[SYLLABUS FOR THE 2020 BAR EXAMINATION] COMMERCIAL LAW

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READING MATERIALS
IN COMMERCIAL LAWS
FOR THE 2021 BAR EXAMINATIONS

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ANTI-MONEY LAUNDERING ACT

(RA 9160, as amended)

Policy of the law

It is hereby declared the policy of the State to protect and preserve the
integrity and confidentiality of bank accounts and to ensure that the
Philippines shall not be used as a money-laundering site for the proceeds
of any unlawful activity. Consistent with its foreign policy, the State shall
extend cooperation in transnational investigations and prosecutions of
persons involved in money laundering activities whenever committed. (Sec.
2)

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Covered persons refer to:

(1) banks, non-banks, quasi-banks, trust entities, foreign exchange

dealers, pawnshops, money changers, remittance and transfer
companies and other similar entities and all other persons and their
subsidiaries and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);

Person refers to any natural or juridical person. (Sec. 3, e)

(2) insurance companies, pre-need companies and all other persons

supervised or regulated by the Insurance Commission;

(3) (i) securities dealers, brokers, salesmen, investment houses and

other similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, and other similar persons,
and (iii) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash
substitutes and other similar monetary instruments or property
supervised or regulated by the Securities and Exchange Commission
(SEC);

Monetary instrument refers to: (a) coins or currency of

legal tender, or of any other country; (b) drafts, checks and
notes; (c) securities or negotiable instruments, bonds,
commercial papers, deposit certificates, trust certificates,
custodial receipts or deposit substitute instruments, trading
orders, transaction tickets and confirmations of sale or
investments and money market instruments; and (4) other
similar instruments where title thereto passes to another by
endorsement, assignment or delivery. (Sec. 7, c)

(4) jewelry dealers in precious metals, who, as a business, trade in

precious metals, for transactions in excess of one million pesos
(P1,000,000.00);

Previous metals shall mean gold, silver, platinum, rhodium,

ruthenium, iridium and osmium. These include alloys of
precious metals, solders and plating chemicals, such as
rhodium and palladium plating solutions and potassium gold
cyanide and potassium silver cyanide and silver cyanide in
salt solution. (Sec. 3, j; added by RA 10365)

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Transaction refers to any act establishing any right or

obligation or giving rise to any contractual or legal
relationship between the parties thereto It also includes any
movement of funds by any means with a covered institution.
(Sec. 3, h)

(5) jewelry dealers in precious stones, who, as a business, trade in

precious stones, for transactions in excess of one million pesos
(P1,000,000.00);

Precious stones shall mean diamond, ruby, emerald,

sapphire, opal, amethyst, beryl, topaz, and garnet that are
used in jewelry making, including those formerly classified as
semi-precious stones. (Sec. 3, k; as added by RA 10365)

(6) company service providers, which, as a business, provide any of the

following services to third parties: (i) acting as a formation agent of juridical
persons; (ii) acting as (or arranging for another person to act as) a director
or corporate secretary of a company, a partner of a partnership, or a similar
position in relation to other juridical persons; (iii) providing a registered
office, business address or accommodation, correspondence or
administrative address for a company, a partnership or any other legal
person or arrangement; and (iv) acting as (or arranging for another person
to act as) a nominee shareholder for another person; and

(7) persons who provide any of the following: (a) managing of client
money, securities or other assets; (b) management of bank, savings or
securities accounts; (c) organizations of contributions for the creation,
operation or management of companies; and (d) creation, operation or
management of juridical persons or arrangements, and buying and selling
entities.

Notwithstanding the foregoing, the term covered persons shall exclude

lawyers and accountants acting as independent legal professionals in
relation to information concerning their clients or where disclosure of
information would compromise client confidences or the attorney-client
relationship; provided that these lawyers and accountants are authorized too
practice in the Philippines and shall continue to be subject to the provisions
of their respective codes of conduct and/or professional responsibility or any
of its amendments. (as amended by RA 1036)

(8) casinos, including internet and ship-based casinos, with respect to their
casino cash transactions related to their gaming operations. (as
amended by RA 10927) [Sec. 3, a, as amended by RA 10927]

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Casino refers to a business authorized by the appropriate

government agency to engage in gaming operations.

Casino cash transaction refer to transactions involving the

receipt of cash by a casino paid by or on behalf of a
customer; or transactions involving the payment of cash by a
casino to a customer or to any person in his/her behalf.
(Sec. 3, (2))

Gaming operations refer to the activities of the casino

offering games of chance and any variations thereof
approved by the appropriate government authority. (Sec. 3,
(3))

Covered transaction is a transaction in cash or other equivalent

monetary instrument involving a total amount in excess of Five hundred
thousand pesos (PhP500,000.00) within one (1) banking day; for covered
persons under Sec. 3(a)(8), a single casino cash transaction involving an
amount in excess of five million pesos (P5,000,000.00) or its equivalent in
any other currency (Sec. 3 (b), as amended by RA 10927).

Suspicious transactions are transactions with covered

institutions, regardless of the amounts involved, where any of the
following circumstances exist:

1. there is no underlying legal or trade obligation, purpose or

economic justification;

2. the client is not properly identified;

3. the amount involved is not commensurate with the business or

financial capacity of the client;

4. taking into account all known circumstances, it may be perceived

that the client's transaction is structured in order to avoid being the
subject of reporting requirements under the Act;

5. any circumstances relating to the transaction which is observed to

deviate from the profile of the client and/or the client's past
transactions with the covered institution;

6. the transactions is in a way related to an unlawful activity or offense

under this Act that is about to be, is being or has been committed; or
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7. any transactions that is similar or analogous to any of the foregoing."

Money Laundering Offense

Money laundering is committed by any person who, knowing that any

monetary instrument or property represents, involves, or relates to the
proceeds of any unlawful activity:

(a) transacts said monetary instrument or property;

(b) converts, transfers, disposes of, moves, acquires,

possesses or uses said monetary instrument or property;

(c) conceals or disguises the true nature, source,

location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
property;

(d) attempts or conspires to commit money laundering

offenses referred to in paragraphs (a), (b) or (c);

(e) aids, abets, assists in or counsels the commission of

the money laundering offenses referred to in paragraphs
(a), (b) or (c) above; and

(f) performs or fails to perform any act as a result of

which he facilitates the offense of money laundering
referred to in paragraphs (a), (b) or (c) above.

Money laundering is also committed by any covered person who,

knowing that a covered or suspicious transaction is required under
this Act to be reported to the Anti-Money Laundering Council
(AMLC), fails to do so. (Sec. 4, as amended by RA 10365)

Unlawful activity refers to any act or omission or series or combinations

thereof involving or having direct relation to the following:

(1) Kidnapping for ransom under Article 267 of Act No. 3815,
otherwise known as the Revised Penal Code, as amended;

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(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic

Act No. 9165, otherwise known as the Comprehensive Dangerous
Drugs Act of 2002;

(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No.

3019, as amended, otherwise known as the Anti-Graft and Corrupt
Practices Act;

(4) Plunder under Republic Act No. 7080, as amended;

(5) Robbery and extortion under Articles 294, 295, 296, 299, 300,
301 and 302 of the Revised Penal Code, as amended;

(6) Jueteng and Masiao punished as illegal gambling under

Presidential Decree No. 1602;

(7) Piracy on the high seas under the Revised Penal Code, as
amended and Presidential Decree No. 532;

(8) Qualified theft under Article 310 of the Revised Penal Code, as
amended;

(9) Swindling under Article 315 and Other Forms of Swindling under
Article 316 of the Revised Penal Code, as amended;

(10 ) Smuggling under Republic Act Nos. 455 and 1937;

(11 ) Violations of Republic Act No. 8792, otherwise known as the

Electronic Commerce Act of 2000;

(12 ) Hijacking and other violations under Republic Act No. 6235;
destructive arson and murder, as defined under the Revised Penal
Code, as amended;

(13 ) Terrorism and conspiracy to commit terrorism as defined and

penalized under Sections 3 and 4 of Republic Act No. 9372;

(14 ) Financing of terrorism under Section 4 and offenses

punishable under Sections 5, 6, 7 and 8 of Republic Act No.
10168, otherwise known as the Terrorism Financing Prevention
and Suppression Act of 2012:

(15 ) Bribery under Articles 210, 211 and 211-A of the Revised Penal
Code, as amended, and Corruption of Public Officers under
Article 212 of the Revised Penal Code, as amended;

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(16 ) Frauds and Illegal Exactions and Transactions under Articles

213, 214, 215 and 216 of the Revised Penal Code, as amended;

(17) Malversation of Public Funds and Property under Articles 217 and
222 of the Revised Penal Code, as amended;

(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168,
169 and 176 of the Revised Penal Code, as amended;

(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise

known as the Anti-Trafficking in Persons Act of 2003;

(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential

Decree No. 705, otherwise known as the Revised Forestry Code of the
Philippines, as amended;

(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No.

8550, otherwise known as the Philippine Fisheries Code of 1998;

(22) Violations of Sections 101 to 107, and 110 of Republic Act No.
7942, otherwise known as the Philippine Mining Act of 1995;

(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No.
9147, otherwise known as the Wildlife Resources Conservation and
Protection Act;

(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known
as the National Caves and Cave Resources Management Protection Act;

(25) Violation of Republic Act No. 6539, otherwise known as the Anti-
Carnapping Act of 2002, as amended;

(26) Violations of Sections 1, 3 and 5 of Presidential Decree No.

1866, as amended, otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession, Manufacture, Dealing In,
Acquisition or Disposition of Firearms, Ammunition or Explosives;

(27) Violation of Presidential Decree No. 1612, otherwise known as the

Anti-Fencing Law;

(28) Violation of Section 6 of Republic Act No. 8042, otherwise known

as the Migrant Workers and Overseas Filipinos Act of 1995, as amended
by Republic Act No. 10022;

(29) Violation of Republic Act No. 8293, otherwise known as the

Intellectual Property Code of the Philippines;

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(30) Violation of Section 4 of Republic Act No. 9995, otherwise known

as the Anti-Photo and Video Voyeurism Act of 2009;

(31) Violation of Section 4 of Republic Act No. 9775, otherwise known

as the Anti-Child Pornography Act of 2009;

(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and

14 of Republic Act No. 7610, otherwise known as the Special Protection
of Children Against Abuse, Exploitation and Discrimination;

(33) Fraudulent practices and other violations under Republic Act No.
8799, otherwise known as the Securities Regulation Code of 2000; and

(34) Felonies or offenses of a similar nature that are punishable under

the penal laws of other countries." (Sec. 3, i)

Creation of Anti-Money Laundering Council (AMLC)

The Anti-Money Laundering Council is hereby created and shall be

composed of the Governor of the Bangko Sentral ng Pilipinas, as Chairman,
the Commissioner of the Insurance Commission and the Chairman of the
Securities and Exchange Commission, as members. The AMLC shall act
unanimously in the discharge of its functions as defined hereunder:

(1) to require and receive covered or suspicious transaction reports

from covered institutions;

(2) to issue orders addressed to the appropriate Supervising Authority

or the covered institutions to determine the true identity of the owner
of any monetary instrument or property subject of a covered transaction
or suspicious transaction report or request for assistance from a foreign
State, or believed by the Council, on the basis fo substantial evidence,
to be, in whole or in part, wherever located, representing, involving, or
related to directly or indirectly, in any manner or by any means, the
proceeds of an unlawful activity.

(3) to institute civil forfeiture proceedings and all other remedial

proceedings through the Office of the Solicitor General;

(4) to cause the filing of complaints with the Department of Justice

or the Ombudsman for the prosecution of money laundering offenses;

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(5) to investigate suspicious transactions and covered transactions

deemed suspicious after an investigation by AMLC, money
laundering activities and other violations of this Act;

(6) to apply before the Court of Appeals, ex parte, for the freezing
of any monetary instrument or property alleged to be the proceeds of
any unlawful activity as defined in Section 3(i) hereof;

(7) to implement such measures as may be necessary and justified

under this Act to counteract money laundering;

(8) to receive and take action in respect of, any request from foreign
states for assistance in their own anti-money laundering operations
provided in this Act;

(9) to develop educational programs on the pernicious effects of

money laundering, the methods and techniques used in the money
laundering, the viable means of preventing money laundering and the
effective ways of prosecuting and punishing offenders;

(10) to enlist the assistance of any branch, department, bureau, office,

agency, or instrumentality of the government, including government-
owned and -controlled corporations, in undertaking any and all anti-
money laundering operations, which may include the use of its
personnel, facilities and resources for the more resolute prevention,
detection, and investigation of money laundering offenses and
prosecution of offenders; and

(11) to impose administrative sanctions for the violation of laws,

rules, regulations, and orders and resolutions issued pursuant thereto.

(12) to require the Land Registration Authority and all its Registries of
Deeds to submit to the AMLC, reports on all real estate transactions
involving an amount in excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from the date of registration of the
transaction, in a form to be prescribed by the AMLC. The AMLC may
also require the Land Registration Authority and all its Registries of
Deeds to submit copies of relevant documents of all real estate
transactions. (Sec. 7, as amended by RA 10365)

Freezing of Monetary Instrument or Property

Upon a verified ex-parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any
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way related to an unlawful activity as defined in Sec. 3(i) hereof, the Court
of Appeals may issue a freeze order which shall be effective
immediately for a period of twenty (20) days. Within the twenty (20)-day
period, the Court of Appeals shall conduct a summary hearing, with notice
to the parties, to determine whether or not to modify or lift the freeze order,
or extend its effectivity. The total period of the freeze order issued by
the Court of Appeals under this provision shall not exceed six (6)
months. This is without prejudice to an asset preservation order that the
Regional Trial Court having jurisdiction over the appropriate anti-money
laundering case or civil forfeiture case may issue on the same account
depending upon the circumstances of the case, where the Court of
Appeals will remand the case and its records: Provided, That if there is
no case filed against a person whose account has been frozen within
the period determined by the Court of Appeals, not exceeding six (6)
months, the freeze order shall be deemed ipso facto lifted: Provided,
further, That this new rule shall not apply to pending cases in the courts. in
any case, the court should act on the petition to freeze within twenty-four
(24) hours from filing of the petition. If the application is filed a day before
a non-working day, the computation of the twenty-four (24)-hour period shall
exclude the non-working days.

The freeze order or asset preservation order issued under this Act shall be
limited only to the amount of cash or monetary instrument or value of
property that the court finds there is probable cause to be considered as
proceeds of a predicate offense, and the freeze order or asset preservation
order shall not apply to amounts in excess of the amount or value of the
proceeds of the predicate offense. (As amended by RA 10927)

A person whose account has been frozen may file a motion to lift the freeze
order and the court must resolve this motion before the expiration of the
freeze order.

No court shall issue a temporary restraining order or a writ of injunction

against any freeze order, except the Supreme Court. (As amended by RA
10365) [Sec. 10]

Jurisdiction of Money-Laundering cases

The regional trial court shall have jurisdiction to try all cases on money
laundering. Those committed by public officers and private persons who are
in conspiracy with such public officers shall be under the jurisdiction of the
Sandiganbayan. (Sec. 5)

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Mutual Assistance among States

(a) Request for Assistance from a Foreign State - Where a foreign State
makes a request for assistance in the investigation or prosecution of a
money laundering offense, the AMLC may execute the request or
refuse to execute the same and inform the foreign State of any valid
reason for not executing the request or for delaying the execution
thereof. The principles of mutuality and reciprocity shall, for this
purpose, be at all times recognized.

(b) Power of the AMLC to Act on a Request for Assistance from a

Foreign State -The AMLC may execute a request for assistance from a
foreign State by: (1) tracking down, freezing, restraining and seizing
assets alleged to be proceeds of any unlawful activity under the
procedures laid down in this Act; (2) giving information needed by the
foreign State within the procedures laid down in this Act; and (3)
applying for an order of forfeiture of any monetary instrument or property
in the court: Provided, That the court shall not issue such an order unless
the application is accompanied by an authenticated copy of the order of
a court in the requesting State ordering the forfeiture of said
monetary instrument or properly of a person who has been convicted
of a money laundering offense in the requesting State, and a
certification of an affidavit of a competent officer of the requesting
State stating that the conviction and the order of forfeiture are final and
then no further appeal lies in respect or either.

(c) Obtaining Assistance from Foreign States - The AMLC may make a
request to any foreign State for assistance in: (1) tracking down, freezing,
restraining and seizing assets alleged to be proceeds of any unlawful
activity; (2) obtaining information that it needs relating to any covered
transaction, money laundering offense or any other matter directly or
indirectly, related thereto; (3) to the extent allowed by the law of the
Foreign State, applying with the proper court therein for an order to enter
any premises belonging to or in the possession or control of, any or all
of the persons named in said request, and/or search any or all such
persons named therein and/or remove any document, material or
object named in said request: Provided, That the documents
accompanying the request in support of the application have been duly
authenticated in accordance with the applicable law or regulation of the
foreign State; and (4) applying for an order of forfeiture of any
monetary instrument or property in the proper court in the foreign State:
Provided, That the request is accompanied by an authenticated copy of
the order of the regional trial court ordering the forfeiture of said monetary
instrument or property of a convicted offender and an affidavit of the
clerk of court stating that the conviction and the order of forfeiture are
final and that no further appeal lies in respect of either.

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(d) Limitations on Request for Mutual Assistance. - The AMLC may

refuse to comply with any request for assistance where the action
sought by the request contravenes any provision of the Constitution or
the execution of a request is likely to prejudice the national interest of
the Philippines unless there is a treaty between the Philippines and the
requesting State relating to the provision of assistance in relation to
money laundering offenses.

(e) Requirements for Requests for Mutual Assistance from Foreign

State. - A request for mutual assistance from a foreign State must: (1)
confirm that an investigation or prosecution is being conducted in respect
of a money launderer named therein or that he has been convicted of
any money laundering offense; (2) state the grounds on which any
person is being investigated or prosecuted for money laundering or
the details of his conviction; (3) gives sufficient particulars as to the
identity of said person; (4) give particulars sufficient to identity any
covered institution believed to have any information, document,
material or object which may be of assistance to the investigation
or prosecution; (5) ask from the covered institution concerned any
information, document, material or object which may be of
assistance to the investigation or prosecution; (6) specify the
manner in which and to whom said information, document, material
or object detained pursuant to said request, is to be produced; (7) give
all the particulars necessary for the issuance by the court in the
requested State of the writs, orders or processes needed by the
requesting State; and (8) contain such other information as may assist in
the execution of the request.

(f) Authentication of Documents - For purposes of this Section, a

document is authenticated if the same is signed or certified by a judge,
magistrate or equivalent officer in or of, the requesting State, and
authenticated by the oath or affirmation of a witness or sealed with an
official or public seal of a minister, secretary of State, or officer in or of,
the government of the requesting State, or of the person administering
the government or a department of the requesting territory,
protectorate or colony. The certificate of authentication may also be
made by a secretary of the embassy or legation, consul general,
consul, vice consul, consular agent or any officer in the foreign service of
the Philippines stationed in the foreign State in which the record is kept,
and authenticated by the seal of his office.

(g) Extradition - The Philippines shall negotiate for the inclusion of

money-laundering offenses as herein defined among extraditable
offenses in all future treaties. (Sec. 13)

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Prevention of Money Laundering; Customer Identification

Requirements and Record Keeping

(a) Customer Identification – Covered institutions shall establish and

record the true identity of its clients on official documents. They shall
maintain a system of verifying the true identity of their clients and, in case
of corporate clients, require a system of verifying their legal existence and
organizational structure, as well as the authority and identification of all
persons purporting to act on their behalf.

The provisions of existing laws to the contrary notwithstanding

anonymous accounts, accounts under fictitious names and all other
similar accounts shall be absolutely prohibited. Peso and foreign
currency non-checking numbered accounts shall be allowed. The
BSP may conduct annual testing solely limited to the determination
of the existence and true identity of the owners of such accounts.

(b) Record Keeping – All records of all transactions of covered institutions

shall be maintained and safely stored for five (5) years from the date of
transactions. With respect to closed accounts, the records on customer
identification, account files and business correspondence, shall be
preserved and safely stored for at least five (5) years from the dates when
they were closed.

(c) Reporting of Covered and Suspicious Transactions - Covered

institutions shall report to the AMLC all covered transactions and
suspicious transactions within five (5) working days from occurrence
thereof, unless the ALMC prescribes a different period not exceeding
fifteen (15) working days. (Sec. 9)

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DATA PRIVACY ACT OF 2012

(RA No. 10173)

Policy

To protect the fundamental human right of privacy of communications while

ensuring free flow of information to promote innovation and growth. (Sec. 2)

Scope

This Act applies to the processing of all types of personal information and to
any natural and juridical person involved in personal information processing
including those personal information controllers and processors who,
although not found or established in the Philippines, use equipment that are
located in the Philippines, or those who maintain an office, branch or agency
in the Philippines subject to the immediately succeeding
paragraph: Provided, That the requirements of Sec. 5 are complied with.

This Act does not apply to the following:

(a) Information about any individual who is or was an officer or employee of

a government institution that relates to the position or functions of the
individual, including:

(I) The fact that the individual is or was an officer or employee of

the government institution;

(ii) The title, business address and office telephone number of

the individual;

(iii) The classification, salary range and responsibilities of the

position held by the individual; and

(iv) The name of the individual on a document prepared by the

individual in the course of employment with the government;

(b) Information about an individual who is or was performing service under

contract for a government institution that relates to the services performed,

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including the terms of the contract, and the name of the individual given in
the course of the performance of those services;

(c) Information relating to any discretionary benefit of a financial nature such

as the granting of a license or permit given by the government to an
individual, including the name of the individual and the exact nature of the
benefit;

(d) Personal information processed for journalistic, artistic, literary or

research purposes;

(e) Information necessary in order to carry out the functions of public

authority which includes the processing of personal data for the performance
by the independent, central monetary authority and law enforcement and
regulatory agencies of their constitutionally and statutorily mandated
functions. Nothing in this Act shall be construed as to have amended or
repealed RA No. 1405, otherwise known as the Secrecy of Bank Deposits
Act; RA No. 6426, otherwise known as the Foreign Currency Deposit Act;
and RA No. 9510, otherwise known as the Credit Information System Act
(CISA);

(f) Information necessary for banks and other financial institutions under the
jurisdiction of the independent, central monetary authority or BSPs to comply
with RA No. 9510, and RA No. 9160, as amended, otherwise known as the
Anti-Money Laundering Act and other applicable laws; and

(g) Personal information originally collected from residents of foreign

jurisdictions in accordance with the laws of those foreign jurisdictions,
including any applicable data privacy laws, which is being processed in the
Philippines. (Sec. 4)

Protection afforded to journalists and their sources

Nothing in this Act shall be construed as to have amended or repealed the

provisions of RA No. 53, which affords the publishers, editors or duly
accredited reporters of any newspaper , magazine or periodical of general
circulation protection from being compelled to reveal the source of any news
report or information appearing in said publication which was related in any
confidence to such publisher, editor, or reporter. (Sec. 5)

Extra-territorial Application
This Act applies to an act done or practice engaged in and outside of the
Philippines by an entity if:
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(a) The act, practice or processing relates to personal information

about a Philippine citizen or a resident;

(b) The entity has a link with the Philippines, and the entity is
processing personal information in the Philippines or even if the
processing is outside the Philippines as long as it is about Philippine
citizens or residents such as, but not limited to, the following:

(b.1) A contract is entered in the Philippines;

(b.2) A juridical entity unincorporated in the Philippines but has

central management and control in the country; and

(b.3) An entity that has a branch, agency, office or subsidiary

in the Philippines and the parent or affiliate of the Philippine
entity has access to personal information; and

(c) The entity has other links in the Philippines such as, but not
limited to:

(c.1) The entity carries on business in the Philippines; and

(c.2) The personal information was collected or held by an

entity in the Philippines. (Sec. 6)

General Data Privacy Principles

The processing of personal information shall be allowed, subject to

compliance with the requirements of this Act and other laws allowing
disclosure of information to the public and adherence to the principles of
transparency, legitimate purpose and proportionality.
Processing refers to any operation or any set of operations
performed upon personal information including, but not limited
to, the collection, recording, organization, storage, updating or
modification, retrieval, consultation, use, consolidation, blocking,
erasure or destruction of data. (Sec. 3, j)

Personal information must, be:

Personal information refers to any information whether

recorded in a material form or not, from which the identity of
an individual is apparent or can be reasonably and directly
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ascertained by the entity holding the information, or when

put together with other information would directly and
certainly identify an individual. (Sec. 3, h)

(a ) Collected for specified and legitimate purposes determined and

declared before, or as soon as reasonably practicable after collection, and
later processed in a way compatible with such declared, specified and
legitimate purposes only;

(b) Processed fairly and lawfully;

(c) Accurate, relevant and, where necessary for purposes for which it is to
be used the processing of personal information, kept up to date; inaccurate
or incomplete data must be rectified, supplemented, destroyed or their
further processing restricted;

(d) Adequate and not excessive in relation to the purposes for which they
are collected and processed;

(e) Retained only for as long as necessary for the fulfillment of the purposes
for which the data was obtained or for the establishment, exercise or defense
of legal claims, or for legitimate business purposes, or as provided by law;
and

(f) Kept in a form which permits identification of data subjects for no longer
than is necessary for the purposes for which the data were collected and
processed: Provided, That personal information collected for other purposes
may lie processed for historical, statistical or scientific purposes, and in
cases laid down in law may be stored for longer periods: Provided,
further, That adequate safeguards are guaranteed by said laws authorizing
their processing.

The personal information controller must ensure implementation of

personal information processing principles set out herein. (Sec. 11)

Personal information controller refers to a person or organization

who controls the collection, holding, processing or use of personal
information, including a person or organization who instructs
another person or organization to collect, hold, process, use,
transfer or disclose personal information on his or her behalf. The
term excludes:

(1) A person or organization who performs such functions as

instructed by another person or organization; and

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(2) An individual who collects, holds, processes or uses personal

information in connection with the individual‘s personal, family or
household affairs. (Sec. 3, h)

Processing of Sensitive Personal Information and Privileged

Information

The processing of sensitive personal information and privileged

information shall be prohibited, except in the following cases:

Sensitive personal information refers to personal information:

(1) About an individual‘s race, ethnic origin, marital status,

age, color, and religious, philosophical or political affiliations;

(2) About an individual‘s health, education, genetic or sexual

life of a person, or to any proceeding for any offense committed
or alleged to have been committed by such person, the
disposal of such proceedings, or the sentence of any court in
such proceedings;

(3) Issued by government agencies peculiar to an individual

which includes, but not limited to, social security numbers,
previous or current health records, licenses or its denials,
suspension or revocation, and tax returns; and

(4) Specifically established by an executive order or an act of

Congress to be kept classified. (Sec. 3, l)

Privileged information refers to any and all forms of data which

under the Rules of Court and other pertinent laws constitute
privileged communication. (Sec. 3, k)

(a) The data subject has given his or her consent, specific to the purpose
prior to the processing, or in the case of privileged information, all parties to
the exchange have given their consent prior to processing;

Data subject refers to an individual whose personal information is

processed. (Sec. 3, c)

Consent of the data subject refers to any freely given, specific,

informed indication of will, whereby the data subject agrees to the
collection and processing of personal information about and/or
relating to him or her. Consent shall be evidenced by written,
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electronic or recorded means. It may also be given on behalf of the

data subject by an agent specifically authorized by the data subject
to do so. (Sec. 3, b)

(b) The processing of the same is provided for by existing laws and
regulations: Provided, That such regulatory enactments guarantee the
protection of the sensitive personal information and the privileged
information: Provided, further, That the consent of the data subjects are not
required by law or regulation permitting the processing of the sensitive
personal information or the privileged information;

(c) The processing is necessary to protect the life and health of the data
subject or another person, and the data subject is not legally or physically
able to express his or her consent prior to the processing;

(d) The processing is necessary to achieve the lawful and noncommercial

objectives of public organizations and their associations: Provided, That such
processing is only confined and related to the bona fide members of these
organizations or their associations: Provided, further, That the sensitive
personal information are not transferred to third parties: Provided,
finally, That consent of the data subject was obtained prior to processing;

(e) The processing is necessary for purposes of medical treatment, is

carried out by a medical practitioner or a medical treatment institution, and
an adequate level of protection of personal information is ensured; or

(f) The processing concerns such personal information as is necessary for

the protection of lawful rights and interests of natural or legal persons in
court proceedings, or the establishment, exercise or defense of legal claims,
or when provided to government or public authority. (Sec. 13)

Rights of the Data Subject

The data subject is entitled to:

(a) Be informed whether personal information pertaining to him or her shall

be, are being or have been processed;

(b) Be furnished the information indicated hereunder before the entry of his
or her personal information into the processing system of the personal
information controller, or at the next practical opportunity:

(1) Description of the personal information to be entered into the

system;

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(2) Purposes for which they are being or are to be processed;

(3) Scope and method of the personal information processing;

.(4) The recipients or classes of recipients to whom they are or may

be disclosed;

.(5) Methods utilized for automated access, if the same is allowed by

the data subject, and the extent to which such access is authorized;

(6) The identity and contact details of the personal information

controller or its representative;

(7) The period for which the information will be stored; and

(8) The existence of their rights, i.e., to access, correction, as well as

the right to lodge a complaint before the Commission.

Any information supplied or declaration made to the data subject on these

matters shall not be amended without prior notification of data
subject: Provided, That the notification under subsection (b) shall not apply
should the personal information be needed pursuant to a subpoena or when
the collection and processing are for obvious purposes, including when it is
necessary for the performance of or in relation to a contract or service or
when necessary or desirable in the context of an employer-employee
relationship, between the collector and the data subject, or when the
information is being collected and processed as a result of legal obligation;
(c) Reasonable access to, upon demand, the following:

(1) Contents of his or her personal information that were processed;

(2) Sources from which personal information were obtained;

(3) Names and addresses of recipients of the personal information;

(4) Manner by which such data were processed;

(5) Reasons for the disclosure of the personal information to

recipients;

(6) Information on automated processes where the data will or likely

to be made as the sole basis for any decision significantly affecting or
will affect the data subject;

(7) Date when his or her personal information concerning the data
subject were last accessed and modified; and
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(8) The designation, or name or identity and address of the personal

information controller;

(d) Dispute the inaccuracy or error in the personal information and have the
personal information controller correct it immediately and accordingly, unless
the request is vexatious or otherwise unreasonable. If the personal
information have been corrected, the personal information controller shall
ensure the accessibility of both the new and the retracted information and
the simultaneous receipt of the new and the retracted information by
recipients thereof: Provided, That the third parties who have previously
received such processed personal information shall he informed of its
inaccuracy and its rectification upon reasonable request of the data subject;

(e) Suspend, withdraw or order the blocking, removal or destruction of his

or her personal information from the personal information controller‘s filing
system upon discovery and substantial proof that the personal information
are incomplete, outdated, false, unlawfully obtained, used for unauthorized
purposes or are no longer necessary for the purposes for which they were
collected. In this case, the personal information controller may notify third
parties who have previously received such processed personal information;
and

(f) Be indemnified for any damages sustained due to such inaccurate,

incomplete, outdated, false, unlawfully obtained or unauthorized use of
personal information. (Sec. 16)

Sub-contract of Personal Information

A personal information controller may sub-contract the processing of

personal information: Provided, That the personal information controller shall
be responsible for ensuring that proper safeguards are in place to ensure the
confidentiality of the personal information processed, prevent its use for
unauthorized purposes, and generally, comply with the requirements of this
Act and other laws for processing of personal information. The personal
information processor shall comply with all the requirements of this Act and
other applicable laws. (Sec. 14).

Extension of Privileged Communication

Personal information controllers may invoke the principle of privileged

communication over privileged information that they lawfully control or
process. Subject to existing laws and regulations, any evidence gathered on
privileged information is inadmissible. (Sec. 15)
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Transmissibility of Rights of the Data Subject

The lawful heirs and assigns of the data subject may invoke the rights of the
data subject for, which he or she is an heir or assignee at any time after the
death of the data subject or when the data subject is incapacitated or
incapable of exercising the rights as enumerated in the immediately
preceding section. (Sec. 17)

Right to Data Portability

The data subject shall have the right, where personal information is
processed by electronic means and in a structured and commonly used
format, to obtain from the personal information controller a copy of data
undergoing processing in an electronic or structured format, which is
commonly used and allows for further use by the data subject. The
Commission may specify the electronic format referred to above, as well as
the technical standards, modalities and procedures for their transfer. (Sec.
18)

The immediately preceding sections are not applicable if the processed

personal information are used only for the needs of scientific and statistical
research and, on the basis of such, no activities are carried out and no
decisions are taken regarding the data subject: Provided, That the personal
information shall be held under strict confidentiality and shall be used only for
the declared purpose. Likewise, the immediately preceding sections are not
applicable to processing of personal information gathered for the purpose of
investigations in relation to any criminal, administrative or tax liabilities of a
data subject. (Sec. 19)

Security of Personal Information

(a) The personal information controller must implement reasonable and

appropriate organizational, physical and technical measures intended for the
protection of personal information against any accidental or unlawful
destruction, alteration and disclosure, as well as against any other unlawful
processing.

(b) The personal information controller shall implement reasonable and

appropriate measures to protect personal information against natural
dangers such as accidental loss or destruction, and human dangers such as
unlawful access, fraudulent misuse, unlawful destruction, alteration and
contamination.

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(c) The determination of the appropriate level of security under this section
must take into account the nature of the personal information to be
protected, the risks represented by the processing, the size of the
organization and complexity of its operations, current data privacy best
practices and the cost of security implementation. Subject to guidelines as
the Commission may issue from time to time, the measures implemented
must include:

(1) Safeguards to protect its computer network against accidental,

unlawful or unauthorized usage or interference with or hindering of
their functioning or availability;

(2) A security policy with respect to the processing of personal

information;

(3) A process for identifying and accessing reasonably foreseeable

vulnerabilities in its computer networks, and for taking preventive,
corrective and mitigating action against security incidents that can
lead to a security breach; and

(4) Regular monitoring for security breaches and a process for taking
preventive, corrective and mitigating action against security incidents
that can lead to a security breach.

(d) The personal information controller must further ensure that third parties
processing personal information on its behalf shall implement the security
measures required by this provision.

(e) The employees, agents or representatives of a personal information

controller who are involved in the processing of personal information shall
operate and hold personal information under strict confidentiality if the
personal information are not intended for public disclosure. This obligation
shall continue even after leaving the public service, transfer to another
position or upon termination of employment or contractual relations.

(f) The personal information controller shall promptly notify the Commission
and affected data subjects when sensitive personal information or other
information that may, under the circumstances, be used to enable identity
fraud are reasonably believed to have been acquired by an unauthorized
person, and the personal information controller or the Commission believes
(bat such unauthorized acquisition is likely to give rise to a real risk of
serious harm to any affected data subject. The notification shall at least
describe the nature of the breach, the sensitive personal information possibly
involved, and the measures taken by the entity to address the breach.
Notification may be delayed only to the extent necessary to determine the
scope of the breach, to prevent further disclosures, or to restore reasonable
integrity to the information and communications system.

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(1) In evaluating if notification is unwarranted, the Commission may

take into account compliance by the personal information controller
with this section and existence of good faith in the acquisition of
personal information.

(2) The Commission may exempt a personal information controller

from notification where, in its reasonable judgment, such notification
would not be in the public interest or in the interests of the affected
data subjects.

(3) The Commission may authorize postponement of notification

where it may hinder the progress of a criminal investigation related to
a serious breach. (Sec. 20)

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FOREIGN INVESTMENTS ACT (RA No. 7042)

Policy of the law

It is the policy of the State to attract, promote and welcome productive

investments from foreign individuals, partnerships, corporations, and
governments, including their political subdivisions, in activities which
significantly contribute to national industrialization and socioeconomic
development to the extent that foreign investment is allowed in such
activity by the Constitution and relevant laws. Foreign investments shall
be encouraged in enterprises that significantly expand livelihood and
employment opportunities for Filipinos; enhance economic value of farm
products; promote the welfare of Filipino consumers; expand the scope,
quality and volume of exports and their access to foreign markets;
and/or transfer relevant technologies in agriculture, industry and support
services. Foreign investments shall be welcome as a supplement to
Filipino capital and technology in those enterprises serving mainly the
domestic market.

As a general rule, there are no restrictions on extent of foreign

ownership of export enterprises. In domestic market enterprises,
foreigners can invest as much as one hundred percent (100%) equity,
except in areas included in the negative list. Foreign-owned firms catering
mainly to the domestic market shall be encouraged to undertake
measures that will gradually increase Filipino participation in their
businesses by taking in Filipino partners, electing Filipinos to the board of
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directors, implementing transfer of technology to Filipinos, generating

more employment for the economy and enhancing skills of Filipino
workers. (Sec. 2)

Philippine national, meaning

This term shall mean: (a) a citizen of the Philippines; (b) a domestic
partnership or association wholly-owned by citizens of the Philippines; (c) a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote Is owned
and held by citizens of the Philippines; or (d) a corporation organized
abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or (e) a
trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals … and at
least sixty percent (60%) of the members of the board of directors of each of
both corporations must be citizens of the Philippines. (Sec. 1, a)

Foreign investment, meaning

The term "foreign investment" shall mean as equity investment made by a

non-Philippine national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly registered with
the Central Bank which shall assess and appraise the value of such assets
other than foreign exchange; (Sec. 3, c)

FIA Inapplicable to banks

The Foreign Investments Act shall not apply to banks and other financial
institutions which are governed and regulated by the General Banking Act
and other laws under the supervision of the Central Bank. (Sec. 4)

Doing business, meaning

The phrase "doing business" shall include soliciting orders, service

contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a
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continuity of commercial dealings or arrangements, and

contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the
business organization: Provided, however, That the phrase "doing
business” shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in
its own name and for its own account; (Sec. 3, d)

Export enterprise, meaning

The term ―export enterprise‖ shall mean an enterprise wherein a

manufacturer, processor, or service (including tourism) enterprise exports
sixty percent (60%) or more of its output or wherein a trader purchases
products domestically and exports sixty percent (60%) or more of such
purchases. (Sec. 3, e)

Domestic market enterprise, meaning

The term "domestic enterprise" shall mean an enterprise which

produces goods for sale, or renders services to the domestic market
entirely or if exporting a portion of its output fails to consistently export at
least sixty percent (60%) thereof. (Sec. 3, f);

Registration of investments of non-Philippine nationals

Without need of prior approval, a non-Philippine national, as that term is

defined in Section 3 a), and not otherwise disqualified by law may upon
registration with the Securities and Exchange Commission (SEC), or with
the Bureau of Trade Regulation and Consumer Protection (BTRCP) of
the Department of Trade and Industry in the case of single
proprietorships, do business as defined in Sec. 3 (d) of this Act or
invest in a domestic enterprise up to one hundred percent (100%) of its
capital, unless participation of non-Philippine nationals in the enterprise
is prohibited or limited to a smaller percentage by existing law and/or
limited to a smaller percentage by existing law and/or under the provisions
of this Act. The SEC or BTRCP, as the case may be, shall not impose
any limitations on the extent of foreign ownership in an enterprise
additional to those provided in this Act: Provided, however, That any
enterprise seeking to avail of incentives under the Omnibus Investment
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Code of 1987 must apply for registration with the Board of Investments
(BOI), which shall process such application for registration in accordance
with the criteria for evaluation prescribed in said Code: Provided, finally,
That a non-Philippine national intending to engage in the same line of
business as an existing joint venture in his application for registration with
SEC. During the transitory period as provided in Section 15 hereof, SEC
shall disallow registration of the applying non-Philippine national if the
existing joint venture enterprise, particularly the Filipino partners therein,
can reasonably prove they are capable to make the investment
needed for they are competing applicant. Upon effectivity of this Act, SEC
shall effect registration of any enterprise applying under this Act within
fifteen (15) days upon submission of completed requirements. (Sec. 5)

Foreign investments in export enterprises

Foreign investment in export enterprises whose products and services do

not fall within Lists A and B of the Foreign Investment Negative List
provided under Sec. 8 hereof is allowed up to one hundred percent (100%)
ownership.

Export enterprises which are non-Philippine nationals shall register with

BOI and submit the reports that may be required to ensure continuing
compliance of the export enterprise with its export requirement. BOI shall
advise SEC or BTRCP, as the case may be, of any export enterprise that
fails to meet the export ratio requirement. The SEC or BTRCP shall
thereupon order the non-complying export enterprise to reduce its sales to
the domestic market to not more than forty percent (40%) of its total
production; failure to comply with such SEC or BTRCP order, without
justifiable reason, shall subject the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties provided in Section 14 hereof.
(Sec. 6)

Foreign Investments in Domestic Market Enterprises

Non-Philippine nationals may own up to one hundred percent (100%) of

domestic market enterprises unless foreign ownership therein is prohibited
or limited by the Constitution and existing law or the Foreign Investment
Negative List under Sec. 8 hereof." (Sec. 7)

Negative Lists

The Foreign Investment Negative List shall have two (2) component lists: A
and B:

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List A shall enumerate the areas of activities reserved to Philippine

nationals by mandate of the Constitution and specific laws.

List B shall contain the areas of activities and enterprises regulated

pursuant to law:
(1) which are defense-related activities, requiring prior
clearance and authorization from Department of National Defense
(DND) to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal weapons,
military ordinances, explosives, pyrotechnics and similar materials,
unless such manufacturing on repair activity is specifically
authorized, with a substantial export component, to a non-Philippine
national by the Secretary of National Defense; or

(2) which have implications on public health and morals,

such as the manufacture and distribution of dangerous drugs, all
forms of gambling, nightclubs, bars, beer houses, dance halls,
sauna and steam bathhouses and massage clinics.

Capital requirement of foreign national

A foreign national intending to do business should make an inward

remittance of at least two hundred thousand U.S. dollars (us$200,000.00).

Rule, if capital be less than US$200,000

Small and medium-sized domestic market enterprises with paid-in equity

capital less than the equivalent of two hundred thousand US dollars
(US$200,000.00), are reserved to Philippine nationals: provided, that if: (1)
they involve advanced technology, or (2) they employ at least fifty (50)
direct employees, then a minimum paid-in capital of One hundred
thousand US dollars (US$100,000.00) shall be allowed to non-
Philippine nationals (Sec. 8).

Amendments to Negative List B

Amendments to Negative List B may be made upon recommendation of

the Secretary of National Defense, or the Secretary of Health, or the
Secretary of Education, Culture and Sports, indorsed by the NEDA, or
upon recommendation motu propio, of NEDA, approved by the
President, and promulgated by a Presidential Proclamation.
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The first Regular Negative Lists shall be published not later than sixty
(60) days before the end of the transitory period provided in said section
and shall become immediately effective at the end of the transitory
period.

Subsequent Foreign Investment Negative Lists shall become effective

fifteen (15) days after publication in a newspaper of general circulation
in the Philippines: provided, however, that each Foreign Investment
Negative List shall be prospective in operation and shall in no way affect
foreign investment existing on the date of its publication.

Amendments to Negative List B, after promulgation and publication of the

first Regular Foreign Investment Negative List at the end of the transitory
period, shall not be made more often than once every two (2) years." (Sec.
8)

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PHILIPPINE COMPETITION ACT

(RA No. 10667)

Policy of the law

xxx

(c) penalize all forms of anti-competetive agreements, abuse of dominant

position and anti-competetive mergers and acquisitions, with the objective of
protecting consumer welfare and advancing domestic and international trade
and economic development. (Sec. 2)

Applicability of the law

This Act shall be enforceable against any person or entity engaged in any
trade, industry and commerce in the Republic of the Philippines. It shall
likewise be applicable to international trade having direct, substantial, and
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reasonably foreseeable effects in trade, industry, or commerce in the

Republic of the Philippines, including those that result from acts done outside
the Republic of the Philippines, including those that result from acts done
outside the Republic of the Philippines..

This Act shall not apply to the combinations or activities of workers or

employees nor to agreements or arrangements with their employers when
such combinations, activities, agreements, or arrangements are designed
solely to facilitate collective bargaining in respect of conditions of
employment. (Sec. 3)

Implementing office

The provisions of the Philippine Competition Act shall be implemented by the

Philippine Competition Commission (PCC). (Sec. 12)

Powers and functions of the PCC

The Commission shall exercise the following powers and functions:

(a) conduct inquiry, investigate, and hear and decide on cases involving any
violation of this Act and other existing competition laws motu proprio or upon
receipt of a verified complaint from an interested party or upon referral by the
concerned regulatory agency, and institute the appropriate civil or criminal
proceedings;

(b) Review proposed mergers and acquisitions, determine thresholds for

notification, determine the requirements and procedures for notification, and
upon exercise of its powers to review, prohibit mergers and acquisitions that
will substantially prevent, restrict, or lessen competition in the relevant
market;

(c) Monitor and undertake consultation with stakeholders and affected

agencies for the purpose of understanding market behavior;

(d) Upon finding, based on substantial evidence, that an entity has entered
into an anti-competitive agreement or has abused its dominant position after
due notice and hearing, stop or redress the same, by applying remedies,
such as, but not limited to issuance of injunctions, requirement of divestment,
and disgorgement of excess profits under such reasonable parameters that
shall be prescribed by the rules and regulations implementing this Act;

(e) Conduct administrative proceedings, impose sanctions, fines or penalties

for any noncompliance with or breach of this Act and its implementing rules
and regulations (IRR) and punish for contempt;

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(f) Issue subpoena duces tecum and subpoena ad testificandum to require

the production of books, records, or other documents or data which relate to
any matter relevant to the investigation and personal appearance before the
Commission, summon witnesses, administer oaths, and issue interim orders
such as show cause orders and cease and desist orders after due notice and
hearing in accordance with the rules and regulations implementing this Act;

(g) Upon order of the court, undertake inspections of business premises and
other offices, land and vehicles, as used by the entity, where it reasonably
suspects that relevant books, tax records, or other documents which relate to
any matter relevant to the investigation are kept, in order to prevent the
removal, concealment, tampering with, or destruction of the books, records,
or other documents;

(h) Issue adjustment or divestiture orders including orders for corporate

reorganization or divestment in the manner and under such terms and
conditions as may be prescribed in the rules and regulations implementing
this Act. Adjustment or divestiture orders, which are structural remedies,
should only be imposed:

(1) Where there is no equally effective behavioral remedy; or

(2) Where any equally effective behavioral remedy would be more

burdensome for the enterprise concerned than the structural remedy.
Changes to the structure of an enterprise as it existed before the
infringement was committed would only be proportionate to the
substantial risk of a lasting or repeated infringement that derives from
the very structure of the enterprise;

(I) Deputize any and all enforcement agencies of the government or enlist
the aid and support of any private institution, corporation, entity or
association, in the implementation of its powers and functions;

(j) Monitor compliance by the person or entities concerned with the cease
and desist order or consent judgment;

(k) Issue advisory opinions and guidelines on competition matters for the
effective enforcement of this Act and submit annual and special reports to
Congress, including proposed legislation for the regulation of commerce,
trade, or industry;

(l) Monitor and analyze the practice of competition in markets that affect the
Philippine economy; implement and oversee measures to promote
transparency and accountability; and ensure that prohibitions and
requirements of competition laws are adhered to;

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(m) Conduct, publish, and disseminate studies and reports on anti-

competitive conduct and agreements to inform and guide the industry and
consumers;

(n) Intervene or participate in administrative and regulatory proceedings

requiring consideration of the provisions of this Act that are initiated by
government agencies such as the Securities and Exchange Commission, the
Energy Regulatory Commission and the National Telecommunications
Commission;

(o) Assist the National Economic and Development Authority, in consultation

with relevant agencies and sectors, in the preparation and formulation of a
national competition policy;

(p) Act as the official representative of the Philippine government in

international competition matters;

(q) Promote capacity building and the sharing of best practices with other
competition-related bodies;

(r) Advocate pro-competitive policies of the government by:

(1) Reviewing economic and administrative regulations, motu

proprio or upon request, as to whether or not they adversely affect
relevant market competition, and advising the concerned agencies
against such regulations; and

(2) Advising the Executive Branch on the competitive implications of

government actions, policies and programs; and

(s) Charging reasonable fees to defray the administrative cost of the

services rendered. (Sec. 12)

What are the anti-competetive agreements?

The following agreements, between or among competitors, are per se

prohibited:

Agreement refers to any type or form of contract,

arrangement, understanding, collective
recommendation, or concerted action, whether
formal or informal, explicit or tacit, written or oral;
(Sec. 4, b)

(a) Restricting competition as to price, or components thereof, or

other terms of trade;
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(b) Fixing price at an auction or in any form of bidding including cover

bidding, bid suppression, bid rotation and market allocation and other
analogous practices of bid manipulation;

Not per se prohibited, but are still prohibited

The following agreements, between or among competitors which have the

object or effect of substantially preventing, restricting or lessening
competition shall be prohibited:

(a) Setting, Limiting, or controlling production, markets, technical

development, or investment;

(b) Dividing or sharing the market, whether by volume of sales or

purchases, territory, type of goods or services, buyers or sellers or
any other means;

Market refers to the group of goods or services that

are sufficiently interchangeable or substitutable and
the object of competition, and the geographic area
where said goods or services are offered; (Sec. 4, i)

(c) Agreements other than those specified in (a) and (b) of this
section which have the object or effect of substantially preventing,
restricting or lessening competition shall also be
prohibited: Provided, Those which contribute to improving the
production or distribution of goods and services or to promoting
technical or economic progress, while allowing consumers a fair share
of the resulting benefits, may not necessarily be deemed a violation of
this Act.

An entity that controls, is controlled by, or is under common control

with another entity or entities, have common economic interests, and
are not otherwise able to decide or act independently of each other,
shall not be considered competitors for purposes of this section.
(Sec. 14)

Entity refers to any person, natural or juridical, sole proprietorship,

partnership, combination or association in any form, whether
incorporated or not, domestic or foreign, including those owned or
controlled by the government, engaged directly or indirectly in any
economic activity. (Sec. 4, h);

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Abuse of Dominant Position

It shall be prohibited for one or more entities to abuse their dominant

position by engaging in conduct that would substantially prevent, restrict
or lessen competition:

Dominant position refers to a position of

economic strength that an entity or entities hold
which makes it capable of controlling the relevant
market independently from any or a combination of
the following: competitors, customers, suppliers, or
consumers; (Sec. 4, g)

Conduct refers to any type or form of undertaking,

collective recommendation, independent or concerted
action or practice, whether formal or informal. (Sec.
4, c);

(a) Selling goods or services below cost with the object of driving
competition out of the relevant market: Provided, That in the Commission‘s
evaluation of this fact, it shall consider whether the entity or entities have no
such object and the price established was in good faith to meet or compete
with the lower price of a competitor in the same market selling the same or
comparable product or service of like quality;

Relevant market refers to the market in which a particular good or

service is sold and which is a combination of the relevant product
market and the relevant geographic market, defined as follows:

1. A relevant product market comprises all those goods and/or

services which are regarded as interchangeable or substitutable by
the consumer or the customer, by reason of the goods and/or
services‘ characteristics, their prices and their intended use; and

2. The relevant geographic market comprises the area in which the

entity concerned is involved in the supply and demand of goods and
services, in which the conditions of competition are sufficiently
homogenous and which can be distinguished from neighboring areas
because the conditions of competition are different in those areas.
(Sec. 4, k)

(b) Imposing barriers to entry or committing acts that prevent competitors

from growing within the market in an anti-competitive manner except those
that develop in the market as a result of or arising from a superior product or
process, business acumen, or legal rights or laws;

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(c) Making a transaction subject to acceptance by the other parties of other

obligations which, by their nature or according to commercial usage, have no
connection with the transaction;

(d) Setting prices or other terms or conditions that discriminate

unreasonably between customers or sellers of the same goods or services,
where such customers or sellers are contemporaneously trading on similar
terms and conditions, where the effect may be to lessen competition
substantially: Provided, That the following shall be considered permissible
price differentials:

(I) Socialized pricing for the less fortunate sector of the economy;

(ii) Price differential which reasonably or approximately reflect

differences in the cost of manufacture, sale, or delivery resulting from
differing methods, technical conditions, or quantities in which the
goods or services are sold or delivered to the buyers or sellers;

(iii) Price differential or terms of sale offered in response to the

competitive price of payments, services or changes in the facilities
furnished by a competitor; and

(iv) Price changes in response to changing market conditions,

marketability of goods or services, or volume;

(e) Imposing restrictions on the lease or contract for sale or trade of goods
or services concerning where, to whom, or in what forms goods or services
may be sold or traded, such as fixing prices, giving preferential discounts or
rebate upon such price, or imposing conditions not to deal with competing
entities, where the object or effect of the restrictions is to prevent, restrict or
lessen competition substantially: Provided, That nothing contained in this Act
shall prohibit or render unlawful:

(i) Permissible franchising, licensing, exclusive merchandising or

exclusive distributorship agreements such as those which give each
party the right to unilaterally terminate the agreement; or

(ii) Agreements protecting intellectual property rights, confidential

information, or trade secrets;

Confidential business information refers to

information which concerns or relates to the
operations, production, sales, shipments,
purchases, transfers, identification of customers,
inventories, or amount or source of any income,
profits, losses, expenditures. (Sec. 4, e);

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(f) Making supply of particular goods or services dependent upon the

purchase of other goods or services from the supplier which have no direct
connection with the main goods or services to be supplied;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods
or services of, among others, marginalized agricultural producers, fisherfolk,
micro-, small-, medium-scale enterprises, and other marginalized service
providers and producers;

(h) Directly or indirectly imposing unfair purchase or selling price on their

competitors, customers, suppliers or consumers, provided that prices that
develop in the market as a result of or due to a superior product or process,
business acumen or legal rights or laws shall not be considered unfair prices;
and

(I) Limiting production, markets or technical development to the prejudice of

consumers, provided that limitations that develop in the market as a result of
or due to a superior product or process, business acumen or legal rights or
laws shall not be a violation of this Act: Provided, That nothing in this Act
shall be construed or interpreted as a prohibition on having a dominant
position in a relevant market or on acquiring, maintaining and increasing
market share through legitimate means that do not substantially prevent,
restrict or lessen competition: Provided, further, That any conduct which
contributes to improving production or distribution of goods or services within
the relevant market, or promoting technical and economic progress while
allowing consumers a fair share of the resulting benefit may not necessarily
be considered an abuse of dominant position: Provided, finally, That the
foregoing shall not constrain the Commission or the relevant regulator from
pursuing measures that would promote fair competition or more competition
as provided in this Act. (Sec. 15)

Merger or acquisition agreements that substantially prevent, restrict or

lessen competition in the relevant market or in the market for goods or
services as may be determined by the Commission shall be prohibited.
(Sec. 20)

Merger refers to the joining of two (2) or more entities into

an existing entity or to form a new entity. (Sec. 4, j);

Acquisition refers to the purchase of securities or assets, through

contract or other means, for the purpose of obtaining control by:

(I ) one (1) entity of the whole or part of another;

(ii) two (2) or more entities over another; or

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(iii) one (1) or more entities over one (1) or more entities;
(Sec. 4, a)

Compulsory Notification

Parties to the merger or acquisition agreement referred to in the preceding

section wherein the value of the transaction exceeds one billion pesos
(P1,000,000,000.00) * are prohibited from consummating their agreement
until thirty (30) days after providing notification to the Commission in the form
and containing the information specified in the regulations issued by the
Commission: Provided, That the Commission shall promulgate other criteria,
such as increased market share in the relevant market in excess of minimum
thresholds, that may be applied specifically to a sector, or across some or all
sectors, in determining whether parties to a merger or acquisition shall notify
the Commission under this Chapter.

An agreement consummated in violation of this requirement to notify the

Commission shall be considered void and subject the parties to an
administrative fine of one percent (1%) to five percent (5%) of the value of
the transaction.

Should the Commission deem it necessary, it may request further

information that are reasonably necessary and directly relevant to the
prohibition under Sec. 20 hereof from the parties to the agreement before the
expiration of the thirty (30)-day period referred. The issuance of such a
request has the effect of extending the period within which the agreement
may not be consummated for an additional sixty (60) days, beginning on the
day after the request for information is received by the
parties: Provided, That, in no case shall the total period for review by the
Commission of the subject agreement exceed ninety (90) days from initial
notification by the parties.

When the above periods have expired and no decision has been
promulgated for whatever reason, the merger or acquisition shall be deemed
approved and the parties may proceed to implement or consummate it. All
notices, documents and information provided to or emanating from the
Commission under this section shall be subject to confidentiality rule under
Sec. 34 of this Act except when the release of information contained therein
is with the consent of the notifying entity or is mandatorily required to be
disclosed by law or by a valid order of a court of competent jurisdiction, or of
a government or regulatory agency, including an exchange.

In the case of the merger or acquisition of: (a) banks, (b) banking
institutions, (c) building and loan associations, (d) trust companies, (e)
insurance companies, (f) public utilities, (g) educational institutions and
(h) other special corporations governed by special laws, a favorable or no-

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objection ruling by the Commission shall not be construed as dispensing of

the requirement for a favorable recommendation by the appropriate
government agency under Sec. 79 (now Sec. 78) of the (Revised)
Corporation Code of the Philippines.

A favorable recommendation by a governmental agency with a competition

mandate shall give rise to a disputable presumption that the proposed
merger or acquisition is not violative of this Act. (Sec. 17)

N.B. This threshold amount had been increased to more than two
billion pesos (P2,000,0000,000.00)

Prohibited Mergers and Acquisitions

Merger or acquisition agreements that substantially prevent, restrict or

lessen competition in the relevant market or in the market for goods or
services as may be determined by the PCC shall be prohibited. (Sec. 20)

Exemptions from Prohibited Mergers and Acquisition

Merger or acquisition agreement prohibited under Sec. 20 of this Chapter

may, nonetheless, be exempt from prohibition by the Commission when the
parties establish either of the following:

(1) The concentration has brought about or is likely to bring about

gains in efficiencies that are greater than the effects of any limitation
on competition that result or likely to result from the merger or
acquisition agreement; or

(2) A party to the merger or acquisition agreement is faced with

actual or imminent financial failure, and the agreement represents the
least anti-competitive arrangement among the known alternative uses
for the failing entity‘s assets: Provided, That an entity shall not be
prohibited from continuing to own and hold the stock or other share
capital or assets of another corporation which it acquired prior to the
approval of this Act or acquiring or maintaining its market share in a
relevant market through such means without violating the provisions
of this Act: Provided, further, That the acquisition of the stock or
other share capital of one or more corporations solely for investment
and not used for voting or exercising control and not to otherwise
bring about, or attempt to bring about the prevention, restriction, or
lessening of competition in the relevant market shall not be prohibited.
(Sec. 21)

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Determining the relevant market

For purposes of determining the relevant market, the following factors,

among others, affecting the substitutability among goods or services
constituting such market and the geographic area delineating the boundaries
of the market shall be considered:

(a) The possibilities of substituting the goods or services in question,

with others of domestic or foreign origin, considering the technological
possibilities, extent to which substitutes are available to consumers
and time required for such substitution;

(b) The cost of distribution of the good or service, its raw materials, its
supplements and substitutes from other areas and abroad,
considering freight, insurance, import duties and non-tariff restrictions;
the restrictions imposed by economic agents or by their associations;
and the time required to supply the market from those areas;

(c) The cost and probability of users or consumers seeking other

markets; and

(d) National, local or international restrictions which limit access by

users or consumers to alternate sources of supply or the access of
suppliers to alternate consumers. (Sec. 24)

Determining control or dominance of market by an Entity

In determining the control of an entity, the Commission may consider the

following:

Control is presumed to exist when the parent owns directly or indirectly,

through subsidiaries, more than one half (1/2) of the voting power of an
entity, unless in exceptional circumstances, it can clearly be demonstrated
that such ownership does not constitute control. Control also exists even
when an entity owns one half (1/2) or less of the voting power of another
entity when:

(a) There is power over more than one half (1/2) of the voting rights
by virtue of an agreement with investors;

(b) There is power to direct or govern the financial and operating

policies of the entity under a statute or agreement;

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(c) There is power to appoint or remove the majority of the members

of the board of directors or equivalent governing body;

(d) There is power to cast the majority votes at meetings of the board
of directors or equivalent governing body;

(e) There exists ownership over or the right to use all or a significant
part of the assets of the entity;

(f) There exist rights or contracts which confer decisive influence on

the decisions of the entity. (Sec. 25)

Determining Market Dominant Position

In determining whether an entity has market dominant position for purposes

of this Act, the Commission shall consider the following:

(a) The share of the entity in the relevant market and whether it is
able to fix prices unilaterally or to restrict supply in the relevant
market;

(b) The existence of barriers to entry and the elements which could
foreseeably alter both said barriers and the supply from competitors;

(c) The existence and power of its competitors;

(d) The possibility of access by its competitors or other entities to its

sources of inputs;

(e) The power of its customers to switch to other goods or services;

(f) I ts recent conducts; and

(g) Other criteria established by the regulations of this Act.

There shall be a rebuttable presumption of market dominant position if the

market share of an entity in the relevant market is at least fifty percent (50%),
unless a new market share threshold is determined by the Commission for
that particular sector.

The Commission shall from time to time determine and publish the threshold
for dominant position or minimum level of share in the relevant market that
could give rise to a presumption of dominant position. In such determination,
the Commission would consider the structure of the relevant market, degree
of integration, access to end-users, technology and financial resources, and
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other factors affecting the control of a market, as provided in subsections (a)

to (g) of this section.

The Commission shall not consider the acquiring, maintaining and increasing
of market share through legitimate means not substantially preventing,
restricting, or lessening competition in the market such as but not limited to
having superior skills, rendering superior service, producing or distributing
quality products, having business acumen, and the enjoyment and use of
protected intellectual property rights as violative of this Act. (Sec. 27)

Determining Anti-Competitive Agreement or Conduct

In determining whether anti-competitive agreement or conduct has been

committed, the Commission shall:

(a) Define the relevant market allegedly affected by the anti-

competitive agreement or conduct, following the principles laid out in
Section 24 of this Chapter;

(b) Determine if there is actual or potential adverse impact on

competition in the relevant market caused by the alleged agreement
or conduct, and if such impact is substantial and outweighs the actual
or potential efficiency gains that result from the agreement or conduct;

(c) Adopt a broad and forward-looking perspective, recognizing future

market developments, any overriding need to make the goods or
services available to consumers, the requirements of large
investments in infrastructure, the requirements of law, and the need of
our economy to respond to international competition, but also taking
account of past behavior of the parties involved and prevailing market
conditions;

(d) Balance the need to ensure that competition is not prevented or

substantially restricted and the risk that competition efficiency,
productivity, innovation, or development of priority areas or industries
in the general interest of the country may be deterred by overzealous
or undue intervention; and

(e) Assess the totality of evidence on whether it is more likely than

not that the entity has engaged in anti-competitive agreement or
conduct including whether the entity‘s conduct was done with a
reasonable commercial purpose such as but not limited to phasing out
of a product or closure of a business, or as a reasonable commercial
response to the market entry or conduct of a competitor. (Sec. 26)

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Forbearance by the PCC

The Commission may forbear from applying the provisions of this Act, for a
limited time, in whole or in part, in all or specific cases, on an entity or group
of entities, if in its determination:

(a) Enforcement is not necessary to the attainment of the policy

objectives of this Act;

(b) Forbearance will neither impede competition in the market where

the entity or group of entities seeking exemption operates nor in
related markets; and

(c) Forbearance is consistent with public interest and the benefit and
welfare of the consumers.

A public hearing shall be held to assist the Commission in making this

determination.

The Commission‘s order exempting the relevant entity or group of entities

under this section shall be made public. Conditions may be attached to the
forbearance if the Commission deems it appropriate to ensure the long-term
interest of consumers.

In the event that the basis for the issuance of the exemption order ceases to
be valid, the order may be withdrawn by the Commission. (Sec. 28)

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BUSINESS ORGANIZATIONS
PARTNERSHIPS

Definition
By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profits among themselves. Two or more persons may also
form a partnership for the exercise of a profession. (Art. 1767, Civil Code)
General professional partnership is a partnership formed by persons for
the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business. (Sec.
22(B), RA 8424)

Requisites/Elements

1. An agreement to contribute money, property, or industry to a common

fund, and

2. Intent to divide the profits among the contracting parties. (Jarantilla vs.
Jarantilla, G.R. No. 154486, December 1, 2010)

Characteristics

1. Bilateral – It is entered into by two or more persons and the rights and
obligations arising therefrom are always reciprocal;

2 Onerous – Each of the parties aspires to procure for himself a benefit

through the giving of something;

3. Nominate – It has a special name or designation in our law;

4. Consensual – Generally, perfected by mere consent, upon the express or

implied agreement of two or more persons;

5 Commutative – The undertaking of each of the partners is considered as

the equivalent of that of the others;

6 Principal – It does not depend for its existence or validity upon some
other contracts;

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7. Preparatory – Because it is entered into as a means to an end, i.e. to

engage in business or specific venture for the realization of profits with the
view of dividing them among the contracting parties; and

8. Profit-oriented (Art. 1770, Civil Code).

9. It has a separate juridical personality. (Art. 1768, Civil Code)

10. It must have a lawful object or purpose and for the common benefit or
interest of the partners. (Art. 1770, New Civil Code)

11. The partners are liable to the creditors of the partnership with their own
property, even beyond their contribution. (Art. 1803[1], Civil Code)

12. It is founded on the right to choose with whom a person wishes to

associate himself, otherwise known as the doctrine of delictus personae.
(Ortega vs. Court of Appeals, G.R. No. 109248, July 3, 1995)

13. As a general rule, all the partners shall be considered agents and
whatever any one of them may do alone shall bind the partnership. This is
the doctrine of mutual agency. (Art. 1803[1], 1818, Civil Code)

Rules to determine existence

1. Except as provided by Art. 1825 of the New Civil Code (partnership by

estoppel), persons who are not partners as to each other are not partners as
to third persons;
2. Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
3. The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
4 The receipt by a person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, but no such inference
shall be drawn if such profits were received in payment:
i. As a debt by installments or otherwise;
ii. As wages of an employee or rent to a landlord;
iii. As an annuity to a widow or representative of a deceased partner;

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iv. As interest on a loan, though the amount of payment varies with the
profits of the business;
v. As the consideration for the sale for the sale of a goodwill of a
business or other property by installments or otherwise (Art. 1769,
Civill Code).
The burden of proving the existence of a partnership rests on the party
having the affirmative of that issue. The existence of a partnership must be
proved and will not be presumed. However, when a partnership is shown to
exist, the presumption is that it continues in the absence of evidence to the
contrary, and the burden of proof is on the person asserting its termination

Term of a Partnership
A partnership begins from the moment of the execution of the contract,
unless it is otherwise stipulated. (Art. 1784, Civil Code)
When a partnership for a fixed term or particular undertaking is continued
after the termination of such term or particular undertaking without any
express agreement, the rights and duties of the partners remain the same
as they were at such termination, so far as is consistent with a partnership
at will. A continuation of the business by the partners or such of them as
habitually acted therein during the term, without any settlement or liquidation
of the partnership affairs, is prima facie evidence of a continuation of the
partnership. (Art. 1785, Civil Code)

Partnership by estoppel

It is one who, by words or conduct does any of the following:

1. Directly represents himself to anyone as a partner in an existing
partnership or in a non-existing partnership.
2. Indirectly represents himself by consenting to another
representing him as a partner in an existing partnership or in a non-
existing partnership.
3. If two or more persons not partners represent themselves as
partners to strangers, a partnership by estoppel results. Similarly,
when partners in connivance with a non-partner friend, inform a
stranger that the friend is their partner, a partnership by estoppel may
also result to the end that the stranger should not be prejudiced. (Art.
1769 and Art. 1825, New Civil Code)

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Elements before a partner can be held liable on the ground of estoppel:

1. Defendant represented himself as partner or is represented by
others as such, and did not deny/refute such representation.
2. Plaintiff relied on such representation.
3 Statement of defendant is not refuted.

Professional Partnership
It is a partnership formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging
in any trade or business. (Sec. 22(B), RA 8424) In a professional
partnership, it is the individual partners who are deemed engaged in the
practice of profession and not the partnership. Thus, they are responsible for
their own acts.

Management
1. The right of management is primarily governed by agreement of the
partners as provided in the articles of partnership (Art. 1800, Civil Code)
2. The right to manage may either be: exercised by all the partners, or
limited to a certain number of partners called managing partners.
3. As a general rule, a partner appointed as manager has all the powers of a
general agent as well as all the incidental powers necessary to carry out the
object of the partnership in the transaction of its business. The exception
is when the powers of the manager are specifically restricted .
4. If two or more partners have been entrusted with the management of the
partnership without specification of their respective duties,or without a
stipulation that one of them shall not act without the consent of all the others,
each one may separately execute all acts of administration, but if any of
them should oppose the acts of the others, the decision of the majority shall
prevail. In case of a tie, the matter shall be decided by the partners owning
the controlling interest (Art. 1801, Civil Code).

Rights and obligations of partnership and partners

1. As a juridical person, the partnership may: (a) acquire and possess

property of all kinds; (b) incur obligations; and (c) bring civil or criminal
actions.
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2. The personality of the partnership is separate and distinct from that of

each of the partners. The partners cannot be held liable for the obligations
of the partnership unless it is shown that the legal fiction of a different
juridical personality is being used for fraudulent, unfair, or illegal purposes.
(Aguila vs. Court of Appeals, G.R. No. 127347, November 25, 1999)
3. The partnership shall be responsible to every partner for the amounts he
may have disbursed on behalf of the partnership, plus interest, and for the
obligations he may have contracted in good faith in the interest of the
partnership business. (Art. 1796, Civil Code)
4. The amount to be refunded (to the partners) is necessarily limited to the
partnership‘s total resources. In other words, it can only pay out what it has
in its coffers, which consists of all its assets. However, before the partners
can be paid their shares, the creditors of the partnership must first be
compensated. After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners'
shares. (Villareal vs. Ramirez, G.R. No. 144214, July 14, 2003).

Obligations of the partners among themselves

1. To contribute money or property (Art. 1786, 1787, Civil Code; Rojas vs.
Maglana, G.R. No. 30616, December 10, 1990)

• A partner who undertakes to contribute money and fails or delays is

a debtor of the partnership and liable for interest. (Art. 1788, Civil Code)

• The contribution shall be in accordance with the agreement or, in

the absence thereof, in equal shares. (Art. 1790, Civil Code)

• The failure or refusal of a partner to deliver his promised

contribution is not a ground for dissolution of the partnership. The remedy is
to sue the partner for specific performance.

2. Not to engage in business

• An industrial partner cannot engage in any business for himself

without the express consent of the partnership. (Art. 1789, Civil Code)

• A capitalist partner cannot engage in a business of the same kind

as the partnership. (Art. 1808, Civil Code)

3. To answer to the partnership for damages it suffered through his/their

fault (Art. 1794, Civil Code)

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Obligations of partnership /partners to third persons

1. All partners, including industrial ones, shall be liable pro-rata with all their
property (after all the partnership assets are exhausted) for the contracts
entered into in the name and for the account of the partnership. (Art. 1816,
Civil Code)

Any stipulation exempting any partner from this liability shall not bind third
persons, but may be enforced only between the partners. (Art. 1817, Civil
Code). Thus, an agreement giving an industrial partner a right of recourse
against the capitalist partners for whatever said industrial partner paid to
third persons is valid and binding between the parties.

2. The partnership is solidarily liable with the erring partner for the damages
caused to a third person. (Art. 1822, Civil Code)

3. Partners‘ subsidiary liability for Partnership Obligations. This liability,

however, is not automatic. A partner must first be impleaded before he could
be prejudiced by the judgment against the partnership. To say that one‘s
liability is subsidiary means that it merely becomes secondary and only
arises if the one primarily liable fails to sufficiently satisfy the obligation.
Resort to the properties of a partner may be made only after efforts in
exhausting partnership assets have failed or that such partnership assets are
insufficient to cover the entire obligation. The subsidiary nature of the
partners‘ liability with the partnership is one of the valid defenses against a
premature execution of judgment directed to a partner. (Guy vs. Gacott,
G.R. No. 206147, Jan. 13, 2016)

Dissolution and winding up

Dissolution is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on of the business. (Art.
1828, Civil Code) It is that point of time the partners cease to carry on the
business together.

Winding up is the process of settling business affairs after dissolution. (Ex:

paying previous obligations, collecting assets previously demandable, even
new business if needed to wind up)
Termination is the point in time after all the partnership affairs have been
wound up.
Causes of Dissolution (Art. 1830, Civil Code)
1. Those without violating the agreement between the partners;

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(a) In contravention of the agreement between the partners, by the

express will of any partner at any time;

(b) By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership; (Ex: Prohibition against a partnership to operate a
fishpond (Deluao vs. Casteel, L-21906, August 29, 1961)

(c) When a specific thing, which a partner had promised to contribute to

the partnership, perishes before the delivery, or when the thing, the
enjoyment or use of which was transferred to the partnership, is lost.

2. By the death of any partner;

3. By the insolvency of any partner or of the partnership;
4. By the civil interdiction of the partner;
5. By the decree of court in the situations provided under Art. 1831, New
Civil Code.

Effects of Dissolution
1. It terminates all authority of any partner to act for the partnership. (Art.
1832, Civil Code)
2. Each partner is liable to his co-partners for his share of any liability
created by any partner not knowing of the cause of the dissolution. (Art.
1833, Civil Code)
3. A partner, however, can bind the partnership by:
(i) Any act appropriate for winding up partnership affairs or completing
transactions unfinished at dissolution;
(ii) Any transaction which would bind the partnership if a third person had
extended credit to the partnership prior to the dissolution and had no
knowledge of said dissolution, or had extended credit to the partnership
after the dissolution but he had no knowledge of said dissolution and the
fact of said dissolution was not advertised in a newspaper of general
circulation.

BUT, the partnership is not bound by any act of the partner where:
(1) the partnership is dissolved because it is unlawful to carry on the
business,
(2) the partner has become insolvent,
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(3) the partner has no authority to wind up partnership affairs, unless,

(a) the third person had extended credit prior to the dissolution
and he had no knowledge of said dissolution, or
(b) the third person had extended credit to the partnership
after the dissolution but he had no knowledge of said
dissolution and the fact of said dissolution was not advertised
in a newspaper of general circulation. (Art. 1834, New Civil
Code)
The dissolution of the partnership does not of itself discharge the existing
liability of any partner. He can only be discharged by an agreement to that
effect between himself, the partnership creditor and the person or
partnership continuing the business. (Art. 1835, Civil Code)

Limited partnership
One formed by two or more persons, having as members one or more
general partners and one or more limited partners. (Art. 1843, Civil Code)
a. It is limited as to liability because:
(i) The limited partner is liable only up to his contribution; he
is not liable with his own property to answer for the
obligations of the partnership. (Art. 1843, second par.,
Civil Code)

(ii) He is not a proper party to proceedings by or against a

partnership, except where the action is to enforce his right
against or liability to the partnership. (Art. 1866, Civil
Code)

b. It is limited in the management. Only general partners can participate in

the management of the partnership. If a limited partner takes part in the
control of the business, he becomes liable as a general partner. (Art. 1848,
Civil Code)
c. It is limited as to the choice of contribution. A limited partner may
contribute cash or property, but not services. (Art. 1845, Civil Code)
d. It is limited in the matter of firm name. The surname of a limited partner
shall not appear in the partnership name, unless: (1) it is also the surname
of a general partner, or (2) prior to the time when the limited partner
became such, the business has been carried on under the name in which his
surname appeared. A limited partner whose surname appears in a

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partnership name contrary to this provision shall be liable as a general

partner. (Art. 1846, Civil Code)

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CORPORATIONS
(Revised Corporation Code – RA 11232)

Corporation, Defined. – A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incidental to its existence.,

Classes of corporations

As to existence of stocks

Corporations formed or organized under this Code may be (a) stock or (b)
non-stock corporations.
Stock corporations are those which have capital stock divided into shares
and are authorized to distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares held. All other
corporations are non-stock corporations.(Sec. 3)
Non-stock corporations may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of
this Title governing particular classes of non-stock corporations. (Sec. 87),

As to the number of persons

i. Corporation Aggregate - a corporation that is formed by and is composed
of two or more stockholders or members.
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ii. One Person Corporation. – A One Person Corporation is a corporation

with a single stockholder: Provided, That only a natural person, trust, or an
estate may form a One Person Corporation. Banks and quasi-banks, pre-
need, trust, insurance, public and publicly-listed companies, and non-
chartered government-owned and -controlled corporations may not
incorporate as One Person Corporations: Provided, further, That a natural
person who is licensed to exercise a profession may not organize as a One
Person Corporation for the purpose of exercising such profession except as
otherwise provided under special laws. (Sec. 116)
iii. Corporation sole. – For the purpose of administering and managing, as
trustee, the affairs, property and temporalities of any religious denomination,
sect or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder of such religious
denomination, sect, or church. (Sec. 108)

As to laws of incorporation
i. Domestic Corporation - formed , organized or existing under Philippine
laws
ii. Foreign Corporation - formed, organized or existing under any laws other
than those of the Philippines, and whose laws allow Filipino citizens and
corporations to do business in its own country or state. It shall have the right
to transact business in the Philippines after obtaining a license for that
purpose in accordance with this Code and a certificate of authority from the
appropriate government agency. (Sec. 140)

As to their legal right to corporate existence

i. De jure‐ one existing both in fact and in law

ii. De facto‐ one existing in fact but not in law

Close ‐ one whose articles of incorporation provides that: (a) all the
corporation‘s issued stock of all classes, exclusive of treasury shares, shall
be held of record by not more than a specified number of persons, not
exceeding twenty (20); (b) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by this
Title; and (c) the corporation shall not list in any stock exchange or make
any public offering of its stocks of any class. Notwithstanding the foregoing,
a corporation shall not be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation within the meaning of

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this Code. Any corporation may be incorporated as a close corporation,

except mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations declared
to be vested with public interest in accordance with the provisions of this
Code. (Sec. 95)

Corporation by Estoppel – All persons who assume to act as a corporation

knowing it to be without authority to do so shall be liable as general partners
for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the ground that there was in fact
no corporation.(Sec. 20)

Nationality of corporations

Generally, the corporation is considered a national of the country where it

was incorporated.

a. Control test

The Foreign Investment Act of 1991 (RA 7042) gives the definition
of a ―Philippine National‖;

i. A corporation organized under Philippine laws of which 60% of

the capital stock outstanding and entitled to vote is owned and held by
Filipino citizens;
ii. A corporation organized abroad and registered as doing
business in the Philippines under the general law n corporations of
which 100% of the capital stocks entitled to vote belong to Filipinos.
b. Grandfather rule

It is the method of attributing the shareholdings of a given corporate

shareholder to the second or even the subsequent tier of ownership in a
corporation. This is consistent with the rule that the ―beneficial ownership‖ of
corporations engaged in nationalized activities must reside in the hands of
Filipino citizens. In the case of multi-tiered corporation, the stock attribution
rule must be allowed to run continuously along the chain of ownership until it
finally reaches the individual stockholders.

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The Grandfather Rule is a method of determining the nationality of a

corporation that owns shares in another corporation by breaking down the
equity structure of the shareholders of the corporation.
The percentage of shares held by the second corporation in the first is
multiplied by the latter‘s own Filipino equity, and the product of these
percentages is determined to be the ultimate Filipino ownership of the
subsidiary corporation. The Grandfather Rule applies if:
1. the Filipino equity is less than 60% of the outstanding capital of a
corporation that owns shares in a partly nationalized enterprise- at
least 60% must be owned by Philippine nationals;
2. there is an attempt to circumvent the nationalization requirement or
when there is doubt as to the real owners, as in the case where there
is layering.

Corporate juridical personality

Doctrine of separate juridical personality

A corporation is a juridical entity with legal personality separate and distinct

from those acting for and in its behalf and, in general, from the people
comprising it, and those obligations incurred by the corporation, acting
through its directors, officers, and employees are its sole liabilities
(Pamplona Plantation Co. v. Acosta G.R. No. 153193, Dec. 6, 2006).

Liability for tort and crimes

Q. When is a corporation liable for torts committed by its officers or agents?

ANS: A corporation is liable, whenever a tortuous act is committed by an

officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing
body (Philippine National Bank v. Court of Appeals, G.R. No. L-27155,
May 18,1978).

The corporate officer or officers who caused the tortuous act to be committed
in the name of the corporation is also personally liable to the victims as joint-
tortfeasors

Q: Can a corporation be held criminally liable?

ANS: No. Since a corporation is a mere legal fiction, it cannot be held liable
for a crime committed by its officers since it does not have the essential
element of malice, except if by express provision of law (e.g. Anti-Dummy
Law and Anti-Money Laundering Act), then corporation is held criminally
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liable. Moreover, the difficulty, if not the possibility, of imposing the penal
sanction of imprisonment and although there are instances that the law
imposed fine as a penalty, which can be imposed on a corporation, would
undermine the criminal law system of the country.

Q: Who shall be held liable for the criminal acts done on behalf of
corporation?

ANS: The officers of the corporation may be held liable. It is settled that an
officer of a corporation can be held criminally liable for acts or omissions
done in behalf of the corporation only where the law directly requires the
corporation to do an act in a given manner and the same law makes the
person who fails performance of an act is an obligation directly imposed on a
corporation, the responsible officer who performed the act must be the one
to assume criminal liability; otherwise this liability as created by the law
would be illusory and the deter the effect of the law (Sia v. People of the
Philippines, G.R. No. L-30896, April 28, 1983).

Recovery of damages

Q: Can a corporation recover moral damages in a suit?

ANS: As a general rule, a corporation is not entitled to recover moral

damages since it is an artificial person and cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral
shock or social humiliation, there would be no basis to grant its recovery
(ABS-CBN v. Court of Appeals, G.R. No. 128690, Jan.21, 1999)

Q: Is there an instance when a corporation recovers moral damages?

ANS: A juridical person may claim for moral damages arising from libel
under Article 2219 (7) of the Civil Code, which expressly authorizes the
recovery of moral damages in case of libel, slander, or any other form of
defamation, and does not qualify whether the plaintiff is a natural or juridical
person.

Q: Can a corporation file a criminal complaint of libel and claim for moral
damages even though it is a juridical person?

ANS: Yes. A juridical person such as a corporation can validly complain for
libel or any other form of defamation and claim for moral damages. The
Supreme Court had ratiocinated that Article 2219 (7) does not qualify
whether the plaintiff is a natural or a juridical person (Filipinas
Broadcasting v. Ago Medical Center-Bicol, et. al., G.R. No. 141994,
January 17, 2005).

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Doctrine of Piercing the Corporate Veil

The main doctrine of separate juridical personality is to be tempered by the

doctrine of piercing the veil of corporate fiction. Under this doctrine, a
corporation is looked upon as a legal entity as a general rule, but when
notion of legal entity is used to defeat public convenience, justify wrong or
defend crime, the law will regard the corporation as a mere association of
persons and will be held liable (Uy v. Villanueva, G.R. No. 157851, June
29, 2007).

Grounds for application of doctrine

When the veil of corporate fiction is used as a shield to:

1. Defeat public convenience;

2. Justify wrong;
3. Protect fraud; or
4. Defend a crime (Francisco Motors v. Court of Appeals, G.R. No.
100812, June 25, 1999).

Tests in determining applicability

The three tests are:

1. Control, not merely majority or complete stock control, but

complete dominion, not only of finances but of policy and business in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time in separate mind, will, or existence of
its own;

2. Such control must have been used by the defendant to commit

fraud or wrong in contravention of plaintiff‘s legal rights; and

3. The aforesaid control and breach of duty must proximately cause

the injury or unjust loss complained of (Concept Builders Inc. v.
NLRC, G.R. No. 108734, May 29, 1996).

Number and qualifications of incorporators

Any person, partnership, association or corporation, singly or jointly with

others but not more than fifteen (15) in number, may organize a corporation
for any lawful purpose or purposes: Provided, That natural persons who are
licensed to practice a profession, and partnerships or associations organized

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for the purpose of practicing a profession, shall not be allowed to organize as

a corporation unless otherwise provided under special laws. Incorporators
who are natural persons must be of legal age.

Each incorporator of a stock corporation must own or be a subscriber to at

least one (1) share of the capital stock.

A corporation with a single stockholder is considered a One Person

Corporation as described in Title XIII, Chapter III of this Code. (Sec. 10)

Subscription requirements

Stock corporations shall not be required to have a minimum capital stock,

except as otherwise specifically provided by special law. (Sec. 12)

Corporate term

A corporation shall have perpetual existence unless its articles of

incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of

this Code, and which continue to exist, shall have perpetual existence,
unless the corporation, upon a vote of its stockholders representing a
majority of its outstanding capital stock, notifies the Commission that it elects
to retain its specific corporate term pursuant to its articles of incorporation:
Provided, That any change in the corporate term under this section is without
prejudice to the appraisal right of dissenting stockholders in accordance with
the provisions of this Code.

A corporate term for a specific period may be extended or shortened by

amending the articles of incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may
be determined by the Commission: Provided, further, That such extension of
the corporate term shall take effect only on the day following the original or
subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its corporate
existence, together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior
to its revival. Upon approval by the Commission, the corporation shall be
deemed revived and a certificate of revival of corporate existence shall be
issued, giving it perpetual existence, unless its application for revival
provides otherwise.

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No application for revival of certificate of incorporation of banks, banking and

quasi- banking institutions, preneed, insurance and trust companies, non-
stock savings and loan associations (NSSLAs), pawnshops, corporations
engaged in money service business, and other financial intermediaries shall
be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency. (Sec. 11)

Classification of shares

The classification of shares, their corresponding rights, privileges, or

restrictions, and their stated par value, if any, must be indicated in the
articles of incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of incorporation and
in the certificate of stock.

The shares in stock corporations may be divided into classes or series of

shares, or both. No share may be deprived of voting rights except those
classified and issued as ―preferred‖ or ―redeemable‖ shares, unless
otherwise provided in this Code: Provided, That there shall always be a class
or series of shares with complete voting rights.

Holders of non-voting shares shall nevertheless be entitled to vote on the

following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of
all or substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation
or other corporations;
(g) Investment of corporate funds in another corporation or business
in accordance with this Code; and
(h) Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote

required under this Code to approve a particular corporate act shall be
deemed to refer only to stocks with voting rights.

The shares or series of shares may or may not have a par value: Provided,
That banks, trust, insurance, and preneed companies, public utilities,
building and loan associations, and other corporations authorized to obtain
or access funds from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.

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Preferred shares of stock issued by a corporation may be given preference

in the distribution of dividends and in the distribution of corporate assets in
case of liquidation, or such other preferences: Provided, That preferred
shares of stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation, may fix the terms
and conditions of preferred shares of stock or any series thereof: Provided,
further, That such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange Commission, hereinafter
referred to as the ―Commission‖.

Shares of capital stock issued without par value shall be deemed fully paid
and non assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That no-par value
shares must be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.

A corporation may further classify its shares for the purpose of ensuring
compliance with constitutional or legal requirements. (Sec. 6)

Preferred shares versus common shares

Preferred shares- may enjoy a right of preference in dividends, voting,

corporate property upon dissolution, or such as may be stated in the Articles
of Incorporation or as determined by the Board. Preferred shares can only
be issued with par value.

Kinds of Preferred shares:

Cumulative- shares with entities the shareholder to recover dividends

in arrears. While dividend declaration may not be compelled, once it is
declared, the shareholder is entitled to the arrears.

Non-cumulative- share which entitles the share-holder to receive the

present dividends, not the arrears.

Participating - share which entitles the share-holder to participate with

common shares after receiving its dividends at a preferred rate.

Non-participating - no such participation is granted.

Cumulative, Participating - a combination of cumulative and

participating.

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Redeemable shares

Redeemable shares may be issued by the corporation when expressly

provided in the articles of incorporation. They are shares which may be
purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of incorporation and the certificate of
stock representing the shares, subject to rules and regulations issued by the
Commission. (Sec. 8)

Common shares - represent the residual ownership interest in the

corporation. It is a basic class of stock ordinarily and usually issued without
extraordinary rights and privileges, and the owners thereof are entitled to a
pro-rata share in the profits. (Commissioner of Internal Revenue v. Court
of Appeals, 301 SCRA 152, 20 January 1999). These shares have the
right to vote, right to dividends and right to examine corporate books.

Founder’s shares

Founders‘ shares may be given certain rights and privileges not enjoyed by
the owners of other stocks. Where the exclusive right to vote and be voted
for in the election of directors is granted, it must be for a limited period not to
exceed five (5) years from the date of incorporation: Provided, That such
exclusive right shall not be allowed if its exercise will violate Commonwealth
Act No. 108, otherwise known as the ―Anti-Dummy Law‖; Republic Act No.
7042, otherwise known as the ―Foreign Investments Act of 1991‖; and other
pertinent laws. (Sec. 7)

Treasury shares

Treasury shares are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation through
purchase, redemption, donation, or some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of
directors. (Sec. 9)

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Incorporation and organization

1. Promoter

A promoter is a person who acting alone or with others, takes initiative in

founding and organizing the business or enterprise of the issuer and
receives consideration therefor. (Sec.3.10, SRC).

Liability of a Promoter

He is personally liable for contracts with third persons contracted in behalf of

the future corporation, if the corporation does not ratify the same or unless
the agreement was expressly made subject to such approval or ratification.
The rationale behind this is that a corporation should have full and complete
organization and existence as an entity before it can enter into any kind of a
contract or transact any business.

Liability of corporation for promoter’s contracts

The corporation is not bound by the contract entered into by the promoter
before incorporation unless the contract is later ratified. (Cagayan Fishing
Development Company v. Sandiko, 65 Phil. 223, 23 December 1977)

2. Subscription contract

Any contract for the acquisition of unissued stock in an existing corporation

or a corporation still to be formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (Sec. 59)

Pre-incorporation subscription agreements

Pre-incorporation Subscription – A subscription of shares in a corporation

still to be formed shall be irrevocable for a period of at least six (6) months
from the date of subscription, unless all of the other subscribers consent to
the revocation, or the corporation fails to incorporate within the same period
or within a longer period stipulated in the contract of subscription. No pre-
incorporation subscription may be revoked after the articles of incorporation
is submitted to the Commission. (Sec. 60)

Consideration for stocks

Stocks shall not be issued for a consideration less than the par or issued
price thereof.

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Consideration for the issuance of stock may be:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the

corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;

(c) Labor performed for or services actually rendered to the

corporation;

(d) Previously incurred indebtedness of the corporation;

(e) Amounts transferred from unrestricted retained earnings to stated

capital;

(f) Outstanding shares exchanged for stocks in the event of

reclassification or conversion;

(g) Shares of stock in another corporation; and/or

(h) Other generally accepted form of consideration.

Where the consideration is other than actual cash, or consists of intangible

property such as patents or copyrights, the valuation thereof shall initially be
determined by the stockholders or the board of directors, subject to the
approval of the Commission.

Shares of stock shall not be issued in exchange for promissory notes

or future service.

The same considerations provided in this section, insofar as applicable, may

be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred by
the articles of incorporation or the bylaws, or if not so fixed, by the
stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose. (Sec. 61)

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Articles of Incorporation

Articles of Incorporation is the basic contract document in corporate law,

defining the character of the corporation. It constitutes the Constitution of
the corporation.

Contents

All corporations shall file with the Commission articles of incorporation in any
of the official languages, duly signed and acknowledged or authenticated, in
such form and manner as may be allowed by the Commission, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law:

(a) The name of the corporation;

(b) The specific purpose or purposes for which the corporation is

being formed. Where a corporation has more than one stated
purpose, the articles of incorporation shall indicate the primary
purpose and the secondary purpose or purposes: Provided, That a
non stock corporation may not include a purpose which would change
or contradict its nature as such;

(c) The place where the principal office of the corporation is to be

located, which must be within the Philippines;

(d) The term for which the corporation is to exist, if the corporation
has not elected perpetual existence;

(e) The names, nationalities, and residence addresses of the

incorporators;

(f) The number of directors, which shall not be more than fifteen (15)
or the number of trustees which may be more than fifteen (15);

(g) The names, nationalities, and residence addresses of persons

who shall act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this Code;

(h) If it be a stock corporation, the amount of its authorized capital

stock, number of shares into which it is divided, the par value of each,
names, nationalities, and residence addresses of the original
subscribers, amount subscribed and paid by each on the subscription,
and a statement that some or all of the shares are without par value, if
applicable;

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(i) If it be a non-stock corporation, the amount of its capital, the

names, nationalities, and residence addresses of the contributors, and
amount contributed by each; and

(j) Such other matters consistent with law and which the incorporators
may deem necessary and convenient.

An arbitration agreement may be provided in the articles of

incorporation pursuant to Sec. 181 of this Code.

The articles of incorporation and applications for amendments thereto

may be filed with the Commission in the form of an electronic
document, in accordance with the Commission‘s rules and regulations
on electronic filing. (Sec. 13)

Non-amendable items

The following are the non-amendable items in the Articles of

Incorporation:

a. names of incorporators;

b. names of incorporating directors/trustees;

c. for stock corporations, names of original subscribers to the capital

stock and their subscribed and paid-up capital; or the names of
members who contributed to the initial capital stock of a non-stock
corporation;

d. treasurer elected by original subscribers;

e. witnesses and the acknowledgment therof. (SEC Opinion, July 1,

1990).

Corporate name; limitations on use of corporate name

No corporate name shall be allowed by the Commission if it is not

distinguishable from that already reserved or registered for the use of
another corporation, or if such name is already protected by law, or when its
use is contrary to existing law, rules and regulations.

A name is not distinguishable even if it contains one or more of the following:

(a) The word ―corporation‖, ―company‖, ―incorporated‖, ―limited‖,

―limited liability‖, or an abbreviation of one of such words; and

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(2) Punctuations, articles, conjunctions, contractions, prepositions,

abbreviations, different tenses, spacing, or number of the same word
or phrase.

The Commission, upon determination that the corporate name is: (1) not
distinguishable from a name already reserved or registered for the use of
another corporation; (2) already protected by law; or (3) contrary to law, rules
and regulations, may summarily order the corporation to immediately cease
and desist from using such name and require the corporation to register a
new one. The Commission shall also cause the removal of all visible
signages, marks, advertisements, labels, prints and other effects bearing
such corporate name. Upon the approval of the new corporate name, the
Commission shall issue a certificate of incorporation under the amended
name. (Sec. 17)

Pertinent portions of SEC Circular 14-2000, series of 2000, provide: *The

corporation name shall contain the word ―Corporation‖ or its abbreviation
―Corp.‖ or ―Incorporated‖, or ―Inc.‖

*If the proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different from the
name of the company already registered.

*If the name or surname of a person is used as part of a corporate name, the
consent of said person or his heirs must be submitted. If such person
cannot be identified or is non-existent, an explanation for the use of such
name shall be required.

The following words shall not be used as part of corporate or partnership

names:

.1. ―Finance‖, ―Financing‖, or ―Finance and Investment‖ by

corporations or partnerships not engaged in the financing business;

2. ―Engineer‖, ―Engineering‖ or ―Architects‖ as part of the corporate

name;

3. ―Bank‖, ―Banking‖, ―Banker‖, Building and Loan Association‖, Trust

Corporation‖, ―Trust Company‖ or words of similar import by
corporations or associations not engaged in banking business;

4. ―United Nations‖ in full or abbreviated form;

5. ―Bonded‖ for corporations or partnerships with unlicensed

warehouse;

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6. ―Investment(s) by corporations or partnership not organized as

investment house company or holding company;

7. ―National‖ by all stock corporations and partnership;

8. ―Asean‖, ―Calabarzon‖ and ―Philippines 2000‖

Registration, incorporation and commencement of corporate existence

A person or group of persons desiring to incorporate shall submit the

intended corporate name to the Commission for verification. If the
Commission finds that the name is distinguishable from a name already
reserved or registered for the use of another corporation, not protected by
law and is not contrary to law, rules and regulations, the name shall be
reserved in favor of the incorporators. The incorporators shall then submit
their articles of incorporation and by-laws to the Commission.

If the Commission finds that the submitted documents and information are
fully compliant with the requirements of this Code, other relevant laws, rules
and regulations, the Commission shall issue the certificate of incorporation.

A private corporation organized under this Code commences its corporate

existence and juridical personality from the date the Commission issues the
certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute a
body corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (Sec. 18)

Election of directors or trustees

Except when the exclusive right is reserved for holders of founders‘ shares
under Sec. 7 of this Code, each stockholder or member shall have the right
to nominate any director or trustee who possesses all of the qualifications
and none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be present, either in

person or through a representative authorized to act by written proxy, the
owners of majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. When so authorized in the
bylaws or by a majority of the board of directors, the stockholders or
members may also vote through remote communication or in absentia:
Provided, That the right to vote through such modes may be exercised in

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corporations vested with public interest, notwithstanding the absence of a

provision in the by-laws of such corporations.

A stockholder or member who participates through remote communication or

in absentia, shall be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or

member.

In stock corporations, stockholders entitled to vote shall have the right to

vote the number of shares of stock standing in their own names in the stock
books of the corporation at the time fixed in the bylaws or where the bylaws
are silent, at the time of the election. The said stockholder may: (a) vote
such number of shares for as many persons as there are directors to be
elected; (b) cumulate said shares and give one (1) candidate as many votes
as the number of directors to be elected multiplied by the number of the
shares owned; or (c) distribute them on the same principle among as many
candidates as may be seen fit: Provided, That the total number of votes cast
shall not exceed the number of shares owned by the stockholders as shown
in the books of the corporation multiplied by the whole number of directors to
be elected: Provided, however, That no delinquent stock shall be voted.
Unless otherwise provided in the articles of incorporation or in the by-laws,
members of non stock corporations may cast as many votes as there are
trustees to be elected but may not cast more than one (1) vote for one (1)
candidate. Nominees for directors or trustees receiving the highest number
of votes shall be declared elected.

If no election is held, or the owners of majority of the outstanding capital

stock or majority of the members entitled to vote are not present in person,
by proxy, or through remote communication or not voting in absentia at the
meeting, such meeting may be adjourned and the corporation shall proceed
in accordance with Section 25 of this Code.

The directors or trustees elected shall perform their duties as prescribed by

law, rules of good corporate governance, and by-laws of the corporation.
(Sec. 23)

Adoption of by-laws

For the adoption of by-laws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock,
or of at least a majority of the members in case of non-stock corporations,
shall be necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members during

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office hours. A copy thereof, duly certified by a majority of the directors or

trustees and countersigned by the secretary of the corporation, shall be filed
with the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be

adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the
Commission of a certification that the by-laws are in accordance with this
Code.

The Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution, or other
special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-
laws or amendments are in accordance with law. (Sec. 45)

Nature and Function

Q. What are By-laws?

ANS: By-laws are permanent and continuing rules and regulations or private
laws enacted by the corporation to regulate, govern, and control its actions,
affairs, and concerns and of its stockholders or members and directors and
officers in relation to the corporation. (Loyola Grand Villas Homeowners
(South) Association, Inc. v. Court of Appeals, G.R. No. 117188, August
7, 1997).

Q: What is the contractual significance of By-Laws?

ANS: Since by-laws operate merely as internal rules, they cannot prejudice
third persons who deal in good faith with the corporation, unless they have
knowledge of the same and that strangers are not bound to know the by-
laws. .

Contents of by-laws

A private corporation may provide the following in its by-laws:

(a) The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;

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(b) The time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members thereof;

(c) The required quorum in meetings of stockholders or members and

the manner of voting therein;

(d) The modes by which a stockholder, member, director, or trustee

may attend meetings and cast their votes;

(e) The form for proxies of stockholders and members and the
manner of voting them;

(f) The directors or trustees‘ qualifications, duties and responsibilities,

the guidelines for setting the compensation of directors or trustees
and officers, and the maximum number of other board representations
that an independent director or trustee may have which shall, in no
case, be more than the number prescribed by the Commission;

(g) The time for holding the annual election of directors or trustees
and the mode or manner of giving notice thereof;

(h) The manner of election or appointment and the term of office of all
officers other than directors or trustees;

(i) The penalties for violation of the by-laws;

(j) In the case of stock corporations, the manner of issuing stock

certificates; and

(k) Such other matters as may be necessary for the proper or

convenient transaction of its corporate affairs for the promotion of
good governance and anti-graft and corruption measures.

An arbitration agreement may be provided in the bylaws pursuant to

Section 181 of this Code. (Sec. 46)

Binding effects

Q: What are the binding effects of the corporation‘s by-laws?

1. As to members and shareholders:

a. The by-laws have the force of a contract between the members

themselves.

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b. There is a conclusive presumption that the members and

shareholders know the provisions of the corporate by-laws by the fact
of their being such is charged with notice of by-laws. If he remains
actually ignorant of the provision, he does so at his peril.

2. As to corporate directors and its officers:

a. They are bound by it and must comply with it unless and until they
are changed.

b. Subordinate employees without actual knowledge of the by-laws

are not bound.

3. As to third-persons:

They are not bound to know the by-laws unless they have notice,
actual or constructive. (China Banking Corporation v. CA, G.R.
No. 117604, March 26, 1997).

Amendments

A majority of the board of directors or trustees, and the owners of at least a

majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal the by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal the by-laws or
adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal the by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or majority of the
members shall so vote at a regular or special meeting.

Whenever the by-laws are amended or new by-laws are adopted, the
corporation shall file with the Commission such amended or new by-laws
and, if applicable, the stockholders‘ or members‘ resolution authorizing the
delegation of the power to amend and/or adopt new by-laws, duly certified
under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new by-laws shall only be effective upon the issuance by
the Commission of a certification that the same is in accordance with this
Code and other relevant laws. (Sec. 47)

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Effects of non-use of corporate charter

If a corporation does not formally organize and commence its business

within five (5) years from the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day following the end of the
five (5)-year period.

However, if a corporation has commenced its business but subsequently

becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under
delinquent status.

A delinquent corporation shall have a period of two (2) years to resume

operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall issue
an order lifting the delinquent status. Failure to comply with the requirements
and resume operations within the period given by the Commission shall
cause the revocation of the corporation‘s certificate of incorporation.

The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction. (Sec. 21)

Corporate Powers

Q: What are the kinds of corporate powers?

ANS: They are the following:

1. Express - those expressly authorized by the Corporation Code,

applicable special laws, administrative regulations, and the articles of
incorporation;

2. Implied- those essential and necessary to carry out its purpose/s as

stated in the articles of incorporation; and
3. Incidental- those that are deemed conferred on the corporation because
they are incidental to the existence of the corporation

General powers; theory of general capacity

A corporation has no power, except those expressly conferred upon it by the

Corporation Code and those that are implied to its existence.

Every corporation incorporated under this Code has the power and capacity:

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(a) To sue and be sued in its corporate name;

(b) To have perpetual existence unless the certificate of incorporation

provides otherwise;

(c) To adopt and use a corporate seal;

(d) To amend its articles of incorporation in accordance with the provisions

of this Code;

(e) To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same in accordance with this Code;

(f) In case of stock corporations, to issue or sell stocks to subscribers and to

sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;

(h) To enter into a partnership, joint venture, merger, consolidation, or any

other commercial agreement with natural and juridical persons;

(i) To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;

(j) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees; and

(k) To exercise such other powers as may be essential or necessary to carry

out its purpose or purposes as stated in the articles of incorporation. (Sec.
35)

Specific powers; theory of specific capacity

The specific powers of a corporation are:

a. extend or shorten corporate term;

b. Increase or decrease capital stock;

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c. incur, create or increase bonded indebtedness;

d. deny pre-emptive right;

e. sell, lease, exchange, mortgage, pledge or otherwise dispose of all

or substantially all of
its property, assets, and goodwill;

f. purchase or acquire own shares;

g. invest in another corporation or business or for any purpose other

than the primary purpose;

h. declare dividends;

i. enter into management contract;

j. amend the Articles of Incorporation

Power to extend or shorten corporate term

A private corporation may extend or shorten its term as stated in the articles
of incorporation when approved by a majority vote of the board of directors
or trustees, and ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital stock or of its
members. Written notice of the proposed action and the time and place of
the meeting shall be sent to stockholders or members at their respective
place of residence as shown in the books of the corporation, and must either
be deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent of the
stockholder, sent electronically in accordance with the rules and regulations
of the Commission on the use of electronic data messages. In case of
extension of corporate term, a dissenting stockholder may exercise the right
of appraisal under the conditions provided in this Code. (Sec. 36)

Power to increase or decrease capital stock or incur, create, increase

bonded indebtedness

No corporation shall increase or decrease its capital stock or incur, create or

increase any bonded indebtedness unless approved by a majority vote of the
board of directors and by two-thirds (2/3) of the outstanding capital stock at a
stockholders‘ meeting duly called for the purpose.

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Written notice of the time and place of the stockholders‘ meeting and the
purpose for said meeting must be sent to the stockholders at their places of
residence as shown in the books of the corporation and served on the
stockholders personally, or through electronic means recognized in the
corporation‘s bylaws and/or the Commission‘s rules as a valid mode for
service of notices.

A certificate must be signed by a majority of the directors of the corporation

and countersigned by the chairperson and secretary of the stockholders‘
meeting, setting forth:

(a) That the requirements of this section have been complied with;

(b) The amount of the increase or decrease of the capital stock;

(c) In case of an increase of the capital stock, the amount of capital

stock or number of shares of no-par stock thereof actually subscribed,
the names, nationalities and addresses of the persons subscribing,
the amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on the subscription in cash or
property, or the amount of capital stock or number of shares of no-par
stock allotted to each stockholder if such increase is for the purpose
of making effective stock dividend therefor authorized;

(d) Any bonded indebtedness to be incurred, created or increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of the capital stock,
or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or

increasing of any bonded indebtedness shall require prior approval of the
Commission, and where appropriate, of the Philippine Competition
Commission. The application with the Commission shall be made within six
(6) months from the date of approval of the board of directors and
stockholders, which period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation
and filed with the Commission and attached to the original articles of
incorporation. After approval by the Commission and the issuance by the
Commission of its certificate of filing, the capital stock shall be deemed
increased or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may declare:
Provided, That the Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by a sworn statement of the

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treasurer of the corporation lawfully holding office at the time of the filing of
the certificate, showing that at least twenty-five percent (25%) of the increase
in capital stock has been subscribed and that at least twenty-five percent
(25%) of the amount subscribed has been paid in actual cash to the
corporation or that property, the valuation of which is equal to twenty-five
percent (25%) of the subscription, has been transferred to the corporation:
Provided, further, That no decrease in capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur, create or increase bonded indebtedness

when approved by a majority of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Commission,

which shall have the authority to determine the sufficiency of the terms
thereof. (Sec. 37)

Power to deny pre-emptive right

All stockholders of a stock corporation shall enjoy pre-emptive right to

subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-emptive
right shall not extend to shares issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or to shares
issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed
for corporate purposes or in payment of a previously contracted debt. (Sec.
38)

Power to sell or dispose corporate assets

Subject to the provisions of RA No. 10667, otherwise known as ―Philippine

Competition Act‖, and other related laws, a corporation may, by a majority
vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and assets, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds,
or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation‘s properties and assets,

including its goodwill, must be authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or at
least two-thirds (2/3) of the members, in a stockholders‘ or members‘
meeting duly called for the purpose.

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In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
this section.

The determination of whether or not the sale involves all or substantially all
of the corporation‘s properties and assets must be computed based on its
net asset value, as shown in its latest financial statements. A sale or other
disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was
incorporated.

Written notice of the proposed action and of the time and place for the
meeting shall be addressed to stockholders or members at their places of
residence as shown in the books of the corporation and deposited to the
addressee in the post office with postage prepaid, served personally, or
when allowed by the by-laws or done with the consent of the stockholder,
sent electronically: Provided, That any dissenting stockholder may exercise
the right of appraisal under the conditions provided in this Code.

After such authorization or approval by the stockholders or members, the

board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or
members.

Nothing in this section is intended to restrict the power of any corporation,

without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge, or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business
of the corporation or if the proceeds of the sale or other disposition of such
property and assets shall be appropriated for the conduct of its remaining
business. (Sec. 39)

Power to acquire own shares

Provided that the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired, a stock corporation shall
have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including the following cases:

(a) To eliminate fractional shares arising out of stock dividends;

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(b) To collect or compromise an indebtedness to the corporation, arising out

of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code. (Sec. 40)

Power to invest corporate funds in another corporation or business

Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation, business, or for any purpose other than the
primary purpose for which it was organized, when approved by a majority of
the board of directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or by at
least two thirds (2/3) of the members in the case of non-stock corporations,
at a meeting duly called for the purpose. Notice of the proposed investment
and the time and place of the meeting shall be addressed to each
stockholder or member at the place of residence as shown in the books of
the corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or sent electronically in accordance with
the rules and regulations of the Commission on the use of electronic data
message, when allowed by the bylaws or done with the consent of the
stockholders: Provided, That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (Sec. 41)

Power to declare dividends

The board of directors of a stock corporation may declare dividends out of

the unrestricted retained earnings which shall be payable in cash, property,
or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholders until
their unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of

one hundred percent (100%) of their paid-in capital stock, except: (a) when
justified by definite corporate expansion projects or programs approved by
the board of directors; or (b) when the corporation is prohibited under any
loan agreement with financial institutions or creditors, whether local or

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foreign, from declaring dividends without their consent, and such consent
has not yet been secured; or (c) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable
contingencies. (Sec. 42)

Power to enter into management contract

No corporation shall conclude a management contract with another

corporation unless such contract is approved by the board of directors and
by stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (a) where a stockholder
or stockholders representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock corporation.

These shall apply to any contract whereby a corporation undertakes to

manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for such
periods as may be provided by the pertinent laws or regulations.

No management contract shall be entered into for a period longer than five
(5) years for any one (1) term. (Sec. 43)

Limitations

i. Ultra vires acts

No corporation shall possess or exercise corporate powers

other than those conferred by this Code or by its articles of
incorporation and except as necessary or incidental to the
exercise of the powers conferred.

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An ultra vires act is an act committed outside the purpose for

which a corporation is created as defined by the law and its
organization, and therefore beyond the powers conferred upon
it. (Sec. 44)

Acts which are clearly beyond the scope of the corporation‘s

authority are null and void and cannot be given any effect.
(Gancayco v. City Government of Quezon City, 658 SCRA
853, 11 Oct. 2011).

2. Applicability of ultra vires doctrine

Q: What are the types of ultra vires acts?

ANS: They are as follows:

1. Acts done beyond the powers of the corporation as provided
in the law or its articles of incorporation;

2. Acts or contracts entered into in behalf of a corporation by

persons who have no corporate authority. (However, this is
technically ultra vires acts of officers and not of the
corporation); and

3. Acts or contracts, which are per se illegal as being contrary

to law.

Q: Who may commit ultra vires acts?

ANS: It may be committed by:

1. The corporation;
2. The Board of Directors;
3. The Corporate officers.

3. Consequences of ultra vires acts

Q: What are the effects of an ultra vires act in an executed and

executory contracts?

ANS: The effects are:

1. Executed contract - courts will not set aside or interfere with

such contracts;

2. Executory contracts- no enforcement even at the suit of

either party (void and unenforceable);

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3. Partly executed and partly executory- principle of ―no unjust

enrichment at expense of another‖ shall apply; and

4. Executory contracts apparently authorized but ultra vires-

the principle of estoppel shall apply (Pirovano v. De la Rama,
G.R. No. 6817, July 31,1958).

Doctrine of individuality of subscription

The doctrine of individuality of subscription holds that a subscription is one

entire and indivisible whole contract. It cannot be divided into portions.

Doctrine of equality of shares

This Doctrine provides that where the Articles of Incorporation do not provide
for any distinction of the shares of stock, all shares issued by the corporation
are presumed to be equal and enjoy the same rights and privileges, subject
to the same liabilities.

Trust fund doctrine

The capital stock, property and other assets of the corporation are regarded
as equity in trust for the payment of the corporate creditors. The subscribed
capital stock of the corporation is a trust fund for the payment of the debts of
the corporation which the creditors have the right to look into to satisfy their
credits, and which the corporation may not dissipate.
Examples where the trust fund doctrine is violated:
1. When the corporation releases or condones payment of the unpaid
subscription.
2. When there is payment of dividends without unrestricted retained
earnings.
3. When properties are transferred in fraud of creditors.
4. When properties are disposed or undue preference is given to some
creditors even if the corporation is insolvent.

Distribution of Assets and the Trust Fund Doctrine

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The Trust Fund Doctrine provides that subscriptions to the capital stock of
a corporation constitute a fund to which the creditors have a right to look for
the satisfaction of their claims.
This doctrine is the underlying principle and/or articulated in the following:
(a) Procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital
only in three instances:
1) amendment of the Articles of Incorporation to reduce the
authorized capital stock,
2) purchase of redeemable shares by the corporation, regardless
of the existence of unrestricted/ retained earnings, and
3) dissolution and eventual liquidation of the corporation;
(b) Section 40 on the power of a corporation to acquire its own
shares;
(c) In the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.
The distribution of corporate assets and property cannot be made to depend
in the whims and caprices of the stockholders, officers or directors of the
desire of the court a quo ―to prevent further squabbles and future litigations‖
unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the ―corporate peace‖ laudably
hoped for by the court will remain nothing but a dream because this time, it
will be the creditors‘ turn to engage in ―squabbles and litigations‖ should the
court order an unlawful distribution in blatant disregard of the Trust Fund
Doctrine. (Ong Yong, et al. v. David S. Tiu, et al., G.R. No. 144476, April
8, 2003).

Exceptions: The law allows distribution of corporate capital only in these

instances:

a. Amendment of the Articles of Incorporation to reduce the authorized

capital stock;
b. Purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings;
c. Dissolution and eventual liquidation of the corporation;
d. Dividends from investments in wasting asset corporation (one solely or
principally engaged in the exploitation of their holdings, such as mines, oil
wells, without allowance or deduction for depletion;
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e. In close corporation, where there is a deadlock

f. Purchase own shares of stock;
g. Payment for the fair value of the shares of dissenting stockholders.
Further, under this doctrine, a corporation has no legal capacity to release an
original subscriber, in whole or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors . The creditor is allowed to maintain
an action upon any unpaid subscriptions and thereby steps into the shoes of
the corporation for the satisfaction of its debts. (Halley v. Printwell, 649
SCRA 116, 30 May 2011). Under the Trust Fund Doctrine, the
subscribed capital stock of the corporation serves as trust fund for the
payment of debts of the corporation to which the creditors have the
right to look up to satisfy their credits, and which the corporation may
not dissipate. The creditors may sue the stockholders directly for the
latter’s unpaid subscription. (Philippine Trust Co. v. Rivera, G.R. No.
19761, Jan. 29, 1923).

Q: Discuss the applicability of the Trust Fund Doctrine.

ANS: It applies in the following instances:
1. Where the corporation has distributed its capital among the
stockholders without providing for the payment of creditors;
2. When there is payment of dividends without unrestricted retained
earnings;
3. Where it had released the subscribers to the capital stock from
their subscriptions;
4. Where it has transferred the corporate property in fraud of its
creditors; and
5. Where the corporation is insolvent (Steinberg v. Velasco, 52 Phil.
953, 1929).

Stockholders and members

a. Fundamental rights of a stockholder

Q: What are the fundamental rights of a stockholder?

ANS: The following are the rights and remedies of stockholders

.1. Right as to control and management

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a. To adopt/ amend/ repeal the by-laws or adopt new by-laws

b. To have the corporation voluntarily dissolved
c. To elect and remove directors
d. To attend and vote in person/ proxy at stockholder‘s meetings
e. To enter into a voting trust agreement
f. To compel the calling of meetings
g. To approve certain corporate acts

2. Proprietary Rights

a. To pre-emption in the issue of shares

b. To transfer of stock in the corporate book
c. To receive dividends when declared
d. To issuance of certificate of stock/ other evidence of stock
ownership; and
e. To participate in distribution of corporate assets upon dissolution

3. Remedial Rights
a. To be furnished recent financial statements/ reports of
corporation‘s operations
b. To bring suits;
c. To inspect corporate books;
d. To recover stock unlawfully sold for delinquency; and
e. To demand payment in the exercise of appraisal right

Participation in management

(a) Directly or (b) by proxy or (c) voting trust

Q: Define proxy.

ANS: A proxy can either be:

(1) A written authorization given by one person to another so that the latter
can act for the former such as that given by the shareholder to someone else
to represent him. (Black’s Law Dictionary); or

(2) The person who was so authorized .

Stockholders and members may vote: (a) in person or (b) by proxy in all
meetings of stockholders or members.

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When so authorized in the by-laws or by a majority of the board of directors,

the stockholders or members of corporations may also vote through remote
communication or in absentia: Provided, That the votes are received before
the corporation finishes the tally of votes.

A stockholder or member, who participates through remote communication

or in absentia, shall be deemed present for purposes of quorum.

The corporation shall establish the appropriate requirements and procedures

for voting through remote communication and in absentia, taking into
account the company‘s scale, number of shareholders or members, structure
and other factors consistent with the basic right of corporate suffrage.

Proxies shall be in writing, signed and filed, by the stockholder or member, in

any form authorized in the by-laws and received by the corporate secretary
within a reasonable time before the scheduled meeting. Unless otherwise
provided in the proxy form, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than five
(5) years at any one time. (Sec. 57)

Voting trust

One or more stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the shares for a period not exceeding five (5) years
at any time: Provided, That in the case of a voting trust specifically required
as a condition in a loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Commission;
otherwise, the agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the trustee or trustees, stating
that they are issued pursuant to said agreement. The books of the
corporation shall state that the transfer in the name of the trustee or trustees
is made pursuant to the voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors, voting
trust certificates, which shall be transferable in the same manner and with
the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as
any other corporate book or record: Provided, That both the trustor and the

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trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.

Any other stockholder may transfer the shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust agreement,
and thereupon shall be bound by all the provisions of said agreement.

No voting trust agreement shall be entered into for purposes of

circumventing the laws against anti-competitive agreements, abuse of
dominant position, anti-competitive mergers and acquisitions, violation of
nationality and capital requirements, or for the perpetuation of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period. The voting trust
certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new certificates of stock
shall be reissued in the name of the trustors.

The voting trustee or trustees may vote by proxy or in any manner

authorized under the by-laws unless the agreement provides otherwise.
(Sec. 58)

Cases when stockholder’s action is required

(a) By a majority vote

1. Fixing of compensation of directors

In the absence of any provision in the by-laws fixing their compensation, the
directors or trustees shall not receive any compensation in their capacity as
such, except for reasonable per diems: Provided however, That the
stockholders representing at least a majority of the outstanding capital stock
or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special
meeting.

In no case shall the total yearly compensation of directors exceed ten (10%)
percent of the net income before income tax of the corporation during the
preceding year.

Directors or trustees shall not participate in the determination of their own

per diems or compensation.

Corporations vested with public interest shall submit to their shareholders

and the Commission, an annual report of the total compensation of each of
their directors or trustees. (Sec. 29)

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2. Adoption of By-laws

For the adoption of by-laws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock,
or of at least a majority of the members in case of non-stock corporations,
shall be necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members during
office hours. A copy thereof, duly certified by a majority of the directors or
trustees and countersigned by the secretary of the corporation, shall be filed
with the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be

adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the
Commission of a certification that the by-laws are in accordance with this
Code.

The Commission shall not accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution, or other
special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-
laws or amendments are in accordance with law. (Sec. 45)

3. Election of Directors/Trustees

Except when the exclusive right is reserved for holders of founders‘ shares
under Section 7 of this Code, each stockholder or member shall have the
right to nominate any director or trustee who possesses all of the
qualifications and none of the disqualifications set forth in this Code.

At all elections of directors or trustees, there must be present, either in

person or through a representative authorized to act by written proxy, the
owners of majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. When so authorized in the
by-laws or by a majority of the board of directors, the stockholders or
members may also vote through remote communication or in absentia:
Provided, That the right to vote through such modes may be exercised in
corporations vested with public interest, notwithstanding the absence of a
provision in the by-laws of such corporations.

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A stockholder or member who participates through remote communication or

in absentia, shall be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or

member.

In stock corporations, stockholders entitled to vote shall have the right to

vote the number of shares of stock standing in their own names in the stock
books of the corporation at the time fixed in the by-laws or where the by-laws
are silent, at the time of the election. The said stockholder may: (a) vote
such number of shares for as many persons as there are directors to be
elected; (b) cumulate said shares and give one (1) candidate as many
votes as the number of directors to be elected multiplied by the number of
the shares owned; or (c) distribute them on the same principle among as
many candidates as may be seen fit: Provided, That the total number of
votes cast shall not exceed the number of shares owned by the stockholders
as shown in the books of the corporation multiplied by the whole number of
directors to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the by-
laws, members of non-stock corporations may cast as many votes as there
are trustees to be elected but may not cast more than one (1) vote for one
(1) candidate. Nominees for directors or trustees receiving the highest
number of votes shall be declared elected.

If no election is held, or the owners of majority of the outstanding capital

stock or majority of the members entitled to vote are not present in person,
by proxy, or through remote communication or not voting in absentia at the
meeting, such meeting may be adjourned and the corporation shall proceed
in accordance with Section 25 of this Code.

The directors or trustees elected shall perform their duties as prescribed by

law, rules of good corporate governance, and by-laws of the corporation.
(Sec. 23)

4. Fixing the issued Price of No-Par value shares

Stocks shall not be issued for a consideration less than the par or issued
price thereof. Consideration for the issuance of stock may be:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and

necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;

(c) Labor performed for or services actually rendered to the corporation;

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(d) Previously incurred indebtedness of the corporation;

(e) Amounts transferred from unrestricted retained earnings to stated

capital;

(f) Outstanding shares exchanged for stocks in the event of reclassification

or conversion;

(g) Shares of stock in another corporation; and/or

(h) Other generally accepted form of consideration.

Where the consideration is other than actual cash, or consists of intangible

property such as patents or copyrights, the valuation thereof shall initially be
determined by the stockholders or the board of directors, subject to the
approval of the Commission.

Shares of stock shall not be issued in exchange for promissory notes or

future service.

The same considerations provided in this section, insofar as applicable, may

be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred by
the articles of incorporation or the by-laws, or if not so fixed, by the
stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (Sec. 61)

(b) By two-thirds (2/3) vote

1. Denial of pre-emptive right

All stockholders of a stock corporation shall enjoy pre-emptive right to

subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive
right shall not extend to shares issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or to shares
issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed
for corporate purposes or in payment of a previously contracted debt. (Sec.
38)

2. Delegation of the power to amend, repeal or adopt new by-laws to

BOD

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A majority of the board of directors or trustees, and the owners of at least a

majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal the by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal the by-laws or
adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal the by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or majority of the
members shall so vote at a regular or special meeting.

Whenever the by-laws are amended or new by-laws are adopted, the
corporation shall file with the Commission such amended or new by-laws
and, if applicable, the stockholders‘ or members‘ resolution authorizing the
delegation of the power to amend and/or adopt new by-laws, duly certified
under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new by-laws shall only be effective upon the issuance by
the Commission of a certification that the same is in accordance with this
Code and other relevant laws. (Sec. 47)

3. Removal of Directors/Trustees

Any director or trustee of a corporation may be removed from office by a vote

of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or in a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members
for the purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of the
stockholders representing or holding at least a majority of the outstanding
capital stock, or a majority of the members entitled to vote. If there is no
secretary, or if the secretary, despite demand, fails or refuses to call the
special meeting or to give notice thereof, the stockholder or member of the
corporation signing the demand may call for the meeting by directly
addressing the stockholders or members. Notice of the time and place of
such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause may not

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be used to deprive minority stockholders or members of the right of

representation to which they may be entitled under Section 23 of this Code.

The Commission shall, motu propio or upon verified complaint, and after due
notice and hearing, order the removal of a director or trustee elected despite
the disqualification, or whose disqualification arose or is discovered
subsequent to an election. The removal of a disqualified director shall be
without prejudice to other sanctions that the Commission may impose on the
board of directors or trustees who, with knowledge of the disqualification,
failed to remove such director or trustee. (Sec. 27)

4. Ratification of act of disloyal director

Where a director, by virtue of such office, acquires a business opportunity

which should belong to the corporation, thereby obtaining profits to the
prejudice of such corporation, the director must account for and refund to the
latter all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least two- thirds (2/3) of the
outstanding capital stock. This provision shall be applicable, notwithstanding
the fact that the director risked one‘s own funds in the venture. (Sec. 33)

(a) By cumulative voting

1. Fixing the issued price of no-par value shares

Stocks shall not be issued for a consideration less than the par or issued
price thereof.

Where the consideration is other than actual cash, or consists of intangible

property such as patents or copyrights, the valuation thereof shall initially be
determined by the stockholders or the board of directors, subject to the
approval of the Commission.

Shares of stock shall not be issued in exchange for promissory notes or

future service. The same considerations provided in this section, insofar as
applicable, may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred by
the articles of incorporation or the by-laws, or if not so fixed, by the
stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose. (Sec. 61)

2. Amendment or repeal of by-laws or adoption of new by-laws

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A majority of the board of directors or trustees, and the owners of at least a

majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal the by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal the by-laws or
adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal the by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or majority of the
members shall so vote at a regular or special meeting.

Whenever the by-laws are amended or new by-laws are adopted, the
corporation shall file with the Commission such amended or new by-laws
and, if applicable, the stockholders‘ or members‘ resolution authorizing the
delegation of the power to amend and/or adopt new by-laws, duly certified
under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new by-laws shall only be effective upon the issuance by
the Commission of a certification that the same is in accordance with this
Code and other relevant laws. (Sec. 47)

3. Management contract

No corporation shall conclude a management contract with another

corporation unless such contract is approved by the board of directors and
by stockholders owning at least the majority of the outstanding capital stock,
or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (a) where a stockholder
or stockholders representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation owning at least
two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at
least two-thirds (2/3) of the members in the case of a non-stock corporation.

These shall apply to any contract whereby a corporation undertakes to

manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,

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exploitation or utilization of natural resources may be entered into for such

periods as may be provided by the pertinent laws or regulations.

No management contract shall be entered into for a period longer than five
(5) years for any one (1) term. (Sec. 43)

Manner of voting/electing directors

Stock corporations may adopt any of the following means:

(a) Straight voting - the stockholder votes such number of shares for as
many persons as there are directors to be elected; or

(b) Cumulative voting for one candidate - stock-holder may cumulate his
share and give one candidate as many votes as the number of directors to
be elected multiplied by the number of his shares; or

(c) Cumulative voting by distribution - stockholder may distribute his shares

among as many candidates as he shall see fit. (Sec. 23)

Basic rules:

*no delinquent stock shall be voted upon (Sec. 70)

*In non-stock corporations, members may cast as many votes as there are
trustees to be elected but may not cast more than one vote for one
candidate. Cumulative voting in non-stock corporation is not allowed.

*In both stock and non-stock corporations, voting by proxy is allowed. (Sec.
57)

*The board shall hold office for one year from election

c. Proprietary rights

i. Right to dividends

Q: When is there a right to receive dividends?

ANS: The right to receive dividends from a corporation is manifestly justified

only on the theory that he is a stockholder
.
1. Cash Dividends - As soon as cash dividends are declared the
stockholders have the right to their pro rata shares.

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2. Stock Dividends - The above rule does not apply to stock dividends as the
declaration of such dividends may be rescinded at any time before the actual
issuance of stock. (PLDT v. NTC, G.R. No. 152685, Dec. 4, 2007).

Q: In the absence of a rule to the contrary, how shall dividends be

distributed?

ANS: As a rule, dividends given to stockholders of the same class must

always be pro rata, equal and without discrimination, and regardless of the
time when the shares were acquired.

ii. Appraisal right

The appraisal right is the right to demand payment of the fair value of his
shares, after dissenting from a proposed corporate action involving a
fundamental change in the corporation in the cases provided by law (Turner
v. Lorenzo Shipping, G.R. No. 157479, November 24, 2010).

(a) When available

1. Investment of corporate funds in another corporation or in a purpose

other than the primary purpose;

2. Sale, encumbrance or other dispositions of all or substantially all of the

corporate property or assets;

3. An amendment to the articles that has the effect of

a. Changing or restricting the rights of shareholders; or

b. Of authorizing preferences over those of Outstanding shares; or

c. Changing the Term of corporate existence;

(The changing or restriction of rights of shareholders must be made in good
faith)

4. Merger or consolidation (Sec. 80)

5. In a close corporation, a stockholder may, for any reason, compel the

corporation to purchase his shares when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock.
(Sec. 104)

(b) Manner of exercise of right

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The dissenting stockholder who votes against a proposed corporate action

may exercise the right of appraisal by making a written demand on the
corporation for the payment of the fair value of shares held within thirty (30)
days from the date on which the vote was taken: Provided, That failure to
make the demand within such period shall be deemed a waiver of the
appraisal right. If the proposed corporate action is implemented, the
corporation shall pay the stockholder, upon surrender of the certificate or
certificates of stock representing the stockholder‘s shares, the fair value
thereof as of the day before the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate action.

If, within sixty (60) days from the approval of the corporate action by the
stockholders, the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two (2) thus chosen. The
findings of the majority of the appraisers shall be final, and their award shall
be paid by the corporation within thirty (30) days after such award is made:
Provided, That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to
cover such payment: Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith
transfer the shares to the corporation. (Sec. 81)

iii. Right to inspect

Q: What is the shareholder‘s right to inspect?

ANS: A stockholder can inspect the books of the corporation. This is part of
the right of shareholders to information. It is a right that is personal to each
stockholder. (Cua, Jr. v. Ocampo Tan, G.R. Nos. 181455-56 and 182008,
Dec. 4, 2009).

Books to be Kept; Stock Transfer Agent. – Every corporation shall keep

and carefully preserve at its principal office all information relating to the
corporation including, but not limited to:

(1) The articles of incorporation and by-laws of the corporation and all their
amendments;

(2) The current ownership structure and voting rights of the corporation,
including lists of stockholders or members, group structures, intra-group
relations, ownership data, and beneficial ownership;

(3) The names and addresses of all the members of the board of directors
or trustees and the executive officers;

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(4) A record of all business transactions;

(5) A record of the resolutions of the board of directors or trustees and of the
stockholders or members;

(6) Copies of the latest reportorial requirements submitted to the

Commission; and

(7) The minutes of all meetings of stockholders or members, or of the board

of directors or trustees. Such minutes shall set forth in detail, among others:
the time and place of the meeting held, how it was authorized, the notice
given, the agenda therefor, whether the meeting was regular or special, its
object if special, those present and absent, and every act done or ordered
done at the meeting.

Upon the demand of a director, trustee, stockholder or member, the time

when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record thereof
carefully made. The protest of a director, trustee, stockholder or member on
any action or proposed action must be recorded in full upon their demand.

Corporate records, regardless of the form in which they are stored, shall be
open to inspection by any director, trustee, stockholder or member of the
corporation in person or by a representative at reasonable hours on business
days, and a demand in writing may be made by such director, trustee or
stockholder at their expense, for copies of such records or excerpts from
said records. The inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws, such as the rules on trade secrets
or processes under RA No. 8293, otherwise known as the ―Intellectual
Property Code of the Philippines‖, as amended, RA No. 10173, otherwise
known as the ―Data Privacy Act of 2012‖, RA No. 8799, otherwise known as
―The Securities Regulation Code‖, and the Rules of Court.

A requesting party who is not a stockholder or member of record, or is a

competitor, director, officer, controlling stockholder or otherwise represents
the interests of a competitor shall have no right to inspect or demand
reproduction of corporate records.

Any stockholder who shall abuse the rights granted under this section shall
be penalized under Section 158 of this Code, without prejudice to the
provisions of RA No. 8293, otherwise known as the ―Intellectual Property
Code of the Philippines‖, as amended, and RA No. 10173, otherwise known
as the ―Data Privacy Act of 2012‖.

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Any officer or agent of the corporation who shall refuse to allow the
inspection and/or reproduction of records in accordance with the provisions
of this Code shall be liable to such director, trustee, stockholder or member
for damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 161 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal: Provided, further, That it
shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation‘s records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making the demand to examine or reproduce corporate records, or is a
competitor, director, officer, controlling stockholder or otherwise represents
the interests of a competitor.

If the corporation denies or does not act on a demand for inspection and/or
reproduction, the aggrieved party may report such to the Commission.
Within five (5) days from receipt of such report, the Commission shall
conduct a summary investigation and issue an order directing the inspection
or reproduction of the requested records.

Stock corporations must also keep a stock and transfer book, which shall
contain a record of all stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stocks for which
subscription has been made, and the date of payment of any installment; a
statement of every alienation, sale or transfer of stock made, the date
thereof, by and to whom made; and such other entries as the by-laws may
prescribe. The stock and transfer book shall be kept in the principal office of
the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable
hours on business days.

A stock transfer agent or one engaged principally in the business of

registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines upon securing a license from the
Commission and the payment of a fee to be fixed by the Commission, which
shall be renewable annually: Provided, That a stock corporation is not
precluded from performing or making transfers of its own stocks, in which
case all the rules and regulations imposed on stock transfer agents, except
the payment of a license fee herein provided, shall be applicable: Provided,
further, That the Commission may require stock corporations which transfer
and/or trade stocks in secondary markets to have an independent transfer
agent. (Sec. 73)

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iv. Pre-emptive right

Q: What is pre-emptive right?

ANS: Pre-emptive right is a common law right granted to the stockholders to

be granted the first option to subscribe to any opening of the corporation‘s
unissued capital stock, or to any increase of its authorized capital stock.

All stockholders of a stock corporation shall enjoy preemptive right to

subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive
right shall not extend to shares issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or to shares
issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed
for corporate purposes or in payment of a previously-contracted debt. (Sec.
38)

v. Right to vote

Q: What are the characteristics of the stockholder‘s right to vote?

ANS: The right to vote:

1 . Is inherent and incidental to the ownership of corporate stocks.

2 . Is a personal right.
3. May only be exercised by owners of stocks actually issued and
outstanding (Tan v. Sycip, GR No. 153468, August 17, 2006).
4. Represents the right of a stockholder to participate in the control and
management of the corporation that is exercised through its vote (Castillo v.
Balinghasay, GR No. 150976, October 18, 2004).

Right to Vote of Secured Creditors and Administrators

In case a stockholder grants security interest in his or her shares in stock

corporations, the stockholder-grantor shall have the right to attend and vote
at meetings of stockholders, unless the secured creditor is expressly given
by the stockholder-grantor such right in writing which is recorded in the
appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote on behalf of the stockholders or
members without need of any written proxy. (Sec. 54)

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Q: Do treasury shares have voting rights?

ANS: No. Treasury shares shall have no voting rights as long as such shares
remain in the Treasury. (Sec. 56)

vi. Right to dividends

Q: Can the stockholders force the board of directors to declare dividends?

ANS: No. Stockholders cannot do so because the declaration of dividends is

discretionary upon the board. Dividends are payable only when there are
surplus profits earned by the corporation and as a general rule, even when
there are profits earned by the corporation and as a general rule, even if
there are existing profits, the Board of Directors has the discretion to
determine whether or not dividends are declared (Republic Planters Bank
v. Agana, G.R. No. 51765, March 3, 1997).

The board of directors of a stock corporation may declare dividends out of

the unrestricted retained earnings which shall be payable in cash, property,
or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholders until
their unpaid subscription is fully paid: Provided, further, That no stock
dividend shall be issued without the approval of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paid-in capital stock, except: (a) when justified by
definite corporate expansion projects or programs approved by the board of
directors; or (b) when the corporation is prohibited under any loan agreement with
financial institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or (c) when it
can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for
probable contingencies. (Sec. 42)

d. Remedial rights

i. Individual suit

An individual suit is an action brought by the shareholder in his own

name against the corporation when a wrong is directly infected
against him personally and to determine his individual right. (Guy v.
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Guy, G.R. Nos. 189486 and 182008, Dec. 4, 2009). Its cause of
action pertains to the shareholder and it is meant directly to protect his
interest.

ii. Representative suit

A representative suit is an action brought by the stockholder in behalf

of himself and all other stockholders stockholder. (Cua, Jr. v.
Ocampo Tan, GR Nos. 181455-56 and 182008, Dec.4, 2009).

iii. Derivative suit

A derivative suit is an action brought by one or more stockholders or

members in the name and on behalf of the corporation to redress
wrongs committed against it or to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue or are
the ones to be sued or hold control of the corporation (Western
Institute v. Salas, G.R. No. 113032, Aug. 21, 1997).

e. Obligations of a stockholder

The obligations of a stockholder are the following:

1. Obligation to the corporation for unpaid subscription;

2. Obligation to the corporation for interest on unpaid subscription;

3. Obligation to creditors of the corporation on the unpaid subscription;

4. Obligation for dividends unlawfully paid;

5. Liability for watered stock;

6. Liability for failure to create corporation

f. Meetings

Meetings could be (a) Regular [annual] or (b) special (Sec. 48)

Regular meetings of stockholders or members shall be held annually on a

date fixed in the by-laws, or if not so fixed, on any date after April 15 of every
year as determined by the board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to all stockholders or
members of record at least twenty-one (21) days prior to the meeting, unless
a different period is required in the bylaws, law, or regulation: Provided,
further, That written notice of regular meetings may be sent to all

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stockholders or members of record through electronic mail or such other

manner as the Commission shall allow under its guidelines.

At each regular meeting of stockholders or members, the board of directors

or trustees shall endeavor to present to stockholders or members the
following:

a) The minutes of the most recent regular meeting which shall include,
among others:

(1) A description of the voting and vote tabulation procedures

used in the previous meeting;

(2) A description of the opportunity given to stockholders or

members to ask questions and a record of the questions asked
and answers given;

(3) The matters discussed and resolutions reached;

(4) A record of the voting results for each agenda item;

(5) A list of the directors or trustees, officers and stockholders

or members who attended the meeting; and

(6) Such other items that the Commission may require in the
interest of good corporate governance and the protection of
minority stockholders.

b) A members‘ list for non-stock corporations and, for stock

corporations, material information on the current stockholders, and
their voting rights;

c) A detailed, descriptive, balanced and comprehensible assessment

of the corporation‘s performance, which shall include information on
any material change in the corporation‘s business, strategy, and other
affairs;

d) A financial report for the preceding year, which shall include

financial statements duly signed and certified in accordance with this
Code and the rules the Commission may prescribe, a statement on
the adequacy of the corporation‘s internal controls or risk
management systems, and a statement of all external audit and non-
audit fees;

e) An explanation of the dividend policy and the fact of payment of

dividends or the reasons for nonpayment thereof;

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f) Director or trustee profiles which shall include, among others, their

qualifications and relevant experience, length of service in the
corporation, trainings and continuing education attended, and their
board representations in other corporations;

g) A director or trustee attendance report, indicating the attendance

of each director or trustee at each of the meetings of the board and its
committees and in regular or special stockholder meetings;

h) Appraisals and performance reports for the board and the criteria
and procedure for assessment;
.
i) A director or trustee compensation report prepared in accordance
with this Code and the rules the Commission may prescribe;

j) Director disclosures on self-dealings and related party transactions;

and/or

k) The profiles of directors nominated or seeking election or

reelection.

A director, trustee, stockholder, or member may propose any other matter for
inclusion in the agenda at any regular meeting of stockholders or members.

Special meetings of stockholders or members shall be held at any time

deemed necessary or as provided in the bylaws: Provided, however, That at
least one (1) week written notice shall be sent to all stockholders or
members, unless a different period is provided in the bylaws, law or
regulation.

A stockholder or member may propose the holding of a special meeting and

items to be included in the agenda.

Notice of any meeting may be waived, expressly or impliedly, by any

stockholder or member: Provided, That general waivers of notice in the
articles of incorporation or the bylaws shall not be allowed: Provided, further,
That attendance at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.

Whenever for any cause, there is no person authorized or the person

authorized unjustly refuses to call a meeting, the Commission, upon petition
of a stockholder or member on a showing of good cause therefor, may issue
an order directing the petitioning stockholder or member to call a meeting of
the corporation by giving proper notice required by this Code or the bylaws.
The petitioning stockholder or member shall preside thereat until at least a

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majority of the stockholders or members present have chosen from among

themselves, a presiding officer.

Unless the by-laws provide for a longer period, the stock and transfer book
or membership book shall be closed at least twenty (20) days for regular
meetings and seven (7) days for special meetings before the scheduled date
of the meeting.‘

In case of postponement of stockholders‘ or members‘ regular meetings,

written notice thereof and the reason therefor shall be sent to all
stockholders or members of record at least two (2) weeks prior to the date of
the meeting, unless a different period is required under the by-laws, law or
regulation.

The right to vote of stockholders or members may be exercised in person,

through a proxy, or when so authorized in the by-laws, through remote
communication or in absentia. The Commission shall issue the rules and
regulations governing participation and voting through remote
communication or in absentia, taking into account the company‘s scale,
number of shareholders or members, structure, and other factors consistent
with the protection and promotion of shareholders‘ or members‘ meetings.
(Sec. 49)

i. Notice of meetings

Notice of meetings shall be sent through the means of communication provided in

the by-laws, which notice shall state the time, place and purpose of the meetings.

Each notice of meeting shall further be accompanied by the following:

(a) The agenda for the meeting;

(b) A proxy form which shall be submitted to the corporate secretary within a
reasonable time prior to the meeting;

(c) When attendance, participation, and voting are allowed by remote

communication or in absentia, the requirements and procedures to be
followed when a stockholder or member elects either option; and

(d) When the meeting is for the election of directors or trustees, the
requirements and procedure for nomination and election.

All proceedings and any business transacted at a meeting of the

stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting is improperly held or called: Provided, That
all the stockholders or members of the corporation are present or duly
represented at the meeting and not one of them expressly states at the
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beginning of the meeting that the purpose of their attendance is to object to

the transaction of any business because the meeting is not lawfully called or
convened. (Sec. 50)

ii. Place and time of meetings

Stockholders‘ or members‘ meetings, whether regular or special, shall be

held in the principal office of the corporation as set forth in the articles of
incorporation, or, if not practicable, in the city or municipality where the
principal office of the corporation is located: Provided, That any city or
municipality in Metro-Manila, Metro-Cebu, Metro-Davao, and other
Metropolitan areas shall, for purposes of this section, be considered a city or
municipality. (Sec. 50, first par.)

iii. Quorum

Unless otherwise provided in this Code or in the by-laws, a quorum shall

consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations.
(Sec. 51)

iv. Minutes and agenda of meetings

The minutes of all meetings of stockholders or members, or of the board of

directors or trustees. Such minutes shall set forth in detail, among others: the
time and place of the meeting held, how it was authorized, the notice given,
the agenda therefor, whether the meeting was regular or special, its object if
special, those present and absent, and every act done or ordered done at
the meeting.

Upon the demand of a director, trustee, stockholder or member, the time

when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record thereof
carefully made. The protest of a director, trustee, stockholder or member on
any action or proposed action must be recorded in full upon their demand.
(Sec. 73, g)

Board of Directors and Trustees

Unless otherwise provided in this Code, the board of directors or trustees

shall exercise the corporate powers, conduct all business, and control all
properties of the corporation.

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Directors shall be elected for a term of one (1) Year from among the holders
of stocks registered in the corporation's book while trustees shall be elected
for a term not exceeding three (3) years from among the members of the
corporation. Each director and trustee shall hold office until the successor is
elected and qualified. A director who ceases to own at least one (1) share of
stock or a trustee who ceases to be a member of the corporation shall cease
to be such.
The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of such
board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as "The Securities Regulation Code", namely those
whose securities are registered with the Commission, corporations
listed with an exchange or with assets of at least fifty million pesos
(50,000,000.00) and having two hundred (200) or more holders of
shares, each holding at least one hundred (100) shares of a class of
its equity shares;
(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance
companies and other financial intermediaries; and
(c) Other corporations engaged in businesses vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of an
independent director, such as the extent of minority ownership, type
of financial products or securities issued or offered to investors,
public interest involved in the nature of business operations, and
other analogous factors.
An independent director is a person, who apart from shareholdings and
fees received from any business or other relationship which could, or could
reasonably be received to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.
Independent directors must be elected by the shareholders present or
entitled to vote in absentia during the election of directors. Independent
directors shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements, duration of term and
term limit, maximum number of board membership and other requirements
that the Commission will prescribe to strengthen their independence and
align with international best practices. (Sec. 22)

Corporate Officers - Immediately after their election, the directors of a

corporation must formally organize and elect: (a) a president, who must be a
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director; (b) a treasurer, who must be a resident of the Philippines; (c) a

secretary, who must be a citizen and resident of the Phiiippines and (d) such
other officers as may be provided in the by-laws. If the corporation is vested
with public interest, the board shall also elect a compliance officer. The
same person may hold two (2) or more positions concurrently, except that no
one shall act as president and secretary or as president and treasurer at the
same time, unless otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as may
be provided in the by-laws and/or as resolved by the board of directors.
(Sec. 24)

Report of Election of Directors, Trustees and Officers, Non-holding of

Election and Cessation from Office. - Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the
Commission, the names, nationalities, shareholdings, and residence
addresses of the directors, trustees and officers elected.
The non-holding of elections and the reasons therefor shall be reported to
the Commission within thirty (30) days from the date of the scheduled
election. The report shall specify a new date for the election, which shall not
be later than sixty (60) days from the scheduled date.
If no new date has been designated, or if the rescheduled election is likewise
not held, the Commission may, upon the application of a stockholder,
member, director or trustee, and after verification of the unjustifiable non-
holding of the election, summarily order that an election be held. The
Commission shall have the power to issue such orders as may be
appropriate, including other directing the issuance of a notice stating the time
and place of the election, designated presiding officer, and the record date or
dates for the determination of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation or by-laws to
the contrary, the shares of stock or membership represented at such
meeting and entitled to vote shall constitute a quorum for purposes of
conducting an election under this section.
Should a director, trustee or officer die, resign or in any manner case to hold
office, the secretary or the director, trustee or officer of the corporation, shall,
within seven (7) days form knowledge thereof, report in writing such fact to
the Commission. (Sec. 25)

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Regular and Special Meetings of Directors or Trustees; Quorum –

Unless the articles of incorporation or the by-laws provides for a greater
majority, a majority of the directors or trustees as stated in the articles of
incorporation shall constitute a quorum to transact corporate business, and
every decision reached by at least a majority of the directors or trustees
constituting a quorum, except for the election of officers which shall require
the vote of a majority of all the members of the board, shall be valid as a
corporate act.
Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or
outside the Philippines, unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least two (2) days prior to the
scheduled meeting, unless a longer time is provided in the by-laws. A
director or trustee may waive this requirement, either expressly or impliedly.
Directors or trustees who cannot physically attend or vote at board meetings
can participate and vote through remote communication such as video-
conferencing, teleconferencing, or other alternative modes of communication
that allow them reasonable opportunities to participate. Directors or trustees
cannot attend or vote by proxy at board meetings.
A director or trustee who has a potential interest in any related party
transaction must recuse from voting on the approval of the related party
transaction without prejudice to compliance with the requirements of Section
31 of this Code. (Sec. 52)

Who Shall Preside at Meetings

The chairman or, in his absence, the president shall preside at all meetings
of the directors or trustees as well as of the stockholders or members, unless
the by-laws provide otherwise. (Sec. 53)

Removal of Director or Trustees

Any director or trustee of a corporation may be removed from office by vote
of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or in a non-stock corporation, by a vote of at least
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two-thirds (2/3) of the member entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members
for the purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of stockholders
representing or holding at least a majority of the outstanding capital stock, or
a majority of the members entitled to vote. If there is no secretary, or the
secretary, despite demand, fails or refuses to call the special meeting or to
give notice thereof, the stockholder or member of the corporation signing the
demand may call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand may call for
the meeting by directly addressing the stockholders or members. Notice of
the time and place of such meeting, as well as of the intention to propose
such removal, must be given by publication or by written notice prescribed in
this Code. Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or members
of the right representation to which they may be entitled under Section 23 of
this Code.
The Commission shall, motu propio or upon verified complaint, and after due
notice and hearing, order the removal of a director or trustee elected despite
the disqualification, or whose disqualification arose or is discovered
subsequent to an election. The removal of a disqualified director shall be
without prejudice to other sanctions that the Commission may impose on the
board of directors or trustees who, with knowledge of the disqualification,
failed to remove such director or trustee. (Sec. 27)

Vacancies in the board, how filled up; emergency board

Any vacancy occurring in the board of directors or trustees other that by
removal or expiration of term may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders or members in a regular or
special meeting called for that purpose.
When the vacancy is due to term expiration, the election shall be held no
later than the day of such expiration at a meeting called for that purpose.
When the vacancy arises as a result of removal by the stockholders or
members, the election may be held on the same day of the meeting
authorizing the removal and this fact must be so stated in the agenda and
notice of said meeting. In all other cases, the election must be held no later
than forty-five (45) days from the time the vacancy arose. A director or
trustee elected to fill vacancy shall be referred to as replacement director
or trustee and shall serve only for the unexpired term of the predecessor in
office.
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However, when the vacancy prevents the remaining directors from

constituting a quorum and emergency action is required to prevent grave,
substantial, and irreparable loss or damage to the corporation, the vacancy
may be temporarily filled from among the officers of the corporation by
unanimous vote of the remaining directors or trustees. The action by the
designated director or trustee shall be limited to the emergency action
necessary, and the term shall cease within a reasonable time form the
termination of the emergency or upon election of the replacement director or
trustee, whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the emergency board,
stating therein the reason for its creation.
Any directorship or trusteeship to be filled by a reason of an increase in the
number of directors or trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting.
In all elections to fill vacancies under this section, the procedure set forth in
Section 23 and 25 of this Code shall apply. (Sec. 28)

Compensation of directors

In the absence of any provision in the by-laws fixing their compensation, the
directors or trustees shall not receive any compensation in their capacity as
such, except for reasonable per diems: Provided, however, That the
stockholders representing at least a majority of the outstanding capital stock
or majority of the members may grant directors or trustees with
compensation and approve the amount thereof at a regular or special
meeting.
In no case shall the total yearly compensation of directors exceed ten
percent (10%) of the net income before income tax of the corporation during
the preceding year.
Directors or trustees shall not participate in the determination of their own
per diems or compensation.
Corporations vested with public interest shall submit to their shareholders
and the Commission, an annual report of the total compensation of each of
their directors or trustees. (Sec. 29)

Disloyalty
Where a director, by virtue of such office, acquires a business opportunity
which should belong to the corporation, thereby obtaining profits to the
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prejudice of such corporation, the director must account for and refund to the
latter all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable, notwithstanding
the fact that the director risked one's own funds in the venture. (Sec. 33)

Business Judgment Rule

―They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled in
the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during depression, or
closed down at a smaller loss, is a purely business and economic problem to
be determined by the directors of the corporation and not by the court. It is a
well-known rule of law that questions of policy or of management are left
solely to the honest decision of officers and directors of a corporation, and
the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so long
as it acts in good faith its orders are not reviewable by the courts. (Fletcher
on Corporations, Vol. 2, p. 390). [Montelibano vs. Bacolod-Murcia, 5
SCRA 36 (1962)]

Directors acts in good faith, not reviewable by courts.

The board of directors of a corporation holds the duty to act for the
corporation according to their best judgment, and in so doing it cannot be
controlled in the reasonable exercise and performance of such duty. So long
as it acts in good faith its orders are not reviewable by the courts. (Board of
Liquidators vs. Kalaw, 20 SCRA 987)
The general rule is that in corporate affairs the will of the majority controls,
and that contracts intra vires entered into by the board of directors are
binding upon the corporation and that the court will not interfere unless such
contracts are unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority. (Ingersoll v. The Malabon Sugar
Company, G.R. No. L-27770, Dec. 31, 1927)

Liability of directors, trustees or officers

Directors or trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered
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by the corporation, its stockholders or members and other persons.

(emphasis supplied).
A director, trustee or officer shall not attempt to acquire, or any interest
adverse to the corporation in respect of any matter which has been reposed
in them in confidence, and upon which, equity imposes a disability upon
themselves to deal in their own behalf; otherwise, the said director, trustee or
officer shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation. (Sec. 30)
To hold a director or officer personally liable for corporate
obligations, two requisites must concur: (1) complainant must
allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) complainant
must clearly and convincingly prove such unlawful acts,
negligence or bad faith.
To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and
convincingly. Bad faith is never presumed. Bad faith does not
connote bad judgment or negligence. Bad faith imports a
dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the
nature of fraud. (Ramoso vs. Court of Appeals, 400 Phil.
1260 (2000)

Responsibility for Crimes

If the crime is committed by a corporation or other juridical entity, the
directors, officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. However, a corporation may be charged and prosecuted
for a crime if the imposable penalty is fine. Even if the statute prescribes
both fine and imprisonment as penalty, a corporation may be prosecuted
and, if found guilty, may be fined. (Ching vs. The Secretary of Justice,
G.R. No. 164317, February 6, 2006)

Special Fact Doctrine

The special facts doctrine, as laid down in Strong v. Repide, 213 U.S. 419
(1909) is that ―where special circumstances or facts are present which

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make it inequitable for the director to withhold information from the

stockholder, the duty to disclose arises, and concealment is fraud.

Inside Information
"Insider" means (a) the issuer; (b) a director or officer (or any person
performing similar functions) of, or (c) a person controlling the issuer; gives
or gave him access to material information about the issuer or the security
that is not generally available to the public; (d) a government employee,
director, or officer of an exchange, clearing agency and/or self-regulatory
organization who has access to material information about an issuer or a
security that is not generally available to the public; or (e) a person who
learns such information by a communication from any forgoing insiders.
(Sec. 3.8 of the Securities Regulation Code (RA 8799)

Insider’s Duty to Disclose When Trading

It shall be unlawful for an insider to sell or buy a security of the issuer, while
in possession of material information with respect to the issuer or the
security that is not generally available to the public, unless:
(a) The insider proves that the information was not gained from such
relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is
identified, the insider proves:
(I) that he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party otherwise is
also in possession of the information.
A purchase or sale of a security of the issuer made by an insider defined in
Subsection 3.8, or such insider‘s spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-law, shall be
presumed to have been effected while in possession of material nonpublic
information if transacted after such information came into existence but prior
to dissemination of such information to the public and the lapse of a
reasonable time for market to absorb such information: Provided, however,
That this presumption shall be rebutted upon a showing by the purchaser or
seller that he was aware of the material non-public information at the time of
the purchase or sale. (Sec. 27. 1, RA 8799)
For purposes of this Section, information is "material non-public" if: (a) It
has not been generally disclosed to the public and would likely affect the
market price of the security after being disseminated to the public and the
lapse of a reasonable time for the market to absorb the information; or (b)
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would be considered by a reasonable person important under the

circumstances in determining his course of action whether to buy, sell or hold
a security. (Sec 27.2. RA 8799)
It shall be unlawful for any insider to communicate material non-public
information about the issuer or the security to any person who, by virtue of
the communication, becomes an insider as defined in Subsection 3.8, where
the insider communicating the information knows or has reason to believe
that such person will likely buy or sell a security of the issuer whole in
possession of such information. (27.3. RA 8799)
(a) It shall be unlawful where a tender offer has commenced or is about
to commence for:
(i) Any person (other than the tender offeror) who is in
possession of material nonpublic information relating to such
tender offer, to buy or sell the securities of the issuer that are
sought or to be sought by such tender offer if such person
knows or has reason to believe that the information is
nonpublic and has been acquired directly or indirectly from the
tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any
insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of
the securities sought or to be sought by such tender offer, and
any insider of such issuer to communicate material nonpublic
information relating to the tender offer to any other person
where such communication is likely to result in a violation of
Subsection 27.4 (a)(I).
(b) For purposes of this subsection the term "securities of the issuer sought
or to be sought by such tender offer" shall include any securities convertible
or exchangeable into such securities or any options or rights in any of the
foregoing securities. (27.4. RA 8799)

Contracts

A contract of the corporation with one (1) or more of its directors, trustees,
officers or their spouses and relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of such corporation, unless
all the following conditions are present:
(a) the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;

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(b) the vote of such director or trustee was not necessary for the
approval of the contract;
(c) the contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material
contracts are approved by at least a majority of the independent
directors voting to approved the material contract; and
(e) In case of an officer, the contract has been previously authorized
by the board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting and the
contract is fair and reasonable under the circumstances. (Sec. 31)
Between Corporations with Interlocking Directors

Except in cases of fraud, and provided that the contract is fair and
reasonable under the circumstances, a contract between two (2) or more
corporations having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one
(1) corporation is substantial and the interest in the other corporation or
corporations is merely nominal, the contract shall be subject to the provisions
of the preceding section insofar as the latter corporation or corporations are
concerned.
Stockholding exceeding twenty percent (20%) of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.
(Sec. 32)

Executive and Other Special Committees

If the by-laws so provide, the board may create an executive committee
composed of at least three (3) directors. Said committee may act, by
majority of vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the bylaws or by
majority vote of the board, except with respect to the: (a) approval of any
action for which shareholders' approval is also required; (b) filing of
vacancies in the board; (c) amendment or repeal of by-laws or the adoption
of new by-laws; (d) amendment or term is not amendable or repealable; and
(e) distribution of cash dividends to the shareholders.

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The board of directors may create special committees of temporary or

permanent nature and determine the members' term, composition,
compensation, powers, and responsibilities. (Sec. 34)

Certificate of Stock and Transfer of Shares

The capital stock of corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued
are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to the transaction, the date
of the transfer, the number of the certificate or certificates, and the number of
shares transferred. The Commission may require corporations whose
securities are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities or shares of
stocks in uncertificated or scripless form in accordance with the rules of the
Commission.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. (Sec. 62)

Nature of the Certificate

―A certificate of stock is the paper representative or tangible evidence of the

stock itself and of the various interests therein. The certificate is not stock in
the corporation but is merely evidence of the holder‘s interest and status in
the corporation, his ownership of the share represented thereby, but is not in
law the equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but it is not essential to the existence of a
share in stock or the creation of the relation of shareholder to the
corporation. (13 Am. Jur. 2d, 769)” (Tan vs. Securities and Exchange
Commission, et al., G.R. No. 95696, March 3, 1992)

issuance of Stock Certificates

No certificate of stock shall be issued to a subscriber until the full amount of
subscription together with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63)

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A certificate of stock is a written instrument signed by the proper officer of a

corporation stating or acknowledging that the person named in the document
is the owner of a designated number of shares of its stock. It is prima
facie evidence that the holder is a shareholder of a corporation. A certificate,
however, is merely a tangible evidence of ownership of shares of stock. It is
not a stock in the corporation and merely expresses the contract between
the corporation and the stockholder. The shares of stock evidenced by said
certificates, meanwhile, are regarded as property and the owner of such
shares may, as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so is properly
restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action. (Teng vs. Securities and Exchange
Commission and Ting Ping Lay, G.R. No. 184332, February 17, 2016)

Lost or Destroyed Certificates

The following procedure shall be followed by a corporation in issuing new
certificates of stock in lieu of those which have been lost, stolen or
destroyed:
(a) The registered owner of a certificate of stock in a corporation or such
person's legal representative shall file with the corporation an affidavit in
triplicate setting forth, if possible, the circumstances as to how the certificate
was lost, stolen or destroyed, the number of shares represented by such
certificate, the serial number of the certificate and the name of the
corporation which issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as may be deemed
necessary; and
(b) After verifying the affidavit and other information and evidence with the
books of the corporation, the corporation shall publish a notice in a
newspaper of general circulation in the place where the corporation has its
principal office, once a week for three (3) consecutive weeks at the expense
of the registered owner of the certificate of stock which has been lost, stolen
or destroyed. The notice shall state the name of the corporation, the name
of the registered owner, the serial number of the certificate, the number of
shares represented by such certificate, and shall state that after the
expiration of one (1) year from the date of the last publication, if no contest
has been presented to the corporation regarding the certificate of stock, the
right to make such contest shall be barred and the corporation shall cancel
the lost, destroyed or stolen certificate of stock, the right to make such
contest shall be barred and the corporation shall cancel the lost, destroyed
or stolen certificate of stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock, unless the registered owner files a bond or
other security as may be required, effective for a period of one (1) year, for
such amount and in such form and with such sureties as may be satisfactory
to the board of directors, in which case a new certificate may be issued even
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before the expiration of one (1) year period provided herein. If a contest has
been presented to the corporation or if an action is pending in court
regarding the ownership of the certificate of stock which has been lost, stolen
in lieu thereof shall be suspended until the court renders a final decision
regarding the ownership of the certificate of stock which has been lost, stolen
or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-described. (Sec. 72)

Uncertificated Shares

"Uncertificated security" is a security evidenced by electronic or similar

records. (Sec. 3.14, RA 8799)

Transfer of Shares
The rule is that the endorsement of the certificate of stock by the owner or
his attorney-in-fact or any other person legally authorized to make the
transfer shall be sufficient to effect the transfer of shares only if the same is
coupled with delivery. The delivery of the stock certificate duly endorsed by
the owner is the operative act of transfer of shares from the lawful owner to
the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a)
There must be delivery of the stock certificate; (b) The certificate must be
endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and, (c) to be valid against third parties, the
transfer must be recorded in the books of the corporation. [Bitong vs. CA,
354 Phil. 516, 541 (1998)] [now par. 3, Sec. 62]
N.B. This is true only if the shares are listed with the stock exchange
and traded therein; not in over-the-counter transactions.

Redeemable Shares
Redeemable shares may be issued by the corporation when expressly
provided in the articles of incorporation. They are shares which may be
purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of incorporation and the certificate of
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stock representing the shares, subject to rules and regulations issued by the
Commission (Sec. 8)

Treasury Shares
Treasury shares are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation through
purchase, redemption, donation, or some other lawful means. Such shares
may again be disposed of for a reasonable price fixed by the board of
directors. (Sec. 9)

When regular shares become treasury shares (Power to Acquire Own

Shares)
… Provided, That the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired, a stock corporation
shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code. (Sec. 40)
(d) when the corporation redeems its redeemable shares, even in the
absence of unrestricted earnings. (Sec. 8)
(e) when the corporation buys its own shares in a delinquency sale
(Sec. 67, last par.)

Watered Stocks
i. Defined - These are shares issued by the corporation without receiving its
full fair value.
ii. Who are liable for issuance - A director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration less than its par or
issued value: (b) consents to the issuance of stocks for the consideration
other than cash, valued in excess of its fair value; or (c) having knowledge
of the insufficient consideration, does not file written objection with the
corporate secretary, shall be liable to the corporation or its creditors,
solidarily with the (d) stockholder concerned for the difference between the
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value received at the time of issuance of the stock and the par or issued
value of the same. (Sec. 64)

Delinquency of shares
.i. Definition - Shares become delinquent when they are not fully paid
according to the subscription agreement or upon call by corporation.
.ii. Call
Subject to the provisions of the subscription contract, the board of directors
may, at any time, declare due and payable to the corporation unpaid
subscription and may collect the same or such percentage thereof, in either
case, with accrued interest, if any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof, together with any
interest accrued, shall be made on the date specified in the subscription
contract or on the date stated in the call made by the board. Failure to pay
on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance,
unless a different interest rate is provided in the subscription contract. The
interest shall be computed from the date specified, until full payment of the
subscription. If no payment is made within thirty (30) days from the said
date, all stocks covered by the subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless the
board of directors orders otherwise. (Sec. 66)
iii. Effects of delinquency – (a) No delinquent stock shall be voted for, be
entitled to vote, or be represented at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code, until and unless
payment is made by the holder of such delinquent stock for the amount due
on the distribution with accrued interest, and the costs and expenses of
advertisement, if any. (Sec. 70)
(b) … any cash dividends due on delinquent stock shall be first be applied to
the unpaid balance on the subscription plus costs and expenses, while stock
holders until their unpaid subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval of stockholders
representing at least two-thirds (2/3)of the outstanding capital stock at a
regular or special meeting duly called for the purpose. (Sec. 42)

iv. Remedies in case of delinquency

(a) a court action – Nothing in this Code shall prevent the corporation from
collecting through court action, the amount due on any unpaid subscription
with interest, costs and expenses. (Sec. 69)
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(b) delinquency sale - The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the
sale which shall not be less than thirty (30) days nor more than sixty (60)
days from the date the stock become delinquent.
Notice of the sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally, by registered mail, or through other
means provided in the by-laws. The same shall be published once a week
for two (2) consecutive weeks in newspaper of general circulation in the
province or city where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on the
former's subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at a public auction to such bidder who shall
offer to pay the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in the purchaser's favor. The
remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement, and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited as
fully paid in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the
provisions of this Code. (Sec. 67)
When Sale May be Questioned - No action to recover delinquent
stock sold can be sustained upon the ground of irregularity or defect
in the notice of sale, or in the sale itself of the delinquent stock, unless
the party seeking to maintain such action first pays or tenders to the
party holding the sum for which the same was sold with interest from
the date of sale at the legal rate. No such action shall be maintained
unless a complaint is filed within six (6) months from date of sale.
(Sec. 68)

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Modes of dissolution

A corporation formed or organized under the provisions of this Code may be

dissolved voluntarily or involuntarily. (Sec. 133)

1. By shortening of corporate term

A voluntary dissolution may be effected by amending the articles of

incorporation to shorten the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of incorporation shall be submitted to
the Commission in accordance with this Code.

Upon the expiration of the shortened term, as stated in the approved

amended articles of incorporation, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of this Code on
liquidation.

In the case of expiration of corporate term, dissolution shall automatically

take effect on the day following the last day of the corporate term stated in
the articles of incorporation, without the need for the issuance by the
Commission of a certificate of dissolution. (Sec. 136)

2. Voluntary dissolution where no creditors are affected

If dissolution of a corporation does not prejudice the rights of any creditor

having a claim against it, the dissolution may be effected by majority vote of
the board of directors or trustees, and by a resolution adopted by the
affirmative vote of the stockholders owning at least majority of the
outstanding capital stock or majority of the members of a meeting to be held
upon the call of the directors or trustees.

At least twenty (20) days prior to the meeting, notice shall be given to each
shareholder or member of record personally, by registered mail, or by any
means authorized under its bylaws whether or not entitled to vote at the
meeting, in the manner provided in Section 50 of this Code and shall state
that the purpose of the meeting is to vote on the dissolution of the
corporation. Notice of the time, place, and object of the meeting shall be
published once prior to the date of the meeting in a newspaper published in
the place where the principal office of said corporation is located, or if no
newspaper is published in such place, in a newspaper of general circulation
in the Philippines.

A verified request for dissolution shall be filed with the Commission stating:
(a) the reason for the dissolution; (b) the form, manner, and time when the
notices were given; (c) names of the stockholders and directors or members

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and trustees who approved the dissolution; (d) the date, place, and time of
the meeting in which the vote was made; and (e) details of publication.

The corporation shall submit the following to the Commission: (1) a copy of
the resolution authorizing the dissolution, certified by a majority of the board
of directors or trustees and countersigned by the secretary of the
corporation; (2) proof of publication; and (3) favorable recommendation
from the appropriate regulatory agency, when necessary.

Within fifteen (15) days from receipt of the verified request for dissolution,
and in the absence of any withdrawal within said period, the Commission
shall approve the request and issue the certificate of dissolution. The
dissolution shall take effect only upon the issuance by the Commission of a
certificate of dissolution.

No application for dissolution of banks, banking and quasi-banking

institutions, preneed, insurance and trust companies, NSSLAs, pawnshops,
and other financial intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation of the appropriate
government agency. (Sec. 134)

Dissolution of a corporation where creditors are affected

Where the dissolution of a corporation may prejudice the rights of any

creditor, a verified petition for dissolution shall be filed with the Commission.
The petition shall be signed by a majority of the corporation‘s board of
directors or trustees, verified by its president or secretary or one of its
directors or trustees, and shall set forth all claims and demands against it,
and that its dissolution was resolved upon by the affirmative vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or at least two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose. The petition shall likewise
state: (a) the reason for the dissolution; (b) the form, manner, and
time when the notices were given; and (c) the date, place, and time
of the meeting in which the vote was made. The corporation shall
submit to the Commission the following: (1) a copy of the resolution
authorizing the dissolution, certified by a majority of the board of directors or
trustees and countersigned by the secretary of the corporation; and (2) a list
of all its creditors.

If the petition is sufficient in form and substance, the Commission

shall, by an order reciting the purpose of the petition, fix a deadline for filing
objections to the petition which date shall not be less than thirty (30) days
nor more than sixty (60) days after the entry of the order. Before such date,
a copy of the order shall be published at least once a week for three
(3) consecutive weeks in a newspaper of general circulation published

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in the municipality or city Page 56of 73where the principal office of the
corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall
be posted for three (3) consecutive weeks in three (3) public places in such
municipality or city.

Upon five (5) days‘ notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed
to hear the petition and try any issue raised in the objections filed; and if no
such objection is sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and may appoint a receiver
to collect such assets and pay the debts of the corporation.

The dissolution shall take effect only upon the issuance by the Commission
of a certificate of dissolution. (Sec. 135)

Withdrawal of Request and Petition for Dissolution

A withdrawal of the request for dissolution shall be made in writing, duly

verified by any incorporator, director, trustee, shareholder, or member and
signed by the same number of incorporators, directors, trustees,
shareholders, or members necessary to request for dissolution as set forth in
the foregoing sections. The withdrawal shall be submitted no later than
fifteen (15) days from receipt by the Commission of the request for
dissolution. Upon receipt of a withdrawal of request for dissolution, the
Commission shall withhold action on the request for dissolution and shall,
after investigation: (a) make a pronouncement that the request for
dissolution is deemed withdrawn; (b) direct a joint meeting of the board of
directors or trustees and the stockholders or members for the purpose of
ascertaining whether to proceed with dissolution; or (c) issue such other
orders as it may deem appropriate.

A withdrawal of the petition for dissolution shall be in the form of a motion

and similar in substance to a withdrawal of request for dissolution but
shall be verified and filed prior to publication of the order setting the
deadline for filing objections to the petition. (Sec. 137)

Involuntary dissolution

A corporation may be dissolved by the Commission motu proprio or upon

filing of a verified complaint by any interested party. The following may be
grounds for dissolution of the corporation:

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(a) Non-use of corporate charter as provided under Section 21 of this

Code;

(b) Continuous in operation of a corporation as provided under

Section 21 of this Code;

(c) Upon receipt of a lawful court order dissolving the corporation;

(d) Upon finding by final judgment that the corporation procured its
incorporation through fraud;

(e) Upon finding by final judgment that the corporation:

(e.1) Was created for the purpose of committing, concealing

or aiding the commission of securities violations, smuggling, tax
evasion, money laundering, or graft and corrupt practices;

(e.2) Committed or aided in the commission of securities

violations, smuggling, tax evasion, money laundering, or graft and
corrupt practices, and its stockholders knew; and

(e.3) Repeatedly and knowingly tolerated the commission of graft

and corrupt practices or other fraudulent or illegal acts by its directors,
trustees, officers, or employees.

If the corporation is ordered dissolved by final judgment pursuant to

the grounds set forth in sub-paragraph (e) hereof, its assets, after
payment of its liabilities, shall, upon petition of the Commission
with the appropriate court, be forfeited in favor of the national
government. Such forfeiture shall be without prejudice to the
rights of innocent stockholders and employees for services
rendered, and to the application of other penalty or sanction under this
Code or other laws.

The Commission shall give reasonable notice to, and coordinate

with, the appropriate regulatory agency prior to the involuntary
dissolution of companies under their special regulatory jurisdiction.
(Sec. 138)

Liquidation

When a corporation had been dissolved, its affairs shall be wound up. This
is known as liquidation.

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How liquidation done

(1) By the corporation itself

Except for banks, which shall be covered by the applicable provisions of

Republic Act No. 7653, otherwise known as the ―New Central Bank Act‖, as
amended, and Republic Act No. 3591, otherwise known as the Philippine
Deposit Insurance Corporation Charter, as amended, every corporation
whose charter expires pursuant to its articles of incorporation, is annulled by
forfeiture, or whose corporate existence is terminated in any other manner,
shall nevertheless remain as a body corporate for three (3) years after the
effective date of dissolution, for the purpose of prosecuting and defending
suits by or against it and enabling it to settle and close its affairs, dispose of
and convey its property, and distribute its assets, but not for the purpose of
continuing the business for which it was established. (Sec. 139)

(2) Conveyance to a trustee within a three-year period

(3) By management committee or rehabilitation receiver

Liquidation after three years

The trustee may commence a suit which can proceed to final judgment even
beyond the three-year period. No reason can be conceived why a suit
already commenced by the corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation should not be accorded similar treatment allowed — to
proceed to final judgment and execution thereof.‖ (Reburiano v. Court of
Appeals, G.R. No. 102965, January 21, 1999)

"Upon the appointment [by the SEC] of a management committee or a

rehabilitation receiver, all actions for claims against the corporation pending
before any court, tribunal or board shall ipso jure be suspended . The
justification for the automatic stay of all pending actions for claims is to
enable the management committee or the rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the rescue of the debtor
company. To allow such other actions to continue would only add to the
burden of the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against the
corporation instead of being directed toward its restructuring and
rehabilitation." (Lingkod Manggagawa sa Rubberworld v. Rubberworld
Phils., G.R. No. 153882, January 29, 2007)

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Close corporation

Definition

A close corporation, within the meaning of this Code, is one: whose articles
of incorporation provides that: (a) all the corporation‘s issued stock of all
classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20); (b)
all the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and (c) the
corporation shall not list in any stock exchange or make any public offering of
its stocks of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except

mining or oil companies, stock exchanges, banks, insurance companies,
public utilities, educational institutions and corporations declared to be
vested with public interest in accordance with the provisions of this Code.
(Sec. 95)

Validity of Restrictions on Transfer of Shares

Restrictions on the right to transfer shares must appear in (a) the articles of
incorporation, in the (b) by-laws, as well as in the (c) certificate of stock;
otherwise, the same shall not be binding on any purchaser in good faith.
Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or period
stated. If, upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring
stockholder may sell their shares to any third person. (Sec. 97)

Effects if Issuance or Transfer of Stock in Breach of Qualifying

Conditions
(a) If a stock of a close corporation is issued or transferred to any person
who is not eligible to be a holder thereof under any provision of the articles of
incorporation, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such

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person is conclusively presumed to have notice of the fact of the ineligibility

to be a stockholder.
(b) If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be stockholders of
record, and if the certificate for such stock conspicuously states such
number, and the issuance or transfer of stock to any person would cause the
stock to be held by more than such number of persons, the person to whom
such stock is issued of transferred is conclusively presumed to have notice
of this fact.
(c) If a stock certificate of a close corporation conspicuously shows a
restriction on transfer of the corporation has been issued or transferred has
or is conclusively presumed to have notice of the fact that the stock in
violation of such restriction, the transferee is conclusively presumed to have
notice of the fact that the stock was acquired in violation of the restriction.
(d) Whenever a person to whom stock of a close corporation has been
issued or transferred has or is conclusively presumed under this section to
have notice of: (1) the person's ineligibility to be a stockholder of the
corporation; or (2) that the transfer of stock would cause the stock of the
corporation to be held by more than the number of persons permitted under
its articles of incorporation ; or (3) that the transfer violates a restriction on
transfer of stock, the corporation may, at its option, refuse to register the
transfer in the name of the transferee.
(e) The provisions of subsection (d) shall not be applicable if the transfer of
stock, though contrary to subsections (a), (b) or (c), has been consented to
by all stockholders of the close corporation, or if the close corporation has
amended its articles of incorporation in accordance with this Title.
The term "transfer", as used in this section, is not limited to a transfer
for value.
The provisions of this section shall not impair any right which the transferee
may have to either rescind the transfer or recover the stock under any
express or implied warranty. (Sec. 98)

Preemptive Right in Close Corporations

The preemptive right of stockholders in close corporations shall extend to all

stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate
debts, unless the articles of incorporation provide otherwise. (Sec. 101)

Direct management by stockholders

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The articles of incorporation of a close corporation may provide that

the business of the corporation shall be managed by the stockholders
of the corporation rather than by a board of directors. So long as this
provision continues in effect, no meeting of stockholders need be called to
elect directors: Provided, That the stockholders of the corporation shall
be deemed to be directors for the purpose of applying the provisions of this
Code, unless the context clearly requires otherwise: Provided, further, That
the stockholders of the corporation shall be subject to all liabilities of
directors. (Sec. 96)

When a Board Meeting is Unnecessary or Improperly held

Unless the by-laws provide otherwise, any action taken by the directors of a
close corporation without a meeting called properly and with due notice
shall nevertheless be deemed valid if:
(a) before or after such action is taken, a written consent thereto is
signed by all the directors; or
(b) all the stockholders have actual or implied knowledge of the
action and make no prompt objection in writing; or
(c) the directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
(d) all the directors have express or implied knowledge of the action
in question and none of them makes prompt objection in writing.
An action within the corporate powers taken at a meeting held without
proper call or notice is deemed ratified by a director who failed to
attend, unless after having knowledge thereof, the director promptly
files his written objection with the secretary of the corporation. (Sec.
100)

Amendment of Articles of Incorporation

Any amendment to the articles of incorporation which seeks to delete or

remove any provision required by this Title or to reduce a quorum or voting
requirement stated in said articles of incorporation shall require the
affirmative vote of at least two-thirds (2/3) of the outstanding capital stock,
whether with or without voting rights, or of such greater proportion of shares
as may be specifically provided in the articles of incorporation for amending,
deleting or removing any of the aforesaid provisions, at a meeting duly
called for the purpose. (Sec.. 102)

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Deadlocks

Notwithstanding any contrary provision in the close corporation‘s articles of

incorporation, by-laws, or stockholders‘ agreement, if the directors or
stockholders are so divided on the management of the corporation‘s
business and affairs that the votes required for a corporate action cannot be
obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the
stockholders generally, the Commission, upon written petition by any
stockholder, shall have the power: (a) to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make
appropriate orders, such as:

(a.1) cancelling or altering any provision contained in the articles of

incorporation, by-laws, or any stockholder‘s agreement;

(a.2) cancelling, altering or enjoining a resolution or act of the corporation or

its board of directors, stockholders, or officers;

(a.3) directing or prohibiting any act of the corporation or its board of

directors, stockholders, officers, or other persons party to the action;

(a,4) requiring the purchase at their fair value of shares of any

stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or (b) by the other stockholders
(b.1) appointing a provisional director; (b.2) dissolving the corporation; or
(b.3) ranting such other relief as the circumstances may warrant.

A provisional director shall be an impartial person who is neither a

stockholder nor a creditor of the corporation or any of its subsidiaries or
affiliates, and whose further qualifications, if any, may be determined by the
Commission.

A provisional director is not a receiver of the corporation and does not have
the title and powers of a custodian or receiver.

A provisional director shall have all the rights and powers of a duly elected
director, including the right to be notified of and to vote at meetings of
directors until removed by order of the Commission or by all the
stockholders.

The compensation of the provisional director shall be determined by

agreement between such director and the corporation, subject to approval
of the Commission, which may fix the compensation absent an
agreement or in the event of disagreement between the provisional
director and the corporation. (Sec. 103)
‗

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Non-stock corporations

Definition

For purposes of this Code and subject to its provisions on dissolution, a non-
stock corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers: Provided, That any profit
which a non-stock corporation may obtain incidental to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the
provisions of this Title. (Sec. 86)

Purposes

Non-stock corporations may be formed or organized for charitable, religious,

educational, professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of
this Title governing particular classes of non-stock corporations. (Sec. 87)

Treatment of profits
(Jurisprudence)

In a non-stock corporation, earning profits is merely its secondary, not

primary, purpose. In fact, it may not lawfully engage in any business activity
for profit, for to do so would change or contradict its nature as a non-profit
entity. It may, however, invest its corporate funds in order to earn additional
income for paying its operating expenses and meeting benefit claims. Any
excess profit it obtains as an incident to its operations can only be used,
whenever necessary or proper, for the furtherance of the purpose for which it
was organized. (Republic v. Sunlife Assurance Company of Canada, G.R.
No. 158085, Oct. 14, 2005)

Plan and distribution of assets upon dissolution

The assets of a non-stock corporation undergoing the process of

dissolution for reasons other than those set forth in Section 139 of this Code,
shall be applied and distributed as follows:

(a) All liabilities and obligations of the corporation shall be paid,

satisfied and discharged, or adequate provision shall be made
therefor;

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(b) Assets held by the corporation upon a condition requiring return,

transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements;

(c) Assets received and held by the corporation subject to limitations

permitting their use only for charitable, religious, benevolent,
educational or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of the dissolution,
shall be transferred or conveyed to one (1) or more corporations,
societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant to this Chapter;

(d) Assets other than those mentioned in the preceding

paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the extent
that the articles of incorporation or the by-laws determine the
distributive rights of members, or any class or classes of members, or
provide for distribution; and

(e) In any other case, assets may be distributed to such persons,

societies, organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter. (Sec. 93)

Plan of Distribution of Assets

A plan providing for the distribution of assets, consistent with the provisions
of this Title, may be adopted by a non-stock corporation in the process
of dissolution in the following manner:

(a) The board of trustees shall, by majority vote, adopt a resolution

recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members
having voting rights;

(b) Each member entitled to vote shall be given a written notice

setting forth the proposed plan of distribution or a summary thereof
and the date, time and place of such meeting within the time and in
the manner provided in this Code for the giving of notice of meetings;
and

(c) Such plan of distribution shall be adopted upon approval of at least

two-thirds (2/3) of the members having voting rights present or
represented by proxy at such meeting. (Sec. 94)

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Educational corporations

Educational corporations shall be governed by special laws and by the

general provisions of this Code. (Sec. 105)

Board of Trustees – Trustees of educational institutions organized as non-

stock corporations shall not be less than five (5) nor more than fifteen (15):
Provided, That the number of trustees shall be in multiples of five (5).

Unless otherwise provided in the articles of incorporation or by-laws, the

board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term
of office of one-fifth (1/5) of their number shall expire every year.
Trustees thereafter elected to fill vacancies, occurring before the expiration
of a particular term, shall hold office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by expiration of term shall hold
office for five (5) years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall
be defined in the bylaws.

For institutions organized as stock corporations, the number and term of

directors shall be governed by the provisions on stock corporations. (Sec.
106)

Religious corporations

Classes of Religious Corporations

Religious corporations may be incorporated by one or more persons. Such

corporations may be classified into: (a) corporation sole and (b) religious
societies. Religious corporations shall be governed by this Chapter and by
the general provisions on non-stock corporations insofar as applicable.
(Sec. 107)

Corporation sole; nationality

For the purpose of administering and managing, as trustee, the affairs,

property and temporalities of any religious denomination, sect or church, a
corporation sole may be formed by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding elder of such religious denomination, sect,
or church. (Sec. 108)

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Articles of incorporation

In order to become a corporation sole, the chief archbishop, bishop, priest,

minister, rabbi or presiding elder of any religious denomination, sect or
church must file with the Commission articles of incorporation setting forth
the following:

(a) That the applicant chief archbishop, bishop, priest, minister, rabbi, or
presiding elder represents the religious denomination, sect, or church which
desires to become a corporation sole;

(b) That the rules, regulations and discipline of the religious denomination,
sect or church are consistent with becoming a corporation sole and do not
forbid it;

(c) That such chief archbishop, bishop, priest, minister, rabbi, or presiding
elder is charged with the administration of the temporalities and the
management of the affairs, estate and properties of the religious
denomination, sect or church within the territorial jurisdiction, so
described succinctly in the articles of incorporation;

(d) The manner by which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi, or presiding elder is required to be
filled, according to the rules, regulations or discipline of the religious
denomination, sect or church; and

(e) The place where the principal office of the corporation sole is to
be established and located, which place must be within the territory of the
Philippines.

The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation. (Sec. 109)

The articles of incorporation must be verified, by affidavit or affirmation of the

chief archbishop, bishop, priest, minister, rabbi, or presiding elder, as the
case may be, and accompanied by a copy of the commission, certificate of
election or letter of appointment of such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder, duly certified to be correct by any notary
public.

From and after filing with the Commission of the said articles of
incorporation, verified by affidavit or affirmation, and accompanied by the
documents mentioned in the preceding paragraph, such chief archbishop,
bishop, priest, minister, rabbi, or presiding elder shall become a corporation
sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed as such

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chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall be

personally held in trust as a corporation sole, for the use, purpose, exclusive
benefit and on behalf of the religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages, and cemeteries
thereof. (Sec. 110)

Acquisition and Alienation of Property

A corporation sole may purchase and hold real estate and personal property
for its church, charitable, benevolent, or educational purposes, and may
receive bequests or gifts for such purposes. Such corporation may sell or
mortgage real property held by it by obtaining an order for that purpose from
the Regional Trial Court of the province where the property is situated upon
proof that the notice of the application for leave to sell or mortgage has been
made through publication or as directed by the Court, and that it is in the
interest of the corporation that leave to sell or mortgage be granted. The
application for leave to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest, minister, rabbi, or presiding
elder acting as corporation sole, and may be opposed by any member of the
religious denomination, sector church represented by the corporation sole:
Provided, That in cases where the rules, regulations, and discipline of the
religious denomination, sect or church, religious society, or order concerned
represented by such corporation sole regulate the method of acquiring,
holding, selling, and mortgaging real estate and personal property, such
rules, regulations and discipline shall govern, and the intervention of
the courts shall not be necessary. (Sec. 111)

Filling of Vacancies

The successors in office of any chief archbishop, bishop, priest, minister,

rabbi, or presiding elder in a corporation sole shall become the corporation
sole on their accession to office and shall be permitted to transact business
as such upon filing a copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary public with the
Commission.

During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi, or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized by
the rules, regulations or discipline of the religious denomination, sect or
church represented by the corporation sole to administer the temporalities
and manage the affairs, estate, and properties of the corporation sole shall
exercise all the powers and authority of the corporation sole during such
vacancy. (Sec. 112)

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Dissolution

A corporation sole may be dissolved and its affairs settled voluntarily by

submitting to the Commission a verified declaration of dissolution, setting
forth:

(a) The name of the corporation;

(b) The reason for dissolution and winding up;

(c) The authorization for the dissolution of the corporation by

the particular religious denomination, sect or church; and

(d) The names and addresses of the persons who are to

supervise the winding up of the affairs of the corporation.

Upon approval of such declaration of dissolution by the Commission,

the corporation shall cease to carry on its operations except for the
purpose of winding up its affairs. (Sec. 113)

Jurisprudence

"x x x every corporation sole then organized and registered had by express
provision of law the necessary power and qualification to purchase in its
name private lands located in the territory in which it exercised its functions
or ministry and for which it was created, independently of the nationality of its
incumbent unique and single member and head, the bishop of the dioceses.
It can be also maintained without fear of being gainsaid that the Roman
Catholic Apostolic Church in the Philippines has no nationality and that the
framers of the Constitution, as will be hereunder explained, did not have in
mind the religious corporations sole when they provided that 60 per centum
of the capital thereof be owned by Filipino citizens." (Roman Catholic
Apostolic Church v. Land Registration Commission, G.R. No. L-8451,
Dec. 20, 1957)

Religious societies

Unless forbidden by competent authority, the Constitution, pertinent rules,

regulations, or discipline of the religious denomination, sect or church of
which it is a part, any religious society, religious order, diocese, synod,
or district organization of any religious denomination, sect or church, may,
upon written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management of its affairs,

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properties, and estate by filing with the Commission, articles of incorporation

verified by the affidavit of the presiding elder, secretary, or clerk or other
member of such religious society or religious order, or diocese, synod, or
district organization of the religious denomination, sector church, setting
forth the following:

(a) That the religious society or religious order, or diocese, synod, or

district organization is a religious organization of a religious
denomination, sect or church;

(b) That at least two-thirds (2/3) of its membership has given written
consent or has voted to incorporate, at a duly convened meeting of
the body;

(c) That the incorporation of the religious society or religious order, or

diocese, synod, or district organization is not forbidden by
competent authority or by the Constitution, rules, regulations or
discipline of the religious denomination, sect or church of which it
forms part;

(d) That the religious society or religious order, or diocese, synod, or

district organization desires to incorporate for the administration of its
affairs, properties and estate;

(e) The place within the Philippines where the principal office of the
corporation is to be established and located; and

(f) The names, nationalities, and residence addresses of the trustees,

not less than five (5) nor more than fifteen (15), elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization. (Sec. 114)

One person corporations

A One Person Corporation is a corporation with a single stockholder:

Provided, That only a natural person, trust, or an estate may form a One
Person Corporation. (Sec. 116)

Excepted corporations

x x x Banks and quasi-banks, pre-need, trust, insurance, public and publicly-

listed companies, and non-chartered government-owned and -controlled
corporations may not incorporate as One Person Corporations: Provided,

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further, That a natural person who is licensed to exercise a profession

may not organize as a One Person Corporation for the purpose of
exercising such profession except as otherwise provided under special laws.
(Sec. 116)

Capital stock requirement

Minimum Capital Stock Required for One Person Corporation. – A One

Person Corporation shall not be required to have a minimum authorized
capital stock, except as otherwise provided by special law. (Sec. 117)

Articles of incorporation and by-laws

A One Person Corporation shall file articles of incorporation in accordance

with the requirements under Section 14 of this Code. It shall likewise
substantially contain the following:

(a) If the single stockholder is a trust or an estate, the name, nationality,

and residence of the trustee, administrator, executor, guardian,
conservator, custodian, or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or
estate; and

(b) Name, nationality, residence of the nominee and alternate

nominee, and the extent, coverage and limitation of the authority.
(Sec. 118)

By-laws

The One Person Corporation is not required to submit and file corporate
bylaws. (Sec. 119)

Corporate name

A One Person Corporation shall indicate the letters ―OPC‖ either below or at
the end of its corporate name. (Sec. 120)

Single Stockholder as Director, President

The single stockholder shall be the sole director and president of the One
Person Corporation. (Sec. 121)

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Treasurer, Corporate Secretary, and Other Officers

Within fifteen (15) days from the issuance of its certificate of incorporation,
the One Person Corporation shall appoint a treasurer, corporate secretary,
and other officers as it may deem necessary, and notify the
Commission thereof within five (5) days from appointment.

The single stockholder may not be appointed as the corporate secretary.

A single stockholder who is likewise the self-appointed treasurer of the

corporation shall give a bond to the Commission in such a sum as may be
required: Provided, That the said stockholder/treasurer shall undertake in
writing to faithfully administer the One Person Corporation‘s funds to be
received as treasurer, and to disburse and invest the same according to the
articles of incorporation as approved by the Commission. The bond shall be
renewed every two (2) years or as often as may be required. (Sec. 122)

Special Functions of the Corporate Secretary

In addition to the functions designated by the One Person Corporation, the

corporate secretary shall:

(a) Be responsible for maintaining the minutes book and/or records of

the corporation;

(b) Notify the nominee or alternate nominee of the death or

incapacity of the single stockholder, which notice shall be given no
later than five (5) days from such occurrence;

(c) Notify the Commission of the death of the single stockholder

within five (5) days from such occurrence and stating in such notice
the names, residence addresses, and contact details of all known
legal heirs; and

(d) Call the nominee or alternate nominee and the known legal
heirs to a meeting and advise the legal heirs with regard to, among
others, the election of a new director, amendment of the articles of
incorporation, and other ancillary and/or consequential matters. (Sec.
123)

Nominee/alternate nominee

The single stockholder shall designate a nominee and an alternate nominee

who shall, in the event of the single stockholder‘s death or incapacity, take

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the place of the single stockholder as director and shall manage the
corporation‘s affairs.

The articles of incorporation shall state the names, residence addresses and
contact details of the nominee and alternate nominee, as well as the extent
and limitations of their authority in managing the affairs of the One Person
Corporation.

The written consent of the nominee and alternate nominee shall be

attached to the application for incorporation. Such consent may be
withdrawn in writing any time before the death or incapacity of the single
stockholder. (Sec. 124)

Term of Nominee and Alternate Nominee

When the incapacity of the single stockholder is temporary, the nominee

shall sit as director and manage the affairs of the One Person Corporation
until the stockholder, by self-determination, regains the capacity to assume
such duties.

In case of death or permanent incapacity of the single stockholder, the

nominee shall sit as director and manage the affairs of the One Person
Corporation until the legal heirs of the single stockholder have been lawfully
determined, and the heirs have designated one of them or have agreed that
the estate shall be the single stockholder of the One Person Corporation.

The alternate nominee shall sit as director and manage the One Person
Corporation in case of the nominee‘s inability, incapacity, death, or refusal to
discharge the functions as director and manager of the corporation, and only
for the same term and under the same conditions applicable to the nominee.
(Sec. 125)

Change of Nominee or Alternate Nominee

The single stockholder may, at any time, change its nominee and alternate
nominee by submitting to the Commission the names of the new nominees
and their corresponding written consent. For this purpose, the articles of
incorporation need not be amended. (Sec. 126)

Minutes Book

A One Person Corporation shall maintain a minutes book which shall contain
all actions, decisions, and resolutions taken by the One Person Corporation.
(Sec. 127)

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Records in Lieu of Meetings

When action is needed on any matter, it shall be sufficient to prepare a

written resolution, signed and dated by the single stockholder, and recorded
in the minutes book of the One Person Corporation. The date of recording in
the minutes book shall be deemed to be the date of the meeting for all
purposes under this Code. (Sec. 128)

Liability of Single Shareholder

A sole shareholder claiming limited liability has the burden of affirmatively

showing that the corporation was adequately financed.

Where the single stockholder cannot prove that the property of the One
Person Corporation is independent of the stockholder‘s personal property,
the stockholder shall be jointly and severally liable for the debts and other
liabilities of the One Person Corporation.

The principles of piercing the corporate veil apply with equal force to One
Person Corporations as with other corporations. (Sec. 130)

Conversion of corporation to one person corporation

When a single stockholder acquires all the stocks of an ordinary stock

corporation, the latter may apply for conversion into a One Person
Corporation, subject to the submission of such documents as the
Commission may require. If the application for conversion is approved, the
Commission shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion. The One Person Corporation
converted from an ordinary stock corporation shall succeed the latter and be
legally responsible for all the latter‘s outstanding liabilities as of the date of
conversion. (Sec. 131)

Conversion from a One Person Corporation to an Ordinary Stock

Corporation

A One Person Corporation may be converted into an ordinary stock

corporation after due notice to the Commission of such fact and of the
circumstances leading to the conversion, and after compliance with all other
requirements for stock corporations under this Code and applicable rules.
Such notice shall be filed with the Commission within sixty (60) days from the
occurrence of the circumstances leading to the conversion into an ordinary
stock corporation. If all requirements have been complied with, the

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Commission shall issue a certificate of filing of amended articles of

incorporation reflecting the conversion.

In case of death of the single stockholder, the nominee or alternate nominee

shall transfer the shares to the duly designated legal heir or estate within
seven (7) days from receipt of either an affidavit of heirship or self-
adjudication executed by a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify the Commission of
the transfer. Within sixty (60) days from the transfer of the shares, the legal
heirs shall notify the Commission of their decision to either wind up and
dissolve the One Person Corporation or convert it into an ordinary stock
corporation.

The ordinary stock corporation converted from a One Person Corporation

shall succeed the latter and be legally responsible for all the latter‘s
outstanding liabilities as of the date of conversion. (Sec. 132)

Foreign corporations

Definition

For purposes of this Code, a foreign corporation is one formed, organized or

existing under laws other than those of the Philippines‘ and whose laws allow
Filipino citizens and corporations to do business in its own country or State.
It shall have the right to transact business in the Philippines after obtaining a
license for that purpose in accordance with this Code and a certificate of
authority from the appropriate government agency. (Sec. 140)

Application to Existing Foreign Corporations

Every foreign corporation which, on the date of the effectivity of this Code, is
authorized to do business in the Philippines under a license issued to it shall
continue to have such authority under the terms and conditions of its license,
subject to the provisions of this Code and other special laws. (Sec. 141)

Doctrine of "doing business," meaning

Foreign Investments Act of 1991 (RA.7042) Section 3(d) provides:. The

phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred
eighty (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the

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Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization: Provided, however, That the phrase
"doing business: shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.

Jurisprudence

The true test, however, seems to be whether the foreign corporation is

continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it
over to another. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to,and in
progressive prosecution of, the purpose and object of its organization.
(Mentholatum Co. v. Mangaliman, et. al., G.R. No. L-47701, June 27,
1941):

Application for a License

A foreign corporation applying for a license to transact business in the

Philippines shall submit to the Commission a copy of its articles of
incorporation and by-laws, certified in accordance with law, and their
translation to an official language of the Philippines, if necessary. The
application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:

(a) The date and term of incorporation;

(b) The address, including the street number, of the principal office of
the corporation in the country or State of incorporation;

(c) The name and address of its resident agent authorized to accept
summons and process in all legal proceedings and all notices
affecting the corporation, pending the establishment of a local office;

(d) The place in the Philippines where the corporation intends to

operate;

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(e) The specific purpose or purposes which the corporation

intends to pursue in the transaction of its business in the
Philippines: Provided, Thatsaid purpose or purposes are those
specifically stated in the certificate of authority issued by the
appropriate government agency;

(f) The names and addresses of the present directors and officers of
the corporation;

(g) A statement of its authorized capital stock and the aggregate

number of shares which the corporation has authority to issue,
itemized by class, par value of shares, shares without par value, and
series, if any;

(h) A statement of its outstanding capital stock and the aggregate

number of shares which the corporation has issued, itemized by class,
par value of shares, shares without par value, and series, if any;

(i) A statement of the amount actually paid in; and

(j) Such additional information as may be necessary or

appropriate in order to enable the Commission to determine
whether such corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the fees payable.

Attached to the application for license shall be a certificate under oath

duly executed by the authorized official or officials of the jurisdiction of
its incorporation, attesting to the fact that the laws of the country or
State of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in
good standing. If the certificate is in a foreign language, a translation
thereof in English under oath of the translator shall be attached to the
application.

The application for a license to transact business in the

Philippines shall likewise be accompanied by a statement under
oath of the president or any other person authorized by the
corporation, showing to the satisfaction of the Commission and
when appropriate, other governmental agencies that the applicant is
solvent and in sound financial condition, setting forth the assets and
liabilities of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.

Foreign banking, financial, and insurance corporations shall, in

addition to the above requirements, comply with the provisions of
existing laws applicable to them. In the case of all other foreign
corporations, no application for license to transact business in the

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Philippines shall be accepted by the Commission without previous

authority from the appropriate government agency, whenever required
by law. (Sec. 142)

Issuance of license

(Refer to Sec. 143)

Who May be a Resident Agent

A resident agent may be either an individual residing in the Philippines or a

domestic corporation lawfully transacting business in the Philippines:
Provided, That an individual resident agent must be of good moral character
and of sound financial standing: Provided, further, That in case of a domestic
corporation who will act as a resident agent, it must likewise be of sound
financial standing and must show proof that it is in good standing as certified
by the Commission. (Sec. 144)

Resident Agent; Service of Process

As a condition to the issuance of the license for a foreign corporation to

transact business in the Philippines, such corporation shall file with the
Commission a written power of attorney designating a person who must be a
resident of the Philippines, on whom summons and other legal processes
may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be
admitted and held as valid as if served upon the duly authorized officers of
the foreign corporation at its home office. (Sec. 145)

Resident Agent; Service of Process

As a condition to the issuance of the license for a foreign corporation to

transact business in the Philippines, such corporation shall file with the
Commission a written power of attorney designating a person who must be a
resident of the Philippines, on whom summons and other legal processes
may be served in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident agent shall be
admitted and held as valid as if served upon the duly authorized officers of
the foreign corporation at its home office. Such foreign corporation shall
likewise execute and file with the Commission an agreement or stipulation,
executed by the proper authorities of said corporation, in form and substance
as follows:

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The (name of foreign corporation) hereby stipulates and

agrees, in consideration of being granted a license to transact
business in the Philippines, that if the corporation shall cease
to transact business in the Philippines, or shall be without any
resident agent in the Philippines on whom any summons or
other legal processes may be served, then service of any
summons or other legal process may be made upon the
Commission in any action or proceeding arising out of any
business or transaction which occurred in the Philippines and
such service shall have the same force and effect as if made
upon the duly authorized officers of the corporation at its home
office.

Whenever such service of summons or other process is made upon the

Commission, the Commission shall, within ten (10) days thereafter, transmit
by mail a copy of such summons or other legal process to the corporation at
its home or principal office. The sending of such copy by the Commission
shall be a necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance by the
party at whose instance the service is made.

It shall be the duty of the resident agent to immediately notify the

Commission in writing of any change in the resident agent‘s address. (Sec.
145)

Law Applicable. – A foreign corporation lawfully doing business in the

Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except those which provide for the
creation, formation, organization or dissolution of corporations or those which
fix the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation.
(Sec. 146)

Service upon foreign private juridical entities

When the defendant is a foreign private juridical entity which has transacted
business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if there be no such
agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines. (Sec. Rule 11, Rules of
Court)

Amendment of license

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A foreign corporation authorized to transact business in the Philippines shall

obtain an amended license in the event it changes its corporate name, or
desires to pursue other or additional purposes in the Philippines, by
submitting an application with the Commission, favorably endorsed by the
appropriate government agency in the proper cases (Sec. 148)

Personality to sue and be sued

No foreign corporation transacting business in the Philippines without a

license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines, but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. (Sec. 150)

When considered doing business:

That the phrase "doing business‖ shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own
account. (Foreign Investments Act of 1991 (RA 7042), Sec 3(d))

Test of doing business

The test of ―doing business‖ is not the number or quantity of transactions, but
rather the intention of the entity to continue its business in the country. (Top-
Weld Manufacturing v. ECED, S.A., et. al., G.R. No. L-44944, August 9,
1985)

Isolated transactions

The phrase "isolated transaction" has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from the common business of
a foreign enterprise in the sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the business organization.
Whether a foreign corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but more upon the nature and
character of the transactions. (Eriks PTE v. Court of Appeals, G.R. No.
118843, February 6, 1997)

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Grounds for revocation of license

Without prejudice to other grounds provided under special laws, the license
of a foreign corporation to transact business in the Philippines may be
revoked or suspended by the Commission upon any of the following
grounds:

(a) Failure to file its annual report or pay any fees as

required by this Code;

(b) Failure to appoint and maintain a resident agent

in the Philippines as required by this Title;

(c) Failure, after change of its resident agent or

address, to submit to the Commission a statement of
such change as required by this Title;

(d) Failure to submit to the Commission an

authenticated copy of any amendment to its articles
of incorporation or bylaws or of any articles of merger or
consolidation within the time prescribed by this Title;

(e) A misrepresentation of any material matter in any

application, report, affidavit or other document submitted
by such corporation pursuant to this Title;

(f) Failure to pay any and all taxes, imposts,

assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political
subdivisions;

(g) Transacting business in the Philippines outside

of the purpose or purposes for which such
corporation is authorized under its license;

(h) Transacting business in the Philippines as agent

of or acting on behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines;
or

(I) Any other ground as would render it unfit to transact

business in the Philippines. (Sec. 151)

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MERGER and CONSOLIDATION

Two (2) or more corporations may merge into a single corporation which
shall be one of the constituent corporations or two (2) or more corporations
may consolidate into a new single corporation which shall be the
consolidated corporation. (Sec. 75)

Procedure in Merger or Consolidation

(1) The board of directors or trustees of each corporation, party to the

merger or consolidation, shall approve a plan of merger or consolidation
setting forth the following:

(a) The names of the corporations proposing to merge or consolidate,

hereinafter referred to as the constituent corporations;

(b) The terms of the merger or consolidation and the mode of

carrying the same into effect;

(c) A statement of the changes, if any, in the articles of

incorporation of the surviving corporation in case of merger; and, in
case of consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this Code;
and

(d) Such other provisions with respect to the proposed merger or

consolidation as are deemed necessary or desirable. (Sec. 75)

(2) After the approval by the stockholders or members as required by the

preceding section, articles of merger or articles of consolidation shall be
executed by each of the constituent corporations, to be signed by the
president or vice president and certified by the secretary or assistant
secretary of each corporation setting forth:

(a) The plan of the merger or the plan of consolidation;

(b) As to stock corporations, the number of shares outstanding, or in

the case of non-stock corporations, the number of members;

(c) As to each corporation, the number of shares or members voting

for or against such plan, respectively;

(d) The carrying amounts and fair values of the assets and
liabilities of the respective companies as of the agreed cut-off date;

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(e) The method to be used in the merger or consolidation of accounts

of the companies;

(f) The provisional or pro forma values, as merged or consolidated,

using the accounting method; and

(g) Such other information as may be prescribed by the Commission.

(Sec. 77)

Contents of Articles of Merger or Consolidation

Upon approval by a majority vote of each of the board of directors or trustees

of the constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members of
each of such corporations at separate corporate meetings duly called for the
purpose. Notice of such meetings shall be given to all stockholders or
members of the respective corporations in the same manner as giving notice
of regular or special meetings under Section 49 of this Code. The notice
shall state the purpose of the meeting and include a copy or a summary of
the plan of merger or consolidation.

The affirmative vote of stockholders representing at least two-thirds (2/3) of

the outstanding capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in the case of non-
stock corporations shall be necessary for the approval of such plan.
Any dissenting stockholder may exercise the right of appraisal in accordance
with this Code: Provided, That if after the approval by the stockholders of
such plan, the board of directors decides to abandon the plan, the right of
appraisal shall be extinguished.

Any amendment to the plan of merger or consolidation may be made:

Provided, That such amendment is approved by a majority vote of the
respective boards of directors or trustees of all the constituent corporations
and ratified by the affirmative vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the
members of each of the constituent corporations. Such plan, together with
any amendment, shall be considered as the agreement of merger or
consolidation. (Sec. 76)

Effects of Merger or Consolidation

The merger or consolidation shall have the following effects:

(a) The constituent corporations shall become a single corporation which, in

case of merger, shall be the surviving corporation designated in the plan of

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merger; and, in case of consolidation, shall be the consolidated corporation

designated in the plan of consolidation;

(b) The separate existence of the constituent corporations shall cease,

except that of the surviving or the consolidated corporation;

(c) The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities, and powers and shall be subject to all
the duties and liabilities of a corporation organized under this Code;

(d) The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and franchises of each constituent
corporation; and all real or personal property, all receivables due on
whatever account, including subscriptions to shares and other choses in
action, and every other interest of, belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and

(e) The surviving or consolidated corporation shall be responsible for all the
liabilities and obligations of each constituent corporation as though such
surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or
against any constituent corporation may be prosecuted by or against the
surviving or consolidated corporation. (Sec. 79)

Effectivity

The articles of merger or of consolidation, signed and certified as required by

this Code, shall be submitted to the Commission for its approval: Provided,
That in the case of merger or consolidation of banks or banking institutions,
loan associations, trust companies, insurance companies, public utilities,
educational institutions, and other special corporations governed by special
laws, the favorable recommendation of the appropriate government agency
shall first be obtained. If the Commission is satisfied that the merger or
consolidation of the corporations concerned is consistent with the provisions
of this Code and existing laws, it shall issue a certificate approving the
articles and plan of merger or of consolidation, at which time the merger or
consolidation shall be effective.

If, upon investigation, the Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the
provisions of this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Written notice of the
date, time, and place of hearing shall be given to each constituent
corporation at least two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code. (Sec. 78)

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FINANCE REHABILITATION & INSOLVENCY ACT

(RA No. 10142)

Purpose of the law

To encourage debtors, both juridical and natural persons, and their creditors
to collectively and realistically resolve and adjust competing claims and
property rights.

Debtors, who are:

(a) sole proprietorship registered with the Department of Trade and
Industry;

(b) partnership registered with the Securities and Exchange Commission;

(c) Domestic corporation registered with the Securities and Exchange

Commission;

(d) An individual debtor (Sec. 4, k) (a natural person, who is a resident

and citizen of the Philippines that has become insolvent. (Sec. 4, o)

Insolvency, meaning

It shall refer to: (a) the financial condition of a debtor that generally is
unable to pay its or his liabilities as they fall due in the ordinary course of
business; (b) has liabilities that are greater than its or his liabilities. (Sec.
4, p)

Proceedings under the FRIA

(a) Voluntary – Proceedings initiated by the debtor. (Sec. 4, rr)

(i) Court-supervised rehabilitation (Sec. 12)

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(ii) Suspension of payments – may be initiated by an individual debtor

with sufficient property to cover all his debts but foreseeing the
impossility of them when they respectively fall due. (Sec 94)

(iii) Liquidation (Sec. 90 & 111)

(b) Involuntary – Proceedings initiated by creditors. (Sec. 4, r)

(i) Involuntary rehabilitation (Sec. 13)

(ii) liquidation (Sec. 91)

Rehabilitation shall refer to the restoration of the debtor to a condition of

successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor continues
as a going concern than if it is immediately liquidated. (Sec. 4, gg)

Who may initiate rehabilitation proceedings

(a) by the debtor himself (Sec. 12)

When approved by the owner in case of a sole proprietorship, or by a

majority of the partners in case of a partnership, or in case of a corporation,
by a majority vote of the board of directors or trustees and authorized by the
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of nonstock corporation, by the vote of
at least two-thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose, an insolvent debtor may initiate
voluntary proceedings under this Act by filing a petition for rehabilitation with
the court and on the grounds hereinafter specifically provided. The petition
shall be verified to establish the insolvency of the debtor and the viability of
its rehabilitation, and include, whether as an attachment or as part of the
body of the petition, as a minimum the following:

(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or
inability to pay its obligations as they become due
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the
form of relief requested;
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(f) Schedule of the debtor's debts and liabilities including a list of creditors
with their addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against
third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation
receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act
and the rules of procedure as may be promulgated by the Supreme Court
(Sec. 12).

A group of debtors may jointly file a petition for rehabilitation under this Act
when one or more of its members foresee the impossibility of meeting debts
when they respectively fall due, and the financial distress would likely
adversely affect the financial condition and/or operations of the other
members of the group and/or the participation of the other members of the
group is essential under the terms and conditions of the proposed
Rehabilitation Plan. (Sec. 12)

(b) by any creditor or group of creditors with a claim of, or the aggregate
of whose claims is, at least One Million Pesos (PhP1,000,000.00) or at
least twenty-five percent (25%) of the subscribed capital stock or
partners' contributions, whichever is higher, may initiate involuntary
proceedings against the debtor by filing a petition for rehabilitation with
the court if:

(I) there is no genuine issue of fact on law on the claim/s of the

petitioner/s, and that the due and demandable payments thereon
have not been made for at least sixty (60) days or that the debtor
has failed generally to meet its liabilities as they fall due; or

(II) a creditor, other than the petitioner/s, has initiated foreclosure

proceedings against the debtor that will prevent the debtor from paying
its debts as they become due or will render it insolvent. (Sec. 13)

Circumstances Necessary to Initiate Involuntary Proceedings

Any creditor or group of creditors with a claim of, or the aggregate of whose
claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-
five percent (25%) of the subscribed capital stock or partners' contributions,
whichever is higher, may initiate involuntary proceedings against the debtor
by filing a petition for rehabilitation with the court if:

(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s,
and that the due and demandable payments thereon have not been made for

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at least sixty (60) days or that the debtor has failed generally to meet its
liabilities as they fall due; or

(b) a creditor, other than the petitioner/s, has initiated foreclosure

proceedings against the debtor that will prevent the debtor from paying its
debts as they become due or will render it insolvent. (Sec. 13)

Contents of Petition

The creditor/s' petition for rehabilitation shall be verified to establish the

substantial likelihood that the debtor may be rehabilitated, and include:

(a) identification of the debtor its principal activities and its address;

(b) the circumstances sufficient to support a petition to initiate

involuntary rehabilitation proceedings under Section 13 of this Act;

(c) the specific relief sought under this Act;

(d) a Rehabilitation Plan;

(e) the names of at least three (3) nominees to the position of

rehabilitation receiver;

(f) other information that may be required under this Act depending
on the form of relief requested; and

(g) other documents required to be filed with the petition pursuant to

this Act and the rules of procedure as may be promulgated by the
Supreme Court. (Sec. 14)

FRIA is not applicable to

(a) banks,
(b) Insurance companies,
(c) pre-need companies, and
(d) national and local government agencies or units. (Sec. 5)

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Other terms to know:

Commencement Date shall refer to the date on which the court issues the
Commencement Order – which shall be retroactive to the date of the filing of
the petition for voluntary or involuntary proceedings. (Sec. 4, d)

Commencement Order shall refer to the order of the court under Sec. 16 of
the FRIA. (Sec. 4, e)

Rehabilitation shall refer to the restoration of the debtor to the condition of

successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by the way of
the present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated. (Sec. 4, gg)

Rehabilitation plan shall refer to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using various means including,
but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting up a new business entity
or other similar arrangements as may be approved by the court or creditors.
(Sec. 4, ii)

Suspension of Payments

Who may initiate; how initiated

An individual debtor who, possessing sufficient property to cover all his debts
but foreseeing the impossibility of meeting them when they respectively fall
due, may file a verified petition that he be declared in the state of suspension of
payments by the court of the province or city in which he has resides for six (6)
months prior to the filing of his petition. He shall attach to his petition, as a
minimum: (a) a schedule of debts and liabilities; (b) an inventory of assess;
and (c) a proposed agreement with his creditors. (Sec. 94)

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Action on the Petition

If the court finds the petition sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue an Order:

(a) calling a meeting of all the creditors named in the schedule of

debts and liabilities at such time not less than fifteen (15) days nor
more than forty (40) days from the date of such Order and designating
the date, time and place of the meeting;

(b) directing such creditors to prepare and present written evidence of

their claims before the scheduled creditors' meeting;

(c) directing the publication of the said order in a newspaper of

general circulation published in the province or city in which the
petition is filed once a week for two (2) consecutive weeks, with the
first publication to be made within seven (7) days from the time of the
issuance of the Order;

(d) directing the clerk of court to cause the sending of a copy of the
Order by registered mail, postage prepaid, to all creditors named in
the schedule of debts and liabilities;

(e) forbidding the individual debtor from selling, transferring,

encumbering or disposing in any manner of his property, except those
used in the ordinary operations of commerce or of industry in which
the petitioning individual debtor is engaged so long as the
proceedings relative to the suspension of payments are pending;

(f) prohibiting the individual debtor from making any payment outside
of the necessary or legitimate expenses of his business or industry, so
long as the proceedings relative to the suspension of payments are
pending; and

(g) appointing a commissioner to preside over the creditors' meeting.

(Sec. 95)

Actions Suspended

Upon motion filed by the individual debtor, the court may issue an order
suspending any pending execution against the individual debtor. Provide,
That properties held as security by secured creditors shall not be the subject
of such suspension order. The suspension order shall lapse when three (3)
months shall have passed without the proposed agreement being accepted
by the creditors or as soon as such agreement is denied.

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No creditor shall sue or institute proceedings to collect his claim from the
debtor from the time of the filing of the petition for suspension of payments
and for as long as proceedings remain pending except:

(a) those creditors having claims for personal labor, maintenance, expense
of last illness and funeral of the wife or children of the debtor incurred in the
sixty (60) days immediately prior to the filing of the petition; and

(b) secured creditors. (Sec. 96)

Creditors' Meeting

The presence of creditors holding claims amounting to at least three-fifths

(3/5) of the liabilities shall be necessary for holding a meeting. The
commissioner appointed by the court shall preside over the meeting and the
clerk of court shall act as the secretary thereof, subject to the following
rules:

(a) The clerk shall record the creditors present and amount of their
respective claims;

(b) The commissioner shall examine the written evidence of the

claims. If the creditors present hold at least three-fifths (3/5) of the
liabilities of the individual debtor, the commissioner shall declare the
meeting open for business;

(c) The creditors and individual debtor shall discuss the propositions
in the proposed agreement and put them to a vote;

(d) To form a majority, it is necessary:

(1) that two-thirds (2/3) of the creditors voting unite upon the
same proposition; and

(2) that the claims represented by said majority vote amount to

at least three-fifths (3/5) of the total liabilities of the debtor
mentioned in the petition; and

(e) After the result of the voting has been announced, all protests
made against the majority vote shall be drawn up, and the
commissioner and the individual debtor together with all creditors
taking part in the voting shall sign the affirmed propositions.

No creditor who incurred his credit within ninety (90) days prior
to the filing of the petition shall be entitled to vote. (Sec. 97)

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Persons Who May Refrain From Voting

Creditors who are unaffected by the Suspension Order may refrain from
attending the meeting and from voting therein. Such persons shall not be
bound by any agreement determined upon at such meeting, but if they
should join in the voting they shall be bound in the same manner as are the
other creditors. (Sec. 98)

Rejection of the Proposed Agreement

The proposed agreement shall be deemed rejected if the number of creditors

required for holding a meeting do not attend thereat, or if the two (2)
majorities mentioned in Section 97 hereof are not in favor thereof. In such
instances, the proceeding shall be terminated without recourse and the
parties concerned shall be at liberty to enforce the rights which may
correspond to them. (Sec. 99)

Objections

If the proposal of the individual debtor, or any amendment thereof made

during the creditors' meeting, is approved by the majority of creditors in
accordance with Section 97 hereof, any creditor who attended the meeting
and who dissented from and protested against the vote of the majority may
file an objection with the court within ten (10) days from the date of the last
creditors' meeting. The causes for which objection may be made to the
decision made by the majority during the meeting shall be: (a) defects in the
call for the meeting, in the holding thereof and in the deliberations had
thereat which prejudice the rights of the creditors; (b) fraudulent connivance
between one or more creditors and the individual debtor to vote in favor of
the proposed agreement; or (c) fraudulent conveyance of claims for the
purpose of obtaining a majority. The court shall hear and pass upon such
objection as soon as possible and in a summary manner.

In case the decision of the majority of creditors to approve the individual

debtor's proposal or any amendment thereof made during the creditors'
meeting is annulled by the court, the court shall declare the proceedings
terminated and the creditors shall be at liberty to exercise the rights which
may correspond to them. (Sec. 100)

Effects of Approval of Proposed Agreement

If the decision of the majority of the creditors to approve the proposed

agreement or any amendment thereof made during the creditors' meeting is

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upheld by the court, or when no opposition or objection to said decision has

been presented, the court shall order that the agreement be carried out and
all parties bound thereby to comply with its terms.

The court may also issue all orders which may be necessary or proper to
enforce the agreement on motion of any affected party. The Order
confirming the approval of the proposed agreement or any amendment
thereof made during the creditors' meeting shall be binding upon all creditors
whose claims are included in the schedule of debts and liabilities submitted
by the individual debtor and who were properly summoned, but not upon: (a)
those creditors having claims for personal labor, maintenance, expenses of
last illness and funeral of the wife or children of the debtor incurred in the
sixty (60) days immediately prior to the filing of the petition; and (b) secured
creditors who failed to attend the meeting or refrained from voting therein.
(Sec. 101)

Failure of Individual Debtor to Perform Agreement

If the individual debtor fails, wholly or in part, to perform the agreement

decided upon at the meeting of the creditors, all the rights which the creditors
had against the individual debtor before the agreement shall revest in them.
In such case the individual debtor may be made subject to the insolvency
proceedings in the manner established by this Act. (Sec. 102)

Commencement order

If the court finds the petition for rehabilitation to be sufficient in form and
substance, it shall, within five (5) working days from the filing of the petition,
issue a Commencement Order. If, within the same period, the court finds
the petition deficient in form or substance, the court may, in its discretion,
give the petitioner/s a reasonable period of time within which to amend or
supplement the petition, or to submit such documents as may be necessary
or proper to put the petition in proper order. In such case, the five (5)
working days provided above for the issuance of the Commencement Order
shall be reckoned from the date of the filing of the amended or supplemental
petition or the submission of such documents. (Sec. 15)

Stay or Suspension order

The rehabilitation proceedings shall commence upon the issuance of the

Commencement Order, which shall:
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(a) identify the debtor, its principal business or activity/ies and its
principal place of business;

(b) summarize the ground/s for initiating the proceedings;

(c) state the relief sought under this Act and any requirement or
procedure particular to the relief sought;

(d) state the legal effects of the Commencement Order, including

those mentioned in Section 17 hereof;

(e) declare that the debtor is under rehabilitation;

(f) direct the publication of the Commencement Order in a newspaper

of general circulation in the Philippines once a week for at least two
(2) consecutive weeks, with the first publication to be made within
seven (7) days from the time of its issuance;

(g) If the petitioner is the debtor direct the service by personal

delivery of a copy of the petition on each creditor holding at least ten
percent (10%) of the total liabilities of the debtor as determined from
the schedule attached to the petition within five (5) days; if the
petitioner/s is/are creditor/s, direct the service by personal delivery of
a copy of the petition on the debtor within five (5) days;

(h) appoint a rehabilitation receiver who may or not be from among

the nominees of the petitioner/s and who shall exercise such powers
and duties defined in this Act as well as the procedural rules that the
Supreme Court will promulgate;

(i) summarize the requirements and deadlines for creditors to

establish their claims against the debtor and direct all creditors to their
claims with the court at least five (5) days before the initial hearing;

(j) direct Bureau of internal Revenue (BIR) to file and serve on the
debtor its comment on or opposition to the petition or its claim/s
against the debtor under such procedures as the Supreme Court
provide;

(k) prohibit the debtor's suppliers of goods or services from

withholding the supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services or
goods supplied after the issuance of the Commencement Order;

(l) authorize the payment of administrative expenses as they become

due;

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(m) set the case for initial hearing, which shall not be more than forty
(40) days from the date of filing of the petition for the purpose of
determining whether there is substantial likelihood for the debtor to be
rehabilitated;

(n) make available copies of the petition and rehabilitation plan for
examination and copying by any interested party;

(o) Indicate the location or locations at which documents regarding

the debtor and the proceedings under Act may be reviewed and
copied;

(p) state that any creditor or debtor who is not the petitioner, may
submit the name or nominate any other qualified person to the
position of rehabilitation receiver at least five (5) days before the initial
hearing;

(q) include Stay or Suspension Order which shall:

(1) suspend all actions or proceedings, in court or otherwise,

for the enforcement of claims against the debtor;

(2) suspend all actions to enforce any judgment, attachment or

other provisional remedies against the debtor;

(3) prohibit the debtor from selling, encumbering, transferring

or disposing in any manner any of its properties except in the
ordinary course of business; and

(4) prohibit the debtor from making any payment of its liabilities
outstanding as of the commencement date except as may be
provided herein. (Sec. 16)

Rehabilitation receiver

Any qualified natural or juridical person may serve as a rehabilitation

receiver: Provided, That if the rehabilitation receiver is a juridical entity, it must
designate a natural person/s who possess/es all the qualifications and none of the
disqualification‘s as its representative, it being understood that the juridical entity
and the representative/s are solidarily liable for all obligations and responsibilities of
the rehabilitation receiver (Sec. 28).

Initial Appointment of the Rehabilitation Receiver

The court shall initially appoint the rehabilitation receiver, who may or may
not be from among the nominees of the petitioner, However, at the initial
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hearing of the petition, the creditors and the debtor who are not petitioners
may nominate other persons to the position. The court may retain the
rehabilitation receiver initially appointed or appoint another who may or may
not be from among those nominated.

In case the debtor is a securities market participant, the court shall give
priority to the nominee of the appropriate securities or investor protection
fund.

If a qualified natural person or entity is nominated by more than fifty percent

(50%) of the secured creditors and the general unsecured creditors, and
satisfactory evidence is submitted, the court shall appoint the creditors'
nominee as rehabilitation receiver. (Sec. 30)

Powers, Duties and Responsibilities of the Rehabilitation Receiver

The rehabilitation receiver shall be deemed an officer of the court with the
principal duty of preserving and maximizing the value of the assets of the
debtor during the rehabilitation proceedings, determining the viability of the
rehabilitation of the debtor, preparing and recommending a Rehabilitation
Plan to the court, and implementing the approved Rehabilitation Plan, To
this end, and without limiting the generality of the foregoing, the rehabilitation
receiver shall have the following powers, duties and responsibilities:

(a) To verify the accuracy of the factual allegations in the petition and
its annexes;

(b) To verify and correct, if necessary, the inventory of all of the

assets of the debtor, and their valuation;

(c) To verify and correct, if necessary, the schedule of debts and

liabilities of the debtor;

(d) To evaluate the validity, genuineness and true amount of all the
claims against the debtor;

(e) To take possession, custody and control, and to preserve the

value of all the property of the debtor;

(f) To sue and recover, with the approval of the court, all amounts
owed to, and all properties pertaining to the debtor;

(g) To have access to all information necessary, proper or relevant to

the operations and business of the debtor and for its rehabilitation;

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(h) To sue and recover, with the. approval of the court, all
property or money of the debtor paid, transferred or disbursed in fraud
of the debtor or its creditors, or which constitute undue preference of
creditor/s;

(i) To monitor the operations and the business of the debtor to ensure
that no payments or transfers of property are made other than in the
ordinary course of business;

(j) With the court's approval, to engage the services of or to employ

persons or entities to assist him in the discharge of his functions;

(k) To determine the manner by which the debtor may be best

rehabilitated, to review) revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the court for
approval;

(1) To implement the Rehabilitation Plan as approved by the court, if

80 provided under the Rehabilitation Plan;

(m) To assume and exercise the powers of management of the

debtor, if directed by the court pursuant to Section 36 hereof;

(n) To exercise such other powers as may, from time to time, be

conferred upon him by the court; and

(o) To submit a status report on the rehabilitation proceedings every

quarter or as may be required by the court motu proprio. or upon
motion of any creditor. or as may be provided, in the Rehabilitation
Plan.

Unless appointed by the court, pursuant to Section 36 hereof, the

rehabilitation receiver shall not take over the management and
control of the debtor but may recommend the appointment of a
management committee over the debtor in the cases provided by
this Act. (Sec. 31)

Removal of the Rehabilitation Receiver

The rehabilitation receiver may be removed at any time by the court

either motu proprio or upon motion by any creditor/s holding more than fifty
percent (50%) of the total obligations of the debtor, on such grounds as the
rules of procedure may provide which shall include, but are not limited to, the
following:

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(a) Incompetence, gross negligence, failure to perform or failure to

exercise the proper degree of care in the performance of his duties
and powers;

(b) Lack of a particular or specialized competency required by the

specific case;

(c) Illegal acts or conduct in the performance of his duties and

powers;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general

body of the stakeholders. (Sec. 32)

Vacancy

In case the position of rehabilitation receiver is vacated for any reason

whatsoever. the court shall direct the debtor and the creditors to submit the
name/s of their nominee/s to the position. The court may appoint any of the
qualified nominees. or any other person qualified for the position. (Sec. 35)

Displacement of Existing Management by the Rehabilitation Receiver

or Management Committee

Upon motion of any interested party, the court may appoint and direct the
rehabilitation receiver to assume the powers of management of the debtor,
or appoint a management committee that will undertake the management of
the debtor. upon clear and convincing evidence of any of the following
circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage or

destruction of the debtor‘s assets or other properties;

(b) Paralyzation of the business operations of the debtor; or

(c) Gross mismanagement of the debtor. or fraud or other wrongful

conduct on the part of, or gross or willful violation of this Act by.
existing management of the debtor Or the owner, partner, director,
officer or representative/s in management of the debtor.

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In case the court appoints the rehabilitation receiver to assume the

powers of management of the debtor. the court may:

(1) require the rehabilitation receiver to post an additional bond;

(2) authorize him to engage the services or to employ persona or

entities to assist him in the discharge of his managerial functions; and

(3) authorize a commensurate increase in his compensation. (Sec.

36)

Role of the Management Committee

When appointed pursuant to the foregoing section, the management

committee shall take the place of the management and the governing
body of the debtor and assume their rights and responsibilities.

The specific powers and duties of the management committee, whose

members shall be considered as officers of the court, shall be
prescribed by the procedural rules. (Sec. 37)

Cram Down Effect

A restructuring/workout agreement or Rehabilitation Plan that is approved

pursuant to an informal workout framework referred to in this chapter shall
have the same legal effect as confirmation of a Plan under Section 69
hereof. The notice of the Rehabilitation Plan or restructuring agreement or
Plan shall be published once a week for at least three (3) consecutive weeks
in a newspaper of general circulation in the Philippines. The Rehabilitation
Plan or restructuring agreement shall take effect upon the lapse of fifteen
(15) days from the date of the last publication of the notice thereof. (Sec. 86)

Liquidation

Types:

(I) Voluntary Liquidation - An insolvent debtor may apply for

liquidation by filing a petition for liquidation with the court. The petition
shall be verified, shall establish the insolvency of the debtor and shall
contain, whether as an attachment or as part of the body of the
petition;

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(a) a schedule of the debtor's debts and liabilities including a list of

creditors with their addresses, amounts of claims and collaterals, or
securities, if any;

(b) an inventory of all its assets including receivables and claims

against third parties; and

(c) the names of at least three (3) nominees to the position of

liquidator.

At any time during the pendency of court-supervised or pre-negotiated

rehabilitation proceedings, the debtor may also initiate liquidation
proceedings by filing a motion in the same court where the
rehabilitation proceedings are pending to convert the rehabilitation
proceedings into liquidation proceedings. The motion shall be verified,
shall contain or set forth the same matters required in the preceding
paragraph, and state that the debtor is seeking immediate dissolution
and termination of its corporate existence.

If the petition or the motion, as the case may be, is sufficient in form
and substance, the court shall issue a Liquidation Order mentioned in
Sec. 112 hereof. (Sec. 90)

(ii) Involuntary Liquidation - Three (3) or more creditors the

aggregate of whose claims is at least either one million pesos
(PhP1,000,000,00) or at least twenty-five percent (25%0 of the
subscribed capital stock or partner's contributions of the debtor,
whichever is higher, may apply for and seek the liquidation of an
insolvent debtor by filing a petition for liquidation of the debtor with the
court. The petition shall show that:

(a) there is no genuine issue of fact or law on the claims/s of the

petitioner/s, and that the due and demandable payments thereon
have not been made for at least one hundred eighty (180) days or that
the debtor has failed generally to meet its liabilities as they fall due;
and

(b) there is no substantial likelihood that the debtor may be

rehabilitated.

At any time during the pendency of or after a rehabilitation court-

supervised or pre-negotiated rehabilitation proceedings, three (3) or
more creditors whose claims is at least either One million pesos
(Php1,000,000.00) or at least twenty-five percent (25%) of the
subscribed capital or partner's contributions of the debtor, whichever
is higher, may also initiate liquidation proceedings by filing a motion in
the same court where the rehabilitation proceedings are pending to

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convert the rehabilitation proceedings into liquidation proceedings.

The motion shall be verified, shall contain or set forth the same
matters required in the preceding paragraph, and state that the
movants are seeking the immediate liquidation of the debtor.

If the petition or motion is sufficient in form and substance, the court

shall issue an Order:

(1) directing the publication of the petition or motion in a newspaper

of general circulation once a week for two (2) consecutive weeks; and

(2) directing the debtor and all creditors who are not the petitioners to
file their comment on the petition or motion within fifteen (15) days
from the date of last publication.

If, after considering the comments filed, the court determines that the
petition or motion is meritorious, it shall issue the Liquidation Order
mentioned in Sec.112 hereof. (Sec. 91)

Conversion of rehabilitation to liquidation proceedings

During the pendency of court-supervised or pre-negotiated rehabilitation

proceedings, the court may order the conversion of rehabilitation
proceedings to liquidation proceedings pursuant to (a) Section 25(c) of this
Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section
90 of this Act; or at any other time upon the recommendation of the
rehabilitation receiver that the rehabilitation of the debtor is not feasible.
Thereupon, the court shall issue the Liquidation Order mentioned in Section
112 hereof (Sec. 92)
.
Liquidation order

The Liquidation Order shall:

(a) declare the debtor insolvent;

(b) order the liquidation of the debtor and, in the case of a juridical
debtor, declare it as dissolved;

(c) order the sheriff to take possession and control of all the property
of the debtor, except those that may be exempt from execution;

(d) order the publication of the petition or motion in a newspaper of

general circulation once a week for two (2) consecutive weeks;
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(e) direct payments of any claims and conveyance of any property

due the debtor to the liquidator;

(f) prohibit payments by the debtor and the transfer of any property by
the debtor;

(g) direct all creditors to file their claims with the liquidator within the
period set by the rules of procedure;

(h) authorize the payment of administrative expenses as they

become due;

(i) state that the debtor and creditors who are not petitioner/s may
submit the names of other nominees to the position of liquidator; and

(j) set the case for hearing for the election and appointment of the
liquidator, which date shall not be less than thirty (30) days nor more
than forty-five (45) days from the date of the last publication. (Sec.
112)

Effects of the Liquidation Order

Upon the issuance of the Liquidation Order:

(a) the juridical debtor shall be deemed dissolved and its corporate or
juridical existence terminated;

(b) legal title to and control of all the assets of the debtor, except
those that may be exempt from execution, shall be deemed vested in
the liquidator or, pending his election or appointment, with the court;

(c) all contracts of the debtor shall be deemed terminated and/or

breached, unless the liquidator, within ninety (90) days from the date
of his assumption of office, declares otherwise and the contracting
party agrees;

(d) no separate action for the collection of an unsecured claim shall

be allowed. Such actions already pending will be transferred to the
Liquidator for him to accept and settle or contest. If the liquidator
contests or disputes the claim, the court shall allow, hear and resolve
such contest except when the case is already on appeal. In such a
case, the suit may proceed to judgment, and any final and executor
judgment therein for a claim against the debtor shall be filed and
allowed in court; and

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(e) no foreclosure proceeding shall be allowed for a period of one

hundred eighty (180) days. (Sec. 113)

Rights of secured creditors

The Liquidation Order shall not affect the right of a secured creditor to
enforce his lien in accordance with the applicable contract or law. A secured
creditor may:

(a) waive his right under the security or lien, prove his claim in the
liquidation proceedings and share in the distribution of the assets of
the debtor; or

(b) maintain his rights under the security or lien:

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon
by the creditor and the liquidator. When the value of the property is
less than the claim it secures, the liquidator may convey the property
to the secured creditor and the latter will be admitted in the liquidation
proceedings as a creditor for the balance. If its value exceeds the
claim secured, the liquidator may convey the property to the creditor
and waive the debtor's right of redemption upon receiving the excess
from the creditor;

(2) the liquidator may sell the property and satisfy the secured
creditor's entire claim from the proceeds of the sale; or

(3) the secure creditor may enforce the lien or foreclose on the
property pursuant to applicable laws. (Sec. 114)

Liquidator

Only creditors who have filed their claims within the period set by the court,
and whose claims are not barred by the statute of limitations, will be allowed
to vote in the election of the liquidator. A secured creditor will not be allowed
to vote, unless: (a) he waives his security or lien; or (b) has the value of the
property subject of his security or lien fixed by agreement with the liquidator,
and is admitted for the balance of his claim.

The creditors entitled to vote will elect the liquidator in open court. The
nominee receiving the highest number of votes cast in terms of amount of

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claims, and who is qualified pursuant to Sec.118 hereof, shall be appointed

as the liquidator. (Sec. 115)

Court-Appointed Liquidator

The court may appoint the liquidator if:

(a) on the date set for the election of the liquidator, the creditors do
not attend;

(b) the creditors who attend, fail or refuse to elect a liquidator;

(c) after being elected, the liquidator fails to qualify; or

(d) a vacancy occurs for any reason whatsoever, In any of the cases
provided herein, the court may instead set another hearing of the
election of the liquidator.

Provided further, That nothing in this section shall be construed to

prevent a rehabilitation receiver, who was administering the debtor
prior to the commencement of the liquidation, from being appointed as
a liquidator. (Sec. 116)

Powers, Duties and Responsibilities of the Liquidator

The liquidator shall be deemed an officer of the court with the principal duly
of preserving and maximizing the value and recovering the assets of the
debtor, with the end of liquidating them and discharging to the extent
possible all the claims against the debtor. The powers, duties and
responsibilities of the liquidator shall include, but not limited to:

(a) to sue and recover all the assets, debts and claims, belonging or
due to the debtor;

(b) to take possession of all the property of the debtor except

property exempt by law from execution;

(c) to sell, with the approval of the court, any property of the debtor
which has come into his possession or control;

(d) to redeem all mortgages and pledges, and so satisfy any

judgement which may be an encumbrance on any property sold by
him;
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(e) to settle all accounts between the debtor and his creditors,
subject to the approval of the court;

(f) to recover any property or its value, fraudulently conveyed by the

debtor;

(g) to recommend to the court the creation of a creditors' committee

which will assist him in the discharge of the functions and which shall
have powers as the court deems just, reasonable and necessary; and

(h) upon approval of the court, to engage such professional as may

be necessary and reasonable to assist him in the discharge of his
duties.

In addition to the rights and duties of a rehabilitation receiver, the

liquidator, shall have the right and duty to take all reasonable steps to
manage and dispose of the debtor's assets with a view towards
maximizing the proceedings therefrom, to pay creditors and
stockholders, and to terminate the debtor's legal existence. Other
duties of the liquidator in accordance with this section may be
established by procedural rules.

A liquidator shall be subject to removal pursuant to procedures for

removing a rehabilitation receiver. (Sec. 119)

Determination of claims

Within twenty (20) days from his assumption into office the liquidator shall prepare a
preliminary registry of claims of secured and unsecured creditors. Secured
creditors who have waived their security or lien, or have fixed the value of the
property subject of their security or lien by agreement with the liquidator and is
admitted as a creditor for the balance, shall be considered as unsecured creditors.
The liquidator shall make the registry available for public inspection and provide
publication notice to creditors, individual debtors owner/s of the sole proprietorship-
debtor, the partners of the partnership-debtor and shareholders or members of the
corporation-debtor, on where and when they may inspect it. All claims must be duly
proven before being paid. (Sec. 123)

Right of Set-off

If the debtor and creditor are mutually debtor and creditor of each other one
debt shall be set off against the other, and only the balance, if any shall be
allowed in the liquidation proceedings. (Sec. 124)
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Opposition or Challenge to Claims

Within thirty (30 ) days from the expiration of the period for filing of
applications for recognition of claims, creditors, individual debtors, owner/s of
the sole proprietorship-debtor, partners of the partnership-debtor and
shareholders or members of the corporation -debtor and other interested
parties may submit a challenge to claim or claims to the court, serving a
certified copy on the liquidator and the creditor holding the challenged claim.
Upon the expiration of the (30) day period, the rehabilitation receiver shall
submit to the court the registry of claims containing the undisputed claims
that have not been subject to challenge. Such claims shall become final
upon the filling of the register and may be subsequently set aside only on
grounds or fraud, accident, mistake or inexcusable neglect. (Sec. 125)

Submission of Disputed to the Court

The liquidator shall resolve disputed claims and submit his findings thereon
to the court for final approval. The liquidator may disallow claims. (Sec. 126)

Liquidation plan

Within three (3) months from his assumption into office, the Liquidator shall
submit a Liquidation Plan to the court. The Liquidation Plan shall, as a
minimum enumerate all the assets of the debtor and a schedule of liquidation
of the assets and payment of the claims. (Sec. 129)

Exempt Property to be Set Apart

It shall be the duty of the court, upon petition and after hearing, to exempt
and set apart, for the use and benefit of the said insolvent, such real and
personal property as is by law exempt from execution, and also a
homestead; but no such petition shall be heard as aforesaid until it is first
proved that notice of the hearing of the application therefor has been duly
given by the clerk, by causing such notice to be posted it at least three (3)
public places in the province or city at least ten (10) days prior to the time of
such hearing, which notice shall set forth the name of the said insolvent
debtor, and the time and place appointed for the hearing of such application,
and shall briefly indicate the homestead sought to be exempted or the
property sought to be set aside; and the decree must show that such proof
was made to the satisfaction of the court, and shall be conclusive evidence
of that fact. (Sec. 130)
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Sale of Assets in Liquidation.

The liquidator may sell the unencumbered assets of the debtor and convert
the same into money. The sale shall be made at public auction. However, a
private sale may be allowed with the approval of the court if; (a) the goods
to be sold are of a perishable nature, or are liable to quickly deteriorate in
value, or are disproportionately expensive to keep or maintain; or (b) the
private sale is for the best interest of the debtor and his creditors.

With the approval of the court, unencumbered property of the debtor may
also be conveyed to a creditor in satisfaction of his claim or part thereof.
(Sec. 131)

Manner of Implementing the Liquidation Plan

The Liquidator shall implement the Liquidation Plan as approved by the

court. Payments shall be made to the creditors only in accordance with the
provisions of the Plan. (Sec. 132)

Concurrence and Preference of Credits

The Liquidation Plan and its Implementation shall ensure that the
concurrence and preference of credits as enumerated in the Civil Code of
the Philippines and other relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right. For purposes of this chapter,
credits for services rendered by employees or laborers to the debtor
shall enjoy first preference under Article 2244 of the Civil Code, unless the
claims constitute legal liens under Article 2241 and 2242 thereof. (Sec. 133)

Order Removing the Debtor from the List of Registered Entitles at the
Securities and Exchange Commission

Upon determining that the liquidation has been completed according to this
Act and applicable law, the court shall issue an Order approving the report
and ordering the SEC to remove the debtor from the registry of legal entities.
(Sec. 134)

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Termination of Proceedings

Upon receipt of evidence showing that the debtor has been removed from
the registry of legal entities at the SEC. The court shall issue an Order
terminating the proceedings. (Sec. 135)

Liquidation of a Securities Market Participant

The foregoing provisions of this chapter shall be without prejudice to the

power of a regulatory agency or self- regulatory organization to liquidate
trade-related claims of clients or customers of a securities market participant
which, for purposes of investor protection, are hereby deemed to have
absolute priority over other claims of whatever nature or kind insofar as
trade-related assets are concerned.

For purposes of this section, trade -related assets include cash, securities,
trading right and other owned and used by the securities market participant
in the ordinary course of this business. (Sec. 136)

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LETTER OF CREDIT
(Title XIII, Code of Commerce)

Definition

Are those issued by a merchant to another merchant to enable the person

named in the letter to attend to a commercial transaction. (Art. 567, Code
of Commerce)

A letter of credit is a written instrument whereby the writer requests or

authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the
addressee (Transfield Philippines v. Luzon Hydro, 2004).

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A letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a seller, who refuses
to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase
price under the contract for the sale of goods and to reduce the risk of
nonperformance of an obligation in a non-sale setting. (Transfield
Philippines Inc. vs. Luzon Hydro Corp., G.R. NO. 146717, Nov. 22,
2004)

A letter of credit is an engagement by a bank or other person made

at the request of a customer that the issuer shall honor drafts or other
demands of payment upon compliance with the conditions specified in
the credit. (Prudential Bank v. Intermediate Appellate Court, 1992)

Kinds of letters of credit (L/C)

1. As to the type of the main contract

(a) Commercial L/C

The main transaction involves a contract of sale. The credit is

payable upon the presentation by the seller of documents that
show he has taken affirmative steps to comply with the sales
agreement. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract.
(Transfield Philippines v. Luzon Hydro, 2004).

(b) Stand-by L/C

Used in non-sale settings. The credit is payable upon certification

of a party's non-performance of the agreement. The beneficiary of
the stand-by credit must certify that his obligor has not performed
the contract. (Transfield Philippines v. Luzon Hydro, 2004).

2. As to revocability

(a) Revocable L/C

One which can be revoked by the issuing bank without the

consent of the buyer and seller
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(b) Irrevocable L/C

One which the issuing bank cannot revoke without the consent of
the buyer and seller (Feati Bank and Trust Co. v. CA, 1991)

3. As to the obligation assumed by correspondent bank

(a) Unconfirmed L/C

One which continues to be the obligation of the issuing bank

(b) Confirmed L/C

One which is supported by the absolute assurance to the

beneficiary that the confirming bank will undertake the issuing
bank's obligation as its own according to the terms and conditions
of the credit. (Feati Bank and Trust Co. v. CA, 1991)

Rule of strict compliance

Under this rule, the documents tendered by the seller must strictly
conform to the terms of the letter of credit. Otherwise, the issuing bank or
the concerned correspondent bank is not obliged to perform its
undertaking under the contract.

The tender of documents by the beneficiary (seller) must include all

documents required by the letter. A correspondent bank which
departs from what has been stipulated under the letter of credit, as
when it accepts a faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary. (Feati v. Court of
Appeals, G.R. No. 94209, April 30, 1991)

Independence principle

The so-called "independence principle‖ assures the seller or the

beneficiary of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not.

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Under this principle, banks assume no liability or responsibility for the

form, sufficiency, accuracy, genuineness, falsification or legal effect of
any documents, or for the general and/or particular conditions stipulated
in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented
by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever. (PNB v. San
Miguel, G.R. No. 186063, January 15, 2014)

Three (3) independent contracts in a domestic L/C

(a) contract between buyer and seller;

(b) contract between buyer and bank; and

(c) contract between seller and bank.

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CONCURRENCE & REFERENCE OF CREDITS
(Civil Code, Family Code & Rules of Court)

Concurrence of credits occurs when the same specific property of the

debtor or all of his property is subjected to the claims of several creditors.
The concurrence of credits raises no questions of consequence where the
value of the property or the value of all assets of the debtor is sufficient to
pay in full all the creditors. However, it becomes material when said assets
are insufficient for then some creditors of necessity will not be paid or some
creditors will not obtain the full satisfaction of their claims. In this situation,
the question of preference will then arise, that is to say who of the creditors
will be paid ahead of the others. (Caguioa, Comments and Cases on Civil
Law, 1970 ed., Vol. VI, p. 472.) (Metropolitan Bank and Trust
Company vs. S.F. Naguiat Enterprises, G.R. No.178407, March 18,
2015)

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Classification of credits

1. Special preferred credits listed in articles 2241 and 2242 of the Civil
Code:

(a) With reference to specific movable property of the debtor, the

following claims or liens shall be preferred:

(1) Duties, taxes and fees due thereon to the State or any
subdivision thereof;

(2) Claims arising from misappropriation, breach of trust, or

malfeasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by
them;

(3) Claims for the unpaid price of movables sold, on said movables,
so long as they are in the possession of the debtor, up to the value
of the same; and if the movable has been resold by the debtor
and the price is still unpaid, the lien may be enforced on the price;
this right is not lost by the immobilization of the thing by
destination, provided it has not lost its form, substance and identity;
neither is the right lost by the sale of the thing together with other
property for a lump sum, when the price thereof can be
determined proportionally;

(4) Credits guaranteed with a pledge so long as the things

pledged are in the hands of the creditor, or those guaranteed by a
chattel mortgage, upon the things pledged or mortgaged, up to the
value thereof;

(5) Credits for the making, repair, safekeeping or preservation of

personal property, on the movable thus made, repaired, kept or
possessed;

(6) Claims for laborers' wages, on the goods manufactured or the

work done;

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits or
harvest;

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(9) Credits for transportation, upon the goods carried, for the price
of the contract and incidental expenses, until their delivery and for
thirty days thereafter;

(10) Credits for lodging and supplies usually furnished to travelers

by hotel keepers, on the movables belonging to the guest as long
as such movables are in the hotel, but not for money loaned to the
guests;

(11 ) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;

(12) Credits for rent for one year, upon the personal property of
the lessee existing on the immovable leased and on the fruits of the
same, but not on money or instruments of credit;

(13) Claims in favor of the depositor if the depositary has

wrongfully sold the thing deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or

preference attaches have been wrongfully taken, the creditor
may demand them from any possessor, within thirty days from
the unlawful seizure. (Sec. 2241)

(b) With reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and
shall constitute an encumbrance on the immovable or real right:

(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon the immovable
sold;

(3) Claims of laborers, masons, mechanics and other workmen, as

well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction,

reconstruction, or repair of buildings, canals or other works, upon
said buildings, canals or other works;

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(5) Mortgage credits recorded in the Registry of Property,

upon the real estate mortgaged;

(6) Expenses for the preservation or improvement of real

property when the law authorizes reimbursement, upon the
immovable preserved or improved;

(7) Credits annotated in the Registry of Property, in virtue of

a judicial order, by attachments or executions, upon the property
affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an

immovable among them, upon the real property thus divided;

(9) Claims of donors or real property for pecuniary charges or

other conditions imposed upon the donee, upon the immovable
donated;

(10) Credits of insurers, upon the property insured, for the

insurance premium for two years. (Art. 2242)

2. Ordinary preferred credits listed in Article 2244 of the Civil

Code. (Art. 2244, Civil Code)

With reference to other property, real and personal, of the debtor, the
following claims or credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under

his or her parental authority who have no property of their own,
when approved by the court;

(2) Credits for services rendered the insolvent by employees,

laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;

(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they
have no property of their own;

(4) Compensation due the laborers or their dependents under

laws providing for indemnity for damages in cases of labor
accident, or illness resulting from the nature of the employment;

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(5) Credits and advancements made to the debtor for support of

himself or herself, and family, during the last year preceding the
insolvency;

(6) Support during the insolvency proceedings, and for three

months thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the

administration of the insolvent's estate for the common interest of
the creditors, when properly authorized and approved by the court;

(9) Taxes and assessments due the national government, other

than those mentioned in articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those
referred to in articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other

than those indicated in articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-

delict;

(13) Gifts due to public and private institutions of charity or

beneficence;

(14) Credits which, without special privilege, appear in (a) a public

instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments
and of the judgments, respectively. (Art. 2244, Civil Code)

3. Common credits under Article 2245 of the Civil Code.

Credits of any other kind or class, or by any other right or title not
comprised in the four preceding articles, shall enjoy no preference.
(Art. 2245)

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Order of preference of credits

(a ) Those credits which enjoy preference with respect to specific

movables, exclude all others to the extent of the value of the personal
property to which the preference refers. (Art. 2246)

(b) If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment of
duties, taxes and fees due the State or any subdivision thereof. (Art.
2247)

(c) Those credits which enjoy preference in relation to specific real

property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers. (Art. 2248)

(d) If there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property or
real right. (Art. 2249)

(e) The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment of
the other credits. (Art. 2250)

(f) Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount
not paid, shall be satisfied according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro-

rata regardless of dates. (Art. 2251)

Properties exempt from execution

Section 13, Rule 39 of the Rules of Court; Section 118 of CA

No. 141

The family home, constituted jointly by the husband and the wife or by
an unmarried head of a family, is the dwelling house where they and
their family reside, and the land on which it is situated. (Art. 152, Family
Code)

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The family home is deemed constituted on a house and lot from the
time it is occupied as a family residence. From the time of its constitution
and so long as any of its beneficiaries actually resides therein, the family
home continues to be such and is exempt from execution, forced sale or
attachment except as hereinafter provided and to the extent of the value
allowed by law. (Art. 153, Family Code)

The beneficiaries of a family home are:(1) The husband and wife, or an

unmarried person who is the head of a family; and (2) Their parents,
ascendants, descendants, brothers and sisters, whether the relationship
be legitimate or illegitimate, who are living in the family home and who
depend upon the head of the family for legal support. (Art. 154, Family
Code)

The family home shall be exempt from execution, forced sale or

attachment except: (1) for non-payment of taxes; (2) for debts
incurred prior to the constitution of the family home; (3) for debts
secured by mortgages on the premises before or after such constitution;
and (4) for debts due to laborers, mechanics, architects, builders,
materialmen and others who have rendered service or furnished
material for the construction of the building. (Art. 155, Family Code)

The right to receive support under this Title as well as any money or
property obtained as such support shall not be levied upon on attachment
or execution. (Art. 205, Family Code)

Property exempt from execution — Except as otherwise expressly

provided by law, the following property, and no other, shall be exempt
from execution:

(a) The judgment obligor's family home as provided by law, or the

homestead in which he resides, and land necessarily used in connection
therewith;

(b) Ordinary tools and implements personally used by him in his

trade, employment, or livelihood;

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(c) Three horses, or three cows, or three carabaos, or other beasts of

burden, such as the judgment obligor may select necessarily used
by him in his ordinary occupation;

(d) His necessary clothing and articles for ordinary personal use,
excluding jewelry;

(e) Household furniture and utensils necessary for housekeeping, and

used for that purpose by the judgment obligor and his family, such as the
judgment obligor may select, of a value not exceeding one hundred
thousand pesos;

(f) Provisions for individual or family use sufficient for four months;

(g) The professional libraries and equipment of judges, lawyers,

physicians, pharmacists, dentists, engineers, surveyors, clergymen,
teachers, and other professionals, not exceeding three hundred
thousand pesos in value;

(h) One fishing boat and accessories not exceeding the total value
of one hundred thousand pesos owned by a fisherman and by the lawful
use of which he earns his livelihood;

(i) So much of the salaries, wages, or earnings of the judgment obligor

for his personal services within the four months preceding the levy as
are necessary for the support of his family;

(j) Lettered gravestones;

(k) Monies, benefits, privileges, or annuities accruing or in any manner

growing out of any life insurance;

(l) The right to receive legal support, or money or property obtained

as such support, or any pension or gratuity from the Government;

(m) Properties specially exempted by law. But no article or species of

property mentioned in this section shall be exemptfrom execution issued
upon a judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon. (Sec. 13, Rule 39, Rules of Court)

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SECURITIES REGULATION CODE

(RA No. 8799)

What securities are:

Securities are shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instrument, whether written or electronic in character. It
includes:

a. shares if stock, bonds, debentures, notes, evidence of indebtedness,

asset-backed securities;

b. Investment contracts, certificates of interest or participation in a profit-

sharing agreement, certificated of deposit for a future subscription;

c. Fractional undivided interests in oil, gas or other mineral rights;

d. Derivatives like option and warrants;

e. Certificates if assignments, certificates of participation, trust

certificates or similar instruments;

f. Properties or non-proprietary membership certificates incorporations;

and

g. Other instruments as may in the future be determined by the

Commission. (Sec. 3.1)

Simply, they are instruments representing investments In a commercial

enterprise.

How may one invest in a commercial enterprise?

One may invest in a commercial enterprise either: (a) by lending money to

it; or (b) by becoming a part-owner of it.

Policy of state in passing the Securities Regulation Code

The State shall establish a socially conscious free market that regulates
itself, encourage the widest participation of ownership in enterprises,
enhance the democratization of wealth, promotes the development of the
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capital market, project investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create distortions in
the free market. (Sec. 2)

Exempt securities

The requirement of registration under Subsection 8.1 shall not as a general

rule apply to any of the following classes of securities:

(a) Any security issued or guaranteed by the Government of the

Philippines, or by any political subdivision or agency thereof, or by
any person controlled or supervised by, and acting as an
instrumentality of said Government.

(b) Any security issued or guaranteed by the government of any

country with which the Philippines maintains diplomatic relations, or
by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require compliance
with the form and content for disclosures the Commission may
prescribe.

(c) Certificates issued by a receiver or by a trustee in bankruptcy

duly approved by the proper adjudicatory body.

(d) Any security or its derivatives the sale or transfer of which, by

law, is under the supervision and regulation of the Office of the
Insurance Commission, Housing and Land Use Rule Regulatory
Board, or the Bureau of Internal Revenue.

(e) Any security issued by a bank except its own shares of stock.
(Sec. 9)

More exempt securities

The Commission may, by rule or regulation after public hearing, add to the
foregoing any class of securities if it finds that the enforcement of this Code
with respect to such securities is not necessary in the public interest and for
the protection of investors. (Sec. 9)

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Exempt transactions

The requirement of registration under Sub-section 8.1 shall not apply to the
sale of any security in any of the following transactions:

(a) At any judicial sale, or sale by an executor, administrator,

guardian or receiver or trustee in insolvency or bankruptcy.

(b) By or for the account of a pledge holder, or mortgagee or any of a

pledge lien holder selling of offering for sale or delivery in the ordinary
course of business and not for the purpose of avoiding the provision
of this Code, to liquidate a bonafide debt, a security pledged in good
faith as security for such debt.

(c) An isolated transaction in which any security is sold, offered for

sale, subscription or delivery by the owner therefore, or by his
representative for the owner‘s account, such sale or offer for sale or
offer for sale, subscription or delivery not being made in the course of
repeated and successive transaction of a like character by such
owner, or on his account by such representative and such owner or
representative not being the underwriter of such security.

(d) The distribution by a corporation actively engaged in the business

authorized by its articles of incorporation, of securities to its
stockholders or other security holders as a stock dividend or other
distribution out of surplus.

(e) The sale of capital stock of a corporation to its own stockholders

exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital
stock.

(f) The issuance of bonds or notes secured by mortgage upon real

estate or tangible personal property, when the entire mortgage
together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale.

(g) The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion entitling
the holder of the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt from the
provision of this Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.

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(h) Broker‘s transaction, executed upon customer‘s orders, on any

registered Exchange or other trading market.

(i) Subscriptions for shares of the capitals stocks of a corporation

prior to the incorporation thereof or in pursuance of an increase in its
authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale or disposition
of such securities, and only when the purpose for soliciting, giving or
taking of such subscription is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation which
should be subscribed before it can be registered and duly
incorporated, or its authorized, capital increase.

(j) The exchange of securities by the issuer with the existing security
holders exclusively, where no commission or other remuneration is
paid or given directly or indirectly for soliciting such exchange.

(k) The sale of securities by an issuer to fewer than twenty (20)

persons in the Philippines during any twelve-month period.

(l) The sale of securities to any number of the following qualified

buyers:

(i) Bank

(ii) Registered investment house;

(iii) Insurance company;

(iv ) Pension fund or retirement plan maintained by the

Government of the Philippines or any political subdivision
thereof or manage by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions;

(v) Investment company or;

(vi) Such other person as the Commission may rule by

determine as qualified buyers, on the basis of such factors as
financial sophistication, net worth, knowledge, and experience
in financial and business matters, or amount of assets under
management. (Sec. 10)

More exempt transactions

The Commission may exempt other transactions, if it finds that the

requirements of registration under this Code is not necessary in the public
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interest or for the protection of the investors such as by the reason of the
small amount involved or the limited character of the public offering. (Sec.
10.2)

Any person applying for an exemption under this Section, shall file with the
Commission a notice identifying the exemption relied upon on such form and
at such time as the Commission by the rule may prescribe and with such
notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one
percent (1%) of the maximum value aggregate price or issued value of the
securities. (Sec. 10.3)

Requirement of prior registration

Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may
prescribe, shall be made available to each prospective purchaser. (Sec.
8.1).

Actions of the SEC on the registration statement

(a) The Commission may conditionally approve the registration

statement under such terms as it may deem necessary. (Sec. 82)

(b) The Commission may specify the terms and conditions under
which any written communication, including any summary
prospectus, shall be deemed not to constitute an offer for sale under
this Section. (8.3.)

(c) A record of the registration of securities shall be kept in Register

Securities in which shall be recorded orders entered by the
Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on
business days. (8.4)

(d) The Commission may audit the financial statements, assets and
other information of firm applying for registration of its securities
whenever it deems the same necessary to insure full disclosure or to
protect the interest of the investors and the public in general. (8.5)

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Procedure for registration of securities

All securities required to be registered under Sub-section 8. I shall be
registered through the filing by the issuer in the main office of the
Commission, of a sworn registration statement with the respect to such
securities, in such form and containing such information and document as
the Commission prescribe. The registration statement shall include any
prospectus required or permitted to be delivered under Subsections 8.2, 8.3,
and 8.4. (Sec. 12.1)
In promulgating rules governing the content of any registration
statement (including any prospectus made a part thereof or annex
thereto), the Commission may require the registration statement to
contain such information or documents as it may, by rule, prescribe. It
may dispense with any such requirements, or may require additional
information or documents, including written information from an
expert, depending on the necessity thereof or their applicability to the
class of securities sought to be registered. (Sec. 12.2)
The information required for the registration of any kind, and all
securities, shall include, among others, the effect of the securities
issue on ownership, on the mix of ownership, especially foreign and
local ownership. (Sec. 12.3)
The registration statement shall be signed by the issuer‘s executive
officer, its principal operating officer, its principal financial officer, its
comptroller, its principal accounting officer, its corporate secretary, or
persons performing similar functions accompanied by a duly verified
resolution of the board of directors of the issuer corporation. The
written consent of the expert named as having certified any part of the
registration statement or any document used in connection therewith
shall also be filed. Where the registration statement shares to be sold
by selling shareholders, a written certification by such selling
shareholders as to the accuracy of any part of the registration
statement contributed to by such selling shareholders shall be filed.
(Sec. 12.4)
(a) Upon filing of the registration statement, the issuer shall
pay to the Commission a fee of not more than one-tenth (1/10) of one
per centum (1%) of the maximum aggregate price at which such
securities are proposed to be offered. The Commission shall prescribe
by the rule diminishing fees in inverse proportion the value of the
aggregate price of the offering.
(b) Notice of the filing of the registration statement shall be
immediately published by the issuer, at its own expense, in two (2)
newspapers of general circulation in the Philippines, once a week for
two (2) consecutive weeks, or in such other manner as the
Commission by the rule shall prescribe, reciting that a registration
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statement for the sale of such securities has been filed, and that
aforesaid registration statement, as well as the papers attached
thereto are open to inspection at the Commission during business
hours, and copies thereof, photostatic or otherwise, shall be furnished
to interested parties at such reasonable charge as the Commission
may prescribe. (Sec. 12.5)
Within forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented,
the Commission shall declare the registration statement effective or
rejected, unless the applicant is allowed to amend the registration
statement as provided in Section 14 hereof. The Commission shall
enter an order declaring the registration statement to be effective if it
finds that the registration statement together with all the other papers
and documents attached thereto, is on its face complete and that the
requirements have been complied with. The Commission may impose
such terms and conditions as may be necessary or appropriate for the
protection of the investors. (Sec. 12.6)
Upon affectivity of the registration statement, the issuer shall state
under oath in every prospectus that all registration requirements have
been met and that all information are true and correct as represented
by the issuer or the one making the statement. Any untrue statement
of fact or omission to state a material fact required to be stated herein
or necessary to make the statement therein not misleading shall
constitute fraud. (Sec. 12.7)

Prohibitions on fraud, manipulation, and insider trading

(1) It shall be unlawful for any person acting for himself or through a dealer
or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in
any listed security traded in an Exchange or any other trading market
(hereafter referred to purposes of this Chapter as "Exchange"):

(i) By effecting any transaction in such security which involves

no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of
such security with the knowledge that a simultaneous order or
orders of substantially the same size, time and price, for the
sale or purchase of any such security, has or will be entered by
or for the same or different parties; or
(iii) By performing similar act where there is no change in
beneficial ownership.
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(b) To effect, alone or with others, a securities or transactions in

securities that:
(I) Raises their price to induce the purchase of a security,
whether of the same or a different class of the same issuer or
of controlling, controlled, or commonly controlled company by
others; or

(ii) Depresses their price to induce the sale of a security,

whether of the same or of a different class, of the same issuer
or of a controlling, controlled or commonly controlled company
by others; or

(iii) Creates active trading to induce such a purchase or sale

through manipulative devices such as marking the close,
painting the tape, squeezing the float, hype and dump, boiler
room operations and such other similar devices.
(c) To circulate or disseminate information that the price of any
security listed in an Exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons
conducted for the purpose of raising or depressing the price of the
security for the purpose of inducing the purpose of sale of such
security.
(d) To make false or misleading statement with respect to any material
fact, which he knew or had reasonable ground to believe was so false
or misleading, for the purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the
purchase and/or sale of any security traded in an Exchange for the
purpose of pegging, fixing or stabilizing the price of such security;
unless otherwise allowed by this Code or by rules of the Commission.
(Sec. 24.1)
(2) No person shall use or employ, in connection with the purchase or sale
of any security any manipulative or deceptive device or contrivance. Neither
shall any short sale be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except in accordance
with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest for the protection of investors.
(Sec. 24.2)
(3) The foregoing provisions notwithstanding, the Commission, having due
regard to the public interest and the protection of investors, may, by rules
and regulations, allow certain acts or transactions that may otherwise be
prohibited under this Section. (Sec. 24.3)

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Short sales

They are the sale of shares which at the time of sale the seller does not own
while the prices are high and which shares he later buys so that he could
deliver what he had earlier sold.

Option trading
Regulation of Option Trading – No member of an Exchange shall, directly
or indirectly endorse or guarantee the performance of any put, call, straddle,
option or privilege in relation to any security registered on a securities
exchange. The terms "put", "call", "straddle", "option", or "privilege" shall not
include any registered warrant, right or convertible security. (Sec. 25)
Put - is a contract that gives the holder the right to sell a certain
number of shares for a particular price for a certain period.
Call - is a contract that gives the holder the right to buy a certain
number of shares for a particular price for a certain period.
Straddle - is a contract that gives the holder the right to sell and buy a
certain number of shares for a particular price for a certain period.
Option
Privilege

Fraudulent transactions
It shall be unlawful for any person, directly or indirectly, in connection with
the purchase or sale of any securities to:
(a). Employ any device, scheme, or artifice to defraud; (Sec. 26.1)
(b) gain money or property by means of any untrue statement of a material
fact of any omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were
made, not misleading; (Sec. 26.2)or
(c) Engage in any act, transaction, practice or course of business which
operates or would operate as a fraud or deceit upon any person. (Sec. 26.3).

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Insider trading
An insider means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of or a person controlling the issuer; (c) a
person whose relationship or former relationship to the issuer gives or gave
him access to material information about the issuer or the security that is not
generally available to the public: (d) a government employee, or director or
officer of an exchange, clearing agency and/or self-regulatory organizations
who has access to material information about an issuer or a security that is
not generally available to the public; or (e) a person who learns such
information by a communication from any of the foregoing insiders. (Sec.
3.8)

Insider’s Duty to Disclose When Trading

It shall be unlawful for an insider to sell or buy a security of the issuer, while
in possession of material information with respect to the issuer or the
security that is not generally available to the public, unless: (a) The insider
proves that the information was not gained from such relationship; or (b) If
the other party selling to or buying from the insider (or his agent) is identified,
the insider proves: (I) that he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party otherwise is also in
possession of the information. A purchase or sale of a security of the issuer
made by an insider defined in Sub-section 3.8, or such insider‘s spouse or
relatives by affinity or consanguinity within the second degree, legitimate or
common-law, shall be presumed to have been effected while in possession
of material non-public information if transacted after such information came
into existence but prior to dissemination of such information to the public and
the lapse of a reasonable time for market to absorb such information:
Provided, however, That this presumption shall be rebutted upon a showing
by the purchaser or seller that he was aware of the material nonpublic
information at the time of the purchase or sale. (Sec. 27.1)
For purposes of this Section, information is "material non-public" if: (a) It
has not been generally disclosed to the public and would likely affect the
market price of the security after being disseminated to the public and the
lapse of a reasonable time for the market to absorb the information; or (b)
would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or hold
a security. (Sec. 27.2)

Prohibited acts

It shall be unlawful for any insider to communicate material non-public

information about the issuer or the security to any person who, by virtue of

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the communication, becomes an insider as defined in Sub-section 3.8, where

the insider communicating the information knows or has reason to believe
that such person will likely buy or sell a security of the issuer whole in
possession of such information. (Sec. 27.3)

Tender offer rule

(1) Any person or group of persons acting in concert who intends to acquire
at least 15% of any class of any equity security of a listed corporation of any
class of any equity security of a (a) listed corporation or (b) of any class of
any equity security of a corporation with assets of at least fifty million pesos
(50,000,000.00) and having two hundred(200) or more stockholders at least
one hundred shares each or (2) who intends to acquire at least thirty
percent(30%) of such equity over a period of twelve (12) months shall make
a tender offer to stockholders by filling with the Commission a declaration to
that effect; and furnish the issuer, a statement containing such of the
information required in Sec. 17 of this Code as the Commission may
prescribe. Such person or group of persons shall publish all request or
invitations or tender offer or requesting such tender offers subsequent to the
initial solicitation or request shall contain such information as the
Commission may prescribe, and shall be filed with the Commission and sent
to the issuer not alter than the time copies of such materials are first
published or sent or given to security holders. (Sec. 19.1, (a))
Any solicitation or recommendation to the holders of such a security to
accept or reject a tender offer or request or invitation for tenders shall be
made in accordance with such rules and regulations as may be prescribe.
(Sec. 19.1, (b))
Securities deposited pursuant to a tender offer or request or invitation for
tenders may be withdrawn by or on behalf of the depositor at any time
throughout the period that tender offer remains open and if the securities
deposited have not been previously accepted for payment, and at any time
after sixty (60) days from the date of the original tender offer to request or
invitation, except as the Commission may otherwise prescribe. (Sec. 19.1,
(c))
Where the securities offered exceed that which person or group of persons
is bound or willing to take up and pay for, the securities that are subject of
the tender offers shall be taken up us nearly as may be pro data,
disregarding fractions, according to the number of securities deposited to
each depositor. The provision of this subject shall also apply to securities
deposited within ten (10) days after notice of increase in the consideration
offered to security holders, as described in paragraph (e) of this subsection,
is first published or sent or given to security holders. (Sec. 19.1, (d))

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Where any person varies the terms of a tender offer or request or invitation
for tenders before the expiration thereof by increasing the consideration
offered to holders of such securities, such person shall pay the increased
consideration to each security holder whose securities are taken up and paid
for whether or not such securities have been taken up by such person before
the variation of the tender offer or request or invitation. (Sec. 19.1, (e))
It shall be unlawful where a tender offer has commenced or is about to
commence for: (a) for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made in the light of the circumstances under which they are
made, not misleading, or to engage in any fraudulent, deceptive or
manipulative acts or practices, in connection with any tender offer or request
or invitation for tenders, or any solicitation for any security holders in
opposition to or in favor of any such favor of any such offer, request, or
invitation. The Commission shall, for the purposes of this sub-section, define
and prescribe means reasonably designed to prevent, such acts and
practices as are fraudulent, deceptive and manipulative. (Sec. 19.2)
(a) It shall be unlawful where a tender offer has commenced or is about to
commence for: (i) Any person (other than the tender offeror) who is in
possession of material non-public information relating to such tender offer, to
buy or sell the securities of the issuer that are sought or to be sought by such
tender offer if such person knows or has reason to believe that the
information is non-public and has been acquired directly or indirectly from the
tender offeror, those acting on its behalf, the issuer of the securities sought
or to be sought by such tender offer, or any insider of such issuer; (Sec. 27.4
(a) (i) and (ii) Any tender offeror, those acting on its behalf, the issuer of
the securities sought or to be sought by such tender offer, and any insider of
such issuer to communicate material nonpublic information relating to the
tender offer to any other person where such communication is likely to result
in a violation of Sub-section 27.4 (a)(I).
For purposes of this subsection the term "securities of the issuer sought or to
be sought by such tender offer" shall include any securities convertible or
exchangeable into such securities or any options or rights in any of the
foregoing securities. (Sec. 27)

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INSURANCE CODE
(RA No. 10607)

Concept of Insurance

A contract of insurance is an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event. (Sec. 2)

Who may be insured

Anyone having an insurable interest in the thing or life insured mat be

insured, except a public enemy. (Sec. 3 & 7).

What may be insured

Any contingent or unknown event, whether past, present or future, which

may damnify a person having an insurable interest or create a liability
against him. (Sec. 3)

Characteristics and nature of an insurance contract

Risk-distributing device - contract of insurance is primarily a risk-

distributing device, a mechanism by which all members of a group exposed
to a particular risk contribute premiums to an insurer. From these
contributory funds are paid whatever losses occur due to exposure to the
peril insured against. Each party therefore takes a risk: the insurer that of
being compelled upon the happening of the contingency to pay the entire
sum agreed upon and the insured that of parting with the amount required as
premium. Without receiving anything therefor in case the contingency does
not happen.
Contract of adhesion or Fine Print Rule – Insurance is a contract of
adhesion considering that most terms of the contract do not result from
mutual negotiations between the parties as they are prescribed by the
insurer in printed form to which the insured may adhere if he chooses but
which he cannot change. Hence, in case of doubt, the contract shall be
interpreted strictly against the insurer and liberally in favor of the insured.

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Aleatory - An insurance is an aleatory contract as it involves an

assumption of risks.
Contract of Indemnity, not a wagering contract - An insurance contract is
a contract of indemnity. In it, one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or
contingent event. The insured should not expect to profit from the happening
of the risk insured against. He should simply be put back to where he was
before the happening of the risk insured against.
Uberrimae Fidae Contracts - contract of insurance is uberrimae fidae and
demand the most abundant good faith.

Classes:

(1) Marine

Marine Insurance includes:

(a) Insurance against loss of or damage to:

(1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes,

merchandise, effects, disbursements, profits, moneys,
securities, choses in action, instruments of debts, valuable
papers, bottomry, and respondentia interests and all other kinds
of property and interests therein, in respect to, appertaining to or
in connection with any and all risks or perils of navigation, transit
or transportation, or while being assembled, packed, crated,
baled, compressed or similarly prepared for shipment or while
awaiting shipment, or during any delays, storage,
transshipment, or reshipment incident thereto, including war
risks, marine builder‘s risks, and all personal property floater
risks;

(2) Person or property in connection with or appertaining to a

marine, inland marine, transit or transportation insurance,
including liability for loss of or damage arising out of or in
connection with the construction, repair, operation, maintenance
or use of the subject matter of such insurance (but not including
life insurance or surety bonds nor insurance against loss by
reason of bodily injury to any person arising out of ownership,
maintenance, or use of automobiles);

(3) Precious stones, jewels, jewelry, precious metals, whether

in course of transportation or otherwise; and

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(4) Bridges, tunnels and other instrumentalities of transportation

and communication (excluding buildings, their furniture and
furnishings, fixed contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to navigation and
transportation, including dry docks and marine railways, dams
and appurtenant facilities for the control of waterways.

(b) Marine protection and indemnity insurance, meaning

insurance against, or against legal liability of the insured for loss,
damage, or expense incident to ownership, operation, chartering,
maintenance, use, repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways, including liability
of the insured for personal injury, illness or death or for loss of or
damage to the property of another person. (Sec. 101)

(2) Fire

As used in this Code, the term fire insurance shall include insurance
against loss by fire, lightning, windstorm, tornado or earthquake and
other allied risks, when such risks are covered by extension to fire
insurance policies or under separate policies. (Sec. 189)

(3) Casualty

Casualty insurance is insurance covering loss or liability arising from

accident or mishap, excluding certain types of loss which by law or
custom are considered as falling exclusively within the scope of other
types of insurance such as fire or marine. It includes, but is not limited
to, employer‘s liability insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft insurance, personal accident
and health insurance as written by non-life insurance companies, and
other substantially similar kinds of insurance. (Sec. 176)
(4) Suretyship
A contract of suretyship is an agreement whereby a party called the
surety guarantees the performance by another party called the
principal or obligor of an obligation or undertaking in favor of a third
party called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any company by virtue
of and under the provisions of Act No. 536, as amended by Act No.
2206. (Sec. 177)
It shall be deemed to be an insurance contract only if made by a
surety who or which, as such, is doing an insurance business. (Sec.
2 (a))

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Life insurance is insurance on human lives and insurance appertaining

thereto or connected therewith.

Every contract or undertaking for the payment of annuities including

contracts for the payment of lump sums under a retirement program
where a life insurance company manages or acts as a trustee for such
retirement program shall be considered a life insurance contract for
purposes of this Code. (Sec. 181)

(5) Microinsurance

Microinsurance is a financial product or service that meets the risk

protection needs of the poor where:

(a) The amount of contributions, premiums, fees or charges,

computed on a daily basis, does not exceed seven and a half percent
(7.5%) of the current daily minimum wage rate for non-agricultural
workers in Metro- Manila; and

(b) The maximum sum of guaranteed benefits is not more than one
thousand (1,000) times of the current daily minimum wage rate for
non-agricultural workers in Metro-Manila. (Sec. 187)

(6) Compulsory motor vehicle liability insurance

For purposes of this chapter:

(a) Motor Vehicle is any vehicle as defined in Sec. 3, paragraph (a) of

Republic Act No. 4136, otherwise known as the ‗Land Transportation
and Traffic Code‘.

(b) Passenger is any fare-paying person being transported and

conveyed in and by a motor vehicle for transportation of passengers
for compensation, including persons expressly authorized by law or by
the vehicle‘s operator or his agents to ride without fare.

(c) Third party is any person other than a passenger as defined in

this section and shall also exclude a member of the household, or a
member of the family within the second degree of consanguinity or
affinity, of a motor vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of death, bodily
injury, or damage to property arising out of and in the course of
employment.

(d) Owner or motor vehicle owner means the actual legal owner of a
motor vehicle, in whose name such vehicle is duly registered with the
Land Transportation Office;
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(e) Land transportation operator means the owner or owners of motor

vehicles for transportation of passengers for compensation, including
school buses.

(f) Insurance policy or Policy refers to a contract of insurance against

passenger and third-party liability for death or bodily injuries and
damage to property arising from motor vehicle accidents. (Sec. 386)

It shall be unlawful for any land transportation operator or owner of a

motor vehicle to operate the same in the public highways unless
there is in force in relation thereto a policy of insurance or
guaranty in cash or surety bond issued in accordance with the
provisions of this chapter to indemnify the death, bodily injury, and/or
damage to property of a third-party or passenger, as the case may be,
arising from the use thereof. (Sec. 387).

(7) Compulsory insurance coverage for agency-hired workers

Migrant Workers Covered. Each migrant worker to be deployed by a

recruitment/manning agency shall be covered by a compulsory
insurance contract which shall be secured at no cost to the said
worker.
Seafarers already covered by entities providing indemnity cover to the
vessel pursuant to Section 5, Rule XVI of the Omnibus Rules shall be
governed by pertinent POEA Rules and Regulations and the POEA-
Standard Employment Contract for Seafarers. These Guidelines shall
apply to principals/shipowners which obtained insurance cover from
local insurance companies. (Sec. 3, POEA Insurance Guidelines on
Rule XVI of the Omnibus Rules and Regulations Implementing R.A.
8042)
(g) Migrant Workers‘ Compulsory Insurance Coverage – the
compulsory insurance policy bought by the recruitment/manning
agency from a reputable insurance company duly authorized by the
Insurance Commission in favor of a migrant worker with the minimum
coverage enumerated under Section 37-A of the Act. (Rule XVI of
the Omnibus Rules and Regulations Implementing R.A. 8042 (The
Migrant Workers and Overseas Filipinos Act of 1995, as amended by
RA 10022)
(8) Variable Contracts

(a) No insurance company authorized to transact business in the

Philippines shall issue, deliver, sell or use any variable contract in the
Philippines, unless and until such company shall have satisfied the
Commissioner that its financial and general condition and its methods
of operations, including the issue and sale of variable contracts, are

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not and will not be hazardous to the public or to its policy and contract
owners. No foreign insurance company shall be authorized to issue,
deliver or sell any variable contract in the Philippines, unless it is
likewise authorized to do so by the laws of its domicile.

(b) The term variable contract shall mean any policy or contract on
either a group or on an individual basis issued by an insurance
company providing for benefits or other contractual payments or
values thereunder to vary so as to reflect investment results of any
segregated portfolio of investments or of a designated separate
account in which amounts received in connection with such contracts
shall have been placed and accounted for separately and apart from
other investments and accounts. This contract may also provide
benefits or values incidental thereto payable in fixed or variable
amounts, or both. It shall not be deemed to be a security or securities
as defined in The Securities Act, as amended, or in the Investment
Company Act, as amended, nor subject to regulations under said
Acts.

(c) In determining the qualifications of a company requesting

authority to issue, deliver, sell or use variable contracts, the
Commissioner shall always consider the following:

(1) The history, financial and general condition of the

company: Provided, That such company, if a foreign company,
must have deposited with the Commissioner for the benefit and
security of its variable contract owners in the Philippines,
securities satisfactory to the Commissioner consisting of bonds
of the Government of the Philippines or its instrumentalities
with an actual market value of Two million pesos
(P2,000,000.00);

(2) The character, responsibility and fitness of the officers and

directors of the company; and

(3) The law and regulation under which the company is

authorized in the state of domicile to issue such contracts.

(d) If after notice and hearing, the Commissioner shall find that
the company is qualified to issue, deliver, sell or use variable
contracts in accordance with this Code and the regulations and
rules issued thereunder, the corresponding order of
authorization shall be issued. Any decision or order denying
authority to issue, deliver, sell or use variable contracts shall
clearly and distinctly state the reasons and grounds on which it
is based. (Sec. 238)

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(9) Life – insurance coverage over human life

Insurable Interest

1. In life/health

Every person has an insurable interest in the life and health:

(a) of himself, of his spouse and of his children;

(b) of any person on whom he depends wholly or in part for

education or support, or in whom he has a pecuniary interest;

(c) of any person under a legal obligation to him for the

payment of money, or respecting property or services, of which
death or illness might delay or prevent the performance; and

(d) of any person upon whose life any estate or interest vested
in him depends. (Sec. 10)

2. In property

An insurable interest in property may consist in:

(a) an existing interest;

(b) an inchoate interest founded on an existing interest; or

(c) an expectancy, coupled with an existing interest in that out

of which the expectancy arises. (Sec. 14)

3. In case of Double insurance and Over insurance

Where the insured in a policy other than life is over insured by double
insurance:

(a) the insured, unless the policy otherwise provides, may

claim payment from the insurers in such order as he may
select, up to the amount for which the insurers are severally
liable under their respective contracts;

(b) where the policy under which the insured claims is a valued
policy, any sum received by him under any other policy shall be
deducted from the value of the policy without regard to the
actual value of the subject matter insured;

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(c) where the policy under which the insured claims is an

unvalued policy, any sum received by him under any policy
shall be deducted against the full insurable value, for any sum
received by him under any policy;

(d) where the insured receives any sum in excess of the

valuation in the case of valued policies, or of the insurable
value in the case of unvalued policies, he must hold such sum
in trust for the insurers, according to their right of contribution
among themselves;

(e) each insurer is bound, as between himself and the other

insurers, to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract. (Sec. 96)

In case of an over insurance by several insurers other than life, the

insured is entitled to a ratable return of the premium, proportioned to
the amount by which the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk. (Sec. 83)
4. Multiple or several interests on same property

The measure of an insurable interest in property is the extent to

which the insured might be damnified by loss or injury thereof. (Sec.
17)

Perfection of the contract of insurance

1. Offer and acceptance/consensuality

Under the Cognition Theory, a contract is perfected upon knowledge

of the acceptance. Hence, a contract is not perfected if it has not
been satisfactorily proved that the acceptance of the application ever
came to the knowledge of the applicant. (Enriquez vs Sun life
Assurance, GR. L-15774)
a. Delay in acceptance
Delay in acting on the application does not constitute acceptance
even though the insured has forwarded his premium with his
application.
b. Delivery of policy
Delivery is not necessary in the formation of a contract of insurance
since a contract of insurance is consensual.
The mere delivery of an insurance policy to someone does not give
rise to the formation of a contract of insurance in the absence of proof
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that he had agreed to be insured. The contract may be completed

prior to delivery of the policy or even without the delivery of the policy
depending upon the intention of the parties. The policy may contain
provision that states that the insurance is not effective until the
delivery of the policy.
2. Premium payment
(a) An insurer is entitled to payment of the premium as soon as the
thing insured is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except
in the case of a life or an industrial life policy whenever the grace
period provision applies, or whenever under the broker and agency
agreements with duly licensed intermediaries, a ninety (90)-day
credit extension is given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from date of
issuance of the policy. (Sec. 77)
(b) Refund of premiums

A person insured is entitled to a return of premium, as follows:

(i) to the whole premium if no part of his interest in the thing

insured be exposed to any of the perils insured against;

(ii) where the insurance is made for a definite period of time

and the insured surrenders his policy, to such portion of the
premium as corresponds with the unexpired time, at a pro rata
rate, unless a short period rate has been agreed upon and
appears on the face of the policy, after deducting from the
whole premium any claim for loss or damage under the policy
which has previously accrued: Provided, That no holder of a life
insurance policy may avail himself of the privileges of this
paragraph without sufficient cause as otherwise provided by
law. (Sec. 80)

3. Non-default options in life insurance.

(a) Grace period - A provision that the policyholder is entitled
to a grace period either of thirty (30) days or of one (1) month
within which the payment of any premium after the first may be
made, subject at the option of the insurer to an interest charge
not in excess of six percent (6%) per annum for the number of
days of grace elapsing before the payment of the premium,
during which period of grace the policy shall continue in full
force, but in case the policy becomes a claim during the said
period of grace before the overdue premium is paid, the
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amount of such premium with interest may be deducted from

the amount payable under the policy in settlement. (Sec. 233,
par. [a])
(b) Cash-surrender value – A provision specifying the
options to which the policyholder is entitled to in the event of
default in a premium payment after three (3) full annual
premiums shall have been paid. Such option shall consist of:

(1) a cash-surrender value payable upon surrender of the

policy which shall not be less than the reserve on the
policy, the basis of which shall be indicated, for the then
current policy year and any dividend additions thereto,
reduced by a surrender charge which shall not be more
than one-fifth (1/5) of the entire reserve or two and one-half
percent (2½%) of the amount insured and any dividend
additions thereto; and

(2) one or more paid-up benefits on a plan or plans specified

in the policy of such value as may be purchased by the
cash surrender value .(Sec. 233, par. [f])

(c) Reinstatement - A provision that the policyholder shall be entitled

to have the policy reinstated at any time within three (3) years from
the date of default of premium payment unless the cash surrender
value has been duly paid, or the extension period has expired, upon
production of evidence of insurability satisfactory to the company and
upon payment of all overdue premiums and any indebtedness to the
company upon said policy, with interest rate not exceeding that which
would have been applicable to said premiums and indebtedness in
the policy years prior to reinstatement. (Sec. 233, par. [j])

Rescission of insurance contracts

Due to: (a) Concealment

A neglect to communicate that which a party knows and ought to

communicate, is called a concealment. (Sec. 26)

A concealment whether intentional or unintentional entitles the injured

party to rescind a contract of insurance (Sec. 27).

