A Philippine Legal Article

Abstract

Demand letters and capital calls are two recurring pressure points in Philippine microfinance and lending corporations. A demand letter is a creditor’s formal notice that a borrower is in default and must pay; a capital call is a corporation’s formal requirement that shareholders pay subscribed share capital (or additional capital under lawful corporate mechanisms) to fund operations, maintain solvency, or comply with regulatory requirements. Although they often appear in the same distress scenario—collection issues triggering liquidity strain—their legal bases, procedural requirements, and remedies differ sharply. This article discusses the Philippine framework governing (1) demand letters for collection and enforcement in microfinance and lending and (2) capital calls, including subscription enforcement, delinquency rules, and related corporate governance issues, with emphasis on compliance, enforceability, and common disputes.

I. Philippine Landscape: Microfinance vs Lending Corporations

A. Microfinance activities in the Philippines

Microfinance generally refers to the provision of small-scale financial services (credit, savings, insurance, and payments) typically to low-income clients. In practice, microfinance credit is delivered by multiple institution types, including:

banks and quasi-banks offering microfinance products,
cooperatives,
NGOs (often through lending programs),
and non-bank lending corporations that market micro-loans.

Because the user asked for microfinance and lending corporations, this article focuses on non-bank lending corporations (as corporations), and microfinance lending products as the business activity.

B. Lending companies as regulated non-bank financial institutions

A lending corporation is a corporation engaged primarily in granting loans from its own capital funds (not deposits from the public). In the Philippines, lending companies are regulated as a business sector with licensing/registration, reportorial, and conduct requirements, and are also governed by general civil, commercial, and corporate law.

C. Key idea

Demand letters are part of credit enforcement (civil law obligations/collections).
Capital calls are part of corporate finance/governance (corporate law on subscriptions and shareholder obligations). Mixing them up causes invalid actions: a lender cannot “capital call” a borrower, and a corporation cannot “demand letter” a shareholder in a way that bypasses corporate statutory delinquency procedures.

II. Demand Letters: Nature, Purposes, and Legal Effects

A. What a demand letter is

A demand letter is a written notice by which a creditor (the lending corporation) formally requires a debtor (borrower) to perform an obligation—typically to pay a sum certain—within a specified period, warning of escalation (collection steps, litigation, foreclosure, assignment to collectors).

B. Why demand letters matter legally

Default and delay (mora) In Philippine civil law, a debtor may be considered in delay upon demand in many circumstances. A clear written demand helps establish:

the date from which default/interest/penalties properly run (subject to contract and law),
the creditor’s right to pursue remedies triggered by default,
and evidentiary support for collection.

Cause of action and ripeness for suit While some obligations are due “upon maturity” without need of demand, many contracts or doctrines make demand relevant to prove breach, especially when:

an acceleration clause requires notice,
the obligation is payable upon demand,
or the parties agreed that demand is a condition before enforcing a remedy.

Good faith and fairness Demand letters can demonstrate attempts at amicable settlement or restructuring, which may matter in court perceptions, potential attorney’s fees assessments, and compliance with consumer protection expectations (even where no strict pre-suit demand is required).

C. Typical triggers for demand letters in microfinance/lending

missed amortizations or balloon payments,
breach of covenants (e.g., use of loan proceeds, insurance requirements),
dishonored checks,
misrepresentation and fraud allegations (subject to evidentiary caution),
cross-default across multiple loans,
deterioration of collateral or failure to perfect/maintain security.

III. Demand Letter Anatomy: What Should Be Included

A demand letter’s persuasiveness and enforceability in later proceedings depend on clarity, correctness, and documentation.

A. Essential contents

Identification of parties Full legal name of lending corporation, borrower, and, if relevant, co-makers/sureties/guarantors; include addresses and reference to IDs or account numbers.
Loan and obligation details

Date of promissory note/loan agreement
Principal amount, interest rate, payment schedule
Security (chattel mortgage, real estate mortgage, pledge), if any
Penalty charges, late fees, and any applicable default interest provisions

Statement of default Specify:

missed installment dates and amounts
unpaid balance as of a cutoff date
how the balance is computed (principal + accrued interest + penalties + fees) Avoid inflated, unexplained totals—these are common litigation vulnerabilities.

Demand and deadline A concrete demand: pay X amount on or before date, with payment channels and instructions.
Consequences

acceleration (if contract allows, and if notice is required, comply),
enforcement of security (foreclosure/replevin),
endorsement to counsel/collection agency,
filing of civil action,
claim for attorney’s fees and costs if contractually stipulated and reasonable.

Reservation of rights A standard reservation protects the creditor from waiver arguments.
Attachments and supporting documents Include a statement of account, copies of the note, amortization schedule, and relevant security documents when sending a formal final demand.

B. Evidence and delivery

Use methods that prove receipt:

personal service with acknowledgment,
courier with tracking and proof of delivery,
registered mail (and keep registry receipts),
email only if contract recognizes it and you can show deliverability and authenticity.

IV. Key Legal Issues in Demand Letters

A. Interest, penalties, and unconscionability

Microfinance and small loans are prone to disputes over:

high effective interest rates,
compounding,
multiple fees (service fees, collection fees, processing fees),
penalty stacking (late fee + default interest + penalty interest).

Courts may scrutinize charges that appear punitive, unconscionable, or unsupported by contract or computation. A demand letter that overreaches can backfire by undermining credibility and exposing claims to reduction.

B. Attorney’s fees clauses

Many notes include “10% attorney’s fees” or similar. Philippine courts generally treat attorney’s fees as subject to reasonableness and judicial discretion; they are not awarded automatically just because they are written. A demand letter should avoid presenting attorney’s fees as guaranteed or non-negotiable.

C. Acceleration clauses and notice

If the loan contract requires notice before acceleration (or if the acceleration is framed as optional upon notice), the demand letter must:

quote the acceleration clause,
state that the creditor is exercising it,
and show compliance with any notice requirement.

D. Suretyship and guaranty

Microfinance loans sometimes include:

co-makers (solidary debtors),
sureties,
guarantors.

A demand letter should accurately characterize the undertaking:

surety/solidary: creditor can demand directly from surety without exhausting debtor’s assets (depending on contract).
guaranty: may require exhaustion/benefit of excussion unless waived. Mislabeling may lead to defenses.

E. Data privacy and confidentiality in collections

Collection practices must respect privacy and avoid disclosing a borrower’s debt to unauthorized third parties (neighbors, employers without basis, social media harassment). A legally sound demand process focuses on lawful communication channels and avoids coercive or shaming tactics that can create liability.

F. Harassment, threats, and criminalization

Demand letters should not:

threaten arrest merely for non-payment (debt is generally civil),
insinuate criminal liability unless there is a legitimate factual and legal basis (e.g., bouncing checks under specific circumstances, fraud with evidence). Improper threats can expose the sender to counterclaims and regulatory sanctions.

V. Remedies After Demand: Litigation and Enforcement Options

A. Ordinary civil collection

If unpaid, the lender may file:

collection of sum of money,
or enforcement of a promissory note/loan agreement.

Evidence typically includes:

signed loan documents,
statement of account and computation,
proof of disbursement,
proof of default and demand (if relevant),
and proof of authority of signatories.

B. Enforcement of security

Depending on the collateral:

Real estate mortgage: judicial or extrajudicial foreclosure (if permitted), with statutory notice/publication rules.
Chattel mortgage: foreclosure or replevin-related remedies for possession then sale.
Pledge: sale under applicable rules after default and notice requirements.

A demand letter often serves as the “default notice” needed before foreclosure steps.

C. Bouncing checks scenarios

If the borrower issued checks that were dishonored, the lender may consider civil remedies and, when facts support it, the relevant penal/administrative frameworks. However, demand letters must be extremely careful: a purely coercive “pay or go to jail” tone is risky; any reference to criminal proceedings should be factual, restrained, and grounded.

D. Restructuring and settlement

Microfinance commonly uses restructuring. Demand letters can also be drafted as “restructuring invitation” notices—careful not to waive default while exploring repayment plans.

VI. Capital Calls: Core Concepts in Philippine Corporate Law

A. What is a capital call?

A capital call is a corporation’s act of requiring shareholders to pay:

unpaid subscribed capital (the most common and most strictly governed), and/or
additional capital through lawful corporate mechanisms (e.g., issuance of additional shares requiring subscription, or other contributions), subject to corporate approvals and shareholder rights.

In Philippine corporate practice, “capital call” often refers to calls on unpaid subscriptions: a corporation needs operating funds, so it calls the unpaid balance of subscriptions.

B. Why capital calls arise in lending corporations

Lending companies must maintain adequate capitalization to:

fund loan portfolio growth,
cover operating expenses and impairments,
satisfy regulatory capital requirements and preserve financial stability,
respond to delinquency spikes or liquidity crunches.

When collections suffer (borrowers default), a lending corporation may need shareholders to pay the remainder of their subscriptions or infuse new capital.

VII. Unpaid Subscriptions, Calls, and Delinquency: The Legal Framework

A. Subscription as a binding obligation

A subscription to shares is not a casual pledge; it is a binding commitment to pay the subscription price according to the terms approved (par value/issue price, payment schedule, and corporate acceptance).

B. The Board’s authority to make calls

Generally, the board of directors manages corporate affairs and has authority to make calls on unpaid subscriptions consistent with:

the subscription contract terms,
the corporation’s articles/bylaws,
and statutory rules on calls and delinquency.

A call should be made by board resolution specifying:

the amount due per share or per subscriber,
due date,
place/mode of payment,
and consequences of non-payment.

C. Notice requirements

To enforce delinquency consequences, notice must be properly given to subscribers/shareholders. Good practice includes:

written notice served to the address on record,
proof of service,
enough lead time as required by governing law and bylaws.

D. Delinquent subscriptions and delinquency sale

If a subscriber fails to pay after a lawful call and notice, shares may become delinquent, and the corporation may conduct a delinquency sale (auction of delinquent shares) following statutory procedure and notice. The objective is to recover the unpaid subscription plus costs from a buyer; failing that, other consequences may follow per law.

E. Effects of delinquency

Typically, a delinquent subscriber may lose certain shareholder rights (especially voting and dividends) until payment, depending on statutory and bylaw rules. However, corporate actions must strictly follow the legal process; informal “you’re delinquent because we say so” shortcuts are fertile grounds for intra-corporate disputes.

VIII. Capital Calls Beyond Unpaid Subscriptions: Additional Capital Infusions

Not all capital needs can be met by calling unpaid subscriptions. If the corporation wants new money beyond existing subscriptions, common lawful routes include:

A. Issuance of additional shares

The corporation may increase capital stock (if required) and issue new shares, subject to:

corporate approvals,
shareholder pre-emptive rights (unless validly denied),
valuation/issue price rules,
and regulatory filings where applicable.

B. Advances, deposits, or loans from shareholders

Shareholders may lend money to the corporation or provide advances. This is not a “capital call” in the subscription sense; it creates debt, not equity, unless later converted properly.

C. Assessments or additional contributions in special structures

Certain entities (e.g., some cooperative structures) use member assessments. For corporations, “assessments” on shareholders are generally not the default mechanism unless explicitly permitted within the corporate framework and consistent with governing law.

IX. Drafting and Enforcing Capital Call Notices

A. Capital call notice essentials

Authority: cite board resolution (date, resolution number if used).
Obligation: identify the subscription agreement and unpaid balance.
Computation: show number of subscribed shares, amount paid, amount due.
Due date and payment instructions.
Consequences: delinquency declaration and delinquency sale procedures (not vague threats).
Rights information: any effect on voting/dividends under law/bylaws.
Contact and records update: ensure shareholder addresses are updated.

