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General Principles & National Taxation –

Letter of credit – any arrangement, however
named or described, whereby a bank, acting
upon the request of each client or on its
own behalf, agrees to pay against stipulated
documents, provided that the terms of the
credit are complied with
Section 2, Uniform Customs and Practices
for Documentary Credit – provides for the
comprehensive definition of a letter of
credit and is being used in the present

1. Sales/Importation
BUYER SELLER
(COUNTRY A) (COUNTRY B)
4. Goods shipped

3. LC Issuance
2. LC Application
6. Payment by
7. Reimbursement by issuing bank to
buyer to Issuing Bank seller
& release of
documents to the 5.
Buyer Documents
presented to
issuing bank
ISSUING BANK

Debtor 1. Non-sale Creditor

transaction

6. Reimbursement
2. LC Application by Debtor to the
Bank 5. Payment
to
4. Present beneficiary
documents
on default
ISSUING BANK

3. LC Issuance
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General Principles & National Taxation –
Kinds of letter of credit:
1. commercial or import letter of credit –
one where the main contract underlying the
letter of credit is a sale or importation
2. standby letter of credit – one where the
transaction underlying the letter of credit is
not a sale transaction
3. irrevocable – one which cannot, during its
lifetime, be cancelled or modified without
the express permission of the beneficiary
4. revocable – may be changed or cancelled
by the issuing bank at any time and for any
reason even without the consent of the
beneficiary
5. confirmed – one where the letter of
credit is guaranteed by adding payment
confirmation by the advising bank or any
third bank on behalf of the issuing bank
Feati Bank & Trust Company vs CA
- an irrevocable letter of credit is not
synonymous with a confirmed letter of
credit
irrevocable letter of credit = the issuing
bank may not, without the consent of the
beneficiary or applicant, revoke its
undertaking under the letter
confirmed letter of credit = corresponding
bank gives an absolute assurance to the
beneficiary that it will undertake the issuing
bank’s obligation as its own according to
the terms and conditions of the credit
Letter of credit = commercial transaction =
governed by its own provisions, by the Code
of Commerce and by usages and customs
Uniform Customs and Practices (UCP) for
Documentary Credit – bible of LC
transactions; applies even if it is not
incorporated in the letter of credit
Charles Lee vs Court of Appeals – LC is not a
negotiable instrument because it does not
have the elements of negotiability under
Section 1 of the Negotiable Instruments Law
= not payable to order or bearer and
promise to pay is not unconditional
Is the issuer of LC liable as a guarantor or
surety? No for both.
Metropolitan Waterworks and Sewerage
Systems vs Hon Reynaldo Daway – while a
letter of credit is a security arrangement,
the bank that issued the letter of credit is
not liable as a guarantor or a surety
Transfield Philippines vs Luzon Hydro
Corporation – while the surety is liable
solidarily with the principal debtor, the
surety has no duty to indemnify the creditor
until the latter establishes the fact of the
obligor’s performance
Parties to a letter of credit and their rights
and obligation:
1. applicant
- either the importer or buyer (commercial
letter) or obligor or debtor (standby letter
of credit)
- no obligation to reimburse the issuing
bank if the latter pays without the
stipulated documents or if the documents
received are different from those stipulated
in the letter of credit
- has the right to have the marginal deposit
deducted from the principal obligation
under the letter of credit and to have the
interest computed only on the balance and
not on the face value
b. issuing bank
- undertakes to pay the beneficiary upon
the latter’s submission of stipulated
documents/compliance with the credit
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General Principles & National Taxation –
despite any breach in the main contract
underlying the letter of credit
- after due payment, issuing bank is entitled
to reimbursement as a matter of right
- failure of the beneficiary to present the
draft to the applicant does not affect the
right of the issuing bank to reimbursement
- an issuing bank which paid the beneficiary
of an expired letter of credit can recover
payment from the applicant, which
obtained the goods from the beneficiary, to
prevent unjust enrichment
c. beneficiary
- one entitled to payment from the issuing
ban after submission of stipulated
documents and compliance with the terms
of the credit
- he has a prestation “to do” under the main
contract but his failure to fulfill his
obligation thereunder does not negate his
right to collect payment from the issuing
bank as long as he is able to submit the
required documents and comply with the
terms of the credit, without prejudice to his