(b) Misrepresentation/omissions

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If a representation is false in a material point, whether affirmative or

promissory, the injured party is entitled to rescind the contract from
the time when the representation becomes false. (Sec. 45)
(c) Breach of warranties

The violation of a material warranty, or other material provision of a

policy, on the part of either party thereto, entitles the other to rescind.
(Sec. 74)

Claims settlement and subrogation

1. Notice and proof of loss

In case of loss upon an insurance against fire, an insurer is

exonerated, if written notice thereof be not given to him by an insured,
or some person entitled to the benefit of the insurance, without
unnecessary delay. For other non-life insurance, the Commissioner
may specify the period for the submission of the notice of loss. (Sec.
90)

When a preliminary proof of loss is required by a policy, the insured is

not bound to give such proof as would be necessary in a court of
justice; but it is sufficient for him to give the best evidence which he
has in his power at the time. (Sec. 91)

2. Guidelines on claims settlement

The proceeds of a life insurance policy shall be paid immediately upon

maturity of the policy, unless such proceeds are made payable in
installments or as an annuity, in which case the installments, or
annuities shall be paid as they become due: Provided, however, That
in the case of a policy maturing by the death of the insured, the
proceeds thereof shall be paid within sixty (60) days after
presentation of the claim and filing of the proof of death of the
insured. Refusal or failure to pay the claim within the time prescribed
herein will entitle the beneficiary to collect interest on the
proceeds of the policy for the duration of the delay at the rate of
twice the ceiling prescribed by the Monetary Board, unless such
failure or refusal to pay is based on the ground that the claim is
fraudulent.
The proceeds of the policy maturing by the death of the insured
payable to the beneficiary shall include the discounted value of all
premiums paid in advance of their due dates, but are not due and
payable at maturity. (Sec. 248)
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The amount of any loss or damage for which an insurer may be liable,
under any policy other than life insurance policy, shall be paid within
thirty (30) days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by arbitration;
but if such ascertainment is not had or made within sixty (60) days
after such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within ninety (90) days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed
herein will entitle the assured to collect interest on the proceeds
of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or
refusal to pay is based on the ground that the claim is fraudulent.
(Sec. 249)

3. Unfair claims settlement, sanctions:

(a) No insurance company doing business in the Philippines shall

refuse, without just cause, to pay or settle claims arising under
coverages provided by its policies, nor shall any such company
engage in unfair claim settlement practices. Any of the following acts
by an insurance company, if committed without just cause and
performed with such frequency as to indicate a general business
practice, shall constitute unfair claim settlement practices:

(1) Knowingly misrepresenting to claimants pertinent facts or

policy provisions relating to coverage at issue;

(2) Failing to acknowledge with reasonable promptness

pertinent communications with respect to claims arising under
its policies;

(3) Failing to adopt and implement reasonable standards for

the prompt investigation of claims arising under its policies;

(4) Not attempting in good faith to effectuate prompt, fair and

equitable settlement of claims submitted in which liability has
become reasonably clear; or

(5) Compelling policyholders to institute suits to recover

amounts due under its policies by offering without justifiable
reason substantially less than the amounts ultimately
recovered in suits brought by them. (Sec. 247)

(b) It is unlawful to:

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(1) Present or cause to be presented any fraudulent claim for

the payment of a loss under a contract of insurance; and

(2) Fraudulently prepare, make or subscribe any writing with

intent to present or use the same, or to allow it to be presented
in support of any such claim. Any person who violates this
section shall be punished by a fine not exceeding twice the
amount claimed or imprisonment of two (2) years, or both, at
the discretion of the court. (Sec. 261)

4. Prescription of action
Any person having any claim upon the policy issued pursuant to this
chapter shall, without any unnecessary delay, present to the
insurance company concerned a written notice of claim setting forth
the nature, extent and duration of the injuries sustained as certified by
a duly licensed physician. Notice of claim must be filed within six
(6) months from the date of accident, otherwise, the claim shall be
deemed waived. Action or suit for recovery of damage due to
loss or injury must be brought, in proper cases, with the
Commissioner or the courts within one (1) year from denial of the
claim, otherwise, the claimant‘s right of action shall prescribe. (Sec.
397)
5. Subrogation

If the plaintiff‘s property has been insured and he has received

indemnity from the insurance company for the injury or loss arising out
of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury. (Art. 2207, Civil Code)

Business of insurance; requirements

Whenever used in this Code, the following terms shall have the
respective meanings hereinafter set forth or indicated, unless the
context otherwise requires:

(i) The term doing an insurance business or transacting an

insurance business, within the meaning of this Code, shall include:

(1) Making or proposing to make, as insurer, any insurance

contract;
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(2) Making or proposing to make, as surety, any contract of

suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety;

(3) Doing any kind of business, including a reinsurance

business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;

(4) Doing or proposing to do any business in substance

equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no

profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefor, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business. (Sec. 2, b)

(ii). For purposes of this Code, the term insurer or insurance

company shall include all partnerships, associations, cooperatives
or corporations, including government-owned or -controlled
corporations or entities, engaged as principals in the insurance
business, excepting mutual benefit associations. Unless the
context otherwise requires, the term shall also include professional
reinsurers defined in Section 288. Domestic company shall include
companies formed, organized or existing under the laws of the
Philippines. Foreign company when used without limitation shall
include companies formed, organized, or existing under any laws
other than those of the Philippines. (Sec. 190)

Insurance Commissioner and its powers

The Insurance Commissioner shall be appointed by the President of the

Republic of the Philippines for a term of six (6) years without reappointment
and who shall serve as such until the successor shall have been appointed
and qualified. If the Insurance Commissioner is removed before the
expiration of his term of office, the reason for the removal must be published.

The Insurance Commissioner shall have the duty to see that all laws relating
to insurance, insurance companies and other insurance matters, mutual
benefit associations, and trusts for charitable uses are faithfully executed
and to perform the duties imposed upon him by this Code, and shall,
notwithstanding any existing laws to the contrary, have sole and exclusive
authority to regulate the issuance and sale of variable contracts as defined in
Section 238 hereof and to provide for the licensing of persons selling such
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contracts, and to issue such reasonable rules and regulations governing the
same.

The Commissioner may issue such rulings, instructions, circulars, orders and
decisions as may be deemed necessary to secure the enforcement of the
provisions of this Code, to ensure the efficient regulation of the insurance
industry in accordance with global best practices and to protect the insuring
public. Except as otherwise specified, decisions made by the Commissioner
shall be appealable to the Secretary of Finance.

In addition to the foregoing, the Commissioner shall have the following

powers and functions:

(a) Formulate policies and recommendations on issues concerning

the insurance industry, advise Congress and other government
agencies on all aspects of the insurance industry and propose
legislation and amendments thereto;

(b) Approve, reject, suspend or revoke licenses or certificates of

registration provided for by this Code;

(c) Impose sanctions for the violation of laws and the rules,
regulations and orders issued pursuant thereto;

(d) Prepare, approve, amend or repeal rules, regulations and orders,

and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;

(e) Enlist the aid and support of, and/or deputize any and all
enforcement agencies of the government in the implementation of its
powers and functions under this Code;

(f) Issue cease and desist orders to prevent fraud or injury to the
insuring public;

(g) Punish for contempt of the Commissioner, both direct and indirect,
in accordance with the pertinent provisions of and penalties
prescribed by the Rules of Court;

(h) Compel the officers of any registered insurance corporation or

association to call meetings of stockholders or members thereof under
its supervision;

(i) Issue subpoena duces tecum and summon witnesses to appear in

any proceeding of the Commission and, in appropriate cases, order
the examination, search and seizure of all documents, papers, files
and records, tax returns, and books of accounts of any entity or

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person under investigation as may be necessary for the proper

disposition of the cases before it, subject to the provisions of existing
laws;

(j) Suspend or revoke, after proper notice and hearing, the license or
certificate of authority of any entity or person under its regulation,
upon any of the grounds provided by law;

(k) Conduct an examination to determine compliance with laws and

regulations if the circumstances so warrant as determined by
appropriate rules and regulations;

(l) Investigate not oftener than once a year from the last date of
examination to determine whether an institution is conducting its
business on a safe and sound basis: Provided, That, the
deficiencies/irregularities found by or discovered by an audit shall be
immediately addressed;

(m) Inquire into the solvency and liquidity of the institutions under its
supervision and enforce prompt corrective action;

(n) To retain and utilize, in addition to its annual budget, all fees,
charges and other income derived from the regulation of insurance
companies and other supervised persons or entities;

(o) To fix and assess fees, charges and penalties as the

Commissioner may find reasonable in the exercise of regulation; and

(p) Exercise such other powers as may be provided by law as well as

those which may be implied from, or which are necessary or incidental
to the express powers granted the Commission to achieve the
objectives and purposes of this Code. (Sec. 437)

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PRE-NEED CODE
(RA 9829)

Pre-need plans & Pre-need Company, defined

(b) "Pre-need plans" are contracts, agreements, deeds or plans for the
benefit of the planholders which provide for the performance of future
service/s, payment of monetary considerations or delivery of other benefits at
the time of actual need or agreed maturity date, as specified therein, in
exchange for cash or installment amounts with or without interest or
insurance coverage and includes life, pension, education, interment and
other plans, instruments contracts or deeds as may in the future he
determined by the Commission.
(c) "Pre-need company" refers to any corporation registered with the
Commission and authorized/licensed to sell or offer to sell pre-need plans.
The term "pre-need company" also refers to schools, memorial chapels,
banks, nonbank financial institutions and other entities which have also been
authorized/licensed to sell or offer to sell pre-need plans insofar as their pre-
need activities or business are concerned. (Sec. 4, b & c)

Registration of pre-need plans

(i) Registration of Pre-need Contracts/Plans. – Within a period of forty-

five (45) days after the grant of a license to do business as a pre-need
company, and for every pre-need plan which the pre-need company intends
to offer for sale to the public, the pre-need company shall file with the
Commission a registration statement for the sale of pre-need plans pursuant
to this Code. The Commission shall promulgate rules governing the
registration of pre-need plans and the required documents which include,
among others, the viability study with certification, under oath, of a pre-need
brochure, a copy of the pre-need plan, and information and documents
necessary to ensure the protection of planholders and the general public.
Said rules shall further set forth the )conditions under which such
registration may be denied revoked, suspended or withdrawn, and the
remedies of pre-need companies in such instances. (Sec. 14)

(ii) Registration Requirements. – The Commission shall set forth the

requirements for registration of pre-need plans and shall require the following
documents, among others;

(a) Duly accomplished Registration Statements;

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(b) Board resolution authorizing the registration of applicant‘s pre-

need plans;

(c) Opinion of independent counsel on the legality of the issue;

(d) Audited financial statements;

(e) Viability study with certification, under oath, of pre-need actuary

accredited by the Commission;

(f) Copy of the proposed pre-need plan; and

(g) Sample of sales materials.

Such registration statements and sales materials required under this

section shall contain the appropriate risk factors as may be
determined by the Commission. (Sec. 15)

Licensing of Sales Counselors

No sales counselor shall be allowed to solicit, sell or offer to sell pre-need

plans under this Code without being licensed as such by the Commission.
No license shall be issued unless the following qualifications have been
complied with:

(a) The applicant must be of good moral character and must not have
been convicted of any crime involving moral turpitude;

(b) The applicant has undergone a training program approved by the

Commission and such fact has been certified under oath by a duly
authorized representative of a pre-need company; and

(c) The applicant has passed a written examination administered by

the. Commission: Provided, That the administration of the
examination may be delegated to an independent organization under
the supervision of the Commission.

Such license shall automatically expire every thirtieth (30th) day of

June or such date of every year as may be fixed by the Commission
and may be accordingly renewed. (Sec. 20)

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Licensing of General Agents.

If the issuer should contract the services of a general agent to undertake the
sales of its plans, such general agent shall be required to be licensed as
such with the Commission, in accordance with the requirements imposed by
the Commission. (Sec. 22)

Default, grace period, reinstatement and notice of termination

The pre-need company must provide in all contracts issued to planholders a
grace period of at least sixty (60) days within which to pay accrued
installments, counted from the due date of the first unpaid installment. Non-
payment of a plan within the grace period shall render the plan a lapsed
plan. Any payment by the planholder after the grace period shall be
reimbursed forthwith, unless the planholder duly reinstates the plan. The
planholder shall be allowed a period of not less than two (2) years from
the lapse of the grace period or a longer period as provided in the
contract within which to reinstate his plan. No cancellation of plans shall
be made by the issuer during such period when reinstatement may be
effected.
Within thirty (30) days from the expiration of the grace period and within thirty
(30) days from the expiration of the reinstatement period, which is two (2)
years from the lapse of the grace period, the pre-need company shall give
written notice to the planholder that his plan will be cancelled if not reinstated
within two (2) years. Failure to give either of the required notices shall
preclude the pre-need company from treating the plans as cancelled. (Sec.
23)

Termination of Pre-need Plans

A planholder may terminate his pre-need plan at any time by giving written
notice to the issuer.

A pre-need plan shall contain a schedule of termination values to which

the planholder is entitled to upon termination. Such schedule of
termination value shall be required for all in-force pre-need plans and shall
be fair, equitable and in compliance with the Commission issuances. The
termination value of the pre-need plan shall be pre-determined by the
actuary of the pre-need company upon application for registration of the pre-
need plans with the Commission and shall be disclosed in the contract (Sec.
24).

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Claims settlement

Unfair Claims Settlement Practices

(a) No pre-need company shall refuse, without just cause, to pay or settle
claims arising under coverages provided by its plans nor shall any such
company engage in unfair claim settlement practices. Any of the following
acts by a pre-need company, if committed without just cause, shall constitute
unfair claims settlement practices:

(1) Knowingly misrepresenting to claimants pertinent facts or plan

provisions relating to coverages at issue;

(2) Failing to acknowledge with reasonable promptness pertinent

communications with respect to claims arising under its plan;

(3) Failing to adopt and implement reasonable standards for the

prompt investigation of claims arising under its plan;

(4) Failing to provide prompt, fair and equitable settlement of claims

submitted in which liability has become reasonably clear; or

(5) Compelling planholders to institute suits or recover amounts due

under its plan by offering, without justifiable reason, substantially less
than the amounts ultimately recovered in suits brought by them.

(b) Evidence as to the number and types of valid and justifiable complaints
to the Commission against a pre-need company shall be deemed admissible
in an administrative or judicial proceeding brought under this section.

(c) Any violation of this section shall be considered sufficient cause for the
suspension or revocation of the company's certificate of authority. (Sec. 25)

Payment of Plan Proceeds

In the case of scheduled benefit plans, the proceeds of the plan shall be paid
immediately upon maturity of the contract, unless such proceeds are made
payable in installments or as an annuity, in which case the installments or
annuities shall be paid as they become due. Refusal or failure to pay the
claim within fifteen (15) days from maturity or due date will entitle the
beneficiary to collect interest on the proceeds of the plan for the duration of
the delay at the rate twice the legal interest unless such failure or refusal to
pay is based on the ground that the claim is fraudulent: Provided, That the
planholder has duly complied with the documentary requirements of the pre-
need company.
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In the case of contingent benefit plans, the benefits shall be paid by the pre-
need company thirty (30) days upon submission of all necessary documents.
(Sec. 26)

Recovery of Investment

The planholder may institute the necessary legal action in court to recover
his/her investment in the pre-need company thirty (30) days upon
submission of all necessary documents.

However, in case the insolvency or bankruptcy is a mere cover-up for fraud

or illegality, the planholder may institute the legal action directly against the
officers and/or controlling owners of the said pre-need company. (Sec. 27)

Consequences of Delay or Default

In case of any litigation for the enforcement of any pre-need plan, it shall be
the duty of the Commission to determine whether the payment of the claim of
the planholder has been unreasonably denied or withheld. If found to have
unreasonably denied or withheld the claim, the pre-need company shall be
liable to pay damages, consisting of actual damages, attorney‘s fees and
legal interest, to be computed from the date the claim is made until it is fully
satisfied: Provided, That the failure to pay any such claim within the time
prescribed in Section 26 hereof shall be considered prima facie evidence of
unreasonable delay in payment. (Sec. 28)

Distribution of Profits

A pre-need company may declare dividend: Provided, That the following

shall remain unimpaired, as certified under oath by the president and the
treasurer with respect to items (a) and (b); and in the case of item (c), by the
trust officer:

(a) One hundred percent (100%) of the capital stock;

(b) An amount sufficient to pay all net losses reported, or in the

course of settlement, and all liabilities for expenses and taxes; and

(c) Trust fund.

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Any dividend declared under the preceding paragraph shall be

reported to the Commission within thirty (30) days after such
declaration. (Sec. 29)

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TRANSPORTATION LAWS
(Civil Code)

A. COMMON CARRIERS
1. Diligence required of common carriers
A common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using th e utmost diligence of
very cautious persons, with a due regard for all the circumstances.
(Art.1755, Civil Code)
Common carriers, from the nature of their business andfor reasons of
public policy, are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case..
Such extraordinary diligence in vigilance over the goods is further
expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while
the extraordinary diligence for the safety of the passengers is further
set forth in articles 1755 and 1756. (Art. 1733, Civil Code)
2. Liabilities of common carriers
In case of death of or injuries to passengers, common carriers are
presumed to have been at fault or to have acted negligently, unless
they prove that they observed extraordinary diligence as prescribed in
articles 1733 and 1755. (Art. 1755, Civil Code)
Common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers

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transported by them, according to all the circumstances of each case.

Such extraordinary diligence in vigilance over the goods is further

expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while
the extraordinary diligence for the safety of the passengers is further
set forth in articles 1755 and 1756
(Art. 1733, Civil Code)

In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the

preceding article, if the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary
diligence as required in article 1733. (Art. 1735, Civil Code)

Common carriers are responsible for the loss, destruction, or

deterioration of the goods, unless the same is due to any of the
following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or

calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the

container;

(5) Order or act of competent public authority (Art. 1734, Civil Cod.
Classification of transport network vehicle services and transport
network companies

R.A. 4136 - An Act to Compile the Laws Relative to Land

Transportation and Traffic Rules, to Create a Land Transportation
Commission and for Other Purposes provides
All motor vehicles and other vehicles must be registered.

No motor vehicle shall be used or operated on or upon any public

highway of the Philippines unless the same is properly registered for
the current year in accordance with the provisions of this Act.

Any registration of motor vehicles not renewed on or before the date

fixed for different classifications, as provided hereunder shall
become delinquent and invalid:

1. For hire motor vehicles - on or before the last working day of

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February.

2. Privately-owned motor vehicles - from March one to the last

working day of May.

3. All other motor vehicles - from June one to the last working day
of June; except when the plates of such motor vehicles are returned
to the Commission in Quezon City or to the Office of the Motor
Vehicles Registrar in the provincial or city agency of the Commission
on or before the last working day of December of the year of issue.
(Sec. 5, RA 4136)

C. VIGILANCE OVER GOODS, avoidance of liability

In order that the common carrier may be exempted from responsibility, the
natural disaster must have been the proximate and only cause of the loss.
However, the common carrier must exercise due diligence to prevent or
minimize loss before, during and after the occurrence of flood, storm or other
natural disaster in order that the common carrier may be exempted from
liability for the loss, destruction, or deterioration of the goods. The same duty
is incumbent upon the common carrier in case of an act of the public enemy
referred to in Article 1734, No. 2. (Art. 1739, Civil Code)

(a) Absence of delay

If the common carrier negligently incurs in delay in transporting the
goods, a natural disaster shall not free such carrier from responsibility.
(Art. 1740, Civil Code)
(b) Due diligence to prevent or lessen the loss
Even if the loss, destruction, or deterioration of the goods should be
caused by the character of the goods, or the faulty nature of the
packing or of the containers, the common carrier must exercise due
diligence to forestall or lessen the loss. (Art. 1742, Civil Code)
(c) Contributory negligence
The contributory negligence of the passenger does not bar recovery
of damages for his death or injuries, if the proximate cause thereof is
the negligence of the common carrier, but the amount of damages
shall be equitably reduced.
Contributory negligence on the part of the passenger is not a defense
that will excuse the carrier from liability. It will only mitigate such
liability. (Art. 1762, Civil Code)
(d) Duration of liability
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Delivery of goods to common carrier

The extraordinary responsibility of the common carrier lasts from the
time the goods are unconditionally placed in the possession of, and
received by the carrier for transportation until the same are delivered,
actually or constructively, by the carrier to the consignee, or to the
person who has a right to receive them, without prejudice to the
provisions of Article 1738. (Art. 1736, Civil Code)
The common carrier's duty to observe extraordinary diligence over the
goods remains in full force and effect even when they are temporarily
unloaded or stored in transit, unless the shipper or owner has made
use of the right of stoppage in transitu. (Art. 1737, Civil Code)
The extraordinary liability of the common carrier continues to be
operative even during the time the goods are stored in a warehouse
of the carrier at the place of destination, until the consignee has
been advised of the arrival of the goods and has had reasonable
opportunity thereafter to remove them or otherwise dispose of them.
(Art. 1738, Civil Code)
Temporary unloading or storage
The common carrier's duty to observe extraordinary diligence over the
goods remains in full force and effect even when they are
temporarily unloaded or stored in transit, unless the shipper or
owner has made use of the right of stoppage in transitu. (Art. 1737,
Civil Code)

Stipulation for limitation of liability

(a) Void stipulations
Any of the following or similar stipulations shall be considered
unreasonable, unjust and contrary to public policy:

(1) That the goods are transported at the risk of the owner or shipper;
(2) That the common carrier will not be liable for any loss, destruction,
or deterioration of the goods;

(3) That the common carrier need not observe any diligence in the
custody of the goods;
(4) That the common carrier shall exercise a degree of diligence less
than that of a good father of a family, or of a man of ordinary prudence
in the vigilance over the movables transported;
(5) That the common carrier shall not be responsible for the acts or
omission of his or its employees;

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(6) That the common carrier's liability for acts committed by thieves,
or of robbers who do not act with grave or irresistible threat, violence
or force, is dispensed with or diminished;
(7) That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in the contract of carriage.
(Art. 1745, Civil Code)

(b) Limitation of liability to fixed amount

A contract fixing the sum that may be recovered. by the owner or

shipper for the loss, destruction, or deterioration of the goods is valid,
if it is reasonable and just under the circumstances, and has been
fairly and freely agreed upon. (Art. 1750, Civil Code)

(c) Limitation of liability in absence of declaration of greater

value
A stipulation that the common carrier's liability is limited to the value of
the goods appearing in the bill of lading, unless the shipper or owner
declares a greater value, is binding. (Art. 1749, Civil Code)

(d) Liability for baggage of passengers

(i) Checked-in baggage
The law of the country to which the goods are to be transported shall
govern the liability of the common carrier for their loss, destruction or
deterioration. (Art. 1753, Civil Code)

(ii) Baggage in possession of passengers

The provisions of Articles 1733 to 1753 shall apply to the passenger's
baggage which is not in his personal custody or in that of his
employee. As to other baggage, the rules in Articles 1998 and 2000
to 2003 concerning the responsibility of hotel- keepers shall be
applicable. (Art. 1754, Civil Code)

D. SAFETY OF PASSENGERS

Common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.
(Art. 1733, Civil Code)

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A common carrier is bound to carry the passengers safely as far as

human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances
(Art. 1755, Civil Code).

The responsibility of a common carrier for the safety of passengers as

required in Articles 1733 and 1735 cannot be dispensed with or
lessened by stipulation, by posting of notices, by statements on
tickets, or otherwise. (Art. 1757, Civil Code)

When a passenger is carried gratuitously, a stipulation limiting the

common carrier's liability for negligence is valid, but not for wilful acts
or gross negligence.

The reduction of fare does not justify any limitation of the common
carrier's liability. (Art. 1758, Civil Code)

E. LIABILITY FOR ACTS OF OTHERS

Employees
Common carriers are liable for the death of or injuries to passengers through
the negligence or wilful acts of the former's employees, although such
employees may have acted beyond the scope of their authority or in
violation of the orders of the common carriers.
This liability of the common carriers does not cease upon proof that
they exercised all the diligence of a good father of a family in the
selection and supervision of their employees. (Art. 1759, Civil Code)

The common carrier's responsibility prescribed in the preceding article

cannot be eliminated or limited by stipulation, by the posting of
notices, by statements on the tickets or otherwise.

The common carrier shall be liable for acts or omissions of its

employees although said employees may have acted without or in
excess of authority (Art. 1760, Civil Code)
Other passengers and strangers
The passenger must observe the diligence of a good father of a family
to avoid injury to himself. (Art. 1761, Civil Code)
The contributory negligence of the passenger does not bar recovery
of damages for his death or injuries, if the proximate cause thereof is
the negligence of the common carrier, but the amount of damages
shall be equitably reduced. (Art. 1762, Civil Code)

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A common carrier is responsible for injuries suffered by a passenger

on account of the willful acts or negligence of other passengers or of
strangers, if the common carrier's employees through the exercise of
the diligence of a good father of a family could have prevented or
stopped the act or omission.
For acts or omissions of the passengers or third person, if the
common carrier could prevent death or injury by merely exercising the
diligence of a good father of a family and failed to do so, the carrier is
liable. (Art. 1763, Civil Code)
F. DAMAGES -
Damages in cases comprised in this Section shall be awarded in
accordance with Title XVIII of this Book, concerning Damages. Article
2206 shall also apply to the death of a passenger caused by the
breach of contract by a common carrier. (Art. 1764, Civil Code)
The amount of damages for death caused by a crime or quasi-delict
shall be at least three thousand pesos, even though there may have
been mitigating circumstances. In addition:
(1) The defendant shall be liable for the loss of the earning capacity
of the deceased, and the indemnity shall be paid to the heirs of the
latter; such indemnity shall in every case be assessed and awarded
by the court, unless the deceased on account of permanent physical
disability not caused by the defendant, had no earning capacity at the
time of his death;
(2) If the deceased was obliged to give support according to the
provisions of Article 291, the recipient who is not an heir called to the
decedent's inheritance by the law of testate or intestate succession,
may demand support from the person causing the death, for a period
not exceeding five years, the exact duration to be fixed by the court;
(3) The spouse, legitimate and illegitimate descendants and
ascendants of the deceased may demand moral damages for mental
anguish by reason of the death of the deceased. (Art. 2206, Civil
Code)

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CODE OF COMMERCE

1. Responsibilities and Liabilities of the Carrier

(1) The carrier shall be bound, before and at the beginning of the
voyage exercise due diligence to —

(a) Make the ship seaworthy;

(b) Properly man, equip, and supply the ship;
(c) Make the holds, refrigerating and cooling chambers, and
all other parts of the ship in which goods are carried, fit and
safe for their reception carriage and preservation.

(2) The carrier shall properly and carefully load, handle ,stow, carry,
keep, care for, and discharge the goods carried.

(3) After receiving the goods into his charge the carrier, or the master
or agent of the carrier, shall, on demand of the shipper, issue to the
shipper a bill of lading showing among other things —
(a) The leading marks necessary for identification of the
goods as the same are furnished in writing by the shipper
before the loading of such goods starts, provided such marks
are stamped or otherwise shown clearly upon the goods if
uncovered, or on the cases or coverings in which such goods
are contained, in such a manner as should ordinarily remain
legible until the end of the voyage.

(b) Either the number of packages or pieces, or the quantity

or weight, as the case may be, as furnished in writing by the
shipper.

(c) The apparent order and condition of the goods: Provided,

that no carrier, master, or agent of the carrier, shall be bound
to state or show in the bill of lading any marks, number,
quantity, or weight which he has reasonable ground for
suspecting not accurately to represent the goods actually
received, or which he has had no reasonable means of
checking. (Sec. 3.)

2. Liability for defects in equipment and facilities

(1) Neither the carrier nor the ship shall be liable for loss or damage
arising or resulting from unseaworthiness unless caused by want of
due diligence on the part of the carrier to make the ship seaworthy,
and to secure that the ship is properly manned, equipped, and
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supplied, and to make to the holds, refrigerating and cool chambers,

and all other parts of the ship in which goods are carried fit and safe
for their reception, carriage, and preservation in accordance with the
provisions of paragraph (1) of section 3. Whenever loss or damage
has resulted from unseaworthiness, the burden of proving the
exercise of due diligence shall be on the carrier or other persons
claiming exemption under the section.

(2) Neither the carrier nor the ship shall be responsible for loss or
damage arising or resulting from —

(a ) Act, neglect, or default of the master, mariner, pilot, or the

servants of the carrier in the navigation or in the management
of the ship;
(b) Fire, unless caused by the actual fault or privity of the
carrier;
(c) Perils, dangers, and accidents of the sea or other
navigable waters;
(d) Act of God;
(e) Act of war,
(f) Act of public enemies;
(g) Arrest or restraint of princes, rulers, or people, or seizure
under legal process;
(h) Quarantine restrictions;
(I) Act or omission of the shipper or owner of the goods, his
agent or representative;
(j) Strikes or lockouts or stoppage or restraint of labor from
whatever cause, whether partial or general; Provided, that
nothing herein contained shall be construed to relieve a
carrier from responsibility for the carrier's own acts;
(k) Riots and civil commotions
(l) Saving or attempting to save life or property at sea;
(m) Wastage in bulk or weight or any other loss or damage
arising from inherent defect, quality, or vice of the goods;
(n) Insufficiency of packing;
(o) Insufficiency of inadequacy of marks;
(p) Latent defects not discoverable by due diligence; and
(q) Any other cause arising without the actual fault and privity
of the carrier and without the fault or neglect of the agents or
servants of the carrier, but the burden of proof shall be on the
person claiming the benefit of this exception to show that
neither the actual fault or privity of the carrier nor the fault or
neglect of the agents or servants of the carrier contributed to
the loss or damage.

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(3) The shipper shall not be responsible for loss or damage

sustained by the carrier or the ship arising from any cause without
the act, fault, or neglect of the shipper, his agents, or servants.
(4) Any deviation in saving or attempting to save life or property at
sea, or any reasonable deviation shall not be deemed to be an
infringement or breach of this Act or of the contract of carriage, and
the carrier shall not be liable for any loss or damage resulting
therefrom: Provided, however, that if the deviation is for the purpose
of loading cargo or unloading cargo or passengers it shall, prima
facie, be regarded as unreasonable.

(5) Neither the carrier nor the ship shall in any event be or become
liable for any loss or damage to or in connection with the
transportation of goods in an amount exceeding $600 per package
lawful money of the United States, or in case of goods not shipped in
packages, per customary freight unit, or the equivalent of that sum in
other currency, unless the nature and value of such goods have been
declared by the shipper before shipment and inserted in the bill of
lading. This declaration, if embodied in the bill of lading, shall be prima
facie evidence, but shall not be conclusive on the carrier.

By agreement between the carrier, master, or agent of the carrier, and

the shipper another maximum amount than that mentioned in this
paragraph may be fixed: Provided, that such maximum shall not be
less than the figure above named. In no event shall the carrier be
liable for more than the amount of damage actually sustained.

Neither the carrier nor the ship shall be responsible in any event for
loss or damage to or in connection with the transportation of the
goods if the nature or value thereof has been knowingly and
fraudulently misstated by the shipper in the bill of lading.

Goods of an inflammable, explosive, or dangerous nature to the

shipment whereof the carrier, master or agent of the carrier, has not
consented with knowledge of their nature and character, may at any
time before discharge be landed at any place or destroyed or
rendered innocuous by the carrier without compensation, and the
shipper of such goods shall be liable for all damages and expenses
directly or indirectly arising out of or resulting from such shipment. If
any such goods shipped with such knowledge and consent shall
become a danger to the ship or cargo, they may in like manner be
landed at any place, or destroyed or rendered innocuous by the
carrier without liability on the part of the carrier except to general
average, if any. (Sec. 4.)

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3. BILL OFLADING

(a) Three-fold character/purposes

(i) written contract between the parties;
(ii) it stands for the goods mentioned therein;;

(iii) receipt of the cargo.

(b) Kinds ob bills of lading
(b.1) On Board” Bill of lading- It states that the goods
have been received on the board the specified vessel
that will carry them;
(b.2) ―Received Shipment‖ Bill of Lading – It states that the
goods have been received for shipment with or without
specifying the vessel on which they are to be shipped.
(b.3) Clean Bill of Lading – It has no notation of any defect
or damage in the goods; a clean bill of lading constitutes
prima facie evidence of the receipt by the carrier of the goods
as therein described
Delivery of goods
(a) Period for delivery
In transportation made by railroads or other enterprises subject to
regulation rate and time schedules, it shall be sufficient for the bills of
lading or the declaration of shipment furnished by the shipper to
refer, with respect to the cost, time and special conditions of the
carriage, to the schedules and regulations the application of which
he requests; and if the shipper does not determine the schedule, the
carrier must apply the rate of those which appear to be the lowest,
with the conditions inherent thereto, always including a statement or
reference to in the bill of lading which he delivers to the shipper.
(Art. 351, Code of Commerce)

If there is no period fixed for the delivery of the goods the carrier
shall be bound to forward them in the first shipment of the same or
similar goods which he may make point where he must deliver them;
and should he not do so, the damages caused by the delay should
be for his account. (Art. 358, Code of Commerce)

If a period has been fixed for the delivery of the goods, it must be
made within such time, and, for failure to do so, the carrier shall pay
the indemnity stipulated in the bill of lading, neither the shipper nor
the consignee being entitled to anything else. If no indemnity has
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been stipulated and the delay exceeds the time fixed in the bill of
lading, the carrier shall be liable for the damages which the delay
may have caused. (Art. 370, Code of Commerce)
In case of delay through the fault of the carrier, referred to in the
preceding articles, the consignee may leave the goods transported in
the hands of the former, advising him thereof in writing before their
arrival at the point of destination.
When this abandonment takes place, the carrier shall pay the full
value of the goods as if they had been lost or mislaid. f the
abandonment is not made, the indemnification for losses and
damages by reason of the delay cannot exceed the current price
which the goods transported would have had on the day and at the
place in which they should have been delivered; this same rule is to
be observed in all other cases in which this indemnity may be due.
(Art., 371, Code of Commerce)

b. Delivery without surrender of bill of lading

In the absence of a bill of lading, disputes shall be determined by the
legal proofs which the parties may present in support of their
respective claims, according to the general provisions established in
this Code for commercial contracts (Art. 354, Code of Commerce).

c. Refusal of consignee to take delivery

Carriers may refuse packages which appear unfit for transportation;
and if the carriage is to be made by railway and the shipment is
insisted upon, the company shall transport them, being exempt from
all responsibility if its objections, is made to appear in the bill of
lading. (Art. 356, Code of Commerce)

4. Period for filing claims

Within the twenty-four hours following the receipt of the merchandise,

the claim against the carrier for damage or average be found therein
upon opening the packages, may be made, provided that the
indications of the damage or average which gives rise to the claim
cannot be ascertained from the outside part of such packages, in
which case the claim shall be admitted only at the time of receipt.
After the periods mentioned have elapsed, or the transportation
charges have been paid, no claim shall be admitted against the
carrier with regard to the condition in which the goods transported
were delivered. (Art. 366, Code of Commerce)
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5. Effects of stipulations
The legal evidence of the contract between the shipper and the
carrier shall be the bills of lading, by the contents of which the
disputes which may arise regarding their execution and performance
shall be decided, no exceptions being admissible other than those of
falsity and material error in thedrafting.

After the contract has been complied with, the bill of lading which the
carrier has issued shall be returned to him and by virtue of the
exchange of this title with the thing transported, the respective
obligations and actions shall be considered cancelled, unless in the
same act the claim which the parties may wish to reserve be reduced
to writing, with the exception of that provided for in Article 366.
In case the consignee, upon receiving the goods, cannot return the
bill of lading subscribed by the carrier because of its loss or of any
other cause he must give the latter a receipt for the goods delivered
this receipt producing the same effects as the return of the bill of
lading. (Art. 353, Code of Commerce)
)If there is an agreement between the shipper and the carrier as to
the road over which the conveyance is to be made, the carrier may
not change the route, unless it be by reason of force majeure; and
should he do so without this cause he shall be liable for all the losses
which the goods he transports may suffer from any other cause,
beside paying the sum which may have been stipulated for such
case.

When on account of said cause of force majeure, the carrier had to

take another route which produced an increase in transportation
charges, he shall be reimbursed for such increase upon formal proof
thereof. (Art. 359, Code of Commerce)

6. MARITIME COMMERCE

(a) Charter Parties

(I) Bareboat/demise charter

By the terms of which the whole vessel is let to the charterer

which transfers to him the entire command and possession,
and consequent control over its navigation, including the
master and crew who are his servants. The charterer is treated
as owner pro hac vice of the vessel. In such case, a common
carrier becomes a private carrier.

(ii) Time charter

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A contract of affreightment wherein the vessel is leased to the

charterer for a fixed period of time.

(iii) Voyage/trip charter

A contract of affreightment wherein the vessel is leased to the

charterer for a single voyage.

(b) Liability of shipowners and shipping agents

The owner of a vessel and the ship agent shall be civilly liable for the
acts of the captain and for the obligations contracted by the latter to
repair, equipa dn provision the vessel, provided that the creditor
proves that the amount was invested therein. (Art. 586, Code of
Commerce)

(c) Liability for acts of captain.

Damages suffered by the vessel and its cargo by reason of want of

skill or negligence on his part;
(I) Thefts committed by the crew, reserving his right of action
against the guilty parties;
(ii) Losses, fines, and confiscations imposed an account of
violation of customs, police, health, and navigation laws and
regulations;
(iii) Losses and damages caused by mutinies on board the
vessel or by reason of faults committed by the crew in the
service and defense of the same, if he does not prove that he
made timely use of all his authority to prevent or avoid them;
(iv) Damage caused by the misuse of the powers;
(v) For those arising by reason of his going out of his course or
taking a course which he should not have taken without
sufficient cause, in the opinion of the officers of the vessel, at a
meeting with the shippers or supercargoes who may be on
board.
No exceptions whatsoever shall exempt him from this obligation;
1. For those arising by reason of his voluntarily entering a port other
than that of his destination, outside of the cases or without the
formalities referred to in Article 612; and

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2. For those arising by reason of non‐observance of the provisions

contained in the regulations on situation of lights and maneuvers for
the purpose of preventing collisions. (Art. 618, Code of Commerce)

(d) Accidents and damages in maritime commerce

1. Particular Average

This includes all damages and expenses which a vessel or its cargo
which does not inure to the benefit of any one and therefore shall be
borne exclusively by the owner of the vessel or cargo.

2. General average

This includes all damages and expenses which are deliberately

caused in order to save the vessel, its cargo or both at the same time
from real and known risk.

Art. 811 of the Code of Commerce provides that general averages

include:

1. The goods or cash invested in the redemption of the vessel or the

cargo captured by the enemies, privateers, or pirates, and the
provisions wages, and expenses of the vessel detained during the
time the arrangement or redemption is taking place;
2, The goods jettisoned to lighten the vessel, whether they belong to
the vessel, to the cargo, or to the crew, and the damage suffered
through said act by the goods which are kept on board;
3. The cables or masts which are cut or rendered useless, the
anchors and the chains which are abandoned, in order to save the
cargo, the vessel or both;
4. The expenses of removing or transferring a portion of the cargo in
order to lighten the vessel and place her in condition to enter a port of
roadstead, and the damage resulting therefrom to the goods removed
or transferred;
5. The damage suffered by the goods through the opening made in
the vessel in order to drain her and prevent her from sinking;
6. The expenses caused through floating a vessel intentionally
stranded for the purpose of saving her;
7. The damage caused to the vessel which had to be opened,
scuttled or broken in order to save the cargo;

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8. The expenses of curing and maintaining the members of the crew

who may have been wounded or crippled in defending or saving the
vessel;
9 The wages of any member of the crew detained as hostage by
enemies, privateers or pirates, and the necessary expenses which he
may incur in his imprisonment, until he has returned to the vessel or to
his domicile, should he prefer it;
10. The wages and victuals of the crew of the vessel chartered by the
month during the time it should be embargoed or detained by force
majeure or by order of the government, or in order to repair the
damage caused for the common good;
11. the loss suffered in the value of the goods sold at arrivals under
stress in order to repair the vessel because of gross average; and
12. The expenses of the liquidation of the average.
Requisites of General Average

1. Common danger to ship and the cargo after it has been loaded
whether during voyage or port of loading and unloading;
2. That for the common safety, part of the vessel or the cargo or both
is sacrificed deliberately;
3 That from the expenses or damages caused, follows the successful
saving of the vessel and the cargo; and
4. That the expenses or damages should have been incurred or
inflicted after taking legal steps and authority.

Collisions and allisions

Collision is the impact of two moving vessels; whereas, Allision is the

impact between a moving vessel and a stationary one.
In a collision, the vessel at fault shall indemnify the damages
sustained or losses incurred (Art. 826, Code of Commerce), and if
both vessels were at fault, each shall suffer its own damages, and
both shall be solidarily liable to others (Arts. 827-828, Code of
Commerce).
The solidarity expressed in Article 827 has been held to preclude a
common carrier operating a vessel from interposing a defense of due
diligence in the selection and supervision of its employees in an action
against it by a shipper of the other colliding vessel as distinguished
from the ordinary rule in liabilities for tort or culpa aquiliana.

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The collision may be due to the fault, negligence, or lack of skill of the
captain, sailing mate, or any other member of the complement of the
vessel. The owner of the vessel at fault shall be liable for the losses
and damages (Art. 826, Code of Commerce).
The collision may be due to the fault of both vessels. Each vessel
shall suffer its own losses, but as regards to the owner of the cargoes,
both vessels shall be jointly and severally liable (Art. 827, Code of
Commerce).
If it cannot be determined which vessel is at fault, each vessel shall
also suffer its own losses or damages on the cargoes (Art. 828, Code
of Commerce) Under the ―Doctrine of Inscrutable Fault‖, where
fault is established but it cannot be determined which of the two
vessels were at fault, both shall be deemed at fault.
The vessels may collide with each other through fortuitous event or
force majeure. In this case, each shall bear its own damages (Art.
830, Code of Commerce).
The vessels may collide with each other without their fault by reason
of a third vessel. The third vessel will be liable for losses and
damages (Art. 831, Code of Commerce).
A vessel which is properly anchored and moored may collide with
those nearby by reason of storm or other cause of force majeure. The
vessel run into shall suffer its own damage e or expense (Art. 832,
Code of Commerce).

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CARRRIAGE OF GOODS BY SEA ACT (COGSA)

Applicability

It will only be applicable to call contracts for carriage of goods by sea to or

from ports of the United States in foreign trade. (Sec. 13, COGSA).

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Notice of loss or damage

If the damage is apparent – Notice must be immediately given. The notice
must be in writing. (Sec. 3, (6), COGSA).

If the damage is not apparent, the notice must be given within 3 days after
delivery. (same).

Periods of prescription

The suit should be brought within one year from:

(a) delivery of the goods to the arrastre operator, in case of damage; or
(b) the date when the goods should have been delivered, in case of
loss.
The one-year period is computed from the delivery of goods to the
arrastre operator and not to the consignee. (Sec. 3, (6), COGSA)
The period is interrupted when:
(a) When an action is filed in court; or
(b) When there is a contrary agreement between the parties.

In case of misdelivery or conversion, the proper periods are:

(a) If there is a written contract – 10 years (Art. 1144, Civil Code)
(b) oral contract – 6 years (Art. 1145, Civil Code)
(c) for quasi‐delict – 4 years (Art. 1146, Civil Code)

Limitation of liability

Neither shall the carrier nor the ship be in any event be or become liable for
any loss or damage to or in connection with the transportation of goods in an
amount exceeding US$500 per package of lawful money of the United
States, or in case of goods not shipped in packages, per customary freight
unit, or the equivalent of that sum in other currency, unless the nature and
value of such goods have been declared by the shipper before shipment and
inserted in the bill of lading. (Sec. 3, (5), COGSA)

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PUBLIC SERVICE ACT

(Commonwealth Act 146)

DEFINITION OF PUBLIC UTILITY

A ―public utility‖ is a business or service engaged in regularly supplying the

public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service.

The regulation of public utilities is founded upon the police powers of the
State and statutes prescribing rules for the control and regulation of public
utilities are considered valid exercise thereof. When private property is used
for a public purpose and is affected with public interest, it ceases to be juris
privati only and becomes subject to regulation. The regulation is to promote
the common good. Submission to regulation may be withdrawn by the owner
by discontinuing use; but as long as use of property is continued, the same is
subject to public regulation.

NECESSITY OF CERTIFICATE OF PUBLIC CONVENIENCE

Proceedings of the Commission, upon notice and hearing. - The

Commission shall have power, upon proper notice and hearing in
accordance with the rules and provisions of this Act, subject to the limitations
and exceptions mentioned and saving provisions to the contrary:

(a) To issue certificates which shall be known as certificates of public

convenience authorizing the operation of public service within the
Philippines whenever the Commission finds that the operation of the public
service proposed and the authorization to do business will promote the
public interest in a proper and suitable manner. Provided, That thereafter,
certificates of public convenience and certificates of public convenience
and necessity will be granted only to citizens of the Philippines or of the
United States or to corporations, co-partnerships, associations or joint-stock
companies constituted and organized under the laws of the Philippines;
Provided, That sixty per centum of the stock or paid-up capital of any such
corporations, co-partnership, association or joint-stock company must
belong entirely to citizens of the Philippines or of the United States:
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Provided, further, That no such certificates shall be issued for a period of

more than fifty years. (Sec. 16)

Requisites:

1. Citizenship

Applicant must be a citizen of the Philippines. If the applicant is a

corporation, at least 60% of its capital must be owned by Filipinos.

2. Promotion of public interests (willingness to engage in public

service)

Applicant must prove public necessity. Applicant must prove the

operation of proposed public service will promote public interest in a
proper and suitable manner; and

3. Financial capability

Applicant must have sufficient financial capability to undertake

proposed services and meeting responsibilities incidental to its
operation.

Some terms to know:

(a) Prior or Old-operator rule

Meaning - Provides existing franchise operator preferential right

within authorized territory as long as said operator renders
satisfactory and economical service.

(b) Prior Applicant Rule -

Meaning - Gives first applicant priority only if things and

circumstances are equal.

A prior operator must be given the opportunity to extend its transportation

services before permitting a new operator to operate in the territory of said
prior operator.

Exceptions:

(I) Where the old operator failed to make an offer to meet the increase in
traffic;
(ii) Where the CPC granted to the new operator is a maiden certificate;
(iii) When the application of the rule would be conducive to monopoly.
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Ruinous competition
A destructive competition which forces prices to a point where capital
invested receives no return or even fails to maintain its value intact. But
competition may be fairly regarded as ruinous, even though the capital
invested receives some return, if the return is inadequate to attract the
requisite supplies of future capital.
The law contemplates that the first licensee will be protected in his
investment and will not be subjected to a ruinous competition. So long as
an operator under a prior license complies with its terms and conditions and
the reasonable rules and regulations for its operation, and meets the
reasonable demands of the public, it will be protected rather than destroy its
investment by the granting of the second license to another person for the
same thing over the same route of travel.
The "prior-operator" and "protection of investment" rules cannot take
precedence over the convenience of the public.
Fixing of Rate, Rate of return
Sec/ 16 of the Public Service Law provides;
(c ) To fix and determine individual or joint rates, tolls, charges,
classifications, or schedules thereof, as well as commutation, mileage,
kilometrage, and other special rates which shall be imposed observed
and followed thereafter by any public service: Provided, That the
Commission may, in its discretion, approve rates proposed by public
services provisionally and without necessity of any hearing; but it shall call a
hearing thereon within thirty days, thereafter, upon publication and notice to
the concerns operating in the territory affected: Provided, further, That in
case the public service equipment of an operator is used principally or
secondarily for the promotion of a private business, the net profits of said
private business shall be considered in relation with the public service of
such operator for the purpose of fixing the rates.

Unlawful arrangements

A. Boundary system

Under this system the driver is engaged to drive the owner/operator‘s unit
and pays the latter a fee commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his income.

The relationship between jeepney owners/operators on one hand and

jeepney drivers on the other under the boundary system is that of
employer‐employee and not of lessor‐ lessee.

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The features which characterize, the "boundary system" – namely, the fact
that the driver does not receive a fixed wage but gets only the excess of the
amount of fares collected by him over the amount he pays to the jeep‐owner,
and that the gasoline consumed by the jeep is for the account of the driver –
are not sufficient to withdraw, the relationship between them from that of the
employer and employee.

B. Kabit system

It is an arrangement whereby a person who has been granted the certificate

allows other persons who own motor vehicles to operate under his license,
sometimes for a fee or percentage of the earnings.
Although not outrightly penalized as a criminal offense, the kabit system is
invariably recognized as being contrary to public policy and therefore, void
and inexistent under Art. 1409 of the New Civil Code. It is a fundamental
principle that the court will not aid either party to enforce an illegal contract,
but will leave them both where it finds them.

Approval of sale, encumbrance or lease of property

While in the old law the sale without the approval of the Public Utility
Commission was declared null and void, under Commonwealth Act 146, the
new law, the sale may not only be negotiated but completed before said
approval. In other words, the approval by the Commission is not a condition
precedent to the validity of the contract. The approval is only necessary to
protect public interest.

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THE WARSAW CONVENTION

Applicability

This Convention applies to all international carriage of persons, luggage or

goods performed by aircraft for reward. It applies equally to gratuitous

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carriage by aircraft performed by an air transport undertaking. (Art. 1, par. 1,

Warsaw Convention and Civil Aviation Laws)
This Convention applies to international transportation by air. An
international transportation is any carriage in which, according to the contract
made by the parties, the place of departure and the place of destination,
whether or not there be a break in the carriage or a transshipment, are
situated either:
1. Within the territories of two High Contracting Parties; or
2. Within the territory of a single High Contracting Party, if there is an
agreed stopping place within a territory subject to the sovereignty,
suzerainty, mandate or authority of another Power, even though that
Power is not a party to the Convention. (Art. 1, par. 2, Warsaw
Convention)

High Contracting Parties refer to the sovereign nations which participated

in the Warsaw Convention.

The Convention took place in Oct. 12, 1929 and was intended for two (2)
purposes:
1. to have uniform documents in connection with international air
transportation; and
2. to fix the liabilities of international air carriers.

The documents made uniform by the Convention were:

1. passenger ticket,
2. luggage ticket, and (In the Guatemala Protocol, this became
known as baggage check)
3. air consignment note (In the Guatemala Protocol, this became
known as airwaybill)

Limitation of liability

a. liability to passengers

- 250,000 francs for each passenger. Nevertheless, by special contract, the

carrier and the passenger may agree to a higher limit of liability.
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-The limit for passenger death or injury is $75,000 inclusive of legal fees
and costs where the US is the origin, destination or stopping place. (Sec. 1,
CAB Econ. Reg. [ER] No. 9 [2012])

b. liability for checked-in baggage

Two hundred and fifty (250) francs per kilogramme, unless the passenger or
consignor has made, at the time when the package was handed over to the
carrier, a special declaration of interest in delivery at destination and has
paid a supplementary sum if the case so requires.

c. liability for hand-carried baggage

Five thousand (5,000) francs per passenger. (Art. 22, Warsaw Convention
and Civil Aviation Laws)

1. Willful misconduct

Article 25 of the Warsaw Convention and Civil Aviation Law

provides:
1. The carrier shall not be entitled to avail himself of the provisions of
this Convention which exclude or limit his liability, if the damage is
caused by his willful misconduct or by such default on his part as, in
accordance with the law of the Court seized of the case, is considered
to be equivalent to willful misconduct.
2. Similarly the carrier shall not be entitled to avail himself of the said
provisions, if the damage is caused as aforesaid by any agent of the
carrier acting within the scope of his employment.
The definition of "willful misconduct" depends in some measure on which
court is deciding the issue. Some common factors that courts will consider
are:
1. Knowledge that an action will probably result in injury or damage
2. Reckless disregard of the consequences of an action, or
3. Deliberately failing to discharge a duty related to safety.
Courts may also consider other factors.
There must be a showing that the acts complained of were impelled by an
intention to violate the law, or were in persistent disregard of one's rights.
It must be evidenced by a flagrantly or shamefully wrong or improper
conduct.

