Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i SecurityReal estate

Security may be taken over real property by way of a real estate mortgage.

The primary laws governing the creation, perfection and foreclosure of a mortgage on real property are the Civil Code and Act No. 3135. Under Article 2085 of the Civil Code, to constitute a mortgage it is necessary that the mortgagor be the owner of the item mortgaged. Generally, there is no specified form to the mortgage agreement. The document is not required to be registered in the Registry of Deeds for validity. The registration of the security interest and annotation in the certificate of title (if the mortgaged item is land) will bind third parties, and constitute public notice to third parties on the creation of the security interest from the date of its recordation. Nevertheless, an unregistered mortgage is binding between the parties.

A real estate mortgage may be foreclosed extrajudicially or judicially. Extrajudicial foreclosure may be made where a clause is inserted in the contract giving the mortgagee the power, upon default of the mortgagor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property (Act No. 3135, as amended by Act No. 4148, Section 1). The sale should be made after giving notice and should be at a public auction, in the province in which the property is situated.

Owing to foreign ownership restrictions on land, a foreign mortgagee cannot bid or purchase land at a foreclosure sale. Its right is limited to receiving the net proceeds from the sale.

Security interest on personal property

The PPSA introduced new rules governing the creation of security interest over personal property in the Philippines and registration of such security interests.

Under the PPSA, a security interest over personal property is created through a 'security agreement'. A security agreement must be in writing, signed by the parties and shall provide for the language to be used in the agreements and notices. There is no requirement under the PPSA that the security agreement be in a public instrument, but it is advisable given the practical effects of placing documents in a public instrument (i.e., admissible in court as evidence without the need for further proof of its authenticity). A security agreement may provide for the creation of a security interest in future property, but the security interest in that property will be created only when the grantor acquires rights in it or the power to encumber it. In creating a security interest, it would be sufficient that the collateral be reasonably identified, whether in a general or specific manner.

The PPSA provides that security interest over personal property may be perfected to bind third parties through the following means: registration of a notice with the registry, possession of the collateral by the secured creditor, or control of the investment property or deposit account.

A security interest in a tangible asset may be perfected by registration or possession, whereas a security interest in an investment property or deposit account may be perfected by registration or control.

ii Guarantees and other forms of credit support

Corporate guarantees are typically provided by parents and affiliates of a borrower. A Philippine company can guarantee a debt of the borrower provided that the guarantor is authorised to give the guarantee under its articles of incorporation and has obtained the requisite corporate approvals.

iii Priorities and subordinationPriority of security interests

The priority of security interests in the same collateral is generally determined by time of perfection. However, with respect to security interests over personal property, there are rules for determining priority for specific types of properties.

Deposit accounts

For a deposit account or investment property where the secured creditor is the deposit-taking institution, the order of priority is as follows:

  1. deposit-taking institution's right to set-off against the deposit account;
  2. creation of a security interest in favour of the deposit-taking institution or the intermediary;
  3. conclusion of a control agreement; and
  4. registration.
Certificated securities

For security certificates, the order of priority is as follows:

  1. possession; and
  2. registration.
Intermediated securities

For electronic securities not held with an intermediary, the order of priority is as follows:

  1. notation in the books maintained by or on behalf of the issuer;
  2. conclusion of a control agreement; and
  3. registration.
Instruments and negotiable documents

For an instrument or negotiable document, the order of priority is as follows:

  1. possession; and
  2. registration.
Debt subordination

Banks may only issue unsecured subordinated debt to the public with prior approval from the BSP. Banks applying for such authority must comply with the minimum amount of capital under Section 101 and, if it will be offered to the general public, the issuing bank must be rated by an independent credit rating agency recognised by the BSP.

Unsecured subordinated debts shall be issued in minimum denominations of 500,000 pesos or its equivalent in foreign currency.