special commercial laws midterm notes

Notes in Special Commercial Law (MIDTERM)

1 Letters of Credit • Trust Receipts Law • SRC • New Central Bank Act | CHINKY.LING.LORDIE.MARGA.BARBS

The old definition of letters of credit has now been rendered obsolete. The governing rules now involving letters of credit is Uniform Customs and Practices for Documentary Credits adopted by the International Chamber of Commerce which is applicable also here in our jurisdiction.

Modern day LC transactions are bank to bank transactions so the old definition under Commerce Code is no longer applicable.

What is a LC?

-‐ Historically LC was developed by merchants to facilitate sale of goods between buyers and sellers who are unfamiliar. Ex. Buyer in PH Seller abroad. (Buyer and seller are located in different places – there’s no trust between them yet)

-‐ Essentially it is a bank to bank transaction -‐ An engagement by a bank who undertakes to

honor drafts or other forms of demands for payment issued by the bank upon request of the customer. Engaging that once the draft is issued by the seller he will undertake to honor and pay the draft also upon issue of certain documents of fulfillment of certain conditions specified in the LC.

-‐ It reconciles the seemingly irreconcilable interest of the seller and the buyer, in a way that when a bank issues a LC it substitutes its promise to pay for that of the promise to pay of its customer or in this case buyer with the corresponding promise from the buyer to reimburse the bank as soon as the goods are shipped or he obtains the possession of the cargo.

-‐ LC is not only applicable to sale of goods but also applicable to contracts involving services (ex. Contracts of construction of loan agreements, etc).

How does it work?

-‐ Applying it in the sale of goods, we have: BUYER -‐-‐-‐à SELLER BUYER’S BANK -‐-‐-‐à SELLER’S BANK So between Buyer and Seller there should be a contract of SALE. Ex. Buyer Seller Buyer refuses to pay Seller refuses to deliver until he receives the goods, until he is paid. How do we break the deadlock/ impasse? Under the LC the Buyer would now be required to contact a bank and request for the issue of an LC in favor of seller. Once seller is informed that the LC has already been issued in his favor, the seller now will be assured of payment. The bank will undertake to pay the seller as soon as he issues the draft and submits the documents specified in the LC. What are these documents? Documents evidencing shipment ( Bill of Lading, Invoice, Insurance contract, Warehouse receipt, delivery receipt, certification of quality, it DEPENDS ON THE STIPULATION OF THE PARTIES, certificate of origin of goods (because you might need it for customs purposes). Basically documents of title evidencing OWNERSHIP and FACT that goods have been shipped. What does Seller do? He would now ship the goods and secure the necessary documents of title -‐> Bring these documents and issue a draft (Bill of Exchange BOE drawn on the bank) -‐> Presents it on the issuing bank -‐> Issuing bank checks if the documents are in order -‐> If in order, obtain possession of such documents -‐> Pay Seller How is transaction completed? Although documents are addressed or consigned to the Buyer, he cannot obtain possession of the goods until

Letters of Credit



he has the documents of title. To get possession of the documents, he must go to the issuing bank to reimburse it in exchange for the documents of title – then the transaction is completed.

BUT in cases where the Buyer and Seller is located in different places/ countries:

Buyer (Cebu) Seller (US)

Issuing Bank -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐à Correspondent Bank (located in the place where the seller is; or seller’s bank)

-‐ It is important for the Buyer to choose an issuing bank, to make sure that the issuing bank is large, strong enough and well known in international trading. Kung gamay imo banko there is a tendency that it does not have a correspondent bank. It becomes complicated now when there is a correspondent bank.

Why would a bank issue a LC? Does it get revenue out of it? YES.

-‐ The buyer when it contracts for a LC with issuing bank, aside from the credit extended it has also to pay fees or service fees.

Basically, that is how a LC works especially in a sale of goods.

Who are the parties?

Main

1. Buyer-‐Applicant (Importer) – the one who applies for a LC and who purchases something

2. Seller-‐Beneficiary -‐ the one who engages to sell the goods; the one who issues the draft against bank so he will be paid for the shipment, and he is the one who should secure the documents specified under the LC

3. Issuing Bank/ Opening Bank – the bank who issues the LC; undertakes to pay the LC; the one

primarily and solidarily liable with the Buyer to pay the LC

Others

1. Correspondent Bank –could either act as an (a) advising or notifying bank; (b) negotiating bank; or (c) confirming bank.

2. Advising Bank – notifies that such LC is issued; responsibility is simply to inform or notify or convey to the beneficiary or seller that there is a LC issued in his favor

3. Confirming Bank – bank who confirms that LC is good, genuine; nature of obligation is solidary with that of the issuing bank you also undertake to pay the LC or draft issued under the LC Why do we have Confirming Bank when we already have issuing bank? If issuing bank is not well-‐known and you only have correspondent bank, aside from having correspondent bank the seller or beneficiary will request that correspondent bank to confirm the LC. Ex. BDO -‐> Seller (foreign company not familiar with BDO) Unless that bank confirms dili sila liable. If you only have an advising or notifying bank and something goes wrong, the advising bank or notifying bank does not undertake to pay. So if you’re the seller and you want to be assured you would require that the correspondent bank will also be the confirming bank.

4. Paying Bank – undertakes to pay or honor the draft; draft that will be drawn to the seller will be drawn against the paying bank; it could either be the notifying bank or confirming bank or other bank

5. Negotiating Bank -‐ if the paying bank or confirming bank is located in a different state



where the seller or beneficiary is , instead of going to the place where the paying or confirming bank is located, you will just have the draft still drawn against either the paying or confirming bank negotiated with a negotiating bank. (This is a negotiable bill of exchange, you have a drawee and a drawer. You make it payable to yourself also and you’ll just have to indorse in favor of the negotiating bank.) It acts as an indorsee, and eventually to get money it will have to indorse to the paying bank.

• It is important to take note of the obligations and responsibilities of the different correspondent banks because their liability would depend on those obligs and responsibilities.

Between issuing bank and corresponding bank: Issuing bank would now issue a LC, it will give correspondent bank a copy of that LC and in turn corresponding bank will be the one to inform the seller If correspondent bank becomes paying bank or confirming bank, it undertakes now to pay the seller -‐> he receives documents of title -‐> forward these docs to issuing bank -‐> issuing bank could now reimburse the correspondent bank. It presupposes that between the issuing bank and correspondent bank, there is an arrangement. There’s also an element of TRUST.

Does correspondent bank get any payment?

YES. Notifying fees, advising fees, confirming fees, negotiating fees, etc. There is always a fee for everything, nothing is free J Whatever fee is charged by the correspondent bank it passes on to the issuing bank and issuing bank ultimately passes it on to the buyer.

Marginal Deposit

-‐ For example a LC that you applied for is for P5,000,000 assuming that is the price of the goods you are importing, some banks require you to make a marginal deposit. Out of the amount

you will open, you should make a deposit of let’s say P1,000,000. In effect the credit extended by the bank is only P4,000,000.

Question: Is there a need for the issuing bank to get consent from the Buyer before or when it contracts with a correspondent bank? Can the Buyer choose who the correspondent bank will be?

In the process of applying for a LC, the issuing bank would already inform the buyer that there’s a need to contract with a correspondent bank. The arrangement is already made known to the buyer at the time he applies for an LC. So consent, yes because it is already presented to the buyer that this will be the arrangement, these will be the fees, charges, etc. But as to the choice of what correspondent bank, pwede ka pili but it depends if the issuing bank has an existing arrangement with the choice of the buyer.

What is the nature of an obligation of an LC: Guaranty or Solidary?

Case: Pru Bank vs IAC

• Correspondent bank could either be notifying bank, confirming bank, paying bank or negotiating bank or combinations. Liability will depend on obligation it assumes.

Bank of America vs CA

• What is the obligation of an advising bank? Only to advise. The fact that it paid the draft does not necessarily make it a confirming bank. Bank of America is only considered a negotiating bank (merely an indorsee), it does not become a confirming bank hence, it does not warrant the genuineness and due execution of the LC.

• It only warrants the APPARENT authenticity.



The liability of the bank in an LC is primary and solidary as that of the buyer-‐applicant and hence not covered by stay order.

Nature: Primary, direct and absolute.

Stages in Perfection of LC

1. Underlying contract 2. Apply for LC 3. Issuance of LC in favor of seller 4. Shipment of goods (commercial) 5. Seller to present necessary documents 6. Payment of issuing bank/ corresponding bank 7. Redemption of issuing bank from buyer

Is LC necessary for validity of underlying contract?

NO. Because an LC is only a mode of payment it is not one of the elements of a contract.

Contracts involved in an LC (3 main)

1. Underlying contract – contract of sale or contract of service -‐> governs relationship between buyer and seller or applicant and beneficiary

2. Contract between Buyer and Issuing Bank (Issuance of LC)– governed by terms in application for a LC; separate contract

3. Contract of LC (LC proper) – governs relation of Issuing Bank and Seller

(Others)

• Insurance contract • Contract of carriage

Principle (Contracts): Separate and distinct from each other. Maintained in a state of PERPETUAL separation.

“Independence Principle” – LC is distinct and different from other contracts and vice versa. Applies mainly in obligation of the bank, bank is precluded from determining whether the underlying contract has been complied with. It is only limited to checking if the

documents stated in LC are complied with. One involving “paper transaction” only look at the docs and see if it complies with docs required in the LC, banker is not expected to go out in the field and check the cargoes whether it complied with that stated on the Bill of Lading or Sales Document.

Regardless of the breach of the underlying contract, so long as the seller or beneficiaries complies with the LC, then the obligation of the bank is to pay.

Bank is not liable for the accuracy, legal effect, or genuineness of shipping document. It is not even liable for the quantity or quality, or whether or not the goods actually exist or the value is actually that as stated or correct. Its only obligation is simply to look at the documents and determine whether they are complete and they are those specified in LC.

CASE: KENG HUA PAPER PRODUCTS

• What governs the rights and obligations of parties is their respective contracts, independent from each other.

CASE: (Fraud Exception Rule) TRANSFIELD CASE

• If it is established that there is fraud on the part of the seller/ beneficiary in drawing the LC, or there’s a fraud in presenting the documents (docs are complete BUT fictitious or spurious meaning there was really no bill of lading or underlying contract etc), this can be invoked as an exception to the independence principle rule -‐> issuing bank has right to refuse payment.

• Strict Compliance Rule – Bank must strictly comply with requirements or instructions of LC. If LC states we need this doc, bank must require doc, compliance must be complete. Such that if bank pays even in the absence of such doc, it does so on its risk.

• Can bank add or impose an additional requirement? NO.

CASE: FEATI BANK



Guaranty vis-‐à-‐vis LC

Kinds of LC

CASE: Phil. Virginia Tobacco

• Irrevocable LC – issuing bank cannot alter tenor of LC, cancel it or revoke without conformity of the applicant and beneficiary or the consent of all the parties (re: right of parties to cancel or revoke)

• Revocable LC – while it is a security arrangement it does not assure payment because it can be revoked anytime

• Confirmed LC – correspondent bank confirms LC or undertakes the obligation to pay; confirming bank becomes solidarily liable with issuing bank and buyer

• Unconfirmed LC -‐ only issuing bank can be held primarily and solidarily liable (re: obligation of correspondent bank)

• Commercial -‐ involves sale of goods; requires performance

• Standby – involves sale of service or service transaction (loan agreement, contract of services); proof of non performance

• Revolving LC – secures several transactions (ex. Security of several importations)

• Back-‐to-‐Back LC – normally in an LC transaction it only involves an buyer-‐applicant, seller-‐beneficiary, and issuing bank, in this case, the beneficiary also applies for a LC so seller-‐beneficiary also becomes a seller-‐applicant and buyer-‐applicant now becomes buyer-‐beneficiary

• Cumulative LC – normally in a bank there exist a limit or threshold amount, in this LC if you have not utilized the limit or threshold amount it will be carried over to a next period

• Non Cumulative – if you are allowed a credit line for example of 1M and you do not use it up, it cannot be carried over to the succeeding periods or LC’s

IMPORTANT POINTS TO REMEMBER IN LETTERS OF CREDIT:

-‐ 3 Principles: Independence Principle, Fraud Exception Rule, Strict Compliance Rule

-‐ Obligations of Diff. Correspondent Banks -‐ Nature of obligation under LC

Governed by PD 115 “Trust Receipts Law”

Trust Receipt Transaction – form of security transaction whereby it involves:

Entruster – someone who either owns the goods, documents and instruments, holds title to the goods or holds security interest. He releases possession of these goods, documents and instruments to the Entrustee and in exchange

Entrustee – executes document called Trust Receipt; it undertakes the following obligations;

a) Hold the goods in trust b) Sell or dispose the goods, docs, or

instruments c) Return or Turn-‐over the proceeds or the

goods if they are unsold d) Section 9. Obligations of the entrustee. The

entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly

TRUST RECEIPTS

CASE: Filam vs Insular

Guarantor – Liable only if one primarily liable cannot pay.

LC – absolute undertaking to pay



in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-‐sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.

e) Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a 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.

Why do they enter into this transaction?

• To aid importers or merchants who do not have enough or necessary funds to finance importation of goods and cannot likewise apply for a LC (ex. No credit line etc). They can use their goods as collateral.

• It is a security device. • SCENARIO: In an LC the bank holds title to or

documents of the goods, but what if you cannot reimburse the bank, you cannot get hold of documents or the goods. To solve this problem we have the TR. The buyer will issue a TR to the bank and the bank becomes an entruster, so possession of goods will be

released to him. Subsequently the entrustee (buyer/importer) will sell or dispose off goods and realize proceeds and pay the bank/entruster. (In this transaction bank holds SECURITY INTEREST)

NOTE: It is not required or it does not happen all the time that there should be a prior LC transaction before a TR transaction takes place.

FORM: Does the law require a specific form as to a TR?

NO. But it should comply or substantially contain the following information:

1. DESCRIBE goods, documents or instruments released under the TR.

Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every such receipt must substantially contain (a) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-‐sale within the period specified therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs.



2. Invoice or VALUE of such goods, documents or instruments.

3. UNDERTAKING OF ENTRUSTEE: a) HOLD goods, docs or instrument in

TRUST. b) Undertaking of entrustee to SELL or

DISPOSE off goods. (“Dispose” – also contemplates processing or manufacturing of raw materials; not necessarily sale.)

c) RETURN GOODS if unsold or undisposed; TURN-‐OVER PROCEEDS in case of sale or disposal.

• May additional stipulations be supplied? YES. It depends on agreement of parties, as long as it is not contrary to law, good customs and public morals.

RAW MATERIALS: What if raw materials were already processed and manufactured BUT was not subsequently sold, what happens to the security interest of the entruster?

• Turn-‐over finished goods. Law states that entruster should retain his title to the goods whether it is in original or processed form until the entrustee has complied with its obligation. So even if raw material has been converted to a processed product, security interest of entruster still subsists. But the interest of the entruster there is only to the extent of the value of the raw materials.

How does TR transaction differ from CONSIGNMENT?

• Consignment – release possession of goods and consignee undertakes to sell, turn-‐over proceeds or if unsold return goods. If he doesn’t return liability is under the RPC.

• TR transaction – distinction is issuance of a TR; violation can be under RPC or under PD 115.

Question: Is there a pro forma TR?

NO. As discussed, law does not require a specific form so long as it contains the 3 basic info: DESCRIPTION, VALUE and UNDERTAKING. Normally in printed form but can also be handwritten (no prescribed form).

Why would people opt for a TR rather than Consignment, is penalty under PD 115 heavier?

PD 115 is malum prohibitum, no need to prove deceit whereas estafa you need to establish deceit. But violation of PD 115 is also one mode of committing estafa but it is easier to prove.

CASE: SOUTH CITY HOMES vs BA FINANCE

• Rights of BA Finance under the TR is only alternative. It depends on the discretion of an entruster, either the cancellation of the trust and possession of the goods or if he does not want that, he can file for collection of sum of money. Option is with BA Finance or entruster.



TR can also cover machineries and equipment used in operation of business or even supply used in manufacture business (not necessarily only goods for sale).

COVERAGE OF TR TRANSACTION

» Goods, documents, instruments which may or may not be obtained for the purpose of sale.

» Goods-‐ intended for sale and those necessary for production

» Instruments-‐ negotiable instrument » Documents-‐ warehouse receipts » It could also include machineries and equipments

used in the processing or manufacturing of raw materials.

TRUST RECEIPT VS CONSIGNMENT

In consignment if the consignee fails to sell the goods he simply returns. No more liability after that. In TR mere turnover of goods is not enough, does not extinguish CIVIL liability only CRIMINAL liability. Only when the goods are sold in a public/private and the proceeds are applied. In fact if there is a deficiency the enturster can still recover. If there is surplus it goes to the entrustee.

CASE: CHING vs CA

• A trust receipt is a principal contract and not an accessory contract even if it is a security device. Nature of a TR is a security transaction it is not a side contract hence the consequences or obligations under this transaction cannot be brushed aside. By executing a TR one undertakes certain obligations failure to comply will result to liabilities.

• Violation of PD 115 is only a mode of committing estafa, it is not a prejudicial question to the criminal case. Estafa, even without the resolution of the nature of the document, can still be established by other evidence.

NACU V. CA THE FACT THAT THERE WAS ALREADY A TRUST RECEIT MEANS THAT THE 1ST REAL ESTATE MORTGAGE WAS NO LONGER EXISTING BECAUSE IF IT IS STILL EXISTING THERE IS NO NEED FOR THE PARTIES TO HAVE ANOTHER SECURITY DEVICE (THE TRUST RECEIT). SO CLEARLY THE FIRST REM WAS ALREADY CANCELLED AS PAYMENT FOR THE PREVIOUS LOAN. FACTS There was a first loan obtained which was secured by a real estate mortgage. After the loan was paid, another set of parties (Nacu spouses remained parties to both first and second loans) obtained a loan. The second loan was made thru a LC to pay for the purchase of machineries, and this time, the second loan was secured by TR. Now, the bank is saying that the 2nd loan is as well secured by the real mortgage owned by Nacu spouses.

Held: NO. The second loan is not secured by the real estate mortgage, but only by the TR. Not only because the loan consisted of different parties but also because the nature of a TR is that it is a security transaction already. Thus, real estate mortgage is not anymore necessary. By virtue of the TR, since it is already a security in itself, you go after the TR, don't go after the real mortgage. The bank should go after the goods which were the machineries. » TR covers only the goods that were released

under the TR. So, it cannot happen that a TR agreement would include another security other than those goods released under the TR.

Note: In TR, there has to be goods, documents or instruments involved. TRs do not just cover money. Otherwise, it would amount to a simple loan.



PARTIES

» Entruster -‐ seller, lender, the financier. He is the one who holds either title of goods, documents, or instruments or has security interest over the same.

» Entrustee -‐ buyer, borrower, or it could be the importer. He is the one having or taking possession of the goods, documents or instruments released under the TR transaction.

RIGHTS AND OBLIGATIONS OF THE PARTIES

ENTRUSTER RIGHTS 1. He is entitled to the proceeds from the sale of the

goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster, or as appears in the trust receipt,

2. He has the right to the return of the goods, documents or instruments in case of non-‐sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of PD115.

3. He may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom. Once in

ROBLES V. CA WHAT DISTINGUISHED THE TRANSACTION OF MR. ROBLES FROM A MERE SALE ON CREDIT IS THE EXECUTION OF A DOCUMENT. IT WAS VERY CLEAR FROM SUCH DOCUMENT THAT IT WAS REALLY A TRUST RECEIPT TRANSACTION BECAUSE IT WAS STATED THERE THAT IT WAS HELD IN TRUST. SINCE IT WAS A TRUST RECEIT TRANSACTION HE CAN’T SAY THAT HE IS ONLY IS JUST CIVIL BECAUSE THE FAILUTRE TO TURN OVER THE PROCEEDS OR RETURN THE GOODS WILL HOLD HIM LIABLE FOR PD 115. Robles received goods (office equipment) under the TR. It was stated in the TR: "goods are released under the TR executed in favor of Paramount Business Machines.” Robles contended that what he executed was not a TR agreement. He said that what he signed was not a TR but a mere formality to evidence that he received the goods. Further, he said that the transaction was only a sale on trial basis for 2 days. Such that if it is not sold, he only has to return the goods. Also if he cannot return the same, his obligation is only a civil one, and not estafa. DECISION: Court said that by virtue of the document he executed, it was very clear that it was a TR transaction. In the document, the wordings state "in trust for" PBM xxx. So it is clear that it was a TR and not just a mere formality. Therefore, Robles is liable under PD 115. Moreover, he must have fully understood the contents of the stipulations appearing on the face of the delivery trust receipts which he actually signed as he is "an intelligent man, a college professor,” and thus, he should have known what it is that he has entered into. F Is a TR a contract of adhesion?

-‐ YES, but you only apply the contract of adhesion rule if there are ambiguities. But, if the language of the law is clear, whatever is written should govern the parties.

-‐ In one case it was considered as a contract of adhesion since the TR was already prepared for by the bank. And the customer merely signs it if he wants for the loan to be approved.

But, in this case contract of adhesion rule was not applied since, Robles was considered as a knowledgeable man (a college professor) contracting a TR with PBM. Thus, the court said that he must have known what he was entering into. F What if in the same situation there was no

TR executed? -‐ It could just be a mere consignment.

Then, he would not be liable under PD 115. But, he can still be sued for estafa as long as there is FRAUD. Again, PD 115 is only one of the ways to commit estafa.



possession of the goods, he may sell them under a public or private sale after giving notice to the entrustee,.

4. The proceeds of any such sale shall be applied a. to the payment of the expenses thereof; b. to the payment of the expenses of re-‐taking,

keeping and storing the goods, documents or instruments;

c. to the satisfaction of the entrustee's indebtedness to the entruster.

F Can the entruster become the purchaser?

-‐ Yes. So, this only shows that the entruster is really not the owner of the goods but he only has security interest over the goods.

F If the entruster has already opted the trust and

take possession of the goods. Can he still file a civil case against the entrustee for recovery of sum of money?

-‐ Yes. The civil liability still subsists unless there is a sale and the proceeds are applied.

SURPLUS » The entrustee shall receive the surplus.

DEFICIENCY » The entrustee shall be liable to the entruster for

any deficiency. OBLIGATIONS OF THE ENTRUSTEE 1. To hold the goods, documents or instruments in

trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt;

2. To receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt;

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

4. To keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;

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

6. To observe all other terms and conditions of the trust receipt not contrary to the provisions of PD 115

» Basically, the entrustee has 2 alternative

obligations: 1. Turn over the proceeds; or 2. Turn over the goods

» Take note that these two alternatives refer to the

obligation of the entrustee under the TR. » So, if you choose to turn over, can you do that? Yes,

but it does not extinguish your civil liability. Only the criminal liability is extinguished.

RIGHTS OF AN INNOCENT PURCHASER FOR VALUE AS AGAINST THE ENTRUSTER F Example: We have entruster and entrustee. But,

the entrustee sold the goods released by virtue of the TR, to a third party buyer -‐ an innocent purchaser for value. And, assuming that after the sale the entrustee failed to remit the proceeds to the entruster, can the entruster go after the buyer to enforce his lien over the goods? -‐ No. Section 11 of PD 115 provides:

-‐ So, even if the entrustee failed to remit the proceeds, the entruster could no longer go after the buyer. Why? Because when the entrustee enters into a contract with the innocent purchaser for value, the one who is now considered as the vendor is the entrustee. Such that, if there is now a break in the sale (i.e. Warranty of hidden defects), the third

Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.



person-‐buyer could no longer go after the entruster because the entruster is not the vendor.

-‐ As far as the contract of sale is concerned, it is only between the entrustee (as vendor), and the buyer.

-‐ So, the buyer cannot go after the entruster in the same way that the entruster cannot go after the buyer.

F What if there is a defect in the goods, can the

buyer hold the entruster for violation warranty of hidden defects or breach of contract of sale? -‐No because if an entrustee enters into a contract with a buyer the vendor is the entrustee even if the real owner of the goods is the entruster. The entruster is out of the picture.

RIGHTS OF AN ENTRUSTER AS AGAINST THE CREDITORS OF THE ENTRUSTEE » The entruster is preferred over the creditors of the

entrustee based on Section 12 of PD 115, viz:

There was one case wherein X was an importer of gasoline from a foreign supplier. PNB opened a LC in favor of X’s foreign supplier. The gasoline was released to X by virtue of a TR. Now, under the TR, X entered into a contract with T for the sale of the gasoline with an agreement that whatever proceeds, T shall pay to PNB to comply with the TR agreement. Now, a judgment creditor of X, filed a writ of attachment and execution. As a result, the proceeds of the gasoline in the hands of T was garnished by the sheriff. Now, PNB filed a case to recover the money garnished. Issue: Who has the better rights ot the proceeds of the garnished money?

PNB -‐ based on section 12, the rights of the entruster is preferred against all other creditors. Based also on the preference on credits rule under the Civil Code, the right of the entruster is preferred against a judgment creditor since the entruster's claim is specific, whereas the judgment creditor’s claim is general, which is directed to all the properties of the debtor. In sum: C interest of the entruster as against an innocent

purchaser for value= not preferred C interest of the entruster as against other creditors =

preferred WHO SHALL BEAR THE RISK OF LOSS? » The risk of loss shall be borne by the entrustee.

F So, if the goods were lost, does it extinguish the

liability of the entrustee? -‐No, he bears the loss and at the same time his obligation shall not be extinguished.

F So, this is an exception to the “Res Perit

Domino” Rule

F Effect on civil obligation: it still subsist

F Ex: goods were lost due to fortuitous event; will there still be a CRIMINAL liability? -‐it still subsist unless he gives an amount equal to the supposed proceeds. PD 115 is a special law so malum prohibitum, regardless of the cause of the loss you will still be liable.

VIOLATION OF PD 115

F So, when is an entrustee considered to have

committed a breach under PD 115? 1. If he fails to comply with the terms and

conditions of the trust receipt. (like payment of interest, etc)

2. If he fails to return the goods covered by the trust receipt if unsold.

3. If sold, he was not able to return the proceeds

Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.



-‐ Note: the mere failure of the entrustee to turn over the proceeds of the sale or to turn over the goods themselves constitute a violation of PD 115.

-‐ Thus, it is not necessary to prove that the entruster suffered damage because it is malum prohibitum: an offense against public order or public policy.

LIABILITIES OF THE ENTRUSTEE 1. CRIMINAL LIABILTY (ESTAFA) 2. CIVIL LIABILITY-‐ under art. 33 anyone who causes

injury by reason of defamation, fraud or physical injury shall be liable.

EXTINGUISHMENT OF ENTRUSTEE’S CIVIL LIABILITY » The civil liability of the entrustee is extinguished

only when the goods are returned, and the entruster disposes the goods in a public or private sale, and the proceeds thereof are applied in payment of the debt. -‐ Hence, the entrustee cannot extinguish his civil

obligation by just surrendering the goods to the entruster. The mere return of the goods does not by itself relieve entrustee of his civil liability.

F What if the entrustee is subsequently acquitted of

his criminal liability? -‐ the extinguishment of his criminal liability

does not dissolve his civil liability. It is separate form the criminal liability.

F If it is committed by a corporation who will be liable? -‐BOD and officers will be held criminally and civilly liable.

EXTINGUISHMENT OF ENTRUSTEE’S CRIMINAL LIABILITY » If entrustee returns the goods, his criminal liability

is extinguished. -‐ Note that only his criminal liability is

extinguished, not his civil liability. The civil liability is separate from the criminal liability.

COLINARES VS CA SO THE NATURE OF TRANSACTION ENTERED INTO BY COLINARES WITH THE BANK IT WAS ONLY A SIMLE LOAN BECAUSE EVEN IF THERE WAS A TRUST RECEIPT ISSUED, THERE WAS ALREADY TRANSFER OF OWNERSHIP/GOODS BEFORE THE DOCUMENT WAS ISSUED (A DAY BEFORE) WHICH IS CONTRARY TO THE NATURE OF A TRUST RECEIPT TRANSACTION. » Where the debtor received the goods subject of

the trust receipt before the trust receipt itself was entered into, the transaction in question is a simple loan and not a trust receipt agreement.

Colinares acquired construction materials from the seller. So, the materials are already in the possession of Colinares. To pay off his debts to the supplier, he availed of a loan from the bank. But, the bank was of course very shrewd. Thinking that it was only an ordinary loan, it required Colinares to execute a TR in order to secure the loan. Ruling: It is no longer a TR transaction. Take note that the possession of the goods was already with Colinares when he acquired a loan from the bank. So, when the bank required him to execute a TR to secure the loan, it already contradicted the nature of a TR transaction because in a TR transaction, possession of the goods is with the seller/entruster. It is only upon execution of the TR that those goods are released to the entrustee. In here, the entrustee is already in possession of the goods. So, the possession of the goods never came to the possession of the entruster. This is just a simple loan.

TIOMICO V. CA WON PD 115 IS UNCONSTITUTIONAL What is being punished by the law is the public order, dishonesty and abuse of confidence in the handling of money or goods to the prejudice to another.



C

C A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as security on the letter of credit, still the two documents involve different undertakings and obligations. -‐ Letter of Credit – covers the loan feature of

the transaction -‐ Trust Receipt – covers the security of the

transaction -‐ So, even if liability is extinguished under the

trust receipt, there is still a civil liability for the letter of credit.

» Previously known as the revised securities act » SRC is also known as the “BLUE SKY LAW” » Blue sky -‐ because it intends to protect the public

against unscrupulous promoters or individuals who stake business claims or ventures with no real basis, and sell shares or interests to investors who are left holding certificates which represent nothing but claims in a square in the blue sky (like building a castle in the air). This comes in several forms like fraud or scams.

PURPOSES

SEC. 2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth,

promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. To achieve these ends, this Securities Regulation Code is hereby enacted. 1. establish a socially conscious, free market that

regulates itself -‐ intends to educate the public about the risk

involved, to raise awareness among the public 2. encourage the widest participation of ownership in

enterprises -‐ so that ownership in businesses shall not be

limited to individuals. No monopoly in business 3. enhance the democratization of wealth

-‐ equal distribution of wealth 4. promote the development of the capital market

protect investors, 5. ensure full and fair disclosure about securities

-‐ transparency, so that the public will know what it will get into

6. minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market -‐ refers to the prohibited acts under the SRC

NATURE SRC is a self-‐executory law. Even if the SEC has not issued rules and regulations, it does not affect the self-‐executory nature of the SRC. FEATURES The SRC contains regulatory controls to achieve its objectives, to name a few: 1. requirement of registration of securities

-‐ before a promoter or issuer will be allowed to offer the securities for sale

2. registration of those engaged in the sale of securities -‐ such as brokers, dealers, salesmen

3. expanded the power of the SEC – the body which is tasked to implement the SRC -‐ possesses investigatory and rule-‐making

powers

THE SECURITIES REGULATION CODE (REPUBLIC ACT NO. 8799)

» So it does not violate the constitutional provision that no person shall be imprisoned for non-‐payment of debt.

PHILIPPINE BLOOMING

» TR covers not only goods intended for sale but also machinery and equipment

» Even if the bank already takes possession of the goods the civil liability still subsist



o SEC has been divested with some adjudicative powers (quasi judicial) of the SEC which were vested before under PD 902-‐A

o no power not to decide intra corporate disputes (regular court na)

o PURPOSE: so that SEC can focus on its regulatory powers.

THE SECURITIES AND EXCHANGE COMMISSION » nature – collegial body » composition – a Chairperson and 4 Commissioners

(total of 5) » qualifications –

a. natural-‐born citizens of the Philippines b. at least 35 years of age for the Commissioners;

at least 40 years of age for the Chairperson c. of good moral character d. of unquestionable integrity e. of known probity and patriotism f. with recognized competence in social and

economic disciplines g. majority of the Commissioners, including the

Chairperson, shall be members of the Philippine bar

» appointed by the president for a term of 7 years

POWERS AND FUNCTIONS OF SEC

SEC. 5. Powers and Functions of the Commission: (a) Have jurisdiction and supervision over all

corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government;

» corporations here refer to “private corporations”

only, excluding public corporations » N/A to sole proprietorship because that is with DTI

(b) Formulate policies and recommendations on issues

concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto;

» since they are the agency tasked to enforce the

SRC, they are presumed to have the expertise regarding these matters

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;

(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto;

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders;

(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

» If the corporation is doing any of the prohibited

acts

(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;

(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses

to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;



(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and

(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

NOTE: Jurisdiction over intra-‐corporate controversies, election cases, are now transferred to the regular courts and is no longer with SEC F Can the SEC compel a corporation to declare

dividends? Is it an exercise of regulatory power? Is it within their exercise of supervisory power, regulatory power? -‐ They cannot compel, but they can penalize the

corporation (If the corporation’s unrestricted retained earnings exceed 100% of its capital, the excess should already be declared as dividends. It can only retain URE of up to 100% of its capital.), and also SEC may also stop the issuing of shares of stock. These are in the exercise of their regulatory powers.

REGISTRATION OF SECURITIES F What are securities?

SEC. 3.1. “Securities” are shares, participation or interests in a corporation or in a commercial enterprise or profit-‐making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: (a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-‐backed securities; (b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (f) Proprietary or non proprietary membership certificates incorporations; and (g) Other instruments as may in the future be determined by the Commission.

KINDS OF SECURITIES 1. DEBT INSTURMENTS

-‐ Any evidence of indebtedness. Ex. bonds, debentures, promissory notes

-‐ Bonds are elaborate forms of promissory notes.

2. EQUITY INSTRUMENTS -‐ Proprietary or non-‐proprietary membership

certificates in corporations. -‐ Ex. shares in club ultima, alta vista, cebu

country club

3. INVESTMENT CONTRACTS -‐ A contract, transaction or scheme whereby a

person invests his money in a common enterprise and is led to expect profits not solely but primarily from the efforts of others.

-‐ 4 elements: 1. Investment in money 2. Common enterprise – 2 or more persons 3. Expectation of profit 4. Profits derived from efforts of others

BAVIERA V. PAGLINAWAN – Doctrine of Primary Jurisdiction REFER FIRST TO SEC BEFORE FILING TO DOJ (SEC WILL NOW ENDORSE IT TO DOJ)-‐ DOCTRINE OF PRIMARY JURISDICTION All complaints for violation of the Code and its implementing rules and regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Sec. 53.1. Hence, the petitioner committed a fatal procedural lapse when he filed his criminal complaint directly with the DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in dismissing petitioner’s complaint.



4. DERIVATIVES

-‐ with respect to equity securities, are financial instruments whose value depends on the interest in or performance of an underlying security, but which does not require any investment of principal in the underlying security

-‐ Ex. options or warrants

5. TRUST INTRUMENTS -‐ Ex. certificates of assignment, participation,

voting trust certificates SEC. 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. F Purpose of registration of securities? (registration

and approval before a security can be offered and sold)

1. GIVE THE PUBLIC AND THE ISSUER FULL AND

ADEQUATE DISCLOSURE OF THE SECURITIES, -‐ If you look at the registration statement

SEC requires full disclosure so that by virtue of this the public can make a better judgment whether to invest in that company. Who are the people involve, are they of good standing all those are required to be disclosed. If it is selling products, what is the status, is it still in research or is it now being sold? What is their dividend policy? ETC.

-‐ With this registration statement, the public can decide on the feasibility of investing in such company, without such registration statement the public has no idea on the standing etc. of the company.

2. ASSURANCE TO THE PUBLIC THAT THE COMPANY SELLING SECURITIES IS A LEGITIMATE ONE – not a fly-‐by-‐night company.

SITUATION You with your friends want to establish a recreational wellness center in SRP then the project cost is expected to be 100M and since you only have 50M you want to raise the other 50M by issuing membership certificates. (will entitle member to use facilities but not to dividends)

F Before offering to sell such certificates, should you register first to the SEC?

-‐Yes because it is a security. (equity instrument)

F SO CHECK FIRST IF IT IS A SECURITY OR NOT!

POWERHOMES UNLIMITED Powerhomes is a domestic corporation engaged in network marketing (not the development and improvement of real estate properties). WON it is an INVESTMENT CONTRACT? -‐ SC: YES. The four elements are present: (1) an

investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others.

-‐ An investor enrolls under the scheme of the corporation to be entitled to recruit other investors and to receive commissions from the investments of those directly recruited by him. Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits.

WON SEC can issue cease and desist order? -‐ YES. Because this is an investment contract,

registration with the SEC is required. Therefore, the SEC was correct in issuing a cease and desist order.

TIMESHARE REALTY Timeshare is engaged in the selling of time shares (time shares are those issued by corporations or resorts or hotels which give you a right to stay in that hotel for a certain period of time, or day in a specific year, and you can use the facilities for free)-‐ so a security!



NOTE: Registration is for every security that you want to issue. For example, you want to register stocks, or bonds, or investment contracts. The registration statement you obtained for the shares of stocks does not apply to the investment contracts or bonds that you intend to issue. Even in common stocks, if you are registered to issue common stocks but you later on issued preferred stocks, that’s another requirement for registration because as far as the preferred shares are concerned these are unregistered securities.

EXAMPLE You registered 100M worth of shares of stock, but you only sold 50M. The period to sell such shares expired. If you want to resell the remaining 50M you are even required to file an “UPDATED REGISTRATION STATEMENT.” F What about the pre-‐selling of condominium units,

townhouse, subdivision? Is registration required? -‐ No need to register. You are not selling

securities.

Exceptions to the Requirement of Registration of Securities

1. Exempt Securities 2. Exempt Transactions Note: The exception only extends to the registration requirement and not on any other requirements.

(Note further: take note of the exempt securities and exempt transactions because in the exam, Atty. might make us determine if the transaction is an exempt security or transaction.)

EXEMPT SECURITIES

Sec. 9 Exempt Securities

What is the common denominator why these securities are exempt?

Look into the personality of the issuer.

1. The issuer is an entity that can be trusted not to deceive the public like the government.

2. If not the government, it is an entity which is under regulation of another government agency which is expected to protect the public in the same manner as that of the SEC.

3. The nature of the offering is of a limited character. It involves only a small amount.

SEC. 9. Exempt Securities. –

9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. (b) Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require

ISSUE: WON the shares issued prior to the registration are valid and effective, and whether or not the registration on 1998 had a RETROACTIVE EFFECT? SC: NO RETROACTIVE EFFECT, because the law is specific that no sale of security shall be made until unless a registration statement is filed and approved, and so any sale made prior to that is null and void. Contention of time share: it was registered as a corporation before 1996! A: being registered as a corporation is just one of the several requirements before it may deal with timeshares. The registration of securities is a separate requirement.



compliance with the form and content of disclosures the Commission may prescribe.

-‐ It is expected that the government will never go bankrupt because of their inherent power to tax.

-‐ GOCCs are covered (also securities issued by GOCCs) because it is not limited to the government but also to any person or entity controlled or supervised by the government.

-‐ Ex. Treasury bonds issued – therefore, if the government will issue treasury bonds, there is no need to file a registration statement.

(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

-‐ This could refer to any security issued by any entity but this was issued pursuant to a bankruptcy proceeding, which was duly approved by the courts. It is under the supervision of the courts that is why it is considered an exempt security. Also, this is of limited public offering (i.e not offered to the public but only pursuant to a bankruptcy proceeding.

(d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue.

1. Office of the Insurance Commission -‐ Under here are insurance companies. Aside from

the traditional insurance products, they also sell investment products like mutual funds or some other form of investment products.

-‐ If an insurance company issues investment products or an equity or debt instruments, it does not registration because the insurance companies is under the supervision of the Office of the Insurance Commissioner.

2. HLURB -‐ something to do with housing, subdivisions,

condominiums etc. An example of a security is time shares. (note: selling of condo units is not an investment product)

3. BIR -‐ practically all corporations are registered with BIR

but it does not mean that when you are registered with BIR, you are already allowed to sell securities because the BIR does not monitor for that purpose. Its concern is more on the payment of taxes.

(e) Any security issued by a bank except its own shares of stock.

GR: Any bank issuing bonds, investment contracts etc., does not require registration because the bank is under the supervision of the BSP.

EXC: if it pertains to the bank’s OWN shares of stock.

It has to be a security OTHER than its own security

o Ex. When a bank issues bonds. -‐ If bank issues ITS OWN SHARES OF STOCK (bank

being a stock corporation also) – it must register. -‐ If the bank sells stocks of another company – it is

exempt because it is not the bank’s own shares of stock.

-‐ If a bank sells its own bonds – does not require registration. Bond is different from shares of stock.

-‐ Other than that, it can issue without the need of registration.

-‐ So banks have a special treatment. -‐ But if the bank (ex. BDO) will go public

and issue its own capital stock, in this case, it already requires registration.

9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors.



-‐ catch-‐all provision: any other securities added by SEC after a public hearing.

EXEMPT TRANSACTIONS

SEC. 10. Exempt Transactions. –

10.1. The requirement of registration under Subsection 8.1. shall not apply to the sale of any security in any of the following transactions:

-‐ In EXEMPT TRANSACTIONS, the security issued is NOT EXEMPT (otherwise it would fall under exempt securities). Only that the circumstances under which the securities are sold makes registration unnecessary. (i.e not necessary for the protection of the public or investors)

-‐ Perhaps the risk involved is not that great. If you look at enumeration of exempt transactions, the sales of securities are mostly isolated transactions, and do not involve sales of security to the public or general offers to the public.

(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.

-‐ It is exempt because it is only on a limited public offering – an isolated transaction and under the supervision of the courts.

-‐ Example of a judicial sale: foreclosure in a public auction

(b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.

-‐ Here, you have a security and you use your security as a collateral for a debt or as a mortgage or pledge. You are selling your security to liquidate a debt or in payment of a debt.

-‐ This is an isolated transaction because you are not selling several securities but only a particular security used as a collateral. Therefore, registration is not necessary.

(c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security.

An isolated transaction wherein the security is sold, offered, sold, subscribed or delivery by the owner thereof – meaning, it is not the issuer who is selling the security but it is issued by the owner. Therefore, previously, the security has already been bought.

-‐ Ex. 1. Company A is the issuer. Mr. X bought a

security from Company A. Mr. X is now the owner of the security and he sells the security in an isolated transaction to Mr Y. -‐ does not require registration because it is an isolated transaction. It is presumed that the security sold by Company A to Mr. X has already been registered before.

o What do you mean by an isolated transaction?

§ it is done once; not regular; not done in a course of repeated or successive transaction.

2. What if subsequently Mr. Y sells it again to Mr. C, does it require registration? -‐ exempt from registration. It is still an isolated transaction.



-‐ The requirement is that it should be in an isolated transaction and not in the course of a repeated transaction.

o What do you mean “in the course of repeated and successive transaction”?

§ The same seller sold several shares. (ako sabot: Mr. X selling to Mr. Y, Z, W.) In this case, it requires registration.

-‐ See also (h)

(d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.

-‐ Here, the shares are not sold but are declared as stock dividends. Ex. Corporation A would issue additional 1000 shares to its existing stockholders via stock dividends.

-‐ Why is it exempt? o It is not sold or offered to the public

because it is offered only to its existing stockholders. Thus, there is no risk. There is no need to protect the existing stockholders. Hence, registration is not necessary.

-‐ Ex. If X corporation would increase its ACS from 100m to 200M, the increase would be subscribed by way of stock dividends.

-‐ So, is there a need for X to file for a registration statement to cover for the issuance of the additional 100M shares?

-‐ NO, the issuance is an exempt transaction. It is subscribed by its existing stock holders by way of stock dividends.

(e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

-‐ This one is no longer declaration of stock dividends (d) but of sale

-‐ Why is it exempt? o It is sold to “its own stockholders

exclusively” – the offer was made only to existing stockholders. It is exempt because it is not offered to the public but only to its own stockholders.

-‐ Aside from it being to its own stockholders exclusively, there must be no commission or other remuneration.

-‐ Additional subscriptions made by stockholders. -‐ Compare (e) and (k):

o In letter (e), the sale is made to a stockholder; in letter (k), it could be a sale not to an existing stock holder.

(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.

-‐ It talks about issuance of bonds or notes. It’s a debt instrument secured by a real estate or a tangible personal property provided that the bonds or notes are sold to a single purchaser at a single sale. So again, it is an isolated transaction.

-‐ Ex. XYZ BANK plans to sell 100M 5 year term bonds and the bonds are secured by a real estate in favor of Mr. A. o Is there a need for registration? NO o Is it an exempt security? NO o Is it an exempt transaction? YES. Single

purchaser at a single sale. -‐ What if in the following month, the bank issued

another 5 million worth of bonds to Mr. B. Does it still qualify in letter (f)? o NO. But it is still exempt, not because it is an

exempt transaction but because it is an exempt security. It is a bond (other than shares of stock) issued by a bank! (exempt security, item (d))

o If it was sold by a corporation (other than a bank), it is no longer an exempt security.

(g) The issue and delivery of any security in exchange for



any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provisions of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.

-‐ About securities exchanged for another securities. Here, it’s like convertible shares of stock (common to preferred).

-‐ Ex. if the holder of a common share is given the option to convert it into a preferred share, the law states that in converting (common –> preferred) it would qualify as an exempt transaction. After converting into preferred shares and after the issuance of the preferred shares, no registration is required. Because upon conversion you will surrender the common shares and you will be issued new shares of stock.

-‐ Note that the security surrendered has been previously registered.

-‐ So, there is no risk, you are an existing stock holder and the shares have been previously registered but was just converted.

(h) Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading market.

-‐ Broker’s transactions are those transactions in the stock exchange. Every time a broker sells a security, he does not need to apply for registration because: 1. The shares sold have been previously

registered. 2. It is not a new offering of shares. 3. The registered exchange is probably monitored

or supervised by the SEC.

-‐ So, the circumstances under which you are selling the shares will qualify them as exempt transactions.

(i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.

-‐ In (i), subscription during incorporation is exempt because in the first place the corporation has not been incorporated as yet. The law provides that in order to comply with the requirements of the law as to percentage of capital stock of a corporation, it should be subscribed before it can be registered or be duly incorporated. So a corporation in the process of registration in the SEC -‐ subscription of the authorized capital stock does not need registration. But subsequent issuance of shares after the corporation has been incorporated, then, there is a need for registration.

-‐ Also, pursuant to an increase in authorized capital stock (in effect, there are new shares). It is exempt from registration because of pre-‐emptive right – you are offering it first to the existing stockholders before the public.

(j) The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

-‐ In (j), you exchange another security for another security. This is similar to conversion of stocks.



There is no need for registration because you are only issuing it to an existing stockholder.

(k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-‐month period.

-‐ Before, there was a requirement that although it is an exempt transaction that every time a corporation will issue shares of stock esp. out of its unissued shares, you need to submit to SEC a form you have to fill up – request for exemption – you would like to seek a confirmation that this issuance of share is exempt from registration requirement. Normally, the reason used by the corporation to be exempt is (k), wherein sale of securities is issued to 19 or less persons within a 12-‐month period.

-‐ Ex. If the corporation issues its shares to 10 new investors – this would qualify as an exempt transaction.

-‐ So, if the issuer sells securities to over 20 persons, then the securities must be registered.

-‐ However it does not invalidate the sale from 1-‐19 because it is still an exempt transaction.

-‐ It is exempt because of the limited character of the offering.

Questions raised by classmates:

1. Would this invalidate the requirement of isolated transaction?

-‐ in letter (c), the person who sells is the owner and not the issuer. As we said that the sales sold by the owner are securities that have already been previously registered.

-‐ in letter (k), it talks about the issuance made by the issuer himself, basta lang di mo-‐exceed ug 20, it would qualify as an exempt transaction. Therefore, no need for registration.

2. Mr. X received 1000 shares and he wants to subsequently sell his shares – 100 shares to Mr. Y and the rest (900 shares) to other persons. Is there a time period?

(kani refer mos provision sa [c] kay I think adto ni directed nga question)

-‐ None. The law is silent. Wala siya niingon within a 12-‐month period unlike in letter (k).

-‐ So if Mr X, will sell the other shares after 5 years, is he required to register such shares? Atty. Larrobis submits YES. If you read carefully, the law says “an isolated transaction”, wala siya niingon ug two or more transactions. It does not talk about a period or what. Then, Atty. submits that by reading only the provision of the law, it will only be one transaction.

3. In letter (k), how does the SEC monitor that you have not reached 20 such that what if in a month’s time two transactions per month, what happens to the 20th transaction, does it invalidate the previous transaction?

-‐ No. Only the 20th transaction. Based on practice, they have to monitor whether the corporation has issued shares out of its authorized capital stock. So that it will not be considered as an unauthorized issuance, you need to submit to the SEC a confirmation or notice that you are issuing shares and in the request form for approval to issue additional shares, you will indicate there that you are asking for an exemption of the registration requirements. So, in that manner, the SEC will know whether you have issued shares which is more than 20 persons within a 12-‐month period.

(l) The sale of securities to any number of the following qualified buyers:

(i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company; or (vi) Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth,



knowledge, and experience in financial and business matters, or amount of assets under management.

Who are qualified buyers?

1. banks 2. registered investment house 3. insurance company 4. pension fund or retirement plan maintained by

the government 5. investment company 6. other persons SEC will determine as qualified

buyers (catch all phrase)

Why are they considered as qualified buyers?

-‐ Because these are entities which have achieved “financial sophistication” – meaning, they have the necessary expertise and competence to determine whether or not the security is good or not; or they have experts to advise them WON this is a good buy or not a good buy.

-‐ In effect, there is no need to protect the investor.

10.2. The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering. 10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee equivalent to one-‐tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities.

Example, a corporation – has this policy of encouraging stock ownership among its employees. What if the corporation plans to issue its own shares of stock to all its employees numbering 1000 employees, is there a need

for the corporation to register before it can sell or offer its securities?

Is it an exempt security? No. The issuer is not the government etc.

Is it an exempt transaction? No. They are not stockholders but employees; and it does not fall under any of the categories of an exempt transaction.

Therefore, the transaction needs to be registered.

RATIONALE (why registration is not required): issuer can be trusted not to deceive the investor, or the issuer is regulated, supervised or monitored by another government entity which is expected to perform the same function as that of SEC as far as protecting the investor is concerned.

* Stock options are not exempt securities, nor are they exempt transactions.

PROCEDURE FOR THE REGISTRATION OF SECURITIES

1. Filing of the following with the SEC: a. sworn registration statement (standard pro

forma form) SIGNATORIES TO A REGISTRATION STATEMENT (see sec. 12.4)

-‐the same persons who will be held liable if there are misrepresentations in the registration statement.

i. Chief Executive Officer

ii. Chief Operating Officer

iii. Chief Financial Officer

iv. Accounting Manager/Comptroller

v. Corporate Secretary



vi. Expert Opinion (signature is not mandatory)

b. attach the Resolution of the Board of Directors c. prospectus -‐ normally contains all the

necessary information about the issuer or about the business

d. other information that may be required (other annexes)

2. Payment of filing fee—not more than 1/10 of 1% of the maximum aggregate price at which such securities are proposed to be offered.

3. Publication – 2 newspapers of general circulation once a week for 2 consecutive weeks. The publication is very important, it informs the public that the registration statement has been filed.

F How long will the SEC issue an Order either approving or denying the application?

-‐ Within 45 days after the filing of the registration statement,

-‐ Or by such later date to which the issuer has consented.

-‐ TAKE NOTE! It is only upon the issuance of the Order by the SEC approving the Registration Statement shall the issuer be allowed to sell the securities or offer them for sale. So any sale made prior to the effectivity of the registration statement is considered NULL and VOID.

GROUNDS TO REJECT/REVOKE THE REGISTRATION OF SECURITIES

SEC. 13. Rejection and Revocation of Registration of Securities. -‐ 13.1. The Commission may reject a registration statement and refuse registration of the security thereunder, or revoke the effectivity of a registration statement and the registration of the security thereunder after due notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that: (a) The issuer:

(i) Has been judicially declared insolvent; (ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed; (iii) Has been or is engaged or is about to engage in

fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirement that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or

(b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or (c) The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the Commission or other competent judicial or administrative body for violations of securities, commodities, and other related laws. GROUNDS FOR REVOCATION OF REGISTRATION OF SECURITIES

1. The issuer: a. judicially declared as insolvent b. violated provisions of the Code c. engaged in fraudulent transactions d. made false or misleading representation of

material facts e. failed to comply with any requirements the

Commission may impose as a condition for registration of security.

2. Registration Statement is on its face incomplete or inaccurate.

3. The issuer, any officer, director or controlling person of the issuer has been convicted by a competent judicial or administrative body of an offense involving moral turpitude and/or fraud.

Ex. Estafa; any manipulative devices 4. SEC requested that it produce its books and

records and it failed to comply with such order -‐ a ground for rejection of application -‐ if application has already been accepted or

approved, it will subsequently revoked.



TAKE NOTE: Judicial or administrative body here includes decisions of a FOREIGN COURT.

GROUNDS TO SUSPEND THE SALE OF SECURITIES. SEC. 15. Suspension of Registration. -‐ 15.1. If, at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect, or the sale or offering for sale of the security registered thereunder may work or tend to work a fraud, the Commission may require from the issuer such further information as may in its judgment be necessary to enable the Commission to ascertain whether the registration of such security should be revoked on any ground specified in this Code. The Commission may also suspend the right to sell and offer for sale such security pending further investigation, by entering an order specifying the grounds for such action, and by notifying the issuer, underwriter, dealer or broker known as participating in such offering. 15.2. The refusal to furnish information required by the Commission may be a ground for the issuance of an order of suspension pursuant to Subsection 15.1. Upon the issuance of any such order and notification to the issuer, underwriter, dealer or broker known as participating in such offering, no further offer or sale of any such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void. 15.3. Upon issuance of an order of suspension, the Commission shall conduct a hearing. If the Commission determines that the sale of any security should be revoked, it shall issue an order prohibiting sale of such security. Until the issuance of a final order, the suspension of the right to sell, though binding upon the persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear that the order of suspension has been violated after notice. If, however, the Commission finds that the sale of the security will neither be fraudulent nor result in fraud, it shall forthwith issue an order revoking the order of suspension, and such security shall be restored to its status as a registered security as of the date of such order of suspension.

• Now, assuming SEC has already issued an

approval of your registration statement, you will now proceed with the sale. Can the SEC subsequently order the suspension of the sale? -‐ YES. If the issuer is found to commit any of

the grounds for the revocation, SEC may suspend such sale. The order of suspension can be ordered at anytime.

-‐ Any sale made even after there is already suspension order shall be considered as null and void.

AMENDMENTS TO THE REGISTRATION STATEMENT

SEC. 14. Amendments to the Registration Statement. -‐ 14.1. If a registration statement is on its face incomplete or inaccurate in any material respect, the Commission shall issue an order directing the amendment of the registration statement. Upon compliance with such order, the amended registration statement shall become effective in accordance with the procedure mentioned in Subsection 12.6 hereof. 14.2. An amendment filed prior to the effective date of the registration statement shall recommence the forty-‐five (45) day period within which the Commission shall act on a registration statement. An amendment filed after the effective date of the registration statement shall become effective only upon such date as determined by the Commission. 14.3. If any change occurs in the facts set forth in a registration statement, the issuer shall file an amendment thereto setting forth the change. 14.4. If, at any time, the Commission finds that a registration statement contains any false statement or omits to state any fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may conduct an examination, and, after due notice and hearing, issue an Order suspending the effectivity of the registration statement. If the statement is duly amended, the suspension order may be lifted. 14.5. In making such examination the Commission or any officer or officers designated by it may administer



oaths and affirmations and shall have access to, and may demand the production of, any books, records or documents relevant to the examination. Failure of the issuer, underwriter, or any other person to cooperate, or his obstruction or refusal to undergo an examination, shall be a ground for the issuance of a suspension order.

• Can you amend your registration statement? -‐ YES, especially when the registration

statement is incomplete or inaccurate. You are given an opportunity to still amend it. (Atty L: Ayaw nalang huwata na ma revoke, might as well amend it.)

-‐ The 45 days approval will be reckoned from the time you have submitted your amended registration statement.

REGISTRATION OF PRE-‐NEED PLANS

-‐ Pre-‐need plans are contracts which provide for the

performance of future services or the payment of future monetary considerations at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve.

-‐ affects public interest that is why it is regulated by the state (particularly the SEC)

SEC.16. Pre-‐Need Plans. -‐ No person shall sell or offer for sale to the public any pre-‐need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-‐need plans by, among other things, requiring the registration of pre-‐need plans, licensing persons involved in the sale of pre-‐need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and record keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans. Ex. insurance; educational plans; memorial plans; pension plans

• What are the safeguards provided by the SRC on

pre-‐need plans to protect the interest of planholders? 1. The issuer cannot sell or offer for sale a pre-‐

need plan unless the issuer is duly registered. 2. The persons involved in the sale of pre-‐need

plans are licensed. 3. There is a requirement of disclosure to the

respective plan holders. 4. There are guidelines with respect to

advertisements. -‐ advertisements should not be

exaggerated or overstated. 5. There is a requirement as to capitalization

and establishment of trust funds. -‐ important because there is a level of trust

fund that they should maintain for these trust funds will answer later on their liability to the planholders.

PROTECTION OF SHAREHOLDER INTERESTS

There are several provisions in the SRC, which will protect the shareholders’ interests. These are:

1. Tender Offer Rule (SEC. 19) 2. Proxy Rule (SEC. 20) 3. Disclosure Rule (SEC. 23)

I. TENDER OFFER RULE

• Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities (e.g. shares of stock) of a PUBLIC COMPANY (meaning ownership or control over the corporation)

-‐ Public Company is any corporation: 1. with a class of equity securities listed or

trated in a stock exchange; or 2. with assets at least 50 Million Pesos

and having 200 or more stockholders and at least 200 of the stockholders are holding at least 100 shares each.

• any person or group of persons who intend to acquire equity securities of a public company/corporation is required to make his/her intention public or made known to all



shareholders by making a tender offer such that you are giving all stockholders an opportunity to sell their shares at the same price, terms and conditions as that of the majority stockholders. In fact, if you want to make an acquisition, you have to acquire from all stockholders (including minority stockholders) in proportion to their respective percentages. It has to be on a pro-‐rata basis.

• PURPOSES: -‐ to regulate activities relating to

acquisition of control of the listed company

-‐ to protect minority shareholders against any scheme that will dilute the value of their shares by giving them opportunity to sell their shares at the same price offered to majority shareholders.

o Situation: If you are interested in acquiring control, you would be interested in acquiring the shares of the majority SH. For ex. A, B, C, D, E and the rest are minority SH and (ABCDE) will hold the controlling shares of 60% and the buyer is interested in acquiring the control of this corporation. Therefore, I will make my offer only to those who hold the controlling interest. Now once I acquire their shares, I will no longer be interested to acquire the shares of the minority. Even if these minority stockholders will sell their shares in the future, nobody will want to buy because it will not give the interested buyer control. à this is what the law tries to avoid because it will be prejudicial to the minority stockholders (i.e. secret negotiations with majority stockholders will be avoided). Why? The value of their sales will be reduced because they are willing to sell but nobody will be interested to buy.

o Example: You want to acquire only 70%. Since the tender offer rule requires that you have to make your offer to all stockholders, so you have to buy from all the stockholders on a pro rata basis.

§ So, 20 (shares of the minority) / 100 (total shares) x 70% (shares to be acquired)

§ The effect is that, even if you hold a minority share, you are given the opportunity to sell.

§ What if all the minority SH will sell, are you compelled to buy all? NO. Again you do it in a pro rata basis.

§ NOTE: what the law requires is only to give the minority stockholders the opportunity to sell. If they would not, there is no problem with that.

• Are all acquisitions of equity securities in a public company required to make a tender offer?

-‐ No. There are thresholds provided in the SRC and as amended by the Implementing Rules and Regulations for tender offer rule to be mandatory.

• What are the thresholds? (WHEN TENDER OFFER RULE IS MANDATORY) 1. single acquisition – at least 35% 2. creeping acquisition within 12 mos. – at least

35% 3. although you acquire less than 35% but after

the acquisition it would result to ownership of more than 51% -‐ apply when you are an existing

stockholder. -‐ Ex. You are an existing SH of 30% and

subsequently you acquire in a single transaction 25%. Although in a single transaction, it was below 35% but the total acquisition amounted to 55%, so



you fall under the third case. In effect, tender offer rule is mandatory.

• PROCEDURE FOR MAKING THE TENDER OFFER 1. File a declaration with the SEC

-‐ there is a form you have to fill up and submit that and such form will become a public document. The form contains the information on who is the purchaser and the number of shares the purchaser intends to acquire

-‐ Together with the form, you have to submit the financials of the purchaser/acquirer – whether he or she has the financial capacity to make the purchase.

2. Pay the filing fee -‐ not more than 1/10 of 1% of the

proposed payment in cash, and the value of any securities or property to be transferred in acquisition, merger or consolidation.

3. Furnish the issuer a statement containing the information/declaration.

4. Publication – because the purpose of the tender offer is to make public your intention to acquire the shares.

• Now what is the effect, assuming you have already paid the tender offer and all the shareholders are interested in selling their shares -‐ what if you only want to acquire 70%? How will this be taken up? -‐ It will be on a pro-‐rata basis. Meaning, tanang shareholders gyud will be given the opportunity to sell their shares.

• TRANSACTIONS EXEMPT FROM THE TENDER OFFER RULE

1. Tender Offer rule will not apply to any purchase from the UNISSUED SHARES. -‐ REASONS:

a. the law grants the SH the pre-‐emptive right b. the existing Stockholders are not selling their shares, only the unissued shares.

-‐ GR: tender offer rule not applicable in the purchase of unissued shares.

-‐ EXC: acquisition will not result to 50% or more ownership. (REASON: because you will already acquire control)

o If you acquire, will it not affect the existing ownership of the existing stockholders?

§ No, it will not. The existing stockholders enjoy a protection through their pre-‐emptive right. It is only up to the SH WON they will waive their pre-‐emptive right.

2. When there is an increase in authorized capital stock. -‐ REASONS:

a. the law grants the SH the pre-‐emptive right b. the existing Stockholders are not selling

their shares, only the unissued shares. 3. Purchase of shares pursuant to a foreclosure

proceeding. -‐ REASON: the purchaser is not interested in

acquiring control because what is purchased here is only the share subject of the foreclosure proceedings.

4. Privatization undertaken by the government. -‐ it is a government owned and controlled

corporation which is converted into a private corporation.

-‐ REASON: there are no minority stockholders. The owner of the shares is only the government.

5. When you acquired the shares pursuant to corporate rehabilitation.

6. When you acquired the shares in an open market at the prevailing market price. -‐ REASON: there is no secret negotiation,

which is what the law tries to avoid. 7. When you acquired the shares pursuant to a

merger or consolidation. -‐ REASON: there is no change of

ownership. CEMCO HOLDINGS V. NATIONAL LIFE The mandatory tender offer does not only apply to a direct acquisition but also applies to the indirect acquisition (where it will result to an indirect control) of a PUBLICLY-‐LISTED COMPANY, through the purchase of shares in a NON-‐LISTED COMPANY.



Facts:

Union Cement Corp. (UCC), a publicly listed company, has two principal stockholders—Union Cement Holdings Corp. (UCHC), a non-‐listed company, with shares amounting to 60.51 percent, and Cemco Holdings Inc. (Cemco) with 17.03 percent. The majority of UCHC’s stocks were owned by Bacnotan Consolidated Industries Inc. (BCI) with 21.31 percent and Atlas Cement Corp. (ACC) with 29.69 percent. Cemco, on the other hand, directly owned 9 percent of UCHC stocks.

BCI and its subsidiary, ACC, sold their 21.31 percent and 29.69 percent shareholdings in the holding company (UCHC) to Cemco. As a result of the acquisition, Cemco’s total beneficial ownership, direct and indirect, in UCC increased by 36 percent, thereby resulting into at least 53 percent ownership of the shares of UCC.

A minority stockholder of UCC, the National Life Insurance Co. of the Philippines Inc., sought to nullify the sale for failure of Cemco to comply with the mandatory tender offer rule.

Cemco argued that, based on the plain wording of Section 19.1 of the SRC as confirmed by the SEC En Banc before the transaction was consummated, the “tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm.”

Issue: whether the mandatory offer rule under the SRC applies only to direct acquisition of shares in the public company. Held: The mandatory tender offer rule applies to both direct and indirect acquisition, holding that the legislative intent of Section 19 of the SRC is to regulate activities relating to the acquisition of control of a public company. Whatever may be the method by which control of the company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies.

The bottom line of the law is to give the shareholders of the public company the opportunity to decide whether or not to sell their shares in connection with the transfer of control.

» It is the policy of the state to create a central

monetary authority. » The central monetary authority is the Central Bank

or the Bangko Sentral ng Pilipinas » Functions as an independent and accountable body

to formulate policies concerning the areas of MONEY, BANKING AND CREDIT

» How is the BSP organized? -‐ It is a stock corporation (GOCC) and all of its

shares are fully subscribed to by the government.

-‐ It enjoys fiscal and administrative autonomy. -‐ Principal place in Manila but it also has offices

and branches all over the Philippines.

PRIMARY OBJECTIVES AND ROLES Section 3. Responsibility and Primary Objective. -‐ The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-‐bank financial institutions performing quasi-‐banking functions, hereafter referred to as quasi-‐banks, and institutions performing similar functions. » The major responsibilities of the BSP are:

1. provide policy direction in the areas of money, banking and credit;

2. supervision and regulation of all operations of banks, quasi banks and other financial institution, including financial companies, non-‐bank financial institutions performing quasi banking functions

THE NEW CENTRAL BANK ACT (REPUBLIC ACT NO. 7653 – Basics))



3. maintain price stability and promote monetary stability and convertibility of the peso. à PRIMARY OBJECTIVE

ROLES OF THE BSP 1. Designated as the banker of the government, so all

the funds of the government are deposited with the BSP. The political subdivisions and instrumentalities of the government are required to deposit their cash balances with the BSP, and only a certain amount are held by other banks

2. Acts as the representative of the government to the international monetary fund/ board

3. It also acts as representative of the government to various foreign financial institutions (World Bank, IMF)

4. Handles the fiscal operations of the government. The BSP is required to open an account for the treasurer of the Philippines wherein all funds and money of the government are deposited with BSP as banker of the government

PRIVILEGES OF THE BSP F Is the BSP exempt from tax?

-‐ NO. -‐ Under the New Central Bank Act, the

exemption of BSP from taxes is only within 5 years from the approval of the act. Thereafter, the BSP is already subject to tax.

-‐ But it is exempt from custom duties wi th respect to importation of equipment necessary for the printing of notes or the minting of coins.

F Can the BSP own any private bank or financial

institution? -‐ No, to avoid conflict of interest.

BSP cannot acquire any shares or accept any shares of stocks as a collateral and shall not and shall not participate in the management in any enterprise. So, BSP cannot be a stockholder nor have an investment in any enterprise and it cannot engage in the development of any banking or financing.

THE MONETARY BOARD

WHO EXERCISES THE POWERS OF BSP? -‐ the Monetary Board -‐ Normally in corporations, we have BODs. But in the

BSP, we have the Monetary Board.

COMPOSITION OF THE MONETARY BOARD -‐ 7 members -‐ 1 – Governor of the BSP who shall be considered as

chairman of the monetary board -‐ 1 – member of the cabinet -‐ 5 – members coming from the private sectors

serving full time for a period of 6 years o 3 members serve for 6 years o 2 members serve for 3 years o They are appointed by the president of

the Philippines, but in case of the governor of BSP, the appointment is

BUSUEGO v. CA There was an examination conducted by BSP over this savings and loan association. Based on the findings, there were irregularities, accounted bank loan proceeds and loans to fictitious borrowers. On the basis of that irregularity, the BSP placed the officers of PESALA in the watch list order, meaning, it prevented them from holding positions in entities which are subject to the regulations of the Central Bank. 1. WON there was denial of due process. 2. WON BSP has authority of PESALA. 3. WON the resolution of the monetary board of placing them in the watch list deprived them of a lawful calling or profession. SC Ruling: 1. NO, due process simply means an opportunity to be heard. In this case, there was ample opportunity given to PESALA. 2. YES, it is stated in the New Central Bank Act that BSP has regulatory powers over financial institutions and quasi-‐banks. Savings and loans associations can be considered as quasi-‐banks. 3. NO, the restriction is only limited to entities which are under the regulatory and supervisory powers of the BSP, but they are still allowed for other employment as long as it is not under the supervision of BSP.



subject to confirmation by the Commission on Appointment

o They cannot be reappointed

QUALIFICATIONS OF THE MEMBERS OF THE MONETARY BOARD Section 8. Qualifications. -‐ The members of the Monetary Board must be natural-‐born citizens of the Philippines, at least thirty-‐five (35) years of age, with the exception of the Governor who should at least be forty (40) years of age, of good moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines. -‐ Natural born citizen -‐ 40 years old – governor -‐ 35 years old – members -‐ Good moral character -‐ Unquestionable integrity -‐ Known probity and patriotism -‐ And with recognized competence in social and

economic disciplines.

DISQUALIFICATIONS AND INHIBITIONS OF THE GOVERNOR AND THE BOARD MEMBERS OF THE MONETARY BOARD Section 9. Disqualifications. -‐ In addition to the disqualifications imposed by Republic Act No. 6713, a member of the Monetary Board is disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-‐bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office as member of the Monetary Board. The members of the Monetary Board coming from the private sector shall not hold any other public office or public employment during their tenure. No person shall be a member of the Monetary Board if he has been connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution

within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution.

1. So if you are a member of the monetary board you

are disqualified from being a: a. director b. officer c. employee d. consultant e. lawyer f. agent g. stock holder

-‐ Of any bank, quasi-‐bank or any other institution which is subject to supervision or examination by the central bank

-‐ The moment you become a member of the monetary board, you are required to divest yourself from all interest in any institution which is subject to the supervision of the BSP.

-‐ Reason: conflict of interest 2. If you are a member of the monetary board from

the private sector, you shall not hold any other public or private office, because you are to serve full time.

3. Another prohibition, a person cannot be appointed as a member of the monetary board if within a period within 1 year prior to appointment that person is connected directly with any bank or private institution, or has substantial interest in any private bank within the supervision if the BSP. (To name a few): -‐ Officer -‐ Director -‐ Lawyer -‐ Consultant -‐ Stockholder

4. At the same time he cannot be employed in any

institution under the supervision of the CB within 2 years from the expiration of his term -‐ So there is prohibition before and after

o 1 year before, you must not be connected with any financial institution



o 2 years after, you cannot work in banks or financial institutions subject to the supervision of the central bank

-‐ Reason: conflict of interest

5. You shall limit your professional activities to those directly connected with your position with the BSP and accordingly, shall not accept other employment whether public or private, with or without compensation. Except charitable, civic, religious or cultural organizations or when you are designated by the president to serve the interest of the government.

6. AND during the meeting of the monetary board, if you have a pecuniary interest taken up as agenda of the monetary board, you shall disclose such interest and retire, or not participate in that meeting.

GROUNDS FOR REMOVAL FROM THE MONETARY BOARD Section 10. Removal. -‐ The President may remove any member of the Monetary Board for any of the following reasons:

(a) If the member is subsequently disqualified under the provisions of Section 8 of this Act; or (b) If he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than six (6) months; or (c) If the member is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the Bangko Sentral; or (d) If the member no longer possesses the qualifications specified in Section 8 of this Act.

MEETINGS Section 11. Meetings. -‐ The Monetary Board shall meet at least once a week. The Board may be called to a meeting by the Governor of the Bangko Sentral or by two (2) other members of the Board. The presence of four (4) members shall constitute a quorum: Provided, That in all cases the Governor or his duly designated alternate shall be among the four (4).

Unless otherwise provided in this Act, all decisions of the Monetary Board shall require the concurrence of at least four (4) members. The Bangko Sentral shall maintain and preserve a complete record of the proceedings and deliberations of the Monetary Board, including the tapes and transcripts of the stenographic notes, either in their original form or in microfilm. The governor or his duly designated alternative (the deputy governor) must be around. Otherwise, there shall be no quorum. To have a quorum in a meeting, you need 4 and 1 of them is the governor. To pass a board resolution, you still need 4. SCOPE OF THE AUTHORITY OF THE MONETARY BOARD Section 15. Exercise of Authority. -‐ In the exercise of its authority, the Monetary Board shall: (a) issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon the Monetary Board and the Bangko Sentral. The rules and regulations issued shall be reported to the President and the Congress within fifteen (15) days from the date of their issuance; (b) direct the management, operations, and administration of the Bangko Sentral, reorganize its personnel, and issue such rules and regulations as it may deem necessary or convenient for this purpose. The legal units of the Bangko Sentral shall be under the exclusive supervision and control of the Monetary Board; (c) establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to establish professionalism and excellence at all levels of the Bangko Sentral in accordance with sound principles of management. A compensation structure, based on job evaluation studies and wage surveys and subject to the Board's approval, shall be instituted as an integral component of the Bangko Sentral's human resource development program: Provided, That the Monetary Board shall make its own system conform as closely as possible with the principles provided for under Republic Act No. 6758: Provided, however, That compensation and wage structure of employees whose positions fall under salary grade 19 and below shall be in accordance with the rates



prescribed under Republic Act No. 6758. On the recommendation of the Governor, appoint, fix the remunerations and other emoluments, and remove personnel of the Bangko Sentral, subject to pertinent civil service laws: Provided, That the Monetary Board shall have exclusive and final authority to promote, transfer, assign, or reassign personnel of the Bangko Sentral and these personnel actions are deemed made in the interest of the service and not disciplinary: Provided, further, That the Monetary Board may delegate such authority to the Governor under such guidelines as it may determine. (d) adopt an annual budget for and authorize such expenditures by the Bangko Sentral as are in the interest of the effective administration and operations of the Bangko Sentral in accordance with applicable laws and regulations; and (e) indemnify its members and other officials of the Bangko Sentral, including personnel of the departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or misconduct. In the event of a settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Bangko Sentral is advised by external counsel that the person to be indemnified did not commit any negligence or misconduct. The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Bangko Sentral in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the member, officer, or employee to repay the amount advanced should it ultimately be determined by the Monetary Board that he is not entitled to be indemnified as provided in this subsection. What is the scope of authority of the monetary board? 1. issue rules and regulations 2. direct the management and operation of the BSP 3. establish human resource management system 4. adopt budget

5. indemnify any member if that member is sued criminally or civilly, civil or criminal action particularly those engaged in the supervision and examination of banks

SUPERVISION AND EXAMINATION OF BANKS Section 25. Supervision and Examination. -‐ The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-‐banks, including their subsidiaries and affiliates engaged in allied activities. For purposes of this section, a subsidiary means a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-‐bank and an affiliate means a corporation the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-‐bank or which is related or linked to such institution or intermediary through common stockholders or such other factors as may be determined by the Monetary Board. The department heads and the examiners of the supervising and/or examining departments are hereby authorized to administer oaths to any director, officer, or employee of any institution under their respective supervision or subject to their examination and to compel the presentation of all books, documents, papers or records necessary in their judgment to ascertain the facts relative to the true condition of any institution as well as the books and records of persons and entities relative to or in connection with the operations, activities or transactions of the institution under examination, subject to the provision of existing laws protecting or safeguarding the secrecy or confidentiality of bank deposits as well as investments of private persons, natural or juridical, in debt instruments issued by the Government. No restraining order or injunction shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to supervision or examination by the Bangko Sentral, unless there is convincing proof that the action of the Bangko Sentral is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending



a bond executed in favor of the Bangko Sentral, in an amount to be fixed by the court. The provisions of Rule 58 of the New Rules of Court insofar as they are applicable and not inconsistent with the provisions of this section shall govern the issuance and dissolution of the restraining order or injunction contemplated in this section. » The BSP is vested with the authority to supervise

and conduct a periodic or special examination of all banking institutions and quasi banks INCLUDING THEIR SUBSIDIARIES AND AFFILIATES. Do you understand what a subsidiary or affiliate is? -‐ Subsidiary – If the bank owns more than 50% of

the shares -‐ Affiliate – if it is for a lesser percentage, 50% or

less » The BSP examines not only banks but including

their subsidiaries and affiliates as well, PROVIDED THE SUBSIDARIES AND AFFILIATES ARE PERFORMING ALLIED ACTIVITIES or activities related to banking, like insurance, credit card and mutual fund operations. Those activities could be financial or non-‐financial in nature.

» Why? Because it is possible that some of the transactions and funds of the bank may be diverted to these subsidiaries and affiliates.

» Example of allied activities: credit card services, insurance policies.

» BSP could also require the production of books and documents

F Can the act of BSP in examining any institution be

subject to a restraining order? -‐ GENERAL RULE: NO, because it would subject

the officers of BSP to undue harassment. -‐ EXCEPTION: Unless, it is found that the act of

BSP was plainly arbitrary and was done in bad faith. But first you have to file a petition and prove in court that there was bad faith or that the act was arbitrary upon posting of a BOND.

Section 26. Bank Deposits and Investments. -‐ Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: (1) his bank; or (2) from a bank (a)

which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank, in excess of five percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account. EFFECT ON DOSRI ACCOUNTS (Director, Officer, Stockholder and Related Interest) -‐ Can a DOSRI obtain a loan from his OWN bank or a

bank which is an affiliate or from one under the same parent company that of his bank? YES.

-‐ CONDITION: You are required to waive the secrecy of your deposits in whatever nature in all banks in the Philippines.

-‐ REASON: To protect the bank – so they would know the DOSRI’s financial standing. He might just secure the approval of the loan even if he is not a qualified borrower.

-‐ But under the General Banking Law, there are other several requirements:

o Approval by BODs of the bank o Adequately secured o There is a certain limit, a certain

percentage of the bank’s total loan portfolio that can be extended to DOSRIs.

PROHIBITIONS ON BANK OFFICERS, DIRECTORS,

LAWYERS, AGENTS Section 27. Prohibitions. -‐ In addition to the prohibitions found in Republic Act Nos. 3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from:

(a) being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except non-‐stock savings and loan associations and provident funds organized exclusively for employees of the Bangko



Sentral, and except as otherwise provided in this Act; (b) directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; (c) revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any institution. This prohibition shall not be held to apply to the giving of information to the Monetary Board or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and (d) borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board, and shall be subject to such further rules and regulations as the Monetary Board may prescribe: Provided, however, That personnel of the supervising and examining departments are prohibited from borrowing from a bank under their supervision or examination.

Prohibitions of a personnel of the BSP a. You cannot be an officer, director, lawyer or agent,

employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral ng Pilipinas. EXCEPTION: with respect to non-‐stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral. Again, this is to avoid conflict of interest.

b. You cannot directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral. This prohibition applies to all government employees under the anti-‐graft and corrupt practices act.

c. If you work with BSP you cannot reveal information relating to the condition or business of any

institution under the supervision of BSP. For example you work with BSP and examined this particular bank, and you found out that this bank is going down, you are not supposed to disclose that information to your brothers and sisters and friends. It might cause of panic. So again, confidentiality of information. EXCEPTION: upon order of the court, congress, or any government office; or when you are required to disclose by the monetary board.

d. Can you obtain a loan from a bank if you work with BSP? If you are an auditor of BSP, what’s the rule? If you are a personnel of BSP, you cannot obtain or you are prohibited from borrowing. EXCEPTION: provided the loan in adequately secured and fully disclosed with the monetary board. And there is a stricter prohibition if you are assigned to the supervision and examination department. These are personnel who conduct regular audit of banks. They are prohibited from obtaining a loan from banks under the said personnel’s supervision. This is an absolute prohibition.

CONSERVATORSHIP, RECEIVERSHIP AND LIQUIDATION

BANKS IN DISTRESS The bank under distress is placed under: 1. conservatorship 2. receivership 3. liquidation

So these are the stages, depending on the condition of the bank. I. CONSERVATORSHIP When does the BSP place a bank under conservatorship? -‐ when a bank or a quasi-‐bank is in a state of

continuing inability or unwillingness to maintain a



condition of liquidity deemed adequate to protect the interest of depositors and creditors o inability – in a state of financial difficulty. You

are in a tight cash position. But it does not mean that the bank is insolvent

o liquidity – the ability to convert assets into cash -‐ EXAMPLE: when the assets of the banks are all

receivables and past due accounts, here a bank can be placed under conservatorship

-‐ ANOTHER EXAMPLE: the bank declares huge dividends or anything irregular, because that would have an effect to the financials of the bank

What are the responsibilities/functions of the conservator? -‐ take charge of the assets, liabilities, and the

management thereof -‐ reorganize the management, collect all monies and

debts due said institution, and exercise all powers necessary to restore its viability

-‐ overrule or revoke the actions of the previous management and board of directors of the bank or quasi-‐bank o But not all actions. In the case of FIRST

PHILIPPINE INTERNATIONAL BANK v. CA, the authority of the conservator to overrule or revoke does not extend to: • Perfected contracts which are valid and

enforceable. o Authority refers to actions of the board which

are defective (i.e. unenforceable contracts). o Otherwise it would violate the non-‐impairment

clause. o Conservator merely steps into the shoes of the

BOD. He cannot do those acts which the BOD themselves cannot do.

FIRST PHILIPPINE INTERNATIONAL BANK vs. CA Prior to placing the bank under conservatorship, the bank entered into a perfected contract of sale involving real property. When the conservator was appointed, the conservator sought to revoke the contract of sale because according to the conservator, such sale will be prejudicial to the bank because the selling price was very low compared to the market value of the property which was already very high. Issue: Can a conservator revoke a contract of sale that was already perfected prior to the appointment of the conservator? Is still included in the powers of the conservator to overrule and revoke decisions of the previous management? SC Ruling: NO, the authority of the conservator to revoke actions or previous decisions of the board refer only to contracts which are voidable, recissible and unenforceable but it does not include contracts which are already perfected. Otherwise, it would violate the constitutional prohibition on non-‐impairment of contracts. For how long will the conservatorship last? -‐ It shall not exceed 1 year. So within 1 year the

conservator must submit a report to the monetary board whether (1) the bank can operate on its own or rehabilitated or (2) the bank cannot continue without incurring probable loss, so the bank will now be placed under receivership.

Is the conservator entitled to compensation? -‐ YES. He is entitled to an amount not exceeding 2/3

of the salary of the president of the bank for a period of 1 year. If the conservatorship was terminated before 1 year, it depends. o If the conservatorship is terminated on the

ground that the institution can operate on its own, then you are entitled to 2/3 as if you worked for whole year.

o Otherwise, you will not be entitled for the remaining balance.



Can the Monetary Board appoint a conservator connected with the Bangko Sentral? -‐ Yes, in which case he shall not be entitled to

receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-‐bank concerned.

-‐ He is still entitled to compensation. The compensation shall not come from his employment at the Bangko Sentral but compensation shall be as a conservator.

Effect if bank is placed under Conservatorship: -‐ Does not mean that the bank is closed and cannot

transact business -‐ The effect is that the control now will be exercised

by the conservator, instead of the BOD II. RECEIVERSHIP The bank does not necessarily have to undergo conservatorship. The BSP may immediately place the bank under receivership. Instances when a bank may be placed under receivership: -‐ So after conservatorship, if the conservator would

determine that the bank cannot continue without incurring probable loss then the monetary board would now put the bank under receivership. That is one instance.

-‐ Other Instances: 1. The bank is unable to pay its current liabilities

as they become DUE in the ordinary course of business o Example: they cannot service their

withdrawals to depositors o EXCEPT: when you cannot service

withdrawals due to extra ordinary demands influence by financial panic, “bank run”. Example: during the global crisis when the big companies went down

2. Its liabilities are more than its assets, or when in a state of insolvency

3. if the continuation of the business would probably result in a loss

4. the bank has willfully violated a cease and desist order under Section 37 that has become

final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution

Is it necessary that a bank be placed under conservatorship first before it shall be placed under receivership? NO, conservatorship is not a precondition in placing a bank under receivership as long as the aforementioned conditions or instances are met.

Who could be appointed as a receiver? -‐ BANKS: PDIC (Philippine Deposit Insurance

Corporation) -‐ QUASI BANKS: Any person of recognized

competence in banking or finance may be designed as receiver. o Quasi-‐banks obtain money or funds not from

deposits but from the issuance of deposit substitutes. Deposit substitutes are debt instruments.

What are the obligations of the receiver? -‐ gather and take charge of all the assets and

liabilities of the institution -‐ administer the same for the benefit of its creditors -‐ exercise the general powers of a receiver under the

Revised Rules of Court -‐ but shall not, with the exception of administrative

expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution

Within how many days shall the receiver determine whether or not the bank can still be rehabilitated? -‐ It should be within the period of 90 days from the

time of take-‐over. In a certain case it was mentioned 60 days, but it in the provision of the New Central Bank Act, it should be 90 days.

-‐ The receiver is given 90 days from the take-‐over to determine whether the bank can still be rehabilitated or not. If based on the determination of the receiver it can no longer be rehabilitated,



then it will proceed with liquidation. In this case, the receiver will now file for a petition in the assistance for liquidation.

-‐ If it is already in liquidation, the court will convert the assets of the bank in money, and use such money in payment of the creditors. The creditors will be paid in accordance with preference of credits as mentioned in your credit transaction.

Is there a need for notice and hearing before a bank can be placed under receivership? -‐ NO, as we will discuss later on, BSP can summarily

place a bank under receivership without prior notice and hearing. CLOSE NOW HEAR LATER.

Is there a violation of due process? -‐ NO. There is a reason why it’s “close now hear

later.” Hearing would cause unnecessary delay. By that time, the assets would already be dissipated. Another reason is that it might give the erring officers an opportunity to destroy evidence of fraud. It is a valid exercise of police power.

-‐ Moreover, the bank is not without remedy. The bank could question the act of the monetary board, whether or not it was arbitrary and made in bad faith. The act of the monetary board in placing the bank under receivership could always be subject to judicial review.

Who can file a petition for judicial review? -‐ It is the majority of the stockholders of the bank.

NOT the director. NOT the officer. NOT the bank! It should be the majority of its stockholders.

What's the reason for this? -‐ Because normally, the officers and directors are at

fault. That is why the order is directed to the responsible or erring directors or officers, since it is usually them who are the ones involved. So, if they are also the same persons who may file the petition, then, naturally they would always say that the decision of the Monetary Board was arbitrary or done in bad faith. Of course, you would always go for the cancellation of the issuance by the Monetary Board.

-‐ While in the case of the stockholders, it would seem that they are more objective and less biased in determining whether or not the issuance of the

resolution was really arbitrary. Otherwise, if the directors or stockholders can make the questioning, there would be no objectivity. This is the reason why the power to question the issuance is lodge upon the stockholders.

CENTRAL BANK V. CA -‐ CLOSE NOW HEAR LATER This case involves Triumph Savings Bank which after examination was found out to be insolvent. So it was placed by SEC under receivership. In court, they raised the issue of unconstitutionality of the provision in the law which allows SEC to close banks now “even without prior notice”. Issue: May a Monetary Board resolution validly place a bank under receivership in absence of prior notice and hearing? Ruling: Absence of prior notice and hearing constitutes no denial of due process. Close now, pay later principle is grounded on practical and legal considerations. As what we said, if we would conduct hearing first, it would cause not only unnecessary delay but also to bank run and public panic. As well as to prevent further dissipating of bank's assets; to prevent destruction of evidence; to prevent the stockholders further anomalies in frustrating or defeating justice. Anyway, in cases like this, the bank is not without remedies. Since, if they feel that the decision was arbitrary or done in bad faith, they can always resort to judicial review and file a petition before the RTC.

WHO CAN FILE A PETITION OF ANNULMENT OF THE RESOLUTION OF THE MB regarding receivership/liquidation cases?

The stockholders representing majority of the capital stock. They are more objective in determining WON there was ARBITRARINESS or BAD FAITH on the MB resolution. The BOD is expected to question the resolution since the resolution is directed to them. (usually they are ones under investigation/suspension)



WITHIN WHAT PERIOD CAN THEY FILE A PETITION OF ANNULMENT?

Within 10 days from the time the bank was placed under receivership or liquidation.

EFFECTS of RECEIVERSHIP

1. The bank still retains its juridical personality. It is not replaced by the conservator/receiver/liquidator. It can still sue and be sued but all actions will be brought through the receiver.

2. Its operations are completely suspended. It can no longer enter into new transactions (new loans, new deposits)

-‐ It can still pursue/file actions on existing loans, collect debts, close mortgage (part of receiver’s duty – collect, pursue all amounts owing to the bank)

3. The assets of the bank are considered custodia legis, meaning exempt from garnishment, execution and levy)

4. The bank is not liable to pay interests on the deposits of its clients during the period of receivership. The bank derives its income from its operations. So if its operations are suspended, it cannot earn income to pay for the interests.

-‐ But under General Banking Act: if it is the bank that obtained a loan from BSP, it is still liable to pay interests on such loans even if placed under receivership.

-‐ The client’s deposit does not become a preferred credit. Still has to follow the order of preference of credit. (remember credit transactions)

5. The bank’s capacity to act is restricted. Authority of the bank’s officers is suspended and instead

transferred to the receiver. It is the receiver that has the authority to deal with the bank’s assets.

VILLANUEVA V. CA Villanueva was an owner of several parcels of land. He undertook a loan with the bank but the contract was made to appear as if the agreement was that of a sale. As a result, the property was foreclosed and was scheduled for a public sale. Before the public sale was conducted, a certain Ong made an offer to the bank to purchase the said property. Such offer was accepted by the bank (Phil. Veteran's Bank). Ong insisted that there was already perfected contract between him and the bank even before Villanueva made his offer. Since he made an offer with the bank which was also accepted by the bank, Ong now insists that he has the better right to buy the property. In fact, Ong filed a case before the court to enforce the contract. At the same time, upon learning that the property is to be sold in a public sale, Villanueva also offered to buy back the property. The problem, however, was that the bank was already placed under receivership and is now undergoing the process of liquidation. Issue 1: What was the effect of the offer made by Ong which was accepted by the bank? Was there a perfected contract between the bank and Ong? NO, there was no perfected contract between Ong and the bank. The acceptance of the bank of Ong’s offer was made through correspondence. But before Ong could have known the bank’s acceptance, the bank was already placed under receivership. (remember OBLICON on perfection of contracts) Now, since all the assets of the bank are considered in custodia legis, the bank has no power to accept any offer. All the powers of the bank involving the disposal or management of its properties is now transferred to the receiver. Issue 2: Who has a better right on the parcel of land between Ong and Villanueva? NEITHER OF THEM. The bank should return the payment made by Ong because it had no authority to accept such payments.



Just because Ong has no right over the property, it does not mean that Villanueva now has better rights to the property. Like Ong, VIllanueva has no rights over the property. But, he may resort in making a claim before the liquidation court for the recovery of the properties. Bottom line in this case is that once a bank is placed under receivership, the authority to dispose of its properties is now transferred to the receiver. And, if it is already undergoing liquidation; the authority is with the liquidation court. So, any sale made by the directors or officers is invalid.

WHO HAS JURISDICTION OVER THE CLAIMS AGAINST THE BANK?

When the bank is placed under liquidation, all or any claims against the bank should be filed in the liquidation court.

ONG VS. CA RDO (Rural Bank of DO) was the owner of 2 parcels of land which were mortgaged to Ong to secure the liability of Omnibus Finance to another entity. Since, the obligation was not paid, Ong (mortgagee) moved for the extra-‐judicial foreclosure. Thus, the properties were auctioned and the purchaser was Ong. So, a certificate of sale was issued and registered. However, the TCT of the said parcels of land were not transferred in his name immediately due to the refusal of RD. Now, Ong sought to have the TCTs transferred in his name before a regular court. But, the problem was the bank was already under liquidation. Issue: Who has jurisdiction over the relief prayed for by Ong before non-‐liquidation court (to have the TCTs transferred in his name)? Ruling: Only the liquidation court has the jurisdiction over the issue. Since, Liquidation Courts have authority on all assets of the subject bank and not only limited to disputed claims So long as the property forms part of the asset of the bank, it is under the jurisdiction of the

liquidation court. It is not necessary that there has to be a dispute over a property before the liquidation court can have jurisdiction over such property. In this case, the problem was that, to the prejudice of Ong, the TCTs were still in the name of RDO. So, as far as the liquidation court is concerned, it still considered as assets of the bank. Nonetheless, the court says that this is without prejudice for Ong to file his case before the liquidation court. The only disadvantage is that, once he files his case before the liquidation court, his claim is not a preferred claim anymore. There is no assurance that he can have the property since there will be an order for preference of credit.

III. LIQUIDATION

The next step after receivership is liquidation.

STEPS:

1. After 90 days of receivership, the receiver makes a report to the Monetary Board regarding the status of the bank and recommends: either to resume bank operations or proceed with liquidation.

2. IF the MB decides to conform with the receiver’s recommendation to proceed with liquidation, the MB notifies the BOD of the bank and directs receiver to proceed with liquidation.

3. The receiver shall then file ex parte with the proper RTC and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. In case of quasi-‐banks, the liquidation plan shall be adopted by the Monetary Board.

4. All disputed claims will be resolved in the liquidation court and all claims against individuals, officers will also be pursued with the end view of liquidating assets.



5. Converting assets into cash. 6. Once these are liquidated, they will be

distributed according to the order of preference of credit. If naay sobra, the depositor can go after it. If wala, he can go after PDIC.

7. The franchise of the bank may be sold to other interested parties.

RECAP:

HOW BSP HANDLES BANK IN DISTRESS?

1. Conservatorship – if di pa kaayo grabe 2. Receivership – pwede ra diritso ani 3. Liquidation

SEC 34, 35, 36 – talks about penalties for violation of the New Central Bank and other banking laws.

Sec 37 is important

Section 37. Administrative Sanctions on Banks and Quasi-‐banks. -‐ Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at its discretion, impose upon any bank or quasi-‐bank, their directors and/or officers, for any willful violation of its charter or by-‐laws, willful delay in the submission of reports or publications thereof as required by law, rules and regulations; any refusal to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the Board or the appropriate supervising and examining department or its examiners; any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board, the following administrative sanctions, whenever applicable: (a) fines in amounts as may be determined by the Monetary Board to be appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the

violation or irregularity and the size of the bank or quasi-‐bank; (b) suspension of rediscounting privileges or access to Bangko Sentral credit facilities; (c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) suspension of interbank clearing privileges; and/or (e) revocation of quasi-‐banking license. Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions. The Monetary Board may, whenever warranted by circumstances, preventively suspend any director or officer of a bank or quasi-‐bank pending an investigation: Provided, That should the case be not finally decided by the Bangko Sentral within a period of one hundred twenty (120) days after the date of suspension, said director or officer shall be reinstated in his position: Provided, further, That when the delay in the disposition of the case is due to the fault, negligence or petition of the director or officer, the period of delay shall not be counted in computing the period of suspension herein provided. The above administrative sanctions need not be applied in the order of their severity. Whether or not there is an administrative proceeding, if the institution and/or the directors and/or officers concerned continue with or otherwise persist in the commission of the indicated practice or violation, the Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct the conditions resulting from such practice or violation. The cease and desist order shall be immediately effective upon service on the respondents. The respondents shall be afforded an opportunity to defend their action in a hearing before the Monetary Board or any committee chaired by any Monetary Board member created for the purpose, upon request made by the respondents within five (5) days from their receipt of the order. If no such hearing is requested within said



period, the order shall be final. If a hearing is conducted, all issues shall be determined on the basis of records, after which the Monetary Board may either reconsider or make final its order. The Governor is hereby authorized, at his discretion, to impose upon banking institutions, for any failure to comply with the requirements of law, Monetary Board regulations and policies, and/or instructions issued by the Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal.

