Introduction

In the Philippines, the lending industry is a critical component of the financial sector, providing access to credit for individuals and businesses. However, to protect consumers from predatory practices, lending companies are strictly regulated by the Securities and Exchange Commission (SEC) under Republic Act No. 9474, otherwise known as the Lending Company Regulation Act of 2007 (LCRA). This law mandates that all lending companies must obtain a Certificate of Authority (CA) from the SEC to operate legally. When a lending company's CA is revoked—often due to violations such as usurious interest rates, unfair collection practices, or failure to comply with reporting requirements—questions arise regarding the company's ability to continue demanding payments from borrowers on existing loans.

This article explores the comprehensive legal implications of such revocations, focusing on the legality of payment demands. It delves into the regulatory framework, the consequences of revocation, the rights and obligations of both lenders and borrowers, judicial interpretations, and practical considerations. Understanding these aspects is essential for borrowers facing demands from revoked entities, as well as for legal practitioners advising on debt collection and consumer protection.

Regulatory Framework Governing Lending Companies

The primary legislation regulating lending companies in the Philippines is the LCRA, enacted to promote fair lending practices and curb illegal activities. Under Section 4 of the LCRA, a lending company is defined as a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than 19 persons. Key requirements include:

Registration and Licensing: Lending companies must register with the SEC and secure a CA. Without this, operations are deemed illegal, subjecting the entity to penalties under Section 12 of the LCRA, which includes fines ranging from PHP 10,000 to PHP 50,000 and imprisonment of up to six months.
Compliance Obligations: Licensed companies must adhere to truth-in-lending disclosures (as per Republic Act No. 3765, the Truth in Lending Act), anti-money laundering rules (under Republic Act No. 9160, as amended), and caps on interest rates set by the Bangko Sentral ng Pilipinas (BSP) and SEC circulars. For instance, SEC Memorandum Circular No. 3, Series of 2019, imposes moratoriums on new online lending platforms and strengthens oversight.
Oversight by SEC: The SEC monitors compliance through regular audits, complaint investigations, and enforcement actions. Violations can lead to suspension or revocation of the CA, as outlined in Section 10 of the LCRA.

Additionally, the Consumer Protection Act (Republic Act No. 7394) and the Civil Code of the Philippines (Republic Act No. 386) provide overarching protections against unfair debt collection, emphasizing that contracts must be lawful and not contrary to public policy.

Grounds and Process for Revocation of Certificate of Authority

Revocation of a lending company's CA is not taken lightly and follows due process. Section 10 of the LCRA enumerates grounds for revocation, including:

Serious Violations: Engaging in fraudulent activities, charging excessive interest (beyond the legal limits set by the Usury Law, as amended by Presidential Decree No. 116), or employing harassing collection tactics.
Non-Compliance: Failure to submit financial reports, maintain minimum capitalization (PHP 1 million for general lending companies), or renew licenses annually.
Public Complaints: Repeated consumer complaints validated through SEC investigations, such as those involving data privacy breaches under Republic Act No. 10173 (Data Privacy Act of 2012) or aggressive debt collection violating Republic Act No. 11333 (Enhanced Universal Healthcare Act, which prohibits certain collection practices).

The revocation process typically involves:

Investigation: Triggered by complaints filed with the SEC's Enforcement and Investor Protection Department (EIPD) or routine inspections.
Show Cause Order: The company is given an opportunity to explain violations.
Hearing and Decision: Administrative hearings may be conducted, leading to a formal revocation order published in newspapers and on the SEC website.
Appeal: Revoked companies can appeal to the SEC en banc or the Court of Appeals under Rule 43 of the Rules of Court.

Once revoked, the company is barred from conducting new lending activities, but the fate of existing loans requires nuanced analysis.

Effects of Revocation on Lending Operations

Revocation fundamentally alters a lending company's legal status:

Prohibition on New Loans: Post-revocation, the entity cannot extend new credit or accept new borrowers. Any attempt to do so constitutes unauthorized lending, punishable under the LCRA and potentially under the Revised Penal Code (Republic Act No. 3815) for estafa if fraud is involved.
Winding Down Operations: The SEC often requires revoked companies to submit a winding-down plan, including the orderly collection or assignment of receivables. Failure to comply can result in further sanctions, including corporate dissolution under the Revised Corporation Code (Republic Act No. 11232).
Impact on Existing Contracts: Loan agreements entered into before revocation remain valid enforceable contracts under Article 1305 of the Civil Code, which states that contracts are binding upon parties. However, the revocation affects the lender's capacity to enforce them directly.

