Special Lecture of Dean Nilo Divina

Special Commercial Law

What is a LETTER OF CREDIT ?

A letter of credit is any arrangement, however named or described, whereby a bank, acting upon the
request of its client or on its own behalf, agrees to pay another against stipulated documents, provided
that the terms of the credit are complied with.

What are the kinds of LETTER OF CREDIT ?

A letter of credit may be :
a. Commercial or import letter of credit- where the transaction underlying the letter of credit is a sale or
importation
b. Standby letter of credit-where the transaction underlying the letter of credit is not a sale transaction
c. Irrevocable where the terms of the letter of credit can not be changed without the consent of the
beneficiary
d. Revocable-where the terms of the letter of credit may be changed even without the consent of the
beneficiary
e. Confirmed -When the Letter of credit is guaranteed by adding payment confirmation by the advising
bank or any third bank ( Confirming Bank ) on behalf of the opening bank, it is termed as a confirmed
LC
f. Unconfirmed- when the letter of credit is not guaranteed by a confirming bank. Confirmation can be
added only to irrevocable and not to the revocable credits.

Is a letter of credit a form of a SURETY OR GUARANTY AGREEMENT ?

While a letter of credit is a security arrangement, the liability of the bank that issued the letter of credit is
neither that of a surety nor a guarantor.

The liability of the issuing bank is primary and solidary.

In one case, the Supreme Court ruled that the stay order issued by the rehabilitation court enjoining the
enforcement of claims against the principal debtor, its guarantor and surety not liable solidarily with the
principal debtor does not preclude the beneficiary from collecting on the letter of credit because the
liability of the bank that issued the letter of credit is direct, primary and solidary.

The issuing bank is not entitled to the benefit of excussion.

Also, while the surety is liable solidarily with the principal debtor, the suretys liability is subsidiary.

The surety is liable only the to the extent that the principal debtor is liable unlike the issuing bank which
should pay the beneficiary upon the latters submission of the stipulated documents and compliance with
the terms of the credit regardless of any pending issue on whether or not the principal contract
underlying the l/c has been paid/fulfilled or not.

What laws govern LETTER OF CREDIT ?

A letter of credit is a commercial transaction. As such, it is governed by the Code of Commerce.

The Code of Commerce, nevertheless, provides that in the absence of applicable laws governing
commercial transactions, customs and usages shall be made to apply.

Letter of credit is thus now primarily governed by the Uniform Customs and Practices (UCP ) for
Documentary Credit, a codification of customs and usages governing letter of credit prepared by the
International Chamber of Commerce.

The Supreme Court has recognized the validity and applicability of UCP in resolving issues and disputes
relating to letter of credit.

The law on contracts and damages shall also apply to provide remedies to the party aggrieved by the
breach of the main contract although such breach will not affect the obligation of the bank to pay the
beneficiary or its right to obtain reimbursement from the applicant of the letter of credit if the terms of
the l/c have been complied with.

Is a letter of credit a NEGOTIABLE INSTRUMENT ?

A letter of credit is not a negotiable instrument because it does not satisfy all the elements of
negotiability under Section 1 of the Negotiable Instruments Law.

For instance, a letter of credit is not an unconditional promise or order to pay sum certain in money. The
undertaking of the bank to pay the beneficiary is conditioned on the submission of stipulated documents
and compliance with the terms of the credit.

Not being a negotiable instrument, there is no presumption of consideration in letter of credit.

However, the draft that may be issued under a letter of credit as a mode of payment to the beneficiary
may be considered a negotiable instrument if the draft conforms to all the elements of negotiability
under the NIL.

Who are the parties to a letter of credit/rights?What are their respective rights and obligations?

Account Party/Applicant

The account party or applicant of the letter of credit who is either the importer or buyer in a commercial
letter of credit or the obligor/debtor in a standby letter of credit. He agrees to pay the bank that issued
the l/c the commission/charges and to reimburse the issuing bank amounts duly paid under the lc.

Applicant has no obligation to reimburse the issuing bank if the latter pays without the stipulated
documents or in case of discrepant documents.

He has the right to have the marginal deposit deducted from the principal obligation under the l/c and to
have the interest computed only on the balance and not on the face value thereof.

The Issuing Bank

It undertakes to pay the beneficiary upon the latters submission of stipulated documents/compliance
with the credit despite any breach in the main contract underlying the l/c.

After due payment, issuing bank is entitled to reimbursement as a matter of right. Reimbursement
includes debiting the bank account of the applicant, if any.

