(By: Atty. R.N.

Dulce)

THE CASE OF THE RETURNED COLLATERAL

In 1962, Company XYZ, a domestic corporation engaged in the marketing of named brand hardware items, extended a credit line up to P20, 000 to Company ABC. Company ABC was a medium-sized corporation based in Davao which had been in business for the past 15 years. To secure the credit line, Company ABC offered, and Company XYZ accepted, a pledge of PW & ED bonds worth P25,000 owned by Mr. B, a majority stockholder of Company ABC. Once the credit line was established, Company ABC started purchasing hardware items from Company XYZ. At the start, the 30-day credit term was faithfully complied with. As a matter of fact, there were times when credit extensions exceeded the P20,000 credit limit but the account were paid in good order.

However, in 1965, several business reverses forced Company ABC to renege on its credit commitments. The payments that usually came within 30-day credit term began to falter. There were times when accounts would be outstanding up to 60 days, and sometimes even 90 days. Anyway, the accounts was still moving until late 1966 Company ABC could no longer keep up its payments and thus Company XYZ suspended credit.

Meantime, Mr. B, through his emissary, made representations with Company XYZ to withdraw the PW & ED bonds for purpose of having them replaced with a new series which yielded a better rate of interest. Because of the intimacy of MR. B with Company XYZ, the PW & ED bonds were released to him upon the latter giving a receipt which simply stated: RECEIVED PW &ED BOND NO. 123 AND 345 WITH FACE VALUE OF 25,000 TO BE EXCHANGED UPON CONVERSION TO 7% NEW BONDS.

Shortly thereafter, Company ABC filed voluntary insolvency proceedings. An earlier with civil case for collection filed by Company XYZ to recover the outstanding obligation of Company ABC amounting P19,000 proved no avail. The writ of execution was returned was returned unsatisfied for the reason that Company ABC had no more assets to satisfy the same.

Thereupon, Company XYZ turned to Mr. B who, after one year, has not complied with his commitment to replace the release PW & ED bonds. To its dismay, Company XYZ verified from the Central Bank that the bond has been encased. Forthwith, Company XYZ sued Mr. B for damages claiming that had he not fail with commitments to replace the bonds, he would not have suffered the loss corresponding to the unpaid obligation of the Company ABC. In his defense, Mr. B cited article 2110 of the Civil Cade which provides:

If the thing pledged is returned by the pledge to the pledgor or the owner, the pledge is extinguished. Any stipulation to the Contrary shall be void.

Company XYZ countered by saying that the return of the bond to Mr. B was not the return contemplated by Article 2110 as it was made for a specific and determinate purpose: - For Exchanged with higher yielding bonds. After the trials, the lower court rendered judgment in favor of Company XYZ and against Mr. B. It ruled that the return of bonds was the return contemplated under Article 2110 of the Civil Code. Further it ruled that Mr. B acted in bad faith in having encashed the bonds contrary to his commitments to the replace the same and to submit the new bonds Company YZ. Mr. B appealed the decision.

Time Frame

1962 to late 1966

Point of View

Company XYZ

Problem

Will the Company XYZ recover the returned collateral to Mr. B?

Objective
To collect the collateral that has been returned.
To avoid the same difficulties with

clients.

Areas of Consideration (SWOT Analysis)

Strength Good management Company XYZ knows the requirements of a company to where they will extend credits. Weakness Credit and collection policy Collection procedures Greedy

Opportunity

Threat

Avoid the uncollectible accounts Uncollectible accounts Increase sales

Alternative Courses of Action

ACA #1
Disregard the outstanding balance of Company ABC and record it as uncollectible account, and instead focus on the improvement of the companys credit and collection policies and procedures.

Advantages:
Less legal expenses No time will be wasted

Disadvantages:
The credit will be written uncollected Mr. B will not be punished

ACA #2
Pursue the case that had been filed against Mr. B and improvement of the companys credit and collection policies and procedures. Advantages:
There is the possibility that the collateral will be collect Mr. B will learn his lesson

Disadvantages:
Increase of legal expenses

Recommendation
ACA # 1 We recommend ACA # 1 because the case that has been filed was caused the company faced with a costly and timeconsuming procedure. Since Mr. B was not willing to return the said collateral it is more convenient to the Company XYZ to move on and focus on the improvements of their credit collection policy to avoid the same difficulties.

Action Plan
Task/Activities

Responsible Person/ Department

Begin Date

Costs

Set a reasonable credit limit Credit and Collection Determine the credit limits So that you do Department not over-expose your business to a potentially large bad debt, determine what level of credit you are willing to give this potential customer and document this into your sales ledger. You may wish to increase this as your customer proves they are paying your invoices promptly Cash discount Credit and Collection Department Offer cash discounts to encourage customers to settle their obligations early. formulate an effective collection procedures Credit and Collection Adopt a collection calendar this way the Department company must implement regularity and systematically to achieve a good collection percentage. the company should practice no Compadre system Credit and Collection Manager

Day 1 from the day none the problem occurred

Day 1 from the day none the problem occurred Day 1 from the day none the problem occurred

Day 1 from the day none the problem occurred

Thank You!!