DOJ Opinion No. 056, s. 1998

DOJ OPINION NO. 056 , s. 1998 May 19, 1998 MR. GONZALO T. SANTOS, JR. Chief Executive Trustee Asset Privatization Trust North Davao Mining Corp. Bldg. 104 Gamboa St., Legaspi Village Makati City MR. ROGELIO L. LUIS President and CEO Philippine National Construction Corp. EDSA cor. Reliance St. Mandaluyong City Gentlemen : This refers to your joint query on the application of Letter of Instruction 1295 (LOI 1295) given the following factual milieu: The Philippine National Construction Corporation (PNCC), formerly known as the Construction Development Corporation of the Philippines (CDCP), suffered serious financial setbacks in the 1980s. By reason thereof, then President Ferdinand Marcos issued LOI 1295 directing measures to expedite the financial rehabilitation program of PNCC. In the initial implementation of LOI 1295, the creditors of PNCC, mostly Government Financial Institutions (GFIs), like the Development Bank of the Philippines (DBP), Government Service Insurance System (GSIS), Land Bank of the Philippines (LBP), National Development Company (NDC), Philippine Export and Foreign Loan Guarantee Corporation (PEFLGC) and Philippine National Bank (PNB) allowed the conversion of PNCC's liabilities into shares of stocks. This debt-to-equity conversion, however, was never completed. On December 8, 1986, Proclamation No. 50 was issued "proclaiming and launching a program for the expeditious disposition and privatization of certain government corporations and/or the assets thereof." It also created the Asset Privatization Trust (APT) and the Committee on Privatization (COP). Some of the assets of PNCC, being a government-acquired asset corporation, were transferred to and placed under the APT. Invoking LOI 1295 and Proclamation No. 50 PNCC now seeks the full and complete implementation of LOI 1295, particularly, the conversion into equity of the balance of its liabilities and obligations now held by APT which were not converted into equity before due to some constraints then prevailing at the time of initial implementation of said LOI 1295. APT, however, does not agree. APT maintains that "LOI 1295 cannot now be fully implemented" for the following reasons: 1. The resulting conversion into equity of the loan obligations of the GFI cannot be accommodated by the authorized capital stock of PNCC which, at present, stands at two billion seven hundred million pesos (P2,700,000,000.00) per the Amended Articles of Incorporation of PNCC filed with the Securities and Exchange Commission (SEC). To amend the Articles of Incorporation for PNCC to be able to accommodate the additional capital that will be infused through the full implementation of LOI 1295 may be unlawful and illegal inasmuch as it may violate Administrative Order No. 14 and Proclamation No. 50, as amended. 2. Administrative Order No. 14, dated February 3, 1987, identified certain portions of the GFIs exposure to PNCC that were transferred to APT as "loans" and not as equity. This is due to the fact that LOI 1295 was not fully implemented in 1983 or even prior to the identification of those loan obligations in 1987 as "non-performing assets." The identification of these exposures as "non-performing assets" was made pursuant to valid and existing laws Proclamation No. 50, as amended, and Administrative Order No. 14. Any further implementation of the provisions of LOI 1295 may be considered as invalid and unlawful inasmuch as this would change the classification of the "receivables" and "loans" that were transferred to APT into equity. Furthermore the "operative fact" of the parties to fully implement LOI 1295 in 1983 resulted to an identification by law of the remaining GFI exposure in PNCC as "non-performing assets". 3. Another problem which may hinder the full implementation of LOI 1295 is the unresolved issue of the value of PNCC's liabilities transferred to APT which is still the subject of an on-going reconciliation. GFIs guarantors/creditors, namely, PNB and NDC are still presenting conflicting figures. The rest of the GFIs had already reconciled their accounts. 4. Lastly, it could not have been the intent of the issuing authority (President Ferdinand E. Marcos) of LOI 1295 to disregard the existing laws applicable to the government Financial Institutions concerned relative to their allowable equity investments. It is a basic rule that laws, rules and regulations should be read and applied in harmony with other existing laws, rules and regulations. It should be remembered that LOI 1295 never repealed, even impliedly, any laws, rules and regulations when it was issued in 1983 inasmuch as it was merely an "instruction" to the GFIs concerned with no penalty or sanction in case of failure to comply with it. PNCC, on the other hand maintains that "LOI 1295 can now be implemented" because of the following reasons. 1. While it is true that the present authorized capital stock of P 2.7 billion cannot absorb the total conversion of all the loans into equity, nevertheless, records show that the stockholders have already approved the increase in PNCC's authorized capital to P 4 billion. What is only needed now is the filing of an application with the SEC for the increase of the authorized capital stock to P 4 billion. With the increase, majority of the loans can already be converted into equity. Should there still be a need for additional increase in the authorized capital stock to cover all the remaining outstanding obligations, there is no hindrance in calling for another stockholder's meeting and SEC approval for the increase. 