January 19, 1994
Atlas is a textile firm. Malayang Samahan is its employee union. Atlas hypothecated its certain assets to DBP but Atlas defaulted. DBP acquired the assets of Atlas by foreclosure.
Malayang Samahan filed their claim against Atlas and DBP.
Lower Courts/Judicial Bodies:
- Labor Arbiter ruled that DBP and Atlas Textile Dev Corp (Atlas) are liable to Malayan Samahan for illegal salary deductions, separation pay, and similar money claims
- NLRC affirmed Labor Arbiter
DBP sought reversal of the NLRC decision before the Supreme Court. DBP contends that its mortgage lien should not cover the workers’ preference under Article 110 of the Labor Code.
Issue and Ruling
Does the mortgage lien of DBP cover the the workers’ preference under Article 110 of the Labor Code? No.
Article 110 provides: “In the event of bankruptcy … of an employer’s business, his workers shall enjoy first preference as regards their wages and other monetary claims, …Such unpaid wages and monetary claims shall be paid in full before claims of the government …may be paid. (As amended by Section 1, Republic Act No. 6715, March 21, 1989)
First, Article 110 of the labor Code cannot be viewed in isolation but must be read in relation to the Civil Code scheme on classification and preference of credits.
Second, In the same way that Insolvency Law has been harmonized with the Civil Code, so must Labor Law be made the same.
Third, in the event of insolvency, there must be liquidation proceedings to effect equitable distribution of the insolvent’s property to his creditors.
Fourth, a preference of credit is not the same as a lien. A preference of credits does not attach to specific properties. liens create a charge on a particular property. Article 110 is not a lien on the property of the insolvent’s debtor (Atlas in this case), It is only a preference of credits on their favor.
Fifth, even if Article 110 be interpreted as absolute, it must not infringe the constitutional guarantee of non-impairment of contracts. Also the mortgage credit of DBP happened before the promulgation of RA 6715 which expanded worker preference to cover not only unpaid wages but also monetary claims.