FINANCIAL LEASE AND OTHER FINANCING Intent of the financial lessor is to recover the
TRANSACTIONS price of the equipment
Lease agreement is non-cancellable FINANCING COMPANIES- are corporations, except OBLIGATION OF THE LESSEE banks, investment houses, savings and loan 1. To pay the amortization up to at least 70% of the associations, insurance companies, cooperatives and acquisition cost other financial institutions organized or operating 2. To pay the lessor for incidental expenses and a under other special laws, which are primarily margin of profit; and organized for the purpose of extending credit 3. To shoulder the cost of repairs, maintenance, facilities to consumers and to industrial, commercial insurance and preservation of the property or agricultural enterprises, by direct lending or by purchased. discounting or factoring commercial papers or No obligation to purchase accounts receivable, or by buying and selling Financial lease will not be invalidated based on contracts, leases, chattel mortgages, or other the allegation of the lessee that rent for the use evidences of indebtedness, or by financial leasing of of movable constitutes value of movable leased movable as well as immovable property (RA 5980, FORMS OF FINANCIAL LEASE Sec. 3(a)) 1. Finance company purchases on behalf or at the 1. FINANCIAL LEASE- mode of extending credit through instance of the lessee the heavy equipment or a non-cancelable lease contract under which the machinery which the latter is interested to buy lessor purchases or acquires movable or immovable but has insufficient funds property in consideration of the periodic payment by 2. When seller or dealer of heavy equipment leases the lessee of a fixed amount of money sufficient to it to the interested buyer amortize at least 70% of the purchase price or Financial lease is a contract sui generis acquisition cost, including any incidental expenses It is a contract of adhesion and a margin profit overn an obligatory period of not Nature of right over the property less than two years during which the lessee has the - Legal title is lodged in the financial lessor right to hold and use the leased property, but with - Financial lessee is entitled to possession and no obligation to purchase the leased property from use of leased equipment the owner-lessor at the end of lease contract (RA Financial lessor does not extend a warranty of 5980 as amended by RA 8556, Sec 3(d)) fitness of the equipment REQUISITES: - Financial lessee can directly enforce a. The lessor purchases or acquires movable or warranty against supplier immovable property Lessee shall bear the loss b. The purchase or acquisition is at the instance of Leasing company is liable under the registered the lessee owner rule if lessee caused damage or injury in c. The lessee agrees that as a consideration, he will the negligent operation of leased vehicle if make periodic payment of a fixed amount of financial lease is not registered money sufficient to amortize at least 70% of the - Their remedy is to resort to third party purchase price or acquisition cost, including any complaints against lessees incidental expenses and a margin of profit 2. ASSIGNMENT OF CREDIT- an act of transferring, d. The payment is over an obligatory period of not either onerously or gratuitously, the right of an less than 2 years; and assignor to an assignee who would then be capable e. During the period agreed upon for payment, the of proceeding against the debtor for enforcement or lessee has the right to hold and use the leased satisfaction of the credit property. Purchase discount- difference between value of 3 BASIC CHARACTERISTICS (Beltran v. PAIC) credit assigned and the net amount paid by a. The legal title to the leased equipment is lodges financing company for such purchase in the financial lessor Purchase discount is limited to 14% of value of b. The financial lessee is entitled to the possession credit assigned exclusive of interest and other and use of the leased equipment charges c. The financial lessee is obligated to make periodic 3. RECEIVABLES FINANCING- mode of extending credit payments denominated as lease rentals, which through the purchase by or assignment to, a enable the financial lessor to recover the financing company of evidence of indebtedness or purchase price of the equipment which had been open accounts by discounting or factoring paid to the supplier thereof; and DISCOUNTING- type of receivables financing d. The financing company, being an extender of whereby evidences of indebtedness of third credit rather than an ordinary equipment rental party are purchased by, or assigned to, a company does not extend a warranty of fitness financing company in an amount or of the equipment for any particular use. consideration less than their face value - Discounting line- credit facility with a merchandise as shown by the invoice and the financing company or bank, which allows draft. business entity to sell, on a continuing basis, - Second letter of credit can be negotiated its accounts receivable at a discount only after the first one - Discount- sale of a receivable at less than its e. General LC- one addressed to any and all persons face value without naming any one in particular FACTORING- type of receivables financing f. Special LC- addressed to a particular individual, whereby open accounts, not evidenced by a firm or corporation by name written promise to pay supported by documents, g. Straight LC- one that does not run in favor of are purchased by, or assigned to, a financing purchasers of drafts drawn company in an amount or for a consideration h. Fixed LC- can be exhausted either when drafts less than the outstanding balance of the open for payment have been drawn by the beneficiary accounts for full amount of credit or when time for drawing upon the letter has expired LETTERS OF CREDIT i. Sight LC- payable on demand as distinguished LETTERS OF CREDIT- engagement by a bank or other from Time LC which is payable within a certain person made at the request of a customer that the period issuer will honor drafts or other demands for Irrevocable letter of credit refers to the duration payment upon compliance with the conditions of the letter of credit while a confirmed letter of specified in the credit (Prudential Bank v. IAC) credit pertains to the kind of obligation assumed Bank merely substitutes its own promise to pay by the correspondent bank for the promise to pay of one of its customers NATURE OF LETTERS OF CREDIT who in return promises to pay the bank the Financial device developed by merchants as a amount of funds mentioned in the letter of convenient and safe mode of dealing with sales credit plus credit or commitment fees mutually of goods to satisfy the interests of a seller and a agreed upon buyer Governed by Code of Commerce on Letters of In standby credit, beneficiary avoids burden of Credit and encompasses only Art. 567-572 which litigation and receives his money promptly upon are obsolete presentation of required documents - Now embodied in the Uniform Customs and PARTIES IN A LETTER OF CREDIT Practice for Documentary Credits (UCP) 1. Buyer- procures the letter of credit and obliges KINDS OF LETTERS OF CREDIT himself to reimburse the issuing bank upon 1. Commercial Letter of Credit- used in the trade of receipt of the documents of title goods 2. Bank- issues the letter of credit, which 2. Standby Letter of Credit- security arrangement undertakes to pay the seller upon receipt of the for the performance of work or service draft and proper documents of titles and to KINDS OF COMMERCIAL CREDIT surrender the documents to the buyer upon a. Confirmed LC- whenever the beneficiary reimbursement stipulates that the obligation of the opening 3. Seller- ships the goods to the buyer and delivers bank shall also be made the obligation of a bank documents of title and draft to the issuing bank to himself to recover payment b. Irrevocable LC- definite undertaking on part of Modern letters of credit parties: issuing bank and constitutes the engagement of a. Buyer or importer that bank to the beneficiary and bona fide b. Seller or beneficiary holders of drafts drawn, that provisions for c. Opening bank who issues letter of credit payment, acceptance or negotiation contained d. Notifying bank which advises the beneficiary in the credit will be duly fulfilled, provided that of the letter of credit all terms and conditions of the credit are e. Negotiating bank which is any bank in the complied with city of the beneficiary c. Revolving LC- credit that provides for renewed f. Paying bank which buys or discounts the credit to become available as soon as the drafts by the letter of credit opening bank has advised that the negotiating or g. Confirming bank which confirms the letter of paying bank that the drafts already drawn by the credit issued by the opening bank beneficiary have been reimbursed to the OBLIGATIONS OF ISSUING BANK opening bank by the buyer 1. To make payment to or to the order of a third d. Back-to-Back LC- credit with identical party (beneficiary) or is to accept and pay the documentary requirements and covering the bills of exchange drawn by the beneficiary same merchandise as another letter of credit, except for a difference in the price of the 2. To authorize another bank to effect such - Banks only deal with documents and not payment, or to accept and pay such bills of with goods, services, or obligations which exchange they relate 3. To authorize another bank to negotiate, against - Issuing bank and beneficiary can invoke the stipulated documents, provided that the terms independence principle doctrine and conditions of the credit are complied with - FRAUD EXCEPTION: exists when the Obligation of the issuing bank is solidary with the beneficiary, for the purpose of drawing on person requesting for its issuance, except the credit, fraudulently presents to the otherwise stipulated confirming bank, documents that contain, Article 13- Standards for Examination of expressly or impliedly, material Documents: Banks must examine all documents representations of fact that to his knowledge stipulated in the credit with reasonable care, are untrue seven banking days following the day of receipt - Remedy for fraudulent abuse is an injunction of documents to determine whether to take up and should not be granted unless: or refuse the documents a. There is clear proof of fraud Doctrine of Strict Compliance- issuing bank must b. Fraud constitutes fraudulent abuse of see to it that the terms of the letters of credit are the independent purpose of the letter of strictly complied with credit and not only fraud under the main - his obligation is to deliver to the paying bank agreement the tender documents stipulated in the c. Irreparable injury might follow if letter of credit injunction is not granted Issuing bank may or may not be the paying bank - Protection of innocent party is emphasized Seller of the merchandise is called the under the Uniform Commercial Code beneficiary of the credit instrument TRUST RECEIPTS LAW The buyer-importer is the person who applies for and for whose benefit the issuing bank issues the PD 115- Trust Receipts Law letter of credit Obligation to pay the issuing bank may also be Notifying or advising bank assumes no liability secured by trust receipts except to notify and/or transmit to beneficiary The bank becomes the entruster of the goods the existence of letter of credit while the buyer-importer is the entrustee Confirming bank assumes the direct obligation to Enacted to safeguard commercial transactions the seller; it is as if it issued the letter of credit and to offer an additional layer of security to the Negotiation bank buys or discounts a draft under lending bank the letter of credit and its liability depends on TRUST RECEIPT TRANSACTION- any transaction by the stage of negotiation: and between the entruster and entrustee, whereby - Before negotiation, it has no liability with the entruster, who holds absolute title or security respect to the seller interests over certain specified goods, documents or - After negotiation, contractual relationship instruments, releases the same to the possession of will prevail between