Agcaoili & Associates

August 24, 1987 Agcaoili & Associates 18th Flr., Citibank Center Paseo de Roxas, Makati, MM Attention : Atty . Antonio Agcaoili Gentlemen : This refers to your letters, dated July 13 and 27, 1987, respectively, requesting the opinion of this Commission on the query posed therein. It appears therein that your client, a domestic banking corporation herein referred to as the "Bank", has obligations/advances with the Central Bank, which are secured by a mortgage on some of the Bank's assets. As part of a proposed Rehabilitation Plan for the Bank, there will be a series of assignments of credit and offsetting arrangement, as a result of which, the obligations/advances of the Bank with the Central Bank will be wiped out. However, instead of the Central Bank directly taking and holding the preferred shares of the Bank, the CB will designate the Philippine Deposit Insurance Corporation (PDIC) to hold the preferred shares. In other words, while the beneficial ownership of the preferred shares remain with the CB, the legal title to the stock will stand with the PDIC as per the stock book of the Bank. The redemption of the aforesaid preferred shares by the PDIC as the record holder will be secured by a lien an some of the assets of the Bank which have been mortgaged with the CB. You contend that such arrangement is intended to preserve the collateral position or preferential mortgage lien of the Central Bank on the Bank's assets, and would not prejudice the other stockholders and/or creditors of the Bank insofar as these assets are concerned; Hence, your query as to whether the redemption of certain preferred shares issued by the domestic bank to the Central Bank, through PDIC as the record holder thereof, may be secured by a lien on some of the assets of the Bank which have existing mortgages with the CB. Purchase or redemption of shares is subject to the general restriction in favor of priority of creditors and may not be made when a corporation is insolvent or if such purchase or redemption will cause insolvency or inability to meet debts and liabilities as they accrue. (Ballantine on Corp., sec. 263, at 620, citing Mueller v. Kreauter & Co., Inc. 131 N.J. Eq. 475, 25 A(2d) 874). It is a general rule that a corporation cannot without express legislative authority issue even preferred shares which will give the shareholders a claim for a return of investment equal or superior to the right of creditors to payment of their claims, such arrangement unless authorized by statute is deemed contrary to a policy of corporation law. (Ballantine, Supra, ses. 214 at 503). The shareholders of both common and preferred, are risk takers who are required to invest capital in this business and who can look only to what is left after creditors are fully provided for. Thus, in the absence of a clear statute, the claims of shareholders cannot be secured by a lien on the corporate assets . (Ibid.) Likewise, please be advised that it is immaterial how or where the holder obtained his stock, since the preference belongs to the stock and not to the stockholders. (11 Fletcher Cyc. Corp., 1971 rev. vol., sec. 5294, citing Field v. Lamson & Goodnow Mfg. Co., 162 Mass. 388, 38 NE 1126, 27 L.R.A. 136). Therefore, the fact that the holders of preferred stock were formerly creditors of the corporation gives them no greater right as against creditor. (Fletcher, Supra., citing St. John v. Erie Ry. Co., 22 Wall (89 U.S.) 136; 22 L. ed. 743, affg. 10 Blarchf 271 Fed. Case No. 12,226; Hamlin v. Toledo, St. L. & K.C.R. Co., 72 F 92). In abandoning their position as creditors, and thus becoming preferred shareholders, they lose their rights as creditors and they cannot be reinstated in their former position. (Warren v. King, 108 US 389, 27 L. 769, 2 S.Ct. 789, affg. 2F 36). A person cannot by virtue of a certificate of preferred stock, be at least as to the creditors of the corporation, both a stockholder and a creditor at the same time. (Ibid.) LibLex In view of the foregoing, our answer to your query is in the negative. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman