DOJ Opinion No. 087, s. 1985

DOJ OPINION NO. 087 , s. 1985 August 1, 1985 The Senior Deputy Governor Central Bank of the Philippines Manila Sir : This refers to the first draft of the Philippines public Sector Model Restructuring Agreement (the "draft Agreement"), a copy of which was furnished this Ministry for "comments and suggestions". The Agreement provides for the scheme by which certain foreign indebtedness of a Philippine Public Sector Borrower (the "Obligor") falling due in the period from October 17, 1983 through December 31, 1985, will be restructured, upon the guaranty of the Republic of the Philippines (the "Guarantor"), for repayment from 1989 through 1994. on the basis of the Restructing Principles distributed by the Philippine Government to the international banking community in 1984. The draft Agreement will serve as a model for the restructuring of such obligations of an Obligor included in the list attached to the said Restructuring Principles. Hereunder are our initial comments/suggestions on the said document: 1. All provisions that certain notices, advises, or certificates submitted to the Obligor "shall be conclusive and binding for all purposes, in the absence of manifest error" (See for instance, sections 3.07 [b] [c] [d] and [e], 3.08 [b], 5.07 [a] and 12.15) should be modified such that the evidentiary value of such documents should only be prima facie in order to afford the Obligor reasonable opportunity to contest the accuracy of such documents. While the qualifying phrase "in the absence of manifest error" does not preclude contestability is greatly restricted. It is pertinent to note that in one instance, the draft Agreement provides that the entries in the bank's records are merely prima facies evidence of its contents (See Section 5.04). 2. Section 4.02 (re mandatory prepayments) should be reexamined. There does not appear to be justification why in the event the Guarantor or the Central Bank shall repay its indebtedness with the IMF or any official credit agencies, the Obligor should be required to similarly prepay its obligations under the draft Agreement. 3. Section 5.08 [e] (re survival of obligations) may be deleted for being redundant. This section is among those mentioned in Section 12.09 which will survive the payment in full of the obligations under the draft Agreement. 4. In Section 7.01 [1] (tax exemption], the correctness of the representation would depend upon whether or not the tax-exempt status of the Obligor which has been abrogated under P.D. No. 1931 has been restored by subsequent Official action. Incidentally, this comment likewise applies to Section 7.02 [1]. 5. In Section 7.02 [e] (re pari passu ranking), the obligations of the Guarantor should be equally ranked only with its unsecured external indebtedness, which is standard in existing credit agreements of the Guarantor. The local indebtedness of the guarantor should not be treated or categorized in the same manner as its foreign indebtedness. prcd 6. In Section 8.01 [h] (compliance with laws), the second part of the proviso should be deleted in as much as it would render nugatory the benefit of the proviso. When an "order, decree or judgment" of any governmental agency is erroneous, the Obligor should be allowed to contest it, regardless of whether or not its inability to comply with the contested "order, judgment or decree" may adversely affect any person to whom a credit is owed. The same comment is made as regards Section 8.01 [i] (removal of liens), with the addition that the phrase therein which requires the establishment of a reserve to satisfy the claims which might become an encumbrance should likewise be deleted for being onerous. 7. In Section 10.01 (re events of default) a. Paragraphs (b) and (c) should provide for a curing period, If the Obligor is given opportunity to remedy a payment default, there is greater reason for giving it similar opportunity to cure a default of representation or performance of covenant. b. Paragraphs (1) (re material adverse change) and (m) (re non-compliance of policy statement regarding support for the private financial sector), should be deleted as the determination by the majority banks is too subjective; in the alternative, simply delete the phrases "gives the Majority Banks grounds to believe" and "in a manner satisfactory to such Banks" found in the two subsections respectively, to give the determination of the occurrence of such defaults more objective basis. c. Paragraph (p) (re other restructuring arrangement) should be deleted. There is no sufficient justification to preventing the Obligor from securing a restructuring arrangement upon terms better than those found in the draft Agreement. This is specially true of private financial sector borrowers over which the Philippine Government has actually no control. d. The number of days prescribed for securing the stay, dismissal or discharge of any judgment or proceeding affecting the Obligor or its properties (Subsection [o], [q], [a]) should be modified to 120 days or longer in view of the current state of judicial processes in the country. 8. In Section 12.05 (re refund of lender's costs and expenses), delete the therefrom subsection (a) (ii) as being unreasonably onerous, especially as regards in investigation of the occurrence of alleged events of default. This is a new reimbursable expense not found in existing agreements. The concerns of the lender in this regard are already taken care of in subsection (a) (iii). 9. In Section 12.08 (re consent to jurisdiction and waiver of immunities) a. delete the phrase whereby the Obligor and the Guarantor irrevocably and unconditionally waives "any defense to the maintenance of such actions or proceedings" in subsection (a) as it can be construed as force losing any defense of the Obligor against any suit of the lender under the draft Agreement; b. delete the first part of subsection (b) for being unnecessary. A submission to the jurisdiction of certain courts is clearly not a similar submission to another court; c. modify the exceptions in subsection (d) by simply stating that properties intended for public use or for public service are not included in the waiver of immunity by the Guarantor. This will ensure that the waiver shall cover only the patrimonial properties of the Guarantor. 10. In Section 12.09 (re partial invalidity), delete the provision on the waiver of legal provisions invalidating any provision of the draft Agreement since the qualifying phrase "to the fullest extent it may effectively do so under applicable law" makes the waiver superfluous and meaningless. prcd 11. In Exhibit "F" (re Ministry opinion), the correctness of paragraph (j) therein (re absence of tax) would depend upon the tax-exempt status of the Obligor under existing legislation. Please be advised accordingly. Very truly yours, (SGD.) ESTELITO P. MENDOZA Minister of Justice