Workers Preference
Development Bank of the Philippines vs. NLRC
[242 SCRA 59 (1995)]
Facts:
PSC obtained a loan in 1983 from the DBP to finance its iron smelting and steel manufacturing business.
To secure said loan, PSCmortgaged to DBP real properties with all the buildings and improvements
thereon and chattels. By virtue of the said loan agreement, DBPbecame the majority stockholder of PSC,
with stockholdings. Subsequently, it took over the management of PSC. When PSC failed to pay
itsobligation with DBP, DBP foreclosed and acquired the mortgaged real estate and chattels of PSC in the
auction sales in 1987. Petitioners filed aPetition for Involuntary Insolvency in the RTC against PSC and
DBP, impleading as co-respondents therein Olecram Mining Corporation andJose Panganiban Ice Plant
and Cold Storage, with said petitioners representing themselves as unpaid employees of said private
respondents.Herein private respondents filed a complaint with the Department of Labor against PSC,
including later on DBP, for non-payment of salaries,13th month pay, incentive leave pay and separation
pay. DBP submits that when it foreclosed the assets of PSC, it did so as a foreclosing creditor.The pivotal
issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the unpaid wages,
13th month pay,incentive leave pay and separation pay of the employees of PSC. The terms 'declaration'
of bankruptcy or 'judicial' liquidation in Article 110 of the Labor Code have been eliminated by RA 6715,
which took effect on March 21, 1989. Does this mean then that liquidation proceedings havebeen done
away with?
SC Ruling:
We opine in the negative. Because of its impact on the entire system of credit, Article 110 of the
Labor Code cannot be viewed in isolation but must be read in relation to the Civil Code scheme
on classification and preference of credits. In the event of insolvency, a principal objective should
be to effect an equitable distribution of the insolvent's property among his creditors. To
accomplish this there must first be some proceeding where notice to all of the insolvent's creditors
may be given and where the claims of preferred creditors may be bindingly adjudicated.
The right of first preference as regards unpaid wages recognized by Article 110 does not
constitute a lien on the property of the insolvent debt or in favor or workers. It is but a preference
of credit in their favor, a preference in application. It is a method adopted to determine and
specify the order in which credits should be paid in the final distribution of the proceeds of the
insolvent's assets.
The DBP anchors its claim on a mortgage credit, which directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted (Art. 2176, CC).
It creates a real right which is enforceable against the whole world. It is a lien on an identified
immovable property, which a preference is not. Even if Article 110 and its Implementing Rule, as
amended, should be interpreted to mean `absolute preference,' the same should be given only
prospective effect in line with the cardinal rule that laws shall have no retroactive effect, unless
the contrary is provided (Art. 4, CC).
Thereby, any infringement on the constitutional guarantee on non-impairment of obligation of
contracts (Sec. 10, Art. III, 1987 Consti.) is also avoided. In point of fact, DBP's mortgage credit
antedated by several years the amendatory law, RA 6715.
To give Article 110 retroactive effect would be to wipe out the mortgage in DBP's favor and
expose it to a risk which it sought to protect itself against by requiring a collateral in the form of
real property.
In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist
in any effective way prior to the time of its presentation in distribution proceedings.
It will find application when, in proceedings such as insolvency, such unpaid wages shall be paid
in full before the `claims of the Government and other creditors' may be paid. But, for an orderly
settlement of a debtor's assets, all creditors must be convened, their claims ascertained and
inventoried, and thereafter the preference determined in the course of judicial proceedings which
have for their object the subjection of the property of the debtor to the payment of his debts or
other lawful obligations.
Thereby, an orderly determination of preference of creditors' claims is assured; the adjudication
made will be binding on all parties-in-interest, since those proceedings are proceedings in rem;
and the legal scheme of classification, concurrence and preference of credits in the Civil Code,
the Insolvency Law, and the Labor Code is preserved in harmony.
