(a) Is the system of ownership rights in respect of both land and other property reasonably stable and certain in this economy?

 

Yes. In the philippine, there are enough laws that govern ownership rights for both land and other property. In general, the Civil Code provides for six ways of acquiring ownership and they are occupation, law, donation, tradition, intellectual creation, prescription, and succession.

For real estate, the specific law that involves the registration for real property is Presidential Decree No. 1529, as amended, otherwise known as the Property Registration Decree.

 

(b) In particular:

(i) is the system of land ownership and rights sufficiently developed to encourage lending on the security of land; and

 

Yes. The practice of lending on the security of land is a common practice in the philippine. A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation specifically subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated.

Land registration in the philippine is patterned after the system being followed in Australia and by several states of the US, called the Torrens system. Under this system of registration, once a parcel of land has been registered, a certificate of title covering the land is issued. The original of the certificates of title remains on file at the office of the Register of Deeds having jurisdiction over the land. A duplicate copy of title is issued to the owner. Once a title is issued, the title becomes incontrovertible after one year from the date the land was registered. When the owner sells the land, his certificate of title is cancelled and a new certificate is issued to the new owner.

Under the Torrens system, all encumbrances and liens on the parcel of land should be annotated on the original of the certificate of title (or on both of the copies certificate of title in the case of voluntary liens) to serve as notice to third persons of the existence of these liens and encumbrances. It is this annotation that makes liens and encumbrances binding as against third parties. Once the liens are annotated, the annotations serve as constructive notice to the whole world of the existence of the liens.

Sections 52 of Presidential Decree No. 1529 provides:

"Every conveyance, mortgage, lien, attachment, order, judgment, instrument or entry affecting registered land shall, if registered, filed or entered in the office of the Register of Deeds for the province or city where the land to which it lies, be constructive notice to all persons from the time of such registering, filing or entering."

Whenever a mortgage is executed over a parcel of land, the mortgage is deemed to include all buildings, structures and other improvements on the land, even if the deed of mortgage does not mention the inclusion of these buildings, structures or improvements. In addition, all objects permanently attached to a mortgaged building or land are also included in the mortgage, even if they were placed there after the mortgage was constituted. If the owner of the land wants to exclude any improvement or future improvement on the land, then there must be an express stipulation in the deed of mortgage excluding a particular improvement or future improvement from the coverage of the mortgage.

Although all real or immovable property may theoretically be the subject of a real estate mortgage, problems arise where real property is mortgaged separately from the land on which it is located. For example, it is not uncommon for a building to be constructed on rented land. In such a case, the land and the building are owned by different persons. If the owner of the building wants to execute a mortgage over the building, there is no place to register the mortgage over the building. This would make the mortgage unenforceable as against third parties. The reason for all of this is that certificates of title are issued only over parcels of land, and no separate titles are issued over buildings; therefore, there is no place to annotate such a mortgage. However, the mortgage over the building would be valid between the parties, even if not registered.

Presidential Decree No. 1529 recognizes a procedure to remedy this situation. The parties may file a petition asking the court to issue an order to annotate on the certificate of land title the existence of a building or an improvement to that land. Once this is annotated, then a real estate mortgage over the building or improvement may also be annotated on the title over the land. Although in theory this remedy is available, in practice it is seldom (if ever) used. This might arise from the usual opposition of the owner of the land to any annotation on his title.

 

(ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property?

 

In the philippine, there are two ways of securing a loan with personal property. This may be done either by a chattel mortgage or through a pledge.

Chattel Mortgage

Article 2140 of the Civil Code provides:

"Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage."

There are two principles applicable to chattel mortgages which often create problems for creditors: (1) a chattel mortgage cannot be executed over future property or 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.

In the case of a real estate mortgage, any improvements introduced on the land after the execution of the mortgage are automatically included in the mortgage, unless they had been expressly excluded. However, Section 7 of Act. No. 1508, otherwise known as the Chattel Mortgage Law, prohibits a chattel mortgage over future property:

"A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding."

