Atty. Edward S. Serapio

December 10, 1991 Atty. Edward S. Serapio De Borja Medialdea Ata Bello Guevarra & Serapio Ground Floor, Greenbelt Mansion 106 Perla St., Legaspi Village Makati, Metro Manila S i r : This refers to your letter dated December 2, 1991 requesting opinion on the queries posed therein. As stated, the Technology and Livelihood Resource Center (TLRC) has rejected the offer of Pioneer Venture, Incorporated to give a third party mortgage to secure the Agro-Industrial Technology Transfer Loan applied for by Amalgamated Technologies, Inc. (AMTEK), on the ground that the same does not fall under any of the following allowable mortgages enumerated in SEC Opinion dated April 15, 1987 addressed to Technology Resource Center: 1. When the mortgage of corporate assets/properties shall be done in the furtherance of the interest of the corporation and in the usual and regular course of its business; and 2. To secure the debt of a subsidiary. You argued, however, that the above-mentioned SEC Opinion further stated that third-party mortgage may be allowed even if the same does not fall under any of the foregoing instances, provided the mortgage is ratified by all the shareholders and where no rights of creditors are prejudiced or impaired thereby. Your queries are: a) Whether a corporation can validly mortgage its property to secure the obligations of another corporation which is not a subsidiary of the former corporation if all stockholders of the former corporation authorize the mortgage and no creditor is prejudiced (or creditors have given their consent)? b) What may be sufficient proof of such stockholders' consent? In connection therewith, please be advised that the above-mentioned exception stated in the above mentioned previous SEC Opinion may be allowed only under the following conditions which should be strictly observed by the corporation: 1. That there is no express restriction in the articles of incorporation or by-laws; 2. The purpose of the mortgage is not illegal; 3. Consent of all corporate creditors and stockholders must be secured; 4. That the transaction is not used as a scheme to defraud or prejudice corporate creditors or result in the infringement of the Trust Fund Doctrine; 5. That the mortgage will not hamper the continuous business operation of the corporation; 6. That the accommodated third party involved in the mortgage is financially solvent and capable of paying the mortgagee/creditor. Relative to your second query, taking into consideration the nature of the proposed transaction, it is more advisable to obtain a formal or written consent from all the stockholders and creditors. llcd Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman