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Tayug Rural Bank vs. Central Bank of the Phils. (G.R. No. L-46158, Nov.

28, 1986)
FACTS:
Tayug Rural is a bank in Pangasinan which took out 13 loans from Central Bank in
1962 and1963, all covered by promissory notes, amounting to 813k. In late 1964,
Central Bank released a circular; Memorandum Circular No. DLC-8 thru the Director of
Loans and Credit. This circular allinformed all rural banks that an additional 10% per
annum penalty interest would be assessed on all past due loans beginning 1965.
This was enforced beginning July 1965.In 1969, the outstanding balance of Tayug was
at 444k. Tayug Rural filed a case in CFI Manila to recover the 10% penalty it paid up to
1968, amounting to about 16k, and to restrain Central bank from further imposing the
penalty. Central Bank filed a counterclaim for the outstanding balance includingthe10%
penalty, stating that it was legally imposed under the Rules and Regulations Governing
Rural Banks promulgated by the Monetary Board on 1958, under RA 720.Tayugs
defense was that the counterclaim should be dismissed since the unpaid obligation of
Tayug was due to Central Banks flexible and double standard policy of its rediscounting
privileges to Tayug Rural and its subsequent arbitrary and illegal imposition of the 10%
penalty. Tayug Rural contends that no such 10% penalty starting from 1965 was
included in the promissory notes covering the loans. A judgment was rendered by CFI
Manila in favor of Central Bank ordering Tayug Rural Bank to pay10% penalty in the
amount of around 19k pesos for loans up to July 1969, and to pay nothing for the next
remaining loans.Tayugs claim in the case was however successful, and so Tayug was
also ordered to pay 444k, with interest to the Central Bank for the overdue accounts
with respect to the promissory notes. Central Bank appealed to the CA, but also lost on
the ground that only a legal question had been raised in the pleadings. The case was
then raised to the SC, with each party arguing in the following manner:
CFI rules that the circulars retroactive effect on past due loans impairs the
obligation of contracts and deprives Tayug Rural of property without due process
of law.

Central Bank reasons that Tayug Rural, despite the loans, should have known
that rules and regulations authorize the Central Bank to impose additional
reasonable penalties.



ISSUE:
WON The Central Bank can validly impose the 10% penalty via Memorandum Circular
No. DLC-8

HELD:
NO. A reading of the circular and pertinent provisions, including that of RA 720, shows
that nowhere therein is the authority given to the Monetary Board to mete out additional
penalties to the rural banks on past due accounts with the Central Bank.
As said by the CFI, while the Monetary Board possesses broad supervisory powers,
nonetheless, the retroactive imposition of administrative penalties cannot be taken as a
measure SUPERVISORY in character. Administrative rules have the force and effect of
law. There are, however, limitations in the rulemaking power of administrative agencies.
All that is required of administrative rules and regulations is to implement given
legislation by not contradicting it and conform to the standards prescribed by law.
Rules and regulations cannot go beyond the basic law. Since compliance therewith can
be enforced by a penal sanction, an administrative agency cannot implement a penalty
not provided in the law authorizing it, much less one that is applied retroactively.
The new clause imposing an additional penalty was not part of the promissory notes
when Tayug took out its loans. The law cannot be given retroactive effect. More to the
point, the Monetary Board revoked the additional penalty later in 1970, which clearly
shows an admission that it had no power to impose the same. The Central bank hoped
to rectify the defect by revising the DLC Form later. However, Tayug Rural must pay the
additional 10% in case of suit, since in the promissory notes, 10% should be paid in
attorneys fees and costs of suit and collection. Judgment AFFIRMED with modification

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