THE AUTHORITY TO INVEST IN DEBT SECURITIES DOES NOT NECESSARILY INCLUDE THE AUTHORITY TO ENGAGE IN DIRECT LENDING ATRAM Unitized Corporate Debt Vehicle Inc. is seeking an opinion on whether a Corporate Debt Vehicle (CDV) can engage in direct lending activities. In reply, the Commission discussed the nature of a CDV and clarified the permissible and prohibited activities of a fund manager. Specifically, Section 6.1, Rule 6 of the Implementing Rules and Regulations (IRR) of the Investment Company Act (ICA) outlines the eligible investment assets in which investment companies may invest, while Section 5.1.3 of the same IRR provides for the prohibited acts, which include engaging in non-permissible activities like direct lending of monies. To resolve the issue, the SEC distinguished between a loan and an investment in debt securities or instruments. As defined under Item 39, Rule I of the ICA-IRR, an investment in securities falls under the category of transferable securities, which constitutes shares and other securities, excluding securities that can be transferred only with the consent of a third party. In contrast, a loan, as defined under Article 1933 of the Civil Code, is a transaction where something is provided for use with the obligation to return the same or an equivalent amount, of the same kind and quality. The SEC further differentiated the same, emphasizing the distinctions in terms of the parties involved, the nature of the transaction, the expectation of profits, and the governing law. As to the parties involved, investment in debt securities or instruments involves an investor and an issuer of the debt securities, while a loan transaction involves the creditor/lender and the debtor/borrower. As to the nature of the transaction, investment in debt securities involves purchasing existing debt securities in the capital market, such as portfolios of corporate debt papers of large corporations and medium-sized enterprises in the case of a CDV, whereas direct lending involves the grant of loans with agreed-upon interest rates and terms between the parties. As to the expectation of profits, in investments in debt securities, the issuers pay a fixed or variable interest rate, which may be influenced by factors like inflation, economic situations, interest rates or asset prices, and in case of a CDV, the investor may sell the securities prior to its maturity, In contrast, direct lending usually involves fixed, direct returns through loan repayment and interest. And finally, as to the governing law, investments in debt securities are governed by securities and investment law, while direct lending is governed by lending laws and regulations. In conclusion, while both activities involve the provision of funds, they differ significantly in the above categories. Therefore, it can be concluded that the authority to invest in debt securities does not necessarily include the authority to engage in direct lending. [SEC OFFICE OF THE GENERAL COUNSEL LEGAL OPINION NO. 25-06, MARCH 6, 2025] [QUORUM IN MEETINGS OF A CONDOMINIUM CORPORATION] [QUORUM FOR CORPORATE MEETINGS BASED ON OWNERSHIP OR VOTING RIGHTS TO ENSURE DECISIONS REFLECT ACTUAL OWNERSHIP INTERESTS] Company T., a condominium corporation, is seeking an opinion regarding the determination of quorum for its Annual General Membership Meeting (AGMM). As represented, the corporation, consisting of 1,027 members (1,003 residential and 24 commercial), has faced difficulties in reaching the required quorum, leading to several failed AGMMs. Specifically, Company T. seeks clarification on whether the quorum should be based on the total number of members, possible legal remedies to lower the quorum requirement, procedures for amending its by-laws to reflect a lower quorum, and whether there is a recommended percentage for quorum that balances efficiency with the protection of members’ interests. In reply, the determination of quorum is primarily governed by Company T’s Declaration of Restrictions, Articles of Incorporation (AOI), and By-Laws. Under the Revised Corporation Code (RCC), unless otherwise specified in the By-Laws, a quorum for a non-stock corporation consists of a majority of members in good standing with voting rights. This means that Company T must first establish the number of members in good standing to determine the required quorum. To address the corporation’s difficulty in reaching a quorum, the SEC outlined several legal remedies. First, Company T may conduct meetings and voting via remote communication, provided its By-Laws permit it or its Board of Trustees approves it through a Resolution. This allows members to participate without being physically present, potentially increasing attendance. Second, the corporation may amend its By-Laws to lower the quorum requirement, but this amendment itself requires approval from a majority of both the Board and the total membership. If two-thirds (2/3) of the members authorize the Board, it may be granted the power to amend the By-Laws directly. Regarding the ideal percentage for a reduced quorum, the SEC noted that while there is no fixed requirement, a reasonable threshold should be established in line with good corporate governance practices. Some corporations set the quorum at 30% of members in good standing, though any change must align with the RCC and other applicable laws. Importantly, even if the By-Laws allow for a lower quorum, certain corporate actions, such as By-Law amendments, may still require a higher approval threshold under the RCC or the Condominium Act. In conclusion, Company T. must adhere to its current by-laws when determining quorum but has the option to amend them to lower the requirement. Utilizing remote communication and proxy voting can facilitate meeting quorum, while any changes to the by-laws must follow the required legal process. [SEC OFFICE OF THE GENERAL COUNSEL OPINION NO. 25-04, FEBRUARY 19, 2025] | | VAT IMPOSITION ON CONDOMINIUM DUES IS ERROENOUS, BUT PROPER SUBSTANTIATION WHEN CLAIMING REFUNDS IS NEEDED Petitioner Pacific Plaza Condominium Corporation, a non-stock, non-profit entity registered under the Condominium Act, filed a Petition for Review seeking a refund of Php 3,185,128.81 representing its alleged erroneously paid Value-Added Tax (VAT) for the third (3rd) and fourth (4th) quarters of 2017. The Petitioner initially paid VAT on condominium dues in compliance with BIR Revenue Memorandum Circular (RMC) No. 65-2012, which classified such dues as subject to VAT. However, following the Supreme Court’s ruling in Association of Non-Profit Clubs, Inc. vs. BIR, that condominium dues are not taxable, the Petitioner filed an administrative claim for a refund with the BIR on October 23, 2019, and simultaneously lodged a judicial claim before the Court of Tax Appeals (CTA). The CTA Special Second (2nd) Division denied the refund, citing two (2) main reasons: (1) lack of substantiation for Php 2,410,026.76 in claimed input VAT credits, as no VAT invoices or official receipts were presented; and (2) absence of erroneous payment of the Php 745,270.37 remitted since the Petitioner still had an output VAT liability of Php 1,489,207.34. The Petitioner argued that a refund under Section 229 of the Tax Code does not require compliance with invoicing requirements and that VAT payments on condominium dues should be refunded as erroneously collected taxes. It also cited Chevron Holdings, Inc. vs. CIR, asserting that the CTA had no authority to offset its VAT payments against an alleged liability. On the other hand, the Respondent Commissioner of Internal Revenue (CIR) countered that the Petitioner failed to substantiate its input VAT and did not prove that the VAT payments were erroneously made. Likewise, the simultaneous filing of administrative and judicial claims violated the Doctrine of the Exhaustion of Administrative Remedies. In ruling, the CTA En Banc DENIED the Petition, ruling that the Petitioner failed to prove erroneous payment. It held that input VAT credits must be substantiated with proper documentation, and since the Petitioner still had a remaining VAT liability, its actual remittance could not be considered erroneously paid. On the Petitioner’s reliance on Chevron Holdings, the same should be rejected because the ruling applied only to input VAT refunds under Section 112 and not to erroneous tax refunds under Section 229. Additionally, the Petitioner’s simultaneous filing of administrative and judicial claims was improper. Thus, the Petition was DENIED, and no refund was granted. [PACIFIC PLAZA CONDOMINIUM CORPORATION VS. CIR, CTA EN BANC CASE NO. 2769, MARCH 18, 2025] |
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