Atty. Emmanuel C. Paras

January 11, 1991 Atty. Emmanuel C. Paras Sycip, Salazar, Hernandez & Gatmaitan 105 Paseo de Roxas, 1200 Makati Metro Manila S i r : This refers to your letter dated December 10, 1990 requesting clarification to our letter dated October 31, 1990 addressed to Projects and Lands, Inc. wherein the Commission ruled that said Corporation cannot extend loan to one of its foreign stockholders in such amount equivalent to 50% of his paid-up subscription as the same may be violative of the Trust Fund Doctrine. However, you noted therein that loans to stockholders may be allowed under certain conditions and you would like to know what these conditions are. LibLex In corporations, other than those formed to engage in the business of making loans, the loaning of money is but an incidental power, and cannot be extended to purposes foreign to the business and objects for which the corporation was created (6 Fletcher, Sec. 2619, citing Leigh v. American Brake-Bean Co.,205 Ill. 147, 68 NE 713, affg. 107 Ill. App. 444) However, while a corporation, other than one created for the purpose, cannot engage in the business of making loans, this does not mean that it may not make temporary use of its surplus funds-by lending them, making them productive. Whenever a corporation has the right to hold funds for which there is no present use, it may loan them in the absence of express restrictions, in order to invest them, instead of allowing them to remain idle and unproductive. (6 Fletcher, Sec. 2620, citing several cases) However, in making loans, a corporation should observe whatever provisions or limitations there may be in regard to the security to be taken, or the parties to whom the loan may be made. (6 Fletcher 2622) Corporate funds may be temporarily loaned to stockholders, provided the following conditions are observed: 1. That the funds are not presently used by the company and the loaning is not made on a regular basis; 2. That by lending the funds, it will make them productive instead of allowing them to remain idle; 3. That there is no express restrictions in the articles of incorporation or by-laws; 4. That there must be a collateral or assurance that the party to whom the loan may be made is capable of returning or paying them at maturity date; 5. That the lending of the funds is not used as a scheme to prejudice corporate creditors or result in the infringement of the Trust Fund Doctrine; and 6. That Section 42 of the Corporation Code be complied with. Please be guided accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman