Metropolitan Waterworks and Sewerage System V. Hon.
Upon certification of
Reynaldo B. Daway G.R. No. 160732. June 21, 2004
MARCH 15, 2014 LEAVE A COMMENT
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
not apply to the the standby letter of credit issued by the bank as
the former prohibition is on the enforcement of claims against
guarantors or sureties of the debtors whose obligations are not
solidary with the debtor.
The concept of guarantee vis--vis the concept of an irrevocable
letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the banks responsibility from
the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. A Standby Letter
of Credit is not a guaranty because under a Standby Letter of
Credit, the bank undertakes a primary obligation. On the other
hand, a guarantor undertakes a collateral obligation which arises
only upon the debtors default. A Standby Letter of Credit is a
primary obligation and not an accessory contract.
Facts: Maynilad obtained a 20-year concession to manage,
repair, refurbish, and upgrade existing Metropolitan Waterworks
and Sewerage System (MWSS) water delivery and sewerage
services in Metro Manilas west zone. Maynilad, under the
concession agreement undertook to pay concession fees and
itsforeign loans. To secure its obligations, Maynilad was required
under Section 9 of the concession contract to put up a bond, bank
guarantee or other security acceptable to MWSS. Pursuant to this
requirement, Maynilad arranged on for a three-year facility with a
number of foreign banks led by Citicorp Intl for the issuance of an
irrevocable standby letter of credit (SLC) in the amount of $ 120
million in favor of MWSS for the full and prompt payment of
Maynilads obligations to MWSS. Due to devaluation of the peso
and other business reversals of Maynilad, MWSS filed a notice of
early termination of the concession contract.
the non performance of Maynilad obligation, the MWSS moved to
collect from Citicorp on the standby letters of credit issued.
Maynilad filed for corporate rehabilitation. Judge Daway stayed
the payment of the letter of credit by Citicorp pursuant to Sec 6
(b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.
Issue: Whether or not the payment of the standby of letter of
credit can be stayed by filing of a petition for rehabilitation
Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim
Rules does not apply to the the standby letter of credit issued by
the bank as the former prohibition is on the enforcement of claims
against guarantors or sureties of the debtors whose obligations
are not solidary with the debtor.
The participating banks obligation under the letter of credit are
solidary with respondent Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay and is not conditioned
on the prior exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And being solidary,
the claims against them can be pursued separately from and
independently of the rehabilitation case.
Issuing banks under the letters of credit are not equivalent to
guarantors. The concept of guarantee vis--vis the concept of an
irrevocable letter of credit are inconsistent with each other. The
guarantee theory destroys the independence of the banks
responsibility from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantors obligation is merely
collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable letter of
credit, the bank undertakes a primary obligation. We have also
defined a letter of credit as an engagement by a bank or other
person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with
the conditions specified in the credit.

A Standby Letter of Credit is not a guaranty because under a

Standby Letter of Credit, the bank undertakes a primary
obligation. On the other hand, a guarantor undertakes a collateral
obligation which arises only upon the debtors default. A Standby
Letter of Credit is a primary obligation and not an accessory
contract.