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THE NEW CENTRAL BANK ACT

(RA 7653, as amended by RA 11211)

Declaration of Policy

The State shall maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge
of its mandated responsibilities concerning money, banking and credit. In line
with this policy, and considering its unique functions and responsibilities, the
central monetary authority established under this Act, while being a
government owned corporation, shall enjoy fiscal and administrative
autonomy. (Sec. 1)

Creation of the Bangko Sentral ng Pilipinas (BSP)

Capitalization

BSP shall be capitalized at two hundred billion pesos (₱200,000,000,000),

to be fully subscribed by the Government of the Republic of the Philippines,
hereafter referred to as the Government: Provided, That the increase in
capitalization shall be funded solely from the declared dividends of the BSP
in favor of the National Government. (Sec. 2)

Responsibility and primary objective

(1) The BSP shall provide policy directions in the areas of money, banking,
and credit. It shall have supervision over the operations of banks and
exercise such regulatory and examination powers as provided in this Act and
other pertinent laws over the quasi-banking operations of non-bank financial
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institutions. As may be determined by the Monetary Board, it shall likewise

exercise regulatory and examination powers over money service businesses,
credit granting businesses, and payment system operators. The Monetary
Board is hereby empowered to authorize entities or persons to engage in
money service businesses.
(2) The primary objective of the BSP is to maintain price stability conducive
to a balanced and sustainable growth of the economy and employment. It
shall also promote and maintain monetary stability and the convertibility of
the peso.
(3) The BSP shall promote financial stability and closely work with the
National Government, including, but not limited to, the Department of
Finance, Securities and Exchange Commission, the Insurance Commission,
and the Philippine Deposit Insurance Corporation.
(4) The BSP shall oversee the payment and settlement systems in the
Philippines, including critical financial market infrastructures, in order to
promote sound and prudent practices consistent with the maintenance of
financial stability. In the attainment of its objectives, the BSP shall promote
broad and convenient access to high quality financial services and consider
the interest of the general public. (Sec. 3)

Corporate powers

The BSP is hereby authorized to adopt, alter, and use a corporate seal which
shall be judicially noticed; to enter into contracts; to lease or own real and
personal property, and to sell or otherwise dispose of the same; to sue and
be sued; and otherwise to do and perform any and all things that may be
necessary or proper to carry out the purposes of this Act.
The BSP may acquire and hold such assets and incur such liabilities in
connection with its operations authorized by the provisions of this Act, or as
are essential to the proper conduct of such operations.
The BSP may compromise, condone or release, in whole or in part, any
claim of or settled liability to the BSPl, regardless of the amount involved,
under such terms and conditions as may be prescribed by the Monetary
Board to protect the interests of the Bangko Sentral. (Sec. 5)

Authority to obtain data and information

The BSP shall have the authority to require from any person or entity,
including government offices and instrumentalities, or government-owned or
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-controlled corporations, any data, for statistical and policy development

purposes in relation to the proper discharge of its functions and
responsibilities: Provided, That disaggregated data gathered are subject to
prevailing confidentiality laws. The BSPl through the Governor or in his
absence, a duly authorized representative shall have the power to issue a
subpoena for the production of the books and records for the aforesaid
purpose. Those who refuse the subpoena without justifiable cause, or who
refuse to supply the Bangko Sentral with data required, shall be subject to
punishment for contempt in accordance with the provisions of the Rules of
Court.
The authority of the BSP to require data from banks shall continue to be
exercised pursuant to its supervisory powers set forth in this Act and other
applicable laws.
Data on individuals and firms, other than banks, gathered by the BSP shall
not be made available to any person or entity outside of the BSP, whether
public or private except under order of the court or under such conditions as
may be prescribed by the Monetary Board: Provided, however, That the
collective data on firms may be released to interested persons or
entities: Provided, finally, That in the case of data on banks, the provisions of
Sec. 27 of this Act shall apply."
Data on individual firms, other than banks, gathered by the Department of
Economic Research and other departments or units of the BSP shall not be
made available to any person or entity outside of the BSP whether public or
private except under order of the court or under such conditions as may be
prescribed by the Monetary Board: Provided, however, That the collective
data on firms may be released to interested persons or entities: Provided,
finally, That in the case of data on banks, the provisions of Sec. 27 of this Act
shall apply. (Sec. 23)

Supervision and examination

The BSP shall have supervision over, and conduct regular or special
examinations of banking institutions and quasi-banks, including their
subsidiaries and affiliates engaged in allied activities.
For purposes of this section, a subsidiary means a corporation more than
fifty percent (50%) of the voting stock of which is directly or indirectly
owned, controlled or held with power to vote by a bank or quasi-bank and an
affiliate means a corporation the voting stock of which, to the extent of fifty
percent (50%) or less, is owned by a bank or quasi-bank or which is related
or linked directly or indirectly to such institution or intermediary through
common stockholders or such other factors as may be determined by the
Monetary Board.
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The BSP shall have regulatory authority over, and conduct regular or special
examinations of, entities which under this Act or by special laws are subject
to its jurisdiction.
The BSP shall establish a mechanism for issues arising from bank
examinations. It shall be independent and reports directly to the Monetary
Board, without prejudice to the authority of the BSP and its Monetary Board
to take enforcement and supervisory actions against supervised entities.
The department heads and the examiners of the supervising and/or
examining departments are hereby authorized to administer oaths to any
director, officer, or employee of any institution under their respective
supervision or subject to their examination, and to compel the presentation of
all books, documents, papers or records necessary in their judgment to
ascertain the facts relative to the true condition of any institution as well as
the books and records of persons and entities relative to or in connection
with the operations, activities or transactions of the institution under
examination, subject to the provision of existing laws protecting or
safeguarding the secrecy or confidentiality of bank deposits as well as
investments of private persons, natural or juridical, in debt instruments
issued by the Government.
No restraining order or injunction shall be issued by the court enjoining
the BSPl from examining any institution subject to supervision or
examination by the BSPl, unless there is convincing proof that the action of
the BSP is plainly arbitrary and made in bad faith and the petitioner or
plaintiff files with the clerk or judge of the court in which the action is pending
a bond executed in favor of the BSP, in an amount to be fixed by the court .
The provisions of Rule 58 of the New Rules of Court insofar as they are
applicable and not inconsistent with the provisions of this section shall
govern the issuance and dissolution of the restraining order or injunction
contemplated in this section." (Sec. 25)

Authority to Approve Transfer of Shares — Transfers or acquisitions, or a

series thereof, of at least ten percent (10%) of the voting shares in banks
or quasi-banks shall require the prior approval of the BSP. The selling or
conveying stockholder shall submit such transfer or acquisition for approval
by the BSP within such period as may be prescribed by the Monetary Board.
In approving such transfers or acquisitions, regard shall be given by the BSP
to the fitness of the incoming stockholders as may be indicated in their
integrity, reputation and financial capacity. Without BSP approval, no such
transfer or acquisition shah have legal effect nor shall the same be
recognized in the books of the institution or by any government agency, and
the transferor-stockholders shall remain accountable and responsible
therefor. Transfer of actual control or management of the institution to the
new stockholders or their representatives prior to BSPl approval shall make
the transferor, the transferee and any person responsible therefor liable
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under Sec. 36 and 37 of this Act. Notwithstanding any provision of law to

the contrary, the BSP may share with the Philippine Deposit Insurance
Corporation any information that the BSP may obtain pertaining to transfer or
acquisition of shares or series of transfers or acquisition of shares in banks
and quasi-banks. (Sec. 25-A)

Bank deposits and investments

Any director, officer or stockholder who, together with his related interest,
contracts a loan or any form of financial accommodation from: (1) his bank;
or (2) from a bank (a) which is a subsidiary of a bank holding company of
which both his bank and the lending bank are subsidiaries or (b) in which a
controlling proportion of the shares is owned by the same interest that owns
a controlling proportion of the shares of his bank, in excess of five percent
(5%) of the capital and surplus of the bank, or in the maximum amount
permitted by law, whichever is lower, shall be required by the lending bank to
waive the secrecy of his deposits of whatever nature in all banks in the
Philippines. Any information obtained from an examination of his deposits
shall be held strictly confidential and may be used by the examiners only in
connection with their supervisory and examination responsibility or by the
BSP in an appropriate legal action it has initiated involving the deposit
account. (Sec. 26)

Prohibitions

In addition to the prohibitions found in Republic Act Nos. 3019 and 6713,
personnel of the BSP are hereby prohibited from:
(a) being an officer, director, lawyer or agent, employee, consultant or
stockholder, directly or indirectly, of any institution subject to supervision or
examination by the BSP, except non-stock savings and loan associations
and provident funds organized exclusively for employees of the BSP, and
except as otherwise provided in this Act;
(b) directly or indirectly requesting or receiving any gift, present or pecuniary
or material benefit for himself or another, from any institution subject to
supervision or examination by the BSP;
(c) revealing in any manner, except under orders of the court, the Congress
or any government office or agency authorized by law, or under such
conditions as may be prescribed by the Monetary Board, information relating
to the condition or business of any such institution. This prohibition shall not
be held to apply to the giving of information to the Monetary Board or the

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Governor of the BSP, or to any person authorized by either of them, in

writing, to receive such information; and
(d) borrowing from any institution subject to supervision or examination by
the BSP unless said borrowing is transacted on an arm‘s length basis, fully
disclosed to the Monetary Board, and shall be subject to such rules and
regulations as the Monetary Board may prescribe. (Sec. 27)"

Examinations

The supervising and examining department head, personally or by deputy,

shall examine the operations of every bank and quasi-bank, including their
subsidiaries and affiliates engaged in allied activities, and other entities
which under this Act or special laws are subject to BSP supervision, in
accordance with the guidelines set by the Monetary Board taking into
consideration sound and prudent practices: Provided, That there shall be an
interval of at least twelve (12) months between regular
examinations: Provided, further, That the Monetary Board, by an affirmative
vote of at least five (5) members, may authorize a special examination if the
circumstances warrant.
The institution concerned shall afford to the head of the appropriate
supervising and examining departments and to his authorized deputies full
opportunity to examine its books and records, cash and assets and general
condition and review its systems and procedures at any time during business
hours when requested to do so by the BSP: Provided, however, That none of
the reports and other papers relative to such examinations shall be open to
inspection by the public except insofar as such publicity is incidental to the
proceedings hereinafter authorized or is necessary for the prosecution of
violations in connection with the business of such institutions. (Sec. 28)

Bangko Sentral Coordination

The suspension or revocation of any government license necessary for the
operation of BSP-supervised entity must be done only with prior consultation
with the BSP. (Sec. 28-A)

Monetary Board; powers and functions

Composition of the Monetary Board
The powers and functions of the BSP shall be exercised by the BSP
Monetary Board, hereafter referred to as the Monetary Board, composed of

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seven (7) members appointed by the President of the Philippines for a term
of six (6) years.
The seven (7) members are:
(a) the Governor of the BSP,, who shall be the Chairman of the Monetary
Board. The Governor of the BSP shall be head of a department and his
appointment shall be subject to confirmation by the Commission on
Appointments. Whenever the Governor is unable to attend a meeting of the
Board, he shall designate a Deputy Governor to act as his alternate:
Provided, That in such event, the Monetary Board shall designate one of its
members as acting Chairman;
(b) a member of the Cabinet to be designated by the President of the
Philippines. Whenever the designated Cabinet Member is unable to attend a
meeting of the Board, he shall designate an Undersecretary in his
Department to attend as his alternate; and
(c) five (5) members who shall come from the private sector, all of whom
shall serve full-time: Provided, however, That of the members first appointed
under the provisions of this sub-section, three (3) shall have a term of six (6)
years, and the other two (2), three (3) years.

No member of the Monetary Board may be reappointed more than once.

(Sec. 6)

Vacancies
Any vacancy in the Monetary Board created by the death, resignation, or
removal of any member shall be filled by the appointment of a new member
to complete the unexpired period of the term of the member concerned.
(Sec. 7)

Qualifications
The members of the Monetary Board must be natural-born citizens of the
Philippines, at least thirty-five (35) years of age, with the exception of the
Governor who should at least be forty (40) years of age, of good moral
character, of unquestionable integrity, of known probity and patriotism, and
with recognized competence in social and economic disciplines. (Sec. 8.)
Disqualifications

In addition to the disqualifications imposed by Republic Act No. 6713, a

member of the Monetary Board is disqualified from being a director, officer,
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employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank

or any other institution which is subject to supervision or examination by the
BSPl, in which case such member shall resign from, and divest himself of
any and all interests in such institution before assumption of office as
member of the Monetary Board.
The members of the Monetary Board coming from the private sector shall not
hold any other public office or public employment during their tenure.
No person shall be a member of the Monetary Board if he has been
connected directly with any multilateral banking or financial institution or has
a substantial interest in any private bank in the Philippines, within one (1)
year prior to his appointment; likewise, no member of the Monetary Board
shall be employed in any such institution within two (2) years after the
expiration of his term except when he serves as an official representative of
the Philippine Government to such institution. (Sec. 9)

Removal
The President may remove any member of the Monetary Board for any of
the following reasons:
(a) If the member is subsequently disqualified under the provisions of
Section 8 of this Act; or

(b) If he is physically or mentally incapacitated that he cannot

properly discharge his duties and responsibilities and such incapacity
has lasted for more than six (6) months; or
(c) If the member is guilty of acts or operations which are of
fraudulent or illegal character or which are manifestly opposed to the
aims and interests of the Bangko Sentral; or
(d) If the member no longer possesses the qualifications specified in
Section 8 of this Act. (Sec. 10)

Meetings
The Monetary Board shall meet at least once a week. The Board may be
called to a meeting by the Governor of the BSP or by two (2) other members
of the Board.
The presence of four (4) members shall constitute a quorum: Provided, That
in all cases the Governor or his duly designated alternate shall be among the
four (4).

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Unless otherwise provided in this Act, all decisions of the Monetary Board
shall require the concurrence of at least four (4) members.
The BSP shall maintain and preserve a complete record of the proceedings
and deliberations of the Monetary Board, including the tapes and transcripts
of the stenographic notes, either in their original form or in microfilm. (Sec.
11)

Attendance of the Deputy Governors

The Deputy Governors may attend the meetings of the Monetary Board with
the right to be heard. (Sec. 12)

Withdrawal of Persons Having a Personal Interest

In addition to the requirements of Republic Act No. 6713, any member of the
Monetary Board with personal or pecuniary interest in any matter in the
agenda of the Monetary Board shall disclose his interest to the Board and
shall retire from the meeting when the matter is taken up. The decision
taken on the matter shall be made public. The minutes shall reflect the
disclosure made and the retirement of the member concerned from the
meeting. (Sec. 14)

How the BSP handles banks in distress

(a) Conservatorship

Whenever, on the basis of a report submitted by the appropriate supervising

or examining department, the Monetary Board finds that a bank or a
quasi-bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board may appoint a
conservator with such powers as the Monetary Board shall deem necessary
to take charge of the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts due said
institution, and exercise all powers necessary to restore its viability. The
conservator shall report and be responsible to the Monetary Board and shall
have the power to overrule or revoke the actions of the previous
management and board of directors of the bank or quasi-bank.
The conservator should be competent and knowledgeable in bank
operations and management. The conservatorship shall not exceed one
(1) year.

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The Monetary Board shall terminate the conservatorship when it is satisfied

that the institution can continue to operate on its own and the
conservatorship is no longer necessary. The conservatorship shall likewise
be terminated should the Monetary Board, on the basis of the report of the
conservator or of its own findings, determine that the continuance in
business of the institution would involve probable loss to its depositors or
creditors, in which case the provisions of Section 30 shall apply. (Sec. 29)

(b) Closure

(c) Receivership

(d) Liquidation (Collectively discussed in the subsequent provisions)

Proceedings in Receivership and Liquidation

Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) has notified the Bangko Sentral or publicly announced a unilateral
closure, or has been dormant for at least sixty (60) days or in any manner
has suspended the payment of its deposit/deposit substitute liabilities, or is
unable to pay its liabilities as they become due in the ordinary course of
business: Provided, That this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko Sentral,
to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its
depositors or creditors; or
(d) has wilfully violated a cease and desist order under Sec. 37 of this Act
that has become final, involving acts or transactions which amount to fraud
or a dissipation of the assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior hearing forbid the institution
from doing business in the Philippines and designate the Philippine Deposit
Insurance Corporation (PDIC) as receiver in the case of banks and direct the
PDIC to proceed with the liquidation of the closed bank pursuant to this
section and the relevant provisions of Republic Act No. 3591, as amended.
The Monetary Board shall notify in writing, through the receiver, the board of
directors of the closed bank of its decision.
The actions of the Monetary Board taken under this section or under Sec. 29
of this Act shall be final and executory and may not be restrained or set
aside by the court except on petition for certiorari on the ground that the
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action taken was in excess of jurisdiction or with such grave abuse of

discretion as to amount to lack or excess of jurisdiction. The petition
for certiorari may only be filed by the stockholders of record representing the
majority of the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership, liquidation or
conservatorship. The designation of a conservator under Sec. 29 of this Act
or the appointment of a receiver under this section shall be vested
exclusively with the Monetary Board. Furthermore, the designation of a
conservator is not a pre-condition to the designation of a receiver.
The authority of the Monetary Board to summarily and without need for prior
hearing forbid the bank or quasi-bank from doing business in the Philippines
as provided above may also be exercised over non-stock savings and loan
associations, based on the same applicable grounds. For quasi-banks and
non-stock savings and loan associations, any person of recognized
competence in banking, credit or finance may be designated by the BSP as
a receiver." (Sec. 30)

Disposition of Banking Franchise

The BSP may, if public interest so requires, award to an institution, upon
such terms and conditions as the Monetary Board may approve, the banking
franchise of a bank under liquidation to operate in the area where said bank
or its branches were previously operating: Provided, That whatever proceeds
may be realized from such award shall be subject to the appropriate
exclusive disposition of the Monetary Board. (Sec. 23)

Administrative sanctions on supervised entities

The imposition of administrative sanctions shall be fair, consistent and

reasonable. Without prejudice to the criminal sanctions against the culpable
persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board
may, at its discretion, impose upon any bank, quasi-bank, including their
subsidiaries and affiliates engaged in allied activities, or other entity which
under this Act or special laws are subject to the BSP supervision, and/or
their directors, officers or employees, for any wilful violation of its charter or
by-laws, wilful delay in the submission of reports or publications thereof as
required by law, rules and regulations; any refusal to permit examination into
the affairs of the institution; any wilful making of a false or misleading
statement to the Board or the appropriate supervising and examining
department or its examiners; any wilful failure or refusal to comply with, or
violation of, any banking law or any order, instruction or regulation issued by
the Monetary Board, or any order, instruction or ruling by the Governor; or
any commission of irregularities, and/or conducting business in an unsafe or

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unsound manner as may be determined by the Monetary Board, the

following administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to
be appropriate, but in no case to exceed One million pesos
(₱1,000,000) for each transactional violation or One hundred
thousand pesos (₱100,000) per calendar day for violations of a
continuing nature, taking into consideration the attendant
circumstances, such as the nature and gravity of the violation or
irregularity and the size of the institution: Provided, That in case profit
is gained or loss is avoided as a result of the violation, a fine no more
than three (3) times the profit gained or loss avoided may also be
imposed;
(b) suspension of rediscounting privileges or access to BSP credit
facilities;
(c) suspension of lending or foreign exchange operations or authority
to accept new deposits or make new investments;
(d) suspension of interbank clearing privileges; and/or
(e) suspension or revocation of quasi-banking or other special
licenses.

Resignation or termination from office shall not exempt such director,

officer or employee from administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances,
preventively suspend any director, officer or employee of the institution
pending an investigation: Provided, That should the case be not finally
decided by the BSP within a period of one hundred twenty (120) days after
the date of suspension, said director, officer or employee shall be reinstated
in his position: Provided, further, That when the delay in the disposition of the
case is due to the fault, negligence or petition of the director or officer, the
period of delay shall not be counted in computing the period of suspension
herein provided.
The above administrative sanctions need not be applied in the order of their
severity.
Whether or not there is an administrative proceeding, if the institution and/or
the directors, officers or employees concerned continue with or otherwise
persist in the commission of the indicated practice or violation, the Monetary
Board may issue an order requiring the institution and/or the directors,
officers or employees concerned to cease and desist from the indicated
practice or violation, and may further order that immediate action be taken to
correct the conditions resulting from such practice or violation. The cease
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and desist order shall be immediately effective upon service on the

respondents.
The respondents shall be afforded an opportunity to defend their action in a
hearing before the Monetary Board or any committee chaired by any
Monetary Board member created for the purpose, upon request made by the
respondents within five (5) days from their receipt of the order. If no such
hearing is requested within said period, the order shall be final. If a hearing is
conducted, all issues shall be determined on the basis of records, after which
the Monetary Board may either reconsider or make final its order.
"The Governor is hereby authorized, at his discretion, to impose upon banks
and quasi-banks, including their subsidiaries and affiliates engaged in allied
activities, and other entities which under this Act or special laws are subject
to BSP supervision for any failure to comply with the requirements of law,
Monetary Board regulations and policies, and/or instructions issued by the
Monetary Board or by the Governor, fines not in excess of one hundred
thousand pesos (₱100,000) for each transactional violation or thirty thousand
pesos (₱30,000) per calendar day for violations of a continuing nature, the
imposition of which shall be final and executory until reversed, modified or
lifted by the Monetary Board on appeal. (Sec. 37)

Rules on bank deposits and investments by directors, officers,

stockholders and their related interests
Bank Deposits and Investments
Any director, officer or stockholder who, together with his related interest,
contracts a loan or any form of financial accommodation from: (1) his bank;
or (2) from a bank (a) which is a subsidiary of a bank holding company of
which both his bank and the lending bank are subsidiaries or (b) in which a
controlling proportion of the shares is owned by the same interest that owns
a controlling proportion of the shares of his bank, in excess of five percent
(5%) of the capital and surplus of the bank, or in the maximum amount
permitted by law, whichever is lower, shall be required by the lending bank to
waive the secrecy of his deposits of whatever nature in all banks in the
Philippines. Any information obtained from an examination of his deposits
shall be held strictly confidential and may be used by the examiners only in
connection with their supervisory and examination responsibility or by the
BSP in an appropriate legal action it has initiated involving the deposit
account. (Sec. 26)

Supervision and regulation of bank operations

(Loans and other credit accommodations)

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Guiding Principles
The rediscounts, discounts, loans and advances which the BSP is authorized
to extend to banking institutions, under the provisions of the present article of
this Act shall be used to influence the volume of credit consistent with the
objective of price stability and maintenance of financial stability. (Sec. 81)

Authorized Types of Operations

Subject to the principle stated in the preceding section of this Act, the BSP
may normally and regularly carry on the following credit operations with
banking institutions operating in the Philippines.
(a) Commercial credits.- The BSP may rediscount, discount, buy
and sell bills, acceptances, promissory notes and other credit
instruments with maturities of not more than one hundred eighty (180)
days from the date of their rediscount, discount or acquisition by the
BSP and resulting from transactions related to:
(1) the importation, exportation, purchase or sale of readily
saleable goods and products, or their transportation within the
Philippines; or
(2) the storing of non-perishable goods and products which are
duly insured and deposited, under conditions assuring their
preservation, in authorized bonded warehouses or in other
places approved by the Monetary Board.
(b) Production credits - The BSP may rediscount, discount, buy and
sell bills, acceptances, promissory notes and other credit instruments
having maturities of not more than three hundred sixty (360) days
from the date of their rediscount, discount or acquisition by the BSPl
and resulting from transactions related to the production or processing
of agricultural, animal, mineral, or industrial products. Documents or
instruments acquired in accordance with this subsection shall be
secured by a pledge of the respective crops or products: Provided,
however, That the crops or products need not be pledged to secure
the documents if the original loan granted by the BSP is secured by a
lien or mortgage on real estate property seventy percent (70%) of the
appraised value of which equals or exceeds the amount of the loan
granted.
(c) Other credits. - Special credit instruments not otherwise
rediscountable under the immediately preceding subsections (a) and
(b) may be eligible for rediscounting in accordance with rules and
regulations which the Bangko Sentral shall prescribe. Whenever
necessary, the BSP shall provide funds from noninflationary sources:

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Provided, however, That the Monetary Board shall prescribe

additional safeguards for disbursing these funds.
(d) Advances. - The BSP may grant advances against the following
kinds of collaterals for fixed periods which, with the exception of
advances against the collateral named in clause (4) of the present
sub-section, shall not exceed one hundred eighty (180) days:
(1) gold coins or bullion;

(2) securities representing obligations of the BSP or of other

domestic credit institutions of recognized solvency;
(3) the credit instruments to which reference is made in sub-
section (a) of this section;
(4) the credit instruments to which reference is made in sub-
section (b) of this section, for periods which shall not exceed three
hundred sixty (360) days;
(5) utilized portions of advances in current account covered by
regular overdraft agreements related to operations included under
sub-sections (a) and (b) of this section, and certified as to amount
and liquidity by the institution soliciting the advance;
(6) negotiable treasury bills, certificates of indebtedness, notes
and other negotiable obligations of the Government maturing
within three (3) years from the date of the advance; and
(7) negotiable bonds issued by the Government of the Philippines,
by Philippine provincial, city or municipal governments, or by any
Philippine Government instrumentality, and having maturities of
not more than ten (10) years from the date of the advance.
The rediscounts, discounts, loans and advances made in accordance with
the provisions of this section may not be renewed or extended unless
extraordinary circumstances fully justify such renewal or extension.
Advances made against the collateral named in clauses (6) and (7) of
subsection (d) of this section may not exceed eighty percent (80%) of the
current market value of the collateral (Sec. 82).

Loans for Liquidity Purposes

The BSP may extend loans and advances to banking institutions for a period
of not more than seven (7) days without any collateral for the purpose of
providing liquidity to the banking system in times of need. (Sec. 83)

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Emergency Loans and Advances

In periods of national and/or local emergency or of imminent financial panic
which directly threaten monetary and financial stability, the Monetary Board
may, by a vote of at least five (5) of its members, authorize the BSP to grant
extraordinary loans or advances to banking institutions, secured by assets as
defined hereunder: Provided, That while such loans or advances are
outstanding, the debtor institution shall not, except upon prior authorization
by the Monetary Board, expand the total volume of its loans or investments.
The Monetary Board may, at its discretion, likewise authorize the BSP to
grant emergency loans or advances to banking institutions, even during
normal periods, for the purpose of assisting a bank in a precarious financial
condition or under serious financial pressures brought by unforeseen events,
or events which, though foreseeable, could not be prevented by the bank
concerned: Provided, however, That the Monetary Board has ascertained
that the bank is not insolvent and has the assets defined hereunder to
secure the advances: Provided, further, That a concurrent vote of at least
five (5) members of the Monetary Board is obtained.
The amount of any emergency loan or advance shall not exceed the sum of
fifty percent (50%) of total deposits and deposit substitutes of the banking
institution, and shall be disbursed in two (2) or more tranches. The amount
of the first tranche shall be limited to twenty-five percent (25%) of the total
deposit and deposit substitutes of the institution and shall be secured by: (a)
government securities; (b) acceptable guarantees backed up by the
national government or its securities; (c) other unencumbered first class
collaterals; and (d) other kinds of collaterals as may be authorized by the
Monetary Board in accordance with sound risk management
principles: Provided, That if as determined by the Monetary Board, the
circumstances surrounding the emergency warrant a loan or advance
greater than the amount provided hereinabove, the amount of the first
tranche may exceed twenty-five percent (25%) of the bank‘s total deposit
and deposit substitutes if the same is adequately secured by any of the
collaterals set forth above as approved by the Monetary Board, and the
principal stockholders of the institution furnish an acceptable undertaking to
indemnify and hold harmless from suit a conservator whose appointment the
Monetary Board may find necessary at any time."Prior to the release of the
first tranche, the banking institution shall submit to the BSP a resolution of its
board of directors authorizing the BSPl to evaluate other assets of the
banking institution certified by its external auditor to be good and available
for collateral purposes should the release of the subsequent tranche be
thereafter applied for.
The Monetary Board may, by a vote of at least five (5) of its members,
authorize the release of a subsequent tranche on condition that the principal
stockholders of the institution:

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(a) furnish an acceptable undertaking to indemnify and hold harmless

from suit a conservator whose appointment the Monetary Board may
find necessary at any time; and
(b) provide acceptable security which, in the judgment of the
Monetary Board, would be adequate to supplement, where necessary,
the assets tendered by the banking institution to collateralize the
subsequent tranche.
In connection with the exercise of these powers, the prohibitions in Sec. 128
of this Act shall not apply insofar as it refers to acceptance as collateral of
shares and their acquisition as a result of foreclosure proceedings, including
the exercise of voting rights pertaining to said shares: Provided,
however, That should the BSP acquire any of the shares it has accepted as
collateral as a result of foreclosure proceedings, the BSP shall dispose of
said shares by public bidding within one (1) year from the date of
consolidation of title by the BSP.
Whenever a financial institution incurs an overdraft in its account with the
BSP, the same shall be eliminated within the period prescribed in Section
102 of this Act. (Sec. 84)

Interest and Rediscount Rates

The BSP shall collect interest and other appropriate charges on all loans and
advances it extends, the closure, receivership or liquidation of the debtor-
institution notwithstanding. This provision shall apply prospectively.

The Monetary Board shall fix the interest and rediscount rates to be charged
by the BSP on its credit operations in accordance with the character and
term of the operation, but after due consideration has been given to the
credit needs of the market, the composition of the BSP‘s portfolio, and the
general requirements of the national monetary policy. Interest and rediscount
rates shall be applied to all banks of the same category uniformly and
without discrimination. (Sec. 85)

Endorsement

The documents rediscounted, discounted, bought or accepted as collateral

by the BSP in the course of the credit operations authorized in this article
shall bear the endorsement of the institution from which they are received.
(Sec. 86)

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Repayment of Credits
Documents rediscounted, discounted or accepted as collateral by the BSP
must be withdrawn by the borrowing institution on the dates of their
maturities, or upon liquidation of the obligations which they represent or to
which they relate whenever said obligations have been liquidated prior to
their dates of maturity.
Banks shall have the right at any time to withdraw any documents which they
have presented to the BSP as collateral, upon payment in full of the
corresponding debt to the BSP, including interest charges. (Sec. 87)

Other Requirements
The Monetary Board may prescribe, within the general powers granted to it
under this Act, additional conditions which borrowing institutions must satisfy
in order to have access to the credit of the BSP. These conditions may refer
to the rates of interest charged by the banks, to the purposes for which their
loans in general are destined, and to any other clearly definable aspect of
the credit policy of the bank. (Sec. 88)

Exemption of Collaterals from Attachments, Executions and Other

Restrictions
Collaterals on loans and advances granted by the BSP, whether or not the
interest of the BSP is registered shall not be subject to attachment, execution
or any other court process or administrative restrictions on land use, nor
shall they be included in the property of insolvent persons or institutions.
(Sec. 88-A)

Deputization of Legal Staff in Case of Foreclosures

In case of an extra-judicial foreclosure of mortgage in connection with loans

and advances under this article, the BSP may deputize any of its lawyers to
conduct the public auction pursuant to Act No. 3135, as amended.
Likewise, in case of a judicial foreclosure in connection with loans and
advances under this article, the BSP may, with the approval of the court,
deputize any of its lawyers to act as special sheriff in the sale of a debtor‘s
properties and in the enforcement of court writs and processes related
thereto. The special sheriff of the BSP shall make a report to the proper
court after any action has been taken by him, which court shall treat such
action as if it were an act of its own sheriff in all respects.

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No restraining order or injunction shall be issued by the court enjoining the

BSP from proceeding with the foreclosure of the mortgage unless a bond is
posted in favor of the BSP in an amount equivalent to the total claim of the
BSP. The restraining order or injunction shall be refused or, if granted, shall
be dissolved upon filing by the BSP of a bond, which shall be in the form of a
BSP check, in an amount twice the amount of the original bond posted
conditioned that the BSP will pay the damages which the party may suffer by
the refusal or dissolution of the injunction. The provisions of the Rules of
Court on injunctions insofar as they are applicable and not inconsistent with
the provisions of this section shall govern the issuance and dissolution of the
restraining order or injunction contemplated in this section. (Sec. 88-B)

Right of Redemption of Foreclosed Real Property; Right of Possession

During Redemption Period

In the event of foreclosure, whether judicially or extra-judicially, the

mortgagor, who is a natural person, shall have the right to redeem the
property within one (1) year from the date of foreclosure sale.
In case the mortgagor is a juridical person, the mortgagor shall have the right
to redeem the property sold in a judicial foreclosure sale within one (1) year
from the date of foreclosure sale: Provided, That in case of an extra-judicial
foreclosure, notwithstanding Act No. 3135, the mortgagor shall have the right
to redeem the property sold within ninety (90) days from the foreclosure sale
but not later than the registration of the certificate of foreclosure sale.
Redemption shall be effected by paying the principal, interests, charges,
commissions and all claims of whatever nature of the BSP outstanding and
due as of the date of foreclosure sale, including all costs and other expenses
incurred by reason of the foreclosure sale and custody of the property.
The BSP, as purchaser in the foreclosure sale and without need of posting a
bond, may take possession of the foreclosed property during the redemption
period. The BSP shall be entitled to the fruits of the property, the same to be
applied against the redemption price. (Sec. 88-C)

Unsecured Bangko Sentral Claims

All unsecured claims of the BSP shall be considered preferred credits similar
to taxes due to the National Government in the order of preference under
Article 2244 of the new Civil Code. (Sec. 88-D)

Provisional Advances to the National Government

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The BSP may make direct provisional advances with or without interest to
the National Government to finance expenditures authorized in its annual
appropriation: Provided, That said advances shall be repaid before the end
of three (3) months extendible by another three (3) months as the Monetary
Board may allow following the date the National Government received such
provisional advances and shall not, in their aggregate, exceed twenty
percent (20%) of the average annual income of the borrower for the last
three (3) preceding fiscal years. (Sec. 89)

Financial Facilities for Islamic Banks

The BSP may, taking into consideration the peculiar characteristics of islamic
banking, formulate rules and regulations for the extension of financial
facilities to islamic banks: Provided, That such exposures shall be properly
secured. (Sec. 89-A)

Loans to the Philippine Deposit Insurance Corporation (PDIC)

The BSP, pursuant to its mandate of maintaining financial stability, may lend
funds to the PDIC for insurance purposes and in cases of financial
assistance that the latter is authorized to extend under Sec. 22(e) of RA No.
3591, as amended. Notwithstanding Section 23 of RA No. 3591, as
amended, the Monetary Board shall prescribe interest rates and such other
terms and conditions of the loan. (Sec. 89-B)

Operations with Foreign Entities

The Monetary Board may authorize the BSP to grant loans to and receive
loans from foreign banks and other foreign or international entities, both
public and private, and may engage in such other operations with these
entities as are in the national interest and are appropriate to its character as
a central bank. The BSP may also act as agent or correspondent for such
entities. Upon authority of the Monetary Board, the BSP may pledge any
gold or other assets which it possesses as security against loans which it
receives from foreign or international entities. (Sec. 75)

Selective regulation:

(1) Margin Requirements Against Letters of Credit

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The Monetary Board may at any time prescribe minimum cash margins for
the opening of letters of credit, and may relate the size of the required
margin to the nature of the transaction to be financed. (Sec. 105)
(2 ) Required security against bank loans

In order to promote liquidity and solvency of the banking system, the

Monetary Board may issue such regulations as it may deem necessary with
respect to the maximum permissible maturities of the loans and investments
which the banks may make, and the kind and amount of security to be
required against the various types of credit operations of the banks (Sec.
106)
(3) Portfolio ceilings

Whenever the Monetary Board considers it advisable to prevent or check an

expansion of bank credit, the Board may place an upper limit on the amount
of loans and investments which the banks may hold, or may place a limit on
the rate of increase of such assets within specified periods of time. The
Monetary Board may apply such limits to the loans and investments of each
bank or to specific categories thereof. In no case shall the Monetary Board
establish limits which are below the value of the loans or investments of the
banks on the date on which they are notified of such restrictions. The
restrictions shall be applied to all banks uniformly and without discrimination.
(Sec. 107)
(4) Minimum capital ratios

The Monetary Board may prescribe minimum risk-based capital adequacy

ratios based on internationally accepted standards and may alter said ratios
whenever it deems necessary. In the exercise of its authority under this
section, the Monetary Board may require banks to hold capital beyond the
minimum requirements commensurate to then risk profile. (Sec. 108)

Exchange Rates

The Monetary Board shall determine the exchange rate policy of the country.
The Monetary Board shall determine the rates at which the BSP shall buy
and sell spot exchange, and shall establish deviation limits from the effective
exchange rate or rates as it may deem proper. The BSP shall not collect any
additional commissions or charges of any sort, other than actual telegraphic
or cable costs incurred by it. The Monetary Board shall similarly determine
the rates for other types of foreign exchange transactions by the BSP,
including purchases and sales of foreign notes and coins, but the margins
between the effective exchange rates and the rates thus established may not
exceed the corresponding margins for spot exchange transactions by more

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than the additional costs or expenses involved in each type of transactions.

(Sec. 74)

Purchases and Sales of Foreign Exchange

The BSP may buy and sell foreign notes and coins, and documents and
instruments of types customarily employed for the international transfer of
funds. The Bangko Sentral may engage in future exchange operations.
The BSP may engage in foreign exchange transactions with the following
entities or persons only;
(a) banking institutions operating in the Philippines;

(b) the Government, its political subdivisions and

instrumentalities;

(c) foreign or international financial institutions;

(d) foreign governments and their instrumentalities; and

(e) other entities or persons which the Monetary Board is

hereby empowered to authorize as foreign exchange dealers,
subject to such rules and regulations as the Monetary Board
shall prescribe.
In order to maintain the convertibility of the peso, the BSP may, at the
request of any banking institution operating in the Philippines, buy any
quantity of foreign exchange offered, and sell any quantity of foreign
exchange demanded by such institution, provided that the foreign
currencies so offered or demanded are freely convertible into gold or
United States dollars. This requirement shall not apply to demands
for foreign notes and coins.
The BSP shall effect its exchange transactions between foreign
currencies and the Philippine peso at the rates determined in
accordance with the provisions of Section 74 of this Act. (Sec. 70)

Foreign Asset Position of the Bangko Sentral

The BSP shall endeavor to maintain at all times a net positive foreign asset
position so that its gross foreign exchange assets will always exceed its
gross foreign liabilities. In the event that the equivalent amount in pesos of
the foreign exchange liabilities of the BSP exceed twice the equivalent
amount in pesos of the foreign exchange assets of the bank, the BSP shall,
within sixty (60) days from the date the limit is exceeded, submit a report to
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the Congress stating the origin of these liabilities, and the manner in which
they will be paid. (Sec. 71)

Emergency Restrictions on Exchange Operations

In order to achieve the primary objective of the BSP as set forth in Sec. 3 of
this Act, or protect the international reserves of the BSP in the imminence of,
or during an exchange crisis, or in time of national emergency and to give
the Monetary Board and the Government time in which to take constructive
measures to forestall, combat, or overcome such a crisis or emergency, the
Monetary Board, with the concurrence of at least five (5) of its members and
with the approval of the President of the Philippines, may temporarily
suspend or restrict sales of exchange by the BSP, and may subject all
transactions in gold and foreign exchange to license by the BSP, and may
require that any foreign exchange thereafter obtained by any person residing
or entity operating in the Philippines be delivered to the BSP or to any bank
or agent designated by the BSP for the purpose, at the effective exchange
rate or rates: Provided, however, That foreign currency deposits made under
RA No. 6426 shall be exempt from these requirements. (Sec. 72)

Acquisition of Inconvertible Currencies

The BSP shall avoid the acquisition and holding of currencies which are not
freely convertible, and may acquire such currencies in an amount exceeding
the minimum balance necessary to cover current demands for said
currencies only when, and to the extent that, such acquisition is considered
by the Monetary Board to be in the national interest. The Monetary Board
shall determine the procedures which shall apply to the acquisition and
disposition by the BSP of foreign exchange which is not freely utilizable in
the international market. (Sec. 73)
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GENERAL BANKING ACT

(RA No. 8791)

Bank, defined

"Banks" shall refer to entities engaged in the lending of funds obtained in the form of
deposits. (Sec. 3)

Classification of banks

Banks shall be classified into:

(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii)
Stock savings and loan associations, and (iii) Private development
banks, as defined in the RA No. 7906 (hereafter the "Thrift Banks
Act");
(d) Rural banks, as defined in RA No. 73S3 (hereafter the "Rural
Banks Act");
(e) Cooperative banks, as defined in RA No 6938 (hereafter the
"Cooperative Code");
(f) Islamic banks as defined in Republic Act No. 6848, otherwise
known as the "Charter of Al Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as determined by the Monetary
Board of the Bangko Sentral ng Pilipinas. (6-Aa) (Sec. 3.2)

Distinction of banks from quasi-banks and trust entities

Quasi-Bank

For the purposes of this Act, "quasi-banks" shall refer to entities engaged in
the borrowing of funds through the issuance, endorsement or assignment
with recourse or acceptance of deposit substitutes as defined in Sec. 95 of
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RA No. 7653 (hereafter the "New Central Bank Act") for purposes of re-
lending or purchasing of receivables and other obligations. (2-Da) [Sec. 4 ]

Trust Entities

Only a stock corporation or a person duly authorized by the Monetary Board

to engage in trust business shall act as a trustee or administer any trust or
hold property in trust or on deposit for the use, benefit, or behoof of others..
(Sec. 79)‖

Organization of a bank

The Monetary Board may authorize the organization of a bank or quasi-bank

subject to the following conditions:
(a) powers and liabilities
(a) that the entity is a stock corporation;
(b) that its funds are obtained from the public, meaning twenty (20)
or more persons; and
(c) that the minimum capital requirements for each category are
satisfied, (Sec. 8)

Authority to engage in banking and quasi-banking functions –

No person or entity shall engage in banking operations or quasi-banking
functions without authority from the BSP; Provided, however, that an entity
authorized by the BSP to perform universal or commercial banking functions
shall likewise have the authority to engage in quasi-banking functions. (Sec.
6)

Rules on stock ownership:

(a) The Monetary Board may prescribe rules and regulations on the
types of stock a bank may issue, including the terms thereof and
rights appurtenant thereto to determine compliance with laws and
regulations governing capital and equity structure of banks;
Provided, That banks shall issue par value stocks only (Sec. 9).
(b) No bank shall purchase or acquire shares of its own capital stock
or accept its own shares as a security for a loan, except when
authorized by the Monetary Board: Provided, That in every case
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the stock so purchased or acquired shall, within six (6) months

from the time of its purchase or acquisition, be sold or disposed of
at a public or private sale. (Sec. 10)

(c) Foreign individuals and non-bank corporations may own or

control up to forty percent (40%) of the voting stock of a domestic
bank. This rule shall apply to Filipinos and domestic non-bank
corporations. (12a; 12-Aa) The percentage of foreign-owned
voting stocks in a bank shall be determined by the citizenship of
the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the
citizenship of the controlling stockholders of the corporation,
irrespective of the place of incorporation. (Sec, 11)
(d) Stockholdings of individuals related to each other within the
fourth degree of consanguinity or affinity, legitimate or common-
law, shall be considered family groups or related interests and
must be fully disclosed in all transactions by such corporations or
related groups of persons with the bank. (12-Ba) (Sec. 12)
(e) Two or more corporations owned or controlled by the same family
group or same group of persons shall be considered related
interests and must be fully disclosed in all transactions by such
corporations or related group of persons with the bank. (12-Ba)
(Sec. 13)

Powers of a universal bank

A universal bank shall have the authority to exercise, in addition to the
powers authorized for a commercial bank in Sec. 29, the powers of an
investment house as provided in existing laws and the power to invest in
non-allied enterprises as provided in this Act. (Sec. 23)

Powers of a commercial Bank

A commercial bank shall have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business
of commercial banking such as accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debt; accepting or creating demand deposits; receiving
other types of deposits and deposit substitutes; buying and selling foreign
exchange and gold or silver bullion; acquiring marketable bonds and other
debt securities; and extending credit, subject to such rules as the Monetary
Board may promulgate. These rules may include the determination of bonds
and other debt securities eligible for investment, the maturities and
aggregate amount of such investment. (Sec. 29)

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Diligence required of banks in view of fiduciary nature of banking

The fiduciary nature of banking requires banks to assume a degree of

diligence higher than that of a good father of a family. (PCI Bank vs CA, 350
SCRA 446, PBCom vs CA, GR No. 121413, Jan. 29, 2001)

Nature of bank funds and bank deposits

All kinds of bank deposits are loan. The bank can make use as its own the
money deposited. Said amount is not being held in trust for the depositor
nor is it being kept for safekeeping. (Tang Tiong Tick v. American
Apothecaries, G.R. No. 43682, Mar. 31, 1938)

Grant of loans and security requirements

(a) The Monetary Board shall prescribe the minimum ratio which the net worth of a
bank must bear to its total risk assets which may include contingent accounts.

For purposes of this Section, the Monetary Board may require such ratio be
determined on the basis of the net worth and risk assets of a bank and its
subsidiaries, financial or otherwise, as well as prescribe the composition and
the manner of determining the net worth and total risk assets of banks and
their subsidiaries: Provided, That in the exercise of this authority, the
Monetary Board shall, to the extent feasible conform to internationally
accepted standards, including those of the Bank for International Settlements
(BIS), relating to risk-based capital requirements: Provided further, That it
may alter or suspend compliance with such ratio whenever necessary for a
maximum period of one (1) year: Provided, finally, That such ratio shall be
applied uniformly to banks of the same category.
In case a bank does not comply with the prescribed minimum ratio, the
Monetary Board may limit or prohibit the distribution of net profits by such
bank and may require that part or all of the net profits be used to increase
the capital accounts of the bank until the minimum requirement has been
met The Monetary Board may, furthermore, restrict or prohibit the acquisition
of major assets and the making of new investments by the bank, with the
exception of purchases of readily marketable evidences of indebtedness of
the Republic of the Philippines and of the BSP and any other evidence of
indebtedness or obligations the servicing and repayment of which are fully
guaranteed by the Republic of the Philippines, until the minimum required
capital ratio has been restored.

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In case of a bank merger or consolidation, or when a bank is under

rehabilitation under a program approved by the BSP, Monetary Board may
temporarily relieve the surviving bank, consolidated bank, or constituent
bank or corporations under rehabilitation from full compliance with the
required capital ratio under such conditions as it may prescribe.
Before the effectivity of rules which the Monetary Board is authorized to
prescribe under this provision, Sec. 22 of the General Banking Act, as
amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued
pursuant thereto, shall continue to be in force. (Sec. 34)

(b) Single borrower's limit

Except as the Monetary Board may otherwise prescribe for reasons of
national interest, the total amount of loans, credit accommodations and
guarantees as may be defined by the Monetary Board that may be extended
by a bank to any person, partnership, association, corporation or other entity
shall at no time exceed twenty percent (20%) of the net worth of such
bank. The basis for determining compliance with single borrower limit is the
total credit commitment of the bank to the borrower. (Sec. 35.1)
Unless the Monetary Board prescribes otherwise, the total amount of loans,
credit accommodations and guarantees prescribed in the preceding
paragraph may be increased by an additional ten percent (10%) of the net
worth of such bank provided the additional liabilities of any borrower are
adequately secured by trust receipts, shipping documents, warehouse
receipts or other similar documents transferring or securing title covering
readily marketable, non-perishable goods which must be fully covered by
insurance. (Sec. 35.2)
The above-prescribed ceilings shall include: (a) the direct liability of the
maker or acceptor of paper discounted with or sold to such bank and the
liability of a general endorser, drawer or guarantor who obtains a loan or
other credit accommodation from or discounts paper with or sells papers to
such bank; (b) in the case of an individual who owns or controls a majority
interest in a corporation, partnership, association or any other entity, the
liabilities of said entities to such bank; (c) in the case of a corporation, all
liabilities to such bank of all subsidiaries in which such corporation owns or
controls a majority interest; and (d) in the case of a partnership, association
or other entity, the liabilities of the members thereof to such bank. (Sec.
35.3)
Even if a parent corporation, partnership, association, entity or an individual
who owns or controls a majority interest in such entities has no liability to the
bank, the Monetary Board may prescribe the combination of the liabilities of
subsidiary corporations or members of the partnership, association, entity or
such individual under certain circumstances, including but not limited to any
of the following situations: (a) the parent corporation, partnership,
association, entity or individual guarantees the repayment of the liabilities;

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(b) the liabilities were incurred for the accommodation of the parent
corporation or another subsidiary or of the partnership or association or
entity or such individual; or (c) the subsidiaries though separate entities
operate merely as departments or divisions of a single entity. (Sec. 35.4)
For purposes of this Section, loans, other credit accommodations and
guarantees shall exclude: (a) loans and other credit accommodations
secured by obligations of the BSP or of the Philippine Government: (b) loans
and other credit accommodations fully guaranteed by the government as to
the payment of principal and interest; (c) loans and other credit
accommodations covered by assignment of deposits maintained in the
lending bank and held in the Philippines; (d) loans, credit accommodations
and acceptances under letters of credit to the extent covered by margin
deposits; and (e) other loans or credit accommodations which the Monetary
Board may from time to time, specify as non-risk items. (Sec. 35.5)
Loans and other credit accommodations, deposits maintained with, and
usual guarantees by a bank to any other bank or non-bank entity, whether
locally or abroad, shall be subject to the limits as herein prescribed. (Sec.
35.6)
Certain types of contingent accounts of borrowers may be included among
those subject to these prescribed limits as may be determined by the
Monetary Board.(Sec. 35.7)

(c) Restrictions on bank exposure to directors, officers, stockholders,

and their related interests (DOSRI)
No director or officer of any bank shall, directly or indirectly, for himself or as
the representative or agent of others, borrow from such bank nor shall he
become a guarantor, endorser or surety for loans from such bank to others,
or in any manner be an obligor or incur any contractual liability to the bank
except with the written approval of the majority of all the directors of the
bank, excluding the director concerned: Provided, That such written approval
shall not be required for loans, other credit accommodations and advances
granted to officers under a fringe benefit plan approved by the BSP. The
required approval shall be entered upon the records of the bank and a copy
of such entry shall be transmitted forthwith to the appropriate supervising
and examining department of the BSP.
Dealings of a bank with any of its directors, officers or stockholders and their
related interests shall be upon terms not less favorable to the bank than
those offered to others.
After due notice to the board of directors of the bank, the office of any bank
director or officer who violates the provisions of this Section may be declared
vacant and the director or officer shall be subject to the penal provisions of
the New Central Bank Act.

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The Monetary Board may regulate the amount of loans, credit

accommodations and guarantees that may be extended, directly or indirectly,
by a bank to its directors, officers, stockholders and their related interests, as
well as investments of such bank in enterprises owned or controlled by said
directors, officers, stockholders and their related interests. However, the
outstanding loans, credit accommodations and guarantees which a bank
may extend to each of its stockholders, directors, or officers and their related
interests, shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital contribution in
the bank: Provided, however, That loans, credit accommodations and
guarantees secured by assets considered as non-risk by the Monetary Board
shall be excluded from such limit: Provided, further, That loans, credit
accommodations and advances to officers in the form of fringe benefits
granted in accordance with rules as may be prescribed by the Monetary
Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related interests."
The limit on loans, credit accommodations and guarantees prescribed
herein shall not apply to loans, credit accommodations and guarantees
extended by a cooperative bank to its cooperative shareholders. (Sec.
36)

Prohibited Transactions.
(a) A bank shall not directly engage in insurance business as the insurer.
(Sec. 54)
(b) No borrower of a bank shall -
(a) Fraudulently overvalue property offered as security for a loan or
other credit accommodation from the bank;

(b) Furnish false or make misrepresentation or suppression of

material facts for the purpose of obtaining, renewing, or increasing a
loan or other credit accommodation or extending the period thereof;

(c) Attempt to defraud the said bank in the event of a court action to
recover a loan or other credit accommodation; or

(d) Offer any director, officer, employee or agent of a bank any gift,
fee, commission, or any other form of compensation in order to
influence such persons into approving a loan or other credit
accommodation application. (Sec. 55.2)

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Floating rates of interest

The rate of interest on a floating rate loan during each interest period shall
be stated on the basis of Manila Reference Rates (MRRs), T-Bill Rates or
other market based reference rates plus a margin as may be agreed upon by
the parties.
The MRRs (Manual of Rules and Regulations) for various interest periods
shall be determined and announced by the BSP every week and shall be
based on the weighted average of the interest rates paid during the
immediately preceding week by the ten (10) KBs (commercial banks) with
the highest combined levels of outstanding deposit substitutes and time
deposits, on promissory notes issued and time deposits received by such
banks, of P100,000 and over per transaction account, with maturities
corresponding to the interest periods for which such MRRs are being
determined. Such rates and the composition of the sample KBs shall be
reviewed and determined at the beginning of every calendar semester on the
basis of the banks‘ combined levels of outstanding deposit substitutes and
time deposits as of 31 May or 30 November, as the case may be.
The rate of interest on floating rate loans existing and outstanding as of 23
December 1995 shall continue to be determined on the basis of the MRRs
obtained in accordance with the provisions of the rules existing as of 01
January 1989: §§ X304.12 - X305.3 13.12.31 Part III - Page 15 Manual of
Regulations for Banks Provided, however, That the parties to such existing
floating rate loan agreements are not precluded from amending or modifying
their loan agreements by adopting a floating rate of interest determined on
the basis of the TBR or other market based reference rates. Where the loan
agreement provides for a floating interest rate, the interest period, which
shall be such period of time for which the rate of interest is fixed, shall be
such period as may be agreed upon by the parties. For the purpose of
computing the MRRs, banks shall accomplish the report forms, RS Form 2D
and Form 2E (BSP 5-17-34A). (Bangko Sentral ng Pilipinas, Manual of
Regulations for Banks, Volume I, Part III, Page 15-16).

