DOJ Opinion No. 006, s. 1998

DOJ OPINION NO. 006 , s. 1998 January 19, 1998 Ms. Zorayda Amelia C. Alonzo President & Chief Executive Officer Home Development Mutual Fund The Atrium of Makati, Makati Avenue Makati City M a d a m : This has reference to your request for an opinion confirming that in the event of the winding up, bankruptcy, insolvency (or other similar event) of the Home Development Mutual Fund (HDMF), the claims of its creditors shall be preferred over the claims of the members of the Fund. You state that the HDMF is a body corporate created under Presidential Decree No. 1530, as amended; that it is a provident savings system for both private and public employees with housing as the primary investment; that membership in HDMF is compulsory in nature; and that an element of its mandate is the provision of housing finance which it satisfies by providing housing-related loans to its members, accredited institutions and developers. You further state that HDMF has been borrowing from, and intends to pursue other financing transactions with, various financial institutions, primarily to fund HDMF's housing-related lending programs. And to clarify the nature of these transactions, you seek confirmation from this Department that, "in the event of the winding up, bankruptcy, insolvency (or other similar event) of HDMF, the claims of creditors of HDMF for money borrowed would be preferred over, and would be entitled to be paid in full by HDMF before any payment is made by HDMF in respect of the claims of the members of HDMF as such members". We answer in the affirmative. The Home Development Mutual Fund, being a body corporate (Sec. 3, P.D. No. 1752 amending P.D. No. 1530) is endowed with a complete array of corporate powers. Section 10 of the aforementioned law provides: "SEC. 10. Corporate Powers . The Fund shall have the powers and functions specified in this Act and the usual corporate powers : (a) To make policies and guidelines, as well as adopt, amend and rescind such rules and regulations as may be necessary to carry out the provisions and purposes of this Act; (b) To submit annually to the President of the Philippines not later than March 15, and make available to the members of public report recovering its activities in the implementation of this Act, as well as the state of the Fund during the preceding year, including information and recommendations for the development and improvement of the Fund; (c) To invest not less than seventy percent (70%) of its investible funds to housing, in accordance with this act ; (as amended by R . A . No . 7742) ; (d) To acquire, utilize, or dispose of, in any manner recognized by law, real or personal properties to carry out the purposes of this Act; (e) To set up its own accounting and computer systems; to conduct continuing actuarial and statistical studies and valuations to determine the financial viability of the Fund and its projects; to require reports, compilations and analysis of statistical and economic data, as well as make such other studies and surveys as may be needed for the proper administration and development of the Fund; (f) To have the power of succession; to sue and be sued; to adopt and use a corporate seal; (g) to enter into and carry out contracts of every kind and description with any person, firm or association or corporation, domestic or foreign ; (h) To borrow funds from any source, private or government, foreign or domestic ; (i) To invest, own or otherwise participate in equity in any establishment, firm or entity; to form, organize, invest in or establish and maintain a subsidiary or subsidiaries in relation to any of its purposes; (j) To exercise such powers and perform such acts as may be necessary, useful, incidental or auxiliary to carry out the provisions of this Act." (Emphasis supplied) Without any trace of doubt, HDMF, under its Charter, has the power to invest its funds, directly or indirectly; could enter into and carry out contracts of every kind and description ; and could borrow funds from any source, whether foreign or domestic. The intention of the law, it seems, is to make HDMF operate just like any other corporate entity, the only difference being that its purpose is also " to motivate the employed and other earning groups to better plan and provide for their housing needs by membership in an integrated, nationwide savings system " (see Sec. 2, P.D. No. 1752), and not just to realize profit. It may be said, therefore, that the members of the Fund are akin to the stockholders of a corporation. This position is further bolstered by the fact that the contributions of the members " shall earn dividends as may be provided for in the implementing rules " (see Sec. 8, ibid .). A dividend is defined as a return upon the stock of its stockholders paid to them by a going corporation without reducing their stock, leaving them in a position to enjoy future return upon the same stock (Wise and Co. v. Meer, 78 Phil. 655, 675; see also Fisher v. Trinidad, 43 Phil. 973, 986; Nielson and Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540, 569). There is no provision in P.D. No. 1530, P.D. No. 1752 and R.A. No. 7742 prescribing the rules to be observed in case the HDMF would liquidate and wind up its affairs. This being the case, the rules laid down by Section 122 of the Corporation Code of the Philippines (B.P. Blg. 68) could find pertinent applicability, thus "SEC. 122. Corporate liquidation . xxx xxx xxx "Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities ." (Emphasis supplied.) In American Law, upon which our corporation law is tailored, when the corporation is insolvent , the creditors of the corporation are entitled to have all its assets distributed first among them according to their respective rights and properties. This is in accordance with the trust fund doctrine . (19 Am. Jur. 2d 1027-1029; Stevens, Handbook on the Law of Private Corporations, 2nd Edition, p. 871 [1949] citing Wood V. Dummer, Fed. Cas. No. 17, 944, 3 Mason, 308-311) While there may be basis to the claim that the relationship between the HDMF and its contributors-members is that of a trustee and a trustor, an argument that seems to flow from Section 8 of P.D. No. 1752, which provides: "SEC. 8. Provident Character . The fund shall be private in character, owned wholly by the members, administered in trust and applied exclusively for their benefit . . ."; (Emphasis supplied.) this does not, however, diverge from the basic premise that HDMF is a corporate body empowered to make investments, enter into contracts, and borrow funds to further the fulfillment of its mandate. Thus, Section 15 of P.D. No. 1752 provides: "SEC. 15. Money Investments . All moneys of the Fund , as are not needed to meet current administrative and operational requirements, shall be invested with due and prudent regard for its safety, growth and liquidity needs." To ensure the liquidity of HDMF and the receipt by the members of the Fund of their provident payments when they are due, Section 16 of P.D. No. 1752 grants tax and guarantee benefits to the Fund, as follows: "SEC. 16. Tax and Guarantee Benefits . Notwithstanding any provisions of existing law, decree, executive or administrative order, rule or regulations to the contrary, the Fund and all its assets, collections, receivables and increments, as well as all distributions therefrom, whether of contributions, ratable income of the Fund, or dividends paid to or received by the members thereof, or their heirs/beneficiaries, shall be exempt from the payment of any and all forms of taxes, assessments and other charges. All such provident payments shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever, either before or after receipt by the persons entitled thereto, except to pay any debt of the covered member to the Fund. In addition, the Government of the Republic of the Philippines hereby guarantees the payment of employees ' and employers ' contributions and dividends to the members when they are due ". (Emphasis supplied) Based on the foregoing premises, we reiterate our affirmative view on the matter treated herein. Very truly yours, (SGD.) TEOFISTO T. GUINGONA, JR. Secretary