PART VII CASE STUDIES As is true with the other Management Courses, there are still studies developed in Philippine setting on credit and collection management. ‘case Reproduced in the succeeding pages are some case studies bei res discussed in various credit and collection seminars. Most, ifnot all, oftee rs were written and developed by the resource speakers themselves, notably Messrs. Roberto N. Dulce, Santos Migallos, Jr., Placido R. Real, Jr., Marcelo P. Villanueva, all ex-Presidents, at one time or another, of the CMAP. Mr. Dulce appears to be the most prolife with the following cases credited to him: The Case of the Dutiful Sons. ‘The Problem of Good Equity To Repossess or Not? The Case of the Returned Collateral Whither the Over-Extended Client? Mr. Placido R. Real, Jr., several times President of CMAP, came up with a thought-provoking case studies of “The Case of the Entertained Credit Investigator.” “THE DUMMY CREDIT APPLICATION” How does a credit manager treat and decide a dummy credit application? By dummy application is meant that the applicant for credit is not the real party-in-interest but an accommodating party who is willing to allow his name to be used by another party. There are various reasons why a credit applicant would use the name of another party for purposes of obtaining credit. Among the possible reasons: 1. The teal credit applicant does not enjoy a good credit standing; 2. Even if he does not have a good credit standing, he does not keep records or financial statements which a scrutinizing Credit Department would require him, v3. Where the applicant’s capital comes from illegal sources; 4. Personal reasons why the applicant would not want his name used for a particular credit transaction. . . Ina given credit application, assume that the credit manager, upon investigation, found out that indeed it is a dummy application. The credit applicant himself does not enjoy an A:l credit rating although he may not be totally unacceptable credit-wise. But the accommodating party is established to be a very good credit risk. Having full knowledge of these facts, should a credit manager approve or disapprove the credit application? R.N. DULCE 193“THE ENGINEER GOING ON HIS OWN” ‘The Credit Manager of a substantial wholesale trading firm received a visitor who gave his name as Crispin de la Cruz. He was a Sales Engineer in a construction firm who wanted to go on business for the sale of construction materials on his own. Engr. De la Cruz felt that he would need more help from the Credit Department than from the Sales Department. Accordingly, a meeting was arranged between Engr. De la Cruz, the Credit Manager and the Sales Manager of the trading firm. Engr. De Ja Cruz claimed that he worked for about two years as sales engineer and then for three (3) years as Sales Supervisor and one (1) year as Manager. According to him, he saved P50,000 which he could put up as initial capital and if a credit of another P50,000 is extended to him, he could start with the business. Then he said to the Managers: “I hope you are interested and will study my problem. The Credit Manager and Sales Manager said that they were always interested in helping new business get underway especially when those business seemed to have promise for the future. The Credit Department proceeded to make a thorough investigation of Engr. De la Cruz’s antecedents and reputation. ‘The information was not only favorable but highly complimentary. He was well-known, well-liked, hard-working, honest to the bone, and most conscientious. ‘After the Credit Manger had visited the proposed location of the business, he talked with the Head of Division of their firm. He informed the Division Manager that from his point of view, the risk seemed too great. But while he thought the risk is substantial, yet he concluded that the risk should be accepted in view of the experience and the reputation of the engineer. In every place, the engineer worked, he acquired customers who kept coming back. His merchandising ability will help him but more than that, he would be able to manage with small capital. He knows the figures, expenses and what he is talking about. “The Sales Manager was less enthusiastic than the Credit Manager and suggested that the account be turned down. How will this situation be handled? M. VILLANUEVA 194ALLIED PRODUCTS, INC. In the summer of 1992, Amax Corporation had completed an ambitious P100 million expansion program which would allow Amax to sell special alloy bars and sheets for various specialty metal products manufacturing shops in Metropolitan Manila, Amax estimates its market for such special alloys to ran up to ili annum, boosting its sales by over P20 million per month. ‘The ni prot on aaah products, after deducting plant operating costs and general selling and administration expenses, would be 10%, a neat addition to the already existing profitable product lines of the company. In the past year, Amax had sales of P1 billion and a net profit of P805 million and the bad debt losses were, as usual, less than % percent. Amax believes that its new special alloy bars and sheets could not only add another P250 million in new product sales but could open up a vast reservoir of new demand which in 2-3 years could help double the company’s present sales volume and profits. Sales Department, therefore, presented Credit Department with a list of firms which they believed were ‘typical’ of the new batch of small manufacturing companies that could soon be their customers. Among in the list was Allied Products, Inc., which was investigated forthwith by Credit Department. Within the week, Rosman Credit Investigation Services submitted to Amax< its report on Allied Products, Inc., and Sales Department pressed Credit Department for a decision to sell Allied on 30-days credit an initial supply of 1,200 kgs valued at P200,000. Questions: . Ifyou were the Credit Manager, what would you have done? What considerations would you take into account in reaching your decision . Considering the urgency of the decision, would you still call for additional data or checkings to be able to make a judgment? If so, what additional data and checkings would you require first before deciding on the matter? 4. What analytical procedures would you undertake to reach a decision? wre Business History-Operation A domestic corporation established in conformity with the Philippine laws and duly registered with the Securities and Exchange Commission on May 31, 1965 under Reg. No. 27282. Conporate life is 50 years. Authorized capital stock is P10,000,000, 195aa subscribed capital of P2,000.000, and paid-in capital of P500,000. Authorized is divideg into 100,000 shares with par value of P100,00 each share. Engaged in the business of manufacturing and surface finishing metal products, including mechanical, electrolytic, organic and chemical processes with special preferences to finishing metal products. Territory covered is within the metropolitan area and sometimes up to Central Luzon and the Souther Tagalog provinces. Sells products through orders and salesman, sells in cash and carry basis and sometimes extend terms to selected customers up to 120 days. Has adequate facilities for normal operating needs Employ 5 salesman and 114 employees including laborers. Has one (1) delivery truck and one (1) panel. Office and warehouse located at captioned address is being rented at P30,200 a month. Checkings made with the administrator of the building confided that subject’s manner of payment is satisfactory. Checkings from the outside normal sources made, confirmed by a reliable informant, claimed that subject is in a stable position in business. Have not leamed to have incurred business failure nor fire losses in the past. When a reliable informant was confronted, he claimed that subject is insured including equipments and machineries in the amount of P3,500,000, but refused to name the insurance firm treating the matter strictly confidential. Financial Condition: An audited balance sheet for the year ended December 31, 1991 with comparative figures for the year 1990: ASSETS Current Assets: 1991 1990 Cash on hand and in banks P 120,814.38 P 100,138.59 Accounts receivable (net of allowance For doubtful accounts of P140,293.88 In 1991 and P80,367.64 in 1990) 1,470,866.38 940,038.26 Inventories Raw Materials 220,610.29 180,657.91 Work in Process 60,973.92 30,793.38 Finished Goods 40,412.09 30,386.84 Factory Supplies 50,906.23 50,665.05 Office Supplies 8,300.28 5,680.53 Due from officers and employees ae at, a7) Other receivables and 481, 1273 Miscellaneous deposits 20,267.10 10,386.23 TOTAL CURRENT ASSETS P_2,050,155.72 P_1,540,912.21 196Property & Equipment at Cost Leasehold Improvements Machinery & Equipment Laboratory Glassware & Equipment Delivery Equipment Office Furniture & Equipment Small tools and dies Electrical switches, cables, eto. Total Cost Less: Accumulated Depreciation TOTAL ASSETS LIABILITIES & STOCKHOLDERS’ EQUITY Current Liabilities ‘Accounts Payable-trade SSS premiums & income tax withheld ‘Accrued expenses & other payables Loan Payable Note payable-due within 1 year Estimated income tax Commission Payable TOTAL CURRENT LIABILITIES Long-Term Debt: Note payable-net of portion shown under Current liabilities Stockholders’ Equity Capital Stock- P100.00 par value a share Authorized — 50,000 shares Subscribed — 20,923 shares in 1991 and 20,650 in 1990 (subscription receivable Which amount to P1,280,100 in 1991 and P1,280,100 in 1990) Retained Eamings, Exh. “B” TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES & KHOLDERS’ EQUITY P 10,005.26 1,230,141.29 10,977.05 320,987.66 150,582.50 80,028.46 P 1,820,722.22 580,510.90 3, 04 P 290,996.53 60,210.44 510,254.00 150,000.00 50,466.00 90,961.00 150,403.62 P_1,330,291.59 P__50,466.00 P 1,640,200.00 260,409.45 P._1,900,609.45 P_2,390,367.04 P - 970,128.92 10,977.05 230,546.66 140,988.25 60,928.41 20,300.00 P 1,460,869.29 410,174.12 2,600,607.38 P 220,361.45 30,109.41 450,565.23 150,000.00 40,739.00 30,181.00 P_930.956,09 P 1,350,900.00 290,751.29 P_1,660,651.29 P_2,600,607.38 197STATEMENT OF INCOME & RETAINED EARNINGS For the Year Ended December 31, 1991 With Comparative Figures for 1990 1991 1990 Gross Income: Contracted Revenue (net of retums and P 5,630,924,22 Allowances 9,630, Costs of completed contracts Exh. C 3,460,123.60 Gross Income P 2,170,890.62 PP _1,380,091.93 Operating Expenses: Salaries, Wages & Bonuses P 300,471.74 =P 220,474.79 Directors” per diem and allowances 420,466.00 380,925.00 Taxes, licenses, and fees 130,831.76 110,583.58 Security Guards services 90,120.00 90,240.00 Employees Welfare 90,694.46 90,631.75 : Depreciation 70,366.68 70,009.14 ‘Rent 50,760.00 50,760.00 Representation & Entertainment 30,639.15 10,129.80 Repairs & Maintenance 1,250.00 1,110.00 Stationery & Office Supplies used 30,718.48 30,441.69 Professional fees 10,462.50 40,600.00 Commission 270,955.67 - Light, water and power 20,237.66 10,861.64 Delivery Expenses 100,361.39 80,329.80 Tel. and postages 3,350.59 1,990.74 Insurance 419.39 305.74 Trans. & Traveling 20,926.04 80,367.64 Provisional for Doubtfill Accounts 50,926.04 80,367.64 Miscellaneous 60,469.83 30,386.10 TOTAL OPERATING EXPENSES 2.1,830,833.14 — P_1,330,79931 ay) oe] : lv Net Income from Operations 'p 330,967.48 Pp /'40,292.62 Add: Other Income 40,102.00 30,824.35 Ne Income before interest P 380,069.48 =P 80,116.97 ess: Interest expense 40,150.32 30,760.00 Net income before income tax P 330,919.16 =P 40,356.97 Provisional for income tax 90,961.00 30,181.00 198/74/ jt Net income during the year P 230,958.16 P 10,175.97 Retained earnings at the beginning of the year 290,751.29 280,575.32 stock dividends declared (__270'300.00) : Retained earings at the end of the year P__260,409.45 P__290,751.29 Rationale The Amax credit manager reached his decision to give credit but for a lower amount of P100,000 than the amount requested of P200,000, on the following reasons: 1, __Although there was no direct information on the character, credit standing and paying habits of the company or its officers, he was satisfied that they had no adverse records elsewhere. They were not listed by CMAP and other organizations among those who issued bad checks or were habitually past due, or had court cases in the past two years. ‘The credit report showed the business was “stable” and rental payments “satisfactory” — which are always favorable indications. 2. Capacity was clearly shown in the large payroll — 5 salesman and 114 employees and the P30,200 monthly rental which was reportedly promptly paid. ‘The business had a good current ratio (1.54) and not much debt. Profits were modest but on the upswing with increasing sales. 3, __ Although a small company, it had enough tangible assets to show in the form of machinery and equipment and two delivery vehicles. Assets were well-used with the sales figure closed double (1.71) the value of assets. Inventory and receivable were somewhat high but should be a good source of cash, if sold and/or collected. He made a note to advise Allied management on the wisdom of reducing inventory and receivable figures. A credit grant of P100,000 would be a fraction (1/9) of Allied’s net worth of P1,900,609. 4. Sales and profits appeared to be on the upswing and use of the new Product lines might improve these even more. 199‘Adequate insurance on the premises and no previous fire loss in dicate responsible management. ' had just spent P100 million to acquire the new facility to cs a pas department had to be more aggressive in appraising a possibilities. This need for new aggressiveness was indicated by the consistently low b, " Y low bad dey losses in the past — too low bad debts might mean not necessarily credit Wisdom by having been too cautious and strict with past credit decisions. Furthermore, the new lines were very profitable and could stand a little aggressiveness (and slightly higher bad debt losses) in evaluating new customers new products. Hence, the decision to grant a credit line of P100,000, net 30 days on clean bass, Prologue: Sales Department found the P100,000 line somewhat inadequate for the _| Tequirements of introducing the new line to Allied and the actual order submitted was for P10,500, which the Credit Manager only approved after some hesitation; but he was convinced that the bases for approval were still there. On August 15, 1992, delivery was effected and the goods properly billed to Allied the following week. On September 7, 1992, a statement was sent to Allied for the amount of P140,500 falling due in September. Although due on September 15, Amax normally allowed is customers to pay on or before the end of the month on which the account falls due, ora grace period of another 15 days in this case. __,, On September 30, Allied could only pay Amax partially with a check for P50,000 Which was postdated to October 10. Upon deposit, the check bounced. ‘The account had become a problem account from the s tart. Several payments bounced thereafter. ‘The Amax credit manager had to three-month period and it was not fully and final demand letter was served on c Personally attend to collecting the amount over a Paid until January 1993, and only after a second ustomer, Shortly afterwards, Allied Products was sold out to a new owner and management and presently appears to be a thriving small manufacturing company. 200 More forthe |“TO REPOSSESS OR NOT- THAT IS THE QUESTION” A newly-formed beverage company, moderately capitalized, has purchased 40 units of delivery trucks from a motor vehicle dealer. The total value of the trucks amounted to P1,350,000. The local bodies built at the expense of the buyer was valued at P500,000. The buyer made an initial down payment of P250,000 and amortized the balance, with finance charged. for 36 monthly installments. The company promptly paid the first two (2) installments of the amortization schedule. Then, it met a series of difficulties. First, one of its two principal machineries broke down. Then, it suffered from acute water shortage such that it had to contend with the rising cost of sugar which made production doubly expensive. As if these problems were not enough, it met difficulties in the procurement of empty bottles which is reportedly controlled by a giant soft drinks company. The present status of the account — P450,000 overdue equivalent to six (6) monthly installments. The total unpaid balance is about P1 million. Present value of the vehicles — P1,250,000. The Credit Manager of the vehicle dealer made a thorough evaluation of the account as it presently stands. In point of character, the major stockholder of the company is a successful businessman in his own right. He has varied interests here and abroad and, moreover, except for this particular business, he has been proven financially responsible and capable. From the point of view of capital, the company fails for indeed it is suffering from dire lack of capital. Capacity is impaired for the moment although there are high hopes that come summer time, assuming the operational difficulties are solved, business should pick up and prove profitable. Collateral-wise, the transaction is still viable. Note that out of the present balance of P1 million, the total value of the trucks including the cost of locally-built bodies is still 1,250,000. The question that confronts the credit manager is whether at this particular point the company should lower the boom and repossess the vehicles. Judging from the amount overdue and the number of installments outstanding and unpaid, the initial answer seems to be YES. Yet, there are factors that militate against taking repossession action, to wit: 1. If this action is taken, surely the selling company would have lost a potential fleet customer. 2. If the units are repossessed, the seller faces the problem of having in its inventory P1 million worth of assets which it cannot hope to readily convert into cash since the trucks are constructed for soft drinks delivery purposes and there is a limited market for this type of trucks. 3. The cost of storing the vehicles will be approximately 2% per month. 201= 1. FOR REPOSSESSION — Full recovery of account, plus good prosp reselling units even at a profit after reconditions, considering the upwarq i de i chicles; . 