FINANCIAL LEASE AND OTHER FINANCING
TRANSACTIONS of the equipment for any particular use.
FINANCING COMPANIES- are corporations, except
banks, investment houses, 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 or factoring commercial
papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other
evidences of indebtedness, or by financial leasing of
movable as well as immovable property (RA 5980,
Sec. 3(a))
1. FINANCIAL LEASE- mode of extending credit
through a non-cancelable lease contract under
which the lessor purchases or acquires movable or
immovable property in consideration of the periodic
payment by the lessee of a fixed amount of money
sufficient to amortize at least 70% of the purchase
price or acquisition cost, including any incidental
expenses and a margin profit overn an obligatory
period of not less than two years during which the
lessee has the right to hold and use the leased
property, but with no obligation to purchase the
leased property from the owner-lessor at the end of
lease contract (RA 5980 as amended by RA 8556,
Sec 3(d))
REQUISITES:
a. The lessor purchases or acquires movable or
immovable property
b. The purchase or acquisition is at the instance of
the lessee
c. The lessee agrees that as a consideration, he
will make periodic payment of a fixed amount of
money sufficient to amortize at least 70% of the
purchase price or acquisition cost, including any
incidental expenses and a margin of profit
d. The payment is over an obligatory period of not
less than 2 years; and
e. During the period agreed upon for payment, the
lessee has the right to hold and use the leased
property.
3 BASIC CHARACTERISTICS (Beltran v. PAIC)
a. The legal title to the leased equipment is lodges
in the financial lessor
b. The financial lessee is entitled to the possession
and use of the leased equipment
c. The financial lessee is obligated to make
periodic payments denominated as lease
rentals, which enable the financial lessor to
recover the purchase price of the equipment
which had been paid to the supplier thereof;
and
d. The financing company, being an extender of
credit rather than an ordinary equipment rental
company does not extend a warranty of fitness
Intent of the financial lessor is to recover the
price of the equipment
Lease agreement is non-cancellable
OBLIGATION OF THE LESSEE
1. To pay the amortization up to at least 70% of
the acquisition cost
2. To pay the lessor for incidental expenses and a
margin of profit; and
3. To shoulder the cost of repairs, maintenance,
insurance and preservation of the property
purchased.
No obligation to purchase
Financial lease will not be invalidated based on
the allegation of the lessee that rent for the use
of movable constitutes value of movable leased
FORMS OF FINANCIAL LEASE
1. Finance company purchases on behalf or at the
instance of the lessee the heavy equipment or
machinery which the latter is interested to buy
but has insufficient funds
2. When seller or dealer of heavy equipment
leases it to the interested buyer
Financial lease is a contract sui generis
It is a contract of adhesion
Nature of right over the property
- Legal title is lodged in the financial lessor
- Financial lessee is entitled to possession and
use of leased equipment
Financial lessor does not extend a warranty of
fitness of the equipment
- Financial lessee can directly enforce
warranty against supplier
Lessee shall bear the loss
Leasing company is liable under the registered
owner rule if lessee caused damage or injury in
the negligent operation of leased vehicle if
financial lease is not registered
- Their remedy is to resort to third party
complaints against lessees
2. ASSIGNMENT OF CREDIT- an act of transferring,
either onerously or gratuitously, the right of an
assignor to an assignee who would then be capable
of proceeding against the debtor for enforcement or
satisfaction of the credit
Purchase discount- difference between value of
credit assigned and the net amount paid by
financing company for such purchase
Purchase discount is limited to 14% of value of
credit assigned exclusive of interest and other
charges
3. RECEIVABLES FINANCING- mode of extending credit
through the purchase by or assignment to, a
financing company of evidence of indebtedness or
open accounts by discounting or factoring
DISCOUNTING- type of receivables financing
whereby evidences of indebtedness of third
party are purchased by, or assigned to, a
financing company in an amount or
consideration less than their face value
 - Discounting line- credit facility with a
financing company or bank, which allows
business entity to sell, on a continuing basis,
its accounts receivable at a discount
- Discount- sale of a receivable at less than its
face value
FACTORING- type of receivables financing
whereby open accounts, not evidenced by a
written promise to pay supported by
documents, are purchased by, or assigned to, a
financing company in an amount or for a
consideration less than the outstanding balance
of the open accounts
LETTERS OF CREDIT
LETTERS OF CREDIT- engagement by a bank or other
person made at the request of a customer that the
issuer will honor drafts or other demands for
payment upon compliance with the conditions
specified in the credit (Prudential Bank v. IAC)
Bank merely substitutes its own promise to pay
for the promise to pay of one of its customers
who in return promises to pay the bank the
amount of funds mentioned in the letter of
credit plus credit or commitment fees mutually
agreed upon
Governed by Code of Commerce on Letters of
Credit and encompasses only Art. 567-572
which are obsolete
- Now embodied in the Uniform Customs and
Practice for Documentary Credits (UCP)
KINDS OF LETTERS OF CREDIT
1. Commercial Letter of Credit- used in the trade
of goods
2. Standby Letter of Credit- security arrangement
for the performance of work or service
KINDS OF COMMERCIAL CREDIT
a. Confirmed LC- whenever the beneficiary
stipulates that the obligation of the opening
bank shall also be made the obligation of a bank
to himself
b. Irrevocable LC- definite undertaking on part of
issuing bank and constitutes the engagement of
that bank to the beneficiary and bona fide
holders of drafts drawn, that provisions for
payment, acceptance or negotiation contained
in the credit will be duly fulfilled, provided that
all terms and conditions of the credit are
complied with
c. Revolving LC- credit that provides for renewed
credit to become available as soon as the
opening bank has advised that the negotiating
or paying bank that the drafts already drawn by
the beneficiary have been reimbursed to the
opening bank by the buyer
d. Back-to-Back LC- credit with identical
documentary requirements and covering the
same merchandise as another letter of credit,
except for a difference in the price of the
merchandise as shown by the invoice and the
draft.
- Second letter of credit can be negotiated
only after the first one
e. General LC- one addressed to any and all
persons without naming any one in particular
f. Special LC- addressed to a particular individual,
firm or corporation by name
g. Straight LC- one that does not run in favor of
purchasers of drafts drawn
h. Fixed LC- can be exhausted either when drafts
for payment have been drawn by the
beneficiary for full amount of credit or when
time for drawing upon the letter has expired
i. Sight LC- payable on demand as distinguished
from Time LC which is payable within a certain
period
Irrevocable letter of credit refers to the duration
of the letter of credit while a confirmed letter of
credit pertains to the kind of obligation
assumed by the correspondent bank
NATURE OF LETTERS OF CREDIT
Financial device developed by merchants as a
convenient and safe mode of dealing with sales
of goods to satisfy the interests of a seller and a
buyer
In standby credit, beneficiary avoids burden of
litigation and receives his money promptly upon
presentation of required documents
PARTIES IN A LETTER OF CREDIT
1. Buyer- procures the letter of credit and obliges
himself to reimburse the issuing bank upon
receipt of the documents of title
2. Bank- issues the letter of credit, which
undertakes to pay the seller upon receipt of the
draft and proper documents of titles and to
surrender the documents to the buyer upon
reimbursement
3. Seller- ships the goods to the buyer and delivers
documents of title and draft to the issuing bank
to recover payment
Modern letters of credit parties:
a. Buyer or importer
b. Seller or beneficiary
c. Opening bank who issues letter of credit
d. Notifying bank which advises the
beneficiary of the letter of credit
e. Negotiating bank which is any bank in the
city of the beneficiary
f. Paying bank which buys or discounts the
drafts by the letter of credit
g. Confirming bank which confirms the letter
of credit issued by the opening bank
OBLIGATIONS OF ISSUING BANK
1. To make payment to or to the order of a third
party (beneficiary) or is to accept and pay the
bills of exchange drawn by the beneficiary
2. To authorize another bank to effect such
payment, or to accept and pay such bills of
exchange
 3. To authorize another bank to negotiate, against
stipulated documents, provided that the terms
and conditions of the credit are complied with
Obligation of the issuing bank is solidary with
the person requesting for its issuance, except
otherwise stipulated
Article 13- Standards for Examination of
Documents: Banks must examine all documents
stipulated in the credit with reasonable care,
seven banking days following the day of receipt
of documents to determine whether to take up
or refuse the documents
Doctrine of Strict Compliance- issuing bank
must see to it that the terms of the letters of
credit are strictly complied with
- his obligation is to deliver to the paying
bank the tender documents stipulated in
the letter of credit
Issuing bank may or may not be the paying bank
Seller of the merchandise is called the
beneficiary of the credit instrument
The buyer-importer is the person who applies
for and for whose benefit the issuing bank
issues the letter of credit
Notifying or advising bank assumes no liability
except to notify and/or transmit to beneficiary
the existence of letter of credit
Confirming bank assumes the direct obligation
to the seller; it is as if it issued the letter of
credit
Negotiation bank buys or discounts a draft
under the letter of credit and its liability
depends on the stage of negotiation:
- Before negotiation, it has no liability with
respect to the seller
- After negotiation, contractual relationship
will prevail between negotiating bank and
seller
TRANSACTIONS INVOLVED:
1. Independent contracts
a. Contract of sale between the buyer and seller
b. Contract of buyer with the issuing bank- bank
agrees to issue the LC in favor of the seller
subject to reimbursement or payment by the
buyer of whatever is paid to the seller plus
proper consideration agreed by the parties
c. Letter of credit proper- bank obligates itself to
pay the seller after presentation to the bank of
tender documents stipulated upon
Other contracts may be actually involved
INDEPENDENCE PRINCIPLE- Contracts involved
in letter of credit arrangement are to be
maintained in a state of perpetual separation
- Assures the seller or beneficiary of prompt
payment independent of any breach of the
main contract
- Banks only deal with documents and not
with goods, services, or obligations which
they relate
- Issuing bank and beneficiary can invoke the
independence principle doctrine
- FRAUD EXCEPTION: exists when the
beneficiary, for the purpose of drawing on
the credit, fraudulently presents to the
confirming bank, documents that contain,
expressly or impliedly, material
representations of fact that to his
knowledge are untrue
- Remedy for fraudulent abuse is an
injunction and should not be granted
unless:
a. There is clear proof of fraud
b. Fraud constitutes fraudulent abuse of
the independent purpose of the letter
of credit and not only fraud under the
main agreement
c. Irreparable injury might follow if
injunction is not granted
- Protection of innocent party is emphasized
under the Uniform Commercial Code
TRUST RECEIPTS LAW
PD 115- Trust Receipts Law
Obligation to pay the issuing bank may also be
secured by trust receipts
The bank becomes the entruster of the goods
while the buyer-importer is the entrustee
Enacted to safeguard commercial transactions
and to offer an additional layer of security to
the lending bank
TRUST RECEIPT TRANSACTION- any transaction by
and between the entruster and entrustee, whereby
the entruster, who holds absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of
the entrustee upon the latters execution and
delivery to the entruster of a signed document
called a trust receipt wherein the entrustee binds
himself to hold the designated goods, document or
instrument in trust for the entruster and to sell or
otherwise dispose of such with the obligation to
turn over to the entruster the proceeds thereof to
the amount owing to the entruster or as appears in
the trust receipt or the goods, documents or
instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.
In case of goods or documents
a. To sell the goods or procure their sale
b. To manufacture or process the goods with the
purpose of ultimate sales
- Provided that entruster shall retain its title
over the goods whether in its original or
processed form until the entrustee has
complied fully with his obligation under the
trust receipt
c. To load, unload, ship or otherwise deal with
them in a manner preliminary or necessary to
their sale
In case of instruments
a. To sell or procure their sale or exchange
 b. To deliver to them to a principal
c. To effect the consummation of some
transactions involving delivery to a depository
or register
d. To effect their presentation, collection or
renewal
Not applicable to contract to sell where the
ownership of the good is retained by the seller
Not applicable to simple loan
PARTIES
The ENTRUSTEE is obliged to:
a. Hold the goods, documents or instruments in
trust for the entruster and shall dispose of them
strictly in accordance with the terms and
conditions of the trust receipt agreement
b. Receive the proceeds in trust for the entruster
and turn over the same to the entruster to the
extent of the amount owing to the entruster or
as appears on the trust receipt
c. Insure the goods for their total value against
loss from fire, theft, pilferage or other casualties
d. Keep said goods or proceeds thereof whether in
money or whatever form, separate and capable
of identification as property of the entruster
e. Return the goods, documents or instruments in
the event of non-sale or upon demand of the
entruster observe all other terms and
conditions of the trust receipt not contrary to
the provisions of the decree
The ENTRUSTER shall be entitled to:
a. The proceeds from the sale of the goods,
documents or instruments released under a
trust receipt to the entrustee to the extent of
the amount owing to the entruster or as
appears in the trust receipt
b. The return of the goods, documents or
instruments in case of non-sale
c. The enforcement of all other rights conferred on
him in the trust receipt
PURPOSE OF ACQUISITION OF GOODS
Goods covered by trust receipt are meant for
sale or disposition by the entrustee
Not only for the purpose of sale, but as well for
purpose of installing them in the machineries
and equipment of the entrustee
Two scenarios in trust receipt transaction
a. Refers to money received under the obligation
involving the duty to deliver it (entregarla) to
the owner of the merchandise sold
b. Refers to merchandise received under the
obligation to return it (devolvera) to the owner
NATURE OF ENTRUSTERS RIGHT OVER THE GOODS
1. VIEW THAT OWNERSHIP IS NOT ACQUIRED BY
ENTRUSTER
Trust receipt evidences the absolute title or
security interest of the entruster over the goods
Entruster-bank does not acquire real ownership
over the subject goods
- What is acquired is mere security interest
- SECURITY INTEREST- a property interest in
goods, documents, or instruments to secure
performance of some obligation of the
entrustee or of some third persons to the
entruster and included title, whether or not
expressed to be absolute, whenever such
title is in substance taken or retained for
security only
Trust agreement is a collateral agreement
- Transaction involves loan feature
represented by letter of credit and a
security feature, which is the covering trust
receipt
2. VIEW THAT THE ENTRUSTER OWNS THE GOODS
Entrustee cannot mortgage the properties that
are covered by trust receipts
Entruster does not retain absolute ownership
- Right of entrustee over the goods has all
earmarks of ownership though subject to
limitations imposed by law and the
agreement of the parties
- Trust receipt is a limitation on the
ownership of the entrustee
REMEDIES OF ENTRUSTER
1. SPECIFIC PERFORMANCE- entruster can file an
action to pay his obligation to pay the loan
2. RETAKING OF POSSESSION- entruster may cancel
the trust and take possession of the goods,
documents or instruments subject of the trust or of
the proceeds realized therefrom at any time
- Does not result in the full satisfaction of the
entrustees obligation
PENALTY CLAUSE
Sec. 13 of PD 115
- Crimed is malum prohibitum but is classified
as estafa under par. 1(b), Article 315 of RPC
- Entrustee is liable under Trust Receipts Law:
a. if he did not turn over proceeds of the
sale
b. if he did not return the goods when
lawfully demanded or if the goods are
not meant for sale
c. If he did not pay the value of the goods
- May be commited by corporation or other
juridical entity and making officers
responsible for the offense
= separate personality of a corporation not
a defense
- If there is novation of the trust receipt
agreement to the extent that same is
extinguished, criminal liability of the
corporate officers shall also be extinguished