ASG Law

Tag: Liability for Disallowed Amounts

  • Understanding Liability for Unauthorized Corporate Expenditures: Lessons from a Landmark Philippine Supreme Court Ruling

    Key Takeaway: Corporate Boards Must Approve Expenditures to Avoid Liability

    Rizal M. Advincula, et al. vs. Commission on Audit, G.R. No. 209712, February 16, 2021

    Imagine receiving a generous year-end bonus from your employer, only to be told years later that you must return it because it was never authorized. This is the reality faced by employees of Bases Conversion and Development Authority Management and Holdings, Inc. (BMHI) in a recent Supreme Court decision. The case centers on the legality of annual gift checks (AGCs) paid to employees and board members without proper corporate approval, raising critical questions about corporate governance and financial accountability.

    In this case, the Supreme Court of the Philippines upheld the disallowance of AGCs amounting to over P2.9 million, ruling that the payments lacked legal basis and proper board approval. The decision not only clarified the responsibilities of corporate boards but also underscored the potential liabilities for both approving officers and recipients of unauthorized expenditures.

    Legal Context: The Importance of Corporate Governance

    The fundamental principle governing corporate financial transactions in the Philippines is that all disbursements must be authorized by law or a specific statutory provision. This is enshrined in Section 4 of Presidential Decree No. 1445, which states that “No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority.”

    Moreover, corporate actions, including the granting of bonuses or benefits, require formal approval from the corporation’s own board of directors. As per Section 23 of the Corporation Code of the Philippines, “the corporate powers…shall be exercised…by the board of directors…” This means that a subsidiary cannot rely on a resolution from its parent company to justify its expenditures; it must have its own board resolution.

    These legal principles are crucial for ensuring transparency and accountability in corporate governance. They prevent unauthorized use of corporate funds and protect both the corporation and its stakeholders from financial mismanagement.

    Case Breakdown: The Journey to the Supreme Court

    The case began when BMHI, a subsidiary of the Bases Conversion and Development Authority (BCDA), issued AGCs to its employees and board members based on a resolution passed by BCDA’s board. The Commission on Audit (COA) disallowed these payments, citing the lack of legal basis and the absence of a specific BMHI board resolution authorizing the expenditure.

    The employees and board members appealed the COA’s decision, but their appeal was denied. They then escalated the case to the COA Proper, which initially absolved the payees of liability but held the approving and certifying officers accountable. However, upon a motion for reconsideration by the approving officers, the COA Proper reversed its decision, reinstating the liability of the payees.

    The Supreme Court’s ruling emphasized the finality of the COA Director’s decision, which had disallowed the AGCs and held the payees, the approving officer, and the certifying officers liable. The Court stated, “Without an express statutory grant and/or a specific board resolution approving its payment, the release of AGCs contravenes the law and must be disallowed.”

    The Court also clarified the liability of the parties involved:

    • Payees are liable to refund the disallowed amount, regardless of good faith, based on principles of unjust enrichment and solutio indebiti.
    • Approving officers are liable for approving expenditures without proper board approval, which is considered gross negligence.

    The Supreme Court’s decision underscores the importance of adhering to corporate governance protocols and the potential consequences of failing to do so.

    Practical Implications: Navigating Corporate Expenditures

    This ruling sets a precedent for how corporate expenditures, especially those involving employee benefits, are scrutinized. Companies must ensure that all financial transactions are backed by a specific statutory authority and approved by their own board of directors. Failure to do so can lead to disallowance of expenditures and personal liability for those involved.

    For businesses, it is crucial to review their internal policies and ensure that all expenditures are properly documented and approved. Employees should be aware that receiving unauthorized benefits may require them to refund the amounts received, even if they were unaware of the lack of authorization.

    Key Lessons:

    • Always verify that any corporate expenditure, especially employee benefits, has been approved by the company’s board of directors.
    • Understand the legal basis for any financial transaction to avoid potential disallowance and personal liability.
    • Keep meticulous records of all board resolutions and approvals to ensure compliance with corporate governance standards.

    Frequently Asked Questions

    What is a notice of disallowance?

    A notice of disallowance is an official document issued by the Commission on Audit that declares certain expenditures as unauthorized and requires the return of the disallowed amounts.

    Can employees be held liable for receiving unauthorized benefits?

    Yes, according to the Supreme Court, employees who receive unauthorized benefits can be held liable to refund the amounts received, even if they acted in good faith.

    What is the role of the board of directors in approving expenditures?

    The board of directors is responsible for approving all corporate expenditures. Without a board resolution, expenditures are considered unauthorized and may be disallowed.

    How can a company ensure compliance with corporate governance standards?

    Companies should maintain clear policies and procedures for financial transactions, ensure all expenditures are approved by the board, and keep detailed records of all approvals and transactions.

    What are the potential consequences of unauthorized expenditures?

    Unauthorized expenditures can lead to disallowance by the COA, requiring the return of funds, and may result in personal liability for approving officers and recipients.

    ASG Law specializes in corporate governance and financial accountability. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Understanding Liability for Disallowed Government Incentives: Insights from a Philippine Supreme Court Case

    Key Takeaway: The Importance of Adhering to Legal Frameworks in Granting Government Incentives

    Social Security System v. Commission on Audit, G.R. No. 244336, October 06, 2020

    Imagine receiving a bonus at work, only to find out years later that you must return it because it was improperly granted. This scenario became a reality for employees of the Social Security System (SSS) in the Philippines, highlighting the critical need for government agencies to strictly adhere to legal frameworks when granting incentives. The case of SSS vs. COA sheds light on the complexities of government financial management and the accountability of both officials and employees in the disbursement and receipt of such benefits.

    The central issue in this case was the disallowance of Collective Negotiation Agreement (CNA) incentives paid to SSS employees from 2005 to 2008, totaling P9,333,319.66. The Supreme Court was tasked with determining whether the incentives were legally granted and who should be held liable for their return.

    Legal Context: Understanding CNA Incentives and Legal Accountability

    CNA incentives are financial benefits granted to government employees as part of collective negotiation agreements between management and employee organizations. These incentives are governed by specific regulations, such as PSLMC Resolution No. 2, Series of 2003, which outlines the conditions for their grant, including meeting targeted operating income and sourcing funds from identified cost-cutting measures.

    The principle of solutio indebiti is crucial in this case, as it requires the return of payments received without legal basis. This principle is rooted in the concept of unjust enrichment, where a person retains benefits to the loss of another. Similarly, government officials who authorize or certify payments in violation of laws and regulations can be held liable for their actions under the Administrative Code of 1987.

    For example, if a government agency decides to grant a performance bonus to its employees without following the required legal procedures, both the approving officials and the recipients could be held accountable for the return of those funds if they are later disallowed by the Commission on Audit (COA).

    Case Breakdown: The Journey of SSS vs. COA

    The saga began when the SSS granted CNA incentives to its Western Mindanao Division employees from 2005 to 2008, based on what was purported to be Social Security Commission (SSC) Resolution No. 183. However, the COA found no record of this resolution, leading to a notice of disallowance in 2012.

    The SSS appealed the disallowance, but the COA Regional Office and later the COA Commission Proper upheld it, citing multiple violations of the DBM Budget Circular No. 2006-1 and PSLMC Resolution No. 2, Series of 2003. These included the absence of a duly executed CNA for the years in question, the predetermined amount of P20,000 per employee, and the failure to meet financial targets.

    The Supreme Court, in its ruling, emphasized the following key points:

    • “The so-called SSC Resolution No. 183 which supposedly authorized the grant and release of the CNA incentives was found to be inexistent.”
    • “The grant of P20,000.00 to each of the employees infringed Section 5.6.1 of DBM BC No. 2006-1 which prohibits GOCCs or GFIs from making a pre-determination of the amount or rate of each CNA incentive to be given to the employees.”

    The Court held that both the approving and certifying officers and the recipient employees were liable to return the disallowed amounts, rejecting the SSS’s arguments of good faith and prior consultations.

    Practical Implications: Navigating Government Incentives and Accountability

    This ruling underscores the need for government agencies to meticulously follow legal and auditing guidelines when granting incentives. It serves as a reminder that ignorance or negligence of these regulations can lead to severe financial repercussions for both officials and employees.

    For businesses and individuals dealing with government agencies, it’s crucial to verify the legality of any incentives or benefits offered. If you are an employee receiving such benefits, it’s advisable to keep records and seek clarification on the legal basis for these incentives.

    Key Lessons:

    • Always ensure that any financial incentives or benefits are backed by a legal document and follow the prescribed procedures.
    • Employees should be cautious and informed about the legal basis of any benefits they receive.
    • Government officials must exercise due diligence in authorizing payments to avoid liability for disallowed amounts.

    Frequently Asked Questions

    What are CNA incentives?
    CNA incentives are financial benefits granted to government employees as part of collective negotiation agreements between management and employee organizations, aimed at rewarding productivity and efficiency.

    Why were the CNA incentives disallowed in this case?
    The incentives were disallowed because they lacked legal basis, as no valid resolution authorizing them existed, and they violated specific regulations regarding the determination and sourcing of funds for such incentives.

    Who is liable to return disallowed incentives?
    Both the approving and certifying officers who authorized the payment and the employees who received the incentives are liable to return them, based on the principles of solutio indebiti and unjust enrichment.

    Can good faith be a defense against liability for disallowed incentives?
    Good faith is not a sufficient defense if there is a clear violation of explicit rules or regulations, as seen in this case where the officials were held liable despite claims of good faith.

    How can government agencies ensure compliance with incentive regulations?
    Agencies should maintain thorough documentation, verify the legal basis for any incentives, and ensure that all conditions set by relevant regulations are met before granting such benefits.

    What should employees do if they receive questionable incentives?
    Employees should seek clarification from their human resources department or legal office about the basis and legality of any incentives they receive.

    ASG Law specializes in government procurement and administrative law. Contact us or email hello@asglawpartners.com to schedule a consultation and ensure you are navigating these complex legal waters with expert guidance.