B. Strict compliance to avoid invalid delinquency sales

Delinquency sales are frequently attacked for:

defective notice,
improper publication/auction procedure,
wrong computation,
lack of board authority,
and denial of statutory shareholder rights.

A lending corporation under financial strain may be tempted to cut corners. That often converts a liquidity problem into an intra-corporate litigation problem.

X. Demand Letters vs Capital Calls: Comparative Guide

A. Key differences

Feature	Demand Letter (Borrower)	Capital Call (Shareholder)
Relationship	Creditor–debtor	Corporation–subscriber/shareholder
Source of obligation	Loan contract / promissory note	Subscription contract / corporate statute/bylaws
Purpose	Collect debt / trigger remedies	Raise paid-in capital / enforce subscription
Typical remedy	Suit for collection; enforce security	Delinquency declaration and sale; suit to collect subscription (as applicable)
Due process	Contract + civil law demand; fair collection practice	Statutory corporate procedure; board resolution + notice
Common defect	Unclear computation; unconscionable charges; improper threats	Defective notice; lack of board authority; invalid delinquency sale

B. Where they collide in practice

A lending corporation with rising non-performing loans may:

issue demand letters to borrowers, while
issuing capital calls to shareholders to replenish cash.

Errors happen when:

management uses collection language toward shareholders (“final demand” with threats that are not aligned with corporate procedure), or
uses corporate delinquency concepts toward borrowers (which is legally meaningless).

XI. Litigation Hotspots and Risk Management

A. For lending corporations: demand letter pitfalls

Mathematical and documentary weakness A single wrong balance figure can unravel credibility. Always match computations to ledger entries.
Overbroad penalties and fees Avoid stacking charges beyond what the contract and law allow.
Collection conduct complaints Train collectors; standardize scripts; avoid third-party disclosures.
Authority issues Ensure signatories are duly authorized by board resolution or corporate delegation; lack of authority can be raised in court.

B. For shareholders/subscribers: capital call disputes

Defective call process No board resolution, unclear terms, or insufficient notice.
Selective enforcement / oppression Calling certain shareholders while excusing others without legal basis can trigger claims of bad faith or oppression.
Valuation and dilution Where the “capital call” is functionally a new share issuance, pre-emptive rights and pricing become contentious.
Governance failure under distress Financial distress often yields rushed board actions; those are later scrutinized in intra-corporate dispute venues.

XII. Practical Templates: High-Level Structure (Non-Form)

A. Demand letter structure

Header and identification
Statement of obligation
Statement of default
Breakdown of amount due
Demand and deadline
Remedies and reservation of rights
Payment instructions and contact
Proof of service plan and attachments list

B. Capital call notice structure

Corporate header; board authority
Subscription details and unpaid balance
Call amount and due date
Consequences and statutory process outline
Payment instructions
Notice of record update and contact
Proof of service plan

XIII. Compliance, Ethics, and Consumer-Sensitive Microfinance Context

Microfinance borrowers are often more vulnerable to abusive collection practices. Even when the law permits aggressive remedies, sustainable compliance standards emphasize:

transparency of loan pricing and fees,
respectful collection conduct,
fair opportunities to restructure,
and accurate documentation.

For lending corporations, governance is equally crucial: capital calls should be applied consistently, with documented board action, and with a clean record showing that shareholder obligations are enforced lawfully rather than used as leverage in internal disputes.

XIV. Conclusion

In the Philippine context, demand letters and capital calls are essential tools for financial discipline in lending corporations, particularly those engaged in microfinance lending. Demand letters anchor the creditor’s collection posture—establishing default, clarifying the amount due, and preserving remedies—while capital calls operationalize corporate law’s principle that subscriptions are binding commitments necessary to sustain the corporation’s capital base. The difference is not merely semantic: demand letters live in the debtor-creditor world of civil obligations and fair collection practice; capital calls live in the corporate world of board authority, statutory procedure, shareholder rights, and delinquency mechanisms. A lending corporation that treats both with rigor—accurate numbers, clean documentation, proper notice, and lawful conduct—reduces both collection losses and governance litigation risk.