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No relief for private foreign loans

Pursuant to Republic Act No. 11469, or the Bayanihan To Heal As One Act, the Department of Finance (DOF) has ordered all lenders to grant a 30-day grace period in the payment of the principal and/or interest that fall due within the enhanced community quarantine period without imposing interest or charges and fees on their borrowers.

The order applies to all banks, quasi-banks, nonstock savings and loans associations, credit card issuers and pawnshops, including other credit-granting institutions supervised by government agencies, such as the Bangko Sentral

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ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC).

The lockdown period is from March 17 to April 12, 2020, and shall automatically extend to such period as may be ordered by the President.

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The covered institutions are also prohibited from requiring their clients to waive the application provided by the Bayanihan law. And in case any such waiver has been previously made, the waiver shall be invalid.

The moratorium is aimed at giving the borrowers a breather from the adverse financial effects of the lockdown ordered by the government to stem the spread of the new coronavirus disease, or COVID-19.

The common denominator of the entities covered by the order is that they are registered or licensed to do business in the Philippines. This should be the case because, as a rule, Philippine laws are territorial in character, meaning, they can be enforced only within Philippine territory.

They cannot be made to apply to foreign citizens and entities based abroad, or otherwise enjoy extra-territorial application.

Thus, a Philippine company that has entered into a loan agreement with, say, a bank in the United States cannot invoke that order to excuse the payment of any amortization that may be due during the lockdown period.

If the company defaults in the payment of that amortization, the bank can declare it in default and demand the immediate full payment of the loan.

The rule of thumb in loan or credit agreements between parties coming from different countries is, the laws of the lender’s country shall govern the interpretation of the terms and conditions of the agreement.This “governing law” provision is often demanded by foreign banks for two reasons: a) they are not familiar with the laws of the borrower’s country; and b) they enjoy a home-court advantage in the enforcement of the loan in case the borrower defaults.

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The story would be different, however, if the loan was extended by the US bank, or for that matter, any foreign bank, through its representative branch or office in the Philippines.

In this case, since that branch or office submitted itself to the supervisory authority of the BSP and the SEC when it applied for a license to do business in the Philippines, it cannot escape coverage by the DOF’s order.

The fact that their mother company is registered or based elsewhere in the world does not exempt them from complying with the Philippines’ regulatory requirements.

Consider this scenario: A Philippine company has a multilateral dollar-based loan agreement with a US bank, the representative office of a London-based bank and the trust account of a Philippine bank.

Following the DOF order, the representative office and the Philippine bank would be barred from demanding payment of any amortization that may be due during the lockdown period, while that of the US bank has to be paid as scheduled.If the US bank does not receive that payment, it may call in its share of the loan, or the entire loan itself, in spite of the fact that its colenders are prevented from doing so by the DOF order.

Under these circumstances, the borrower-company may have to ask the US bank not to insist on the payment and to put itself on equal footing with its colenders.

To date, there is no assurance the lockdown will be lifted on the date earlier announced by the government.

Between now and that day, the business managers have to make the most out of the situation they find themselves in if only for the sake of the people who depend on them for their livelihood. INQ

For comments, please send your email to [email protected]

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