VESTED INTERESTS (Loans and Interest Rates)

By Obiter07

This is the bane of all borrowers everywhere, the amount of interest that is charged on their loans. But be advised that no interest is due unless expressly stipulated in writing.[1] So if it is not written down, you don’t have to pay it.

Ordinarily, the parties are free to stipulate on the rate of interest with respect to any loan or forbearance (read: delay in the collection) of any money, goods or credits, as there is no longer any limit on interest with the repeal of the Usury Law. This statute previously capped the maximum rate for loans secured with real estate mortgage at 12% per annum (SPOUSES BAUTISTA vs. PILAR DEVELOPMENT CORPORATION, [G.R. No. 135046. August 17, 1999]). And anything beyond that is “usury.” But that is no longer a legal term which we can use. It has been replaced by another word.

One would then think that any lender or 5/6 operator would now be free to impose whatever interest they might see fit. They can, but the validity of stipulations on interest may still be questioned before the courts and invalidated if it is “unconscionable” (read: unfair), the new term which we can now use. As held in Medel, et al. vs. Court of Appeals, et al.,[G.R. No. 131622. November 27, 1998.]:

“We agree with the petitioners that stipulated rate of interest at 5.5 %, per month on the PHP500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we cannot consider the rate as ‘usurious’ because this Court has consistently held the Circular No. 905 of the Central Bank xxx has expressly removed the interest ceiling prescribed by the Usury law and that the Usury Law is now legally inexistent. xxx Nevertheless, we find the interest at 5.5%, per month or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals xxx if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.”

A similar ruling was made by the Supreme Court in DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS, et al. [G.R. No. 137557. October 30, 2000] where it found to be unconscionable an annual interest rate of 18% per annum and ordered the same reduced to 10%. Creditors would be well advised to take note of these decisions. This is a subjective test but it is something that borrowers will take anytime.

Loans, or Forbearance of Money

Please remember that if your agreement does not expressly provide for interest and it concerns a loan or a forbearance of money, then the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under, and subject to, the provisions of Article 1169 of the Civil Code (EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS, et al. [G.R. No. 97412. July 12, 1994.]).

“ARTICLE 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. [N. B. The Monetary Board increased the rate of legal interest from six percent (6%) to twelve percent (12%) per annum (Please see SEMPIO, et al. vs. COURT OF APPEALS, et al. [G.R. No. 115953. October 28, 1996.])”

Need for Demand

Demand is not always necessary before a party is considered in delay.

“ARTICLE 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to he delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.”

Other obligations

If it concerns some other obligation other than the payment of a sum of money, and there is no stipulation as to interest, the rate of interest shall be 6% per annum from the date of judicial or extrajudicial demand.[2]

Fixed or Floating

Please make sure you can handle the type of interest that you sign up for. It may be fixed or floating. Fixed means that it is determined at the outset and does not change. But the rates may also be referenced to commercial reference rate such as LIBOR (London Interbank Offered Rate which is a daily reference rate). It can thus fluctuate and you may be in for more than you bargained for.

Simple or Compounded

And you should see whether the interest is simple or compounded. In the absence of stipulation, interest due shall not earn interest except only from the date of judicial demand or the filing of a complaint.

“Neither is petitioner entitled to compounded or accumulated interest. There was no agreement regarding this either in the compromise agreement or in the deed of second mortgage. The law clearly provides that interest due and unpaid shall not earn interest, unless the contracting parties stipulate to capitalize the interest due and unpaid, which as added to the principal, shall earn new interest. MANUFACTURER’S BUILDING, INC. vs. COURT OF APPEALS, et al. [G. R. No. 116847. March 16, 2001.]).”

“The Supreme Court agrees with the modification made by the appellate court in ordering payment of legal interest from the date judicial demand was made by Pilot Samson against Philippine Air Lines with the filing of the complaint in the lower court and affirms the ruling of respondent court which reads: “Articles 1169, 2209 and 2212 of the Civil Code govern when interest shall be computed. Thereunder interest begins to accrue upon demand, extrajudicial or judicial. A complaint is a judicial demand (Cabarroguis vs. Vicente, 107 Phil. 340). Under Article 2212 of the Civil Code, interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” (CA Resolution pp. 153-154, Records) PHILIPPINE AIR LINES, INC. vs. THE COURT OF APPEALS, et al. [G.R. No. L-46558. July 31, 1981.]“

When payable

And you can agree on when the interest is payable. It can be made to fall due in advance, upon certain designated periods during the lifetime of the contract, or on the same date when the principal is repaid. You can negotiate based on your own capacity to pay.

Receipt (of Principal)

As a borrower, you can try and make the creditor receive the principal amount without paying the interest. The receipt of the principal without reservation as to interest may work against the creditor:

“ARTICLE 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. xxx”

When you find yourself needing a loan, it may be hard enough having to pay the principal. So keep in mind how much interest you may also have to pay on top of it.

[1] ARTICLE 1956, New Civil Code.

[2] II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
2. When a obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount of finally adjudged. EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS, et al. [G.R. No. 97412. July 12, 1994.]

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Marcos Legacy (Plunder and Ill-gotten wealth)

By Siesta-friendly

What a government! With moderate greed as the standard of good behavior. Where a $60M (or P2.5B) commission is acceptable. And we had such high hopes in the wake of the Marcos pillage. Even enacting R.A. 7080 (An Act Defining And Penalizing The Crime Of Plunder).

Having witnessed the recent pardon of a President convicted of plunder, public apathy remains. But because said pardon may have just been a defensive move to obtain support against impeachment for her own plundering activities, and in the interest of vigilance (not to mention to keep up with current events), we shall revisit R.A. 7080.

By legal definition, ill-gotten wealth is any asset, property, business enterprise or material possession of any person acquired directly or indirectly through dummies, nominees, agents, subordinates and/or business associates by any combination or series of the following means or similar schemes:[1]

a. Through misappropriation, conversion, misuse, or malversation of public funds or raids on the public treasury;

b. By receiving, directly or indirectly, any commission, gift, share, percentage, kickbacks or any/or entity in connection with any government contract or project or by reason of the office or position of the public officer concerned;

c. By the illegal or fraudulent conveyance or disposition of assets belonging to the government or any of its subdivisions, agencies or instrumentalities or government-owned or controlled corporations and their subsidiaries;

d. By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation including the promise of future employment in any business enterprise or undertaking;

e. By establishing agricultural, industrial or commercial monopolies or other combinations and/or implementation of decrees and orders intended to benefit particular persons or special interests; or

f. By taking undue advantage of official position, authority, relationship, connection or influence to unjustly enrich himself or themselves at the expense and to the damage and prejudice of the Filipino people and the Republic of the Philippines.

Guess which of the above FG has (reportedly) violated. Might be easier to guess which one he hasn’t. Anyway, so what’s plunder, you ask? Might be anything FG and Mr. Comelec concoct. Jointly or severally. Imagination aside, plunder under the law occurs when any public officer who, by himself or in connivance with others, amasses, accumulates or acquires ill-gotten wealth, through a combination or series of overt criminal acts as described above, in the aggregate amount or total value of at least P50M.[2]

Penalties

And now we enter dreamland. In an alternate reality, people convicted of plunder should suffer the penalty of reclusion perpetua to death. I doubt that’s Erap’s ghost limping around.

Any and all ill-gotten wealth and their interests and other incomes and assets, including the properties and shares of stocks derived from the deposit or investment thereof, shall be forfeited in favor of the State.[3]Although the crime of plunder prescribes in 20 years, the right of the State to recover properties unlawfully acquired by public officers from them or from their nominees or transferees shall not be barred by prescription, laches, or estoppel.[4]

Of course, any public officer against whom any criminal prosecution is pending in court shall be suspended from office; and should he be convicted by final judgment, he shall lose all retirement or gratuity benefits under any law.[5] And the dream goes on.

People may think that with anomalous multi-million peso transactions regularly unearthed like clockwork, R.A. 7080 seems an anachronism better applied in an ideal world. But to aim for that world, it is precisely these kinds of laws that need upholding and implementing to the fullest.

[1] Sec. 1.d, R.A. 7080.

[2] Sec. 2, ibid.

[3] ibid.

[4] Sec. 6, ibid.

[5] Sec. 5, ibid.

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TIME’S UP (Prescription and How Legally To Tell Time)

By Obiter07

When we enter into agreements, we invariably use periods to reckon when certain obligations are to be performed. In contracts, it pays to be precise in determining when things are supposed to happen and, when a right is violated, when an action can be filed to enforce such right against another.

When you expect that something is to be done in a week’s time, what do you really mean? For example, just saying that another party has “seven days” while seemingly clear can be subject to interpretation. You can leave it to lawyers to either require precision or find a way to obfuscate matters (or in layman’s terms, confuse). Days can mean business days which results in a longer period, or calendar days which can be much shorter. So you just have to say what you mean. It may be reasonable to state business days if a thing can be acted upon only during office hours.

And when you say “business day” and you deal with parties in different jurisdictions (or time zones), you may have to specify a business day to refer to a day when banks are generally open in a certain jurisdiction. Pay attention to this provision especially in the case of loans. If a lender is based abroad, and you have to pay on a business day, does it have to a business day in your place of business, that of the lender’s or both?

You might say, what’s a day or two anyway? Well a year has 365 days or at least that is how we normally count it. But in a loan, interest is usually quoted as “per annum” and the bank usually defines a year to be 360 days. For example, if the interest is 10% p.a. and the principal is P1 million the interest per month will be different:

If we use 365 days, i.e. 10%/365 days * 30 days, interest is only about P8,219 per month

At 360 days, interest is about P8,333 per month

That may seem small but it all adds up specially if the amount is bigger and if the tenor of the loan is longer. In a loan of P1B, the interest per month would be between 8.2 million per month or P8.33 million per month.

Actually, it would just be much better if we specify dates, like this should be done by the June 15, but there are just occasions when we cannot.

By default, the Philippine’s Revised Administrative Code does provides legal definitions for time periods. And please note that the law is considered read into every contract. You might not be aware you’re already in default if you have failed to correctly count the days.

The Code states:

“SECTION 31. Legal Periods. — “Year” shall be understood to be twelve calendar months; “month” of thirty days, unless it refers to a specific calendar month in which case it shall be computed according to the number of days the specific month contains; “day,” to a day of twenty-four hours; and “night,” from sunset to sunrise.

So a “year” does not include the 31^st of each month. And, unless you specify February, a “month” is always presumed to have 30 days. If you need something done before nightfall, you have to state the particular time, say “on or before 5:00 p.m.”, when a delivery is to be made. Otherwise, a delivery by 11:59 p.m. and 58 seconds on a certain day will still be valid.

Before, the New Civil Code defined a year to have 365 days but the Code is a more recent piece of legislation which should govern. But the NCC contains an important explanation on how a period is computed. It states in part:

“ARTICLE 13. xxx In computing a period, the first day shall be excluded, and the last day included. (7a)”

Whatever period is given to you, you just don’t count the first day. In other words, you start counting from the day after the first day. This is illustrated in the following case:

“Under this cited provision, the Appeal may be taken within 30 days from notice of the judgment or order of the trial court. xxx In relation thereto, the New Civil Code states that in computing a period, the first day shall be excluded and the last day included.

The petitioners admit that they received their copy of the Order of dismissal of their Complaint on July 17, 1979. xxx. In computing the 30-day period, July 17, 1979 (the first day) is excluded, pursuant to Article 13 of the New Civil Code. Counting 30 days thereafter, beginning on July 18, 1979, the petitioners had up to August 16, 1979 to file their Motion for Reconsideration. Their Motion for Reconsideration, although dated August 16, 1979, was filed with the trial court on August 17, 1979 or one day beyond the 30-day reglementary period xxx. REMIGIO QUIQUI,et al. vs. BONCAROS, et al. [G.R. No. L-51841. June 30, 1987.]”

Dates are also important when you get to figure out if you can still file cases or actions against another party. Please note that the prescription period (or the time when you can still do a particular act) can be based on law or contract. We will focus on written contracts here. Under the New Civil Code, an action upon a written contract must be brought within ten years from the time the right of action accrues (Article 1144). The right accrues from the time there is a breach or violation of a contract. From the time of breach, you thus have 10 years within which to sue the other party.

But in one case, the Supreme Court upheld a contractual provision which provided for a shorter period than that provided by law within which an action can be filed (PHIL-AM vs. Sweet Lines, Inc. et al. (G.R. No. 87343, August 5, 1992). So a contract can trump the law, at least in this particular case, if so agreed by the parties.

So the next time you get into a contract, take a look at the dates when you have to do something or when you want something done. And see what the consequences are if you don’t, or if someone else doesn’t do it. Then we can go into penalties for default, or even liquidated damages, which are different topics altogether. For now, just be careful what you sign up for and when.

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DIRECTOR’S CUT (Rewards and responsibilities of the board of directors)

By Obiter07

It can be one of the cushiest jobs to have, being a member of the board of directors of a big company, preferably one of the listed ones. No day to day responsibilities, except the regular meetings of the board, but with the possibility of substantial rewards as per diem or possibly having a share in the profits of the company.

For example, one listed company described the following benefits for non-executive directors:

“P1,000,000.00 consisting of the following components:

Retainer Fee: P500,000.00

Per diem per Board meeting attended: P100,000.00

In addition, a non-executive director is entitled to a per diem of P20,000.00 per board committee meeting actually attended.”[1]

Now, who would not attend a meeting that is worth P100,000.00? No one can get enough of such meetings.

Unfortunately, the perks above are more the exception than the rule. This is because ordinarily, a director does not receive compensation as such except for reasonable per diems.

SECTION 30. Compensation of directors. — In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)

Authority

Ordinarily, a corporation cannot act unless it does so through an authority given by the board. As provided in the Corporation Code:

SECTION 23. The board of directors or trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) xxx”

But what exactly does a director do? How can one be a director? And what liabilities does a director have to contend with?

Qualifications

The qualifications for appointment to the Board of Directors has been summarized thus:

1. ownership of at least one share of the capital stock of the corporation in his own during his term of office (Section 23);

2. majority of the directors must be residents (Section 23);

3. he must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code committed within five (5) years prior to the date of his election (Section 27);

4. he must not have a substantial interest in a competing corporation (Gokongwei vs. SEC)

5. only natural persons can be elected as directors, and

6. other qualifications as may be prescribed in the by-laws (Section 47[5]). [2]

Lately, the SEC has now required certain companies to have “independent” directors. An independent director “shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” The definition of independent directors is further refined in the Securities Regulation Code’s Implementing Rules and Regulations.[3]

Removal

Directors are generally subject to removal with or without cause irrespective of the 1-year tenure under Section 23 of the Code. Section 28 pertains to the inherent power to remove directors, trustees and officers prior to the expiration of their term.[4] The underlying reason is that stockholders are the ultimate masters, not the directors, to make the corporate government responsible to the owners. Nevertheless, there can be no removal without cause if this would deprive minority stockholders of their right to representation by virtue of the rule on cumulative voting.[5] (We’ll tackle voting, cumulative or otherwise, in a different post.)

Liabilities and responsibilities

What do directors have to watch out for? Well, they may be solidarily responsible for all damages suffered by the corporation and its stockholders as stated in Section 31 of the Code:

SECTION 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n)

But a director cannot be held liable for mistakes or errors in the exercise of their business judgment, provided they have acted in good faith and with due care and prudence. The general rule is that contracts intra vires (or within one’s authority) entered into by the board of directors are binding upon the corporation and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.[6]

However, a director cannot appropriate corporate opportunities for himself.

SECTION 34. Disloyalty of a director. — Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. (n)

Being a director can be a heavy responsibility but it can have substantial rewards as well.

[1] SEC Form 20-IS, Ayala Corporation, 2005.

[2] SEC Opinion No. 31, May 26, 2003.

[3] SRC Rule 38 (2).

[4] SECTION 28. Removal of directors or trustees. — Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (n)

[5] Ibid.

[6] (Campos, et al.,The Corporation Code, Comments, Notes and Selected Cases, Vol. I (1990), p. 643).

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