The failure of the beneficiary to present the draft to the applicant does not affect the right of the issuing
bank to reimbursement.

An issuing bank which paid the beneficiary of an expired letter of credit can recover payment from the
applicant which obtained the goods from the beneficiary to prevent unjust enrichment.

The Beneficiary

The beneficiary is the one entitled to payment from the issuing bank after submission of stipulated
documents and compliance with the terms of the credit.

He has a prestation to do under the main contract but his failure to fulfill his obligation under the main
contract does not negate his right to payment from the issuing bank as long as he is able to submit the
required documents and comply with the terms of the credit, without prejudice to his liability against the
account party under the law on contract and damages.

There can also be additional parties depending on the need to engage a correspondent bank.

In commercial or import letter of credit, a bank, other than the issuing bank, may also act as follows:
The advising bank determines the apparent authenticity of the letter of credit and notifies the beneficiary
of the l/c issuance.

ii.
It does not guarantee the genuineness or due execution of the l/c. It is not liable for damages
even if the l/c turns out to be spurious provided the spurious character is not apparent on the face of the
instrument.

It has no obligation to pay the beneficiary unless it is also the paying or confirming bank.

The Confirming Bank

The confirming bank lends credence to the lc issued by a lesser known bank as if it were the one that
issued the letter of credit.

Its obligation is similar to the issuing bank. Thus, beneficiary may tender documents to the confirming
bank and collect payment.

The confirming bank collects fees for such engagement and obtains reimbursement from the issuing
bank.

The Paying Bank

The paying bank is the agent of the issuing bank to facilitate payment to the beneficiary.

The paying bank can also be the advising bank.

The negotiating bank becomes a party to the l/c transaction after it buys the draft drawn by the
beneficiary and becomes the holder thereof.

As holder, it has the right to payment from the bank primarily liable on the draft ( either the issuing
bank or the confirming bank ).

If the party primarily liable on the l/c( issuing bank or confirming bank ) refuses to honor the draft, the
negotiating bank has the right to proceed against the drawer thereof.

DOCTRINE OF INDEPENDENCE ?

By this doctrine, the relationships amongthe issuing bank and the beneficiary; the issuing bank
and the applicant; and,the beneficiary and the applicant while interrelated are separate, distinct
and independent of one another.

Thus, in determining the obligation of the issuing bank to pay the beneficiary, the issuing bank has no
obligation to verify whether or not the main contract has been fulfilled or not.

The issuing bank is liable to pay the beneficiary upon the latters submission of the stipulated documents
and compliance with the terms of the credit regardless of any breach of contract by the beneficiary to the
applicant of the l/c. Conversely, the right of the issuing bank to obtain reimbursement from the
applicant of the l/c is not adversely affected by the non-fulfillment by the beneficiary of its obligation to
the applicant.

The doctrine is likewise applicable to standby letter of credit.

In one case, the Supreme Court ruled that in standby letter of credit issued to secure a loan obligation,
any payment of the debtor to the creditor should not be deducted from the total obligation of the issuing
bank to the beneficiary. The issuing bank, after payment of the full amount, is entitled to full
reimbursement from the debtor. But the debtor may recover excess payment from the creditor to prevent
unjust enrichment.

Q: B entered into a contract with S for the purchase of one container of johnny walker whisky.
Upon the instance of B, ABC Bank issued a letter of credit in favor of S undertaking to pay the latter
upon submission of the shipping documents showing compliance with S obigation under the contract of
sale. However, S caused the shipment of container containing Emperador brandy but, through fraud,
was able to submit the shipping documents required by the letter of credit. As a consequence, ABC Bank

paid S. Can ABC Bank obtain reimbursement from B or may B invoke the breach of contract on the part
of S to validly refuse payment ?

A: ABC Bank may obtain reimbursement from B despite the breach of contract on the part of S.

Under the independence principle, once the issuing bank pays the beneficiary of the letter of credit upon
the latters submission of the stipulated documents, its right of reimbursement comes as a matter of
right. Such right can not be impaired by the non-fulfillment of the obligations under the main contract
underlying the letter of credit.

Q: If ABC Bank debit the account of B and as consequence the funds of B needed for his business became
insufficient resulting in lost profits, can B hold ABC Bank liable ?
A:
NO. The right of ABC Bank to debit the account is a logical and natural consequence of its right of
reimbursement. It can not be made liable for the unintended effects of such valid act.

Q: SMC accredited B as one its dealers authorized to sell SMC beer products. As required by the terms of
the dealership, B obtained a credit line from ABC Bank and that in case of purchase by B from SMC, the
latter may draw on the credit line and such drawdown shall be considered loan availments on the part of
B.
The obligation of B under the dealership agreement secured by a letter of credit issued by ABC Bank. B failed
to pay certain purchase orders. SMC filed an action for collection against B and ABC Bank.The Court rendered
judgment finding B solely liable to pay SMC and omitted by inadvertence to insert in its decision the phrase
without prejudice to the decision that will be made against ABC, may the Bank avoid responsibility on this
ground ?
A: No. The obligation of B to pay under its agreement with SMC is distinct and independent from the right of
SMC to draw on the letter of credit. Under the independence principle, the seller or beneficiary is assured of
prompt payment independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually fulfilled or not.

What is the FRAUD EXCEPTION PRINCIPLE ?

Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of
credit if the following elements are present :
a.) there is fraud on the part of the beneficiary,
b ) fraud must be in relation to the independent purpose or character of the credit,

c ) unless the beneficiary is restrained, the applicant shall suffer grave and irreparable

injury.

For the fraud exception principle to serve as an exception to the doctrine of independence, the fraud
must not be in relation to the performance of the main contract but in relation to the independent purpose
or character of the credit.

Q: D entered into a contract with C to construct a power plant. The obligation of D is secured by a
standby letter of credit issued by ABC Bank. D failed to finish the construction within the stipulated date.
It sought extension which was granted by C. D did not finish the construction within the extended period
because of typhoon. Because of such failure, C threatened to draw on the standby letter of credit. D
initiated arbitration proceedings for the sole purpose of obtaining an arbitral award that the delay was
due to force majeure and as such, D should not be considered in default. D and C previously agreed that
in case of resort to arbitration, the parties must wait for the outcome before C can collect on the letter of
credit. During the pendency of the arbitration proceedings, C issued a certification of default on the part
of D which is the document required by the letter of credit to entitle C to collect from the bank. D filed an
action for injunction with prayer for the issuance of preliminary injunction to enjoin C from collecting
under the letter of credit. D invoked the fraud exception principle and argued that the issuance of the
certification of default is fraudulent. Decide.
A: D is entitled to injunction.
The certification of default is premature and fraudulent particularly since the parties have agreed to wait for the
outcome of the arbitration proceedings to determine if the delay is due to force majeure before any certification
of default may be issued. Under the fraud exception principle-which is the exception to the doctrine of
independence, the issuing bank may be enjoined from paying the beneficiary of the letter of credit if there was
fraud on the part of the beneficiary and such fraud relates not to the performance of the main contract but to the
independent character or purpose of the credit and the applicant will suffer, as in this case, grave and irreparable
injury.

What is the DOCTRINE OF STRICT COMPLIANCE?

Under this doctrine, the documents that the beneficiary should submit to the issuing bank or confirming
bank must strictly conform to the documents stipulated.

If there is discrepancy, the issuing bank is not liable to pay. If it pays despite discrepant documents, it
pays at its own risk and can not obtain reimbursement from the applicant.

It is not a question of whether or not it is fair or equitable to require submission of documents but
whether or not the documents were agreed upon. In which case, all such documents must be submitted.

Trust receipt

is a transaction between the entruster and the entrustee whereby the entruster who owns or holds
absolute title or security interest over certain goods, documents and instruments, releases the same to the

possession of the entrustee upon the latters execution and delivery of a trust receipt wherein the
entrustee binds himself to hold the designated goods, documents and instruments in trust for the
entruster and to sell or otherwise dispose of the goods or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to the entruster or to return them to
the entruster in case of non- sale.

A trust receipt has loan and security features.

The entruster (bank ) extends the loan to the entrustee (importer and retail dealers) to finance the
importation or acquisition of goods or instruments in favor of the entrustee who may not be able to
obtain credit except thru utilization of the merchandise imported or purchased.

The security feature is in the covering trust receipt which secures the indebtedness.

What are the rights of the ENTRUSTER ?

To be entitled to the proceeds of the sale of the goods under trust receipt to the extent of the amount
owing to him or to the return of the goods in case of non-sale.

To cancel the trust and take possession of the goods or of the proceeds realized therefrom at any time
upon default by the entrustee.

To sell the goods with at least five day notice to the entrustee and apply the proceeds in payment of the
obligation. Entrustee liable to pay deficiency, if any.

