The present petition for certiorari seeks the reversal of the decision of the National Labor Relations Commission (NLRC) in NLRC-NCR Case No. 00-07-02500-87, dated January 16, 1986,^[1] which dismissed the appeal of the Development Bank of the Philippines (DBP) from the decision of the labor arbiter ordering it to pay the unpaid wages, 13th month pay, incentive pay and separation pay of herein private respondents.

Philippine Smelters Corporation (PSC), a corporation registered under Philippine law, obtained a loan in 1983 from the Development Bank of the Philippines, a government-owned financial institution created and operated in accordance with Executive Order No. 81, to finance its iron smelting and steel manufacturing business.  To secure said loan, PSC mortgaged to DBP real properties with all the buildings and improvements thereon and chattels, with its President, Jose T. Marcelo, Jr., as co-obligor.

By virtue of the said loan agreement, DBP became the majority stockholder of PSC, with stockholdings in the amount of P31,000,000.00 of the total P60,226,000.00 subscribed and paid-up capital stock.  Subsequently, it took over the management of PSC.

When PSC failed to pay its obligation with DBP, which amounted to P75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired the mortgaged real estate and chattels of PSC in the auction sales held on February 25, 1987 and March 4, 1987.

On February 10, 1987, forty (40) petitioners filed a Petition for Involuntary Insolvency in the Regional Trial Court, Branch 61 at Makati, Metropolitan Manila, docketed therein as Special Proceeding No. M-1359,^[2] against PSC and DBP, impleading as co-respondents therein Olecram Mining Corporation, Jose Panganiban Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners representing themselves as unpaid employees of said private respondents, except PISO Bank.

On February 13, 1987, herein private respondents filed a complaint with the Department of Labor against PSC for non-payment of salaries, 13th month pay, incentive leave pay and separation pay.  On February 20, 1987, the complaint was amended to include DBP as party respondent.  The case was thereafter indorsed to the Arbitration Branch of the National Labor Relations Commission (NLRC).  DBP filed its position paper on September 7, 1987, invoking the absence of employer-employee relationship between private respondents and DBP and submitting that when DBP foreclosed the assets of PSC, it did so as a foreclosing creditor.

On January 30, 1988, the labor arbiter rendered a decision, the dispositive portion of which directed that "DBP as foreclosing creditor is hereby ordered to pay all the unpaid wages and benefits of the workers which remain unpaid due to PSC's foreclosure."^[3]

On appeal by DBP, the NLRC sustained the ruling of the labor arbiter, holding DBP liable for unpaid wages of private respondents "not as a majority stockholder of respondent PSC, but as the foreclosing creditor who possesses the assets of said PSC by virtue of the auction sale it held in 1987." In addition, the NLRC held that the labor arbiter is correct in assuming jurisdiction because "the worker's preference to the amount secured by DBP by virtue of said foreclosure sales of PSC properties arose out of or are connected or interwoven with the labor dispute brought forth by appellees against PSC and DBP."^[4] Hence, the present petition by DBP.

DBP contends that the labor arbiter and the NLRC committed a grave abuse of discretion (1) in assuming jurisdiction over DBP; (2) in applying the provisions of Article 110 of the Labor Code, as amended; and (3) in not enforcing and applying Section 14 of Executive Order No. 81.

We find merit in the petition.

It is to be noted that in their comment, private respondents tried to prove the existence of employer-employee relationship based on the fact that DBP is the majority stockholder of PSC and that the majority of the members of the board of directors of PSC are from DBP.^[5] We do not believe that these circumstances are sufficient indicia of the existence of an employer-employee relationship as would confer jurisdiction over the case on the labor arbiter, especially in the light of the express declaration of said labor arbiter and the NLRC that DBP is being held liable as a foreclosing creditor.  At any rate, this jurisdictional defect was cured when DBP appealed the labor arbiter's decision to the NLRC and thereby submitted to its jurisdiction.

The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the unpaid wages, 13th month pay, incentive leave pay and separation pay of the employees of PSC.

We rule in the negative.

During the dates material to the foregoing proceedings, Article 110 of the Labor Code read:

"Art. 110.  Worker preference in case of bankruptcy. - In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding.  Unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer."

In conjunction therewith, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code provided:

"Sec. 10.  Payment of wages in case of bankruptcy. - Unpaid wages earned by the employees before the declaration of bankruptcy or judicial liquidation of the employer's business shall be given first preference and shall be paid in full before other creditors may establish any claim to a share in the assets of the employer."

Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al.,^[6] explicated as follows:

"It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced.  x x x.

x        x          x

"Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be applied was explained by this Court in the case of Philippine Savings Bank v. Lantin (124 SCRA 476 [1983]).  We said:

'The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement of a decedent's estate.  The action filed by Ramos was only to collect the unpaid cost of the construction of the duplex apartment.  It is far from being a general liquidation of the estate of the Tabligan spouses.

'Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are binding against the whole world.  All persons having interest in the subject matter involved, whether they were notified or not, are equally bound.  Consequently, a liquidation of similar import or 'other equivalent general liquida­tion must also necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be bound by such proceeding.

'In the case at bar, although the lower court found that 'there were no known creditors other than the plaintiff and the defendant herein', this can not be conclusive.  It will not bar other creditors in the event they show up and present their claim against the petitioner bank, claiming that they also have preferred liens against the property involved.  Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain constantly unstable and questionable.  Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory liens.  Neither does the De Barreto case x x x.'

