In the Philippine corporate landscape, inter-company debts—whether between parent and subsidiary, sister companies, or unrelated commercial entities—are a standard part of business operations. However, when these obligations remain unpaid beyond the agreed terms, a Formal Demand Letter becomes the most critical preliminary step in the recovery process.
Under Philippine law, specifically the Civil Code, a demand letter is not merely a courtesy; it is often a legal prerequisite to establishing "default" or "mora."
1. The Legal Necessity: Article 1169 of the Civil Code
The primary legal basis for a demand letter is Article 1169 of the Civil Code of the Philippines, which states:
"Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation."
In simpler terms, even if a debt is past due, the debtor is not legally in "delay" (and therefore not liable for legal interest or damages) until a formal demand is made. Exceptions exist only if the law, the contract, or the nature of the obligation expressly declares that demand is not necessary. For inter-company transactions, a written demand is the "extrajudicial" act that triggers legal consequences.
2. Essential Elements of an Effective Demand Letter
To be legally effective and withstand scrutiny in a potential court case, a demand letter for inter-company debt must contain the following:
- Identity of the Parties: Clearly state the full registered corporate names of both the creditor and the debtor.
- The Basis of the Obligation: Reference the specific contract, Purchase Order (PO), Sales Invoice, or Memorandum of Agreement (MOA) that created the debt.
- Statement of Account: Provide a clear breakdown of the principal amount, any accrued interest (if stipulated in writing), and late payment penalties.
- A Specific Period for Payment: You must provide a "grace period" (typically 5 to 15 days from receipt) for the debtor to settle the amount.
- The "Finality" Clause: State that if payment is not received within the specified period, the company will be forced to pursue legal remedies, including the filing of a civil action for "Sum of Money" or "Specific Performance."
3. Strategic Drafting Considerations
A. Establishing the Paper Trail
Inter-company debts often involve complex accounting. Ensure the demand letter refers to Annexes such as:
- Acknowledged Delivery Receipts (DRs).
- Certified True Copies of Invoices.
- Statement of Account (SOA) as of a specific date.
B. Signatory Authority
The letter should ideally be signed by legal counsel or a high-ranking officer (e.g., CFO or Treasurer). If signed by an external lawyer, it signals to the debtor company that the creditor is prepared for litigation.
C. Interest and Damages
In the Philippines, if the contract is silent on the interest rate, the legal interest (as per Bangko Sentral ng Pilipinas Circular No. 799) is currently 6% per annum, reckoned from the date of extrajudicial demand.
4. Recommended Structure of the Letter
| Section | Content Focus |
|---|---|
| Formal Heading | Corporate letterhead, date, and "Via Registered Mail/Personal Service." |
| The Preamble | "We write on behalf of [Creditor Co.] regarding your outstanding obligations..." |
| The Factual Basis | "Per our records and Sales Invoice Nos. 123-125, you received goods valued at..." |
| The Demand | "Demand is hereby made for the full payment of PHP [Amount] within 10 days..." |
| The Warning | "Failure to comply will leave us no choice but to protect our interests through legal action..." |
5. Mode of Service: The "Proof of Receipt"
A demand letter is only as good as the proof that the debtor received it. Under the Rules of Court, the following modes are preferred:
- Personal Service: Having a messenger deliver the letter and getting a "received" stamp with a signature and date from the debtor's authorized representative.
- Registered Mail: Using the Philippine Postal Corporation (PHLPost). The "Registry Receipt" and the "Return Card" serve as primary evidence of receipt in court.
- Courier (LBC/Grab/etc.): While faster, these are generally considered "private couriers." In litigation, they may require an affidavit from the courier to prove delivery if the debtor denies receipt.
6. Inter-Company Specifics: The "Piercing" Threat
In cases where the debtor company is a shell or is being drained of assets to avoid debt, the demand letter may subtly hint at the "Doctrine of Piercing the Corporate Veil." While companies have separate legal personalities, Philippine courts allow creditors to go after the directors or parent companies if the corporate fiction is used to perpetrate fraud or evade a valid obligation.
7. Conclusion of the Process
Once the demand letter is served, the "period of delay" begins. If the debtor remains silent or refuses to pay, the creditor is now legally equipped to file a Verified Complaint for Sum of Money. For claims not exceeding PHP 1,000,000 (excluding interest and costs), the case may fall under Small Claims procedure in the Metropolitan or Municipal Trial Courts, where lawyers are not allowed during the hearing, making the demand letter the most vital piece of written evidence.