The SEC on Financing Leasing Transactions

In order for a transaction to fall within the definition of “financial leasing” which is governed by Republic Act No. 8556 or the Financing Company Act of 1998 (“FCA”), the following considerations must be present: (a) there must be three parties involved, the installment buyer, seller, and the financing company, and (b) the arrangement between the parties must be preceded by a purchase and sale contract covering the equipment which becomes the subject matter of the financial lease.   

On 16 May 2024, the Securities and Exchange Commission Office of the General Counsel issued SEC OGC Opinion No. 13-2024 which discussed financial leasing in relation to the activities of Adventus IT Services (Philippines) Inc. (“Adventus”). 

Adventus is a domestic corporation engaged in providing information and communications technology solutions and services. To provide its services, it offers its customers a lease of office equipment under a trilateral scheme. In this scheme, a financing company referred by Adventus will purchase the office equipment from Adventus which will then become the subject of a financial lease between the financing company and the customer. However, Adventus intends to offer its customers the option of directly leasing the office equipment without the intervention of a financing company with the expectation that the equipment will be purchased by the customer at the end of the lease period. In this regard, Adventus inquired whether this proposed activity will classify them as engaged in financial leasing.

Financial leasing under the FCA

Under Section 3(d) of the FCA, financial leasing is defined as “a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money…”

The SEC cited the case of International Harvester Macleod, Inc. v. Medina, et al. where the Supreme Court held that the financing transaction contemplated under the FCA involves a trilateral relationship among the following three parties: the (a) installment buyer, (b) seller, and (c) the financing company. In that case, the Supreme Court held that the transaction between the petitioner International Harvester Macleod, Inc. (“IHMI”) and Medina was bilateral, not trilateral. There was also no discounting, factoring or assignment of IHMI’s credit against Medina to a finance company. Therefore, IHMI was not engaged in financial leasing.

The SEC also stated that pursuant to the case of Beltran et. al. v. PAIC Finance Corporation, a financial lease must be preceded by a purchase and sale contract covering the equipment which becomes the subject of the financial lease. The Supreme Court also noted in that case that:

“The basic purpose of a financial leasing transaction is to enable the prospective buyer of equipment, who is unable to pay for such equipment in cash in one lump sum, to lease such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with the expectation that at the end of the lease period, the buyer/financial lessee will be able to pay any remaining balance of the purchase price.”

The proposed activity of Adventus is not financial leasing

Applying the above, the SEC opined that the proposed activity of Adventus is not considered to be “financial leasing” under the FCA. First, the relationship between Adventus and its customers is bilateral, not trilateral as a financing company shall not be involved. Second, the arrangement between the parties is not preceded by a purchase and sale contract. Third, the customer, not a financing company, pays the lease rentals directly to Adventus. Therefore, Adventus is not engaged in financial leasing as contemplated under the FCA.