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SPV Law Scuppered By The Courts

Thursday, 11 December, 2008

AT a time when a global recession is gripping east and west, one would have thought that the Special Purpose Vehicle (SPV) Law, enacted by Congress in 2002, could be considered propitious, especially since this particular law was envisioned to save banks and financial institutions from the debilitating effects of non-performing loans (NPLs) and non-performing assets (NPAs) used as collateral, which have burdened the banking system since the 1997 financial crisis - an alarming scenario that is predicted to repeat itself in the current looming crisis.

It would be recalled that after the Asian financial crisis of 1997, Philippine banks were saddled with billions of pesos in bad credit loans.

The failure of the banks to dispose of these non-performing loans and non-performing assets and to “clean” their balance sheets undermined the capability of the banks to extend easy credit to the public. To address the serious problem and with the aim of averting a devastating financial crisis, Congress enacted the SPV Law.

In essence, this law made it easy for banks and financial institutions to sell their non-performing loans and non-performing assets at a discount. On the other hand, the buyers (or the SPV Companies) were given incentives to buy non-performing loans and non-performing assets with the important assurance that they would step into the shoes of the banks, thereby enabling them to claim the complete amount due the banks and nothing less.

By clearing the banks’ balance sheets of non-performing loans and non-performing assets through such transactions, the economy benefited through the easing of credit, lowering of interest rates and greater economic activity.

But just when the local banking sector felt assured that it was in a better position than most to counter the inevitable increase of non-performing loans and non-performing assets in the current crippling economic meltdown, a landmark though in most corporate legal circles it is considered as supremely flawed recent Supreme Court ruling seems to have effectively negated the SPV Law and undermined the laudable purposes for which it was enacted.

Last month the Supreme Court denied the appeal of Philippine Investment One, an Special Purpose Vehicle Company, to reverse the ruling of the Regional Trial Court-Makati City in the case involving Philippine Investment One (PI One) against two sets of corporate debtors.

The genesis of the Supreme Court’s ruling was a collection case filed in the Regional Trial Court in which the said debtors owed the Bank of Commerce a total of P73,147,408.83. When the former failed to pay Bank of Commerce, the latter filed a case against them with the Regional Trial Court-Makati to collect the P73,147,408.83 debts.

Meanwhile, Philippine Investment One bought from Bank of Commerce, at a discounted rate, the NPL owed by the debtors. Under the SPV Law, PI One stepped into the shoes of Bank of Commerce, and thus became the creditor of the debtors in lieu of Bank of Commerce. PI One thus has the right to collect from debtors all of their debt to Bank of Commerce.

Come decision time, a Regional Trial Court-Makati judge held that the debtors owed PI One, its new creditor, only PI One’s acquisition cost of the NPL from Bank of Commerce and not the full amount of P73,147,408.83 debts.

In doing so, the Regional Trial Court-Makati disregarded the SPV Law, which should govern SPV transactions, and applied a general provision of the Civil Code, which allows a debtor to be released from his debt that has been sold to a third party by paying the latter the price paid to the original creditor.

The talk in legal circles is that a special law, such as the SPV, should prevail over a general law when the transaction involves the subject of the special law. This principle appears to have been ignored by the trial court in its curious decision.

The decision however, defeats the very reason why the SPV Law was enacted. For if an SPV Company cannot profit from buying and selling non-performing loans’ why should any company go into this business when it may not even recover its overheads?

PI One appealed the Regional Trial Court-Makati’s decision to the Supreme Court on a pure question of law. Surprisingly, the Supreme Court denied the appeal through a minute resolution, invoking the hierarchy of courts and declaring that no reversible error was apparent from the trial court’s decision.

What is alarming the banking sector over this legal outcome is that the courts, through decisions, which appear to be far from thoughtful, are in effect making economic policy - an area that is reserved by the Constitution to the political branches of government.

Source: http://www.manilatimes.net/