, as required by Sections 48 to 51 of PD 1445 and Section 8, Rule IV of the 2009 Revised Rules of Procedure of the COA. Aguilar did not participate in the appeal until the Petition before the Supreme Court, and Lusung only joined at the COA Proper stage. Their failure rendered the ND final as to them; however, even on the merits the disallowance was upheld.

• Status of PNCC: PNCC is a government-owned or controlled corporation without original charter. Its status was jurisprudentially settled in Radstock, Alejandrino v. COA, and Philippine National Construction Corp. v. NLRC. Under Section 2(13) of EO 292, any stock corporation where the government owns at least 51% of capital stock is a GOCC. PNCC therefore falls within the audit jurisdiction of the COA and must observe the guidelines and policies issued by the President governing compensation and fringe benefits, as mandated by Section 6 of PD 1597.

• Retroactivity of Radstock: The ruling in Radstock applies retroactively because it merely confirmed PNCC’s status under existing law—EO 292—and did not invalidate any statute or overturn a previous doctrine. Pabion and Radstock are not inconsistent; Pabion dealt with an intra-corporate election controversy and, in any event, recognized that the exclusion in AO 59 applies only within that specific administrative order. Because no law, regulation, or jurisprudential doctrine was overturned, the Operative Fact Doctrine did not apply; judicial interpretation of a law is deemed incorporated from the moment of its enactment.

• Validity of the Gratuity Benefits: The disallowance was proper. The gratuity benefits, granted in addition to retirement benefits, constituted additional compensation subject to Sec. 6 of PD 1597 and the requirement of prior presidential approval. Multiple issuances in effect at the time—OP Memorandum Order No. 20 (2001) and AO No. 103 (2004)—suspended the grant of new or increased benefits to board members and senior officers. DBM Circular Letter No. 2002-2 provided that board members are non-salaried officials not entitled to retirement benefits unless expressly provided by law. Moreover, Section 30 of the Corporation Code limited total yearly compensation of directors to 10% of the preceding year’s net income; PNCC had incurred substantial losses since 2003 and had a net worth of at least negative six billion pesos in 2009. The gratuity benefits, being a form of bonus, were entirely dependent on profits, and their grant despite massive losses rendered the disbursements illegal. No law or DBM issuance authorized the benefits, thus the COA’s disallowance was not attended by grave abuse of discretion.

• Civil Liability: The Madera Rules on Return, as refined by Torreta, Abellanosa, and Cagayan de Oro Water District, were applied. Approving officers Aguilar, Defensor, and Cuejilo, Jr. were held solidarily liable for the entire disallowed amount because they acted in bad faith. As high-ranking officers, they were expected to know the governing laws and PNCC’s financial condition. Even if they mistakenly relied on Pabion, they should have ensured compliance with Section 30 of the Corporation Code, which they failed to do. Their fiduciary duty required them to preserve corporate assets and avoid waste, yet they approved gratuity pay for their own benefit a mere six days before the franchise expired, while PNCC was deeply insolvent. That conduct constituted a breach of fiduciary duty and bad faith. All payee-recipients (including the other petitioners) were held liable to return the amounts they respectively received on the principle of solutio indebiti, regardless of good faith. The exceptions under Rule 2c (genuinely given in consideration of services rendered) did not apply because the benefits lacked a legal basis and were not merely procedurally irregular. The equitable exception under Rule 2d (lapse of three years without notice, applicable to rank-and-file employees in Cagayan de Oro Water District) was also unavailable: the ND was issued within three years for payments from 2008 to 2010; more critically, the payees were directors or former directors with a duty to know the law and PNCC’s financial distress, and thus were not passive recipients who could claim ignorance or inequity.

• Madera Rules on Return (as qualified by Torreta, Abellanosa, and Cagayan de Oro Water District) — The liability of public officers and employees for disallowed amounts is governed by a structured framework. (1) If the ND is set aside, no return is required. (2) If the ND 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; (b) those who acted in bad faith, malice, or gross negligence are solidarity liable for the net disallowed amount; (c) recipients — whether approving officers or passive payees — must return what they received unless they prove the amounts were genuinely given in consideration of services rendered, which requires (i) a proper legal basis for the benefit, the disallowance resting only on procedural irregularities, and (ii) a clear, direct, and reasonable connection between the benefit and the payee’s official work; (d) return may be excused in highly exceptional circumstances based on undue prejudice, social justice considerations, or other bona fide exceptions, including the lapse of three years without notice of irregularity — but this three-year exception does not apply to persons who actively participated in fraudulent transactions or who, as directors or high-ranking officers, were on notice of the irregularity. The Court applied this framework to hold the approving officers solidarity liable for bad faith and to impose return liability on all payees.

• Retroactivity of judicial interpretation — A judicial decision interpreting a law or regulation applies retroactively if it merely confirms an existing legal status without invalidating a statute or overturning a prior doctrine. The Operative Fact Doctrine is triggered only when a law, regulation, or jurisprudential rule is invalidated; where no invalidation occurs, the interpretation is deemed incorporated from the moment of the law’s enactment. Radstock, which confirmed PNCC’s status as a GOCC under EO 292, therefore applied retroactively to the board resolutions at issue.

• Dimagiba v. Espartero rule on gratuity as additional compensation — Gratuity pay granted to board members of a GOCC in addition to separation or retirement benefits and in consideration of their satisfactory performance constitutes a bonus, which by its nature is additional remuneration or compensation. Such benefits are prohibited unless specifically authorized by law.

• Fiduciary duty of directors and approving officers — Directors and high-ranking officers owe a fiduciary duty to preserve corporate assets, avoid waste, and examine financial records; approving gratuity benefits for their own benefit while the corporation is insolvent and shortly before the termination of its franchise constitutes bad faith and a breach of that duty.

• “The Court’s interpretation of a law or regulation is prospective in application if the law or regulation was invalidated for being illegal or unconstitutional. ... However, when no law or regulation was invalidated nor doctrine abandoned by the Court, a judicial interpretation of the law should be deemed incorporated at the moment of legislation or issuance.” — This passage defines the scope of the Operative Fact Doctrine and justifies the retroactive application of Radstock.

• “Bad faith does not simply connote bad judgment or negligence; instead, it refers to ‘a breach of a known duty through some motive, interest or ill will that partakes of the nature of fraud, including a dishonest purpose or some moral obliquity and conscious doing of a wrong.’” — The Court used this standard to conclude that the approving officers acted in bad faith.

• “As Board Members at that time, Aguilar, Defensor, and Cuejilo, Jr., had the power of control over PNCC’s properties. It thus appears that they approved the gratuity pay for their own benefit while they were still holding positions in the Board, knowing that they were about to turn-over PNCC’s operations for privatization. Plainly, within that short span of time when they still held power, they took advantage of their position in PNCC to enrich themselves with property that should have accrued to the corporation.” — This factual finding underpinned the ruling of bad faith and solidary liability.

• “The lapse-of-time exception was applied in Cagayan de Oro Water District in favor of rank-and-file employees. ... petitioners ... were members or former Board members at the time that they received the disallowed gratuity benefits. Thus, it cannot be said that they were deprived of notice of the possible illegality or irregularity in the disallowed transaction.” — The Court distinguished the equitable three‑year rule and refused to extend it to directors.

• Strategic Alliance Dev’t Corp. v. Radstock Securities Limited, 622 Phil. 431 (2009) — Followed; the controlling precedent that definitively ruled PNCC is a GOCC without original charter and subject to COA’s audit jurisdiction. Its retroactive application was upheld because it merely confirmed the legal status under EO 292.

• Philippine National Construction Corp. v. Pabion, 377 Phil. 1019 (1999) — Distinguished; this case involved an intra-corporate election dispute, not the board’s power to grant benefits. Its discussion of AO 59 was confined to that administrative order and did not contradict the conclusion that PNCC is a GOCC under EO 292.

• Cuenca v. Hon. Atas, 561 Phil. 186 (2007) — Distinguished; similarly did not resolve the board’s authority to grant gratuity benefits and was not an impediment to treating PNCC as a GOCC.

• Madera v. Commission on Audit, 882 Phil. 744 (2020) — Applied; the Court used the Madera framework to determine the civil liability of approving officers and payee-recipients, adopting its rules on return, good faith, bad faith, and solutio indebiti.

• Abellanosa v. Commission on Audit, 890 Phil. 413 (2020) — Applied; clarified the requisites for amounts “genuinely given in consideration of services rendered” and the highly exceptional nature of equitable excuses from return.

• Cagayan de Oro Water District v. COA, G.R. No. 213789, April 27, 2021 — Applied but distinguished; the three‑year lapse‑of‑time exception applies to passive rank-and-file recipients, not to directors or officers who were on notice of irregularities.

• Dimagiba v. Espartero, 691 Phil. 16 (2012) — Applied; the principle that gratuity pay given in addition to separation or retirement benefits is a form of bonus taxable as additional compensation and prohibited unless authorized by law.

• Gonzaga v. COA, G.R. No. 244816, June 29, 2021 — Applied; bonuses granted to directors of a non-chartered GOCC must comply with Section 30 of the Corporation Code and require the existence of net income in the preceding year.

• Section 6, Presidential Decree No. 1597 — Requires agencies, including GOCCs exempt from OCPC coverage, to observe presidential guidelines on compensation, allowances, and fringe benefits, and mandates reporting to the President through the Budget Commission. Applied to PNCC as a GOCC, rendering the gratuity benefits illegal absent presidential approval.

• Section 30, Corporation Code (Batas Pambansa Blg. 68) — Limits total yearly compensation of directors, as such, to 10% of the corporation’s net income before tax of the preceding year. The gratuity benefits, being additional compensation, violated this cap because PNCC had incurred substantial losses and had a negative net worth.

• Section 2(13), Executive Order No. 292 (Administrative Code of 1987) — Defines a GOCC as any agency organized as a stock or non-stock corporation, owned by the government directly or through its instrumentalities to the extent of at least 51% of its capital stock. PNCC met this definition, having 90.3% government equity.

• Sections 48 to 51, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Govern appeals from COA auditors’ decisions; failure to appeal within six months renders the decision final and executory. Invoked to hold that the ND became final against Aguilar and Lusung.

• Section 1, OP Memorandum Order No. 20 (June 25, 2001) — Directed heads of GOCCs to immediately suspend the grant of any salary increases and new or increased benefits to senior officer positions, including members of the board, unless in accordance with the Salary Standardization Law. Applied to suspend PNCC’s authority to grant the gratuity benefits.

• Sections 3(b) and 3(c), Administrative Order No. 103 (August 31, 2004) — Suspended the grant of new or additional benefits to full-time and non‑full-time officials and employees of GOCCs, including members of governing boards, subject only to narrow exceptions. Applied to bar the gratuity benefits.

• Items 2.2 and 2.3, DBM Circular Letter No. 2002-2 — Provide that members of the board of directors of agencies are non-salaried officials not entitled to PERA, ADCOM, year-end bonus, and retirement benefits unless expressly provided by law. Applied to support the disallowance of retirement-linked gratuity pay to PNCC directors.

• Section 5.09, PNCC By-Laws — Authorizes a PHP 1,000 per diem for directors’ meeting attendance and allows the Board to fix compensation only when a director is designated to perform executive functions or special service. The Court agreed with the COA that this provision did not authorize the creation of the retirement fund or payment of gratuity benefits.

Chief Justice Gesmundo, Senior Associate Justice Leonen, and Justices Caguioa, Hernando, Lazaro-Javier, Zalameda, M. Lopez, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, Kho, Jr., and Singh.