6.

Feliciano v Commision on Audit, 419 SCRA 363

Doctrine:

1. Congress cannot enact a law creating a private corporation with a special charter;
Since private corporations cannot have special charters, it follows that Congress can
create corporations with special charters only if such corporations are government-
owned or controlled.
2. Private corporations may exist only under a general law. If the corporation is private,
it must necessarily exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations. Under existing laws,
that general law is the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives. The Constitution authorizes Congress to create
government-owned or controlled corporations through special charters.

Facts:

A Special Audit Team from COA Regional Office audited the accounts of
LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999
requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a
reply dated 12 October 1999 informing COA’s Regional Director that the water district
could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20
of Presidential Decree 198 (“PD 198”),2 as well as Section 18 of Republic Act No. 6758 .
The Regional Director referred petitioner’s reply to the COA Chairman on 18 October
1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking
for refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangan’s
Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion for
reconsideration on 31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition
were resolutions of the Visayas Association of Water Districts (VAWD) and the
Philippine Association of Water Districts (PAWD) supporting the petition.
 The COA also denied petitioner’s request for COA to stop charging auditing fees
as well as petitioner’s request for COA to refund all auditing fees already paid.
Petitioner maintains that LWDs are not government-owned and controlled
corporations with original charters. Petitioner even argues that LWDs are private
corporations. Petitioner asks the Court to consider certain interpretations of the
applicable laws, which would give a “new perspective to the issue of the true character
of water districts. Petitioner theorizes that what PD 198 created was the Local Waters
Utilities Administration (“LWUA”) and not the LWDs. Petitioner claims that LWDs are
created “pursuant to” and not created directly by PD 198. Thus, petitioner concludes
that PD 198 is not an “original charter” that would place LWDs within the audit
jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution.
Petitioner elaborates that PD 198 does not create LWDs since it does not expressly direct
the creation of such entities, but only provides for their formation on an optional or
voluntary basis.8Petitioner adds that the operative act that creates an LWD is the
approval of the Sanggunian Resolution as specified in PD 198.

Issue:

Whether LWDs are Private or Government-Owned and Controlled Corporations with

Original Charters

Whether a Local Water District (“LWD”) created under PD 198, as amended, is a

government-owned or controlled corporation subject to the audit jurisdiction of COA;

Ruling:

The petition lacks merit.

The Constitution and existing laws4 mandate COA to audit all government
agencies, including government-owned and controlled corporations (“GOCCs”) with
original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D
of the Constitution provides for COA’s audit jurisdiction. The COA’s audit jurisdiction
extends not only to government “agencies or instrumentalities,” but also to
“government-owned and controlled corporations with original charters” as well as
“other government-owned or controlled corporations” without original charters.
The Constitution recognizes two classes of corporations. The first refers to
private corporations created under a general law. The second refers to government-
owned or controlled corporations created by special charters. Section 16, Article XII of
the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations
except by a general law applicable to all citizens.9 The purpose of this constitutional
provision is to ban private corporations created by special charters, which historically
gave certain individuals, families or groups special privileges denied to other citizens.10

In short, Congress cannot enact a law creating a private corporation with a

special charter. Such legislation would be unconstitutional. Private corporations may
exist only under a general law. If the corporation is private, it must necessarily exist
under a general law. Stated differently, only corporations created under a general law
can qualify as private corporations. Under existing law sgeneral law is the Corporation
Code,11 except that the Cooperative Code governs the incorporation of cooperatives.
LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange
Commission. Section 14 of the Corporation Code states that “[A]ll corporations
organized under this code shall file with the Securities and Exchange Commission
articles of incorporation x x x.” LWDs have no articles of incorporation, no
incorporators and no stockholders or members. There are no stockholders or members
to elect the board directors of LWDs as in the case of all corporations registered with the
Securities and Exchange Commission. The local mayor or the provincial governor
appoints the directors of LWDs for a fixed term of office. This Court has ruled that
LWDs are not created under the Corporation Code.
LWDs exist by virtue of PD 198, which constitutes their special charter. Since
under the Constitution only government-owned or controlled corporations may have
special charters, LWDs can validly exist only if they are government-owned or
controlled. To claim that LWDs are private corporations with a special charter is to
admit that their existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from
the Corporation Code, LWDs derive their legal existence and power from PD 198. The
determining factor of COA’s audit jurisdiction is government ownership or control of
the corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine
Veterans Bank,22 the Court even ruled that the criterion of ownership and control is
more important than the issue of original charter.
Certainly, the government owns and controls LWDs. The government organizes
LWDs in accordance with a specific law, PD 198. There is no private party involved as
co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or
local government owns and controls all their assets. The government controls LWDs
because under PD 198 the municipal or city mayor, or the provincial governor, appoints
all the board directors of an LWD for a fixed term of six years.
COA may charge GOCCs “actual audit cost” but GOCCs must pay the same
directly to COA and not to COA auditors. Petitioner has not alleged that COA charges
LWDs auditing fees in excess of COA’s “actual audit cost.” Neither has petitioner
alleged that the auditing fees are paid by LWDs directly to individual COA auditors.
Thus, petitioner’s contention must fail.