negotiating bank and the entrustee upon the latters execution and seller delivery to the entruster of a signed document called TRANSACTIONS INVOLVED: a trust receipt wherein the entrustee binds himself 1. Independent contracts to hold the designated goods, document or a. Contract of sale between the buyer and seller instrument in trust for the entruster and to sell or b. Contract of buyer with the issuing bank- bank otherwise dispose of such with the obligation to turn agrees to issue the LC in favor of the seller over to the entruster the proceeds thereof to the subject to reimbursement or payment by the amount owing to the entruster or as appears in the buyer of whatever is paid to the seller plus trust receipt or the goods, documents or instruments proper consideration agreed by the parties themselves if they are unsold or not otherwise c. Letter of credit proper- bank obligates itself to disposed of, in accordance with the terms and pay the seller after presentation to the bank of conditions specified in the trust receipt. tender documents stipulated upon In case of goods or documents Other contracts may be actually involved a. To sell the goods or procure their sale INDEPENDENCE PRINCIPLE- Contracts involved b. To manufacture or process the goods with the in letter of credit arrangement are to be purpose of ultimate sales maintained in a state of perpetual separation - Provided that entruster shall retain its title - Assures the seller or beneficiary of prompt over the goods whether in its original or payment independent of any breach of the processed form until the entrustee has main contract complied fully with his obligation under the trust receipt c. To load, unload, ship or otherwise deal with Trust receipt evidences the absolute title or them in a manner preliminary or necessary to security interest of the entruster over the goods their sale Entruster-bank does not acquire real ownership In case of instruments over the subject goods a. To sell or procure their sale or exchange - What is acquired is mere security interest b. To deliver to them to a principal - SECURITY INTEREST- a property interest in c. To effect the consummation of some goods, documents, or instruments to secure transactions involving delivery to a depository or performance of some obligation of the register entrustee or of some third persons to the d. To effect their presentation, collection or entruster and included title, whether or not renewal expressed to be absolute, whenever such Not applicable to contract to sell where the title is in substance taken or retained for ownership of the good is retained by the seller security only Not applicable to simple loan Trust agreement is a collateral agreement PARTIES - Transaction involves loan feature The ENTRUSTEE is obliged to: represented by letter of credit and a security a. Hold the goods, documents or instruments in feature, which is the covering trust receipt trust for the entruster and shall dispose of them 2. VIEW THAT THE ENTRUSTER OWNS THE GOODS strictly in accordance with the terms and Entrustee cannot mortgage the properties that conditions of the trust receipt agreement are covered by trust receipts b. Receive the proceeds in trust for the entruster Entruster does not retain absolute ownership and turn over the same to the entruster to the - Right of entrustee over the goods has all extent of the amount owing to the entruster or earmarks of ownership though subject to as appears on the trust receipt limitations imposed by law and the c. Insure the goods for their total value against loss agreement of the parties from fire, theft, pilferage or other casualties - Trust receipt is a limitation on the ownership d. Keep said goods or proceeds thereof whether in of the entrustee money or whatever form, separate and capable REMEDIES OF ENTRUSTER of identification as property of the entruster 1. SPECIFIC PERFORMANCE- entruster can file an action e. Return the goods, documents or instruments in to pay his obligation to pay the loan the event of non-sale or upon demand of the 2. RETAKING OF POSSESSION- entruster may cancel the entruster observe all other terms and conditions trust and take possession of the goods, documents of the trust receipt not contrary to the provisions or instruments subject of the trust or of the proceeds of the decree realized therefrom at any time The ENTRUSTER shall be entitled to: - Does not result in the full satisfaction of the a. The proceeds from the sale of the goods, entrustees obligation documents or instruments released under a PENALTY CLAUSE trust receipt to the entrustee to the extent of the Sec. 13 of PD 115 amount owing to the entruster or as appears in - Crimed is malum prohibitum but is classified the trust receipt as estafa under par. 1(b), Article 315 of RPC b. The return of the goods, documents or - Entrustee is liable under Trust Receipts Law: instruments in case of non-sale a. if he did not turn over proceeds of the c. The enforcement of all other rights conferred on sale him in the trust receipt b. if he did not return the goods when PURPOSE OF ACQUISITION OF GOODS lawfully demanded or if the goods are Goods covered by trust receipt are meant for not meant for sale sale or disposition by the entrustee c. If he did not pay the value of the goods Not only for the purpose of sale, but as well for - May be commited by corporation or other purpose of installing them in the machineries juridical entity and making officers and equipment of the entrustee responsible for the offense Two scenarios in trust receipt transaction = separate personality of a corporation not a a. Refers to money received under the obligation defense involving the duty to deliver it (entregarla) to the - If there is novation of the trust receipt owner of the merchandise sold agreement to the extent that same is b. Refers to merchandise received under the extinguished, criminal liability of the obligation to return it (devolvera) to the owner corporate officers shall also be extinguished NATURE OF ENTRUSTERS RIGHT OVER THE GOODS 1. VIEW THAT OWNERSHIP IS NOT ACQUIRED BY ENTRUSTERc