Angara Concepcion Regala & Cruz

January 18, 1983 Angara Concepcion Regala & Cruz 5th Floor ACCRA Building 122 Gamboa St.,Legaspi Village Makati, Metro Manila Gentlemen: This refers to your letter, dated October 11, 1982, requesting confirmation of this Commission that redemption of redeemable shares may be financed out of borrowings. cdll For the protection of creditors, the most general limitation is that redemption shall not be paid out of capital but only from surplus (Agbayani, Commercial Laws of the Philippines, p. 103, citing Rohrlich 339, and Stevens 439).Thus, the Commission in a previous opinion ruled that preferred shares cannot be redeemed out of borrowings because the same will not result in the creation of surplus for the company, but will, on the contrary, increase its liabilities ( SEC Opinion, Letter to First Acceptance & Investment Corporation, November 2, 1961 ). However, with the advent of the new Corporation Code of the Philippines, Section 8 thereof provides, thus: "Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. This may be purchased or taken up by the corporation upon the expiration of a fixed period regardless of the existence of unrestricted retained earnings in the books of the corporation ...." Corollary thereto, Section 5 of SEC Rules Governing Redeemable shares provides and we quote: "Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemption, sufficient assets in the books to cover debts and liabilities inclusive of capital stock." In view thereof, it is opined that a corporation may acquire its outstanding redeemable shares out of borrowed funds for as long as the corporation has sufficient assets in its books to cover its liabilities and capital stock after the redemption. Subject to the foregoing limitation, your query is affirmatively confirmed. Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman