Does transfer of a non-performing loan to a SPV under the SPV Act require consent of the debtor?

On Dec. 23, 2002, President Arroyo approved into law Republic Act 9182, otherwise known as "The Special Purpose Vehicle (SPV) Act of 2002." The law became effective on Jan. 26, 2003.

The SPV Act is intended as a measure to address the non-performing assets (NPAs) problem of the banking sector which has been burdened by dangerously high levels of NPAs as a result of the Asian financial crisis that started in 1997. According to figures from the Bangko Sentral ng Pilipinas (BSP), the NPAs (consisting of non-performing loans and ROPOAs) of our commercial banks amounted to P428 billion as of the end of January 2003. Of this amount, total non-performing loans (NPLs) totaled more than P247 billion.

The law seeks to accomplish its objectives basically by granting time-bound tax incentives and fee privileges in the acquisition by a special purpose vehicle (SPV) of NPAs from the banks. The law also grants the SPV tax incentives when it disposes of the acquired NPA to third parties.

On March 19, 2003, the Congressional Oversight Committee (COC) approved the rules and regulations implementing the SPV Act (IRR).

There are a number of legal issues arising from the law and its IRR.

Among the issues is whether the consent of the original debtor is required before a financial institution can transfer a non-performing loan to an SPV. The issue arises because the law and the IRR specifically state that "[i]n the transfer of the NPLs, the provisions on subrogation and assignment of credits under the Civil Code shall apply." (Sec. 13, R.A. 9184 and SPV Rulle 13, IRR)

Note that the SPV Act and its IRR do not state that after the transfer of the NPL by the FI to the SPV, the latter is subrogated to the rights of the transferring FI. What they state is that the provisions of the Civil Code on subrogation shall apply.

There are two kinds of subrogation under the Civil Code. The first is conventional and the other legal. Conventional subrogation takes place by agreement of the parties. Legal subrogation takes place by operation of law. Legal subrogation is never presumed. It is limited to those instances specified by law. The Civil Code provides some instances where legal subrogation takes place. They are: (1) when a creditor pays another who is preferred, even without the debtor’s knowledge; (2) when a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) when, even without the knowledge of the debtor, a person interested in the obligation pays, without prejudice to the effects of confusion as to the latter’s share. (Art. 1302, Civil Code)

If what takes place is not legal but conventional subrogation, then the legal provision may mean that before a financial institution can transfer its NPL to an SPV, the consent of the borrower must be secured. The Civil Code explicitly provides that ""[c]onventional subrogation of a third person requires the consent of the original parties and of the third person." (Art. 1301) The original parties, of course, include the borrower.

If the SPV Act contemplates conventional subrogation and the debtor’s consent is not secured, there may be no subrogation at all. The legal consequences may include: (1) the SPV’s right is limited to the reimbursement of the amount it paid to the transferring FI; (2) the SPV cannot proceed against the borrower for the whole amount of the NPL; (3) the SPV cannot enforce the accessory obligations like mortgages and pledges. Rightly or wrongly, a debtor may raise the foregoing legal issues even in the light of the SPV Act provision that "[t]he SPV shall assume all the rights and obligations of the transferring FI." (Sec. 14). Such borrower may argue that the assumption of rights and obligations is premised on the fact that there is, in fact, subrogation as contemplated by the Civil Code. This is not improbable especially so if the debtor wants to obtain concessions from his bank or simply wants to make life difficult for the bank for whatever reason.

So what does the questioned provision really mean? Could the provision be properly interpreted to mean that subrogation is a result of the transfer from the FI to the SPV? If so, did the SPV Act create a new kind of legal subrogation? If no, does it mean that the SPV cannot be legally subrogated to the rights of the transferring financial institution, unless the debtor consents to the transfer of the NPL to the special purpose vehicle?

The questioned provision raises the foregoing legal issues. For this reason, when the SPV Act was being considered, I proposed that the provision be deleted. Alternative phrases were also proposed. At one point, Senate President Franklin M. Drilon informed me that there was an agreement in principle that the provision would be deleted. Surprisingly, the provision on subrogation somehow found its way into the final version of the law.

The legal challenge for lawyers is how to structure the transaction in such a way as to address the legal issue.

(The author is the co-managing partner and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He can be contacted at 830-8000.)