Banking Finals Q&A

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1. 1. Explain the "after- After-incurred-obligation clause in a real estate mortgage is a valid stipulation. Art. 2091 of the Civil Code
incurred-obligation" provides that a pledge or a mortgage may secure "any obligations".
clause in a Real Estate
Mortgage, taking into Prudential Bank v. Alviar provides judicial confirmation that "after-incurred-obligation" clause is valid.
account Prudential Moreover, Prudential Bank elaborated on a more deeper issue which is the coverage of the dragnet clause.
Bank v. Alviar. This is a situation wherein a debtor executed a real estate mortgage with a dragnet clause and then
afterwards incur a subsequent obligation which is secured by a different security.
This clause is entered into by the parties in anticipation of or in contemplation of future dealings with the
mortgagee such that it promotes efficiency and convenience for the parties. With this clause, the parties are
able to save on time, travel, lending costs, etc. This blanket mortgage clause which cover after-incurred
obligations is valid and binding upon/between the parties, so long as the mortgage deed clearly shows that
such was the intention of the parties.

The Supreme Court ruled, drawing heavily on American jurisprudence, that the creditor cannot foreclose
directly the mortgage with dragnet clause but must foreclose first the subsequent security in case of default of
the second obligation. The mortgage would answer only for the deficiency if any. This is the principle of
"reliance of the security" test. This means that a dragnet clause is a continuing offer of the debtor/mortgagor
to the creditor. Thus, if the debtor incurs a subsequent obligation and the creditor requires a separate
security, the offer is rejected.
2. 2. What is "due entity's documents, records, books and state of its assets and liabilities to ascertain the value of the entity as
diligence" close as possible to its real value within the time given for the due diligence examination.
investigation?
There are two types of due diligence
1) Acquisition Due Diligence - this is done to determine the valuation of a company sought to be acquired
2) Prospectus Due Diligence - this is done in connection with securities offerings. This refers to the registration
requirement with the SEC where no material omission of facts is made. The underwriter's due diligence is not
a complete defense but can be considered as a mitigating circumstance.

Due diligence investigation is required in

1) Mergers and acquisition transactions - wherein pertinent documents are examined such as incorporation
documents, financial statements with the aim of floating hidden liabilities. The purpose is to determine the
credit-worthiness of the company to be acquired - whether it is economically profitable and feasible to acquire
the said company
2) Securities offering - to determine the real value of the securities being offered and to provide the potential
buyers with reliable information that will help them decide whether to purchase the securities or not.
3. 3. What is Sec. 3 of the Securitization Act of 2004 defines securitization as a process by which assets are sold on a without
securitization? recourse basis by the seller to a special purpose entity (SPE which may be a Special Purpose Corp or Special
Why is it necessary Purpose Trust) and the issuance of asset-backed securities (ABS) by the SPE which payment depends upon the
to effect a "true cash flow of the asset.
sale" of receivables
in a securitization The structure may be explained in more detail as follows:
transaction? 1) the originator (original obligee of the assets) transfers the assets (ex. receivables) to a SPE. The transfer must be
a true sale (Sec. 12). To be a true sale, the transfer must be beyond the reach of the creditors of the originator. This
means that the sale must be irrevocable and without recourse.
2) The SPE shall finance the purchase price through issuance of asset-backed securities. The issuance of ABS
requires an approval of the SEC.
3) Usually, the SPE is thinly capitalized. Because of this, credit enhancements are resorted to.
4) Usually, the originator is appointed as the service agent to collect the payments of the underlying assets from
the original obligor.

Sec. 12 of the Securitization Act requires the transfer of assets from the seller to the SPE to be a "true sale". The
reason behind this is 1) if the sale is irrevocable and without recourse, the assets are protected beyond the reach
of the creditors of the originator in case the latter turns bankrupt. Thus, the cash flow of payments would not be
impeded. It is of note that per Sec. 3 definition, the payment of the ABS depends upon the cash flow 2) It would be
beneficial to the originator, which is usually a bank, in reducing regulatory costs. A true sale means it is off its
balance sheet which usually results to less reserve requirements to back the receivables.
4. 4. What is project Project financing is the financing of an economic asset that is capable of generating sufficient cash flow to
financing? conservatively cover operating costs and debt servicing over a reasonable length of time which is less than the
economic life of the asset. What happens in a project financing is that one or more sponsors form a Special Purpose
Vehicle (which can be a stock corporation, joint venture, or limited partnership) and they put up the necessary
equity capital. If the equity capital is not enough, it will be funded through loans secured by a mortgage of the
assets of the SPV and a pledge of the equity holdings of the sponsors.

After gathering or obtaining the necessary capital, the SPV proceeds to build the project and then
operates/transfers/leases depending on the agreement. The income derived from the project is made subject to a
trust retention agreement. The lenders then designate a trustee who will execute a mortgage trust indenture
which will hold the assets of the project for the lenders. Usually an operation and management agreement is
executed in order for the project to be run by professionals. There is also an off-taker, one that buys the
product/service project.

Payments made are given to the trustee. The income is secured with the SPV entering into a regime of lender
controlled cash waterfall wherein the trustee maintains a main account and from which payments are made for
operating costs, taxes and debt servicing.
5. 5. What are Derivatives are financial instruments whose value is derived from the price of another asset such as equity
derivatives? What securities, fixed income securities, foreign currencies and commodities. Derivatives are devices to manage
does ISDA stand for? exposure of risk in relation to the underlying asset.

The following are examples of derivatives:

1) Options
a. Call option - this instrument gives the holder the right to buy an asset or security at a specified price on or
before a specified settlement/expiration date
b. Put option - this instrument gives the holder the right to sell an asset or security at a specified price on or
before a specified settlement/expiration date
Options vary depending on the time they are allowed to be exercised
• American - allows the holder to exercise the option at any time within the specified period
• European - allows the holder to exercise the option only on the expiry date
• Bermudan - allows the holder to exercise the option during a specified time within the option period and also
on the expiry date

2) Forward - contract to buy or sell an asset or commodity at a specified price on a future date. This instrument
protects the holder from the uncertainty of the price of the asset. There are three instances occurring with
regard to forwards
a. In the money - the holder made the right decision in entering into a forward contract
b. Out of the money - the holder is better off not exercising the option given and loses to the extent of the
premium paid
c. At the money - the holder is indifferent whether or not to exercise the option because the forward price is
equal with the spot price

3) Currency Swap - this involves simultaneous purchase and sale of foreign currencies between the same
parties

ISDA stands for International Swaps and Derivatives Association

The ISDA Master Agreement is aimed at standardizing agreements related to derivative transactions.
6. 6. Company X borrowed P10 Million from Bank Y
and executed a pledge over certain shares of stock,
as well as Real Estate Mortgage in Bank Y's favor to
secure the borrowing. Subsequently, Company X
defaulted and Bank Y immediately foreclosed the
pledge. The net proceeds from the foreclosure sale
amounted to P7 Million. To recover the shortfall,
Bank Y moved to foreclose the REM, but Company
X objected. Is the objection justified? Explain.
7. 7. Explain the significance of Ng. v People in trust
receipt transactions.
8. 8. Can chattel mortgages cover after-incurred
obligations?
YES. The objection of Company X is justified.
Article 2115 of the Civil Code provides that the foreclosure of a pledge
extinguishes the primary obligation. Thus, the pledgee cannot recover the
shortfall. Stipulations to the contrary are void.
Since the primary obligation (the loan contract) is extinguished, then the real
estate mortgage is extinguished. Under the Civil Code, one of the essential
elements of a valid mortgage is that it must secure a primary obligation. It being
merely an accessory contract, it cannot stand without a principal obligation.
The judicial pronouncement in Ng v. People effectively abandoned the
doctrine provided in Allied Banking v. Ordonez although there was no explicit
mention of the Allied Banking Case.
The rule prior to the ruling in Ng v. People was that goods not intended for sale
may be a subject matter of a trust receipt transaction. The Supreme Court in
Allied Banking ruled that the penal provisions relating to violations of the trust
receipts law is not limited to goods acquired to be sold or those which form part
of the goods ultimately to be sold BUT ALSO to goods acquired in relation to the
equipment and machineries used to produce the goods.
With the ruling in Ng v. People, the Supreme Court limited the trust receipt
transactions to goods for sale or goods intended for sale. The Court referred to
the whereas clauses of PD 115. Such ruling was sensitive to the definition of a
trust receipt which is a transaction entered into by the entruster and the
entrustee whereby the entruster who owns or holds absolute title to the goods,
documents or instruments surrenders possession to the entrustee upon the
latter's execution of a trust receipt and whereby the entrustee obligates
himself to sell or otherwise dispose of the goods, documents and instruments
and to deliver the proceeds to the extent of the amount owing to the entruster.
As a rule, a chattel mortgage only cover obligations existing at the time the deed
of chattel mortgage is executed. Hence, it does not cover after-incurred
obligations. The case of Acme Shoe v. CA has held that chattel mortgages can
only cover obligations existing at the time the chattel mortgage was constituted.
However, the parties may stipulate in the chattel mortgage deed that they
agree that after-incurred obligations be made subject to the chattel mortgage.
This clause is important because such agreement is binding between the
parties and the mortgagee can actually compel the mortgagor to execute an
amendment or to make a new chattel mortgage that will subject the chattel
mortgage to after-incurred obligations.
But until the original chattel mortgage is amended or a new one is constituted,
the security will not cover after-incurred obligations.
9. 9. What is the In an extrajudicial foreclosure of a real estate mortgage, the mortgagor is allowed to redeem the property mortgaged
redemption within 1 year from the date of the registration of the foreclosure sale in the Registry of Deeds. However, there is an
period in an exemption to this rule. If the mortgagor is a juridical entity and the mortgagee is a bank, Sec. 47 of the General
extrajudicial Banking Law shortens the redemption period. In that case, the mortgagor may redeem the property until, but not
foreclosure of a before the registration of the foreclosure sale in the Registry of Deeds or upon the lapse of 3 months from the
Real Estate extrajudicial foreclosure, whichever comes first.
Mortgage?
However, if the mortgagee is a foreign bank, it cannot avail of the shortened period because RA 133 states that
foreign banks can only foreclose through judicial foreclosure.
10. 10. The SRC is a Sec. 2 of the SRC provides that the policy of the law is full disclosure. Logically, the law substitutes the principle of full
"truth-in- disclosure with that of the principle of caveat emptor. This cornerstone principle is implemented in Secs. 8, 9, and 10.
securities law".
Why? Sec. 8 requires a registration statement duly filed and approved by the SEC before securities are sold, or offered for
sale or distribution within the Philippines. The purpose of the law is to remove the asymmetry of information and to
allow investors to be properly guided and informed. There are exemptions provided by the law: 1) exempt
securities (sec. 9) and 2) exempt transactions. Registration statements are dispensed with in Sec. 9 either because
the issuer is creditworthy (ex. the government) or it is already subject to a different regulatory mechanism (ex.
securities under the regulation of the Insurance Commission)

The registration requirement which is the core of the disclosure principle is further reinforced by Sec. 56 of the SRC
which subjects to liability certain individuals responsible for any misrepresentation in the registration statement.
And to add teeth to this provision, Sec. 56(1) has only 2 defenses: knowledge and prescription. The abovementioned
provisions show the salient features of the SRC as a "truth-in-securities law"

ALTERNATIVE ANSWER

The SRC is a "truth-in-securities law" because it requires that all sale and transfer of securities must be recorded in
the SEC. This registration is in consonance with the full and fair disclosure policy we follow. This helps investors to
properly know the security they wish to purchase. This also protects investors from fraud.

However, there are exemptions to this registration requirement.

1) Exempt Securities - securities that are exempt from registration
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 the Government
b. Any security issued or guaranteed by the government of any country with which the Philippines maintains
diplomatic relations
c. Certificates issued by a receiver or by a trustee in bankruptcy, duly approved by the proper adjudicatory body
d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision of the Insurance
Commission, HLURB or the BIR
e. Any security issued by a bank except its shares of stock
2) Exempt Transactions - by the nature of the transactions or the parties involved, such transaction is exempted
from registration
a. Sales to banks, registered investment houses, insurance companies, investment companies, pension funds
regulated by the government
b. Distribution of stock dividends by a company actively doing business
c. Mortgagee or pledgee only exercising rights over securities based on a bonafide debt
3) Securities issued by off-shore banking institutions because of the territoriality principle
11. 11. What is the "cash-
waterfall" mechanism in
project financing?
12. 12. Explain the significance of
Traders Royal Bank v.
Castanares in conventional
compensation
13. 13. Explain the practical
significance of including an
"after-incurred obligation"
clause in a chattel mortgage,
despite the Affidavit of Good
Faith which contemplates
present or current
obligations.
A "cash-waterfall" mechanism in project financing is a mode of payment.
In a project financing agreement, an asset which is expected to be able to sufficiently earn enough to
cover its own operation costs and debt servicing is built through different sponsors through a special
purpose vehicle which can be either a stock corporation, joint venture or limited partnership. These
sponsors will contribute to a fund to be used for construction of the asset. The deficiencies in the
fund will be had from loans under the SPV's name.
When the asset is built, all payments or funds generated by the asset will be deposited to a main
account. Under this main account, sub-accounts are also established pertaining to the different
obligations incurred by building the asset. Common sub-accounts are: loans/debt servicing,
operation costs, SPV's profits, interest payments, etc. The funds deposited to the main account which
will subsequently be trickled down and be applied to the sub-accounts. This is what is called the
"cash-waterfall" mechanism. It is the way the payments are applied "automatically" to the different
subaccounts after the funds are deposited in the main account.
Article 1279 of the Civil Code enumerates the elements of a legal compensation
1) that they are reciprocally creditors and debtors of each other
2) that the debt involves money, or if it is a fungible thing, it is of the same kind
3) debt is due and demandable
4) debt is liquidated
A conventional compensation allows the set-off of 2 obligations despite the absence of the third
requisite in Art. 1279 in accordance with Art. 1282 of the Civil Code. The case of Royal Bank v.
Castanares enunciates that there can be conventional compensation as long as the parties can freely
dispose the credit and that they agree to extinguish the credit. It is also essential that the parties are
mutual creditors and debtors of each other.
The general rule in chattel mortgages is that the provisions on after-incurred obligations are null and
void as they are contradicting with the statement in the Affidavit of Good Faith accomplished when
executing a chattel mortgage. This can be seen in the ruling of the Supreme Court in the case of
Acme Shoe, Rubber, Inc.
However, the Supreme Court also stated that the practical significance of including an "after-
incurred-obligation" clause in a chattel mortgage is that such clause can be used as evidence to
compel the mortgagor to reform the previous chattel mortgage to cover the new obligation or to
