the case of the returned collateral

7/30/2019 The Case of the Returned Collateral

1/18

THE CASE OF THE RETURNEDCOLLATERAL

(By: Atty. R.N. Dulce)


2/18

In 1962, Company XYZ, a domestic corporationengaged in the marketing of named brand hardwareitems, extended a credit line up to P20, 000 to

Company ABC. Company ABC was a medium-sizedcorporation based in Davao which had been inbusiness for the past 15 years. To secure the creditline, Company ABC offered, and Company XYZ

accepted, a pledge of PW & ED bonds worth P25,000owned by Mr. B, a majority stockholder of CompanyABC. Once the credit line was established, CompanyABC started purchasing hardware items from

Company XYZ. At the start, the 30-day credit termwas faithfully complied with. As a matter of fact,there were times when credit extensions exceededthe P20,000 credit limit but the account were paid ingood order.


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However, in 1965, several business reverses

forced Company ABC to renege on its creditcommitments. The payments that usually camewithin 30-day credit term began to falter. Therewere times when accounts would be outstanding

up to 60 days, and sometimes even 90 days.Anyway, the accounts was still moving until late1966 Company ABC could no longer keep up its

payments and thus Company XYZ suspendedcredit.


4/18

Meantime, Mr. B, through his emissary, made

representations with Company XYZ to withdrawthe PW & ED bonds for purpose of having themreplaced with a new series which yielded a better

rate of interest. Because of the intimacy of MR. Bwith Company XYZ, the PW & ED bonds werereleased to him upon the latter giving a receiptwhich simply stated: RECEIVED PW &ED BOND

NO. 123 AND 345 WITH FACE VALUE OF 25,000TO BE EXCHANGED UPON CONVERSION TO 7%NEW BONDS.


5/18

Shortly thereafter, Company ABC filed

voluntary insolvency proceedings. An earlierwith civil case for collection filed by CompanyXYZ to recover the outstanding obligation of

Company ABC amounting P19,000 proved noavail. The writ of execution was returned wasreturned unsatisfied for the reason thatCompany ABC had no more assets to satisfy the

same.


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Thereupon, Company XYZ turned to Mr. Bwho, after one year, has not complied with his

commitment to replace the release PW & EDbonds. To its dismay, Company XYZ verifiedfrom the Central Bank that the bond has beenencased. Forthwith, Company XYZ sued Mr. Bfor damages claiming that had he not fail withcommitments to replace the bonds, he wouldnot have suffered the loss corresponding to the

unpaid obligation of the Company ABC. In hisdefense, Mr. B cited article 2110 of the CivilCade which provides:


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Ifthe thing pledged is returnedby the pledge to the pledgor or the

owner, the pledge is extinguished.

Any stipulation to the Contrary

shall be void.


8/18

Company XYZ countered by saying that the

return of the bond to Mr. B was not the returncontemplated by Article 2110 as it was made for a

specific and determinate purpose: - For Exchangedwith higher yielding bonds.

After the trials, the lower court renderedjudgment 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 havingencashed the bonds contrary to his commitments to

the replace the same and to submit the new bonds

Company YZ. Mr. B appealed the decision.


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Time Frame

1962 to late 1966


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Point of View

Company XYZ


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Problem

Will the Company XYZ recoverthe returned collateral to Mr.

B?


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Objective

To collect the collateral that hasbeen returned.

To avoid the same difficulties withclients.


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Areas of Consideration

(SWOT Analysis)

Strength

Good managementCompany XYZ knows the

requirements of a company towhere they will extend credits.

Weakness

Credit and collection policyCollection procedures

Greedy

Opportunity

Avoid the uncollectible accounts

Increase sales

Threat

Uncollectible accounts


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Alternative Courses of Action

ACA #1Disregard the outstanding balance of Company ABC andrecord it as uncollectible account, and instead focus onthe improvement of the companys credit and collectionpolicies and procedures.

Advantages:Less legal expensesNo time will be wasted

Disadvantages:The credit will be written uncollectedMr. B will not be punished


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ACA #2

Pursue the case that had been filed against Mr. B andimprovement of the companys credit and collectionpolicies and procedures.

Advantages:

There is the possibility that the collateral will be collect

Mr. B will learn his lesson

Disadvantages:

Increase of legal expenses


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Recommendation

ACA # 1

We recommend ACA # 1 because the casethat has been filed was caused the

company faced with a costly and time-consuming procedure. Since Mr. B was notwilling to return the said collateral it is moreconvenient to the Company XYZ to move onand focus on the improvements of their creditcollection policy to avoid the samedifficulties.


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Action Plan

Task/Activities

Responsible Person/

Department Begin Date Costs

Set a reasonable credit limitDetermine the credit limits So that you do

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

Credit and CollectionDepartment

Day 1 from the daythe problem

occurred

none

Cash discount

Offer cash discounts to encourage

customers to settle their obligations early.

Credit and Collection

Department

Day 1 from the day

the problem

occurred

none

formulate an effective collection proceduresAdopt a collection calendar this way the

company must implement regularity and

systematically to achieve a good

collection percentage.

Credit and CollectionDepartment

Day 1 from the daythe problem

occurred

none

the company should practice no Compadre

system

Credit and Collection

Manager

Day 1 from the day

the problemoccurred

none


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Thank You!!

the case of the returned collateral

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