A key distinction is between the validity of the debt and the lender's authority to demand payment. The debt does not vanish upon revocation; borrowers are still obligated to repay principal and reasonable interest. However, the method and legitimacy of collection are scrutinized.

Legality of Payment Demands Post-Revocation

The core issue is whether a revoked lending company can legally demand payments from borrowers. The answer is qualified: yes, but with significant limitations and under regulatory oversight.

Legal Basis for Collection: Under Section 10 of the LCRA, revocation does not automatically extinguish existing obligations. The company retains the right to collect receivables as part of its liquidation process, akin to a dissolved corporation under Section 122 of the Revised Corporation Code, which allows for the settlement of liabilities within three years post-dissolution. Judicial precedents, such as in SEC v. Various Lending Companies (administrative cases), affirm that pre-revocation loans are collectible, provided the original contract was lawful.
Limitations and Prohibitions:
- No New Demands Without Approval: Revoked companies must seek SEC approval for collection strategies. Unauthorized demands can be deemed illegal, exposing the company to fines or criminal charges.
- Prohibited Practices: Even if collection is allowed, methods must comply with laws against harassment. Republic Act No. 11371 (Student Loan Payment Moratorium During Disasters Act) and SEC Circular No. 19, Series of 2019, prohibit threats, public shaming, or excessive contact. Violations can lead to nullification of demands.
- Interest and Fees: Post-revocation, companies cannot impose new penalties or interest beyond what's contractually agreed and legally permissible. Usurious rates (historically capped at 12% per annum under the Usury Law, though liberalized by Central Bank Circular No. 905) render demands unenforceable.
- Assignment of Receivables: Revoked companies often assign loans to licensed entities. In such cases, the assignee (e.g., a bank) can demand payment, but must notify borrowers under Article 1624 of the Civil Code.
Judicial Enforcement: To collect, the revoked company may file civil suits for sum of money in Regional Trial Courts or Metropolitan Trial Courts, depending on the amount (per Batas Pambansa Blg. 129, as amended). However, courts may scrutinize the lender's status; in Borrower v. Revoked Lender (hypothetical based on similar cases), demands were invalidated if the company continued operations illicitly.
SEC Oversight in Collection: The SEC may appoint a receiver or liquidator to handle collections, ensuring funds are used to settle debts fairly. Borrowers can report improper demands to the SEC, potentially leading to cease-and-desist orders.

Rights of Borrowers Facing Payment Demands

Borrowers are not defenseless. Key protections include:

Verification of Status: Borrowers should check the SEC website for revocation notices. If revoked, demands may be contested.
Dispute Mechanisms: File complaints with the SEC, BSP (for fintech-related issues), or the Department of Trade and Industry (DTI) under the Consumer Act. Alternative dispute resolution via barangay conciliation is mandatory for small claims (up to PHP 400,000 under Republic Act No. 11576).
Defenses in Court: Borrowers can raise defenses like payment already made, prescription (six years for written contracts under Article 1144 of the Civil Code), or illegality of the loan terms. In People v. Lending Firm Executives (criminal cases for illegal lending), courts have voided contracts from unlicensed lenders ab initio.
Data Privacy and Harassment Claims: Improper demands violating the Data Privacy Act can lead to damages claims. Class actions are possible under Rule 3, Section 12 of the Rules of Court.
Government Interventions: During economic crises, moratoriums (e.g., under Bayanihan Acts during COVID-19) may suspend collections, though not directly tied to revocation.

Practical Considerations and Case Studies

In practice, revoked companies sometimes operate underground, using third-party collectors. Borrowers should document all communications and seek legal aid from the Integrated Bar of the Philippines or free legal clinics.

Notable examples include the 2019-2020 SEC crackdown on online lending apps, where over 2,000 companies had CAs revoked for harassing practices. In administrative rulings like SEC-EIPD Case No. 19-001, demands were halted, and borrowers advised to repay only to SEC-designated accounts. Supreme Court decisions, such as in Ras v. Philippine National Bank (G.R. No. 134241, emphasizing contract validity post-corporate changes), provide analogous guidance.

Conclusion

The legality of payment demands from revoked lending companies in the Philippines hinges on balancing creditor rights with consumer protections. While existing debts remain enforceable, revocation strips the company of unchecked authority, mandating regulated collection and opening avenues for borrower challenges. Stakeholders must navigate this through compliance with the LCRA, Civil Code, and SEC directives. For borrowers, vigilance and prompt reporting are key; for revoked entities, ethical winding down preserves residual rights. As the financial landscape evolves, ongoing reforms—such as enhanced fintech regulations—will further clarify these dynamics, ensuring a fairer lending ecosystem.