The Supreme Court has ruled against a questionable compromise agreement involving the Philippine National Construction Corporation (PNCC) and Radstock Securities Limited, designed to settle a staggering P17 billion debt for just P6.185 billion. In doing so, the Court underscored the critical importance of protecting public funds and upholding the Constitution and existing laws in all government transactions. The Court invalidated the agreement, emphasizing that government entities cannot compromise debts to the detriment of the State. The ruling protects public resources and sets a precedent for ensuring government transparency.

PNCC’s Gamble: How a Multi-Billion Peso Debt Settlement Fell Apart Under Scrutiny

This case unveils a complex saga involving the Philippine National Construction Corporation (PNCC), a government-controlled corporation, and Radstock Securities Limited, a foreign private entity. The dispute centered on a compromise agreement designed to settle a long-standing debt allegedly guaranteed by PNCC to Marubeni Corporation, later assigned to Radstock. The agreement sought to reduce PNCC’s liability from a staggering P17 billion to a more manageable P6.185 billion. However, the Supreme Court, scrutinizing the circumstances surrounding the agreement, ultimately declared it void, highlighting significant violations of constitutional principles and established legal procedures.

The roots of the controversy trace back to loans obtained by Basay Mining Corporation, an affiliate of PNCC, from Marubeni Corporation between 1978 and 1981. Letters of guarantee were issued by a PNCC official for these loans, but without the necessary authorization from the PNCC Board. For two decades, the PNCC Board consistently refused to acknowledge any liability for these loans. However, in a sudden turn of events in October 2000, the PNCC Board passed a resolution admitting PNCC’s liability to Marubeni for over P10 billion. This acknowledgment paved the way for Marubeni to assign its credit to Radstock for a mere US$2 million shortly thereafter. Radstock then filed an action for collection against PNCC, leading to a court decision favoring Radstock.

In response, the PNCC Board, under new leadership, revoked the prior resolution acknowledging the Marubeni loans. Despite this revocation, PNCC and Radstock entered into the now-contested compromise agreement. Senator Franklin Drilon brought attention to irregularities surrounding the agreement in a privilege speech, questioning the valuation of assets and the unusual preference given to Radstock over other creditors, including the Philippine government. As Senator Drilon noted:

In addition, Mr. President and my dear colleagues, please hold on to your seats because part of the agreement is 50% of PNCC’s 6% share in the gross toll revenue of the Manila North Tollways Corporation for 27 years, from 2008 to 2035, is being assigned to Radstock. How much is this worth? It is worth P9,382,374,922. I repeat, P9,382,374,922.

The Supreme Court’s decision hinged on several critical legal issues. One central point was whether the PNCC Board had the authority to compromise the P6.185 billion debt. The Court determined that the authority to compromise such a substantial amount rested exclusively with Congress. The Court cited Section 20(1), Chapter IV, Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative Code of 1987, which states:

Section 20. Power to Compromise Claims. – (1) When the interest of the Government so requires, the Commission may compromise or release in whole or in part, any settled claim or liability to any government agency not exceeding ten thousand pesos arising out of any matter or case before it or within its jurisdiction, and with the written approval of the President, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos. In case the claim or liability exceeds one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the President, with their recommendations, to the Congress[.]

The Court emphasized that without congressional approval, the compromise agreement was void. It was determined that toll fees collected by PNCC constitute public funds, and any use of these funds requires a corresponding appropriation law enacted by Congress, which was absent in this case. The Supreme Court also declared that the agreement violated Section 4(2) of the Government Auditing Code, mandating that government funds be used solely for public purposes. In addition, Radstock, as a foreign corporation, was deemed unqualified to own land in the Philippines, rendering the assignment of real properties under the agreement unconstitutional.

Building on this, the Court addressed the requirement of public bidding for the disposal of government assets. The Compromise Agreement sought to transfer parcels of land to Radstock without undergoing the mandatory public bidding process outlined in Section 79 of the Government Auditing Code. Furthermore, the Court found that the agreement unfairly favored Radstock over other creditors, violating established principles of preference of credit. PNCC’s significant debt to the National Government, totaling P36 billion, was being disregarded in favor of a private entity. As expressed by Senator Osmeña:

So now, what you are saying is that you gonna pay Marubeni 6 billion and change and the national government is only recognizing 5 billion. I don’t think that’s protecting the interest of the national government at all.

These cumulative violations led the Supreme Court to invalidate the compromise agreement, safeguarding public funds and underscoring the government’s responsibility to prioritize the interests of its citizens over private entities.

This approach contrasts with the arguments presented by Radstock and PNCC, who sought the Court’s approval to shield themselves from potential criminal liabilities. In dismissing this proposition, the Supreme Court firmly asserted its role as a protector of the public interest and a guardian against any attempts to plunder public coffers.

The Court’s decision sends a clear message that government entities must adhere to the Constitution and existing laws in all financial transactions. It reinforces the principle that public funds are to be managed with utmost care and transparency, and cannot be used to favor private interests at the expense of the public good. Moving forward, this case serves as a stark reminder to government officials of their fiduciary duty to protect public assets and ensure that all agreements are lawful, equitable, and beneficial to the Filipino people.

FAQs

What was the key issue in this case?	The central issue was the validity of a compromise agreement between PNCC and Radstock, which sought to settle a P17 billion debt for a significantly lower amount but was challenged for violating constitutional principles and existing laws. The Court had to decide if the agreement was valid despite allegations of fraud, lack of congressional approval, and violations of public policy.
Why did the Supreme Court invalidate the compromise agreement?	The Supreme Court invalidated the agreement due to violations of the Constitution, existing laws, and public policy, including the lack of congressional approval for compromising a large government claim, the use of public funds for a private purpose, and the unconstitutional transfer of land to a foreign entity.
What was Radstock’s role in this case?	Radstock Securities Limited was the assignee of a debt originally owed to Marubeni Corporation. They sought to enforce the debt against PNCC through a compromise agreement, which was ultimately invalidated by the Supreme Court.
Why was there a question of congressional approval?	Because the debt exceeded a certain threshold, settling it required Congressional approval under existing laws. The Supreme Court ruled that without this approval, the compromise agreement was invalid.
What happened to PNCC’s toll fees?	The Supreme Court determined that the toll fees constituted public funds and required an appropriation law for their expenditure, including paying Radstock. Because there was no appropriation law, the court considered the agreement void.
Why was Radstock’s foreign status an issue?	Radstock, as a foreign corporation, was deemed unqualified to own land in the Philippines under the Constitution. The proposed assignment of real properties to Radstock under the compromise agreement was therefore unconstitutional.
Who is Asiavest Merchant Bankers Berhad and what was their interest?	Asiavest was a judgment creditor of PNCC, and sought to intervene, arguing that the compromise agreement would deplete PNCC’s assets, making it harder for them to collect on their existing judgment. The Court ultimately ruled they had no standing to intervene.
Was public bidding required for PNCC’s assets?	Yes, the disposition of government lands to private parties requires public bidding under the Government Auditing Code. The Court found the compromise agreement failed to comply with this requirement, which further invalidated the agreement.

In conclusion, the Supreme Court’s decision in this case serves as a crucial reminder of the importance of safeguarding public funds and adhering to constitutional principles in all government transactions. By invalidating the compromise agreement, the Court has affirmed its role as a protector of the public interest and set a precedent for ensuring accountability and transparency in the management of public resources.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Strategic Alliance Development Corporation v. Radstock Securities Limited, G.R. No. 178158 & G.R. No. 180428, December 04, 2009