I. Introduction and Governing Law
The law governing the concurrence and preference of credits is primarily found in Articles 2236 to 2251 of the Civil Code of the Philippines. These rules apply when the properties of a debtor are insufficient to pay all of his monetary debts in full, and various creditors, with different types of claims, seek satisfaction from the same patrimony. The system establishes a mandatory legal order of payment, overriding any contractual agreements that seek to alter the preference among credits, except as expressly allowed by law.
II. Fundamental Concepts: Concurrence and Preference
Concurrence refers to the situation where two or more creditors have distinct and separate claims against the same debtor and the same property or properties of that debtor are insufficient to cover all obligations. Preference is the right held by a creditor to be paid ahead of others from the proceeds of the sale of the debtor’s property, based on the legal ranking established by the Civil Code. A preference gives priority in payment but does not grant title to the property itself (unlike a pledge or mortgage).
III. Classification of Credits for Ranking
Credits are classified into two main categories for the purpose of establishing the order of payment:
Common Preferred Credits: Claims that are preferred over all other credits (e.g., funeral expenses, last illness expenses, certain labor claims).
Concurring Ordinary Preferred Credits: Claims that rank equally among themselves but are subordinate to the common preferred credits.
IV. Order of Payment: The Legal Ladder
The absolute order of payment, which must be followed in the distribution of an insolvent debtor’s assets, is as follows:
V. The Rule on “Two-Tier” Payment
A critical procedural rule is that credits of a higher class must be fully paid before any payment is made to the next lower class. No creditor in a lower class may receive anything until all creditors in all preceding classes have been paid in full. If the assets are insufficient to pay all credits within the same class (e.g., all concurring ordinary preferred credits over movables), they are paid pro rata in proportion to the amount of their respective claims.
VI. Waiver and Subordination of Preference
The right of preference is generally established by law for reasons of public policy (e.g., protection of labor, administration of justice, family rights). As such, it is generally not waivable in advance of the concurrence. A creditor may, however, lose his preference by his own acts, such as by subordinating his claim to others or by failing to assert his preference at the proper time in a proper proceeding.
VII. Exceptions to the Order: Taxes and Labor Claims
Certain claims are given super-preference by special laws, which may amend the order under the Civil Code. Most notably:
Tax Lien: Under the National Internal Revenue Code, national internal revenue taxes (e.g., income tax, VAT) constitute a lien on all properties of the taxpayer, which is superior to any mortgage, attachment, or judgment credit. This lien attaches from the time the tax is assessed.
Labor Claims: Article 110 of the Labor Code grants workers a preference over the assets of their employer for unpaid wages, which is superior to the claims of government and private creditors. The Supreme Court has held this to be a “constitutional preference” that must be given the highest regard.
VIII. Key Jurisprudential Doctrines
Priority in Time, Not in Right: In the same class of credits, priority is determined not by the date of the creation of the credit but by the legal classification. “A prior credit does not necessarily enjoy preference over a later credit” if they belong to different legal categories.
Preference vs. Lien: A preference is a right to a prior payment; it is not a lien or a charge on the property until it is enforced in a proper judicial or administrative proceeding.
Burden of Proof: The creditor claiming a preference has the burden of proving the facts that give rise to such preference.
IX. Practical Remedies
To effectively navigate concurrence and protect a credit, a creditor must: (a) Perfect a Security Interest through a real mortgage or pledge, elevating the credit to a special preferred status attached to specific property; (b) Timely Assert the Claim in the correct proceeding, such as an insolvency proceeding, settlement of estate, or foreclosure, as preferences are often lost if not asserted; (c) File Necessary Notices for tax liens or with the Register of Deeds for mortgages to bind third persons; (d) in the case of unsecured credits, Monitor the Debtor’s Solvency and initiate collection or insolvency proceedings early before assets are dissipated; and (e) Coordinate with the Liquidator/Receiver in any insolvency or judicial settlement proceeding to formally present and prove the preferred nature of the claim, ensuring it is placed in the proper class for distribution.