What are the obligations of the ENTRUSTEE?

To hold the goods, documents or instruments in trust for the entruster and to dispose of them strictly in
accordance with the terms of the trust receipt;

To receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of
the obligation to the entruster

To insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

To keep said goods or proceeds thereof separate and capable of identification as property of the
entruster;

To return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;
and

To observe all other terms and conditions of the trust receipt not contrary to law

Are all obligations of the entrustee CRIMINAL IN NATURE ?

No. only the failure of the entrustee to deliver the proceeds of the sale of the goods or instruments
subject of the trust receipt up to the extent of the amount owing to the entruster or to return the goods.
Such violation constitutes estafa.

Under recent jurisprudence, however, the penal sanction under the trust receipts law does not apply in
case the goods are not intended for sale or resale such as when they are for actual use.

What is the EFFECT of the loss or surrender by the entrustee or repossession by the entruster of the goods
under trust receipt ?

The loss of the goods subject of the trust receipt regardless of the cause does not extinguish the civil
liability of the entrustee up the extent of the amount owing to the entruster.

The return of the goods may extinguish the criminal liability but not the civil liability of the entrustee
unless the goods are sold and proceeds thereof applied in full payment of the loan

The repossession of the goods by the entruster in case of default by the entrustee does not extinguish the
civil liability of the entrustee unless the goods are sold and proceeds applied in payment of the
obligation.

In all of the foregoing cases, the civil obligation of the entrustee remains until the loan granted by the
entruster to finance the acquisition of the goods is fully paid and satisfied.

In one case, the Supreme Court ruled that te repossession of the goods in case of default of the entrustee
does not prevent the entruster from foreclosing any mortgage on the property which the entrustee or
surety offered as additional security for the loan.

May a CIVIL ACTION for the collection of the loan be instituted independently of the CRIMINAL ACTION
for violation of the trust receipts law or after the acquittal by entrustee in the criminal action due to his surrender
of the goods to the entruster ?

Yes, because the loan feature of a trust receipt is distinct from its security features. What the entrustee
does with the goods, as security for the loan, determines his criminal liability.

For instance, the return of the goods may extinguish his criminal liability but until the loan is paid, his
civil obligation remains.

The civil action of the entrustee is based on ex-contractu while the criminal action is based on exdelictu.

The two actions may proceed independently of each other despite the failure of the entruster to make
reservation in the criminal action.

When is a TRANSACTION considered a LOAN even though denominated as a trust receipt ?

If the entrustee is already the owner or in possession of the goods before delivery of the loan and
execution of the trust receipt agreement, the transaction shall be considered a simple loan even though
the parties may have denominated the agreement as one of trust receipt.To be in the nature of the trust
receipt, the entruster should have financed the acquisition or importation of the goods. The funds should
have been delivered before or simultaneously with delivery of the goods.

If the goods subject of the trust receipt are not intended for sale or resale

Sale of goods by a person in the business of selling goods, for profit, who at the outset of the transaction
has as against the buyer general property rights in such goods and the seller agrees to hold the proceeds
of the sale of such goods to his creditor under a supposed trust receipt transaction.

Q: D owns 100 sacks of rice which he sold to B. D obtained a loan from C secured by the proceeds of sale
of the rice from B which D agrees to hold in trust for C. D and C denominated their transaction as one of
trust receipt. Is such transaction a trust receipt within the ambit of the trust receipt law ?
A: No. There is no trust receipt, notwithstanding the label, if goods offered as security for loan accommodation
are goods owned and sold by the seller who, at the outset of the transaction, has against the buyer general
property rights over such goods.

Who is the OWNER of the goods under trust receipt ?

The entrustee. If under the trust receipt, the bank is made to appear as owner, it was but a legal fiction
than fact for if it were really so, it could dispose of the goods in any manner that it wants which it can
not do so. To consider the bank the owner would be to disregard the loan feature thereof

The entrustee, however, can not mortgage the goods because one of the requisites of a valid mortgage
is that the mortgagor must be the absolute owner of the property mortgaged or must have free disposal
thereof. Entrustee is not the absolute owner of the goods under trust receipt nor has free disposal thereof.

The entruster likewise is not responsible as principal or vendor under any sale or contract to sell made
by the entrustee

Who has a BETTER RIGHT OVER THE GOODS subject of the trust receipt, the creditors of the entrustee
or the entruster ?
What about between the entruster and the innocent purchaser for value ?

The entrusters security interest in the goods under trust receipt shall be valid as against all creditors of
the entrustee for the duration of the trust receipt agreement. Thus, the security interest of the entruster
over the goods under trust receipt is superior than the monetary claims of the laborers of the entrustee.

The innocent purchaser for value of the goods sold by the entrustee has a better right than the entruster.
He acquires title to the goods free from the security interest of the entruster.

What are the INSTANCES where there is no criminal liability despite execution of a trust receipt agreement?
a. The transaction is not a trust receipt within the contemplation of the trust receipts law
b. Surrender of the goods to the entruster
c. Non-delivery of the goods to the entrustee
d. Compromise agreement before the filing of the criminal information for violation of the trust receipts
law
e. Cancellation of the trust and taking of possession by the entruster
f. Loss of the goods due to force majuere

Who BEARS THE RISK of loss of goods, documents or instruments in a trust receipt ?

The risk of loss shall be borne by the entrustee. Loss of the goods under trust receipt , pending their
disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not
extinguish his obligation to the entruster for the value thereof.

The principle of res perit domino will not apply against the entruster

Upon whom the does the law impose liability if the offender is a CORPORATION ?

If the violation or offense is committed by a corporation, the criminal liability shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense without
prejudice to civil liabilities arising from the criminal offense.

The officer of the corporation who signed a trust receipt can not hide behind the cloak of the separate
legal personality of the corporation and can not avoid criminal prosecution even though he had no
physical possession of the goods nor benefitted from the trust receipt transaction. The law makes him
liable for such corporate act without prejudice to the civil liability of the corporation and/or
directors/officers responsible for the violation.

The director or officer of the corporation or an agent who signed the trust receipt in behalf of the
corporation shall be criminally liable but not civilly liable unless he assumes personal liability.

Is the TRUST RECEIPTS LAW violative of the constitutional prohibition against imprisonment for nonpayment of debt ?

No.

What is sought to be penalized under the trust receipts law is not the payment of debt but the dishonesty
and abuse of confidence in handling of money or goods to the prejudice of another.

What are the REMEDIES available to the entruster in case of violation of the trust receipt agreement ?

File a criminal action for estafa in case of failure of the entrustee to deliver the proceeds of the sale of
the goods under trust receipt up to the extent of his obligation to the entruster. The civil action may be
instituted in the criminal action or separately filed independently of the criminal action. The criminal
action is based on ex-delictu for violation of the law while the civil action is based on ex-contractu for
violation of the trust receipt agreement.

Cancel the trust and take possession of the goods at any time upon default of the entrustee. After
repossession, the entruster may sell the goods upon at least five day notice to the entrustee and apply the
proceeds in payment of the obligation. The entrustee is liable for deficiency or entitled to excess, if any.

If a surety secures the obligation of the entrustee in addition to the trust receipt, the law does not obligate
the entruster to cancel the trust or take possession of the goods. He can proceed against the surety. The
options belong to the entruster

BANKING LAWS THE NEW CENTRAL BANK ACT - State Policies

Creation of the Bangko Sentral ng Pilipinas ( BSP )

What are the POWERS AND FUNCTIONS of the BSP ?

a) The BSP is the central monetary authority
b) It shall have the sole power and authority to issue currency within the territory of the Philippines.
c) It shall function as the banker and financial advisor of the government.
d) It has the power to sue and be sued. This power, however, should be construed in the context of civil
cases only. Mandamus will not lie to compel BSP to actually prosecute for violation of banking laws,
rules and regulations. It can only refer the matter to the Department of Justice.

What are the responsibility and primary objectives of the MONETARY BOARD?
1. It shall provide policy directions in the areas of money, banking and credit.

2. 2.
It shall have supervision over banks and exercise regulatory powers over finance companies and
non-bank financial institutions performing quasi-banking functions
3. It is mandated to maintain price stability conducive to a balance and sustainable growth of the economy.
4. It shall promote and maintain monetary stability and the convertibility of the peso
5. However, if the issue is whether or not the act of a bank or a non-bank financial intermediary is ultra
vires, the same falls within the jurisdiction of the SEC and not the BSP.
What are the TOOLS/REMEDIES available to BSP to handle banks in financial distress ?
Conservatorship
Whenever on the basis of the report of the appropriate supervising and examining department, the MB finds that
a bank or quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity
deemed adequate to protect its depositors and creditors, the MB may appoint a conservator to take charge of the
assets, liabilities and management thereof.
Receivership
The MB may appoint a receiver if the MB finds that a bank or quasi bank :

is unable to pay its liabilities as they become due in the ordinary course of business provided that this
shall not include inability to pay caused by extraordinary demands induced by financial panic in the
banking community;
has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or
can not continue in business without involving probable losses to its depositors and creditors; or
has willfully violated a cease and desist order that has become final involving transactions which
amount to fraud or dissipation of bank assets, the MB may summarily and without need for prior hearing
forbid the institution from doing business in the Philippines and designate the PDIC as the receiver of
the bank.

Close and carry out the liquidation of the bank

What is the NATURE OF THE FUNCTIONS of the conservator and receiver ?

Both conservator and receiver can only perform acts of administration and not acts of dominion.

While they have the power to revoke the actions of the previous management and the Board of directors,
they can not revoke a valid contract.

Neither can they approve an option to purchase real property.

Once the bank is placed under receivership, its officers are no longer authorized to transact business in
connection with the banks assets and property.

Does the court have the AUTHORITY TO APPOINT a receiver for a bank in financial distress ?

The court has no authority to appoint a receiver for a bank if the latter will function as such under the
BSP law.

The power to appoint belongs to BSP.

Who is the STATUTORY RECEIVER for closed banks ?

The PDIC under the charter that created it is considered the receiver of closed banks

Is the resolution of the BSP appointing a receiver or conservator or closing a bank SUBJECT TO
DECLARATORY RELIEF ?

No. It is not.

The power to determine the propriety of appointing a receiver/conservator or closing a bank has been
expressly lodged by law upon the BSP

What do you mean by the CLOSE NOW HEAR LATER doctrine ?

It is the rule that allows BSP to order the closure of the bank even without prior hearing.

BSP may rely on the report of either the conservator, receiver or the head of the supervising and
examining department.

It is not required to conduct a thorough audit of the bank before ordering its closure.

Does INJUNCTION LIE AGAINST THE AUTHORITY OF BSP to appoint a conservator/receiver or order
the closure of a bank ?

No. The authority of BSP to place a bank under conservatorship, receivership or order its closure is a
valid exercise of police power.

It is final and executory and not subject to injunction. However, such orders are subject to judicial
scrutiny.

They may be set aside if they were arbitrary and appear to have been issued with grave abuse of
discretion

What are the REQUISITES TO ASSAIL THE ORDER OF BSP appointing a receiver/conservator or closing
a bank ?

The order of conservatorship ( receivership or closure ) may be assailed :

a.) by the stockholders representing at least majority of the outstanding capital stock;

b ) within ten days from receipt by the board of directors of the order;
c ) thru a petition for certiorari on the ground that the action taken by BSP was in excess of jurisdiction
or with grave abuse of discretion as to amount to lack of jurisdiction

State the RULES ON LIQUIDATION

1. If the Bank can not be restored to its financial health upon recommendation of the conservator or
receiver or head of the supervising and examining department, BSP shall file the petition with the RTC
for assistance in liquidation.
2. In liquidation proceedings, the claims against the bank shall be determined and passed upon and then
paid based on the rules on concurrence and preference of credit. The residual assets are then distributed
to the stockholders.
3. The liquidation of a bank may be carried out despite lack of tax clearance unlike in a voluntary
dissolution of a corporation under the Corporation Code.
4. All claims against the insolvent bank should be filed in the liquidation proceeding. This rule, however,
does not apply to petition for issuance of a writ of possession for foreclosed property filed by the bank
because such petition is not in the nature of a disputed claim against the bank.
5. Bank deposits are not preferred credits except when the deposits are covered by a cashiers check
purchased from the bank when the bank officers knew or ought to have known that the bank is insolvent
6. Any final judgment against the bank which has been ordered closed should be stayed as to execute the
judgment would unduly deplete the assets of the bank to the prejudice of other creditors.

Once liquidation proceedings have been initiated, can the MAJORITY STOCKHOLDERS of the bank still
file a separate action/petition to assail the order of closure?

No.

Instead, issues on validity of closure should be raised as affirmative defenses in the liquidation
proceeding. This is necessary to prevent multiplicity of suits or conflicting resolutions.

What is the legal tender - POWER OF NOTES AND COINS ?

All notes and coins issued by BSP shall be fully guaranteed by the government and shall be legal tender
for all debts, both public and private. However, with respect to coins, they have legal tender power only
for the following amounts :

one peso coins and coins of higher peso value are legal tender for obligations not exceeding P
1,000.

Twenty five cents and coins of lower value are legal tender for obligations not exceeding P 100

Notes, regardless of denomination, are legal tender for any amount.

Coins which show signs of filing, clipping or perforation and notes which have lost more than 2/5s of
their surface or all of the signatures inscribed therein shall be withdrawn from circulation and
demonetized without compensation to the bearer.

Are NOTES AND COINS withdrawn from circulation still legal tender ?

Notes and coins called in for replacement shall remain legal tender for a period of one year from date of
call.

After this period, they shall cease to be legal tender but during the following year or such longer period
as the MB may determine, they may be exchanged at par.

After expiration of this latter period, the notes and coins which have not been exchanged shall cease to
be the liability of the BSP

What is the PURPOSE OF THE LAW ?

To give encouragement to the people to deposit their money in banks and to discourage private hoarding
so that the same may be properly utilized by banks in authorized loans to assist in the economic
development of the country

LAW ON SECRECY OF PHILIPPINE CURRENCY BANK DEPOSITS ( RA 1405 ) What are the prohibited
acts under RA 1405?

Who are COVERED by the prohibition ?

Bank officials and employees.

Non-bank official or employee is not covered by the prohibition.

Disclosure by a bank official or employee of information about bank deposit in favor of a co-employee
in the course of the performance of his duties is not covered by the prohibition

What are the items covered by the prohibition against UNAUTHORIZED DISCLOSURE UNDER RA1405 ?

All Philippine currency bank deposits of whatever nature with banks, including investment in bonds
issued by the government of the Philippines, its political subdivisions and instrumentalities.

Trust funds and any sum of money invested in the bank which the bank may use for loans and similar
transaction are now included in the term deposits .

Deposits are thus no longer limited to those governed by the law on loans giving rise to creditor-debtor
relationship

In what cases may information on PHILIPPINE CURRENCY BANK DEPOSITS, as well as

INVESTMENT IN GOVERNMENT SECURITIES,

be disclosed, examined or looked into without violating the law ?

written permission of the depositor

in case of impeachment

in case of order of a competent court in any of the following cases :

in case of bribery or dereliction of duty of public officials

where the subject matter of litigation is the money deposited

prosecution for unexplained wealth ( plunder is akin to unexplained wealth )

prosecution for violation of the anti-graft and corrupt practices act

in case of prima facie violation of the anti-money laundering law

NOTE : Disclosure can only be made to the anti-money laundering council. Bank inquiry order is not
necessary if the predicate crime is kidnapping, hijacking, arson, murder and violation of the dangerous
drugs law or terrorist

garnishment of bank deposits

The BIR may inquire into bank deposits for the purpose of computing the tax due on the estate of
the deceased depositor. NOTE : The bank can not disclose to the heirs of the deceased depositor but
only to the BIR

The BIR may also inquire into bank deposits if there is an offer of compromise of tax liability on
account of financial incapacity to verify such representation of the taxpayer

Under the Unclaimed Balances law, the bank may disclose to the National Treasurer information
concerning dormant deposits for the purpose of initiating escheat proceedings.

In case the law is repealed, superseded or modified by any law to the contrary.

May the bank disclose information about Philippine currency bank deposits pursuant to a WRIT OF
GARNISHMENT ?

The Bank may disclose information about Philippine currency bank deposits pursuant to a writ of
garnishment. The disclosure in this case is only incidental to the execution process. There is nothing in
the records of Congress that would show the intention of legislature to place Philippine currency bank
deposits beyond the reach of judgment creditor.

Foreign currency deposits, however, are exempt from garnishment or any court or administrative
process. However, the exemption of foreign currency deposits from court order and administrative
processes can not be invoked in case of violation of the anti-money laundering law, or if property or
funds are related to financing of terrorism or acts of terrorism or by a person who is not the owner of the
FCDU account or against a co-owner of the account or by a transient for any purpose contrary to that
intended by law, which is to encourage foreign currency deposits to beef up our international reserves.

GENERAL BANKING ACT - What is a BANK ?

A BANK is an entity engaged in the lending of funds obtained from the public in the form of deposits.

A transaction involving not a loan but purchase of receivables at a discount within the purview of investing,
reinvesting, or trading in securities which an investment company may perform is not banking. What is prohibited
is for investment company to lend funds obtained from the public through receipts of deposit which is a banking
function.

How are BANKS CLASSIFIED ?

universal bank or expanded commercial bank

commercial bank

thrift banks which is composed of savings and mortgage bank, stock savings and loan association and private
development bank

rural bank

cooperative bank

Islamic bank

Other banks as may be classified by the BSP

How do you distinguish banks from QUASI-BANKS and TRUST ENTITIES?

