CREDIT SAFETY OFFICERS

TRANSACTIONS
Group 1

September 26, 2019

 TOPICS

CONCEPT OF LETTERS OF
SECURITY TRUST RECEIPTS
CREDIT
1 2 3
Security General Concepts General Concepts
Securitization Kinds of Letters of Form of Guaranty
Events of Default Credit Rights of Entruster
Kinds of Secured Rule of Strict Rights of Purchaser
Transactions Compliance
Obligations of
Independence Entrustee
Principle
CONCEPT OF SECURITY
UNSECURED TRANSACTIONS

SECURED TRANSACTIONS
WHAT IS SECURED
TRANSACTIONS?

Supported by collateral or an
encumbrance property or any other
security intended to secure the
fulfillment of the principal obligations.
 DISTINGUISHED FROM
SECURITIES

Security Regulation Code 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, instruments, whether written
or electronic in character.
 DISTINGUISHED FROM
SECURITIZATION

Securitization is the process by which loans and other debts

with an expected cash payment stream are sold on a without
recourse basis by a seller to a special purpose entity which
in turn issues securities that depend, for their repayment, on
the expected cash payment stream.
 SECURITIZATION

Debtor Bank/Companies Buyer/Investors

Delivers payment to the Buyer/Investors

EVENTS OF DEFAULT

Principal Obligation becomes due and the

debtor defaults:

Remedies:

1. Action for Specific Performance

2. Elect to enforce the Security
3. Accelerate outstanding obligations
 KINDS OF SECURED
TRANSACTIONS

o Personal Security
o Real Security
o In the Context of Insolvency
 PERSONAL SECURITY

A contract of personal security is a contractual obligation

for the repayment of debt binding a person, as
distinguished from property. It is and obligation of a person,
whether natural or juridical, other than the principal debtor,
to ensure the fulfillment of principal obligation.
In a guaranty, the faithful performance of the obligation by
the principal debtor is secured by the personal commitment
of another.
 CASE
ACME VS. COURT OF APPEALS

Issue: Would it be valid and effective to have a clause in a

chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred?
 CASE
Held: No. While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to be
contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the
old contract conformably with the form prescribed by the Chattel Mortgage
Law. Refusal on the part of the borrower to execute the agreement so as to
cover the after-incurred obligation can constitute an act of default on the
part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts
extant at the time of constitution and during the life of the chattel
mortgage sought to be foreclosed.
 REAL SECURITY

A contract of real security is an encumbrance of

property (the collateral) given to guarantee the
fulfillment of an obligation, especially the assurance
that a creditor will be repaid any money or credit
extended to a debtor, usually with interest.

The creditor acquires security interest in the

collateral for purposes of ensuring the fulfillment of
the principal obligation.
 REAL SECURITY

Security interest is a property interest created by

agreement or by operation of law to secure the performance
of an obligation. It is a form of interest in property that
provides that the property may be sold on default in order
to satisfy the obligation for which the security interest is
given.

Real security differs from personal security in that a

creditor does not acquire a limited real right in the property
of the debtor in the case of personal security, but only
acquires a creditor’s right against a third party as security
for the payment of the principal debt by the debtor. Such a
third party is normally surety of the debtor.
 IN THE CONTEXT OF
INSOLVENCY
Financial Rehabilitation and Insolvency Act (FRIA) of
2010 defines the condition being insolvent as follows:

o Insolvent shall refer to the financial condition of a

debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or
his assets.
o Liabilities shall refer to monetary claims against the
debtor
FRIA defines a secured creditor as a creditor that has in its
favor real security , that is, a claim secured by a statutory,
contractual or judicial charge (a lien) on real or personal
property (the collateral) that legally entitles a creditor to
resort to the property for payment of its claim. Therefore, in
the context of insolvency, creditors who only have in their
favor personal security (such as guaranty) are unsecured
creditor.

It is for this reason, among others, that a declaration of

insolvency should be viewed as a trigger event that results
in the application of certain exceptional legal provisions, and
changes generally applicable rules.
LETTERS OF CREDIT
 CODE OF COMMERCE
Title XIII Letters of Credit

ART. 567. Letters of Credit are those issued by one merchant to

another, or for the purpose of attending to a commercial
transaction.
ART. 568. The essential conditions of letters of credit shall be:

o To be issued in favor of a determined person and not to order.

o To be limited to a fixed and specified amount, or to one or
more indeterminate amounts, but all within a maximum sum
the limit of which must exactly stated.
o Letters of credit which do not have one of these conditions
shall be considered simply as letters of recommendation.
 CODE OF COMMERCE
Title XIII Letters of Credit

ART. 569. One who issues a letter of credit shall be liable to the
person on whom it was issued for the amount paid by virtue of the
same within the maximum fixed therein.

Letters of credit cannot be protested, even when not paid, nor can
the holder thereof acquire any right of action for said non-payment
against the person who issue it.

The payor shall have a right to demand the proof of identity of the
person in whose favor the letter of credit was issued.
 CODE OF COMMERCE
Title XIII Letters of Credit

ART. 570. The drawer of a letter of credit may annul it, informing the
bearer and the person to whom it is addressed of said revocation.

ART. 571. The holder of a letter of credit shall pay the drawer the
amount received without delay.

Should he not do so, an action including attachment may be brought to

recover the said amount with the legal interest and the current
exchange in the place where the payment was made on the place where
it was repaid.
 CODE OF COMMERCE
Title XIII Letters of Credit

ART. 572. If the holder of a letter of credit does not make use thereof
within the period agreed upon with the drawer of the same, or, in the
absence of a fixed period, within six months from its date in any
point of the Philippines, and within twelve months outside thereof, it
shall be void in fact and in law.
 LETTERS OF CREDIT

o The Code of Commerce defines the letter of credit as an

instrument issued by one merchant to another, or for
attending to a commercial transaction.

o It is an instrument under which the issuer (usually a bank),

at the customer’s request (the applicant), agrees to honor a
draft or other demand for payment made by a third party
(the beneficiary), as long as the draft or demand complies
with specified conditions, and regardless whether any
underlying obligation between the applicant and the
beneficiary is satisfied.
G.R. No. 146717
TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION, respondents.

The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the underlying
contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly
used, is it a contract of suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet
the draft presented under it is often negotiable.
Article 2

o Commercial transactions, be they performed by merchants

or not, whether they are specified in this Code or not, shall
be governed by the provisions contained in the same; in
the absence of such provisions, by the commercial
customs generally observed in each place; and in the
absence of both, by those of the common law.
o Commercial transactions shall be considered those
enumerated in this Code and any others of a similar
character.
 KINDS OF LETTERS OF CREDIT

Commercial Letters of Credit

Used as a method of payment in a contract of sale of

goods, so that the seller (beneficiary) can obtain
payment directly from the issuer instead of from the
buyer (the applicant and issuer’s customer).
KINDS OF LETTERS OF CREDIT
STANDBY LETTERS OF CREDIT

Used in non-sale transactions to guarantee, or

secure, either a monetary or a non-monetary
obligation, whereby the issuer agrees to pay the
creditor/beneficiary if the debtor/applicant
defaults on the obligation.
RULE OF STRICT COMPLIANCE

Under this rule, the documents tendered by

the beneficiary must strictly conform to the
terms of the letter credit.
 INDEPENDENCE PRINCIPLE

o Assures the beneficiary of prompt payment

independent of any breach of the underlying or
principal obligation and precludes the issuer from
determining whether the underlying or principal
obligation is actually accomplished or not.

o This principle admits of an exception: Fraud

Exception Rule
 FRAUD EXCEPTION RULE
1. The untruthfulness of a certificate accompanying a
demand for payment under a letter of credit may
qualify as fraud, sufficient to support an injunction.
2. Injunction should not be granted unless:

o There is a clear proof of fraud;

o The fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only
fraud under the underlying obligation;
o Irreparable injury might follow if injunction is not
granted or the recovery of the damages would be
seriously affected.
TRUST RECEIPTS
 DEFINITION

Any transaction between an entruster and entrustee.

Whereby entruster , owns or holds absolute title or security
interest over certain specified goods, documents, or
instruments; and releases the same to the possession of the
entrustee.

This is upon entruster’s execution and delivery to the

entrustee a signed document containing terms and condition
as security called “trust receipt”.
 KEY TERMS

1. ENTRUSTEE – person having or taking possession of

goods, documents, or instruments; and any successor in
interest of such person.
2. ENTRUSTER – person holding title over goods, documents,
or instruments of a trust receipt transaction, and any
successor of interest of such person.
3. SECURITY INTEREST – a property interest over goods,
documents, or instruments to secure performance of
entrustee’s obligation whenever possession is for security
only.
 PURPOSE

1. A trust receipt is a security transaction.

2. A convenient business device that assist
importers and merchants; intended to aid
them when they don’t have sufficient funds to
finance importations.
 FORMS OF TRUST RECEIPTS

A trust receipt can of any form provided it substantially contains

the following:

1. Description of goods, documents or instruments.

2. Total value of the goods and the amount to be paid by the
entrustee.
3. Undertaking or commitment of entrustee to:
o Hold goods in trust.
o Dispose in manner provided in the receipt.
o Turn over the proceeds.
 RIGHTS OF AN ENTRUSTER

1. ENTITLED TO THE PROCEEDS of the goods

including profits.
o In case of non-sale, to receive back the goods.
2. CANCEL THE TRUST and take possession of the
goods in case of non-compliance of the entrustee to
any terms and conditions.
3. ENFORCEMENT of other rights in the trust.
 RIGHTS OF PURCHASER

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.
 OBLIGATIONS OF ENTRUSTEE

Section 9. Obligations of the entrustee. The entrustee

shall:
1. Hold the goods, documents or instruments in trust and
shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt;
2. Receive the proceeds in trust and turn over the same
to the entruster;
3. Insure the goods for their total value;
 OBLIGATIONS OF ENTRUSTEE

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.
The Supreme Court has ruled that a trust receipt
transaction also covers materials used in
manufacturing.

But if there is an agreement between parties that the

return of the goods subject of the trust receipt is not
possible even without any fault on the part of the
entrustee, it is not a true trust receipt transaction. It
becomes a mere loan.
The conversion by the entrustee of
the goods covered by Trust Receipt
constitutes Estafa through
Misappropriation.
 CASE

Colminares vs. Court of Appeals

FACTS:

On 1979, petitioners applied for a commercial letter of credit with the

Philippine Banking Corporation (hereafter PBC) in the amount of ₱22,389.80.
The said amount was in favor of CM Builders Centre for the full invoice value of
the goods needed for the renovation of Carmelite Sister’s covenant. Petitioners
signed a pro-forma trust receipt as security. The loan was due on 29 January
1980. The petitioners defaulted in the payment of the loan, hence, several
demand letters were made. On 1983, petitioners were convicted of the crime of
Estafa for violating P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of
the Revised Penal Code. The petitioners contended that the transaction was not
covered by the Trust Receipts Law.
ISSUE:

Whether or not the transaction between the parties is an ordinary

loan or a trust receipt under Trust Receipts Law

HELD:

No, the transaction between the parties was a simple loan, not a
trust receipt agreement.

Petitioners received the merchandise from CM Builders Centre on

30 October 1979. On that day, ownership over the merchandise
was already transferred to petitioners who were to use the
materials for their construction project. It was only a day later, 31
October 1979, that they went to the bank to apply for a loan to pay
for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where
goods are owned by the bank and only released to the importer in trust subsequent
to the grant of the loan. The bank acquires a "security interest" in the goods as holder of a
security title for the advances it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person who had advanced payment until
he has been paid in full, or if the merchandise has already been sold, the proceeds of
the sale should be turned over to him by the importer or by his representative or
successor in interest. To secure that the bank shall be paid, it takes full title to the goods at
the very beginning and continues to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay for them; hence, the importer has never
owned the goods and is not able to deliver possession. In a certain manner, trust receipts
partake of the nature of a conditional sale where the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price.
Trust receipt transactions are intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.