2. LOI 1295 and Proclamation No. 50 (as amended by Proclamation No. 50-A) share the same principal objective that is, rehabilitation of financially distressed corporations with huge government related obligations. The centerpiece and heart of LOI 1295 is the rehabilitation of PNCC. The rehabilitation can be fully attained by the swapping of all its government debs to equity. 3. One main policy of Proclamation No. 50 is to divest government control of some government-owned or controlled corporations found to be " unnecessary or inappropriate for the government sector to maintain " (Sec. 1, Article I, Proclamation No. 50). PNCC a government-acquired asset corporation, is eyed for eventual government disposition or privatization. To be ready for privatization, it must be clothed with an image attractive to potential investors. To project a good picture, PNCC, as it is now, is undergoing the meticulous process of rehabilitation, which rehabilitation requires the conversion. That is dealt with by the swapping or conversion in that there is no government cash to be released and additional government just to be involved. All that it takes it to convert one asset of the government (receivables) to another asset (investment) when the government (thru GFIs) takes shares of stocks in the conversion. The conversion will clean up PNCC's balance sheet resulting into very favorable "asset to liabilities" and "debt-to-equity" ratios which will make PNCC a very bankable company. PNCC will then become a very attractive company to own considering the various projects it is undertaking. 4. The full implementation of LOI 1295 at present is no longer hindered by the legal constraint that fetters the banks and GFIs because the implementation will be with respect to the indebtedness of PNCC to the national government through the APT which is not a bank or financial institution. In the light of the foregoing, APT and PNCC jointly request this Department for an opinion on the following queries: Can LOI 1295 be still implemented now? Stated differently, can the balance of PNCC's erstwhile obligations with the government financial institutions (GFIs) which were not converted into equity at the time of the initial implementation of LOI 1295 be now validly exchange or converted to PNCC's common shares of stocks? Assuming that the opinion rendered by the DOJ would be in favor of the full implementation of LOI 1295, what shall be the specific reckoning date of the subject obligations? a. 1983 date of issuance of LOI 1295; b. 1986/7 transfer dates of obligations to the APT, pursuant to particular Deeds of Transfer between the National Government and the concerned GFIs; or c. 1998 date today where interest and penalties are added on to the transfer prices. We note that PNCC has a pending case before the Securities and Exchange Commission (SEC), Rodolfo M . Cuenca vs . Philippine National Construction Corporation, et al ., SEC Case No . 05-96-5367, relating to its shares of stocks. Furthermore, it appears that a Temporary Restraining Order (TRO) was issued by the SEC enjoining and/or restraining all GFI stockholders of PNCC from voting their shares or exercising any rights arising therefrom. The same TRO has also enjoined and/or restrained PNCC from allowing or recognizing the voting or other exercise of stockholders' rights by the aforesaid GFI stockholders. Bearing in mind the pendency of the aforesaid case before the SEC, we regret we cannot render the opinion requested. By settled policy and practice, the Secretary of Justice does not render opinion or give legal advice on matters which fall within the jurisdiction of another office or agency, unless upon request of the head of the office or agency concerned (Secretary of Justice Op. Nos. 19, 56 and 60, s. 1996; No. 146, s. 1994; and No. 95, s. 1987). To rule on your query would be an unwarranted intrusion in the exercise by the SEC of its exclusive and original jurisdiction on controversies between and among the stockholders of a Corporation. Moreover, the query involves the substantive rights of private parties the private stockholders of PNCC. Since the opinion of the Secretary of Justice is merely advisory in nature, such opinion would not be binding upon said private parties who, if adversely affected by such opinion, may take issue therewith and contest it before the court. As a matter of policy, therefore, the Secretary of Justice has consistently refrained from rendering opinion on questions which are justiciable in nature or those which may be the subject of litigation before the courts (Secretary of Justice Op. No. 91, s. 1957; Ops. No. 19 and 92, s. 1971; Op. No. 108, s. 1978 and Op. No. 46, s. 1981). Finally, we cannot formulate a responsive answer on the aforementioned queries since your request does not present the complete factual situation from which we may draw our premises and conclusions. We note in particular the unresolved issues pertaining to the nature of the assets and value of liabilities transferred to APT and the on-going reconciliation of accounts among PNCC's GFI creditors. The Secretary of Justice does not render opinion on factual issues and questions the resolution of which hinges on factual matters which are not readily discernible from the query ( Secretary of Justice Opn. Nos. 67, s. 1984; No. 5, s. 1985 and Nos. 113 and 117, s. 1989). Very truly yours, (SGD.) SILVESTRE H. BELLO III Secretary