Collection Rights of Revoked Lending Companies Under Philippine Law

Introduction

In the Philippines, lending companies play a crucial role in providing credit to individuals and businesses, particularly those underserved by traditional banks. These entities are governed primarily by Republic Act No. 9474, otherwise known as the Lending Company Regulation Act of 2007 (LCRA), which mandates registration with the Securities and Exchange Commission (SEC) and adherence to strict operational standards. The LCRA aims to protect borrowers from abusive practices while ensuring the stability and integrity of the lending sector.

Revocation of a lending company's certificate of authority represents a severe regulatory sanction, typically imposed for violations such as non-compliance with capitalization requirements, engaging in fraudulent activities, or failing to maintain proper records. When a lending company's registration is revoked, it is prohibited from conducting new lending activities. However, a critical question arises: What happens to the company's existing loans and its rights to collect on them? This article explores the collection rights of revoked lending companies under Philippine law, examining the legal framework, implications for ongoing obligations, limitations on collection practices, and remedies available to affected parties. It provides a comprehensive analysis based on statutory provisions, regulatory guidelines, and jurisprudential principles.

Legal Framework Governing Lending Companies and Revocation

The primary statute regulating lending companies is the LCRA, which defines a lending company as a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen persons. Under Section 4 of the LCRA, no entity may operate as a lending company without securing a certificate of authority from the SEC. The SEC is empowered to revoke this certificate under Section 12 for grounds including:

Serious misrepresentation in registration documents;
Failure to comply with the LCRA or SEC rules;
Insolvency or inability to pay obligations;
Engaging in business practices that are fraudulent, oppressive, or contrary to law; or
Violation of other applicable laws, such as the Anti-Money Laundering Act (Republic Act No. 9160, as amended) or the Data Privacy Act of 2012 (Republic Act No. 10173).

Revocation is not taken lightly and follows due process, including notice and hearing, as required by administrative law principles enshrined in the Philippine Constitution and the Administrative Code of 1987.

Upon revocation, the lending company must cease all lending operations immediately. However, the LCRA does not explicitly nullify pre-existing contracts. This distinction is vital, as it preserves the sanctity of contracts under Article 1305 of the Civil Code of the Philippines, which states that contracts are binding upon the parties and have the force of law between them. Thus, loans extended before revocation remain valid and enforceable, subject to certain conditions.

Supporting regulations include SEC Memorandum Circular No. 19, Series of 2019, which provides guidelines on the corporate governance of lending companies, and various issuances from the Bangko Sentral ng Pilipinas (BSP) that may apply indirectly, particularly for fair debt collection practices under BSP Circular No. 1133, Series of 2021, on the Prohibition on Unfair Debt Collection Practices.

Effects of Revocation on Collection Rights

Preservation of Existing Obligations

A key principle under Philippine law is that revocation of a lending company's authority does not retroactively invalidate loans issued in good faith prior to the revocation. This is grounded in the doctrine of vested rights and the non-impairment clause of the Constitution (Article III, Section 10), which prohibits laws impairing the obligation of contracts. Consequently, a revoked lending company retains the right to collect on outstanding loans, including principal, interest, and applicable fees, as stipulated in the loan agreements.

For instance, if a borrower has an outstanding debt from a loan granted when the company was duly registered, the company can pursue collection through amicable means or judicial action. This right extends to assigning the receivables to third parties, provided such assignment complies with Article 1624 of the Civil Code, which requires notice to the debtor.

However, the collection process must be conducted in a manner that does not constitute new lending activity. The revoked entity cannot extend payment terms in a way that effectively creates a new loan or engage in refinancing, as this would violate the cessation order.

Modes of Collection Available

Revoked lending companies may employ the following methods to enforce collection, all subject to legal constraints:

Amicable Collection: This involves sending demand letters, making phone calls, or negotiating settlements. However, these must adhere to ethical standards to avoid harassment claims.
Judicial Remedies: The company can file civil actions for sum of money under Rule 3 of the Rules of Court, or small claims actions if the amount qualifies under A.M. No. 08-8-7-SC. In cases of secured loans, foreclosure proceedings under Act No. 3135 (Real Estate Mortgage Law) or Republic Act No. 7353 (Chattel Mortgage Law) may be pursued.
Assignment or Sale of Receivables: The revoked company may sell its loan portfolio to a licensed entity, transferring collection rights. This is common in winding-up processes and must comply with SEC rules on asset disposal.
Administrative Assistance: In some cases, the SEC may appoint a receiver under Section 13 of the LCRA to manage the company's assets, including collections, to ensure orderly liquidation and protection of creditors' and borrowers' interests.