compel the mortgagor to create a new chattel mortgage securing the new obligation with the
property under the old chattel mortgage
Note that until and unless such reform or creation has been effected, the mortgagee has no cause of
action over the property covered by the chattel mortgage. Also, no preferential right is given to the
mortgage until such reform or creation.
14. 14. When Raymond's loan was not paid on time, Reliable Bank
extrajudicially foreclosed the real estate mortgage securing his
loan. After five months from the registration of the certificate
of sale, Raymond contacted Reliable Bank to redeem the
property, but Reliable Bank advised him that he could no
longer do so because his up-to-three-months' right of
redemption had already elapsed. Is Reliable Bank right?
15. 15. What is a comfort letter? Why is this resorted to in lieu of a
guarantee?
16. 16. State the rule on the registration of securities under the
SRC. Also state the exceptions to that rule.
Raymond has the right to redeem the property. Sec. 47 of the
General Banking Law provides that the right of redemption may
be exercised within 1 yr from the registration of the certificate of
sale.
It is true that Sec. 47 provides that in case the mortgagor is a
juridical person and the mortgagee is a bank, the 1 year duration
is reduced to 3 months from the sale but not after the registration
of certificate of sale. This part of the provision is inapplicable to
Raymond who happens to be a natural person.
A comfort letter is a letter by the parent company to a lender for
the purpose of inducing the latter to extend credit
accommodations with the subsidiary of the former. It is not a
guaranty and is not intended to be legally binding. The parent
company relays its intention to maintain the fiscal integrity of the
subsidiary. Comfort letters are also known as keep well letter,
letter of awareness.
It may be resorted to in lieu of a guarantee for the following
reasons:
1) the parent company undertook a negative covenant to make
guarantee pursuant to a loan
2) the parent company does not want the transaction to be
footnoted in its financial statement
3) it is part of the parent company's internal regulations.
The rule is that securities must be registered. 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 SRC. This is to ensure full and fair disclosure of information
about securities with a view to enabling the public to make an
informed investment decision in respect of the securities offered
for sale. The exceptions to the rule are the following:
1) exempt securities (Sec. 9)
a. any security issued or guaranteed by the Government or any
political subdivision or agency
b. any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic relations
c. certificates issued by a receiver or by a trustee in bankruptcy,
duly approved by the proper adjudicatory body
d. any security or derivatives which is under the supervision or
regulation of the insurance commission, HLURB or the BIR.
e. Any security issued by a bank except its own shares of stock
2) exempt transactions (Sec. 9) - some of which are the following:
a. Sales to banks, registered investment houses, insurance
companies, investment companies, pension funds regulated by
the government
b. Distribution of stock dividends by a company actively doing
business
c. Mortgagee or pledgee only exercising rights over securities
based on a bonafide debt
3) offshore offerings - because of the territoriality principle.
17. 17. Distinguish a A covered transaction report is a report made by a covered institution regarding a covered transaction. A
"covered covered transaction is defined as a transaction in cash or other equivalent monetary instrument involving a total
transaction amount in excess of P500,000 in one banking day.
report" from a
"suspicious A suspicious transaction report is a report made by a covered institution regarding a suspicious transaction. A
transaction suspicious transaction is defined as a transaction with covered institutions, regardless of the amounts involved
report" under the where any of the following circumstances exist:
Anti-Money 1) there is no underlying legal or trade obligation, purpose or economic justification
Laundering Act. 2) the client is not properly identified
3) the amount involved is not commensurate with the business or financial capacity of the client
4) it is perceived that the client's transaction is structured in order to avoid being the subject of the reporting
requirements
5) any circumstances which deviate from the profile of the client and/or the client's past transactions with the
covered institution
6) the transaction is in a way related to an unlawful activity or offense
7) any transaction that is similar or analogous to any of the foregoing.
18. 18. What are the 1) the agreement is signed only once but it contemplates a series of transactions between the parties
