Loan Facility Agreement in the Philippines: Security and Documentation

A loan facility agreement in the Philippines is the contract that sets the amount a lender will make available, the interest and fees, the drawdown conditions, the repayment schedule, and the events of default. Security documentation is the separate set of contracts that gives the lender recourse if the borrower fails to pay — a mortgage over real property, a pledge or chattel mortgage over movable assets, or a guarantee from a third party. The facility agreement governs the credit; the security documents govern the lender's remedy.

What a loan facility agreement covers

A facility agreement is a framework, not a single loan. It fixes a credit limit that the borrower may draw on, sometimes in tranches, and states the conditions for each drawdown. Typical provisions include the purpose of the loan, the interest rate and how it is computed, maturity and repayment dates, representations and warranties about the borrower's financial condition, covenants the borrower must observe during the life of the loan, and events of default that allow the lender to accelerate the loan.

Philippine law gives the parties wide latitude over these terms. Under Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Once agreed, Article 1159 of the Civil Code provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

Common security arrangements

Security is what converts an unsecured promise to pay into a right the lender can enforce against specific property. The usual forms in Philippine lending are:

• Real estate mortgage — a charge over land and improvements, registered with the Registry of Deeds.
• Chattel mortgage — a charge over movable property such as vehicles, machinery, or inventory.
• Pledge — delivery of movable property or instruments to the lender as security.
• Surety or guarantee — a third party, often a related corporation or a principal stockholder, binds itself to answer for the debt.
• Assignment of receivables — the borrower assigns collection rights to the lender.

Each security document must be executed with the same formalities the law requires for that type of security, and must be registered or recorded where the law requires registration to bind third parties. A defect in execution or registration can leave the lender with an unenforceable claim against the collateral even where the loan itself is valid.

Corporate approvals for secured borrowings

Where the borrower is a corporation, the board of directors exercises the corporate powers, conducts all business, and controls all properties of the corporation under Section 22 of the Revised Corporation Code (Republic Act No. 11232). Board approval is therefore the starting point for any secured borrowing.

Two provisions deserve particular attention:

Section 6 of the Revised Corporation Code states that holders of nonvoting shares are nevertheless entitled to vote on, among other matters, the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property, and on incurring, creating, or increasing bonded indebtedness. If the proposed security covers all or substantially all of the corporation's property, the approval process must account for this.

Section 15 of the Revised Corporation Code requires that amendments to the articles of incorporation be approved by a majority vote of the board of directors or trustees and the vote or written assent of stockholders representing at least two-thirds (2/3) of the outstanding capital stock. If the borrowing requires an amendment — for example, to increase authorized capital or change a stated purpose — that threshold applies.

Documents a lender typically requires

A complete security package for a Philippine corporate borrower commonly includes:

1. The facility agreement and any promissory notes issued under it.
2. A board resolution of the borrower authorizing the borrowing and the security, certified by the corporate secretary.
3. A secretary's certificate on the signing authority of the officers who execute the documents.
4. The security documents themselves, duly notarized.
5. Registration of the security with the appropriate registry.
6. Legal opinions on capacity, authority, and enforceability.

The corporate secretary's certification matters because Section 25 of the Revised Corporation Code requires the secretary, or any other officer, to submit to the Securities and Exchange Commission the names, nationalities, shareholdings, and residence addresses of the directors, trustees and officers elected, within thirty (30) days after their election. Lenders routinely verify these filings to confirm that the officers who signed actually hold office.

Frequently asked questions

Is a loan facility agreement the same as a loan contract? Not exactly. A loan contract evidences a single loan. A facility agreement sets a credit limit and the terms under which the borrower may draw one or more loans within that limit.

Does a mortgage need to be registered to be valid? Registration is what makes the mortgage effective against third parties. An unregistered mortgage may bind the borrower but will not protect the lender against a subsequent buyer or creditor of the same property.

Can a corporation borrow without board approval? No. The board of directors exercises corporate powers and controls corporate property under Section 22 of the Revised Corporation Code. A borrowing executed without proper board authority can be challenged as an unauthorized corporate act.

Practical takeaways

• The facility agreement sets the commercial terms; the security documents determine whether the lender can actually collect.
• Article 1306 of the Civil Code allows the parties to agree on nearly any terms, provided they are not contrary to law, morals, good customs, public order, or public policy.
• For corporate borrowers, confirm board and, where required, stockholder approvals before signing — Section 6 and Section 15 of the Revised Corporation Code set out the voting rules for dispositions of substantially all corporate property and for amendments to the articles of incorporation.
• Register every security interest with the proper registry; unregistered security is weak security.
• Match the security document to the asset — real estate mortgage for land, chattel mortgage or pledge for movables.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 11232 - AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES

• Civil Code of the Philippines (R.A. No. 386, CIVIL CODE)

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.