Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 80593 December 18, 1989

PHILIPPINE NATIONAL BANK, petitioner,

vs.
TERESITA CRUZ, JOSE AGRIPINO, BERNARDO BAUZON, LUCRECIA BILBAO, MA. LUISA
CABRERA, FRANCIS BAACLO GUADALUPE CAMACHO, LUZ DE LEON, MIKE VILLAVERDE,
NEPOMUCENO MEDINA, EDGARDO MENDOZA, JENNIFER VELEZ, AMELIA MEDINA,
EDUARDO ESPEJO and RICARDO BATTOrespondents.

The Chief Legal Officer for petitioner.

Romualdo C. Delos Santos for respondents.

GANCAYCO, J.:

The focus of the instant petition for certiorari is the application of Article 110 of the Labor Code. The
said article provides that workers shall enjoy first preference with regard to wages due them in cases
of bankruptcy or liquidation of an employer's business.

The antecedent facts of the case are as follows:

Sometime in 1980 Aggregate Mining Exponents (AMEX) laid-off about seventy percent (70%) of its
employees because it was experiencing business reverses. The retained employees constituting
thirty percent (30%) of the work force however, were not paid their wages. This non-payment of
salaries went on until July 1982 when AMEX completely ceased operations and instead entered into
an operating agreement with T.M. San Andres Development Corporation whereby the latter would
be leasing the equipment and machineries of AMEX.

The unpaid employees sought redress from the Labor Arbiter 1 who, on August 27,1986 rendered a
decision finding their claim valid and meritorious. The dispositive part of the said decision, reads:

WHEREFORE, finding the claims of complainants for payment of unpaid wages and
separation pay to be valid and meritorious, respondents Aggregate Mining Exponent
and its president Luis Tirso Revilla should, as they are hereby ordered to pay the
same to said complainants in the following amounts:

Employees Yrs. of Service Rate Separation Pay Backwages

1. Jose Agripino 8 P1,300.00 P5,200.00 P6,174.96
2.Bernardo Bauzon 9 1,900.00 8,550.00 11,712.85
3. Lucresia Bilbao 7 2,300.00 8,050.00 19,247.00
4. Teresita S. Cruz 12 2,700.00 16,200.00 23,485.70
5. Ma. Luisa Cabrera 3 1,800.00 2,700.00 5,004.35
6. Francis Baaclo 7 3,500.00 12,550.00 32,986.90
7. Guadalupe Camacho 6 1,300.00 3,900.00 3,227.15
8. Luz de Leon 5 1,300.00 3,250.00 3,110.85
9. Mike Villaverde 6 1,500.00 4,500.00 4,793.80
10. Nepomuceno Medina 5 1,200.00 3,000.00 4,287.10
11. Edgardo Mendoza 4 920.00 1,840.00 832.10
12. Jennifer Velez 2 740.00 740.00 4,287.66
13. Amelia Medina 2 740.00 740.00 6,822.81
14. Eduardo Espejo 4 970.00 1,940.00 234.10
15. Ricardo Batto 7 3,000.00 10,500.00 9,874.70
TOTAL 83,360.00 136,092.03

in the total amount of P219,452.03. To properly effectuate the payment of the same,
the necessary arrangement should be made between respondents Amex and T.M.
San Andres Development Corp. and Philippine National Bank (PNB) on their
respective role and participation herein. For should the principal respondent be
unable to satisfy these Awards, the same can be satisfied from the proceeds or fruits
of its machineries and equipment being operated by respondent T.M. San Andres
Dev. Corp. either by operating agreement with respondent Amex or thru lease of the
same from PNB.

To obviate any further differences between complainants and their counsel to the
latter's attorney's fees which seems to be the cause of their earlier misunderstanding,
as can be gleaned from the Charging Lien filed by said counsel, respondents are,
moreover, ordered to segregate and pay the same directly to said counsel, the
amount of which is to be computed pursuant to their agreement on July 14, 1983
(Annex A of Position to Enter Attorney's Charging Lien in the Record of the Case). 2

AMEX and its President, Tirso Revilla did not appeal from this decision. But PNB, in its capacity as
mortgagee-creditor of AMEX interposed an appeal with the respondent Commission, not being
satisfied with the outcome of the case. The appeal was primarily based on the allegation that the
workers' lien covers unpaid wages only and not the termination or severance pay which the workers
likewise claimed they were entitled to. In a resolution 3 dated October 27, 1987, the National Labor
Relations Commission affirmed the decision appealed from. Hence the instant petition filed by the
petitioner bank based on the following grounds:

I. ARTICLE 110 OF THE LABOR CODE MUST BE READ IN RELATION TO

ARTICLES 2241, 2242, 2243, 2244 AND 2245 OF THE CIVIL CODE CONCERNING
THE CLASSIFICATION, CONCURRENCE AND PREFERENCE OF CREDITS.

II. ARTICLE 110 OF THE LABOR CODE DOES NOT PURPORT TO CREATE A
LIEN IN FAVOR OF WORKERS OR EMPLOYEES FOR UNPAID WAGES EITHER
 UPON ALL OF THE PROPERTIES OR UPON ANY PARTICULAR PROPERTY
OWNED BY THEIR EMPLOYER. 4

The petition is devoid of merit.

At the outset, petitioner PNB did not question the validity of the workers' claim for unpaid wages with
respect to the mortgaged properties of AMEX, provided that the same be limited to the unpaid
wages, and to the exclusion of termination pay. In the instant petition however, PNB starts off with
the question of whether or not the workers' lien take precedence over any other claim considering
that this Court has ruled otherwise in Republic vs. Peralta. 5

This Court cannot allow the petitioner to alter its stance at this stage inasmuch as it is deemed to
have acquiesced in the decision of the labor arbiter concerning payment of unpaid wages. The
records reveal that the petitioner failed to question the same on appeal. Hence, it is now barred from
claiming that the workers' lien applies only to the products of their labor and not to other properties of
the employer which are encumbered by mortgage contracts or otherwise.

Notwithstanding the foregoing, an attempt on the part of the petitioner to seek relief from that portion
of the decision would still be in vain.

Article 110 of the Labor Code provides that:

Art. 110. Worker preference in case of bankruptcy. In the event of bankcruptcy or

liquidation of an employer's business - his workers shall enjoy first preference as
regards their unpaid wages and other monetary claims, any provision of law to the
contrary notwithstanding. Such unpaid wages and monetary claims, shall be paid in
full before claims of the government and other creditors may be paid.6

This Court must uphold the preference accorded to the private respondents in view of the provisions
of Article 110 of the Labor Code which are clear and which admit of no other interpretation. The
phrase "any provision of law to the contrary notwithstanding" indicates that such preference shall
prevail despite the order set forth in Articles 2241 to 2245 of the Civil Code. 6-a No exceptions were
provided under the said article, henceforth, none shall be considered. Furthermore, the Labor Code was
signed into Law decades after the Civil Code took effect.

In Herman vs. Radio Corporation of the Philippines, 7 this Court declared that whenever two statutes of
different dates and of contrary tenor are of equal theoretical application to a particular case, the statute of
later date must prevail being a later expression of legislative will. Applying the aforecited case in the
instant petition, the Civil Code provisions cited by the petitioner must yield to Article 110 of the Labor
Code.

Moreover, Our pronouncement in A. C. Ransom Labor Union-CCLU vs. NLRC, 8 reinforces the
above-mentioned interpretation where this Court, speaking through Associate Justice Melencio-Herrera,
explicitly stated that "(t)he worker preference applies even if the employer's properties are encumbered by
means of a mortgage contract ... So that, when (the) machinery and equipment of RANSOM were sold to
Revelations Manufacturing Corporation for P2M in 1975, the right of the 22 laborers to be paid from the
proceeds should have been recognized ... " 9

Reliance by the petitioners on Republic vs. Peralta is without basis. The said case involved a
question of workers' preference as against the tax claims of the State. In the said case the Court
held that the State must prevail in that instance since "it has been frequently said that taxes are the
very lifeblood of government. The effective collection of taxes is a task of highest importance for the
sovereign. It is critical indeed for its own survival ." 10

Nevertheless, under Article 110 of the Labor Code as amended, the unpaid wages and other
monetary claims of workers should be paid in full before the claims of the Government and other
creditors. Thus not even tax claims could have preference over the workers' claim.

Consistent with the ruling of this Court in Volkschel Labor Union vs. Bureau of Labor Relations, 11 this
court adopts the doctrine that "(i)n the implementation and interpretation of the provisions of the Labor
Code and its implementing regulations, the workingman's welfare should be the primordial and paramount
consideration." 12 Bearing this in mind, this Court must reiterate the dictum laid down in A.C. Ransom that
the conflict between Article 110 of the Labor Code and Article 2241 to 2245 of the Civil Code must be
resolved in favor of the former. A contrary ruling would defeat the purpose for which Article 110 was
intended; that is, for the protection of the working class, pursuant to the never-ending quest for social
justice.

Petitioner next advances the theory that "even if the worker's lien applies in the instant case, the
same should cover only unpaid wages excluding termination or severance pay. 13 To support this
contention, petitioner cites Section 7, Rule 1, Book VI of the Rules and Regulations implementing the
Labor Code which provides that:

The just causes for terminating the services of an employee shall be those provided
under article 283 of the Code. The separation from work of an employee for a just
cause does not entitle him to termination pay provided in the Code, emphasis
supplied)

Based on that premise, petitioner contends that the claim for termination pay should not be enforced
against AMEX properties mortgaged to petitioner PNB because Article 110 of the Labor Code refers
only to "wages due them for services rendered during the period prior to bankcruptcy or
liquidation." 14 Citing serious financial losses as the basis for the termination of the private respondents,
petitioner alleges that the employees are not entitled to the termination pay which they claim.

This contention is, again, bereft of merit.

The respondent Commission noted that "AMEX failed to adduce convincing evidence to prove that
the financial reverses were indeed serious." 15 After a careful study of the records of the case, this
Court finds no reason to alter the findings of the respondent Commission.

In Garcia vs. National Labor Relations Commission , 16 it was held that "it is essentially required that the
alleged losses in business operations must be proved. " 17 This policy was adopted to obviate the
possibility of an employer fabricating business reverses in order to ease out employees for no apparent
reason. Hence, no departure shall be made by this Court from the ruling in Philippine Commercial and
Industrial Bank vs. National Mines and Allied Workers Union (NAMAWU-MIF) 18where it was categorically
stated that the term "wages" includes not only remunerations or earnings payable by an employer for
services rendered or to be rendered, but also covers all benefits of the employees under a Collective
Bargaining Agreement like severance pay, educational allowance, accrued vacation leave earned but not
enjoyed, as well as workmen's compensation awards and unpaid salaries for services rendered. All of
these benefits fall under the term "wages" which enjoy first preference over all other claims against the
employer. 19

Furthermore, in Peralta, this Court held that for purposes of the application of Article 110,
"termination pay is reasonably regarded as forming part of the remuneration or other money benefits
accruing to employees or workers by reason of their having previously rendered services..." 20 Hence,
separation pay must be considered as part of remuneration for services rendered or to be rendered.

Indeed Article 110 of the Labor Code, as amended, aforecited, now provides that the workers'
preference covers not only unpaid wages but also other monetary claims.

The respondent Commission was, therefore, not in error when it awarded the termination pay
claimed by the private respondents. As far as the latter are concerned, the termination pay which
they so rightfully claim is an additional remuneration for having rendered services to their employer
for a certain period of time. Noteworthy also is the relationship between termination pay and services
rendered by an employee, that in computing the amount to be given to an employee as termination
pay, the length of service of such employee is taken into consideration such that the former must be
considered as part and parcel of wages. Under these circumstances then, this Court holds that the
termination or severance pay awarded by the respondent Commission to the private respondents is
proper and should be sustained.

Lastly, it must be noted that the amount claimed by petitioner PNB for the satisfaction of the
obligations of AMEX is relatively insubstantial and is not significant enough as to drain its coffers. By
contrast, that same amount could mean subsistence or starvation for the workingman. Quoting
further from Philippine Commercial and Industrial Bank, this Court supports the equitable principle
that "it is but humane and partakes of the divine that labor, as human beings, must be treated over
and above chattels, machineries and other kinds of properties and the interests of the employer who
can afford and survive the hardships of life better than their workers. Universal sense of human
justice, not to speak of our specific social justice and protection to labor constitutional injunctions
dictate the preferential lien that the above provision accord to labor. 21 In line with this policy,
measures must be undertaken to ensure that such constitutional mandate on protection to labor is not
rendered meaningless by an erroneous interpretation of the applicable laws.

WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. Nos. 100376-77 June 17, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, GODOFREDO MORILLO, JR., SUNDAY
BACEA, ALFREDO COS and ROGELIO VILLANUEVA, respondents.

Vicente T. Cuison for petitioner.

Tamondong, Wong, Cos, & Associates for private respondent.

PADILLA, J.:

This petition for review on certiorari (here treated as a petition for certiorari under Rule 65, Rules of
Court) seeks to reverse and set aside the Resolution dated 11 June 1991 of respondent National
Labor Relations Commission ("NLRC") in NLRC NCR Case Nos. 00-09-03383-87 and 00-10-03562-
87, denying petitioner’s motion for reconsideration, the dispositive part of which reads:

Accordingly, the Bank’s motion for reconsideration is hereby denied. The responsible
officers of the Bank and its counsel are hereby warned, under pain of contempt, that
we shall not tolerate their further delaying the execution of the subject award. 1

Private respondents Godofredo Morillo, Sunday Bacea, Alfredo Cos and Rogelio Villanueva were
hired as security guards by Confidential Investigation and Security Corporation ("CISCOR") on 19
May 1981, 21 August 1984, 22 January 1985, and 27 November 1985, respectively. In the course of
their employment, private respondents were assigned to secure the premises of CISCOR’s clients,
among them, the herein petitioner, Development Bank of the Philippines ("DBP") which, in turn,
assigned private respondents to secure one of its properties or assets, the Riverside Mills
Corporation.

On 11 August 1987, private respondent Villanueva resigned from CISCOR. On 15 August 1987,
private respondents Morillo, Bacea and Cos followed suit in resigning from CISCOR. Thereafter,
private respondents claimed from CISCOR the return of their cash bond and payment of their 13th
month pay and service incentive leave pay. For failure of CISCOR to grant their claims, private
respondents Villanueva and Cos filed against CISCOR and its President/Manager Ernesto Medina
NLRC NCR Case No. 00-10-3562-87 on 13 October 1987, while private respondents Morillo and
Bacea filed NLRC NCR Case No. 00-09-3383-87 on 29 September 1987. In said two (2) cases,
private respondents sought recovery of their cash bond, payment of 13th month pay, and their five-
day service incentive leave pay. The two (2) cases were consolidated and assigned to Labor Arbiter
Crescencio Iniego.
In their position paper filed on 23 November 1987, private respondents (as complainants) alleged
that they tendered their resignations in August 1987 upon the assurance of CISCOR that they would
be paid the cash benefits due them. For failure of CISCOR to comply, private respondents claimed
violations committed by CISCOR and Medina, specifically, the non-payment of their 13th month pay,
five (5) day service incentive leave pay from the date of employment to the time of their separation,
non-refund of their cash bond, non-payment of legal holiday pay and rest day pay. On the other
hand, CISCOR and Medina in their position paper filed on 3 March 1988 admitted that private
respondents were former security guards of CISCOR. They added, however, that sometime in 1987,
petitioner allegedly formed its own security agency and pirated private respondents who tendered
their voluntary resignations from CISCOR. Thereafter, when private respondents sought from
CISCOR the return of their cash bond deposit, payment of 13th month pay and service incentive
leave pay, CISCOR explained to private respondents that in view of the claim of petitioner that it
incurred losses when private respondents and their other co-security guards secured the premises
of Riverside Mills Corporation, private respondents, prior to the payment of their claims, were asked
to first secure an individual/agency clearance from petitioner to show that no losses were incurred
while they were guarding Riverside Mills Corporation.

Instead of getting such clearance from the petitioner, private respondents secured their clearance
from CISCOR’s detachment commander. Hence, for failure to secure the required clearance, private
respondents’ cash bond deposit, their proportionate 13th month pay and service incentive leave pay
were withheld to answer for liabilities incurred while private respondents were guarding Riverside
Mills Corporation.

On 10 March 1988, CISCOR filed a motion with leave to implead petitioner bank and averred therein
that in view of its contract with the petitioner whereby, for a certain service fee, CISCOR undertook
to guard petitioner’s premises, both CISCOR and petitioner, under the Labor Code, are jointly and
severally liable to pay the salaries and other statutory benefits due the private respondents,
petitioner being an indispensable party to the case. On 11 March 1988, Labor Arbiter Iniego issued
an order granting the aforesaid motion and including petitioner as one of the respondents therein. To
this, private respondents filed their opposition and alleged, among others, that petitioner, not being
an employer of the private respondents, was not a proper, necessary or indispensable party to the
case.

In answer, petitioner filed its position paper alleging therein that it was not made a respondent by the
herein private respondents in their complaint, and that none of the original parties to the case
(private respondents and CISCOR/Medina) interposed any claim against the petitioner. It further
stated that it cannot be held liable to the claim of private respondents because there was no failure
on the part of CISCOR and Medina to pay said claims. If CISCOR had apparently failed to pay
private respondents’ claims, it was only due to the failure of private respondents to secure their
individual clearance of accountability or agency clearance that there were no losses incurred while
they were guarding Riverside Mills Corporation.

On 12 July 1988, the Labor Arbiter rendered a decision, the dispositive part of which reads:

WHEREFORE, judgment is hereby rendered ordering the respondents Confidential

Investigation and Security Corporation, Mr. Ernesto Medina and Development Bank
of the Philippines to pay the complainants the corresponding salary differential due
them to be computed for the last three (3) years from the time they stopped working
with the respondents sometime in August 1987. Confidential Investigation and
Security Corporation is further ordered to return to the complainants their respective
cash bond cited in this decision within a period of ten (10) days from receipt hereof. 2
From the above decision, CISCOR and Medina appealed to the NLRC. Petitioner likewise filed its
Motion for Reconsideration/Appeal and prayed for the Labor Arbiter to modify his decision and make
CISCOR and Medinasolely liable for the claims of private respondents, and to declare the award for
salary differentials as null and void.

In its Resolution of 24 January 1991, the NLRC held the petitioner DBP, CISCOR and Medina, as
jointly and severally liable, the pertinent part of which reads:

WHEREFORE, the decision appealed from is hereby modified. All the respondents
(Confidential Investigation and Security Corporation, Ernesto Medina and the
Development Bank of the Philippines) are hereby adjudged jointly and severally
liable to the admitted claims for 13th month pay, 5 days incentive leave, and refund
of cash bond, and accordingly, immediate execution is hereby directed against any of
the aforesaid respondents without prejudice to their having lawful recourse against
each other.

Anent the award of wage differential and the claim for rest day and legal holiday pay,
the same are hereby remanded to the Arbitration Branch of origin for further hearing
with the directive that it be completed in 20 days from the Arbitration Branch’s receipt
of this Order. 3

Hence, this petition for review on certiorari, with petitioner DBP raising the following issues:

1. Whether or not the DBP is really liable for any of the claims of private respondents;

2. Whether or not the NLRC (or the Labor Arbiter) correctly applied Article 106 of the
Labor Code; and

3. Whether or not the wage differential, rest day and legal holiday pay could and
should be adjudicated in this case.

The threshold and, in the ultimate analysis, the decisive issue raised by the present petition is
whether petitioner was correctly held jointly and severally liable, alongside CISCOR and Medina, for
the payment of the private respondents’ salary differentials, 13th month pay, service incentive leave
pay, rest day pay, legal holiday pay, and the refund of their cash deposit.

Petitioner posits that it is not the employer of private respondents and should thus not be held liable
for the latter’s claims. In addition, it avers that it was not properly impleaded as it was CISCOR and
Medina who filed the motion to implead petitioner, and not the private respondents, as complainants
therein. Petitioner even goes further by countering that, assuming arguendo, it was the indirect
employer of private respondents, Article 106 of the Labor Code 4 cannot be applied to the present
case as there was no failure on the part of CISCOR and Medina, as direct employer, to pay the claims of
private respondents, but only a failure on the part of the latter to present the proper clearance to pave the
way for the payment of the claims. It emphasizes that the term "fails" in Article 106 of the Labor Code
implies insolvency or unwillingness of the direct employer to pay, which cannot be said of CISCOR and
Medina as they have manifested their willingness to pay private respondents’ claims after they have
presented proper clearance from accountability.

We are not persuaded by petitioner’s arguments.

Petitioner’s interpretation of Article 106 of the Labor Code is quite misplaced. Nothing in said Article
106 indicates that insolvency or unwillingness to pay by the contractor or direct employer is a
prerequisite for the joint and several liability of the principal or indirect employer. In fact, the rule is
that in job contracting, the principal is jointly and severally liable with the contractor. The statutory
basis for this joint and several liability is set forth in Articles 107 5and 109 6 in relation to Article 106 of
the Labor Code. 7 There is no doubt that private respondents are entitled to the cash benefits due them.
The petitioner is also, no doubt, liable to pay such benefits because the law mandates the joint and
several liability of the principal and the contractor for the protection of labor. In Eagle Security Agency,
Inc. vs. NLRC, this Court, explaining the aforesaid liability, held:

This joint and several liability of the contractor and the principal is mandated by the
Labor Code to assure compliance of the provisions therein including the statutory
minimum wage [Article 99, Labor Code]. The contractor is made liable by virtue of his
status as direct employer. The principal, on the other hand, is made the indirect
employer of the contractor’s employees for purposes of paying the employees their
wages should the contractor be unable to pay them. This joint and several liability
facilitates, if not guarantees, payment of the workers’ performance of any work, task,
job or project, thus giving the workers ample protection as mandated by the 1987
Constitution [See Article II Sec. 18 and Article XIII Sec. 3]. 8

Neither may petitioner argue that it was not properly impleaded and hence, should not be made
liable to the claims of private respondents. On this matter, petitioner cannot be absolved from
responsibility. We sustain respondent Commission’s holding that:

Anent the Bank’s first issue, what we actually have here is a "Third-Party Complaint",
defined by Section 12, Rule 6 of the Rules of Court as "a claim that a defending party
may, with leave of court, file against a person not a party to the action, called the
third-party defendant, for contribution, indemnity, subrogation or any other relief, in
respect of his opponent’s claim" (emphasis ours). Since Rule I, Section 3 of our 1986
Revised NLRC Rules adopts suppletorily the Rules of Court "in the interest of
expeditious labor justice and whenever practicable and convenient" with the Security
Agency’s impleading the Bank for indemnity and subrogation considering that the
complainants worked with the Bank "to safeguard their premises, properties and their
person" (Record, p. 76), such a third-party complaint would therefore be proper. That
the bank has not disputed liability on the admitted claims, but professes merely
subsidiary, instead of solidary liability, we find its position here all the more,
untenable. 9

Finally, petitioner submits that wage differential, rest day and legal holiday pay should not be
adjudicated in this case. The respondent Commission, however, observed:

Regarding the question of wage differential, we note that the complaint (Record, p.
1), as well as the complainants’ Position Paper (Record, pp. 5-10) do not mention
about any wage differential claim. We do not therefore see any basis with which we
may, on sight, affirm the said award. We note though that complainants’ position
paper save technical arguments (that after all are not binding to us in this
jurisdiction), sufficiently claims rest day and legal holiday pay, claims that were not
strongly refuted by respondents. Impressed, although not convincingly, that the
award on wage differential could have referred to the complainants’ claim for rest day
and legal holiday pay, we therefore see the need to have the said claims subjected to
further hearing but for a limited period of 20 days. 10

We note that in the present case, there is no claim for wage differentials either in the complaints or in
the position paper filed by private respondents before the labor arbiter. Accordingly, no relief may be
granted on such matter. We, however, agree with the respondent Commission in its stand that
private respondents are entitled to rest day and holiday pay (aside from the refund of their cash bond
and the payment of their 13th month pay and service incentive leave pay for 1989). Private
respondents’ position paper submitted before the labor arbiter properly raised the two (2) issues
(rest and holiday pay) and included the same in their prayer for relief. The computation of the
amount due each individual security guard can be made during the additional hearings ordered by
the Commission.

WHEREFORE, premises considered, the questioned resolution of the respondent NLRC is hereby
AFFIRMED with the modification that the additional hearing ordered by the NLRC shall not include
wage differentials but shall be confined to legal holiday and rest day pay. Execution shall forthwith
proceed as to the NLRC awards of 13th month pay, service incentive leave pay and return of private
respondents’ cash bond. Petitioner and CISCOR/Medina are ORDERED to pay jointly and severally
the claims of private respondents, as finally awarded by the NLRC, without prejudice to the right of
reimbursement which petitioner or CISCOR/Medina may have against each other.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-56568 May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of
Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF
MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION
OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS
(FOITAF) USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.

Oscar A. Pascua for assignee F. Candelaria.

Teofilo C. Villarico for respondent Federation.

Pedro A. Lopez for respondent USTC.

FELICIANO, J.:

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980
of the Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of
Voluntary Insolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and
of the Order dated 19 January 1981 of the same court denying the motion for reconsideration of the
earlier Order filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality
Tobacco Corporation (the "Insolvent"), the following claims of creditors were filed:

(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an additional sum of P280,672.99 as attorney's
fees had been awarded by the National Labor Relations Commission in NLRC Case No. RB-IV-
9775-77. 1

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas

("FOITAF), as separation pay for their members, an amount similarly awarded by the NLRC in the
same NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the
period 1 October 1967 to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various
importations by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of
these imported items are apparently still in customs custody so far as the record before this Court goes.
In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims
of USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their
respective members embodied in final awards of the National Labor Relations Commission were to
be preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial
court, in so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as
regards wages due them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Union
paid wages shall be paid in full before other creditors may establish any claim to a
share in the assets of the employer.

The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of
the Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include
the separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,

is given to a laborer for a separation from employment computed on the basis of the number of
years the laborer was employed by the employer; it is a form of penalty or damage against the
employer in favor of the employee for the latter's dismissal or separation from service. 3

Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other method of
calculating the same, which is payable by an employer to an employee under a
written or unwritten contract of employment for work done or to be done, or for
services rendered or to be rendered, and includes the fair and reasonable value, as
determined by the Secretary of Labor, of board, lodging, or other facilities customarily
furnished by the employer to the employee. 'Fair and reasonable value' shall not
include any profit to the employer or to any person affiliated with the
employer.(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection,
that in Philippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers
Union, 4 the Solicitor General took a different view and there urged that the term "wages" under Article
110 of the Labor Code may be regarded as embracing within its scope severance pay or termination or
separation pay. In PCIB, this Court agreed with the position advanced by the Solicitor General. 5 We see
no reason for overturning this particular position. We continue to believe that, for the specific purposes of
Article 110 and in the context of insolvency termination or separation pay is reasonably regarded as
forming part of the remuneration or other money benefits accruing to employees or workers by reason of
their having previously rendered services to their employer; as such, they fall within the scope of
"remuneration or earnings — for services rendered or to be rendered — ." Liability for separation pay
might indeed have the effect of a penalty, so far as the employer is concerned. So far as concerns the
employees, however, separation pay is additional remuneration to which they become entitled because,
having previously rendered services, they are separated from the employer's service. The relationship
between separation pay and services rendered is underscored by the fact that separation pay is
measured by the amount (i.e., length) of the services rendered. This construction is sustained both by the
specific terms of Article 110 and by the major purposes and basic policy embodied in the Labor Code. 6 It
is also the construction that is suggested by Article 4 of the Labor Code which directs that doubts —
assuming that any substantial rather than merely frivolous doubts remain-in the interpretation of the
provisions of the labor Code and its implementing rules and regulations shall be "resolved in favor of
labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.
Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits, which provisions find particular application in
insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be
adjudicated in a binding manner. 7 It is thus important to begin by outlining the scheme constituted by
the provisions of the Civil Code on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general
categories, namely:

(a) special preferred credits listed in Articles 2241 and 2242,

(b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once
that these credits constitute liens or encumbrances on the specific movable or immovable property
to which they relate. Article 2243 makes clear that these credits "shall be considered as mortgages
or pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency." It should be emphasized in this connection that "duties, taxes and fees due [on specific
movable property of the insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and
"taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of the
particular movable or immovable property to which the tax liens have attached. Article 2243 is quite
explicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first be
satisfied. " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles
2242, all come after taxes in order of precedence; such claims enjoy their privileged character as
liens and may be paid only to the extent that taxes have been paid from the proceeds of the specific
property involved (or from any other sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although constituting liens attaching to
particular property, are not preferred one over another inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred credits which subsist in respect of specific movable or
immovable property are to be treated on an equal basis and to be satisfied concurrently and
proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-
tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or
immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari
passu and pro rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take
precedence over ordinary preferred credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first out of the proceeds of the property
to which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds. 9

If the value of the specific property involved is greater than the sum total of the tax liens and other
specially preferred credits, the residual value will form part of the "free property" of the insolvent —
i.e., property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand,
the value of the specific movable or immovable is less than the aggregate of the tax liens and other
specially preferred credits, the unsatisfied balance of the tax liens and other such credits are to the
treated as ordinary credits under Article 2244 and to be paid in the order of preference there set
up. 10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which
follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have
the cash and other assets of the insolvent applied in a certain sequence or order of priority. 11

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In
this sequence, certain taxes and assessments also figure but these do not have the same kind of
overriding preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens
on the taxpayer's property. Under Article 2244,

(a) taxes and assessments due to the national government, excluding those which
result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but including the balance
thereof not satisfied out of the movable or immovable property to which such liens
attached, are ninth in priority;

(b) taxes and assessments due any province, excluding those impressed as tax liens
under Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached,
are tenth in priority; and

(c) taxes and assessments due any city or municipality, excluding those impressed
as tax liens under Articles 2241 No. I and 2242 No. 2 but including the balance
thereof not satisfied out of the movable or immovable property to which such liens
attached, are eleventh in priority.

It is within the framework of the foregoing rules of the Civil Code that the question of the relative
priority of the claims of the Bureau of Customs and the Bureau of Internal Revenue, on the one
hand, and of the claims of the Unions for separation pay of their members, on the other hand, is to
be resolved. A related vital issue is what impact Article 110 of the labor Code has had on those
provisions of the Civil Code.

A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-

Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer

for duties, taxes and fees and other charges attaching on importation constitute a personal debt due
from the importer to the government which can be discharged only by payment in full of all duties,
taxes, fees and other charges legally accruing It also constitutes a lien upon the articles imported
which may be enforced while such articles are in the custody or subject to the control of the
government. (emphasis supplied)

Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of
a specially preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles
importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and
which are still in the custody or subject to the control of the Bureau of Customs. The goods imported
on one occasion are not subject to a lien for customs duties and taxes assessed upon other
importations though also effected by the Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which such duties and taxes are due, would have
to be paid out of the Insolvent's "free property" in accordance with the order of preference embodied
in Article 2244 of the Civil Code. Such unsatisfied customs duties and taxes would fall within Article
2244, No. 9, of the Civil Code and hence would be ninth in priority.

B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —

Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later reenacted in Identical
terms as Section 301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related interest, penalties and costs,
constitutes a lien in favor of the Government from the time an assessment therefor is made and until paid, "upon all property and rights to
property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed
under the National Internal Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and
little VIII, Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees are collected both for purposes of regulation
and control and for purposes of revenue generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section 12 of
Act No. 2613, as amended by Act No. 3179, while the other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in
other words, are imposed both as a regulatory measure and as a revenue-raising measure. In Commissioner of Internal Revenue us.
Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the term "tax" is used in Section 315 of the old Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way
of contributions to the support of the Government, in consideration
of general benefits derived from its operation], but, in abroad sense, encompassing
all government revenues collectible by the Commissioner of Internal Revenue under
said Code, whether involving taxes, in the strict technical sense thereof, or not. x x x
As used in Title IX of said Code, the term 'tax' includes 'any national internal revenue
tax, fee or charge imposed by the Code. 17