features of an ISDA 2) the master agreement itself cannot be changed but it can be amended via its schedule, where the
master amendments are placed
agreement? 3) each transaction is evidenced by a confirmation. The schedule contains a serial agreement clause to the effect
that any and all transactions are considered as having been entered in one agreement. This prevents a cherry-
picking situation.
4) Since derivative transactions are risky, a risk disclosure statement is required which summarizes the risks of the
transaction entered into.
19. 19. What is a hold- A hold out is a "right not to allow the withdrawal of the deposit" until the principal obligation is settled. It is usually
out? coupled with a set-off provision because the depositor may not necessarily be the borrower. A bank's right of set-
off over one's deposit applies only if the depositor is at the same time the debtor of the bank. If the depositor is
merely accommodating a borrower, a contractual stipulation is necessary for the bank to effect a set off. A hold-
out-cum-set-off arrangement may also be coupled with an assignment of the deposit in favor of the lending bank.
20. 20. Compare a real After- acquired property
estate mortgage In chattel mortgages, the general rule is that after-acquired property cannot be covered by a chattel mortgage.
with a chattel The exception is enunciated in the case of Torres v. Limjap with respect to those revolving stock or goods which
mortgage in terms are for retail sale. Another exception would be those goods which are perishable and subject to wear-and-tear. If
of validity of the parties agree to include after-acquired property, an amendment of the list of subject properties must be filed
"after-acquired with the Chattel Mortgage Register. In real estate mortgages the general rule is that after-acquired property
property" and cannot be covered in a real estate mortgage. However, the exception is when there is a stipulation subjecting to
"after-incurred the mortgage lien, properties improvement which the mortgagor may subsequently acquire, install or use in
obligation" connection with the real property already mortgage belonging to the mortgagor.
clauses
After-incurred obligation
Real estate mortgages can cover after-incurred obligations. However, following the doctrine in the Belgian
Missionary case, after-incurred obligations must be subject/junior to other legitimately-incurred obligations prior
to it. As for chattel mortgages, the rules is that they cannot cover after-incurred obligations. Although Art. 2091 of
the New Civil Code would seem to indicate otherwise, the ruling in the case of Acme Shoes is controlling. In that
case, the Supreme Court ruled that obligations incurred after the conclusion of a chattel mortgage are not
covered by the same. There is a need to amend the previous chattel mortgage document or execute a new one.
This is because the after-incurred obligations are generally not covered by the affidavit of good faith stated in the
chattel mortgage.
21. 21. What is an An omnibus agreement is a loan and mortgage embodied in a single document. It is made as such to save on
Omnibus documentary stamp tax because if the loan agreement and the mortgage is executed in separate documents, the
Agreement? transaction will be subject to separate DSTs. The BIR has ruled that if the loan and mortgage are embodied in a
Explain its single agreement, the document will be subject only to the higher DST.
purpose.
22. 22. An FCDU has The FCDU is not obliged to withhold any tax from the income derived by such non-resident. RA 9294 says that
entered in a foreign any income of non-residents from transactions with depositary banks under the expanded system shall be
currency transaction exempt from income tax. Only those transactions with residents shall be subject to 10% final tax in lieu of all
with a non-resident. other taxes.
Is the FCDU obliged
to withhold any tax
from the income
derived by such non-
resident from the
transaction? Explain.
23. 23. If a loan It is not advisable to include the same in the Omnibus Agreement. The guarantee is not subject to
transaction is to be documentary stamp tax. This means that its inclusion in the Omnibus Agreement would serve no useful
secured by only a purpose other than simplicity and convenience. The inclusion of the guarantee would result in a higher DST
guarantee, is it liability.
advisable to include
the same in the
Omnibus Agreement?
24. 24. What is the so- A fronting structure is a legitimate tax-minimizing structure. In this set-up, a fronting entity/bank which enjoys
called fronting tax benefits such as tax exemption or a lower tax rate under prevailing tax laws fronts for what would
structure? otherwise be direct lenders to a borrower. The fronting bank/entity lends dollars/money to the borrower