ADMINISTRATIVE SANCTIONS:

1. Fines (aside from criminal and civil liability); 2. suspension of rediscounting privileges or access

to Bangko Sentral credit facilities; 3. suspension of lending or foreign exchange

operations or authority to accept new deposits or make new investments;

4. suspension of interbank clearing privileges; and/or

5. revocation of quasi-‐banking license.

Section 48. The Peso. -‐ The unit of monetary value in the Philippines is the "peso," which is represented by the sign "P." The peso is divided into one hundred (100) equal parts called "centavos," which are represented by the sign "c." Section 49. Definition of Currency. — The word "currency" is hereby defined, for purposes of this Act, as meaning all Philippine notes and coins issued or circulating in accordance with the provisions of this Act. Section 50. Exclusive Issue Power. — The Bangko Sentral shall have the sole power and authority to issue currency, within the territory of the Philippines. No other person or entity, public or private, may put into circulation notes, coins or any other object or document which, in the opinion of the Monetary Board, might circulate as

currency, nor reproduce or imitate the facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral. The Monetary Board may issue such regulations as it may deem advisable in order to prevent the circulation of foreign currency or of currency substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes. The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches and seizures in accordance with law, for the purpose of maintaining the integrity of the currency. Violation of this provision or any regulation issued by the Bangko Sentral pursuant thereto shall constitute an offense punishable by imprisonment of not less than five (5) years but not more than ten (10) years. In case the Revised Penal Code provides for a greater penalty, then that penalty shall be imposed.

Peso – unit of monetary value in the Philippines Currency – the notes and coins in circulation BSP –has exclusive authority to issue notes and coins; it’s criminally punishable for any other person/entity to produce notes or coins Section 51. Liability for Notes and Coins. — Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko Sentral and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral. Said notes and coins shall be a first and paramount lien on all assets of the Bangko Sentral. The Bangko Sentral's holdings of its own notes and coins shall not be considered as part of its currency issue and, accordingly, shall not form part of the assets or liabilities of the Bangko Sentral.

Notes and coins are liabilities of Central Bank and the government of the Philippines.

Notes and coins may be issued only in an amount not exceeding the assets of Central Bank. That is the



reason why we cannot just print more money to solve poverty. The Central Bank cannot issue notes and coins more than its assets and reserves (the gold and foreign currencies). To have it otherwise, the money would have no value at all. If it would be that easy to print money, then the money would be rendered valueless or worthless. The effect would then be that the money is just a mere piece of paper.

Section 52. Legal Tender Power. — All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-‐five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.

What are considered legal tender in the Philippines?

-‐ Only notes and coins issued by the BSP

Check, even if manager’s check is not legal tender

LEGAL TENDER FOR COINS

-‐ 25-‐centavo coins (and above) still considered legal tender in amounts not exceeding Php 50.00

-‐ 10-‐centavo coins (or less) still considered legal tender in amounts not exceeding Php 20.00

BAR EXAM PROBLEM:

A paid P1,000 worth of 25c. The cashier of the store rejected payment saying it was not legal tender. Is the cashier correct?

No, it is not legal tender. According to sec 52, it is only legal tender up to P50.00

Why is it considered legal tender?

-‐ Because it is fully guaranteed by the government of the Philippines.

CHARACTERISTICS of the Currency:

-‐ Refers to the dimensions, design, denomination of the notes, coins

-‐ Prescribed by the Monetary Board with the approval of the President

ALL NOTES SHOULD CONTAIN:

-‐ Signature of the governor of the BSP and the president of the Philippines.

-‐ "ANG SALAPING ITO AY BAYARIN NG BANGKO SENTRAL AT PANANAGUTAN NG REPUBLIKA NG PILIPINAS".

Section 54. Printing of Notes and Minting of Coins. — The Monetary Board shall prescribe the amounts of notes and coins to be printed and minted, respectively, and the conditions to which the printing of notes and the minting of coins shall be subject. The Monetary Board shall have the authority to contract institutions, mints or firms for such operations. All expenses incurred in the printing of notes and the minting of coins shall be for the account of the Bangko Sentral. Section 55. Interconvertibility of Currency. — The Bangko Sentral shall exchange, on demand and without charge, Philippine currency of any denomination for Philippine notes and coins of any other denomination requested. If for any reason the Bangko Sentral is temporarily unable to provide notes or coins of the denominations requested, it shall meet its obligations by delivering notes and coins of the denominations which most nearly approximate those requested.

Interconvertibility of Currency:

-‐ the ability of the currency to be exchanged for other denominations

Section 56. Replacement of Currency Unfit for Circulation. — The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and



coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-‐fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and demonetized without compensation to the bearer. The Central Bank shall replace notes and coins which are already considered as unfit for circulation. Those notes and coins will be withdrawn from circulation and demonetized. When is it considered as unfit for circulation? -‐ When it is already too old, tattered or mutilated.

But, take note that the central bank will NOT ACCEPT notes and coins whose identification are already impossible to determine. 1. coins which show signs of filing, clipping or

perforation 2. notes which have lost more than two-‐fifths (2/5) of

their surface or all of the signatures inscribed thereon.

-‐ Kung gisi pa na bisag naay scotch tape, pwede pa na as long as not more than 2/5 of their surface is lost

Notes and coins in such mutilated conditions shall be withdrawn from circulation and demonetized without compensation to the bearer. Section 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old. Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call. After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a

liability of the Bangko Sentral and shall be demonetized. The Bangko Sentral shall also demonetize all notes and coins which have been called in and replaced. RETIREMENT OF OLD NOTES AND COINS: -‐ NOTES: more than 5 years old -‐ COINS: more than 10 years old

However, the old notes and coins called for retirement shall remain legal tender for a period of 1 year. After that 1 year, it would no longer be legal tender but may still be replaced with the BSP. After such year will the BSP no longer replaced such money. Technically speaking, it is after the lapse of 2 years from the order of recall will the BSP no longer accept to replace the recalled money. Example: In 2013, notes issued in 2007 and coins issued in 2002 are recalled from circulation. BSP will advise the banks and the banks will inform the public. Within 1 yr from the order to recall (until 2014) – still considered legal tender; or may have them replaced Another 1 yr (until 2015) – no longer legal tender but may still be exchanged/replaced with the banks at par (with value) After that year (which is 2016) – no longer legal tender and can no longer be replaced; ceases to be the liability of the BSP This is usually done with the help of private banks. SEC. 58. Definition. _ For purposes of this Act, the term "demand deposits" means all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. SEC. 59. Issue of Demand Deposits. _ Only banks duly authorized to do so may accept funds or create liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board in accordance with the powers granted it with respect thereto under this Act.



SEC. 60. Legal Character. _ Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. Demand Deposit

-‐ Considered checking accounts; not considered legal tender

Section 61. Guiding Principle. -‐ The Monetary Board shall endeavor to control any expansion or contraction in monetary aggregates which is prejudicial to the attainment or maintenance of price stability. Section 63. Action When Abnormal Movements Occur in the Monetary Aggregates, Credit, or Price Level. -‐ Whenever abnormal movements in the monetary aggregates, in credit, or in prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall:

(a) take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral under the provisions of this Act; and (b) submit to the President of the Philippines and the Congress, and make public, a detailed report which shall include, as a minimum, a description and analysis of:

(1) the causes of the rise or fall of the monetary aggregates, of credit or of prices; (2) the extent to which the changes in the monetary aggregates, in credit, or in prices have been reflected in changes in the level of domestic output, employment, wages and economic activity in general, and the nature and significance of any such changes; and (3) the measures which the Monetary Board has taken and the other monetary, fiscal or administrative measures which it recommends to be adopted.

Whenever the monetary aggregates, or the level of credit, increases or decreases by more than fifteen percent (15%), or the cost of living index increases by more than ten percent (10%), in relation to the level

existing at the end of the corresponding month of the preceding year, or even though any of these quantitative guidelines have not been reached when in its judgment the circumstances so warrant, the Monetary Board shall submit the reports mentioned in this section, and shall state therein whether, in the opinion of the Board, said changes in the monetary aggregates, credit or cost of living represent a threat to the stability of the Philippine economy or of important sectors thereof. The Monetary Board shall continue to submit periodic reports to the President of the Philippines and to Congress until it considers that the monetary, credit or price disturbances have disappeared or have been adequately controlled. DOMESTIC MONETARY STABILIZATION

-‐ one of the functions of the BSP (through monetary board) is to maintain monetary, price stability and convertibility of peso.

-‐ monetary board shall control the supply of money to stabilize the economy.

-‐ Refers to monetary policy of the BSP MONETARY POLICY

-‐ Has something to do with monitoring or altering the supply of money in the economy to achieve the purpose mentioned above

HOW to ALTER THE SUPPLY OF MONEY IN THE ECONOMY

-‐ Either to increase or decrease the supply of money

INCREASE THE SUPPLY -‐ During the times of rescission -‐ To increase people to spend -‐ Extend loans at a reduced interest

DECREASE THE SUPPLY

-‐ During the times of inflation -‐ To discourage or curtail spending

HOW DOES BSP CONTROL the SUPPLY? There are 3 tools that BSP uses:

1. Discount Policy (mao ni term ni mam but sa provision kay credit policy?) (Sec 81)

2. Open Market Operations (Sec 90)



3. Reserve Requirements (Sec 94) A. CREDIT POLICY SEC. 81. Guiding Principles. _ The rediscounts, discounts, loans and advances which the Bangko Sentral is authorized to extend to banking institutions under the provisions of the present article of this Act shall be used to influence the volume of credit consistent with the objective of price stability DISCOUNT POLICY (term used by mam)

-‐ Power of the BSP to extend loans and advances to banks and quasi-‐banking institutions

-‐ BSP has also the power to fix the interest rate it will charge to the bank

-‐ To increase the supply of money, BSP would open its discount window by extending loans at lower rates

-‐ But if it would want to decrease the supply of money, BSP would increase its interest rates

LOANS may be in the form of those granted in the:

1. Normal credit operations (usual extension of credit to banks)

2. Special Credit Operations -‐ Granted to help banks having problem

with their liquidity -‐ Maturity period: not exceeding 7days -‐ Granted by the BSP without collateral

3. Emergency Credit Operations -‐ Extend emergency loans and advances in

time of FINANCIAL PANIC (national, local or international panic)

SEC. 90. Principles of Open Market Operations. _ The open market purchases and sales of securities by the Bangko Sentral shall be made exclusively in accordance with its primary objective of achieving price stability. SEC. 91. Purchases and Sales of Government Securities. _ In order to achieve the objectives of the national monetary policy, the Bangko Sentral may, in accordance with the principle stated in Section 90 of this Act and with such rules and regulations as may be prescribed by the Monetary Board, buy and sell in the open market for its own account: (a) evidences of indebtedness issued directly by the Government of the Philippines or by its political

subdivisions; and (b) evidences of indebtedness issued by government instrumentalities and fully guaranteed by the Government. The evidences of indebtedness acquired under the provisions of this section must be freely negotiable and regularly serviced and must be available to the general public through banking institutions and local government treasuries in denominations of a thousand pesos or more.

OPEN MARKET OPERATIONS

-‐ the open market will buy and sell securities or evidence of indebtedness issued by the government like treasury bonds -‐ To increase the supply of money, BSP would

buy securities (in this case, BSP mupagawas ug kwarta)

-‐ To decrease the supply of money, BSP would sell. It would encourage people to spend and money will be kept by the BSP

SEC. 94. Reserve Requirements. _ In order to control the volume of money created by the credit operations of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities: Provided, That the Monetary Board may, at its discretion, also require all banks and/or quasi-‐banks to maintain reserves against funds held in trust and liabilities for deposit substitutes as defined in this Act. The required reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly and without discrimination. Reserves against deposit substitutes, if imposed, shall be determined in the same manner as provided for reserve requirements against regular bank deposits, with respect to the imposition, increase, and computation of reserves. The Monetary Board may exempt from reserve requirements deposits and deposit substitutes with remaining maturities of two (2) years or more, as well as interbank borrowings. Since the requirement to maintain bank reserves is imposed primarily to control the volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances.



RESERVE REQUIREMENTS -‐ Banks are required to maintain a certain

reserve corresponding/in proportion to their deposit liabilities

-‐ Your deposits in the banks are considered liabilities of the bank

-‐ This reserve cannot be lent out by the bank instead this amount of money is deposited with the BSP

-‐ To increase the supply of money, lower the reserve requirements; so that bank can use that part of the reserve to lend to people therefore releasing money

-‐ To decrease the supply of money, increase the reserve requirements; pra ang kwarta mapahuwam sa bangko sa mga taw, gamay

Section 65. International Reserves. -‐ In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. In judging the adequacy of the international reserves, the Monetary Board shall be guided by the prospective receipts and payments of foreign exchange by the Philippines. The Board shall give special attention to the volume and maturity of the Bangko Sentral's own liabilities in foreign currencies, to the volume and maturity of the foreign exchange assets and liabilities of other banks operating in the Philippines and, insofar as they are known or can be estimated, the volume and maturity of the foreign exchange assets and liabilities of all other persons and entities in the Philippines. INTERNATIONAL MONETARY STABILIZATION/CONVERTABILITY OF PESO

-‐ Something to do with international reserves

INTERNATIONAL RESERVES -‐ BSP will maintain sufficient international

reserves adequate to meet any demand like foreign trade

-‐ Consists of gold and foreign currencies (usually remittance from OFW, exports, BPO)

-‐ Effect on the peso if we have many international reserves: strengthen the peso