The Supreme Court ruled that the Commission on Audit (COA) cannot hold officials personally liable for loan defaults simply because they approved the initial loan applications. The COA must prove that the official’s actions were irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. This decision protects well-meaning public servants from being unfairly penalized for the subsequent failures of borrowers, ensuring that liability is based on demonstrable wrongdoing, not just a connection to a problematic transaction.

QUEDANCOR Loans Gone Sour: Who Bears the Burden of Delinquent Debt?

This case revolves around Orestes S. Miralles, who was held personally liable by the COA for uncollected loans granted by the Quedan and Rural Credit Guarantee Corporation (QUEDANCOR) under two programs: the Sugar Farm Modernization (SFM) Program and the Food and Agricultural Retail Enterprises (FARE) Program. The COA based its decision on Notices of Disallowance (NDs) issued due to the delinquency of the loans. Miralles contested the COA’s decision, arguing that his approval of the loans was in compliance with QUEDANCOR’s policies and guidelines and that he should not be held responsible for the borrowers’ failure to repay.

The central legal question is whether the COA gravely abused its discretion in holding Miralles personally liable for the disallowed amounts, considering his role in approving the loan applications versus the actual reasons for the loan defaults. The Supreme Court examined the extent of Miralles’ responsibility and whether the COA had sufficient grounds to justify the disallowances and his personal liability.

The Constitution grants the COA broad authority to audit government funds and disallow irregular expenditures. According to Section 2(2), Article IX of the 1987 Constitution, the COA has exclusive authority to define the scope of its audit and examination, and to promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties. However, this power is not absolute. The Supreme Court has consistently held that the COA’s decisions are subject to judicial review when the agency acts without or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction.

Presidential Decree No. 1445, the Government Auditing Code of the Philippines, further elaborates on the principles that guide the COA in its duties. Section 4 states that government funds or property shall be spent or used solely for public purposes, and fiscal responsibility shall, to the greatest extent, be shared by all those exercising authority over the financial affairs, transactions, and operations of the government agency. It’s important to understand what constitutes an “irregular” expenditure, as this is often a point of contention.

COA Circular No. 2012-003 defines these terms, clarifying that an “irregular expenditure” is one incurred without adhering to established rules, regulations, procedural guidelines, policies, principles or practices that have gained recognition in laws. “Unnecessary expenditures” are those that could not pass the test of prudence or the diligence of a good father of a family. “Excessive expenditures” signify unreasonable expense or expenses incurred at an immoderate quantity and exorbitant price. “Extravagant expenditures” signify those incurred without restraint, judiciousness and economy. “Unconscionable expenditures” pertains to expenditures which are unreasonable and immoderate, and which no man in his right sense would make.

The Court found that the COA committed grave abuse of discretion in affirming ND No. RLAO-2005-052, which related to the SFM Program loans. The disallowance was primarily based on the QUEDANCOR Management’s failure to take appropriate legal action for the collection of delinquent accounts. As the Court pointed out, the COA’s disallowance was intended to “insure compliance” with the COA’s directives, and further considering that there was no antecedent finding that the disallowed transactions had been irregular, unnecessary, excessive, extravagant, illegal or unconscionable. This did not fall within the recognized grounds for a valid disallowance.

Considering that the loans remained unsettled and/or unpaid despite numerous demands, QUEDANCOR Management should now foreclose the equipment attached as collateral/security for these loans, and in case the collateral is not enough to satisfy the indebtedness, to enforce the stipulation of the contract, as stated above.

To insure compliance with the preceding, we are issuing this Notice of Disallowance (ND) on the unpaid balance of the loan releases, granted to Mr. Severo Robles and Atty. Gaudencio Dizon, with the condition that the same may be lifted if and when QUEDANCOR Management shall take appropriate action to collect the deficiency by means of a collection suit filed in an appropriate court.

The COA held Miralles personally liable for approving the loan transactions, but the Court found that this was unfair because Miralles’ responsibility did not include the task of collection. The responsibility for taking legal actions against delinquent borrowers pertained to the Legal Affairs Department (LEAD) of QUEDANCOR. Section 19.1 of COA Circular No. 94-001 emphasizes that liability should be determined based on the nature of the disallowance, the duties and responsibilities of the officers/employees concerned, the extent of their participation, and the amount of losses suffered by the Government. There was no showing that the COA adequetly considered these factors in relating to Miralles’ role in approving the loans.

Regarding ND No. RLAO-2005-055, which pertained to the FARE Program loans, the COA’s disallowance was based on the finding that the borrowers lacked viable businesses qualified under the program. While the Court upheld the validity of this ND, it ruled that Miralles should not be held personally liable. The Court considered that Miralles relied on the certifications and recommendations of his subordinates in approving the loan applications. Given the high volume of loan applications, it was impractical for him to personally verify every detail.

Miralles invoked the Arias doctrine, established in Arias v. Sandiganbayan, which allows heads of offices to reasonably rely on the findings and recommendations of their subordinates. The COA refused to apply this doctrine, arguing that Miralles should have been aware of the anomalous activities occurring in his area of responsibility. The Court rejected this argument as speculative. The COA did not present sufficient evidence to show that Miralles had actual knowledge of the irregularities or that he acted in bad faith or with gross negligence.

The Court emphasized that the COA cannot justly execute its constitutional function of disallowing expenditures unless it accurately identifies the persons liable, supported by adequate factual basis. The case serves as a reminder that public officials should not be held liable for honest mistakes or for the failures of others, especially when they have acted in good faith and in compliance with established procedures.

The Supreme Court ruled in favor of Miralles. The Court NULLIFIED AND SET ASIDE Notice of Disallowance No. RLAO-2005-052 dated April 7, 2005 for being issued with grave abuse of discretion. It also AFFIRMED Notice of Disallowance No. RLAO-2005-055 dated June 6, 2005 but MODIFIED it to state that petitioner Orestes S. Miralles is not personally liable for the disallowed amount.

FAQs

What was the key issue in this case?	The key issue was whether the Commission on Audit (COA) gravely abused its discretion in holding Orestes S. Miralles personally liable for disallowed loan amounts due to loan defaults. Miralles’ liability stemmed from his role in approving the loans as a QUEDANCOR official.
What is QUEDANCOR?	QUEDANCOR, or Quedan and Rural Credit Guarantee Corporation, is a government financing institution created to accelerate the flow of investment and credit resources into rural areas. It aims to promote rural productivity, employment, and enterprise growth through various credit and guarantee programs.
What is a Notice of Disallowance (ND)?	A Notice of Disallowance (ND) is issued by the COA when it finds that certain government expenditures or uses of funds are irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. It identifies the individuals responsible for the disallowed amounts.
What are the SFM and FARE Programs?	The SFM (Sugar Farm Modernization) Program was designed to provide loans for the purchase of tractors and implements to modernize sugar farms. The FARE (Food and Agricultural Retail Enterprises) Program aimed to augment the working capital of retailers selling agricultural, aquatic, poultry, livestock, and agri-related commodities.
What is the Arias Doctrine?	The Arias Doctrine, established in Arias v. Sandiganbayan, allows heads of offices to reasonably rely on the findings and recommendations of their subordinates, provided there is no reason to go beyond those recommendations. This doctrine recognizes the practical limitations of a supervisor personally examining every detail of every transaction.
Why was ND No. RLAO-2005-052 nullified?	ND No. RLAO-2005-052 was nullified because it was based on QUEDANCOR Management’s failure to pursue collection efforts on delinquent loans, not on any irregularity in the loan approval process by Miralles. The COA’s basis did not fall within the recognized grounds for a valid disallowance, and it unfairly held Miralles liable for a task outside his responsibilities.
Why was Miralles not held personally liable under ND No. RLAO-2005-055?	Although the Court upheld the validity of ND No. RLAO-2005-055, Miralles was not held personally liable because he relied on the certifications and recommendations of his subordinates in approving the FARE Program loans. The COA did not present sufficient evidence to prove that Miralles was aware of the fraudulent activities or acted with bad faith or gross negligence.
What is grave abuse of discretion?	Grave abuse of discretion implies that the COA evaded a positive duty, refused to perform a duty enjoined by law, or acted without contemplation of law. This includes instances where the COA’s decision is not based on law and evidence but on caprice, whim, and despotism.
What are the implications of this ruling for public officials?	This ruling clarifies that public officials cannot be held automatically liable for loan defaults simply because they approved the loans. The COA must demonstrate that the official’s actions were irregular, unnecessary, excessive, extravagant, illegal, or unconscionable. It provides a safeguard against unfair penalization for the subsequent failures of borrowers when the official acted in good faith.

In conclusion, the Supreme Court’s decision in Miralles v. Commission on Audit underscores the importance of due process and fairness in holding public officials accountable for disallowed expenditures. The ruling serves as a reminder that the COA must have a solid factual and legal basis for its disallowances and cannot rely on speculation or guilt by association. This case highlights the need to protect public servants who act in good faith and within the scope of their responsibilities, ensuring that liability is based on demonstrable wrongdoing, not just a connection to a problematic transaction.

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: Orestes S. Miralles v. Commission on Audit, G.R. No. 210571, September 19, 2017