A bank obtains funds from the public in the form of deposit while quasi-banks refer to entities engaged in the
borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes for purposes of relending or purchasing of receivables.

Only deposits are insured with PDIC. Funds obtained by quasi-bank and trust entities are not insured with PDIC.
Unlike deposits or funds obtained thru quasi-banking, there is no creditor and debtor relationship in trust.

What is the KIND OF DILIGENCE required of banks ?

The diligence required of banks is more than that of a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. The highest degree of diligence is based on the General Banking
Law which requires of banks the highest standards of integrity and performance.

But the same degree of diligence is not expected to be exerted by banks in commercial transactions that do not
involve their fiduciary relationship with depositors, such as sale and issuance of demand draft.

Describe the nature of BANK FUNDS and BANK DEPOSITS?

Is STIPULATION ON INTEREST valid ?

CB Circular 905 ( 1982 ) lifted the ceiling on interest rate. The Bank and its depositors are therefore free to
stipulate on the rate of interest for loans. Nevertheless, if the interest rate is unconscionable, it may be nullified on
grounds of equity.

If the parties agreed on the payment of interest but silent as to rate, the legal rate is 6% regardless of the nature or
kind of obligation breached .

What do you mean by RISK BASED CAPITAL ?

It means that the capital of the bank must be sufficient to withstand risks arising from bank operations like
granting of loans and investment in equity. The risk assets of a commercial bank should not exceed 10% its
capital.

What are the LIMITATIONS on the authority of the bank to grant loan and security for such loan ?

Single borrowers limit

Limitation on loan values of properties offered as collateral
Loans granted to its directors, officers, stockholders and their related interests must comply with certain
requirements, otherwise, the erring DOSRI may be held criminally and administratively liable.

What do you mean by the SINGLE BORROWERS LIMIT ?

Unless otherwise prescribed by the MB, the total amount of loans, credit accommodations and guarantees that
may be extended by a bank to a single borrower shall not exceed 25% of the net worth of such bank.
The amount may be increased by an additional 10% of the banks net worth provided that the additional liabilities
are adequately secured by documents of title covering readily marketable and non-perishable goods.

What are the RULES ON LOAN values of properties offered to the bank as collateral or security for loan
accommodations ?

Except as the Monetary Board may otherwise prescribe, loans and credit accommodations against real estate shall
not exceed 75% of the appraised value of the respective real estate security plus 60% of the appraised value of the
insured improvements while loans on the security of chattels and intangible properties shall not exceed 75% of
the appraised value of the security.

What is the REDEMPTION PERIOD if the mortgagee of a real property is a bank ?

If the mortgagee is a bank and the mortgagor is a juridical person and the mode of foreclosure is extra-judicial, the
redemption period is three months from date of foreclosure or registration whichever comes earlier.
If the mortgagee is a bank but the mortgagor is a natural person, the redemption period is one year from
registration of the sale.
If the mortgagee is a bank and the mode of foreclosure is judicial, the mortgagor, on top of his equity of
redemption, has one year from registration of the order confirming the sale to redeem the property.
What is the REDEMPTION PRICE if the mortgagee is a bank ?

The outstanding obligation plus interest stipulated in the mortgage agreement plus costs and expenses incurred
during foreclosure less any income derived from the property except if the mortgagor is an accommodation
mortgagor in which case the redemption price is the bid price plus 12% interest per annum

What are the RULES GOVERNING TRANSACTIONS where DOSRI may incur contractual obligation with their
banks ?

No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of
others, borrow from such bank nor shall become a guarantor, indorser or surety for loans from such bank to
others, or in any be an obligor or incur any contractual liability to the bank except with the written approval of at
least majority of all the directors of the bank excluding the director concerned. The required approval shall be
entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate
supervising and examining department of BSP.
The outstanding loans, credit accommodations and guarantees which a bank may extend to the DOSRI shall be
limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution to the Bank.
Loans which are considered non-risk, as well as loans in the form of fringe benefits under a fringe benefit
program duly approved by BSP are excluded from the limits.

What is the NATURE OF THE LOAN that does not comply with the rules on DOSRI and/or Single Borrowers limit ?
The loan transaction is valid but without prejudice to criminal prosecution against the erring DOSRI.

2016 Dean Nilo T. Divina, All Rights Reserved