Ms. Maria Bella Guevarra-Eviota

January 21, 1993 Ms. Maria Bella Guevarra-Eviota Legislative Staff Chief House Of Representatives Quezon City, Metro Manila M a d a m : This refers to your letter of January 19, 1993 requesting opinion on the following query: "May educational institutions loan substantial amounts of money to its Officers, Directors, or Stockholders?" llcd In corporations, other than those formed to engage in the business of making loans, the lending 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 that purpose, cannot engage in the business of making loans, this does not mean that it may not make temporary use of its surplus funds, and by lending them make 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) Thus, 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. ( SEC letter dated January 11, 1991 addressed to Atty. Emmanuel C. Paras ) In the present query, considering that the amount of money to be loaned is substantial as stated in your letter, the same may not be allowed as it might jeopardize the operation of the school. LibLex Please be guided accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman