DOJ Opinion No. 138, s. 1991

DOJ OPINION NO. 138 , s. 1991 September 19, 1991 Hon. Tomas V. Apacible Acting Secretary Department of Finance Manila Sir : This refers to the Memorandum of Agreement ("MOA") by and among the National Government ("NG"), Central Bank of the Philippines, Government Service Insurance System, National Development Company and Philippine Air Lines ("PAL") regarding the privatization of PAL. Opinion is requested "on whether the transaction contemplated in the MOA are consistent with all applicable laws and are therefore legal, valid and binding". More particularly, you wish clarification on whether "the assumption of PAL's foreign currency obligations in exchange for unissued shares of stocks of PAL" can be legally sustained under Proclamation No. 50, as amended, considering that the said shares are not yet recorded in PAL's books and that under Section 23 of said Proclamation, the assets to be transferred should be identified within one (1) year from the issuance of said Proclamation. prcd It appears from the MOA that PAL has certain foreign currency obligations, which carry the guarantee the NG; that a financial restructuring of PAL was found necessary prior to its privatization so as to maximize the expected proceeds from such undertaking; that said restructuring calls for the assumption by the NG of PAL's foreign currency obligations in return for which PAL shall issue to the NG 800 million shares of stocks and that the assumption of liabilities and delivery of shares shall be based upon Proclamation No. 50. It is also gathered that in connection with the issuance of PAL shares to the NG, the governing board of PAL has already approved the increase of its authorized capital stock from P3 Billion to P10 Billion and that upon PAL's representations. the Securities and Exchange Commission ("SEC") has expressed willingness to approve PAL's application for an increase in its authorize capital stock as long as the required documents are submitted, particularly, the proof of PAL's outstanding foreign currency indebtedness to be assumed by the NG. The pertinent provisions of the subject law state: "Sec. 5. Powers and functions . The Committee shall have the following powers and functions: (1) To identify to the President of the Philippines, and arrange for transfer to the National Government and/or to the Trust and the subsequent divestment to the private sector of (a) such non-performing assets as may be identified by the Committee, and approved by the President, for transfer from the government banks for disposal by the Trust or the government bank for disposal by the Trust or the government banks, and (b) such government corporations, whether parent or subsidiary, and/or such of their assets, as may have been recommended by the Committee for disposition, and approved by the President . . ." (Emphasis supplied) xxx xxx xxx SEC. 22. Transfer of Assets . xxx xxx xxx The terms of transfer of assets may include appropriate arrangements for the consideration thereof, including but not limited to the assumption by the National Government financial institutions and/or other government corporations, whether real or contingent. The National Government, through the President, is hereby authorized to assume the obligations of government on terms and to the extent determined by the President, on the recommendation of the Minister of finance, to be warranted by the transfer of assets from such institution pursuant to this Proclamation." prcd xxx xxx xxx "SEC. 23. Mechanics of Transfer of Assets . As soon as practicable, but not later than one year from the date of the issuance of this Proclamation, the President, acting through the Committee on Privatization, shall identify such assets of government institutions as appropriate for privatization and divestment in an appropriate instrument describing such assets or identifying the load or other transactions giving rise to the receivables, obligations and other property constituting assets to be transferred." (Italics supplied) xxx xxx xxx Under the foregoing provisions of law, the Committee on Privatization is tasked with identifying the assets of government institutions which are be transferred to the NG for their eventual disposition to private sector. The same provision likewise provide that the NG may, in consideration for such transfer, assume certain liabilities of the government institution involved as may be warranted by the assets acquired by it. The law therefore authorized reciprocal undertaking between the two entities, namely, for the government institution to transfer assets to the NG and for the latter to assume specific obligations of the former. It is believed that the abovesaid transaction requires that the assets to be transferred must already be in existence at the time the NG assumes the obligations of the government institution. For, it is clear from the language of Section 22, abovequoted, that transfer of asset is the consideration for the assumption of obligations; put otherwise, what brings about the assumption is the conveyance of the assets. Hence, if there are no assets to be transferred, the NG is disallowed from assuming obligations of the government corporation. Besides, it is necessary that the value of the NG if only because the President shall have to determine whether the assumption of obligations is warranted by the assets assigned to the NG. Based thereon, it is difficult to see how the bilateral transaction abovedescribed may be consummated if, as you state, PAL's new and unissued shares are still to be recorded in its books. the reason is from the perspective of Proclamation 50, PAL does not as yet possess the assets which it intends to transfer to the NG in return for which the latter shall assume the airline's liabilities. As already observed, the law envisions correlative obligations between the NG and the government institution involved, but if one is unprepared to perform his, then the other is not obligated to do his own. It is noteworthy, in this regard, that the SEC has ruled that since every corporate transaction or business event has to be reflected transaction or business event has to be reflected in the books, the corporation may state in its books an increase in its authorized capital stock when the same has already been approved by its managing board and stockholders. effective only upon approval and the issuance of the certificate of filling by the SEC. (See SEC Opinion dated July 28, 1972 cited in de Leon, Corporation Code annotated, 1986 Ed., at p. 250). Hence, there is no legal impediment for PAL to record in its books the new and unissued shares after its governing board and stockholders have approved the increase in its capitalization. It is pertinent to observe that under the transaction specified on the MOA, the NG will in effect subscribe to PAL's new shares of stock in exchange for taking responsibility for discharging its external indebtedness. Pursuant to the Corporation Code, previously-incurred indebtedness constitutes a valid consideration for the issuance of corporate shares (See Sec. 62[4]). Based on the foregoing, it is believed that the transfer of shares and assumption of obligations contemplated in the MOA may be upheld under the terms of Proclamation 50 if the increase in the capital stock of PAL has already been approved by the Sec and a certificate of filing of the increase has been issued by said Commission since by that time, the new PAL shares are ready for issuance to the NG in return for which the NG shall assume PAL's foreign liabilities. prcd As for the requirement in Section 23 of Proclamation 50 that the one-year period prescribed therein, this Department has already ruled that said period like the six-month term laid down in Section 22 thereof, is merely directory and not mandatory (Secretary of Justice Opn. No. 59, s. 1990). As explained in this Department's Opn. No. 210, series 1988, to wit: "True, one of the requirements prescribed in the foregoing provision for the exercise of the said authority by the President is that the government-owned or controlled corporation involved must be within six months from the issuance of this Proclamation on December 8, 1996. But even on the assumption that such government-owned or controlled corporation has not been so identified and approved for divestment as of said date, it is believed that this circumstance does not present a legal impediment since the six-month period is merely director, it appearing that the said period was provided merely for facilitation, and not for prescription, purposes. It has been held that where the statute directs the doing of a thing in a certain time, without any negative words restraining the doing of it afterwards, the provision as to time is generally directory, and not a limitation of authority; and in such case, where no injury appears to have resulted, the fact that the act was performed after the time limited will not of itself render it invalid" (Phil. Ass'n. of Free Labor Unions vs. Sec. of Labor, 27 SCRA 40; Horkan vs. Beasley, 75 S.E. 341). xxx xxx xxx It has been said that an interpretation is favored which reflects the legislative policy, and once the possession of the power granted is established, of the power granted is established, a generous measure of its exercise will be permitted to the end that the purpose/s of the law may be effectuated (75 Am. Jur. 2d 461). Clearly, the abovestated policy of Proclamation No. 50 will be served if the period prescribed in Section 22 is liberally construed. Indeed, we are unable to see any strong reason why the identification and approval for divestment, dissolution, consolidation, etc. of government corporations can, and should, be done only within the six-month period provided in Section 22 and not thereafter, when the clear intent and policy of the Proclamation is to rationalize the government corporate sector through the prompt and judicious disposition and privatization that thwarts the government privatization program is not in keeping with this avowed policy of the government and should be avoided. It bears stress that the privatization of PAL has previously been approved by the committee on Privatization and the President. prcd Please be advised accordingly. Very truly yours, (SGD.) SILVESTRE H. BELLO III Acting Secretary