liability against the applicant under the law
on contract and damages
d. advising or notifying bank (correspondent
bank)
- advising bank determines the apparent
authenticity of the letter of credit, notifies
the beneficiary of the opening of the letter
of credit and transmits the copy thereof to
the beneficiary
- does not guarantee the genuineness or
due execution of the letter of credit. It is not
liable for damages even if the letter of
credit turns out to be spurious provided it is
not apparent on the face of the instrument
- no obligation to pay the beneficiary unless
it is also the paying or confirming bank
e. paying bank
- agent of the issuing bank to facilitate
payment to the beneficiary
- paying bank can also be the advising bank
f. confirming bank
- lends credence to the letter of credit
issued by a lesser known bank as if it were
the one that issued the letter of credit
- obligation is similar to the issuing bank.
Thus, beneficiary may tender documents to
the confirming bank and collect payment
- confirming bank collects fees for such
engagement and obtains reimbursement
from the issuing bank
g. negotiating bank
- becomes a part to the letter of credit
transaction after it buys the draft drawn by
the beneficiary and becomes the holder
thereof
- as holder, it has the right to payment from
the bank primarily liable on the draft (either
the issuing bank or the confirming bank)
- if the party primarily liable on the letter of
credit refuses to honor the draft, the
negotiating bank has the right to proceed
against the drawer thereof
Does a correspondent bank automatically
assume the obligation of a confirming bank?
Marphil Export Corporation vs Allied
Banking Corporation – in order to consider a
correspondent bank as a confirming bank, it
must have assumed a direct obligation to
the seller as if it has issued the letter of
credit itself
3 distinct relationships arising from the
letter of credit transaction:
1st – one contract relationship links the
party applying for the letter of credit and
the party for whose benefit the letter of
credit is issued
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General Principles & National Taxation –
2nd – between the account party and the For fraud exception principle to serve as an
issuing bank exception to the doctrine of independence
3rd – between the issuing bank and the = fraud must not be in relation to the
beneficiary, in order to support the contract performance of the main contract but in
referred to in letter a and to pay monies to relation to the independent purpose or
the beneficiary character of the credit as when he presents
to the issuing or confirming bank spurious
Doctrine of Independence or fraudulent documents that contain
- the “independence principle” provides material facts that, to his knowledge, are
that the rights and obligations of the parties untrue
to a letter of credit are independent of the
right and obligations to the parties to the Doctrine of strict compliance
underlying transaction - the documents that the beneficiary should
- the 3 legal relationships while interrelated tender to the issuing bank or confirming
are separate, distinct and independent of bank must strictly conform to the
one another documents stipulated
- since a bank deals only with documents, it
The Hongkong & Shanghai Banking is not in a position to determine whether or
Corporation, Limited vs National Steel not the documents required by the letter of
Corporation – doctrine of independence is credit are material or superfluous
based on Article 17 of UCP which provides
that an issuing bank assumes no liability or Trust receipt Letter of credit
responsibility “for the form, sufficiency, May have been Issuing bank will
accuracy, genuineness, falsification or legal executed as a not release the
effect of any documents, or for the general security on the documents of title
and/or particular conditions stipulated in letter of credit, still and goods to the
the documents or superimposed thereon” the two documents importer-applicant
involve different unless the latter
Fraud Exception Principle undertakings and has fully paid the
- exception to the doctrine of independence obligations bank
- there is fraudulent abuse of the credit Two parties: Basic parties:
- beneficiary may be enjoined from entruster and applicant, issuing
collecting on the letter of credit if the entrustee bank and the
following elements are present: beneficiary
a. there is fraud on the part of the Failure of entrustee Failure of applicant
beneficiary to deliver the to pay the issuing
b. fraud must be in relation to the proceeds of the bank = civil liability
independent purpose or character of the sale of the goods,
credit or to return the
c. unless the beneficiary is restrained, the goods to the
applicant shall suffer grave and irreparable entruster, in case
injury of non-sale =
criminal offense