"The claims of all creditors whether preferred or non-preferred, the identification of the preferred ones and the totality of the employer's asset should be brought into the picture.  There can then be an authoritative, fair, and binding adjudication instead of the piece meal settlement which would result from the questioned decision in this case."

Republic Act No. 6715, which took effect on March 21, 1989, amended Article 110 of the Labor Code to read as follows:

"Art. 110.  Worker preference in case of bankruptcy. - In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards their unpaid wages and other monetary claims, any provision of law to the contrary notwithstanding.  Such unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors may be paid."

As a consequence, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code was likewise amended, to wit:

"Sec. 10.  Payment of wages and other monetary claims in case of bankruptcy. - In case of bankruptcy or liquidation of the employer's business, the unpaid wages and other monetary claims of the employees shall be given first preference and shall be paid in full before the claims of government and other creditors may be paid."

Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid case of Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was adopted by this Court in the recent case of Development Bank of the Philippines vs. National Labor Relations Commission, et al..^[7] For facility of reference, especially the rationalization for the conclusions reached therein, we reproduce the salient portions of the decision in this later case.

"Notably, the terms 'declaration' of bankruptcy or 'judicial' liquidation have been eliminated.  Does this mean then that liquidation proceedings have been done away with?

"We opine in the negative, upon the following considerations:

1.  Because of its impact on the entire system of credit, 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.

'Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.  Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner.  x x x' (Republic vs. Peralta (G.R. No. L-56568, May 20, 1987, 150 SCRA 37).

2.  In the same way that the Civil Code provisions on classification of credits and the Insolvency Law have been brought into harmony, so also must the kindred provisions of the Labor Law be made to harmonize with those laws.

3.  In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvent's property among his creditors.  To accomplish this there must first be some proceeding where notice to all of the insolvent's creditors may be given and where the claims of preferred creditors may be bindingly adjudicated (De Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928).  The rationale therefor has been expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November 1989), which we quote:

'A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead of other claims which may be established against the debtor.  Logically, it becomes material only when the properties and assets of the debtors are insufficient to pay his debts in full; for if the debtor is amply able to pay his various creditors, in full, how can the necessity exist to determine which of his creditors shall be paid first or whether they shall be paid out of the proceeds of the sale of the debtor's specific property?  Indubitably, the preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and the claims held by his various creditors have been established (Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil. 611 [1916]; Barretto vs. Villanueva, G.R. No. 14938, 29 December 1962, 6 SCRA 928; Philippine Savings Bank vs. Lantin, G.R. 33929, 2 September 1983, 124 SCRA 476).'

4.  A distinction should be made between a preference of credit and a lien.  A preference applies only to claims which do not attach to specific properties.  A lien creates a charge on a particular property.  The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers.  It is but a preference of credit in their favor, a preference in application.  It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets.  It is a right to a first preference in the discharge of the funds of the judgment debtor.  In the words of Republic vs. Peralta, supra:

'Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer.  Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6:  'claims for laborers' wages, on the goods manufactured or the work done; or by Article 2242, number 3:  'claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works.' To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and Article 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under Article 2244.'

5.  The DBP anchors its claim on a mortgage credit.  A mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Article 2176, Civil Code).  It creates a real right which is enforceable against the whole world.  It is a lien on an identified immovable property, which a preference is not.  A recorded mortgage credit is a special preferred credit under Article 2242(5) of the Civil Code on classification of credits.  The preference given by Article 110, when not falling within Article 2241(6) and Article 2242(3) of the Civil Code and not attached to any specific property, is an ordinary preferred credit although its impact is to move it from second priority to first priority in the order of preference established by Article 2244 of the Civil Code (Republic vs. Peralta, supra).

In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or lien of any kind as security is not permitted to vote in the election of the assignee in insolvency proceedings unless the value of his security is first fixed or he surrenders all such property to the receiver of the insolvent's estate.

6.  Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean 'absolute preference,' the same should be given only prospective effect in line with the cardinal rule that laws shall have no retroactive effect, unless the contrary is provided (Article 4, Civil Code).  Thereby, any infringement on the constitutional guarantee on non-impairment of obligation of contracts (Section 10, Article III, 1987 Constitution) is also avoided.  In point of fact, DBP's mortgage credit antedated by several years the amendatory law, RA No. 6715.  To give Article 110 retroactive effect would be to wipe out the mortgage in DBP's favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form of real property.

"In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any effective way prior to the time of its presentation in distribution proceedings.  It will find application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before the 'claims of the Government and other creditors' may be paid.  But, for an orderly settlement of a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the preference determined in the course of judicial proceedings which have for their object the subjection of the property of the debtor to the payment of his debts or other lawful obligations.  Thereby, an orderly determination of preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest, since those proceedings are proceedings in rem; and the legal scheme of classification, concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony."

On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been instituted against PSC, private respondents should properly assert their respective claims in said proceeding.

WHEREFORE, the petition is GRANTED.  The decision of public respondent is hereby ANNULLED and SET ASIDE.

SO ORDERED.

Melencio-Herrera, (Chairman), and Paras, JJ., concur.
Padilla, J., dissents for the same reasons stated in his dissenting opinion in DBP vs. NLRC, et al., G.R. Nos. 82763-64, 19 March 1990.
Sarmiento, J., dissents in a separate opinion.

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^[1] Petition, Annex A; Rollo, 26.

^[2] Rollo, 84.

^[3] Petition, Annex B; Rollo, 30.

^[4] Rollo, 66.

^[5] Ibid., 74-77.

^[6] 171 SCRA 138 (1989).

^[7] G.R. Nos. 82763-64, Mar. 19, 1990; en banc.

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