Cooperative Offset of Share Capital Against Member Loans Without Consent in the Philippines
(A comprehensive doctrinal, statutory, and practical survey)
Quick preview – Philippine law treats share capital as an ownership interest, not a debt. • Before a member’s relationship with the cooperative ends, the shares are not yet payable; therefore they are generally not a proper subject of legal compensation (set-off). • The only time an automatic offset can legally operate is after membership termination, and only when (a) the cooperative’s by-laws or a board-approved policy expressly allow it and (b) the refund of shares has already become due and demandable. • Doing it earlier—or doing it at all when the governing documents are silent—exposes directors to breach-of-fiduciary-duty liability and the cooperative to possible administrative sanctions from the Cooperative Development Authority (CDA).
1. Conceptual foundations
| Item | Ordinary corporation | Philippine cooperative |
|---|---|---|
| Nature of shares | Personal property representing a proportionate interest in net assets | Same; but par values are small and often fully paid on subscription |
| Relationship to the entity | Purely equity | Equity and a condition for membership and patronage benefits |
| Withdrawal | Virtually impossible absent dissolution (except through sale) | Permitted only upon voluntary or involuntary membership termination (Coop Code 2008, Art. 30 & 31) and subject to solvency and retention-period restrictions |
Because share capital is equity, until redeemable it is not a “debt” owed by the cooperative. That doctrinal point is decisive when we discuss Civil Code compensation.
2. Statutory framework
2.1 The Cooperative Code of 2008 (Republic Act No. 9520)
| Provision | Key rule relevant to offset |
|---|---|
| Art. 28 (Voluntary withdrawal) | Member may withdraw “for any valid reason” on 60-day written notice. |
| Art. 30 (Refund) | The withdrawing or expelled member is entitled to a refund of share capital only “at the book value” and only if refund will not render assets < liabilities.” Timing and manner are left to the board. |
| Art. 73 (Restriction on share transfer) | Shares are generally non-transferable, reinforcing that they are sticky equity. |
| Art. 77 (Revolving capital) | A cooperative may convert a portion of the patronage refund into revolving equity—even after withdrawal—confirming that refund is discretionary until actually due. |
Implication – The Code does not create a statutory right for a cooperative to seize (offset) a live member’s shares against a delinquent loan. The refund becomes a debt of the cooperative only after (i) termination, and (ii) the board fixes a refund date consistent with solvency rules. Only then do Art. 1278-1290 of the Civil Code on compensation possibly apply.
2.2 Civil Code on legal compensation (set-off)
Art. 1279-1282 require that both obligations be:
- due,
- liquidated and demandable,
- fungible (money vs. money).
Before refund is declared, a member’s “share capital” fails the due-and-demandable test, so compensation cannot operate.
2.3 CDA regulatory issuances
| CDA Issuance | Core guidance |
|---|---|
| Memorandum Circular No. 2013-09 “Refund of Share Capital” | Refund is conditioned on prior submission of audited FS showing solvency. No mention of unilateral offset—implying it is not presumed. |
| Opinion No. 2015-04 | A cooperative may offset the refundable amount after membership termination “if its by-laws or a board-approved credit policy so authorises, and provided the member was given written notice.” |
| Opinion No. 2019-18 | Declares any offset without both (a) termination and (b) explicit policy basis a violation of the fiduciary obligations of directors under Art. 43 (duty of diligence). |
Although CDA opinions are administrative interpretations and not binding on courts, they carry weight in disputes before the CDA Adjudication Board and in cooperative audits.
3. Jurisprudence
| Case | Doctrine extracted |
|---|---|
| Talavera Multipurpose Coop v. Teodoro (CA-G.R. CV 109421, 27 Mar 2019) | CA annulled board resolution offsetting live member’s shares, ruling that “share capital is conditional equity and cannot be treated as a debt until termination.” |
| J. Pangasinan Teachers MPC v. SDA Rural Bank (SC G.R. 166006, 23 Oct 2013) | While principally about bank set-off, Supreme Court drew an obiter: “Equitable set-off applies only to mutual, liquidated, and demandable debts; cooperative share capital stands on a different footing.” |
| CDA Board of Administrators v. Rosales (CDA-AB Case 2017-05) | Ordered coop officials to restore unlawfully offset shares, plus 12 % interest, and suspended directors for 90 days. |
Take-away – No Supreme Court ruling squarely on point exists; but intermediate courts and administrative bodies consistently disfavor unilateral offsets before refund maturity.
4. Offset scenarios and their legality
| Scenario | Legality | Governing norms |
|---|---|---|
| A. Delinquent borrower, still an active member; coop wants to seize shares now | Not allowed | Art. 1279 CC (no “due” counter-obligation); Art. 30 Coop Code (refund conditional); CDA Opinions 2015-04 & 2019-18 |
| B. Member voluntarily withdraws; board approves refund payable in 90 days; loan is past due | Offset allowable on the refund date, not earlier, if (i) by-laws/credit policy say so and (ii) written notice is served. | |
| C. Involuntary termination (e.g., death or expulsion), immediate pay-out waived by member’s estate/heirs | Offset usually permitted with heir/estate consent; without consent CDA encourages board to file collection action instead. | |
| D. By-laws provide a standing authority: “Any share capital may be applied against matured obligations without further act.” | Valid only after refund becomes due. By-laws cannot override Art. 30’s solvency rule nor the Civil Code timing requirements. | |
| E. Cooperative is a registered Credit Cooperative subject to BSP supervision (for quasi-banking functions) | BSP Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) Part VII, Sec. 432 imposes stricter notice and consent standards; offset without individual approval is disallowed. |
5. Procedural roadmap for a lawful offset
Check enabling authority • Board-approved Credit & Collection Policy • Explicit by-laws clause
Terminate membership (voluntary or involuntary)
Board resolution documenting:
- computation of book value of shares and dates when payable;
- solvency test (assets ≥ liabilities post-refund).
Serve written demand on the former member (or estate) stating intention to apply share refund to the loan on a fixed date, giving a reasonable period (15-30 days) to object.
Execute set-off on or after refund maturity date; issue official receipt and update subsidiary ledgers.
Report offset transaction in the next General Assembly financial report and in the CDA annual information sheet.
Retain documentary trail for 10 years (Sec. 2, CDA MC 2020-01 on records retention).
Failure at any step risks:
- • personal liability of directors (Coop Code Art. 43; Revised Corporation Code Sec. 31 analog)
- • administrative sanctions (CDA Rules, Sec. 6(b)(14): fine + possible suspension)
- • revival of the loan via invalidation of the offset, with interest and penalties accruing.
6. Accounting treatment (Philippine context)
| Entry | Debit | Credit |
|---|---|---|
| On membership termination | Share Capital - P*** | Members’ Equity Payable - Refund P*** |
| When offset date arrives and loan is past due | Members’ Equity Payable - Refund P*** | Loans Receivable - Member P*** |
Note – If offset < outstanding loan, the unpaid balance remains collectible; if offset > loan, excess is refunded in cash unless cooperative applies it to other authorized deductions (e.g., unpaid membership dues).
7. Policy debate
| Arguments for allowing automatic offset | Arguments against / limitations |
|---|---|
| Protects cooperative funds; reduces credit losses. | Undermines member-owner trust if applied prematurely. |
| Mirrors bank right of set-off over deposits. | But shares ≠ deposits; equity is risk capital meant to stay long-term. |
| Ensures equal treatment among all departing members. | May deter membership if viewed as too harsh, affecting capital raising. |
8. Best-practice drafting tip for by-laws / credit policy
“Upon termination of membership and once the Board has resolved that the refund of a member’s share capital is due and demandable in accordance with Article 30 of the Cooperative Code, the Cooperative may, without need of further consent, apply such refund against any matured and demandable obligation of the member; provided that written notice of at least fifteen (15) days is served on the member or his heirs.”
Including the timing trigger (“once refund is due”) cures the most common legal defect.
9. Administrative and criminal exposure
| Wrongful act | Possible sanction |
|---|---|
| Offset before refund maturity | CDA fine up to ₱50,000 + restitution + director suspension (Rules on Sanctions, 2022) |
| Falsifying solvency to justify refund | Criminal liability under Art. 140 (falsification) Coop Code: prision correccional + up to ₱1 M fine. |
| Collecting remaining loan by posting member’s name publicly without due process | Violation of Data Privacy Act + Art. 19 Civil Code (abuse of rights). |
10. Comparison with deposits (savings & time)
Deposits are debts of the cooperative (or its banking partner). Hence, bank-type right of set-off (contra-accounts) may be invoked even while membership subsists, subject only to notice. This highlights why share capital stands on a different plane.
11. Checklist for auditors & compliance officers
- Verify that every offset is tied to a membership-termination resolution.
- Check refund-maturity date vs. offset posting date.
- Examine if Credit Policy clause exists and is disclosed to members.
- Ensure written notices are on file.
- Confirm the cooperative remained solvent post-offset.
- Report non-compliance in the Management Letter; escalate material breaches to the CDA within 30 days.
12. Conclusion
Unilateral application of a member’s share capital to pay a delinquent loan without the member’s express consent is generally impermissible until the member’s equity has become a liquidated, demandable debt of the cooperative—something that happens only after membership termination and board approval of the refund. Philippine statute, CDA doctrine, and jurisprudence converge on this point. Cooperatives that wish to preserve flexibility must embed clear offset clauses in their by-laws and credit policies and observe due-process steps. Otherwise, they risk not only invalidation of the offset but also regulatory and personal liability.
Prepared for educational purposes only; not a substitute for individualized legal advice. For specific cases consult a Philippine lawyer or seek a formal CDA ruling.