2. aie EPOSSESSING — What are the chances that this small bottling "will survive? 5 a. Giant competition ie b. Bottles controlled by competition c. Production problems Company “THE CASE OF THE RETURNED COLLATERAL” @y: Atty. R.N. Dulce) In 1962, Company XYZ, a domestic corporation engaged in the marketing named brand hardware items, extended a credit line up to P20,000 to Company abe 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, anj| 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 accounts 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 when 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 nae OF 25,000 TO BE EXCHANGED UPON CONVERSION TO 7% NEW DS.” Shortly thereafter, Company ABC filed voluntary insolvency proceedings. AN earlier civil case for collection filed by Company XYZ to recover the outstanding obligation of Company ABC amounting to around P19,000 proved to no avail. The wat of execution was retumed unsatisfi ied for the reason that C ABC had no more assets to satisfy the same ee >> 202Thereupon, Company XYZ tumed to Mi with his commitment to replace the release PW. a whe afer oa year, has not complied ace ee the Cental Bank that the bonds has been eeaciereei ‘om . B for damages claiming tha sed. to replace the bonds, he would not have suffered the ey eet fl ith commitments obligation of Company ABC. In his defense, Mr. B cited Article 3110 fhe the unpaid which provides: of the Civil Code If the thing pledged is returned by by the pledgee to th or owner, the pledge is extinguished. Any Sees ieee contrary shall be void.” poe “ oe ea Sai ea saying that the return of the bonds to Mr. B was not Tetum Co} ed by Article 2110 as it was ma to Mr. : purpose: - For exchange with higher yielding sit ws) moe En pai andl die ‘After trials, the lower court rendered judgment in favo ; xr of Company XYZ and against Mr. B. It ruled that the return of the bonds was not 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 replace the same and to submit the new bonds to Company XYZ. Mr. B appealed the decision. “VIRGIN DEVELOPMENT COMPANY” By Placido R. Real, Jr. ment Company (VDC) was registered on May 25, 1970 as a single M.R. was a consultant at the d was a company physician for three firms, two of which were leading He also joined Q.G. hospital as director and stockholder at the In addition to this medical practice, he and his wife L.R., Virgin Develop proprietorship owned by M.R., a medical practitioner. Dr. MG. Hospital anc heavy equipment dealers. inception of the hospital. owned a pharmacy known as Farmacia F. VDC. when they decided to enter the real estate ‘Their income was now derived 50% from real estate, the medical practice. By 1972, the R’s organized a wufacture of hollow blocks. truction industry with the >>> In 1970, the couple set up business in the province of Laguna. 40% from pharmacy and 10% from family corporation, “A” Enterprises, to engage in the mam Three years after, Dr. M.R., via VDC, joined the booming cons| lease of his newly acquired Caterpillar tractor. 203of VDC 3 Estate Division — organized in 1970, Dr. MAR. purchased undeveloped lan) When VDE Ning ant area of 30,620 sqm. This an iestoned ito Du Pansol, Laguna, ivided into 94 residential lot Tanging from 199 |, subdivision which had been subdivi od at P40.00/sq/nv in 1971 and P5000 selling price was pegg tT L ; So re ent oer 5.10 years, monthly amortized with no down Payment at Ripert the adjoining province. After 3 months of delinquency, demang e of letters were sent. i a was noted for its hot springs, Dr. MR. constructed M Hot Sprit Seanad to DL. Subdivision. M Hot Springs, the only one in Laguna Foran first class accommodations has the following facilities: six completed Cottages on Tin style hot bath, a main pavilion which has a restaurant and conference two swimming pools and twelve gazebos (picnic sheds). Accommodations in the other four resorts in Pansol are mainly composed of nipa hut cabafias. The cottages are rented at the rate of P70.00 for the first four hours and P5.00 for each succeeding hour while the gazebos are rented out at the rate of P20.00 per use with a tumover of 2 per day. In order to increase his income from the resort, Dr. M.R. decided to expand in March 1976. He purchased an adjacent place of land having an area of 20 sq.m. for P300 million with a loan from “A” Finance Co. (AFC). He then applied for a P4 million loan with the Development Bank of the Philippines. With the proceeds, Dr. M.R. expected to liquidate his loan with AFC and utilize the remainder to complement present facilites by constructing the following: two tennis and pelota courts, another swimming pool, multipurpose hall, six lane bowling alley, twenty-five motel type rooms, additional bath houses and locker rooms. CONSTRUCTION SEGMENT OF VDC During the latter part of 1975, Dr, M.R. got intrigued with the booming construction industry. He knew the owner of two leading equipment dealers well, Big E and R Builders, Inc. sinoe he was the company physician. Although both Mr. I of Big E and Mr. D of R Builders discouraged him fiom buying equipment due to lack of experience, Dr. M.R. insisted on purchasing of D-7 caterpillar crawler tractor in order to further develop his subdivision. “This was done via lease arrangement with AFC. The tractor was then subleased fo two or three sub-contractors who were eurrently engaged in aoveaurent Projects for thee National Ligation Administration (NIA). A subsequent contract was obtained from Ayala s Corporation, also for constructing a road for the government in Tanay, Rizal. >>> 204AFC RELATIONSHIP In June of 1972, T.C., Account Officer of AFC, was approached by Dr. M.R. who wanted financing for the purchase of two trucks costing P78 million. The trucks would be used for delivery and hauling of building material in the subdivision as well as for A Enterprises. Dr. M.R. was agreeable to putting up 30% of the cost of P23 million. An analysis of VDC’s 1971 financial statements showed a net worth of P143 million in 1972 (P97 million in 1970), a sales growth rate of 32.8%, a retum on revenue of 59.7% and net worth of 32.3%, an NOCG of P82 million versus of negative NOCG in 1970, a current ratio of 5.4:1, leverage of 1.3:1 and days receivable of 150 days. Checking conducted had favorable results, Based on the aforementioned and adequate collateral, a 3-year installment paper purchased traction was approved by the Credit increasing needs. Monthly payment, however, were up-to-date and the loan was fully paid at maturity on July 12, 1975 without having any delinquency. A one-year personal oan of P20 million was also granted to Dr. M.R. in 1972 and was liquidated at maturity. Thereafter, five-year monthly commercial loans were booked in 1974 via pink offering tickets due to satisfactory experience with the account coupled with a high yield of 28% p.a. to be generated. The loans are broken down as follows: P50 million for the acquisition of a new truck. P25 million to build a shower room with 18 baths for M Hot Springs Resort, P40 million for landscaping and construction of sheds around the pool area; P23.5 million for the purchase of one share of stock at Q.G. Hospital valued at P20 million. No additional collateral was given for these loans. Another review of the account was conducted in December 1974 by S.G., an executive trainee and account facility. This time, Dr. M.R. wanted AFC to purchase a caterpillar tractor from Big E, which he would in tum lease and use for his subdivision. In addition, he intended to sublease the tractor if subcontractors could be obtained. Dr. M.R. was confident on this ‘matter inasmuch as Big E and R Builders’ contacts, cultivated through the years, would help secure contracts for him since both firms had long been involved in the construction industry. A P430 million leasing facility was approved on Jul 10, 1975, Four months after the approval of the leasing facility, another P500 million 3-year amortized loan was approved for the purpose of. defraying expenses being incurred in the Construction of an additional 20 cottages in M Hot Springs Resort. The loan was secured by areal estate mortgage for P500 million, On August 19, 1975, Dr. M.R. approached G.S., SAM, for another P450 million 3-year IPP loan which was subsequently granted. As in the previous loans, justification {or approval was profitable operations, potential of the resort in view of the tourist boom, Satisfactory trade and bank checkings, excellent relationship with AFC and the attractive 2057 yield of 20% to be generated fom the account. Proceeds of the loan would be wurchase an adjacent 20,000 sq.m. lot having a cost of P1S/sq.m. Acquisition one lay would enable him to build an additional 10 cottages which would be rented out ¢ for the first four hours and PS/succeeding hour. As collateral, Dr. M.R. was yet? 70 mortgage the piece of land he was géing to buy. Bathe end ofthe ea he ge started incurring past due obligations (PDO). Due to the reorganization in the we MR. could not collect receivables from the subcontractors H Construction Com “> Dt Construction Corp. as they were not paid by the goverment. Moreover, funds wt! up in the expansion of the resort. The IPP-RE transaction was restructured in PP, 1976 with no single amortization met. In addition, title of the property that cg ot mortgaged to AFC was instead given to the Development Bank of the Philippings complete the documentation required on the P4 million loan being requested by Dr Mp According to Dr. M.R., proceeds of the P4 million loan which has been approved wou liquidate AFC outstandings. However, as of June 1977, there has been no release of he funds from the Development Bank of the Philippines. ‘Collatera/securities were value at P290 million versus an outstanding of P1.3 million. | In any case, because of its serious delinquency status, the account is now being considered for legal action. Meanwhile, checkings were made for the purpose of looking into other properties/assets of VDC. The corresponding credit report showed the following under the name of Dr. M.R.: TCT No. 70777 covering a parcel of land with an area of 1,300 sq.m. | situated at San Andres, Manila. ‘Appraised value - ~—-P418,000.00 Encumbrance - 120,000.00 TCT No, 80888 covering a parcel of land with an area of 960 sq.m. improvement thereon consisting of a duplex residential house situated at Parafiaque, Rizal. Appraised value - ~——P178,000.00 QUESTIONS: . What are the essential factors which led to the deterioration of the account? 1 2. How would you have strengthened the credit? 3. If you were the Account Officer, what would you now do under the present circumstances? 206“THE CASE OF THE DUTIFUL SONS” By RN. Dulce Mr. A has been a customer of Company X, a motor vehicle dealer, for the past fifteen years. In the early 1960’s, Mr. A had a relatively successful transportation company. He operated a fleet of 20 passenger buses on a lucrative provincial franchise. Company X used to sell him truck chassis on installment terms ranging from 24 to 36 months, with a down payment of 20% of the cash price of each vehicle. On top of the down payment, Mr. A paid the cost of locally-buit bus body which was equivalent to about 20% of the cost of the chassis, Mr. A’s business was a one-man operation. All responsibilities developed on Mr. A who was only elementary school graduate but through dint of hard work, was able to set up the transportation business. He had three sons and Mr. A knew that unless one of them took over from him, he would not be able to run the transportation business effectively much longer as he felt he was getting old for the job. Unfortunately, none of the sons seemed to show interest on the father’s business. Mr. A dutifully sent his three sons to college; one finished medicine, another economics and the thitd became an engineer. Company X has sold Mr. A no less than 30 units from 1960 thru 1970. All the installment accounts were fully paid in relatively good order. Mr. A would miss his monthly installments only occasionally and for good reasons as when business income suffers a lump because of a calamity. But in 1971 and 1972, Mr. A suffered a series of business