Limitations and Prohibitions on Collection Practices

While collection rights are preserved, they are not absolute. Revoked lending companies are subject to stringent limitations to prevent abuse:

Prohibition on Unfair Practices: Under BSP Circular No. 1133 and SEC regulations, collectors cannot use threats, violence, obscene language, or public shaming. Violations can lead to administrative penalties or criminal charges under Republic Act No. 9995 (Anti-Photo and Video Voyeurism Act) if invasive methods are used, or under the Revised Penal Code for grave threats (Article 282) or unjust vexation (Article 287).
Data Privacy Compliance: Collection efforts must respect the Data Privacy Act, prohibiting unauthorized disclosure of borrower information. Sharing data with third-party collectors requires consent, and breaches can result in fines up to PHP 5 million or imprisonment.
Interest Rate Caps: Even post-revocation, interest rates must not exceed ceilings set by the Usury Law (as suspended) or BSP guidelines. Excessive rates may render the loan void as to interest under Article 1420 of the Civil Code.
No New Extensions: Any attempt to restructure loans post-revocation could be deemed unauthorized lending, exposing the company to further sanctions under Section 14 of the LCRA, including fines up to PHP 1 million or imprisonment.
Winding-Up Oversight: If the SEC initiates dissolution under the Revised Corporation Code (Republic Act No. 11232), collections become part of the liquidation process, prioritized according to creditor hierarchy in Article 2241 et seq. of the Civil Code.

In addition, if revocation stems from fraud, affected borrowers may challenge the validity of their loans in court, potentially leading to rescission under Article 1381 of the Civil Code.

Jurisprudential Insights

Philippine jurisprudence reinforces these principles. In cases like SEC v. Prosperity.Com, Inc. (G.R. No. 164197, 2006), the Supreme Court upheld the SEC's revocation powers but emphasized that pre-existing contracts remain enforceable unless proven void ab initio. Similarly, in Bangko Sentral ng Pilipinas v. ABN Amro Bank (G.R. No. 175018, 2008), the Court clarified that regulatory sanctions do not automatically extinguish debts, protecting the creditor's right to collect through legal channels.

Borrowers have successfully invoked defenses in collection suits, such as in Heirs of Spouses Litonjua v. BPI Family Savings Bank (G.R. No. 166296, 2011), where unfair practices led to the nullification of excessive penalties. These rulings underscore that while revoked companies can collect, courts will scrutinize methods for compliance with due process and fairness.

Remedies for Borrowers and Regulatory Enforcement

Borrowers facing collection from revoked lenders have several protections:

Complaints to Regulators: Report abusive practices to the SEC or BSP, which can impose cease-and-desist orders or fines.
Civil Defenses: In collection suits, borrowers can raise usury, lack of authority, or harassment as defenses, potentially leading to counterclaims for damages under Article 19 of the Civil Code (abuse of rights).
Criminal Actions: Severe violations may warrant charges under the Bouncing Checks Law (Batas Pambansa Blg. 22) if applicable, or anti-harassment laws.
Consumer Protection: The Consumer Act of the Philippines (Republic Act No. 7394) provides additional safeguards against deceptive practices.

For the revoked company, failure to comply with collection limits can result in personal liability for officers under the doctrine of piercing the corporate veil, as seen in SEC v. Price Richard Albion (G.R. No. 187605, 2010).

Conclusion

The collection rights of revoked lending companies under Philippine law strike a balance between upholding contractual obligations and protecting public interest. While revocation halts new operations, it does not erase existing debts, allowing companies to pursue collections through lawful means during winding-up. However, these rights are circumscribed by robust regulatory and legal constraints to prevent exploitation. Borrowers are empowered with remedies to challenge unfair practices, ensuring accountability. As the lending sector evolves, stakeholders must remain vigilant, adhering to the LCRA and related laws to foster a fair financial ecosystem. Policymakers may consider amendments to clarify post-revocation procedures, but current frameworks provide a solid foundation for resolution.