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ASIAN DEVELOPMENT BANK
REGIONAL TECHNICAL ASSISTANCE
TA NO: 5795-REG
INSOLVENCY LAW REFORM
SECURED TRANSACTIONS
PHILIPPINES
Teodoro Regala
Angara Abello Concepcion Regala & Cruz
I. Problems of Creation and Registration of Secured Transactions
(a) Assignment of Incorporeal Rights as Security: Incorporeal
rights that are included here are receivables, credits and such
other contractual rights which may be the object of an assignment
by way of security. Under existing laws, the nature of such assignments
is not clear and it is uncertain if such assignment by way of
security creates a lien in favor of the assignee. This places
the assignee's security position at great risk once the debtor
is in default. Also, there is no system of registration for such
assignments. The creation of a centralized and computerized registry
for future receivables subject to a security arrangement is also
desirable.
(b) Inefficient and Unreliable Registries of Chattel Mortgages:
At present, there are no efficient and reliable registries for
chattel mortgages. Chattels subject to a mortgage do not have
central registries rendering it difficult to ascertain whether
or not a particular chattel is already the subject of an existing
encumbrance.
(c) Overturn Principles of Chattel Mortgage: Another possible
area of reform is to overturn two principles applicable to chattel
mortgages which often create problems for creditors. These are:
(1) a chattel mortgage cannot be executed over future property
not yet in existence at the time the chattel mortgage is executed;
and (2) a chattel mortgage may not be executed to secure future
obligations.
(d) Prohibition of pactum comissorium and equitable mortgage
should be clarified: Under existing law, a mortgagee or pledgee
may not appropriate (i.e., pactum comissorium) the things given
by way of pledge or mortgage. Any stipulation to the contrary
is void. Under Article 1602 of the Civil Code, a contract of sale
shall be presumed to be a mortgage if any of the circumstances
mentioned therein exists. When a transaction is deemed to be an
equitable mortgage, the debtor is given the right to reform the
contract. The reason for these restrictions appear to be based
on the need to protect mortgagors, especially the owners of small
parcels of land, from unscrupulous creditors. In financing arrangements
involving large amounts and with complicated security arrangements,
such restrictions can be a hindrance in coming out with the appropriate
transactional structure.
(e) Registration Fees and Taxes: Relatively high taxes
and other registration fees impede or restrict the creation of
security. These fees and taxes are normally based on a percentage
of the amount of the obligation secured or on the purchase price
during the foreclosure sale.
B. Reforms
Legislation would generally be required to effect the reforms
in the areas identified above.
II. Problems of Enforcement
A. Problem Areas
(a) Chattel Mortgage: Under existing laws, a chattel
mortgagee may not foreclose if the chattel is not in his possession.
An unscrupulous mortgagor may hide the chattel from the creditor
to prevent foreclosure, although this will subject him to penal
sanctions.
(b) Right of Redemption Given to Debtors of Banks or Credit
Institutions: Under existing laws, the mortgagor or debtor
whose real property has been extrajudicially foreclosed for
the full or partial payment of an obligation to any bank, banking
or credit institution shall have the right, within one (1) year
after the sale of the real estate, to redeem the property. Only
banks and credit institutions are covered by this rule.
(c) Pledge: Under the Civil Code, if the price of the
sale of the thing pledged is more than the amount due the creditor,
the debtor is not entitled to the excess unless the contrary
is provided. In the same way, if the price of the sale is less,
neither is the creditor entitled to recover the deficiency and
any stipulation to the contrary is void. In determining the
property to be pledged, the creditor must ensure that the value
of the property that was pledged does not diminish so that at
the time the pledge is enforced the creditor is still sufficiently
secured. This creates possible complications especially if shares
of stock are pledged as it is difficult to ascertain the value
of the shares, unless the shares are listed in the exchange,
in which case the market value thereof may easily be determined.
(d) Foreclosure of Real Estate Mortgage on Land by Foreign
Banks or Financial Institutions: Foreign banks cannot easily
foreclose mortgaged lands which secure outstanding obligations
as foreign banks are not allowed to make a bid during the foreclosure
sale. Under existing law, foreign banks may foreclose the mortgage
but may hold the land for a limited period pending the foreclosure
sale.
(e) Inefficient Judicial System: An inefficient judicial
system is a great and major impediment to the enforcement of
security rights over property.
B. Reforms:
(a) Registration Fees and Taxes: Legislation would be
required to reduce the taxes and some of the fees.
(b) Chattel Mortgage: A centralized registry for chattel
mortgage can reduce attempts of debtors to hide the chattel.
(c) Right of Redemption Given to Debtors of Banks or Credit
Institutions: Enabling legislation would be required to effect
the change.
(d) Pledge: Enabling legislation would be required to effect
the change.
III. Problems of Relationship Between Secured Creditor Interests
and the Administration of an Insolvent Corporate Debtor
A. Problem Areas
1. Secured Creditors Unable to Enforce Security: Under
present jurisprudence, the SEC may, upon order, stop the enforcement
of all claims, whether secured or unsecured. This is an indefinite
suspension with the SEC not required to adopt measures to adequately
protect the interests of the creditors.
2. Lessor Security Transactions: Lessors of, and providers
under similar financing arrangements of, equipment, machines and
vehicles have been considered by the SEC as secured creditors
and have not been allowed to recover the leased property during
the pendency of the debt-relief proceedings. In the meantime,
the property depreciates but no payments are being made to the
lessor.
B. Reforms
1. Secured Creditors Unable to Enforce Security: The Rules
of Procedure on Corporate Recovery drafted by the SEC should include
provisions on adequate protection of the secured creditors' interests.
2. Lessor Security Transactions: The Rules of Procedure
on Corporate Recovery should clarify the effect of the debt-relief
proceedings on the claims of lessors of, and providers under similar
financing arrangements of, equipment, machines and vehicles.
IV Emergency Financing to Corporations Subject of Debt-Relief
Proceeding with the SEC.
It may be anticipated that in the Philippines, a debtor-corporation
in financial difficulties may be in need of emergency financing.
Under our Insolvency Law, payments made within thirty days before
the filing of a petition for insolvency by or against a debtor-corporation
and not in the usual course of business are prima facie evidence
of fraud. Under PD 902-A, the rehabilitation receiver has the
power to study, review and evaluate the feasibility of continuing
the operations of the debtor-corporation if the SEC determines
the feasibility of the restructuring and the rehabilitation thereof.
Where the SEC has appointed a rehabilitation receiver pursuant
to PD 902-A, we are under the impression that the SEC has taken
the position that it can issue an order approving an application
filed by the debtor-corporation for emergency financing, as well
as the terms and conditions for the repayment thereof, which order
will be binding on all creditors, secured or unsecured. Apparently,
the emergency financing can be repaid ahead of the secured creditors.
We do not think, however, that the SEC can approve an emergency
financing which will be secured by a property which is already
the subject of a lien and which will rank in priority ahead of
an existing secured creditor with a pre-existing lien on that
particular property.
alm26/2secured.lis
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