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General Principles & National Taxation –
BANKING LAWS
The New Central Bank Act
Central Monetary Authority – considering
its unique functions and responsibilities, the
central monetary authority established,
while being a government-owned
corporation shall enjoy fiscal and
administrative autonomy = BSP (Bangko
Sentral ng Pilipinas)
The primary objective of the Bangko Sentral
is to maintain price stability conducive to a
balanced and sustainable growth of the
economy and employment. It shall also
promote and maintain monetary stability
and the convertibility of the peso.
Bangko Sentral ng Pilipinas = lender of last
resort – it is because it can lend to banks
and similar institutions under financial
distress when they have no other means to
raise funds
The general public cannot obtain loans from
BSP
BSP shall have the authority to require for
any person or entity, including government
offices and instrumentalities, or
government-owner or controlled
corporations, any data, for statistical and
policy development purposes in relation to
the proper discharge of its functions and
responsibilities
No restraining order or injunction shall be
issued by the court enjoining the BSP from
examining any institution subject to its
supervision or examination, unless there is
convincing proof that the action of the BSP
is plainly arbitrary and made in bad faith
Ana Maria Koruga vs Teodoro Arcenas –
RTC has no jurisdiction to hear and decide a
suit that seeks to place a bank under
receivership or under a management
committee. That authority is lodged with
the BSP
The loan or financial accommodation
granted to the director, officer or
stockholder shall be subject to the following
requirements:
1. approval requirement – the loan must be
approved by at least majority of the entire
board, excluding the borrowing director;
2. reportorial requirement – the loan must
be reported to BSP and entered into the
books and records of the bank; and
3. unless the loan is non-risk, the amount of
the loan shall not exceed the book value of
his paid-up contribution and the amount of
his unencumbered deposit
Transfer and acquisition of voting shares in
banks and quasi-banks subject to BSP
approval = atleast 10%% of the voting
shares
Conservatorship
- board finds that a bank or quasi-bank is in
a state of continuing inability or
unwillingness to maintain a condition of
liquidity deemed adequate to protect its
depositors and creditors
Liquid – not insolvent, more assets than
liabilities, assets can be converted to cash
to pay the liabilities
Central Bank of the Philippines vs Court of
Appeals – a conservatorship, once
appointed, merely takes over the
management of the bank and assumes,
exclusive powers to oversee every aspect of
the bank’s operations and affairs
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General Principles & National Taxation –
The bank retains its juridical personality
even if places under conservatorship; it is
neither replaced nor substituted by the
conservator
First Philippine International Bank vs CA –
conservator merely takes the place of a
bank’s board of directors, so what the
board cannot do; the conservator cannot do
either
Receivership
Happens upon report of the head of the
supervising or examining department, the
Monetary Board finds that a bank or quasi-
bank:
a. has notified the BSP or publicly
announced a unilateral closure or has been
dormant for at least 60 days or in any
manner has suspended the payment of its
deposit/deposit substitute liabilities or is
unable to pay its liabilities as they become
due in the ordinary course of business
b. has insufficient realizable assets, as
determined by the Bangko Sentral, to meet
its liabilities;
c. cannot continue in business without
involving probable losses to its depositors
or creditors
d. has willfully violated a cease and desist
order under Sec 37 of the Central Bank Acts
that has become final, involving acts or
transactions which amount to fraud or a
dissipation of the assets of the institution
Conservator
- appointed if the bank is in a continuing
state of illiquidity
- takes over the management of the bank
- the bank shall not close and be forbidden
to do business but only under the
supervision of the conservator
- one year to restore the bank’s financial
viability
Receiver
- appointed if the bank is insolvent
- the bank cannot do business
- takes charge of the assets for the benefits
of the creditors
- 90 days to rehabilitate the bank,
otherwise, they shall recommend to the MB
the liquidation of the bank
Legal effects under receivership:
a. suspends the authority of the bank and of
its directors and officers over its property
and effects
b. period during which the bank cannot do
business due to insolvency is not a
fortuitous event, unless it is shown that the
government’s action to place a bank under
receivership or liquidation proceedings is
