DOJ Opinion No. 059, s. 1984

DOJ OPINION NO. 059 , s. 1984 March 26, 1984 Chairman Manuel G. Abello Securities and Exchange Commission E. delos Santos Avenue Mandaluyong, Metro Manila Sir : This is in reply to your request for opinion on whether the issuance by Marinduque Mining and Industrial Corporation (MMIC) of U.S. dollar-denominated income bonds to the Philippine National Bank (PNB) and Development Bank of the Philippines (DBP) under the facts set out in your letter may be considered to fall within the exception contained in Section 1(d) of Republic Act No. 529 as amended by Republic Act No. 4100, which relates to "other international banking, financial investment and industrial transactions". The relevant facts as set out in your letter are as follows: "Marinduque Mining and Industrial Corporation ("MMIC") proposes to issue in the Philippines U.S. dollar-denominated income bonds exclusively to two government-owned financial institutions, Philippine National Bank ("PNB") and Development Bank of the Philippines ("DBP"). The Agreements connected with the issuance of the bonds will be executed in the Philippines. "MMIC is presently indebted on foreign loans which it obtained from several foreign banks. These loans, which were entered into with all the requisite Philippine government approvals, were paid to MMIC and are re-payable by MMIC, by their terms, in foreign currency PNB and DBP guaranteed the payment in foreign currency by MMIC of these foreign loans, and are solidarily liable with MMIC to the foreign creditors on these loans Under a financial reorganization program designed to reduce the level of MMIC's debt to that which may be sufficiently serviced by its income from operations and from internally generated funds, PNB and DBP propose to assume the foreign currency obligations of MMIC on the above-mentioned international loans. PNB and DBP will thereby become principal obligors thereon and free MMIC from liability to the foreign banks for the repayment of these loans. This assumption of obligations will be subject to the consent of MMIC's foreign creditors with which DBP and PNB will have to enter into new loan agreements. In turn, PNB and DBP have also proposed that MMIC issue U.S. dollar-denominated income bonds to them in consideration of their assumption of MMIC's foreign debt. The total face value of such income bonds will be approximately equivalent to the foreign indebtedness of MMIC which PNB and DBP will be assuming. LexLib As we understand it, PNB and DBP are requiring MMIC to issue dollar-denominated income bonds in order that PNB and DBP may be able to hold themselves whole since PNB and DBP would have to pay the foreign creditors in foreign currency. In practice, it is anticipated that MMIC would have to deliver to PNB and DBP such number of Philippine pesos as may be necessary under the Philippine peso US dollar exchange rate prevailing from time to time to enable PNB and DBP to purchase from the Central Bank of the Philippines the number of dollars to be repaid to foreign creditors. If the income bonds were denominated in Philippine pesos, the number of pesos re-payable by MMIC to the bond-holders is expected to differ from time to time as the bonds mature, in accordance with the Philippine pesos U.S. dollar exchange rate prevailing at the time of each such repayment or maturity. Thus, if the income bonds were peso-denominated, and if PNB and DBP are to be held whole, the number of pesos repayable by MMIC cannot be fixed and unchanging bonds rather would have to be variable and measured by a foreign currency. Such would appear to be equally covered by the principal provision of Section 1, R.A. No. 529, as amended." Section 1 of Republic Act No. 529, as amended, provides as follows: "Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions where the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long ass the funds are identifiable, having emanated from the sources enumerated above; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking, financial investment and industrial transactions . With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provisions, in which cases the terms of the parties' agreement shall apply, every other domestic obligation heretofore or hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts; Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore and hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private." (As amended by Republic Act No. 4100, approved June 19, 1964) Our opinion is requested on the question of whether the proposed issuance of U.S. dollar-denominated income bonds by MMIC to the PNB and DBP under the above-described circumstances would fall within the exception relating to "other international banking, financial investment and industrial transactions". Subject to the extended discussion hereunder, the query is answered affirmatively. We note that the proposed U.S. dollar-denominated income bonds would clearly constitute a "domestic obligation" that is to say, an obligation contracted in the Philippines that would give the bondholders "the right to require payment in . . . currency other than Philippine currency." Thus, it becomes necessary to determine the ambit of the exception (d) to the general rule set forth in Section 1 of the statute. In the first place, there appears to be no question that the existing obligation of MMIC to repay in foreign currency the loans it obtained from its foreign creditors are valid and enforceable, whether or not they were contracted in the Philippines, since such existing obligations constitute "international banking, financial investment and industrial transactions." The proposed assumption by PNB and DBP of the primary obligation to repay such foreign exchange loans to MMIC's foreign creditors, would be similarly valid and enforceable. The subrogation of PNB and DBP as primary obligators to the foreign creditors, and as such bound to discharge such obligations in foreign currency, will constitute an international banking transaction or, more precisely, an integral part of an international banking transaction, within the meaning of the statute. LexLib In the context of the specific facts set out in your letter, it is believed that the proposed issuance of U.S. dollar denominated income bonds is so clearly or inextricably related to an "international banking transaction" as to itself partake of the nature of an "international banking transaction" within the meaning of the exception in Section 1(d) of the Uniform Currency Act. The proposed income bonds constitute in effect an indemnity arrangement between MMIC on the one hand and PNB and DBP on the other hand, by which the latter may recover from the former what they shall be paying directly in foreign exchange creditors. This being so, the proposed income bonds should be considered together with the proposed assumptions by PNB and DBP of MMIC's foreign exchange obligations to foreign creditors and MMIC's original and subsisting obligations to pay its foreign creditors in foreign exchange. Viewed in a slightly different manner, the original loan and guaranty agreements which MMIC and DBP and PNB entered into with foreign financial institutions, the proposed assumption by PNB and DBP of the status of primary obligors to the foreign financial institutional, and the indemnity arrangements by which PNB and DBP will have to recover from MMIC what they shall have paid on what shall have been originally MMIC's obligations, all constitute integral components of one continuing international banking transaction within the meaning and purpose of exception (d) to the Uniform Currency statute. The evident purpose behind exception (d) is to recognize that in an international foreign exchange transaction where a Philippine party acquires foreign exchange value, such value must be paid to the foreign seller (in import-export transactions) or repaid to the foreign creditor (in international banking transactions) since neither the foreign seller nor the foreign creditor would, in the realities of international commerce and banking, be willing to bear the risk of fluctuation in value between the Philippine peso and the foreign currency stipulated. The proposed income bonds are merely a mechanism by which such risk is effectively passed on by PNB and DBP to MMIC, the original situs of the risk. In view of the foregoing, it is believed that in the context of the specific facts set forth above, the proposed issuance of U.S. dollar-denominated income bonds by MMIC to the PNB and DBP falls within exception (d) of Section 1 of R.A. No. 529, as amended. Very truly yours, (SGD.) RICARDO C. PUNO Minister of Justice