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Interest
A comprehensive term to describe any right, claim, or privilege that an
individual has toward real or Personal Property. Compensation for the use
of borrowed money.
Conventional interest
Depending on, or arising from, the mutual agreement of parties; as
distinguished from legal, which means created by, or arising from, the act
of the law.
Escalation Clause A clause which authorizes the automatic
increase in interest rate.
An escalation clause is valid when it is accompanied by a De-Escalation
Clause. A de-escalation clause is a clause which provides that the rate of
interest agreed upon will also be automatically reduced. There must be a
specified formula for arriving at the adjusted interest rate, over which
neither party has any discretion.
Interest on interest
The interest that is earned upon the re-investment of interest payments.
Interest-on-interest is primarily used in the context of coupon paying
bonds, where all coupon payments are assumed to be re-invested at some
interest rate and held until the bond matures, or when the bond is sold.
Use the compound interest formula to determine the amount of
accumulated interest on the principal amount invested or borrowed. To
calculate the compound interest on a loan or deposit, you need to know
the principal amount, the annual interest rate and the number of
compounding periods.
Compound interest is also known as interest on interest; it is the interest
owed or received that grows at a faster rate than basic interest. The
formula to calculate compound interest is the principal amount multiplied
by 1 plus the annual interest rate in percentage terms raised to the total
number of compound periods. The principal amount is then subtracted
from the resulting value.
For example, assume you want to calculate the compound interest on a $1
million deposit. The principal is compounded annually at a rate of 5%. The
total number of compounding periods is five years. The resulting
compounded interest on the deposit is $276,281.60, or $1,000,000 * (1 +
0.05)^5 - $1000000.
A finance charge is a fee charged for the use of credit or the extension of
existing credit. It may be a flat fee or a percentage of borrowings, with
percentage-based finance charges being the most common.
ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW

Sec. 58. Definitions. (a) In this Act, unless the content or subject matter
otherwise requires:
"Action" includes counterclaim, set-off, and suits in equity as provided by
law in these islands.
"Delivery" means voluntary transfer of possession from one person to
another.
"Fungible goods" means goods of which any unit is, from its nature by
mercantile custom, treated as the equivalent of any other unit.
"Goods" means chattels or merchandise in storage or which has been or is
about to be stored.
"Holder" of a receipt means a person who has both actual possession of
such receipt and a right of property therein.
"Order" means an order by indorsement on the receipt.
"Owner" does not include mortgagee.
"Person" includes a corporation or partnership or two or more persons
having a joint or common interest.
To "purchase" includes to take as mortgagee or as pledgee.
"Receipt" means a warehouse receipt.
"Value" is any consideration sufficient to support a simple contract. An
antecedent or pre-existing obligation, whether for money or not,
constitutes value where a receipt is taken either in satisfaction thereof or
as security therefor.
"Warehouseman" means a person lawfully engaged in the business of
storing goods for profit.
(b) A thing is done "in good faith" within the meaning of this Act when it is
in fact done honestly, whether it be done negligently or not.
PD 1684
Section 1. A new Section 259-A is hereby added to Title VII of the National
Internal Revenue Code of 1977, as amended, which shall read as follows:
"Sec. 259(a). Flexibility Clause. In the interest of the national economy and
general welfare, the President, upon recommendation of the Minister of
both the Ministries of Finance and Natural Resources, is hereby empowered
to revise the rates of tax on and classification of mineral products, as well
as to prescribe the rates of tax in cases of marginal mines requiring
protection, assistance or incentives.
"The foregoing authority may be exercised by the President if any of the
following conditions exist:
"(a) Where, in the interest of economic development, it is necessary to
redirect expenditures or consumption patterns;
"(b) Whenever by reason of fluctuation of currency values and/or inflation
or deflation, the existing taxable base and rate levels are no longer
realistic or consistent with the current price levels;
"(c) When it is necessary to counter adverse action on the part of another
country or adverse international market conditions; or
"(d) When there is need to obviate unemployment and economic and social
dislocation.

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"Before any recommendation is submitted to the President by the Minister
of Finance and the Minister of Natural Resources pursuant to the provisions
of this section, a public hearing shall, whenever practicable, be held and
interested parties afforded a reasonable opportunity to be heard."
Section 1. The rate of interest for the loan or forbearance of any money
goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be six per centum per
annum or such rate as may be prescribed by the Monetary Board of the
Central Ban of the Philippines for that purpose in accordance with the
authority hereby granted.
Sec. 1"a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions.
In the exercise of the authority herein granted, the Monetary Board
may prescribe higher maximum rates for loans of low priority, such as
consumer loans or renewals thereof as well as such loans made by
pawnshops finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily be
uniform. The Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings, including deposits
and deposit substitutes, or loans of financial intermediaries.

Central Bank issued Circular No. 416 as follows:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as
amended, otherwise known as the "Usury Law," the Monetary Board, in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of express contract as to such
rate of interest, shall be twelve per cent (12 %) per annum.

Sec. 7. All covenants and stipulations contained in conveyances,

mortgages, bonds, bills, notes, and other contracts or evidences of debts,
and all deposits of goods or other things, whereupon or whereby there
shall be stipulated, charged, demanded, reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum or value for the
loan or renewal or forbearance of money, goods, or credits than is
hereinbefore allowed, shall be void: Provided, however, That no merely
clerical error in the computation of interest, made without intent to evade
any of the provisions of this Act, shall render a contract void: Provided,
further, That parties to a loan agreement, the proceeds of which may be
availed of partially or fully at some future time, may stipulate that the rate
of interest agreed upon at the time the loan agreement is entered into,
which rate shall not exceed the maximum allowed by law, shall prevail
notwithstanding subsequent changes in the maximum rates that may be
made by the Monetary Board: And Provided, finally, That nothing herein
contained shall be construed to prevent the purchase by an innocent
purchaser of a negotiable mercantile paper, usurious or otherwise, for
valuable consideration before maturity, when there has been no intention
on the part of said purchaser to evade the provisions of this Act and said
purchase was not a part of the original usurious transaction. In any case,
however, the maker of said note shall have the right to recover from said
original holder the whole interest paid by him thereon and, in case of
litigation, also the costs and such attorneys fees as may be allowed by the
court.

Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charged required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection
in which any person is entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as determined by the court.
(b) Except as specified in subsection (a) of this section, nothing contained in this Act
or any regulation contained in this Act or any regulation thereunder shall affect the
validity or enforceability of any contract or transactions.
(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.
(e) A final judgment hereafter rendered in any criminal proceeding under this Act to
the effect that a defendant has willfully violated this Act shall be prima facie
evidence against such defendant in an action or proceeding brought by any other
party against such defendant under this Act as to all matters respecting which said
judgment would be an estoppel as between the parties thereto.

Ra 3765
- AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE
CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT.
Section 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing setting
forth, to the extent applicable and in accordance with rules and regulations
prescribed by the Board, the following information:
(1) The cash price or delivered price of the property or service to be acquired;
(2) The amounts, if any, to be credited as down payment and/or trade-in;
(3) The difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) The total amount to be financed;
(6) The finance charge expressed in terms of pesos and centavos; and
(7) The percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

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interposed. Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying under oath
the allegations of usury.
ISSUE:
In a loan with usurious interest, may the creditor recover the principal of the loan?
RULING:
Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:
Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes criminal offense, both parties being in pari delicto, they shall have no action against each other,
and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects
or instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise.
The Supreme Court do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is
the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from
previous interpretation that, as provided in the Usury Law (Act No.2655, as amended), a loan with
usurious interest is not totally void only as to the interest.
ANGEL WAREHOUSING vs CHELDA
Facts: Angel Warehousing sued Chelda for the recovery of unpaid loans amounting to P20,880 because the
post dated checks issued by Chelda were dishonored. Chelda said that Angel Warehousing charged
usurious interests, thus they have no cause of action against them & cant recover the remaining balance.
Issue: W/N illegal terms as to payment of interest likewise renders a nullity the legal terms as to the
payment of the principal debt?
Ruling: No. The contract of loan with usurious interest consists of principal and accessory stipulations
and the two stipulations are divisible in the sense that the principal debt can stand without the usurious
interest (accessory). These are divisible contracts. In divisible contracts, if the illegal terms can be
separated from legal ones, the latter may be enforced. Illegality lies only as to the prestation to pay
interest, being separable, thus should be rendered void. If the principal will be forfeited this would
unjustly enrich the borrower at the expense of the lender.
ANGEL WAREHOUSING VS. CHELDA
G.R. No. L-25704 April 24, 1968
FACTS:
Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the
partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid
loans inthe total amount of P20,880.00, with legal interest from the filing of the complaint, plus attorney's
fees ofP5,000.00. Alleging that postdated checks issued by defendants to pay said account were
dishonored, that defendants' industrial partner, Chellaram I. Mohinani, had left the country, and that
defendants have removed or disposed of their property, or are about to do so, with intent to defraud their
creditors, preliminary attachment was also sought. Answering, defendants averred that they obtained four
loans from plaintiff in the total amount of P26,500.00, of which P5,620.00 had been paid, leaving a
balance of P20,880.00; that plaintiff charged and deducted from the loan usurious interests thereon, at
rates of 2% and 2.5% per month, and, consequently, plaintiff has no cause of action against defendants and
should not be permitted to recover under the law. A counterclaim for P2,000.00 attorney's fees was

True, as stated in Article 1411 of the New Civil

Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or
object of said contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest
thereon. And said two stipulations are divisible in the sense that the former can still stand without the
latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force."
Antonio Tan vs. Court of Appeals/CCP
GR No. 116285
FACTS:
1.
2.

Petition for review.

TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
a.
Executed a promissory note in amount of P3,411,421.32; payable in 5 installments.
b.
TAN failed to pay any installment on the said restructured loa.
c.
In a letter, TAN requested and proposed to respondent CCP a mode of paying the
restructured loan
i. 20% of the principal amount of the loan upon the respondent giving its
conformity to his proposal
ii. Balance on the principal obligation payable 36 monthly installments until
fully paid.
d.
TAN requested for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on
account of the peso devaluation.
i. No favorable response was made to said letters.
ii. CCP demanded full payment, within ten (10) days from receipt of said
letter P6,088,735.03.
3.
CCP FILED COMPLAINT collection of a sum of money

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a.
b.

TAN interposed the defense that he accommodated a friend who asked for help to
obtain a loan from CCP.
i. Claimed that cannot find the friend.
TAN filed a Manifestation wherein he proposed to settle his indebtedness to CCP by
down payment of P140,000.00 and to issue1 2 checks every beginning of the year
to cover installment payments for one year, and every year thereafter until the
balance is fully paid.
i. CCP did not agree to the petitioners proposals and so the trial of the case

ensued.
4.

TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing defendants

outstanding account as of August 28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
a.
REASONS:
i. Reason of loan for accommodation of friend was not credible.
ii. Assuming, arguendo, that the TAN did not personally benefit from loan,
rd
he should have filed a 3 -party complaint against Wilson Lucmen
iii. 3 times the petitioner offered to settle his loan obligation with CCP.
iv. TAN may not avoid his liability to pay his obligation under the
promissory note which he must comply with in good faith.
v. TAN is estopped from denying his liability or loan obligation to the
private respondent.
5. TAN APPEALED TO CA, asked for the reduction of the penalties and charges on his loan
obligation.
a.
Judgment appealed from is hereby AFFIRMED.
1. No alleged partial or irregular performance.
2. However, the appellate court modified the decision of the trial court by deleting exemplary damages
because not proportionate to actual damage caused by the non-performance of the contract
ISSUES:
WON there are contractual and legal bases for the imposition of the penalty, interest on the penalty and
attorneys fees.
TAN imputes error on CA in not fully eliminating attorney fees and in not reducing the penalties
considering that he made partial payments on the loan.
And if penalty is to be awarded, TAN asking for non-imposition of interest on the surcharges because
compounding of these are not included in promissory note.
No basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is
devoid of any provision allowing the imposition of interest on surcharges.
WON interest may accrue on the penalty or compensatory interest without violating ART 1959: Without
prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.
TAN- No legal basis for the imposition of interest on the penalty charge for the reason that the law only
allows imposition of interest on monetary interest but not the charging of interest on penalty. Penalties
should not earn interest.
WON TAN can file reduction of penalty due to made partial payments.
Petitioner contends that reduction of the penalty is justifiable under ART 1229: The judge shall equitably
reduce the penalty when the principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.

HELD
CA DECISION AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%) per
month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent
(12%) per annum starting from August 28, 1986. With costs against the petitioner.
1.

WON there are contractual and legal bases for the imposition of the penalty, interest on the
penalty and attorneys fees. YES. WITH LEGAL BASES.
a.
ART 1226: In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
i. The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
b.
CASE AT BAR: promissory note expressed the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the
subject restructured loan.
c.
PENALTY IN MANY FORMS:
i. If the parties stipulate penalty apart monetary interest, two are different
and distinct from each other and may be demanded separately.
ii. If stipulation about payment of an additional interest rate partakes of the
nature of a penalty clause which is sanctioned by law:
1. ART 2209: If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
d.
CASE AT BAR: Penalty charge of 2% per month began to accrue from the time of
default by the petitioner.
i. No doubt petitioner is liable for both the stipulated monetary interest and
the stipulated penalty charge.
1. PENALTY CHARGE = penalty or compensatory interest.
2.

WON interest may accrue on the penalty or compensatory interest without violating ART 1959.
a.
Penalty clauses can be in the form of penalty or compensatory interest.
i. Thus, the compounding of the penalty or compensatory interest is
sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code
considering that:
1. There is an express stipulation in the promissory note (Exhibit A) permitting the compounding of
interest.
a. 5th paragraph of the said promissory note provides that: Any interest which may be due if not paid
shall be added to the total amount when due and shall become part thereof, the whole amount to bear
interest at the maximum rate allowed by law..
2. Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent
(12%) per annum, in the absence of express stipulation on the specific rate of interest, as in the case at bar.
b.
ART 2212: Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
c.
CASE AT BAR: interest began to run on the penalty interest upon the filing of the
complaint in court by CCP.
i. Hence, the courts did not err in ruling that the petitioner is bound to pay
the interest on the total amount of the principal, the monetary interest and the penalty interest.
3.

WON TAN can file reduction of penalty due to made partial payments. YES. BUT NOT 10%
REDUCTION AS SUGGESTED BY PETITIONER.
a.
REDUCED TO 2% REDUCTION:

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i. PARTIAL PAYMENTS showed his good faith despite difficulty in
complying with his loan obligation due to his financial problems.
1. However, we are not unmindful of the respondents long overdue deprivation of the use of its money
collectible.
4. The petitioner also imputes error on the part of the appellate court for not declaring the
suspension of the running of the interest during period when the CCP allegedly failed to assist
the petitioner in applying for relief from liability
a.
Alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become
conditional
i. Dependent on a future and uncertain event which consists of whether the
petitioners request for condonation of interest and surcharge would be recommended by the Commission
on Audit.
1. Since the condition has not happened due to the private respondents reneging on its promise, his
liability to pay the interest and surcharge on the loan has not arisen.
b.
COURT ANSWER:
i. Running of the interest and surcharge was not suspended.
ii. CCP correctly asserted that it was the primary responsibility of petitioner
to inform the Commission on Audit of his application for condonation of interest and surcharge.
Art. 1956. No interest shall be due when not expressly stipulated in writing.
ARWOOD INDUSTRIES, INC. vs. D.M. Consunji, Inc.
FACTS: Petitioner and respondent, as owner and contractor, respectively entered into an Agreement for
the construction of petitioners condominium. Despite the completion of the project, petitioner was not
able to pay respondent the full amount and left a balance. Repeated demands were left unheeded
prompting respondent to file a civil case against petitioner, with a prayer among others that the full
amount be paid with interest of 2% per month, from Nov. 1990 up to the time of payment. RTC ruled in
favor of respondent. Petitioner appealed to the CA, particularly opposing the imposition of the 2%
interest. The CA ruled in favor of the 2% interest.
Petitioners contention- The imposition of the interest is without basis because (1) although it was written
in the Agreement, it was not mentioned by the RTC in the dispositive portion and (2) the interest does not
apply to the respondents claim but to the monthly progress billing.
ISSUE: WON the RTC and Ca is correct in imposing a 2% per month interest on the monetary award or
the balance of the contract price.
HELD: Yes. The Agreement between the parties is the formal expression of the parties rights, duties and
obligations. It is the best evidence of the intention of the parties. Consequently, upon the fulfilment by
respondent of its obligation to complete the construction project, petitioner had the correlative duty to pay
for respondents services. However, petitioner refused to pay the balance of the contract price. From the
moment respondent completed the construction of the condominium project and petitioner refused to pay
in full, there was delay on the part of petitioner.
Delay in the performance of an obligation is looked upon with disfavor because, when a party to a contract
incurs delay, the other party who performs his part of the contract suffers damages thereby. Obviously,
respondent suffered damages brought about by the failure of petitioner to comply with its obligation on
time. And, sans elaboration of the matter at hand, damages take the form of interest. Accordingly, the
appropriate measure of damages in this case is the payment of interest at the rate agreed upon, which is
2% interest for every month of delay.
It must be noted that the Agreement provided the contractor, respondent in this case, two options in case of
delay in monthly payments, to wit: a) suspend work on the project until payment is remitted by the owner
or b) continue the work but the owner shall be required to pay interest at a rate of two percent (2%) per
month or a fraction thereof. Evidently, respondent chose the latter option, as the condominium project

was in fact already completed. The payment of the 2% monthly interest, therefore, cannot be jettisoned
overboard.
Since the Agreement stands as the law between the parties, this Court cannot ignore the existence of such
provision providing for a penalty for every months delay. Facta legem facunt inter partes. Neither can
petitioner impugn the Agreement to which it willingly gave its consent. From the moment petitioner gave
its consent, it was bound not only to fulfill what was expressly stipulated in the Agreement but also all the
consequences which, according to their nature, may be in keeping with good faith, usage and law.
Petitioners attempt to mitigate its liability to respondent should thus fail.
As a last-ditch effort to evade liability, petitioner argues that the amount of P962,434.78 claimed by
respondent and later awarded by the lower courts does not refer to monthly progress billings, the
delayed payment of which would earn interest at 2% per month.
Petitioner appears confused by a semantics problem. Monthly progress billings certainly form part of
the contract price. If the amount claimed by respondent is not the monthly progress billings provided in
the contract, what then does such amount represent? Petitioner has not in point of fact convincingly
supplied an answer to this query. Neither has petitioner shown any effort to clarify the meaning of
monthly progress billings to support its position. This leaves us no choice but to agree with respondent
that the phrase monthly progress billings refers to a portion of the contract price payable by the owner
(petitioner) of the project to the contractor (respondent) based on the percentage of completion of the
project or on work accomplished at a particular stage. It refers to that portion of the contract price still to
be paid as work progresses, after the down payment is made.
This definition is, indeed, not without basis. Articles 6.02 and 6.03 of the Agreement, which respectively
provides that the (b)balance shall be paid in monthly progress payments based on actual value of the
work accomplished and that the progress payments shall be reduced by a portion of the down payment
made by the OWNER corresponding to the value of the work completed give sense to respondents
interpretation of monthly progress billings.

