G.R. No. 230628 - Small Business Corp. vs. Commission on Audit

Petitioner, Small Business Corporation (SB Corp.), is a government-owned and controlled corporation (GOCC) created under Republic Act (RA) No. 6977, as amended by RA No. 8289.
SB Corp. offers various financial services for small and medium enterprises including guarantee, lending (direct and indirect), financial leasing, secondary mortgage, venture capital operations, and issuance of debt instruments.
RA No. 9501 (Magna Carta for MSMEs) was enacted on May 23, 2008, which among other provisions, granted SB Corp.’s Board the authority to structure its organizational and compensation framework similar to that in other government financial institutions.

On June 1, 2009, SB Corp.’s Board of Directors (BOD) passed Board Resolution (BR) No. 1610, Series of 2009, approving its revised organizational structure, staffing pattern, qualification standards, and salary structure pursuant to its enabling law.
Later, on October 28, 2011, the BOD approved BR No. 1863, Series of 2011, which set the guidelines and procedures for implementing the revised salary structure, including the grant of step increments for qualified employees.

Step increment was defined as the lateral adjustment of an employee’s basic salary from one salary step to the next higher step.
Two bases for step increment were provided: merit (performance-based) and length of service.

Executive Order (EO) No. 7, issued on September 8, 2010 by President Benigno S. Aquino III, imposed a moratorium on increases in salaries, allowances, and other benefits for GOCC officers and employees until specifically authorized by the President.
On June 6, 2011, RA No. 10149 was enacted, creating the Governance Commission for GOCCs (GCG), which holds the authority to coordinate and oversee policies including those on compensation matters in GOCCs.

On April 12, 2013, SB Corp. granted and paid merit increases to five officers (Charles Albert G. Belgica, Rowena G. Betia, Dida M. Delute, Evelyn P. Felias, and Victor M. Hernandez) in accordance with the approved guidelines in BR No. 1863.
On June 25, 2014, SB Corp.’s President and CEO sent a letter to the GCG requesting confirmation to proceed with the merit increase program for 2013 based on 2012 performance, acknowledging GCG as the proper authority for such confirmation.
On July 8, 2014, the GCG denied the request citing the continuing effect of EO No. 7, which prohibited any new salary increases.
Consequent to this denial, on August 27, 2014, the State Auditor issued Notice of Disallowance (ND) No. 14-001-401000-(13) disallowing the total payment of P759,042.41 for the merit increases paid to the five officers.

SB Corp. appealed the ND before the COA Cluster Director. On April 29, 2015, the Cluster Director denied the appeal, holding that SB Corp. was estopped from questioning EO No. 7’s applicability by having sought GCG’s authorization.
SB Corp. elevated the matter to the COA En Banc through a Petition for Review. However, the COA En Banc, in its Decision dated February 16, 2017, denied the petition and affirmed the ND on the basis that EO No. 7 was in force at the time the merit increases were granted.

Petitioner contended that the COA committed grave abuse of discretion by holding that its BOD did not have the authority to grant a merit increase and by applying EO No. 7, which it argued should have only prospective, not retroactive, effect.
It further argued that the merit increases were already approved by the Civil Service Commission and the Secretary of Trade and Industry, and were in accordance with its approved salary structure.

The Commission on Audit (COA) and respondent, through the Office of the Solicitor General, argued that SB Corp. was estopped from questioning GCG’s authority as evidenced by its own request for confirmation.
They maintained that EO No. 7 applied to the grant of the merit increases because such increases equated to an increase in the salary rate, which was expressly prohibited until further authorized by the President.

Holding that the Board of Directors of SB Corp. did not have the authority to grant the merit increases without prior approval by the GCG.
Applying EO No. 7 to bar the grant of merit increases and thereby disallowing the payments made to the five officers.

Whether EO No. 7 has only prospective application and whether a retroactive application would impair vested and contractual rights.

Whether the clear intent of EO No. 7 in relation to RA No. 10149 mandates its application prospectively and limits the authority of SB Corp. to implement merit increases autonomously.

Whether SB Corp. was authorized to implement the subject merit increases pursuant to its approved salary structure and the subsequent approvals by the Civil Service Commission and the Secretary of Trade and Industry.