Decisions of the Supreme Court, however, have carved out exceptions to this rule. The Court reasoned that the intention behind the enactment of the Chattel Mortgage Law was to promote business and trade in the philippine, and that it could not have been the intention to apply that prohibition to retail stores open to the public, such as drug, grocery and dry goods stores whose stocks-in-trade are constantly sold and substituted with new stock. The Supreme Court held in one case:

"A stipulation in the mortgage, extending its scope and effect to after acquired property, is valid and binding... where the after acquired property is in renewal of, or in substitution for goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods etc. 11 C.J., p.436)

Present practice in the Philippine financial community has extended the exception to the rule against a mortgage of future chattels to inventories of raw materials, goods in process and finished goods. Many lawyers believe that inventories are continually being consumed and subsequently replaced and are of the same nature as stock-in-trade; thus they claim that inventories qualify for this exception. To extend the exception much further, however, would be to tread on uncharted and possibly dangerous ground.

For future obligations, a real estate mortgage may secure not only a specific credit accommodation but also all other present and future obligations of a debtor in favor of a creditor. Thus, the Philippine Supreme Court has upheld the validity of a stipulation in a real estate mortgage that the mortgage would secure a specific loan as well as "such other loans or other advances already obtained or still to be obtained by the mortgagors as makers."

However, this does not apply to chattel mortgages. The Supreme Court has adhered (although not uniformly) to the rule that a chattel mortgage may not secure future obligations. The reason cited for this rule is the fact that Section 5 of the Chattel Mortgage Law requires the parties involved to execute a so-called affidavit of good faith, in which both parties state:

"We severally swear that the foregoing is made for the purpose of securing the obligation specified in the conditions thereof and for no other purpose, and that the same is a just and valid obligation and not one entered into for the purpose of fraud."

In Belgian Catholic Missionaries v. Magallanes Press, the Philippine Supreme Court struck down a chattel mortgage that secured an obligation that had not yet been contracted by the mortgagor at the time of the mortgage's execution; the Court explained:

"Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted."

In a subsequent case, however, the Supreme Court held that this ruling would not apply had there been an express stipulation in the mortgage that it would secure future obligations as well.

These conflicting decisions appeared to have been resolved, at least temporarily when the Supreme Court in a later case categorically stated:

"This deed of chattel mortgage is void because it provides that the security stated herein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee."

However, the Philippine Supreme Court appeared to weaken its position in this ruling by citing as its support part of the Belgian Catholic Missionaries decision, namely that "a mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage."

In an even later case the Supreme Court held that a chattel mortgage could not secure future advances but only those obligations that were expressly specified in the mortgage, namely "[P=40,000] including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the mortgagee.

In Philippine National Bank v. Court of Appeals, although the Court could have simply reasoned that future advances could not have been secured by the mortgage because they were future obligations, the Court chose not to. Instead, the Court implied that certain future obligations, such as costs of collection and certain other obligations, could be secured by the chattel mortgage provided they were embraced within the scope of the mortgage. The Court stated:

"Applying the principle of ejusdem generis, the term 'other obligations' must be limited to such as are the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor. . ."

The extent to which future obligations may be secured by a chattel mortgage is thus not yet well settled. Previous decisions of the Philippine Supreme Court suggest that provided that the chattel mortgage expressly includes within its coverage certain well-defined future obligations, then the mortgage would be upheld.

Pledge

As for creation of pledge, personal or movable property may also be given as security by way of pledge. A pledge is a contract whereby the debtor delivers to the creditor or to a third person by common agreement a movable(or a document that evidences an incorporeal right) for the purpose of securing the fulfillment of a principal obligation.

In addition to the delivery of the thing pledged to the creditor to a third person, it is necessary that a description of the thing pledged and the date of the pledge should appear in a public instrument. On the basis of this rule, a deed of pledge, in order to be valid against a third person, should be acknowledged before a notary public. There is no requirement, however, for the pledge to be registered or recorded in any registry.