without being subject to withholding taxes on the interest payments because of the tax exemption or tax
treaty. Then the fronting bank/entity executes a participation agreement with other local banks' FCDU
whereby the fronting bank participates out the loan to said FCDUs. The FCDU pays the outstanding amount
of the loan, thereby acquiring beneficial interest. Beneficial title is transferred to the FCDU while legal title
remains with the fronting bank/entity who continues to be the creditor of record even though the credit risk is
assumed by the participant and no longer resides with the bank. Another term for this structure would be
"originating structure".
25. 25. True or False. A True. This requires BSP approval unless the tenor of the derivative is for less than 1 year and that the
local bank, even if it engagement is purely on(?) end-users. NOT SURE!
is a Universal Bank,
cannot just engage in
derivative
transactions
26. 26. Is it possible for a Yes. It is stated in Sec. 53.2 of the General Banking Law that a bank can act as a securities broker when it stated
bank to broker a that it can act as a financial agent and buy and sell, by order of and for the account of their customers, shares,
financing of trade evidences of debt and all types of securities.
receivables?
27. 27. When is money Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making
laundering them appear to have originated from legitimate sources. It is committed by the following:
committed? 1) transacting or attempting to transact with monetary instrument or property, knowing such to represent,
involve, or relate to the proceeds of any unlawful activity
2) facilitating the offense of money laundering referred to above by knowingly performing or failing to
perform any act; or
3) knowingly failing to disclose and file a report with the AMLC of any monetary instrument or property as
required.
28. 28. Explain your Money laundering is a device employed to hide large amounts of money, usually from illegal or dubious
understanding of sources, by placing them in bank accounts, taking shelter in secrecy laws or by placing them in investments. To
money laundering. combat money laundering, the Philippines has constituted the Financial Action Task Force (FATF). The
What was recently Philippines also passed its own version of the Anti-Money Laundering Act in compliance with the deadline set
done by the by the IMF. The Act covers not only bank deposits but also certain investments that are in any way related to a
Philippines to money laundering offense. It extends to all deposits (including those in FCDUs) that form part of laundered
combat that? "monetary instruments". It is worthy to note however that it is still open season for money laundering during
election periods because no cases are allowed to be filed nor accounts frozen during these times.
29. 29. Is it necessary to register first with the SEC
the securities issued by the Philippine
Government prior to their offering or sale to
the public in the Philippines? What about
securities issued by a private entity sold in a
private placement? Explain
30. 30. How could you structure an assignment of
receivables so that it will not be deemed a
chattel mortgage or a pledge, and no dacion en
pago will result?
Securities issued by the Philippine Government need not be registered with the
SEC prior to their offering or sale to the public in the Philippines because these are
non-risk items. The public needs no protection from them because the
Government cannot become insolvent because of its inherent power of taxation.
Also, it is already provided in the SRC that securities issued by the Philippine
Government are exempt securities.
Securities issued by a private entity sold in a private placement is an exempt
transaction provided in Sec. 10 of the SRC. Hence, there is no need for prior
registration.
So that an assignment of receivable would not be deemed a chattel mortgage or a
pledge and no dacion en pago would result it must be drafted by:
1) it must be a title instrument and not a lien instrument. Do not use the words "by
way of security". Instead, use "to ensure payment of..."
2) so that it will not constitute a dacion en pago, insert a paragraph with the
following tenor
"Notwithstanding the assignment, nothing in this deed shall be construed as
extinguishing the principal obligation. The principal obligation shall be
extinguished only upon actual application of the proceeds from the foreclosure of
the property..."
3) includes a reconveyance clause which means that if the assignee is able to pay,
whatever remains of the receivables shall revert back to the assignee without need
of further documentation
4) insert the clause that nothing shall be construed as creating a pledge or a chattel
mortgage over the property assigned.