tainted with arbitrariness or the regulatory
body has acted without jurisdiction
c. criminal case for violation of BP 22
against a bank placed under receivership by
the Monetary Board may be dismissed for
the demandability of the obligation to be
performed has been suspended
d. receiver shall immediately gather and
take charge of all the assets and liabilities of
the institution, administer the same for the
benefit of its creditors and exercise the
general powers of a receiver under the
Revised Rules of Court
The PDIC under the charter that created it is
considered the receiver of closed banks
Banco Filipino Savings and Mortgage Bank
vs Bangko Sentral ng Pilipinas – closed bank
under receivership can only sue or be sued
through its receiver, the PDIC
The designation of a conservator or the
appointment of a receiver for a financially
distressed bank shall be vested exclusively
with the Monetary Board
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General Principles & National Taxation –
The designation of a conservator is not a
precondition to the appointment of a
receiver
“Close now hear later” doctrine
- rule that allows BSP to order the closure of
the bank even without prior notice and
hearing
- BSP may rely on the report of the head of
its supervising and examining department,
or of the conservator or receiver, if one is
appointed
Rural Bank of San Miguel vs Monetary
Board – it is not required to conduct a
thorough audit of the bank before ordering
its closure; only a report of the head of the
supervising or examining department is
necessary
Apex Bancrights Holdings, Inc. vs Bangko
Sentral ng Pilipinas – the authority of BSP to
designate a conservator, or appoint a
receiver, or direct its closure, is a valid
exercise of police power. The order is final
and executory and not subject to injunction
Requisites to question MB:
1. petition for certiorari on the ground that
the action was arbitrary and made in bad
faith tantamount to grave abuse of
discretion amounting to lack or excess of
jurisdiction
2. atleast majority of the outstanding
capital stock
3. within 10 days from receipt by the board
of directors of the MPBC of the order
Resolution issued in the exercise of quasi-
judicial functions is not subject to
declaratory relief. The BSP Monetary Board
is a quasi-judicial agency exercising quasi-
judicial powers or functions
Honorable Monetary Board vs Philippine
Veterans Bank – decision of the BSP
Monetary Board cannot be a proper subject
matter for a petition for declaratory relief
since it was issued by the BSP Monetary
Board in the exercise of its quasi-judicial
powers or functions
Liquidation
- after closure of the bank comes liquidation
- BSP shall file the petition with the RTC for
assistance in liquidation
- all disputed claims against the bank should
be filed before the liquidation proceeding
The liquidation of a bank may be carried out
despite lack of tax clearance unlike in a
voluntary dissolution of a corporation under
the Corporation Code
Miranda vs Philippine Deposit Insurance
Corporation – bank deposits are not
preferred credits except when the deposits
are covered by a cashier’s check purchase
from the bank when the bank officers knew
or ought to have known that the bank is
insolvent
Once the bank is ordered closed by BSP and
a petition for assistance in liquidation is
filed in court, the stockholders of the closed
bank cannot file a separate action to enjoin
the liquidation proceeding but should
instead fie a comment or opposition to the
petition for liquidation invoking therein as
affirmative defenses the bad faith on the
part of BSP
Purpose of requiring banks to maintain
reserves against their deposits and deposit
substitutes:
1. control the volume of money arising from
the credit operations of the banking system
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General Principles & National Taxation –
2. provide the banks reserves which they
can tap in case of inadequate liquidity to
service withdrawals of bank deposits
3. help government to finance its operation

Law on Secrecy of Philippine Currency

Bank Deposits (RA 1405)
GR: unlawful for any official or employee of
a bank to disclose or allow the examination
or inquiry by any person other than those
excepted by law any information
concerning Philippine currency bank
deposits of whatever nature and kind as
well as investment in government securities

Who are covered? Only bank officials and

employees

EX:
a. written permission of the depositor
b. in cases of impeachment
c. upon order of a competent court in the
case of bribery or dereliction of duty of
public officials
d. when the money deposited or invested is
the subject matter of the litigation
e. cases of violation of the AMLA

Senate Blue Ribbon Committee/Senate

cannot command banks to produce bank
deposit records even if it is in aid of
legislation because it is not a court that can
order the production of bank deposit
records