G.R. No. 108031 March 1, 1995
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION and LEONOR A. ANG, respondents.

FACTS

Private respondent Leonor A. Ang started employment with Tropical Philippines Wood Industries, Inc. (TPWII) in 1977. In September 1983, petitioner Development Bank of the Philippines (DBP), as mortgagee, foreclosed TPWII’s plant facilities and equipment. TPWII continued operations until January 1986 when DBP took possession of the foreclosed properties, causing the company to cease operations. Consequently, private respondent was verbally terminated on April 15, 1986. On December 14, 1987, she filed a complaint for separation pay, 13th month pay, vacation and sick leave pay, salaries and allowances against TPWII, its General Manager, and DBP. The Labor Arbiter found TPWII primarily liable for separation pay and vacation and sick leave pay (claims for unpaid wages and 13th month pay having been paid after filing). The General Manager was absolved. DBP was held subsidiarily liable if TPWII failed to satisfy the judgment, based on the superior right of an employee to be paid from the employer’s properties over the right of a mortgagee, citing PNB v. Delta Motor Workers Union. The National Labor Relations Commission affirmed the Labor Arbiter’s ruling on November 16, 1992.

ISSUE

Whether public respondent NLRC committed grave abuse of discretion in holding that Article 110 of the Labor Code on worker preference is applicable notwithstanding the absence of any formal declaration of bankruptcy or judicial liquidation of TPWII.

RULING

Yes, the NLRC committed grave abuse of discretion. Article 110 of the Labor Code, which provides for worker preference in case of bankruptcy or liquidation, requires a declaration of bankruptcy or a judicial liquidation to be present before the worker’s preference may be enforced. The Court, citing Development Bank of the Philippines v. Santos, held that Article 110 and its implementing rule cannot be invoked absent a formal declaration of bankruptcy or a liquidation order. The rationale is that an orderly settlement of a debtor’s assets requires all creditors to be convened, their claims ascertained and inventoried, and the preferences determined in the course of judicial proceedings. In this case, there was no declaration of bankruptcy nor judicial liquidation of TPWII; hence, it was premature to enforce the worker’s preference. The Court further clarified that a preference of credit, such as that given to workers under Article 110, applies only to claims which do not attach to specific properties and becomes material only when the debtor’s assets are insufficient to pay all debts. It is a method to determine the order of payment in the final distribution of the insolvent’s assets, not a lien on specific property. A mortgage credit, being a lien on an identified property, constitutes a real right enforceable against the whole world. Therefore, the petition was granted, and the decision of the NLRC was set aside.