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Case digest · Directors’ compensation; bonuses and the 10% net income limit
Gonzaga, et al. vs. Commission on Audit
A government corporation organized under the Corporation Code lost money in 2009 and 2010. Its board’s budget for 2010 still included a Christmas bonus and an anniversary bonus for the directors, and the Monetary Board of its sole stockholder approved it.
Facts
The corporation
“The PICCI is a government-owned or controlled corporation (GOCC) created under Presidential Decree (P.D.) No. 520, as amended by P.D. No. 710, with the Bangko Sentral ng Pilipinas (BSP) as its sole stockholder.” It was incorporated under the Corporation Code.
The by-law
PICCI’s amended by-laws provided: “Directors, as such, shall not receive any salary for their services but shall receive a per diem and allowances in such amounts as may be fixed by a majority of all the members of the Board of Directors in a regular or special meeting and approved by the Monetary Board.”
2009–2010
The COA found that PICCI incurred net losses in its operations in 2009 and 2010. On November 24, 2009, the board submitted its proposed budget for 2010, which included a “Director's Christmas Bonus” and a “Director's Anniversary Bonus” besides a director’s allowance and per diem. The BSP Monetary Board approved the budget on December 29, 2009.
The audit
The auditors flagged several benefits granted to the petitioners, among them the Christmas and anniversary bonuses, as irregular for contravening Sec. 30 of the Corporation Code. Among other arguments, the petitioners said that Sec. 30 “applies only to close corporations”, and the audit team answered that the Code has no such provision. The COA Director affirmed the notices of disallowance, and the COA Proper affirmed.
Issue
Were the directors’ Christmas and anniversary bonuses valid under Sec. 30 of the Corporation Code (B.P. Blg. 68), given the Monetary Board’s approval and the losses of the preceding years?
Ruling
No. A bonus is compensation under Sec. 30, and without a net income in the preceding year there was nothing from which it could validly be given. The Court upheld the disallowance of the bonuses and held the board members and two approving or certifying officers solidarily liable to return them. It partially granted the petition on a separate allowance and absolved the first-named petitioner, the corporate secretary.
The Court first held that, “having been incorporated under the Corporation Code, PICCI is subjected not only to the provisions of P.D. No. 520, but also to the provisions of the Corporation Code, one of which is Section 30”. That section complements the board’s authority, “especially that it authorizes a financial grant decided by themselves, and for themselves.” A bonus, the Court said, “is a form of compensation for services rendered, which is nevertheless covered by the limitation imposed by Section 30 of the Corporation Code”. It was not disputed that PICCI incurred losses in 2009 and 2010. “Without a net income derived from the previous year, there will be no valid appropriation for which the bonuses of the members of the Board of Directors of PICCI may be taken from, which could be disbursed for CY 2010-2011.” The Monetary Board’s approval did not cure this: any compensation “cannot simply rely on the approval of the Monetary Board.” “Thus, the Anniversary and Christmas bonuses were properly disallowed by COA.” Nor could the board members claim good faith: “With the losses incurred by PICCI in CY 2009, there is certainly no net income generated from which benefits for CY 2010 may be taken from. This fact negates any good faith on their part in approving the unauthorized benefits for themselves.” The Court partially granted the petition, on a separate government allowance that this digest does not cover, and because that allowance was valid, it absolved the first-named petitioner, the corporate secretary, whose only part was approving its January 2011 payment. It held the five board members and the two officers who approved or certified the payment of the bonuses solidarily liable to return the disallowed amount corresponding to the Christmas and anniversary bonuses and the medical reimbursements. Those rules on returning disallowed amounts are the Supreme Court’s rules for amounts the COA disallows from public funds, not rules for private corporations. The case applied Sec. 30 of B.P. Blg. 68; today the cap is in Sec. 29 of the Revised Corporation Code.
“With the limitation imposed by Section 30 of the Corporation Code, any form of compensation that may be extended to the Board of Directors of PICCI must be premised on the presence of a net income produced by PICCI in the previous year. It cannot simply rely on the approval of the Monetary Board as the Corporation Code requires the presence of a net income before any compensation may be given by the Board of Directors unto themselves.”
Doctrine
Under Sec. 30 of the old Corporation Code, a bonus to directors is compensation, and the 10% cap is measured against the net income of the preceding year; with no net income, no compensation can validly be given, even with the Monetary Board’s approval. The Court explained why the limit matters: “As members of the Board of Directors, they have a fiduciary duty to safeguard and properly utilize the funds of the corporation.” The case applied Sec. 30 of B.P. Blg. 68 to a government corporation organized under the Corporation Code. Today the cap is in Sec. 29 of the Revised Corporation Code: “In no case shall the total yearly compensation of directors exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year.” In our analysis, the Court’s interpretation of the Code (a bonus is compensation; no net income, no compensation) is not limited to government corporations, but the rules on returning disallowed amounts apply to amounts the COA disallows from public funds.
Compare: who approved
In Central Cooperative Exchange, Inc. vs. Tibe, Sr., et al., G.R. No. L-27972, June 30, 1970, the allowances fell for a different reason: who approved them. The by-laws reserved the directors’ compensation to the stockholders, and the Court held that, by voting compensation for themselves, the directors “acted in excess of their authority, as expressed in the By-Laws.”
Bar tip
Check the cap first. Under Sec. 29 of the Revised Corporation Code (formerly Sec. 30, B.P. Blg. 68), the total yearly compensation of directors may not exceed 10% of the net income before income tax of the preceding year. Following Gonzaga, a bonus counts as compensation, and with no net income in the preceding year there is nothing to grant, even with the approval of the sole stockholder’s Monetary Board. Keep the remedies apart: the solidary return of disallowed amounts comes from the rules on amounts the COA disallows from public funds, not from the Corporation Code.
Hear it explained
Directors’ Compensation, Podcast Ep. 9, at 10:48
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.