Opinion No. 24-20 Re: Financing Company Act of 1998, as amended; Financial Leasing

Securities and Exchange Commission INE

BACONG PILIPINAS

OFFICE OF THE GENERAL COUNSEL

16 July 2024 SEC OGC Opinion No.24-20 Re: Financing Company Act of 1998, as amended; Financial Leasing

BATERINA PERETE &CASTRO LAW 1121 The One Office Building No.5 West Ave. cor. Col.Martinez St. Quezon City

Attention: ATTY.MARKK L.PERETE

Dear Atty.Perete

Corporation), which is one hundred percent (100%) foreign-owned, engaged in the business of importing. RANo. 8556, otherwise known as theFinancing Company ActFCA, as amended exporting, distributing, selling (on a wholesale basis),renting out and leasing machines and equipment, may enter into the following transactions without need for registration as required under Republic Act This refers to your letter requesting the Commission's opinion on whether a corporation (the

I. Enter into and execute lease agreements with customers in the Philippines under any of the following conditions a The lessee shall have the option to purchase the machines/equipment at the end of the

2 Enter into and execute deeds for the assignment or sale of its existing contracts with customers b The lessee shall have the right to cancel the lease subject to the payment of damages for lease term; or early termination;

3. Sell machines/equipment to a registered financing company with lease back to the corporation. lease payments from customers for periodic remittance to the assignee companies;and/or to duly registered financial companies,with the Corporation assuming the obligation to collect

Section 3(a) of the FCA defines financing companies as follows:

(a) 'Finar savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws,which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property:" or by factoring com COTA nercial papers or accounts receivable, or by buying and selling contracts, leases, chattel ereinafter called companies,are corporations,except banks ivestments h

company when it extends credit facilities through any of the following four (4) modes: Hence,based on the above definition, a corporation is said to be engaged in the business of a financing

1.Direct Lending

1 Dated 23 January 2013. 2 Emphasis, italics, and underscoring supplied.

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4. 2 3. Discounting3 or factoring commercial papers or accounts receivables; Buying and selling contracts,leases, chattel mortgages, or other evidences of indebtedness; or Financial leasing.

A.First Transaction.

Section 3(d of the FCA defines financial leasing as a mode of extending credit through a lease contract,thus

d) Financial leasing is a mode of extending credit through a non-cancelable lease contract under which the lessor office machines,and other movable or immovable property in consideration of the periodic payment by the lessee of which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to purchases or acquires,at the instance of the lessee,machinery,equipment,motor vehicles,appliances,business and a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost includingany incidental expenses and a margin of profit over an obligatory period of not less than two 2)years during the lessor and bears the cost of repairs,maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

discussed that a financing company is not an ordinary leasing company and that a financial lease must be preceded by a purchase and sale contract covering the equipment which becomes the subject matter of the financial lease,viz The Supreme Court,in the case of Beltran et. al. v. PAIC Finance Corporationet. al.5 explicitly

pay for such equipment in cash in one lump sum, to lease such equipment in the meantime forhis use,at a fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the The basic purpose of afinancial leasing transaction is to enable the prospective buyer of equipment,who is unable to pay anv remaining balance of the purchase price.Generally speaking,a financing company is not a buyer or seller time of the purchase price of the equipment,plus financing charges, through the payment of lease rentals; that financial lessor) with the expectation that at the end of the lease period the buver/financial lessee will be able to of goods; it is not a trading company. Neither is it an ordinary leasing company; it does not make its profit by buying equipment and repeatedly leasing out such equipment to different users thereof. But a financial lease must he preceded by a purchase and sale contract covering the equipment which becomes the subject matter of the financial lease The financial lessor takes the role of the buyer of equipment leased. And so the formal or documentary tie between the seller and the real buyer of the equipment, i.e., the financial lessee, is apparently severed. In economic reality, however, that relationship remains. The sale of the equipment by the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure the repayment over chattel mortgagee's lien. legal title is the upfront security held by the financial lessor,a security probably superior in some instances to a

lessee is entitled to the possession and use of the leased equipment. At the same time, the financial lessee is obligated to make periodic payments denominated as lease rentals, which enable the financiallessor to recover A financing lease may be seen to be a contract sui generis,possessing some but not necessarily all of the elements of the purchase price of the equipment which had been paid to the supplier thereof. However, the financial lessor, being a financing co between PAIC and the Beltrans, in addition to expressly disclaiming any obligation on the part of PAIC to warrant the fitness of the SUN 1115 for any particular use, had specified that the equipment warranty,issued by SESCO the Warranty to the Beltrans. Thus, the financial lessee was precisely in a position to enforce such warranty directly an ordinary or civil law lease.Thus, legal title to the equipment leased is lodged in the financiallessor. The financial extend a warranty of the fitness of the equipment for any particular use.In the instant case, the contract of lease supplier of the equipment,shall be passed on by [PAIC] to the lessee.In fact,as noted,SESCO issued a Certificate of against the supplier of the equipment and not against the financial lessor. We find nothing contra legem or contrary to public policy in such a contractual arrangement.s any, i.e, an extender of credit rather tha ordinary equipment rental companydoes not

promissory notes,and similar instruments,are purchased by,or assigned to,a financing company in an amount or for a consideration less than their face value.[Section 1(,Rules and Regulations to Implement the Provisions of Republic Act No.8556 (IRR The +"Factoring"is a type of receivables financing whereby open accounts, not evidenced by a written promise to pay supported by Financing Company Act of 1998] 3 "Discounting" is a type of receivables financing whereby evidence of indebtedness of a third party, such as installment contracts, documents such as but not limited to invoices of manufacturers and suppliers,delivery receipts and similar documents,are purchased by, or assigned to, a financing company in an amount or for a consideration less than the outstanding balance of open accounts. SG.R. Nos.83113 and 83256,19 May 1992. 6 Emphasis, italics, and underscoring supplied. Citations omitted. Section 1j),IRR of R.A.No.8556

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Relative thereto, the Commission has previously opined that a financial lease is a transaction which contemplates a trilateral relationship, thus:

relationship where the financial lessee is obligated to make periodic payments denominated as lease rentals that enable the financial lessor to recover the purchase price of the equipment that had been paid to the supplier thereof. Prescinding from the foregoing the financial leasing contemplated under the FCA unequivocally envisions a trilateral

contemplated under the FCA considering that:a the relationship between Adventus and its customers is bilateral, not Applying the foregoing discussion to Adventusthe proposed activity that it intends to engage in is not thefinancialleasing trilateral as the intermediation of a financing company is removed from the transaction; (b the arrangement between the parties is not preceded by a purchase and sale contract covering the equipment which becomes the subject matter of the company, will pay the lease rentals directly to Adventus financial lease as the same already forms part of Adventus'inventory or stock-in-trade;and (c) the customer,not a financing

selling (on a wholesale basis), renting out and leasing machines and equipment it appears that the equipment from a supplier at the instance or on behalf of the lessee,who shall rent the same after the purchase. On the contrary, consistent with its corporate business of importing, exporting, distributing arrangement between the Corporation and its customers is not preceded by the purchase of equipment and that their relationship is bilateral,not trilateral. Hence,the first transaction is not financial leasing From the foregoing, nowhere in the facts is it stated that the Corporation purchased the machines or

B.Second Transaction.

buying and selling of contracts, leases, chattel mortgages, or other evidence of indebtedness. For the selling of a contract e.g.lease contract) to be considered as an extension of credit within the purview of the FCA the contract to be sold must be:(1) bought by the financing company; and (2) one which the financing company is not a party to. As to the second transaction, one of the modes of extending credit by a financing company is the

Under SEC OGC Opinion 24-13,the Commission highlighted the legislative history of the FCA,to wit

the Old FCA),then Senator Ambrosio B.Padilla highlighted that in general, the main business of financing companies involves three (3) parties, thusly: We note that the progenitor of the FCA is R.A. No.5980,otherwise known as the"Financing Company Actwhich was enacted into law on 04 August 1969.In his sponsorship speech of House Bill No.1095 the bill that was enacted into

Usury Law do not apply the idea of applying the maximum interest rates provided for in the Anti-Usury Law does not apply to the business of Usury Law,even without this bill,financing companies can be proceeded against for transactions involving loans. But Senator AYTONA. And in general, the main business of a financing con transactions with banks which generally involved financing companies, Mr. President, we have the principal creditor,we have principal debtor, and financing companies buy the papers that I mentioned. So, Mr. President financing compar with respect to the true and what should be the main business of a financing company, the limitations of the Anti s,except when the financing company grants a loan. Then,Mr.President,by operation of the Anti- npany involves three parties unlike

Senator PADILLA. Your Honor, I agree perfectly with all your statements and observations. The true business of financing companies is not in the granting of loans but the discounting of the commercial papers.Therefore, they do not fall under the provisions of the Anti-Usury Law. And Your Honor is correct that it does not involve only the debtor and the creditor but actually three persons.

differs from the financing transaction contemplated under R.A. No.5980,11 thus: Macleod, Inc. v. Medina, et. al1o where the petitioner's transaction therein with the private respondent Of equal importance is the discussion of the Supreme Court in the case of International Harvester

Evidently,the financing transaction that is regulated by RA.5980 involves the buying discounting or factoring of promissory notes and sales on credit or installment. IHMI did not purchase from itself the Retail Notes Analysis

8 Supra,Note 7 SEC OGC Opinion No.24-13dated 16May 2024 addressed to Puyat Jacinto Santos Law representing Adventus IT Services Philippines Emphasis, italics,and underscoring supplied. 10 G.R.No.53623,22 March 1990. 11 Now R.A.No.8556,as amended or the FCA. Inc

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executed by Medina. IHMI only extended credit to Medina by allowing him to pay for the 24 truck engines in for the interest to be paid by the installment buyer (Medina) on the deferred payment of the purchase price of the vehicles sold and delivered to him by IHMI. installment While the increased price of the sale included a"financing charge, that charge was simply another name

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transaction under R.A.3765, there are three 3) parties involved,namely1 the installment buyer,2 the IHMI correctly pointed out that its transaction with Medina differs from a financing transaction under R.A.5980 in that there were only two parties in its transaction with Medina, namelyIHMI and Medinawhile in afinancing seller, and (3) the financing company. The buyer executes a note or notes for the unpaid balance of the price of the thing purchased by him on installment. The seller assigns the notes or discounts them with a financing company which is subrogated in the place of the seller,as creditor of the installment buyer.

against Medina to a finance company.The transaction was bilateral,not trilateral.No financing company stepped company,paid IHMI for the truck engines.Medina made his installment payments or amortizations to IHMI, not The transac into the shoes of IHMI as assignee or purchaser of IHMI's credit against Medina. Medina himself,not a financing to a financing company action between IHMI and Medina did not involve any discounting factoring or assignment of IHMI's credit

Since IHMI's business of selling trucks in installment is not the business of a financing company under R.A.5980IHMI did not need SEC authorization to engage in it.iz

financing companies are those which the Corporation itself has entered into and not purchased from other persons or entities. In the case of the Corporation, the lease contracts that it will sell or assign to duly registered

purchased or to which the lease contracts were assigned for the collection of payments. financing company with respect to the lease contracts sold or assigned to the latter cannot be considered an extension of credit. The Corporation will merely act as an agent of the financing company which Further, the Corporation's assumption of the obligation to collect and remit payments to the

company. Hence, the second transaction is also not an extension of credit as an activity of a financing

C Third Transaction.

Consortium Co. v. Court of Appeals13 is instructive: With regard to the third transaction,the ruling of the Supreme Court in the case of Cebu Contractors

In Investors Finance Corporation v. Court of Appeals,the Court, applying the definition of financial leasing differentiated between a true financial leasing and an ordinary loan with mortgage in the guise of a lease. It was explained that the definition contemplates the extension of credit to assist a buyer in acquiring movable property at the instance of the lessee the equipment which the latter is interested to buy but has insufficient funds for the it back to him, the lease agreement is simulated to disguise the true transaction that is a loan with security which he can use and eventually own. Thus, in a true financial leasing. a finance company purchases on behalf of or purpose. The finance company therefore leases the equipment to the lessee in consideration of the periodic payment by the lessee of a fixed amount of rental. However,where the client already owns the equipment but needs additional working capital and the finance company purchases such equipment with the intention of leasing In that instance, it is clear that the intention of the parties was not to enable the client to acquire and use the equipment, but to extend to him loan.

equipment Consequently, there can be no doubt that the transaction between the parties is not one of financial Going back to the case at bar, MLFC admits that the transaction with CCCC involved the purchase of already-owned leasingas defined by law,but simply a loan secured by a chattel mortgage over CCCC's equipment

affirmed the classification of this type of transaction in the case of PCI Leasing and Finance, Inc., v. Trojan Metal Industries Incorporated et al.14, thus: The Supreme Court subsequently cited the decision rendered in the above-mentioned case and it

12 Emphasis and italics supplied. 13G.R.No.107199,July 222003 14G.R.No.176381,December 15,2010 The SEC Headquarters.7907 Makati Avenue www.sec.gov.ph I imessagemo@sec.gov.ph +6325322 7696 Salcedo Village, Beair, Makati City IN PEOPLE We invest in people INVESTORS 0A M

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Thus,in a true financialleasingwhether under RA 5980 or RA 8556,a finance company purchases on behalf of a cash- finance company then leases the equipment to the lessee in exchange for the latter's periodic payment of a fixed amount of rentai. strapped lessee the equipment the latter wants to buy but,due to financial limitationsis incapable of doing so. The

transaction between the parties in this case cannot be deemed to be in the nature of a financial leasing as defined by In this case, however,TMI already owned the subject equipment before it transacted with PCILF. Therefore, the Iaw.

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was not one of financial leasing as defined by law, but simply a loan secured by a chattel mortgage over Cccc's working capital and the finance company purchased such equipment with the intention of leasing it back to him, the lease agreement was simulated to disguise the true transaction that was a loan with security. In that instance, continued the Court, the intention of the parties was not to enable the client to acquire and use the equipment, but to The Court held in Cebu Contractors Consortium Co.v. Court of Appeals that the transaction between CCCC and MLFC equipment. The Court went on to explain that where the client already owned the equipment but needed additional extend to him a loan

be the lessor, but the lessee, and hence not the one extending credit. Thus, the participation of the Corporation in the transaction will not pertain to an activity of a financing company. the above-cited cases.More importantly,assuming that it is a financial lease the Corporation will not even In application of the foregoing, the third transaction is the same transaction as the subject matter of

Nonetheless, the Corporation is required to register as an ordinary domestic corporation or to put up and register a branch office in the Philippines in order to acquire a juridical status to legally engage in business. Commission as a financing company considering that its activities are not activities of a financing company. Prescinding from these discussions,we opine that the Corporation does not have to register with the

therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or circumstances and documents disclosed/submitted and relevant solely to the particular issue raised upon the courts whether of similar or dissimilar circumstances.is If, upon further inquiry or investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered void. It shall be understood that the foregoing opinion is rendered based solely on the facts

Please be guided accordingly

Very truly yours,

OdC Romuald C. Padilla General Counsel

15 Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003.

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