reverses. First, one of his passenger buses figured in an accident which resulted in the death of 10 passenger while the bus was a total wreck. Total claim for the death of the 10 passengers was P100,000 which he readily paid as he felt he had the moral obligation to do so. The bus was valued at P50,000. Unfortunately, Mr. A was not covered by insurance for he was one of those who did not believe in insurance coverage. Then there was that catastrophic typhoon and floods in 1972 which forced him to suspend business operations and thereby incurred further operational losses. Because of these financial reverses, he was not able to implement his planned replacement buses. Aggravated by the high cost of spare parts, income from operations literally nose-dived, thereby preventing him from keeping up-to-date his installment accounts with Company xX. By the end of 1972, on six (6) vehicle accounts outstanding with Company X, Mr. A was overdue by about P100,000 consisting of around four (4) monthly installments. In consideration of his past patronage, the company did not press collection as it would with other accounts. Instead, the company’s credit officer called in Mr. A and discussed with him the financial problem. A 2-month moratorium was granted in the hope that Mr. A could recover and thus resume his payments. But in early 1973, when the accounts were seven (7) installments overdue, or an aggregate amount of about P150,000, Company X decided to file court action. >>> 207a Company chose to file a case for a sum of money, as it was apparent thay ae the amount outstanding by repossessing the vehicles which, oy tay were already much depreciated. Mr. A did not contest the case in court, load ting, asked for time to make full payment. He had applied for a loan with a gi ig he with which he hoped to fully pay the accounts, After making a token partial Temata pares filed @ compromise agreement in court whereby Mr. A. promised to pay amount of P200,000 within two (2) months from date of compromise, Mr, A + confident that with the approval of his loan which was assured him by responsibie iz officer, he would surely be able to pay the amount in 60 days. But Mr. A was wrong. An order freezing all govemment loans, coupled with documentation difficulties, caused the disapproval of the loan application. Mr, A, nop aged 70, was in near panic. He certainly could not asked for another extension, ftom Company X as he had pinned all hopes on the government loan. Meantime, the 6 grace period was almost over, and the company was poised to execute the compromiy, judgment. Mr. A had no choice but to appeal to his sons for help. By this time all three (3) sons were relatively successfill in their chosen professions and certainly they would not let their father down. At a conference among the three brothers, Mr. B, the economist, who was now a dean in a local university, was chosen as spokesman to Negotiate with Company X, Mr. B proposed that he and his brothers be allowed to assume the account of their father. Forthwith, he submitted a statement of his assets and liabilities, together With those of his two other brothers. He admitted that they were not in a position to pay cash for the entire obligation but if the company were willing, they could liquidate the account in twelve (12) monthly installments. And their financial statements showed that they had the capacity to fulfill this commitment. Company X weighed the pros and cons of the proposal. For one thing, accepting the proposal would have the effect of extinguishing the compromise judgment which has now become executory. On the other hand, if the company proceeds with execution, the process of execution will require a minimum of one year with which to satisfy the judgment. This can be prolonged by restoring to legal dilatory tactics. Besides, there are rumors that whatever properties still in the name of Mr. A are heavily encumbered. The possibility that Mr. A may not live long enough to see through the satisfaction of the judgment was also considered. Collateral-wise, the transaction is still viable. Note that out of the present balance of PI-M, the total value of the trucks including the cost of locally-built bodies is still P1,250,000.00. The question that confronts the credit manager is whether at this particular point the company should lower the boom and repossess the vehicle. Judging from the amount 208overdue and the number of installments outstanding and unpaid, the initial answer seems tobe YES. Yet, there are factors that militate against taking repossession action, to wit: 1. Ifthis action is taken, surely, the selling company would have lost a potential fleet customer, 2. Ifthe units are repossessed, the seller faces the problem of having in its inventory PI-M worth of assets which it cannot hope to readily convert into cash since the trucks are constructed for softdrinks delivery purposes and there is a limited market for this type of trucks; ny i “eee 3. The cost of storing the vehicles will be approximately 2-1/2 per month. CASE — DUTIFUL SONS: . Im ite Enforcement — personal, immediate; real estate, one year; apparently le properties (for loan); 2. Three (3) sons only forced to assume, may be, will not be successful since fully occupied with their own professions; 3. Judgment will in effect be vacated, so it will be another case if three (3) sons allowed to continue. 4. Financial statement of 3 sons only show financial capacity “to fulfill commitment” (capacity to pay); no indication of other C’s—capital and character; 5. 1975 upwards — prices of second hand trucks on the upswing; 6. PUB business not bright prospects; 7. Already given enough time to recover, but did not; 8. Owner still alive, already 70 years old, if he dies, lots of problems could be met in testate or intestate proceedings; FOR ANOTHER CHANC! 