Incorporeal rights, which are evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents, may also be pledged. In these cases, the instrument proving the right pledged must be delivered to the creditor and, if negotiable, must be endorsed.

The difficulties confronting the lender in case shares of stock are pledged to secure a loan is that of ascertaining the value of the shares especially after a default has occurred, unless the shares are listed in the exchange, in which case the market value thereof may easily be determined.

(a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)?

In the main, there are six main classes of security arrangements available to secure the payment and performance of loans and other credit accommodations. They are the following:

i. guarantee - where a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so;

ii. suretyships - where a person binds himself solidarily with the principal debtor;

iii. real estate mortgage - a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. The documents in which the mortgage appears must be recorded in the appropriate Registry of Property, and if the instrument is not recorded, the mortgage is nevertheless binding between the parties.

iv) chattel mortgages - a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation; and

v) pledges - a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled the thing delivered shall be returned with all its fruits and accessions.

 

(b) In practice, which of these types of security are most commonly employed by financiers?

 

In practice, what is most commonly employed type of security by financiers are real estate mortgages, chattel mortgages, and suretyships.

 

(c) Is there a system of registration in this economy for any of these types of security taken by financiers?

 

For guarantees, suretyships, and pledges, in order for the security agreement to be valid against third parties, it should be acknowledged before a notary public. There's no requirement for the guarantee or pledge agreement to be registered or recorded in any registry.

As for Real Estate Mortgages, in order to create a valid mortgage over land, it is necessary to record the mortgage document in the Registry of Property located where the land is situated. However, if the mortgage is not recorded, it is nevertheless binding between the parties to the mortgage.

For Chattel Mortgages, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.

 

(d) To what extent are priorities between competing securities regulated?

 

The provisions on Concurrence and Preference of Credits in the Civil Code shall regulate this.

(a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods?

 

Yes. Usually the corporate borrower shall exert efforts to extend the credit facilitates given to them by their creditors in order that their loans will not be considered as past due. Creditors are amenable to this and are also open to the possibility of entering into a workout for as long as they feel that the corporate borrower will not file for insolvency, suspension of payments, or will dispose of their assets in fraud of their creditors. Once they feel that their security is threatened, then they will not hesitate to seek legal remedy in enforcing such securities.

 

(b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)?

 

For Real Estate Mortgages, upon default in the principal obligation that it secures, it may be foreclosed either judicially or extrajudicially. In foreclosure proceedings, the property given by way of security is sold at public auctions; the proceeds of the sale are then used to pay or settle the obligations secured by the mortgage. If the proceeds of sale are not sufficient to cover the secured obligations, the creditor has a right of action against the debtor for the deficiency and may file a complaint is court against the debtor for the shortfall.

The creditor may not, however, appropriate for himself the mortgaged property given by way of security without going through foreclosure proceedings. The reason is because of Art. 2088 of the Civil Code which states that "the [creditor] cannot appropriate to himself the things given by way of pledge or mortgage, or otherwise dispose of them." A stipulation such as this is known as a pactum commisorium

The rationale behind this prohibition is that forfeiture of property given as security has traditionally not been allowed because it was considered to be contrary to morals and public policy. Although a debtor, instead of paying for its obligation in cash, can transfer to his creditor property to satisfy the obligation, a debtor may not grant previous authorization to the creditor to appropriate the property mortgaged or pledged as the latter's own payment of the debt. Thus, a stipulation in a mortgage that, in case of default of payment, the mortgaged property would be considered full payment "without further action in court" is held to be null and void as a pactum commisorium.

A Real Estate Mortgage may be foreclosed judicially or extrajudicially. It is foreclosed judicially if the mortgagee files a complaint in court for foreclosure of the mortgage pursuant to the Rules of Court. A real estate mortgage may be foreclosed extrajudicially if the real estate mortgage grants a power of attorney to the creditor allowing it to do so. Because of the expense, inconvenience and length of time that a judicial proceeding for the foreclosure of a mortgage would ental, almost all mortgages contain a clause authorizing extrajudicial foreclosure of the mortgage. Practically all defaulted mortgages are now foreclosed extrajudicially.