EMERITO M. RAMOS, et al., petitioners,

vs.
CENTRAL BANK OF THE PHILIPPINES, respondents; COMMERCIAL BANK OF MANILA,
intervenor.
Facts: This involves question as to applicability of Tapia ruling wherein the Court held that "the obligation
to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the
duly constituted authority, the Central Bank," to loans and advances by the Central Bank
Held: Respondents have failed to adduce any cogent argument to persuade the Court to reconsider its
Resolution at bar that the Tapia ruling is fully applicable to the non-payment of interest, during the period
of the bank's forcible closure, on loans and advances made by respondent Central Bank.
Respondent Central Bank itself when it was then managing the Overseas Bank of Manila (now
Commercial Bank of Manila) under a holding trust agreement, held the same position in Id elfonso D. Yap
vs. OBM wherein it argued that "(I)n a suit against the receiver of a national bank for money loaned to the
Bank while it was a going concern, it was error to permit plaintiff to recover interest on the loan after the
bank's suspension"
A significant development of the case, the Government Service Insurance System (GSIS) has acquired
ownership of 99.93% of the outstanding capital stock of COMBANK. The Court's Resolution manifestly
redounds to the benefit of another government institution, the GSIS, and to the preservation of the banking
system.
LIRAG TEXTILE MILLS, INC. VS. SSS
153 SCRA 338
Facts:

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SSS (respondent) and Lirag Textile Mills (Petitioner) entered into a Purchased Agreement
which Respondent agreed to purchase preferred stocks of Petitioner worth P1 million subject to
conditions:
o
For Petitioner to repurchase the shares of stocks at a regular interval of one year and
to pay dividends.
o
Failure to redeem and pay the dividend, the entire obligation shall become due and
demandable and it shall be liable for an amount equivalent to 12% of the amount
then outstanding as liquidated damages.

Basilio Lirag (Basilio) as President of Lirag Textile Mills signed the Agreement as a surety to
guarantee the redemption of the stocks, the payment of dividends and other obligations.

Pursuant to the Agreement, Respondent paid Petitioner P500,000 on two occasions and the
latter issued 5,000 preferred stocks with a par value of P100 as evidenced by Stock Certificate
Nos. 128 and 139.

After sending Respondent sent demand letters, Petitioner and Basilio still made no redemption
nor made dividend payments.

Respondent filed an action for specific performance and damages against Petitioner:
Petitioner contends that there is no obligation on their part to redeem the stock certificates since
Respondent is still a preferred stock holder of the company and such redemption is dependent upon
the financial ability of the company.
On the part of Basilio, he contends that his liability only arises only if the company is liable and does
not perform its obligations under the Agreement.

Issue:
1)
2)
3)
Held:

Whether or not the Purchase Agreement entered into by the Parties is a debt instrument?
If so, Is Basilio liable as surety?
Whether or not Lirag is liable for the interest as liquidated damages?

1)
o
o

YES, the Purchase Agreement is a debt instrument. The terms and conditions of the Agreement show
that parties intended the repurchase of preferred shares on the respective scheduled dates to be an
absolute obligation, which does not depend on the financial ability of the corporation.
This absolute obligation on the part of the Petitioner corporation is made manifest by the fact that a
surety was required to see to it that the obligation is fulfilled in the event the principal debtors
inability to do so.
It cannot be said that SSS is a preferred stockholder. The rights given by the Purchase Agreement to
SSS are not rights enjoyed by ordinary stockholders. Since there was a condition that failure to
repurchase the stocks on the scheduled dates renders the entire obligation due and demandable with
interest. These features clearly show that intent of the parties to be bound therein as debtor and
creditor and not as a corporation and stockholder.

2)

YES, Basilio is liable as surety. Thus it follows that he cannot deny liability for Lirags default. As
surety, he is bound immediately to pay SSS the amount then outstanding.

3)

The award of liquidated damages represented by 12% of the amount then outstanding is correct,
considering that the petitioners in the stipulation of facts admitted having failed to fulfill their
obligations under the Agreement. The grant of liquidated damages is expressly provided for the
Purchase Agreement in case of contractual breach.

Since Lirag did not deny its failure to redeem the preferred shares and the non-payment of dividends
which are overdue, they are bound to earn legal interest from the time of demand, in this case, judicial i.e.
the time of filing the action.