1. Three sons will be better prepared — all college graduates, one an economist even, while father only an elementary graduate; successful in their own fields so there is every reason to believe that they can make a go for it; 2. Three sons will be made liable for account, with financial capacity to meet their commitments. While there may be further delay, yet the good 209_"—_-——s— background and intention of 3 sons may be well worth the delay; besi 5 payment reco! 3 ds have been good; reasons for delay are valid; the payment period is for 12 months, yet by “acceleration clause» ® atone fut wl tbe made in 2 installments, immediate court action fo, entire balance could be instituted, with the properties not only of the father of the 3 sons as well being made to answer. 4, Loss of potential fleet customer, MATIC SOLUTIONS: Which course of action would be PRAGI advantageous to the Company? 1, FOR EXECUTION: a. Find out how much exactly could be released from the leviable properties, both those mortgaged and not, b. Then, how much equity is left from teal estate properties which are mortgaged. If you can realize substantial proceeds from this to meet the obligation, or where losses is not substantial - then proceed, afterall, enough time has already been given. Ifyou are going to face substantial losses, better give another chance, but first, find out, 2. FOR GIVING ANOTHER CHANCE ‘a. Find out how the Company will be actually run or managed; b. Find out how they intend to increase the earings of the Company—their plans for rehabilitation work; sources of financing. As much as possible, get written commitments of these plans. 210“WITHER AN OVER-EXTENDED CLIENT?” A medium-sized transportation company initially purchased a total of seven ™ transportation units on installment basis. It paid a nominal down payment equivalent to 20% of the cost of the vehicles and executed a promissory note for the balance for a total of 24 monthly installments. The promissory note was secured by chattel mortgage on the vehicles together with the public utility franchise. The account ran for months and payment experience has been rather slow. Thus, total amrearages at one point amounted to 23 installments on each vehicle. With the status of the account thus standing, the transportation company applies for 4 additional units and offers to pay a down. Payment equivalent to 15% of the cost of the vehicles. The additional purchase is necessary to fill in the total number of units authorized under the franchise; otherwise, the Board of ‘Transportation will penalize the operator. The customer-company admits that they are not in a Position to update the present accounts, They argue, however, that if the new application for 4 units is approved and their new operations expanded correspondingly, they will not only be able to pay the installments more religiously, but they can even partially cover for the overdue installments on the previous accounts. ‘The initial reaction of the credit manager of the selling company is to reject the new proposal unless the previous accounts are updated. But the Sales Department ‘appeals strongly and cautious that if the new application for 4 units is rejected, the customer will surely get from a competitor company which has agreed to supply the needed equipment under the terms proposed. Assume that the customer buys from the competitor, what would be the chances of collecting the first overdue account? 1. GRANTING: a. probably get better collection results since the four (4) units being brand new will generate more income; b. no problem on competitors getting collections; ©. get additional collaterals to protect equity: 211| THE “ENTERTAINED” CREDIT INVESTIGATOR Monico Marcial has been working with Reliable Machineries Co., Inc., a based heavy equipment and machineries company, since the latter Was organized ei years ago. Marcial started as a janitor since he was a mere high school graduate wher was hired. Being an ambitious young man, however, he took to evening school and ars self-supporting student, pursued a Bachelor of Science in Commerce degree with maj in economics, during the next four succeeding years. Even as he was only halfway through his BSC, Marcial was designated Utility clerk in the accounting department of the Company. By the time he was already in hig senior year, he was promoted to receivables clerk, a position he held with above-average efficiency for three solid years. ‘Two years ago, the company started expanding its operations b appointing dealers in various provinces all over the country. One of the key areas which had to be strengthened because of the company’s expansion program, was the Credit and Collection Department, especially the Credit Investigation Unit which was faced witha sudden increase in the number of potential dealers to be credit checked. By virtue of his past record, Monico Marcial was an easy choice to fill up one of the new slots in the Credit Investigation Unit. It did not take long for the one time janitor to leam his new job. Ina matter of six months, he had developed into one of the unit’s dependables and was usually assigned to tackle with his supervisor considered the more important application to be investigated. Marcial’s assignments actually brought him: to various business centers around the country. In between big assignments, Marcial had been asked to assist formulate new systems and procedures to facilitate credit investigation. He was also asked to design new forms to improve the quality of credit reports. Because of all these, the Credit Manager did not fail to spot the potentials of Monico Marcial for promotion to a supervisory position. Recently, a major crisis besieged the Credit Department of the company. The assistant credit manager, the credit investigation supervisor (Marcial’s immediate superior) and all but two credit investigators resigned from Reliable Machineries Co,, for the reason that their long standing complaint of being underpaid has not been acted upon by the Management. Marcial, as one of the two credit investigators who remained with the Company, was a most logical choice for the position of Credit Investigation Supervisor. The Credit Manager was convinced about his capacity and ability. But just as the latter was about eI > 212write a memorandum to the Personnel Department recommending Marcial for the vacant