It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees
constitutes a claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets,
movable and immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this
tax claim must be given preference over any other claim of any other creditor, in respect of any and all properties of the Insolvent. 19

C. Claims of the Unions for Separation Pay of Their Members —

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within the category of specially
preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent
that such claims for unpaid wages are already covered by Article 2241, number 6. "claims for
laborers' wages, on the goods manufactured or the work done;" or by Article 2242, number 3:
"claims of laborers and other workers engaged in the construction, reconstruction or repair of
buildings, canals and other works, upon said buildings, canals or other works." To the extent that
claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they
would come within the ambit of the category of ordinary preferred credits under Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of
their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and
other products produced or manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent, the
claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for unpaid
tobacco inspection fees shall have been satisfied out of the products so manufactured by the
Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of
the Insolvent in favor of workmen who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the instant case, since the members of
the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or repair of buildings or other real property, but
rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims do
not therefore constitute a lien or encumbrance upon any immovable property owned by the
Insolvent, but rather, as already indicated, upon the Insolvent's existing inventory (if any of
processed tobacco and tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete
scheme of classification, concurrence and preference of credits in insolvency set out in the Civil
Code. We believe and so hold that Article 110 of the Labor Code did not sweep away the overriding
preference accorded under the scheme of the Civil Code to tax claims of the government or any
subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that
taxes are the very lifeblood of government. The effective collection of taxes is a task of highest
importance for the sovereign. It is critical indeed for its own survival. It follows that language of a
much higher degree of specificity than that exhibited in Article 110 of the Labor Code is necessary to
set aside the intent and purpose of the legislator that shines through the precisely crafted provisions
of the Civil Code. It cannot be assumed simpliciter that the legislative authority, by using in Article
110 the words "first preference" and "any provision of law to the contrary notwithstanding" intended
to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume the sovereign itself within the term "other
creditors" in stating that "unpaid wages shall be paid in full before other creditors may establish any
claim to a share in the assets of employer." Insistent considerations of public policy prevent us from
giving to "other creditors" a linguistically unlimited scope that would embrace the universe of
creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil
Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code
and the fact that the Labor Code does not impress any lien on the property of an employer, the use
of the phrase "first preference" in Article 110 indicates that what Article 110 intended to modify is the
order of preference found in Article 2244, which order relates, as we have seen, to property of the
Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241
and 2242. We have noted that Article 2244, number 2, establishes second priority for claims for
wages for services rendered by employees or laborers of the Insolvent "for one year preceding the
commencement of the proceedings in insolvency." Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period prior to the bankruptcy or liquidation, " a period
not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very substantial effect
may be given to the provisions of Article 110 without grievously distorting the framework established
in the Civil Code by holding, as we so hold, that Article 110 of the Labor Code has modified Article
2244 of the Civil Code in two respects: (a) firstly, by removing the one year limitation found in Article
2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or workers of
the Insolvent from second priority to first priority in the order of preference established I by Article
2244.

Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to
the facts herein, the trial court should inventory the properties of the Insolvent so as to determine
specifically: (a) whether the assets of the Insolvent before the trial court includes stocks of
processed or manufactured tobacco products; and (b) whether the Bureau of Customs still has in its
custody or control articles imported by the Insolvent and subject to the lien of the government for
unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products,
such inventories must be subjected firstly to the claim of the Bureau of Internal Revenue for unpaid
tobacco inspection fees. The remaining value of such inventories after satisfaction of such fees (or
should such inspection fees be satisfied out of other properties of the Insolvent) will be subject to a
lien in favor of the Unions by virtue of Article 2241, number 6. In case, upon the other hand, the
Insolvent no longer has any inventory of processed or manufactured product, then the claim of the
Unions for separation pay would have to be satisfied out of the "free property" of the Insolvent under
Article 2244 of the Civil Code. as modified by Article 110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still
within customs custody or control, or should the importations still held by the Bureau of Customs be
or have become insufficient in value for the purpose, customs duties and taxes remaining unpaid
would have only ninth priority by virtue of Article 2244, number 9. In respect therefore of the
Insolvent's "free property, " the claims of the Unions will enjoy first priority under Article 2244 as
modified and will be paid ahead of the claims of the Bureau of Customs for any customs duties and
taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim for
attorney's fees. Attorney's fees incurred by the Unions do not stand on the same footing as the
Unions' claims for separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19
January 1981 of the trial court are modified accordingly. This case is hereby remanded to the trial
court for further proceedings in insolvency compatible with the rulings set forth above. No
pronouncement as to costs.

SO ORDERED.