As with a real estate mortgage, a chattel mortgage may also be foreclosed judicially or extrajudicially. However, as with a real estate mortgage, practically all chattel mortgages are foreclosed extrajudicially because of the time and expense that a judicial proceeding would require. Similar to a real estate mortgage, any provision in the contract granting the creditor the right to appropriate the thing mortgaged upon debtor default is null and void as a pactum commisorium.

As for pledges, if the debtor defaults in its obligation, the creditor may foreclose the pledge by having the thing sold at a public auction by a notary public. The debtor and the owner of the thing pledged must be given prior notice of the sale. If at the first sale the thing is not sold, a second one with the same formalities must be held; and, if at the second auction there is no sale, the creditor may appropriate the thing pledged. In this case the creditor must give an acquittance for its entire claim.

At the public auction, both the pledgor and owner may bid, and they will have first claim if they offer the same terms as the highest bidder. The creditor may also bid, but its offer will not be valid if it is the only bidder. All bids at the public auction must be for cash, and, if the creditor accepts any other bid, it will be deemed to have received cash. After the auction, the pledge must promptly advise the pledgor of the results. Any provision in a deed of pledge granting the creditor the right to appropriate as its own the thing pledged increase of default is null and void as a pactum commisorium.

Upon foreclosure of either a real estate or chattel mortgage, the creditor may bring an action in court against the debtor for any deficiency in case the proceeds of the foreclosure sale are not sufficient to cover the secured obligations. In the case of a pledge, however, the sale of the thing pledged at a foreclosure sale extinguishes the principal obligation that it secures, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than the amount, the debtor is not entitled to the excess, unless it is otherwise agreed. Likewise, if the price of the sale is less, the creditor is not entitled to recover the deficiency, unless there is a stipulation to the contrary.

The creditor, however, is not obliged to foreclose a pledge. It may choose instead to sue in court on the principal obligation rather than foreclosure. If the creditor prevails in the court action, it may then have the pledged property sold at an execution sale. If the proceeds of the execution sale are not sufficient to cover the secured obligations, the creditor may then recover the deficiency by levying upon other assets of the debtor.

The fact that the creditor is granted possession of the thing pledged may provide a creditor with a greater degree of security than a chattel mortgage. However, many creditors dislike pledges because it is practically impossible to recover any pledge deficiency.

An attempt can be made to combine both a chattel mortgage and a pledge by having a chattel mortgage registered in the chattel mortgage register while also delivering possession of the mortgaged chattel to the creditor. Although this would appear to grant the creditor the best features of both a chattel mortgage and a pledge, most lawyers in the philippine would be unwilling to express the opinion that such an arrangement would not be construed as a pledge. A creditor may still be unable to recover any deficiency in case of foreclosure.

For an antichresis, a contract of antichresis is self-executing and need not await the occurrence of an event of default under the principal obligation. Thus, there is no requirement of foreclosure since the creditor in possession of the debtor's property merely harvests the fruits and applies them in payment of the debtor's obligation.

 

(c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)?

 

See answer in C3(b).

 

(d) In practice, which method(s) of enforcement are most commonly employed by security holders?

 

See answer in C3(b).

 

(e) Briefly describe the process involved in these method(s).

 

See answer in C3(b).

(a) How effective is the judicial or court system for the purpose of enforcing secured property rights?

While obtaining a court order is the most compelling way to enforce the rights of a secured creditor, the length of time for the whole judicial process is the drawback in resorting to the court action. Judicial proceedings may take years to resolve.

(a) What effect, if any, does the commencement of insolvency proceedings in respect of the corporate borrower (ie where an application has been filed for some type of insolvency procedure but has not yet been adjudicated) have on the process of security enforcement?

 

See answer in I5(a)((iv).

 

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on the process of security enforcement?

 

See answer in I5(a)((iv).