supervisory position, he received a letter endorsed to him by the General Manager of the company with a brief note attached to it, saying: “Please investigate and let me have your recommendation as early as possible,” the letter, written and signed by one Juancho ‘Magpantay, is reproduced hereinbelow: 3. That indeed, Magpantay gave him send-off gifts as alleged in the letter. Marcial told his Credit Manager that when Magpantay saw him off at the airport, he was handed a boxful of pasalubong which he discovered to be food stuff and Muslim metal crafts when he opened the same upon arrival at their tesidence. At the airport in Davao, Marcial recalled that he offered to pay the hotel expenses but that again Magpantay refused to accept the offer. Monico Marcial vehemently denied having assured Magpantay, either explicitly or implicitly, that his application would be accepted. He said that he could not have done so in the light of his findings as reflected in his credit report which he had submitted immediately upon his return. Specifically, he mentioned the fact that Magpantay showed him a parcel of land different from that covered by the Transfer Certificate of Title he had submitted. Inquiries made by him at the Assessor’s Office in Davao confirmed this fact; the property covered by TCT submitted was actually a swampy area situated at the outskirts of Davao City. Marcial likewise recalled his findings regarding the reputation of the applicant in the business community. He had gathered information from local businessmen that Magpantay was known to be a swindler and a smuggler. In the local Court of First Instance, he was able to verify that Magpantay was facing two criminal complaints for Estafa and three civil cases for Sums. of Money. Marcial said that based on these, he could not have indicated that he would recommend approval of the application. Further, he expressed the sincere belief that he had been very objective insofar as his report and Tecommendation on Magpantay’s application is concemed. When the Credit Manager confronted him on why he had included his airfare and hotel bills in liquidating his expenses, Marcial said he sincerely and honestly felt he was entitled to those amounts and therefore had no qualms about charging the same against the company. Of course, he acknowledged owing Magpantay a debt of gratitude. >>> 213Me, SEE oe AE 3 Marcial confided to the Credit Manager that the “savings he made oag of his trip to Davao was spent for the hospitalization of his ailing mother. He said that the amount came in handy as he had no personal savings, the fact being that his salary was hardly adequate for his and his mother’s subsistence, He told the Credit Manager that he relly dreaded the thought of what could have happened to his sick mother without the saving from his trip. He knew no fiends or relatives who could help him on his mother’s emergency expenses. The company itself had no policy on salary loans for its employees. Despite his admittedly tight financial position, Marcial offered to reimburse the corresponding amounts to Magpantay if only to save the honor and good name of the company. Ifyou were the Credit Manager of Reliable Machineries, Co., what action would you fake? What recommendation would you make to the General Manager? Would yon still consider Marcial for promotion? Please explain. ‘The General Manager Reliable Machineries Co., Inc. Reliable Building, Manila Dear Sir: write to inform you what kind of a rotten employee you have in one of your credit investigators, Monico Marcial. As a businessman who is interested in distributing your products in Davao City, I have applied for dealership with your company sometime in May this year. Since I wanted my application processed as eatly as possible, I personally came to your offices in Manila and had preliminary talks with your Sales Manager. I was thereafter referred to your Credit Manager, who, after I supplied certain information and complied with certain documentary tequirements, advised me that a credit check had to be undertaken and that an appraisal of the real estate properties I have offered as collateral would be made, Your Monico Marcial was assigned for this purpose, I wish you to know that I personally paid for Marcial’s airfare as well as for his hotel expenses. I personally attended to him and entertain him as a VIP during his entire stay in Davao, and when he came back to Manila, I even gave him send-off gifts consisting of food stuff and Musim metal crafts. 214Marcial had given me the impression th: giver th approval ofmy application and the acceptance ee however, I received a letter from your Credit Manager, advisi |. Las week, hom pplication “could not be favorably considered at iis ime” without really giving any explicit reason. It does not really matter to me now that mm icatic ° appli dealership was disapproved. What Iam interested ee a areien will allow a corrupt employee to continue in the employ of your Company. It is my fond hope that you will see your way i Monico Marcial. your way clear towards fring Very truly yours, (6) Juancho Magpantay () JUANCHO MAGPANTAY ‘The Credit Manager promptly called Monico Marcial toa closed-do During the said conference, Marcial admitted the following: pica 1, That his plane fare in going to and coming from Davao was paid for by y. Marcial explained that when Magpantay learned about his scheduled Magpanta’ trip to Davao, the latter purchased from Philippine Air Lines a one-way ticket for himself and a round-trip ticket for Marcial. When Marcial offered to reimburse the amount, Magpantay refused to accept it. 2. That his hotel expenses was also paid for by Magpantay. By way of explanation, ‘Marcial alleged that when the arrived at ‘the Davao airport, Magpantay told him that he (Magpantay) had made reservations for him (Marcial) at the Davao Insular Hotel. He therefore consented to stay in that hotel. When he checked out of the hotel and requested for his bill, he was handed by receipts covering his expenses and was told by the hotel clerk that the same was already paid for by Magpantay. 215 ;