Understanding Liability for COA Disallowances: The Favila Case

G.R. No. 251824, April 11, 2024

Imagine a scenario where a government official, acting in what they believe is good faith, receives benefits approved by a board resolution. Later, the Commission on Audit (COA) disallows these benefits. Is the official personally liable to return the money? This question often arises in government service, highlighting the tension between public service, good faith, and accountability. The Supreme Court’s resolution in Peter B. Favila vs. Commission on Audit sheds light on this issue, specifically addressing the extent of liability for disallowed benefits received by government officials.

Navigating the Legal Landscape of COA Disallowances

COA disallowances are rooted in the fundamental principle that public funds must be spent prudently and in accordance with the law. Article IX-B, Section 8 of the 1987 Constitution explicitly prohibits public officials from receiving additional, double, or indirect compensation unless specifically authorized by law. This provision aims to prevent abuse and ensure transparency in government spending.

The legal framework governing COA disallowances is further shaped by the Administrative Code of 1987, particularly Sections 38 and 43. Section 38 protects approving and certifying officers who act in good faith, in the regular performance of their official functions, and with the diligence of a good father of a family. However, Section 43 holds officers who act in bad faith, with malice, or gross negligence solidarily liable for the disallowed amounts.

A crucial concept in this area is solutio indebiti, a principle of civil law that dictates that if someone receives something they are not entitled to, they have an obligation to return it. This principle, coupled with the concept of unjust enrichment, forms the basis for requiring recipients of disallowed funds to return the amounts they received.

The Supreme Court’s landmark ruling in Madera v. Commission on Audit (882 Phil. 744 [2020]) established crucial guidelines regarding the return of disallowed amounts. The Madera ruling differentiates between the liability of approving/certifying officers and mere recipients. Recipients, even those acting in good faith, are generally liable to return the disallowed amounts they received, unless they can demonstrate that the amounts were genuinely given in consideration of services rendered or where undue prejudice or social justice considerations exist.

In Abellanosa v. Commission on Audit (890 Phil. 413 [2020]), the Supreme Court further clarified the exceptions to the return requirement for payees. To be excused from returning disallowed amounts, the following conditions must be met: (a) the incentive or benefit has a proper legal basis but is disallowed due to mere procedural irregularities; and (b) the incentive or benefit has a clear, direct, and reasonable connection to the actual performance of the recipient’s official work and functions.

For instance, if a government employee receives an allowance that is disallowed due to a minor paperwork error, and the allowance is directly tied to their job performance, they might be excused from returning the amount. However, if the allowance lacks a legal basis or is not related to their work, they will likely be required to return it.

The Favila Case: A Detailed Look

Peter B. Favila, while serving as Secretary of the Department of Trade and Industry (DTI), was an ex-officio member of the Board of Directors (BOD) of the Trade and Investment Development Corporation of the Philippines (TIDCORP). From 2005 to 2007, TIDCORP’s BOD approved resolutions granting various benefits to its members, including productivity enhancement pay and bonuses.

In 2012, the COA issued a Notice of Disallowance (ND) disallowing these benefits, totaling PHP 4,539,835.02, on the grounds that they constituted double compensation prohibited under the Constitution. Favila, who received PHP 454,598.28 in benefits between 2008 and 2010, was held liable.

Favila contested the disallowance, arguing that the benefits were granted in good faith pursuant to duly issued Board Resolutions and the TIDCORP Charter, also claiming a violation of his right to due process. The COA Proper denied his petition, prompting him to elevate the case to the Supreme Court.

The Supreme Court initially dismissed Favila’s petition, affirming the COA’s decision holding him solidarily liable for the entire disallowed amount, relying on Suratos vs. Commission on Audit where similar benefits were disallowed. He then filed a Motion for Reconsideration, arguing that he was neither an approving officer nor did he participate in the approval of the Board Resolutions.

Upon reconsideration, the Supreme Court modified its ruling, recognizing that Favila was not involved in the approval of the disallowed benefits. The Court then applied the Madera rules, holding him liable only as a recipient of the disallowed amounts, responsible for returning what he personally received. The Court emphasized that:

Recipients – whether approving or certifying officers or mere passive recipients – are liable to return the disallowed amounts respectively received by them, unless they are able to show that the amounts they received were genuinely given in consideration of services rendered.

However, the Court found that the benefits lacked legal basis and were not genuinely given as compensation for services rendered. Additionally, no circumstances warranted excusing Favila from the return requirement based on undue prejudice or social justice considerations.

In sum, Favila is held civilly liable not in his capacity as an approving/authorizing officer, but merely as a payee-recipient who in good faith received a portion of the disallowed amount. His receipt of the foregoing benefits to which he was not legally entitled, gave rise to an obligation on his part to return the said amounts under the principle of solutio indebiti.

Therefore, the Supreme Court directed Favila to settle only the amount he actually received, PHP 454,598.28.

Key Takeaways for Public Officials

The Favila case reinforces the importance of understanding personal liability in COA disallowance cases. While good faith is a factor, it does not automatically absolve recipients of liability. Here are the key lessons:

• Liability as Approving Officer vs. Recipient: Approving/certifying officers can be held liable for the entire disallowed amount if they acted in bad faith, with malice, or with gross negligence. Recipients, on the other hand, are generally liable only for the amounts they personally received.
• The Importance of Legal Basis: Benefits and allowances must have a clear legal basis. Reliance on board resolutions alone is not sufficient if the resolutions are not authorized by law.
• Burden of Proof: Recipients have the burden of proving that the disallowed amounts were genuinely given in consideration of services rendered or that equitable considerations justify excusing the return.

Frequently Asked Questions

Q: What is a Notice of Disallowance (ND)?

A: A Notice of Disallowance is a written notice issued by the COA when it finds that a government transaction is illegal, irregular, unnecessary, excessive, extravagant, or unconscionable.

Q: What does it mean to be ‘solidarily liable’?

A: Solidary liability means that each person held liable is responsible for the entire amount. The COA can choose to collect the entire amount from any one of the individuals held solidarily liable.

Q: What is the ‘good faith’ defense in COA cases?

A: The ‘good faith’ defense applies to approving and certifying officers who acted in the regular performance of their duties, with the diligence of a good father of a family, and without any knowledge of the illegality of the transaction. However, good faith alone may not excuse a recipient from returning disallowed amounts.

Q: What is solutio indebiti?

A: Solutio indebiti is a legal principle that arises when someone receives something they are not entitled to, creating an obligation to return it to the rightful owner.

Q: What should I do if I receive a Notice of Disallowance?

A: If you receive an ND, it’s crucial to seek legal advice immediately. You should gather all relevant documents and evidence to support your case and file a timely appeal with the COA.

Q: Can I be held liable for disallowed amounts even if I didn’t know the transaction was illegal?

A: Yes, as a recipient, you can be held liable to return the amounts you received, even if you acted in good faith. The burden is on you to prove you are excused from returning the money under specific exceptions.

ASG Law specializes in government contracts and procurement, and COA litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.