Escalation clauses

They refer to stipulations allowing an increase in the interest rate agreed

upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which are valid stipulations
in commercial contracts to maintain fiscal stability and to retain the value of
money in long term contracts. Hence, such stipulations are not void per se
(Spouses Juico versus China Banking Corporation, G.R. No. 187678,
April 10, 2013).
Escalation clause; when allowable. Parties to an agreement pertaining to
a loan or forbearance of money, goods or credits may stipulate that the rate
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of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased by the Monetary Board: Provided, That
such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event
that the applicable maximum rate of interest is reduced by law or by the
Monetary Board: Provided, further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest. (Bangko Sentral ng Pilipinas,
Manual of Regulations for Banks, Volume I, Part III, Page 15)

Suspension or removal of director or officer

Unless otherwise herein provided, the violation of any of the provisions of
this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central
Bank Act. If the offender is a director or officer of a bank, quasi-bank or
trust entity, the Monetary Board may also suspend or remove such
director or officer. If the violation is committed by a corporation, such
corporation may be dissolved by quo warranto proceedings instituted by the
Solicitor General. (Sec. 66)

Penalty for Transactions After a Bank Becomes Insolvent

Any director or officer of any bank declared insolvent or placed under
receivership by the Monetary Board who refuses to turn over the bank‘s
records and assets to the designated receivers, or who tampers with banks
records, or who appropriates for himself for another party or destroys or
causes the misappropriation and destruction of the bank‘s assets, or who
receives or permits or causes to be received in said bank any deposit,
collection of loans and/or receivables, or who pays out or permits or causes
to be transferred any securities or property of said bank shall be subject to
the penal provisions of the New Central Bank Act. (Sec. 70)

Dissolution of bank
(a) Voluntary Liquidation - In case of voluntary liquidation of any bank
organized under the laws of the Philippines, or of any branch or office
in the Philippines of a foreign bank, written notice of such liquidation
shall be sent to the Monetary Board before such liquidation shall be
sent to the Monetary Board before such liquidation is undertaken, and
the Monetary Board shall have the right to intervene and take such
steps as may be necessary to protect the interests of creditors. (Sec.
68)
(b) Receivership and Involuntary Liquidation - The grounds and
procedures for placing a bank under receivership or liquidation, as
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well as the powers and duties of the receiver or liquidator appointed

for the bank shall be governed by the provisions of Sections 30, 31,
32, and 33 of the New Central Bank Act: Provided, That the petitioner
or plaintiff files with the clerk or judge of the court in which the action
is pending a bond, executed in favor of the BSP, in an amount to be
fixed by the court. This Section shall also apply to the extent possible
to the receivership and liquidation proceedings of quasi-banks. (Sec.
69)

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PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT

(RA 3591, as amended by RA 10846)

Basic policy
The PDIC shall, as a basic policy of the state to strengthen the mandatory
deposit insurance system to generate, preserve, maintain faith and
confidence in the country‘s banking system, and protect it from illegal
schemes and machinations. (Sec. 2)

Composition of the Board of Directors

The Board of Directors of the PDIC consists of seven members namely:
(a) The powers and functions of the Corporation shall be vested in
and exercised by a Board of Directors which shall be composed of
seven (7) members as follows:
(1) The Secretary of Finance who shall be the ex-oficio Chairman of
the Board without compensation;
(2) The Governor of the BSP who shall be ex-oficio member of the
Board without compensation;

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(3) The President of the Corporation, who shall be appointed by the

President of the Philippines from a shortlist prepared by the
Governance Commission for Government-Owned or -Controlled
Corporations pursuant to RA No. 10149 to serve on a full-time basis
for a term of six (6) years. The President of the Corporation shall also
serve as Vice Chairman of the Board;
(4) Four (4) members from the private sector to be appointed by the
President of the Philippines from a shortlist prepared by the
Governance Commission for Government-Owned or -Controlled
Corporations pursuant to RA No. 10149. The appointive directors shall
serve for a term of six (6) years unless sooner removed for cause and
shall be subject to only one (1) reappointment: Provided, That of those
first appointed, the first two (2) appointees shall serve for a period of
three (3) years: Provided, however, That the appointive director shall
continue to hold office until the successor is appointed. An appointive
director may be nominated by the Governance Commission for
Government-Owned or -Controlled Corporations for reappointment by
the President only if one obtains a performance score of above
average or its equivalent or higher in the immediately preceding year
of tenure as appointive director based on the performance criteria for
appointive directors of the Corporation.
Appointment to any vacancy shall be only for the unexpired term of
the predecessor pursuant to RA No. 10149.
The presence of four (4) members shall constitute a quorum. All
decisions of the Board of Directors shall require the concurrence of at
least four (4) members. (Sec. 3)

Concept of deposits

The term ―deposit‖ means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has
given or is obliged to give credit to a commercial, checking, savings, time of
thrift account, evidenced by a passbook, certificate of deposit, or other form
of deposit issued in accordance with BSP rules and regulations and
applicable laws, together with such other obligations of a bank, which,
consistent with banking usage and practices, the Board of Directors shall
determine and prescribe by regulations to be deposit liabilities of the bank;
Provided that any obligation of a bank which is payable at the office of the
bank located outside of the Philippines shall not be a deposit for the
purposes of the total deposits or of insured deposit: provided, further that
subject to the approval of the Board of Directors, any insured bank which Is
incorporated in the Philippines which maintains a branch office outside the

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Philippines may elect to include for insurance its deposit obligations payable
only at such branch. (Sec. 5, g)

Insured deposit

The term ―insured deposit‖ means the amount due to any bona fide depositor
for legitimate deposits in an insured bank as of the date of closure, but not to
exceed five hundred thousand pesos (P500,000.00). x x x In determining
such amount due to any depositor there shall be added together all the
deposits in the bank maintained in the same right and capacity for his or her
own name or in the name of others.
A ―joint account‖ regardless of whether the conjunction ‗and,‘ ‗or,‘ and/or‘ is
used, shall be insured separately from any individually-owned deposit
account: provided that (1) if the account is held jointly by two or more natural
persons, or by two or more juridical persons or entities, the maximum
insured deposit shall be divided into as many equal shares as there are
individuals, juridical persons or entities, unless a different sharing is
stipulated in the document of deposit; and (2) if the account is held by a
juridical person or entity jointly with one or more natural persons, the
maximum insured deposit shall be presumed to belong entirely to such
juridical person or entity; provided further that the aggregate of the interest of
each co-owner over several joint accounts, whether owner by the same or
different combinations of individuals, juridical persons or entities, shall
likewise be subject to the maximum insured deposit of five hundred thousand
pesos (P500,000.00) (Sec. 5, j) ,

Deposit accounts not entitled to payment

The corporation shall not pay deposit insurance for the following accounts or
transactions::
(1) investment products such as bonds and securities, trust accounts,
and other similar instruments;
(2) deposit accounts or transactions which are fictitious or fraudulent
as determine by the PDIC;
(3) deposit accounts or transactions constituting, and/or emanating
from, unsafe and unsound banking practice/s, as determined by the
PDIC, in consultation with the BSP, after due notice and hearing, and
publication of a directive to cease and desist issued by the PDIC
against such deposit accounts, transactions or practices;
(4) Deposits that are determined to be the proceeds of an unlawful
activity as defined in RA No, 9160, as amended. (Sec. 5, g, 2nd par.)
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Liquidatiion of a closed bank

Whenever a bank is ordered closed by the Monetary Board, the PDIC, shall
be designated as receiver and it shall proceed with the takeover and
liquidation of the closed bank. For this purpose, banks closed by the
Monetary Board shall no longer be rehabilitated. (Sec. 12)

Mode of payment

Whenever an insured bank shall have been closed by the Monetary Board
pursuant to Section 30 of Republic Act No. 7653, or upon expiration or
revocation of a bank‘s corporate term, payment of the insured deposits on
such closed bank shall be made by the Corporation as soon as possible
either (1) by cash or (2) by making available to each depositor a transferred
deposit in another insured bank in an amount equal to insured deposit of
such depositor: Provided, however, That the Corporation, in its discretion,
may require proof of claims to be filed before paying the insured deposits,
and that in any case where the Corporation is not satisfied as to the validity
of a claim for an insured deposit, it may require final determination of a court
of competent jurisdiction before paying such claim: Provided, further, That
failure to settle the claim, within six (6) months from the date of filing of claim
for insured deposit, where such failure was due to grave abuse of discretion,
gross negligence, bad faith, or malice, shall, upon conviction, subject the
directors, officers or employees of the Corporation responsible for the delay,
to imprisonment from six (6) months to one (1) year: Provided, furthermore,
That the period shall not apply if the validity of the claim requires the
resolution of issues of facts and or law by another office, body or agency
including the case mentioned in the first proviso or by the Corporation
together with such other office, body or agency. (Sec. 19)

Effect of payment of insured deposit

The PDIC, upon payment of any depositor as provided for in Sec.19 of this
Act, shall be subrogated to all rights of the depositor against the closed bank
to the extent of such payment. Such subrogation shall include the right on
the part of the PDIC to receive the same dividends and payments from the
proceeds of the assets of such closed bank and recoveries on account of
stockholders‘ liability as would have been payable to the depositor on a claim
for the insured deposits: Provided, That such depositor shall retain his or her
claim for any uninsured portion of his or her deposit, which legal preference
shall be the same as that of the subrogated claim of the PDIC for its payment
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of insured deposits. All payments by the PDIC of insured deposits in

closed banks partake of the nature of public funds, and as such, must
be considered a preferred credit in the order of preference under Article
2244 (9) of the New Civil Code. (Sec. 20)

Failure to settle claim of insured depositor

That failure to settle the claim, within six (6) months from the date of filing of
claim for insured deposit, where such failure was due to grave abuse of
discretion, gross negligence, bad faith, or malice, shall, upon conviction,
subject the directors, officers or employees of the Corporation responsible for
the delay, to imprisonment from six (6) months to one (1) year: Provided,
furthermore, That the period shall not apply if the validity of the claim
requires the resolution of issues of facts and or law by another office, body or
agency including the case mentioned in the first proviso or by the
Corporation together with such other office, body or agency. (Sec. 19)

Failure of depositor to claim insured deposits

Unless otherwise waived by the PDIC, if the depositor of a closed bank shall
fail to claim his insured deposit with the PDIC within two (2) years from actual
takeover of the closed bank by the receiver or does not enforce his claimed
filed with the PDIC after the two (2) year period to file a claim, all rights of the
depositor against the PDIC with respect to the insured deposit shall be
barred (Sec. 21)

Splitting of deposits
Splitting of deposits occurs whenever a deposit account with an outstanding
balance of more than the statutory maximum amount of insured deposit
maintained under the name of natural or juridical persons is broken down or
transferred into 2 or more accounts in the name/s of natural or juridical
persons or entities who have no beneficial ownership on transferred deposits
in their names within 120 days immediately preceding or during a bank
declared holiday, or immediately preceding a closure ordered by the
Monetary Board of the BSP for the purpose of availing of the maximum
deposit insurance coverage. (Sec. 26(f)(1)(e))
Prohibition against issuances of temporary restraining orders
No Court, except the Court of Appeals, shall issue any temporary restraining
order, preliminary injunction or preliminary mandatory injunction against the
Corporation for any action under this Act.

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This prohibition shall apply in all cases, disputes or controversies instituted

by a private party, the insured bank, or any shareholder of the insured bank.
The Supreme Court may issue a restraining order or injunction when the
matter is of extreme urgency involving a constitutional issue, such that
unless the temporary restraining order is issued, grave injustice and
irreparable injury will arise. The party applying for the issuance of a
restraining order or injunction shall file a bond in an amount to be fixed by
the Supreme Court, which bond shall accrue in favor of the PDIC, if the
Court should finally decide that the applicant was not entitled to the relief
sought.
Any restraining order or injunction issued in violation of this Section is void
and of no force and effect and any judge who has issued the same shall
suffer the penalty of suspension of at least 60 days without pay. (Sec. 27)

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LAW ON SECRECY OF BANK DEPOSITS

(Republic Act No. 1405)

Purpose

It is hereby declared to be the policy of the Government to give

encouragement to the people to deposit their money in banking institutions
and to discourage private hoarding so that the same may be properly utilized
by banks in authorized loans to assist in the economic development of the
country. (Sec. 1)

Prohibited acts

All deposits of whatever nature with banks or banking institutions in the

Philippines, including investments in bonds issued by the Government of the
Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined,
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inquired or looked into by any person, government official, bureau or office,

except (1) upon written permission of the depositor, or (2) in cases of
impeachment, or (3) upon order of a competent court in cases of bribery or
dereliction of duty of public officials, or (4) in cases where the money
deposited or invested is the subject matter of the litigation. (Sec. 2) (5)
Upon order of a competent court, by the Anti-Money Laundering Council
where there is probable cause of money laundering under Sec. 11, RA No.
9160:
It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Sec. 2 hereof any
information concerning said deposits. (Sec. 3)
RA 9160. Authority to Inquire into Bank Deposits — Notwithstanding the
provisions of RA No. 1405, as amended; Republic Act No. 6426, as
amended; Republic Act No. 8791, and other laws, the AMLC may inquire
into or examine any particular deposit or investment with any banking
institution or non-bank financial institution upon order of any
competent court in cases of violation of this Act when it has been
established that there is probable cause that the deposits or
investments involved are in any way related to a money laundering
offense: Provided, That this provision shall not apply to deposits and
investments made prior to the effectivity of this Act.

Garnishment of deposits, including foreign deposits

(a) Bank accounts may be garnished by the creditors of the depositor. There
is no violation of the Law on Secrecy of Bank Deposits if the accounts are
garnished. (China Bank v. Ortega, 49 SCRA 356)

(b) The amount of deposit is actually not disclosed and the intent of the
legislature does not cover garnishment. (PCIB, et al. v. Court of Appeals,
193 SCRA 452)

(c) By way of exception that foreign currency deposits of an American

tourist who was found guilty of repeatedly raping a 12-year old child is
subject to garnishment. (Salvacion, et al. v. Central Bank of the
Philippines, (GR No. 94723)
Penalties for violation
Any violation of this law will subject offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty
thousand pesos or both, in the discretion of the court. (Sec. 5)
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REAL MORTGAGE
(Civil Code)

Definition
It is a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, immediately making immovable property or real rights
answerable to the principal obligation in case it is not complied with at the
time stipulated.

Essential requisites
The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property. (Sec. 2085, Civil Code)

Characteristics: (1) Real; (2) Accessory; (3) Subsidiary contract.

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Obligations secured by real estate mortgage

A real estate mortgage is limited to the principal obligations mentioned in the

contract (within its four corners). [Lim Julian v. Lutero, G.R. No. L-25235
(1926)]

Object of real estate mortgage

Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables. (Sec. 2124, Civil Code)

Right to alienate mortgage credit

The mortgage credit may be alienated or assigned to a third person, in whole
or in part, with the formalities required by law. (Art. 2128, Civil Code)

Right to alienate collateral

It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be
alienated for the payment to the creditor. (Sec. 2087, Civil Code)

The mortgagor must have the written consent of the mortgagee to sell
or pledge personal property already pledged. (Art. 319, Revised Penal
Code)

Registration for constructive notice

In addition to the requisites stated in Article 2085, it is indispensable, in order

that a mortgage may be validly constituted, that the document in which it
appears be recorded in the Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding between the parties.
The persons in whose favor the law establishes a mortgage have no other
right than to demand the execution and the recording of the document in
which the mortgage is formalized. (Art. 2125, Civil Code)

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PERSONAL PROERTY SECURITY ACT

(RA 11057)

Policy of the law (PPSA)

To promote economic activity by increasing access to least cost credit,

particularly for micro, small and medium enterprises by establishing a unified
and modern legal framework for securing obligations with personal property.

Applicability of the PPSA

The PPSA shall apply to all transactions of any form that secure an
obligation with movable collateral, except in aircrafts (covered by RA 9497)
and interests in ships (covered by PD No. 1521 – Ship Mortgage Decree)
[Sec. 4]

Security interest

A property right in collateral that secures payment or other performance of

an obligation, regardless of whether the parties have denominated it as a
security interest, and regardless of the type of asset, the status of the grantor
or secured creditor, or the nature of the secured obligation; including the
right of a buyer of accounts receivable and a lessor under an operating lease
for not less than one (1) year. (Sec. 3, j)

1. Right to Proceeds and Commingled Funds and Money.—

(a) A security interest in personal property shall extend to its identifiable or

traceable proceeds.
(b) Where proceeds in the form of funds credited to a deposit account or
money are commingled with other funds or money:

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(1) The security interest shall extend to the commingled money or

funds, notwithstanding that the proceeds have ceased to be
identifiable to the extent they remain traceable:
(2) The security interest in the commingled funds or money shall be
limited to the amount of the proceeds immediately before they were
commingled: and
(3) If at any time after the commingling, the balance credited to the
deposit account or the amount of the commingled money is less than
the amount of the proceeds immediately before they were
commingled, the security interest against the commingled funds or
money shall be limited to the lowest amount of the commingled funds
or money between the time when the proceeds were commingled and
the time the security interest in the proceeds is claimed. (Sec. 8)
2. Security interest in accounts receivables

Rules:
(a) A security interest in an account receivable shall be effective
notwithstanding any agreement between the grantor and the account debtor
or any secured creditor limiting in any way the grantor‘s right to create a
security interest.
(b) Nothing in this section shall affect any obligation or liability of the grantor
for breach of the agreement in sub-section (a).
(c) Any stipulation limiting the grantor‘s right to create a security interest
shall be void.
(d) This section shall apply only to accounts receivable arising from:
(1) A contract for the supply or lease of goods or services other than
financial services;
(2) A construction contract or a contract for the sale or lease of real
property; and
(3) A contract for the sale, lease or license of intellectual property.
(Sec. 10)
3. Security interest in fixtures, Accessions, and Commingled Goods

A perfected security interest in a movable property which has become a

fixture, or has undergone accession or commingling shall continue provided
the movable property involved can still be reasonably traced. In determining
ownership over fixtures, accessions, and commingled goods, the provisions
of Book II of Republic Act No. 386 or the "Civil Code of the Philippines" shall
apply. (Sec. 25)

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4. Purchase money security interest

A security interest in goods taken by: (a) the seller to secure the price or
(b) by a person who gives value to enable the grantor to acquire the goods
to the extent that the credit is used for that purpose. (Sec. 3, g);
Rules:
(a) A purchase money security interest in equipment and its proceeds shall
have priority over a conflicting security interest, if a notice relating to the
purchase money security interest is registered within three (3) business days
after the grantor receives possession of the equipment.
(b) A purchase money security interest in consumer goods that is perfected
by registration of notice not later than three (3) business days after the
grantor obtains possession of the consumer goods shall have priority over a
conflicting security interest.
(c) A purchase money security interest in inventory, intellectual property or
livestock shall have priority over a conflicting perfected security interest in
the same inventory, intellectual property or livestock if:
(1) The purchase money security interest is perfected when the
grantor receives possession of the inventory or livestock, or acquires
rights to intellectual property; and
(2) Before the grantor receives possession of the inventory or
livestock, or acquires rights in intellectual property, the purchase
money secured creditor gives written notification to the holder of the
conflicting perfected security interest in the same types of inventory,
livestock, or intellectual property. The notification sent to the holder of
the conflicting security interest may cover multiple transactions
between the purchase money secured creditor and the grantor without
the need to identify each transaction.
(d) The purchase money security interest in equipment or consumer goods
perfected timely in accordance with subsections (a) and (b), shall have
priority over the rights of a buyer, lessee, or lien holder which arise between
delivery of the equipment or consumer goods to the grantor and the time the
notice is registered. (Sec. 23)

5. Livestock

A perfected security interest in livestock securing an obligation incurred to

enable the grantor to obtain food or medicine for the livestock shall have
priority over any other security interest in the livestock, except for a perfected
purchase money security interest in the livestock, if the secured creditor
providing credit for food or medicine gives written notification to the holder of
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the conflicting perfected security interest in the same livestock before the
grantor receives possession of the food or medicine. (Sec. 24)

Security interest, how created

Security interest shall be created by a security agreement. (Sec. 5, a)

Form of security agreement

It must be in writing (which includes electronic records), signed by the parties

and may provide for the creation of a security interest in a future property,
but the security interest in that property is created only when the grantor
acquires rights in it or the power to encumber it.
It may consist of one or more writings that, taken together, establish the
intent of the parties to create a security interest. (Sec. 3, k, Sec.5, b &
Sec. 6)

Grantor

(1) The person who grants a security interest in collateral to secure its own
obligation or that of another person;
(2) A buyer or other transferee of a collateral that acquires its right subject to
a security interest;
(3) A transferor in an outright transfer of an accounts receivable; or
(4) A lessee of goods. (Sec. 3, c)

Description of collateral, when considered sufficient

A description of collateral shall be considered sufficient whether it is specific

or general, if it reasonably identifies the collateral.
A description such as ―all personal property, ‖all equipment,‖ ―all inventory,‖
or ―sll personal property within a generic category‖ of the grantor shall be
sufficient. (Sec. 7).
Security interest, when perfected

(a) A security interest shall be perfected when it has been created and the
secured creditor has taken one of the actions in accordance with Section 12.
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(b) On perfection, a security interest becomes effective against third parties.

(Sec. 11)

Security interest, how perfected

A security interest may be perfected by:

(a) Registration of a notice with the Registry

Notice – a statement of information that is registered in the

Registry relating to a security interest or lien. The term includes
an initial notice, amendment notice, and termination notice. (Sec.
3, e);
Registry is the centralized and nationwide electronic registry
established in the Land Registration Authority where notice of a
security interest and a lien in personal property may be registered
(Sec. 3, h);

(b) Possession of the collateral by the secured creditor

Secured creditor is a person that has a security interest and for

the purpose of registration and priority only. It includes a buyer of
accounts receivable and a lessor of goods under an operating
lease for not less than one (1) year. (Sec. 3, i) and
(c) Control of investment property and deposit account.

A security interest in any tangible asset may be perfected by: (a)

registration or (b) possession.
A security interest in investment property and deposit account may be
perfected by: (a) registration or (b) control. (Sec. 12)

Perfection by Control

(a) A security interest in a deposit account or investment property may be

perfected by control through:
(1) the creation of the security interest in favor of the deposit-taking
institution or the intermediary;
(2) the conclusion of a control agreement; or

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(3) for an investment property that is an electronic security not held

with an intermediary, the notation of the security interest in the books
maintained by or on behalf of the issuer for the purpose of recording
the name of the holder of the securities.
(b) Nothing in this Act shall require a deposit-taking institution or an
intermediary to enter into a control agreement, even if the grantor so
requests. A deposit-taking institution or an intermediary that has entered into
such an agreement shall not be required to confirm the existence of the
agreement to another person unless requested to do so by the grantor.
(Sec. 13)

Control agreement –

(1) With respect to securities, means an agreement in writing among the

issuer or the intermediary, the grantor and the secured creditor, according to
which the issuer or the intermediary agrees to follow instructions from the
secured creditor with respect to the security, without further consent from the
grantor;
(2) With respect to rights to deposit account, means an agreement in writing
among the deposit-taking institution, the grantor and the secured creditor,
according to which the deposit-taking institution agrees to follow instructions
from the secured creditor with respect to the payment of funds credited to the
deposit account without further consent from the grantor;
(3) With respect to commodity contracts, means an agreement in writing
among the grantor, secured creditor, and intermediary, according to which
the commodity intermediary will apply any value distributed on account of the
commodity contract as directed by the secured creditor without further
consent by the commodity customer or grantor. (Sec. 3, b)
Commodity contract

is: (a) a commodity futures contract (Sec. 11, SRC),

(b) an option on a commodity futures contract,

(c) a commodity option, or

(d) another contract if the contract or option is:

(1) traded on or subject to the rules of a board of trade that

has been designated as a contract market for such a contract;
or

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(2) traded on a foreign commodity board of trade, exchange,

or market, and is carried on the books of a commodity
intermediary for a commodity customer;

Security interest in (a) tangible assets; (b) intangible assets

A security interest in any tangible asset may be perfected by registration or
possession.
A security interest in investment property and deposit account may be
perfected by registration or control. (Sec. 12)

If over security interest in deposit account, how perfected

(a) A security interest in a deposit account or investment property may be

perfected by control through:
(1) The creation of the security interest in favor of the deposit-taking
institution or the intermediary;
(2) The conclusion of a control agreement; or
(3) For an investment property that is an electronic security not held
with an intermediary, the notation of the security interest in the books
maintained by or on behalf of the issuer for the purpose of recording
the name of the holder of the securities.
(b) Nothing in this Act shall require a deposit-taking institution or an
intermediary to enter into a control agreement, even if the grantor so
requests.
A deposit-taking institution or an intermediary that has entered into such an
agreement shall not be required to confirm the existence of the agreement to
another person unless requested to do so by the grantor. (Sec. 13)
Rules on priority

(a) Registration - The priority of security interests and liens in the same
collateral shall be determined according to time of registration of a notice
or perfection by other means, without regard to the order of creation of the
security interests and liens. (Sec. 17)
(b) Control -
(i) A security interest in a deposit account with respect to which the
secured creditor is the deposit-taking institution or the intermediary

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shall have priority over a competing security interest perfected by any

method.
(II) A security interest in a deposit account or investment property that
is perfected by a control agreement shall have priority over a
competing security interest, except a security interest of the deposit-
taking institution or the intermediary.
(III) The order of priority among competing security interests in a
deposit account or investment property that were perfected by the
conclusion of control agreements shall be determined on the basis of
the time of conclusion of the control agreements.
(iv) Any rights to set-off that the deposit-taking institution may have
against a grantor‘s right to payment of funds credited to a deposit
account shall have priority over a security interest in the deposit
account.
(v) A security interest in a security certificate perfected by the secured
creditor‘s possession of the certificate shall have priority over a
competing security interest perfected by registration of a notice in the
Registry.
(vi) A security interest in electronic securities not held with an
intermediary perfected by a notation of the security interests in the
books maintained for that purpose by or on behalf of the issuer shall
have priority over a security interest in the same securities perfected
by any other method.
Non-intermediated securities – securities other than
securities credited to a securities account and rights in
securities resulting from the credit of securities to a
securities account. (Sec. 3,d)
(vi) A security interest in electronic securities not held with an
intermediary perfected by the conclusion of a control agreement shall
have priority over a security interest in the same securities perfected
by registration of a notice in the Registry.
(vii) The order of priority among competing security interests in
electronic securities not held with an intermediary perfected by the
conclusion of control agreements is determined on the basis of the
time of conclusion of the control agreements. (Sec. 18)
(c) For instruments and Negotiable Documents

A security interest in an instrument or negotiable document that is perfected

by possession of the instrument or the negotiable document shall have
priority over a security interest in the instrument or negotiable document that
is perfected by registration of a notice in the Registry. (Sec. 19)
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(d) Priority and Right of Retention by Operation of Law

A person who provides services or materials with respect to the goods, in the
ordinary course of business, and retains possession of the goods shall have
priority over a perfected security interest in the goods until payment thereof.
(Sec. 20)

Registry

(a) Establishment of Electronic Registry.—

(I) The Registry shall be established in and administered by the

LRA.
(ii) The Registry shall provide electronic means for registration and
searching of notices. (Sec. 26)
(b) Public Record

Rules:

(a) information contained in a registered notice shall be considered

as a public record.
(b) any person may search notices registered in the Registry.
(c) the electronic records of the Registry shall be the official records.
(Sec. 27)
(c) Registry Duties.—

(1) For each registered notice, the Registry shall:

(a) Assign a unique registration number;
(b) Create a record that bears the number assigned to the
initial notice and the date and time of registration; and
(c) Maintain the record for public inspection.
(2) The Registry shall index notices by the identification number of
the grantor and, for notices containing a serial number of a motor
vehicle, by serial number.
(3) The Registry shall provide a copy of the electronic record of the
notice, including the registration number and the date and time of
registration to the person who submitted it.

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(4) The Registry shall maintain the capability to retrieve a record by

the identification number of the grantor, and by serial number of a
motor vehicle.
(5) The Registry shall maintain records of lapsed notices for a period
of ten (10) years after the lapse.
(6) The duties of the Registry shall be merely administrative in nature.
By registering a notice or refusing to register a notice, the Registry
does not determine the sufficiency, correctness, authenticity, or
validity of any information contained in the notice. (Sec. 35)
(d) Search of Registry Records and Certified Report.—

(a) The Registry shall communicate the following information to any

person who requests it:
(1) Whether there are in the Registry any unlapsed notices
that indicate the grantor's identification number or vehicle serial
number that exactly matches the relevant criterion provided by the
searcher;
(2) The registration number, and the date and time of
registration of each notice; and
(3) All of the information contained in each notice.
(b) If requested, the Registry shall issue a certified report of the
results of a search that is an official record of the Registry and shall
be admissible into evidence in judicial proceedings without extrinsic
evidence of its authenticity. (Sec. 36)
Notice, rules

(a) Sufficiency of Notice

An initial notice of security interest shall not be rejected:

(1) If it identifies the grantor by an identification number, as further
prescribed in the regulations;
(2) If it identifies the secured creditor or an agent of the secured
creditor by name;
(3) If it provides an address for the grantor and secured creditor or its
agent;
(4) If it describes the collateral: and
(5) If the prescribed fee has been tendered, or an arrangement has
been made for payment of fees by other means.

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(b) If the Registry rejects to register a notice, it shall promptly communicate

the fact of and reason for its rejection to the person who submitted the
notice.
(c) Each grantor must authorize the registration of an initial notice by signing
a security agreement or otherwise in writing.
(d) A notice may be registered before a security agreement is concluded.
Once a security agreement is concluded, the date of registration of the notice
shall be reckoned from the date the notice was registered.
(e) A notice of lien may be registered by a lien holder without the consent of
the person against whom the lien is sought to be enforced.
(f) Description of the collateral in a notice shall be entered in English. (Sec.
28)
(g) The registration of a single notice may relate to security interests created
by the grantor under one (1) or more than one security agreement. (Sec. 29)
(h) Effectiveness of Notice.—

(1) A notice shall be effective at the time it is discoverable on the

records of the Registry.
(2) A notice shall be effective for the duration of the term indicated in
the notice unless a continuation notice is registered before the term
lapses.
(3) A notice substantially complying with the requirements of this
Chapter shall be effective unless it is seriously misleading.
(4) A notice that may not be retrieved in a search of the Registry
against the correct identifier of the grantor shall be ineffective with
respect to that grantor. (Sec. 30)
(i) Amendment of Notice, rules:
(a ) A notice may be amended by the registration of an amendment
notice that: (1) Identifies the initial notice by its registration number;
and (2) Provides the new information.
(b) An amendment notice that adds collateral that is not proceeds
must be authorized by the grantor in writing.
(c) An amendment notice that adds a grantor must be authorized by
the added grantor in writing.
(d) An amendment notice shall be effective only as to each secured
creditor who authorizes it.

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(e) An amendment notice that adds collateral or a grantor shall be

effective as to the added collateral or grantor from the date of its
registration. (Sec. 32)
(j) A notice that does not provide the identification number of the grantor
shall be seriously misleading. (Sec. 31)
(k) Continuation of Notice

(a) The period of effectiveness of a notice may be continued by

registering an amendment notice that identifies the initial notice by its
registration number.
(b) Continuation of notice may be registered only within six (6)
months before the expiration of the effective period of the notice.
(Sec. 33)
(l) Termination of Effectiveness of a Notice.—
(a) The effectiveness of a notice may be terminated by registering a
termination notice that: (1) Identifies the initial notice by its
registration number; and (2) Identifies each secured creditor who
authorizes the registration of the termination notice.
(b) A termination notice terminates effectiveness of the notice as to
each authorizing secured creditor. (Sec. 34)

Recovery in Special Cases

Upon default, the secured creditor may without judicial process:
(a) Instruct the account debtor to make payment to the secured creditor, and
apply such payment to the satisfaction of the obligation secured by the
security interest after deducting the secured creditor‘s reasonable collection
expenses. On request of the account debtor, the secured creditor shall
provide evidence of its security interest to the account debtor when it delivers
the instruction to the account debtor;
(b) In a negotiable document that is perfected by possession, proceed as to
the negotiable document or goods covered by the negotiable document;
(c) In a deposit account maintained by the secured creditor, apply the
balance of the deposit account to the obligation secured by the deposit
account; and
(d) In other cases of security interest in a deposit account perfected by
control, instruct the deposit-taking institution to pay the balance of the
deposit account to the secured creditor‘s account. (Sec. 48)

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Expedited Repossession of the Collateral

(a) The secured creditor may take possession of the collateral without
judicial process if the security agreement so stipulates: Provided, That
possession can be taken without a breach of the peace.
(b) If the collateral is a fixture, the secured creditor, if it has priority over all
owners and mortgagees, may remove the fixture from the real property to
which it is affixed without judicial process. The secured creditor shall
exercise due care in removing the fixture.
(c) If, upon default, the secured creditor cannot take possession of collateral
without breach of the peace, the secured creditor may proceed as follows:
(1) The secured creditor shall be entitled to an expedited hearing
upon application for an order granting the secured creditor possession
of the collateral. Such application shall include a statement by the
secured creditor, under oath, verifying the existence of the security
agreement attached to the application and identifying at least one
event of default by the debtor under the security agreement;
(2) The secured creditor shall provide the debtor, grantor, and, if the
collateral is a fixture, any real estate mortgagee, a copy of the
application, including all supporting documents and evidence for the
order granting the secured creditor possession of the collateral; and
(3) The secured creditor is entitled to an order granting possession of
the collateral upon the court finding that a default has occurred under
the security agreement and that the secured creditor has a right to
take possession of the collateral. The court may direct the grantor to
take such action as the court deems necessary and appropriate so
that the secured creditor may take possession of the collateral:
Provided, That breach of the peace shall include entering the private
residence of the grantor without permission, resorting to physical
violence or intimidation, or being accompanied by a law enforcement
officer when taking possession or confronting the grantor. (Sec. 47)
Right of Redemption

(a) Any person who is entitled to receive a notification of disposition in

accordance with this Chapter is entitled to redeem the collateral by paying or
otherwise performing the secured obligation in full, including the reasonable
cost of enforcement.
(b) The right of redemption may be exercised, unless:
(1) The person entitled to redeem has not, after the default, waived in
writing the right to redeem;
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(2) The collateral is sold or otherwise disposed of, acquired or

collected by the secured creditor or until the conclusion of an
agreement by the secured creditor for that purpose; and
(3) The secured creditor has retained the collateral. (Sec. 45)

Right of Higher-Ranking Secured Creditor to Take Over Enforcement

(a) Even if another secured creditor or a lien holder has commenced

enforcement, a secured creditor whose security-interest has priority over that
of the enforcing secured creditor or lien holder shall be entitled to take over
the enforcement process.
(b) The right referred to in sub-section (a) of this section may be invoked at
any time before the collateral is sold or otherwise disposed of, or retained by
the secured creditor or until the conclusion of an agreement by the secured
creditor for that purpose.
(c) The right of the higher-ranking secured creditor to take over the
enforcement process shall include the right to enforce the rights by any
method available to a secured creditor under this Act. (Sec. 46)
Retention of Collateral by Secured Creditor.—

(a) After default, the secured creditor may propose to the debtor and grantor
to take all or part of the collateral in total or partial satisfaction of the secured
obligation, and shall send a proposal to:
(1) The debtor and the grantor;
(2) Any other secured creditor or lien holder who, five (5) days before
the proposal is sent to the debtor and the grantor, perfected its
security interest or lien by registration; and
(3) Any other person with an interest in the collateral who has given a
written notification to the secured creditor before the proposal is sent
to the debtor and the grantor.
(b) The secured creditor may retain the collateral in the case of:
(1) A proposal for the acquisition of the collateral in full satisfaction of
the secured obligation, unless the secured creditor receives an
objection in writing from any person entitled to receive such a
proposal within twenty (20) days after the proposal is sent to that
person; or
(2) A proposal for the acquisition of the collateral in partial satisfaction
of the secured obligation, only if the secured creditor receives the

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affirmative consent of each addressee of the proposal in writing within

twenty (20) days after the proposal is sent to that person. (Sec. 54)

Right to Dispose of Collateral

(a) After default, a secured creditor may sell or otherwise dispose of the
collateral, publicly or privately, in its present condition or following any
commercially reasonable preparation or processing.
(b) The secured creditor may buy the collateral at any public disposition, or
at a private disposition but only if the collateral is of a kind that is customarily
sold on a recognized market or the subject of widely distributed standard
price quotations. (Sec. 49)
Notification of Disposition
(a) Not later than ten (10) days before disposition of the collateral, the
secured creditor shall notify:
(1) The grantor;
(2) Any other secured creditor or lien holder who, five (5) days before
the date notification is sent to the grantor, held a security interest or
lien in the collateral that was perfected by registration; and
(3) Any other person from whom the secured creditor received
notification of a claim of an interest in the collateral if the notification
was received before the secured creditor gave notification of the
proposed disposition to the grantor.
(b) The grantor may waive the right to be notified.
(c) A notification of disposition is sufficient if it identifies the grantor and the
secured creditor; describes the collateral; states the method of intended
disposition; and states the time and place of a public disposition or the time
after which other disposition is to be made.
(d) The requirement to send a notification under this section shall not apply
if the collateral is perishable or threatens to decline speedily in value or is of
a type customarily sold on a recognized market. (Sec. 51)

Commercial Reasonableness Required

(a) In disposing of collateral, the secured creditor shall act in a commercially

reasonable manner.

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(b) A disposition is commercially reasonable if the secured creditor disposes

of the collateral in conformity with commercial practices among dealers in
that type of property.
(c) A disposition is not commercially unreasonable merely because a better
price could have been obtained by disposition at a different time or by a
different method from the time and method selected by the secured creditor.
(d) If a method of disposition of collateral has been approved in any legal
proceeding, it is conclusively commercially reasonable. (Sec. 50)

Application of Proceeds

(a) Proceeds, meaning

Any property received upon sale, lease or other disposition of collateral, or
whatever is collected on or distributed with respect to collateral, claims
arising out of the loss or damage to the collateral, as well as a right to
insurance payment or other compensation for loss or damage of the
collateral; (Sec. 3, e)
(b) The proceeds of disposition shall be applied in the following order:
(1) The reasonable expenses of taking, holding, preparing for
disposition, and disposing of the collateral, including reasonable
attorneys‘ fees and legal expenses incurred by the secured creditor;
(2) The satisfaction of the obligation secured by the security interest
of the enforcing secured creditor; and
(3) The satisfaction of obligations secured by any subordinate
security interest or hen in the collateral if a written demand and proof
of the interest are received before distribution of the proceeds is
completed.
(c) The secured creditor shall account to the grantor for any surplus, and,
unless otherwise agreed, the debtor is liable for any deficiency. (Sec. 52)

Rights of Buyers and Other Third Parties

(a) If a secured creditor sells the collateral under this Chapter, the buyer
shall acquire the grantor‘s right in the asset free of the rights of any secured
creditor or lien holder.
(b) If a secured creditor leases or licenses the collateral under this Chapter,
the lessee or licensee shall be entitled to the benefit of the lease or license
during its term.

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(c) If a secured creditor sells, leases or licenses the collateral not in

compliance with this Chapter, the buyer, lessee or licensee of the collateral
shall acquire the rights or benefits described in sub-sections (a) and (b) of
this section: Provided, That it had no knowledge of a violation of this Chapter
that materially prejudiced the rights of the grantor or another person. (Sec.
53)

Prior interest

(1) Meaning - a security interest created or provided for by an agreement or

other transaction that was made or entered into before the effectivity of this
Act and that had not been terminated before the effectivity of this Act, but
excludes a security interest that is renewed or extended by a security
agreement or other transaction made or entered into on or after the
effectivity of this Act. (Sec. 55)
(2) Creation of prior interest
(a) to be determined by prior laws.
(b) a prior interest remains effective between the parties
notwithstanding its creation did not comply with the creation
requirements of this Act. (Sec. 56)
(3) Perfection of Prior Interest
(a) A prior interest that was perfected under prior law continues to be
perfected under this Act until the earlier of:
(1) The time the prior interest would cease to be
perfected under prior law; and
(2) The expiration of the transitional period.
(b) If the perfection requirements of this Act are satisfied before the
perfection of a prior interest ceases in accordance with sub-section (a)
of this section, the prior interest continues to be perfected under this
Act from the time when it was perfected under the prior law.
(c) If the perfection requirements of this Act are not satisfied before
the perfection of a prior interest ceases in accordance with subsection
(a) of this section, the prior interest is perfected only from the time it is
perfected under this Act.
(d) A written agreement between a grantor and a secured creditor
creating a prior interest is sufficient to constitute authorization by the
grantor of the registration of a notice covering assets described in that
agreement under this Act.

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(e) If a prior interest referred to in sub-section (b) of this section was

perfected by the registration of a notice under prior law, the time of
registration under the prior law shall be the time to be used for
purposes of applying the priority rules of this Act. (Sec. 57)
(4) Priority of Prior Interest.—

(a) The priority of a prior interest as against the rights of a competing

claimant is determined by the prior law if:
(a) The security interest and the rights of all competing
claimant arose before the effectivity of this Act; and
(b) The priority status of these rights has not changed since
the effectivity of this Act.
(b) For purposes of sub-section (a)(2) of this section, the priority
status of a prior interest has changed only if:
(a) It was perfected when this Act took effect, but ceased to be
perfected; or
(b) It was not perfected under prior law when this Act took
effect, and was only perfected under this Act. (Sec. 58)
(5) Enforcement of Prior Interest
(a) If any step or action has been taken to enforce a prior
interest before the effectivity of this Act, enforcement may
continue under prior law or may proceed under this Act.
(b) Subject to sub-section (a) of this section, prior law shall
apply to a matter that is the subject of proceedings before a
court before the effectivity of this Act. (Sec. 59)

Retention of Collateral by Secured Creditor.—

(a) After default, the secured creditor may propose to the debtor and grantor
to take all or part of the collateral in total or partial satisfaction of the secured
obligation, and shall send a proposal to:
(1) The debtor and the grantor;
(2) Any other secured creditor or lien holder who, five (5) days before
the proposal is sent to the debtor and the grantor, perfected its
security interest or lien by registration; and

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(3) Any other person with an interest in the collateral who has given a
written notification to the secured creditor before the proposal is sent
to the debtor and the grantor.
(b) The secured creditor may retain the collateral in the case of:
(1) A proposal for the acquisition of the collateral in full satisfaction of
the secured obligation, unless the secured creditor receives an
objection in writing from any person entitled to receive such a
proposal within twenty (20) days after the proposal is sent to that
person; or
(2) A proposal for the acquisition of the collateral in partial satisfaction
of the secured obligation, only if the secured creditor receives the
affirmative consent of each addressee of the proposal in writing within
twenty (20) days after the proposal is sent to that person. (Sec. 54)

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GUARANTY
(Civil Code)

Definition

By guaranty a person, called the guarantor, binds himself to the creditor to

fulfill the obligation of the principal debtor in case the latter should fail to
do so. (Art. 2047, Civil Code)

Nature and extent of guaranty

A guaranty is gratuitous, unless there is a stipulation to the contrary. (Art.
2048)
A guaranty may be conventional, legal or judicial, gratuitous, or by onerous
title.
It may also be constituted, not only in favor of the principal debtor, but also in
favor of the other guarantor, with the latter's consent, or without his
knowledge, or even over his objection. (Art. 2051)

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A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance
of a voidable or an unenforceable contract. It may also guarantee a natural
obligation. (1824a) (Art. 2052)

A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured. (Art. 2053)

A guarantor may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to
the limits of that of the debtor. (Art. 2054)

A guaranty is not presumed; it must be express and cannot extend to more

than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation,
but also all its accessories, including the judicial costs, provided with respect
to the latter, that the guarantor shall only be liable for those costs incurred
after he has been judicially required to pay. (Art. 2056)

Parties to a guaranty

(1) Guarantor (2) Principal debtor & (3) Creditor

Benefit of excussion

The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor. ((Art. 2058)

The excussion shall not take place:

(1) If the guarantor has expressly renounced it;

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(2) If he has bound himself solidarily with the debtor;

(3) In case of insolvency of the debtor;

(4) When he has absconded, or cannot be sued within the Philippines

unless he has left a manager or representative;

(5) If it may be presumed that an execution on the property of the

principal debtor would not result in the satisfaction of the obligation.
(Art. 2059)

In order that the guarantor may make use of the benefit of exclusion, he
must set it up against the creditor upon the latter's demand for payment from
him, and point out to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the debt. ((Art. 2060)

The guarantor having fulfilled all the conditions required in the preceding
article, the creditor who is negligent in exhausting the property pointed out
shall suffer the loss, to the extent of said property, for the insolvency of the
debtor resulting from such negligence. ((Art. 2061)

In every action by the creditor, which must be against the principal debtor
alone, except in the cases mentioned in Article 2059, the former shall ask the
court to notify the guarantor of the action. The guarantor may appear so that
he may, if he so desire, set up such defenses as are granted him by law. The
benefit of excussion mentioned in Article 2058 shall always be unimpaired,
even if judgment should be rendered against the principal debtor and the
guarantor in case of appearance by the latter. ((Art. 2062)

A compromise between the creditor and the principal debtor benefits the
guarantor but does not prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice the principal
debtor. ((Art. 2063)

The guarantor of a guarantor shall enjoy the benefit of excussion, both with
respect to the guarantor and to the principal debtor. ((Art. 2064)

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Should there be several guarantors of only one debtor and for the same
debt, the obligation to answer for the same is divided among all. The creditor
cannot claim from the guarantors except the shares which they are
respectively bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same cases
and for the same reasons as the benefit of excussion against the principal
debtor. ((Art. 2065)

The guarantor who pays for a debtor must be indemnified by the latter. The
indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor;
(3) The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him;
(4) Damages, if they are due. (Art. 2066)

The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has really paid. ((Art. 2067)

If the guarantor should pay without notifying the debtor, the latter may
enforce against him all the defenses which he could have set up against the
creditor at the time the payment was made. (Art. 2068)

If the debt was for a period and the guarantor paid it before it became due,
he cannot demand reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor. ((Art. 2069)

If the guarantor has paid without notifying the debtor, and the latter not being
aware of the payment, repeats the payment, the former has no remedy
whatever against the debtor, but only against the creditor. Nevertheless, in
case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous
event from advising the debtor of the payment, and the creditor becomes
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insolvent, the debtor shall reimburse the guarantor for the amount paid.
((Art. 2070)

The guarantor, even before having paid, may proceed against the principal
debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty
within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of
the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed
period for its maturity, unless it be of such nature that it cannot be
extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends
to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the debtor.
(Art. 2071)

If one, at the request of another, becomes a guarantor for the debt of a third
person who is not present, the guarantor who satisfies the debt may sue
either the person so requesting or the debtor for reimbursement. (Art. 2072)

When there are two or more guarantors of the same debtor and for the same
debt, the one among them who has paid may demand of each of the others
the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the
others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has
been made by virtue of a judicial demand or unless the principal debtor is
insolvent. ((Art. 2073)

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In the case of the preceding article, the co-guarantors may set up against the
one who paid, the same defenses which would have pertained to the
principal debtor against the creditor, and which are not purely personal to the
debtor. ((Art. 2074)

A sub-guarantor, in case of the insolvency of the guarantor for whom he

bound himself, is responsible to the co-guarantors in the same terms as the
guarantor. ((Art. 2075))

The obligation of the guarantor is extinguished at the same time as that of

the debtor, and for the same causes as all other obligations. (If the guarantor
should pay without notifying the debtor, the latter may enforce against him all
the defenses which he could have set up against the creditor at the time the
payment was made. (If the guarantor should pay without notifying the debtor,
the latter may enforce against him all the defenses which he could have set
up against the creditor at the time the payment was made. (Art. 2076)

If the creditor voluntarily accepts immovable or other property in payment of

the debt, even if he should afterwards lose the same through eviction, the
guarantor is released. (Art. 2077)

A release made by the creditor in favor of one of the guarantors, without the
consent of the others, benefits all to the extent of the share of the guarantor
to whom it has been granted. (Art. 2078)

An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein. (Art. 2079)

The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preference of the latter. ((Art. 2080)

The guarantor may set up against the creditor all the defenses which pertain
to the principal debtor and are inherent in the debt; but not those that are
personal to the debtor. (Art. 2081)
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Legal and judicial bonds

The bondsman who is to be offered in virtue of a provision of law or of a

judicial order shall have the qualifications prescribed in Article 2056 and in
special laws. (Art. 2082)

If the person bound to give a bond in the cases of the preceding article,
should not be able to do so, a pledge or mortgage considered sufficient to
cover his obligation shall be admitted in lieu thereof. (Art. 2083)

A judicial bondsman cannot demand the exhaustion of the property of the

principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of the
property of the debtor of the surety. (Art. 2084)

Surety

A contract of suretyship is an agreement whereby a party called the Surety

guarantees the performance by another party called the Principal or Obligor
of an obligation or undertaking in favor of a third party called the Obligee. It
includes official recognizances, stipulations, bonds or undertakings issued by
any company by virtue of Act No. 536, as amended by Act No. 2206. (Sec.
177, Insurance Code of the Philippines)

Form of surety

1. Contract bonds – These are connected with construction and supply

contracts. They are for the protection of the owner against a possible default
by the contractor or his possible failure to pay materials, men, laborers and
sub-contractors. The position of surety, therefore, is to answer for a failure
of the principal to perform in accordance with the terms and specifications of
the contract. There may be two bonds:
a. Performance bond – One covering the faithful performance of the
contract; and
b. Payment bond – One covering the payment of laborers and
material men.

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2. Fidelity bonds –They pay an employer for loss growing out of a dishonest
act of his employee.
For the purposes of underwriting, they are classified as:
a. Industrial bond – One required by private employers to cover loss
through dishonesty of employees; and
b. Public official bond – One required of public officers for the faithful
performances of their duties and as a condition of entering upon the
duties of their offices.
3. Judicial bonds – They are those which are required in connection with
judicial proceedings.

Obligations secured

The liability of the surety or sureties shall be joint and several with the obligor
and shall be limited to the amount of the bond. It is determined strictly by the
terms of the contract of suretyship in relation to the principal contract
between the obligor and the obligee.
The extent of surety‘s liability is determined by the language of the
suretyship contract or bond itself. It cannot be extended by implications
beyond the terms of the contract. Having accepted the bond, the creditor is
bound by the recital in the surety bond that the terms and conditions of
distributorship contract be reduced in writing or at the very least
communicated in writing to the surety. Such non- compliance by the creditor
impacts not on the validity or legality of the surety-contract but on the
creditor‘s right to demand performance. (Sec. 178, Insurance Code; First
Lepanto–Taisho Insurance Corporation vs. Chevron Philippines, G.R.
No. 177839, January 18, 2012)

Surety distinguished from standby letter of credit

A contract of suretyship is an agreement whereby a party called the Surety
guarantees the performance by another party called the Principal or Obligor
of an obligation or undertaking in favor of a third party called the Obligee. It
includes official recognizances, stipulations, bonds or undertakings issued by
any company by virtue of Act No. 536, as amended by Act No. 2206. (Sec.
177, Insurance Code of the Philippines)
Standby Letter of Credit is a security arrangement for the performance of
certain obligations. It can be drawn against only if another business
transaction is not performed. It may be issued in lieu of a performance bond.
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Surety distinguished from guaranty

If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case
the contract is called a suretyship. (1822a)

Surety distinguished from joint and solidary obligations

The concurrence of two or more creditors or of two or more debtors in one

and the same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render, entire
compliance with the prestation. There is a solidary liability only: (a)
when the obligation expressly so states, or (b) when the law or (c)
the nature of the obligation requires solidarity. (Art. 1207, Civil Code)

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TRUTH IN LENDING ACT

(RA No. 3765)

Policy of the law

The purpose of the law is to protect its citizens from a lack of awareness of
the true cost of credit to the user by assuring a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the
national economy.

The rationale of the Truth in Lending Act is to protect users of credit

from a lack of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the
loaned amount, and the like. The law thereby seeks to protect debtors
by permitting them to fully appreciate the true cost of their loan, to
enable them to give full consent to the contract, and to properly evaluate
their options in arriving at business decisions. Upholding UCPB‘s claim of
substantial compliance would defeat these purposes of the Truth in
Lending Act. The belated discovery of the true cost of credit will too

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often not be able to reverse the ill effects of an already

consummated business decision. (UCPV vs Spouses Samuel and
Beluso, G.R. No. 159912, August 17, 2007)

Obligation of creditors to person to whom credit is extended

Any creditor shall furnish to each person to whom credit is extended,

prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules
and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be

acquired;

(2) the amounts, if any, to be credited as down payment and/or

trade-in;

(3) the difference between the amounts set forth under clauses (1)
and (2);

(4) the charges, individually itemized, which are paid or to be paid

by such person in connection with the transaction but which are not
incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos;

and

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation. (Sec. 4)

Consequences of non-compliance with obligation

Any creditor who in connection with any credit transaction fails to

disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance charged
required by such creditor in connection with such transaction,
whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty may
be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. In
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any action under this subsection in which any person is entitled to a

recovery, the creditor shall be liable for reasonable attorney's fees and
court costs as determined by the court.

(b) Except as specified in subsection (a) of this section, nothing

contained in this Act or any regulation contained in this Act or any
regulation thereunder shall affect the validity or enforceability of any
contract or transactions.

(c) Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,000
or more than P5,000 or imprisonment for not less than 6 months, nor
more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the

Philippine Government or any agency or any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under

this Act to the effect that a defendant has willfully violated this Act shall be
prima facie evidence against such defendant in an action or proceeding
brought by any other party against such defendant under this Act as to
all matters respecting which said judgment would be an estoppel as
between the parties thereto. (Sec. 6)

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INTELLECTUAL PROPERTY CODE

(RA 8293, as amended by RA 10372)

Policy of the law

To protect and secure the exclusive rights of scientists, inventors, artists and
other gifted citizens to their intellectual property and creations, particularly
those beneficial to the people for such periods provided in the law. (Sec. 2)

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The term ―intellectual property rights‖ consists of:

(a) Copyright and Related Rights;
(b) Trademarks and Service Marks;
(c) Geographic Indications;
(d) Industrial Designs;
(e) Patents;
(f) Layout-Designs (Topographies) of Integrated Circuits; and
(g) Protection of Undisclosed Information (n, TRIPS).

Differences between copyright, trademarks, and patents

Trademark, copyright, and patents are different intellectual property rights

that cannot be interchanged with one another.
A trademark is any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall include a
stamped or marked container of goods. In relation thereto.
A trade name means the name or designation identifying or distinguishing
an enterprise.
The scope of a copyright is confined to literary and artistic works which
are original intellectual creations in the literary and artistic domain protected
from the moment of creation.
Patentable inventions, on the other hand, refer to any technical solution of
a problem in any field of human activity which is new, involves an inventive
step and is industrially applicable. (Kho vs CA, GR No. 115758, March 11,
2002)

Technology transfer arrangements

The term ―technology transfer arrangements‖ refers to contracts or

agreements involving the transfer of systematic knowledge for the
manufacture of a product, the application of a process, or rendering of a
service including management contracts; and the transfer, assignment or
licensing of all forms of intellectual property rights, including licensing of
computer software except computer software developed for mass market.
(Sec. 4.2)
Patentable inventions

Any technical solution of a problem in any field of human activity which is:
(a) new, (b) involves an inventive step and (c) is industrially applicable

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shall be patentable. It may be, or may relate to: (i) a product, or (ii)
process, or (iii) an improvement of any of the foregoing. (Sec. 21)

Non-Patentable Inventions - The following shall be excluded from patent

protection:

(1) Discoveries, scientific theories and mathematical methods, and in the

case of drugs and medicines, the mere discovery of a new form or new
property of a known substance which does not result in the enhancement of
the known efficacy of that substance, or the mere discovery of any new
property or new use for a known substance, or the mere use of a known
process unless such known process results in a new product that employs at
least one new reactant.

For the purpose of this clause, salts, esters, ethers, polymorphs, metabolites,
pure form, particle size, isomers, mixtures of isomers, complexes,
combinations, and other derivatives of a known substance shall be
considered to be the same substance, unless they differ significantly in
properties with regard to efficacy;

(2) Schemes, rules and methods of performing mental acts, playing games
or doing business, and programs for computers;

(3) Methods for treatment of the human or animal body by surgery or

therapy and diagnostic methods practiced on the human or animal body.
This provision shall not apply to products and composition for use in any of
these methods;

(4) Plant varieties or animal breeds or essentially biological process for the
production of plants or animals. This provision shall not apply to micro-
organisms and non-biological and microbiological processes.

Provisions under this subsection shall not preclude Congress to consider the
enactment of a law providing sui generis protection of plant varieties and
animal breeds and a system of community intellectual rights protection:

(5) Aesthetic creations; and

(6) Anything which is contrary to public order or morality. (Sec. 22)

Ownership of a patent

(a) Right to a patent

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The right to a patent belongs to the inventor, his heirs, or assigns. When two
(2) or more persons have jointly made an invention, the right to a patent shall
belong to them jointly. (Sec. 28)

(b) First-to-file rule

If two (2) or more persons have made the invention separately and
independently of each other, the right to the patent shall belong to the person
who filed an application for such invention, or where two or more applications
are filed for the same invention, to the applicant who has the earliest filing
date or, the earliest priority date. (Sec. 29)

(c) Invention created pursuant to a commission

(i) The person who commissions the work shall own the patent, unless
otherwise provided in the contract.
In case the employee made the invention in the course of his employment
contract, the patent shall belong to:

(ii) The employee, if the inventive activity is not a part of his regular duties
even if the employee uses the time, facilities and materials of the employer.

(iii) The employer, if the invention is the result of the performance of his
regularly-assigned duties, unless there is an agreement, express or implied,
to the contrary. (Sec. 30)

(d) Right of priority

An application for patent filed by any person who has previously applied for
the same invention in another country which by treaty, convention, or law
affords similar privileges to Filipino citizens, shall be considered as filed as of
the date of filing the foreign application: Provided, That: (a) the local
application expressly claims priority; (b) it is filed within twelve (12) months
from the date the earliest foreign application was filed; and (c) a certified
copy of the foreign application together with an English translation is filed
within six (6) months from the date of filing in the Philippines. (Sec. 31)
(e) Grounds for cancellation of a patent

Any interested person may, upon payment of the required fee, petition to
cancel the patent or any claim thereof, or parts of the claim, on any of the
following grounds:
(a) That what is claimed as the invention is not new or patentable;
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(b) That the patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out by any person
skilled in the art; or

(c) That the patent is contrary to public order or morality.

Where the grounds for cancellation relate to some of the claims or

parts of the claim, cancellation may be effected to such extent only.
(Sec. 61)

(f) Remedy of the true and actual inventor

If a person, who was deprived of the patent without his consent or through
fraud is declared by final court order or decision to be the true and actual
inventor, the court shall order for his substitution as patentee, or at the option
of the true inventor, cancel the patent, and award actual and other damages
in his favor if warranted by the circumstances. (Sec. 68)
(g) Rights conferred by a patent

The applicant shall have all the rights of a patentee under Sec. 76 against
any person who, without his authorization, exercised any of the rights
conferred under Sec. 71 of this Act in relation to the invention claimed in the
published patent application, as if a patent had been granted for that
invention: Provided, That the said person had:
(1) Actual knowledge that the invention that he was using was the subject
matter of a published application; or

(2) Received written notice that the invention that he was using was the
subject matter of a published application being identified in the said notice by
its serial number: Provided, That the action may not be filed until after the
grant of a patent on the published application and within four (4) years
from the commission of the acts complained of. (Sec. 46)

(h) Rights Conferred by Patent

A patent shall confer on its owner the following exclusive rights:

(1) Where the subject matter of a patent is a product, to restrain, prohibit

and prevent any unauthorized person or entity from making, using, offering
for sale, selling or importing that product;

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(2) Where the subject matter of a patent is a process, to restrain, prevent or

prohibit any unauthorized person or entity from using the process, and from
manufacturing, dealing in, using, selling or offering for sale, or importing any
product obtained directly or indirectly from such process.

(3). Patent owners shall also have the right to assign, or transfer by
succession the patent, and to conclude licensing contracts for the same.
(Sec. 71)

(i) Limitations of patent rights

(1) Prior user

Notwithstanding Sec. 72 hereof, any prior user, who, in good faith was using
the invention or has undertaken serious preparations to use the invention in
his enterprise or business, before the filing date or priority date of the
application on which a patent is granted, shall have the right to continue the
use thereof as envisaged in such preparations within the territory where the
patent produces its effect.

(2) The right of the prior user may only be transferred or assigned together
with his enterprise or business, or with that part of his enterprise or business
in which the use or preparations for use have been made. (Sec. 73)

(m) Use by the government

1. A government agency or third person authorized by the Government may

exploit the invention even without agreement of the patent owner where:
(a) The public interest, in particular, national security, nutrition, health
or the development of other sectors, as determined by the appropriate
agency of the government, so requires; or

(b) A judicial or administrative body has determined that the manner

of exploitation, by the owner of the patent or his licensee is anti-
competitive; or

(c) In the case of drugs and medicines, there is a national emergency

or other circumstance of extreme urgency requiring the use of the
invention; or

(d) In the case of drugs and medicines, there is public non-

commercial use of the patent by the patentee, without satisfactory
reason; or

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(e) In the case of drugs and medicines, the demand for the patented
article in the Philippines is not being met to an adequate extent and
on reasonable terms, as determined by the Secretary of the
Department of Health.

2. Unless otherwise provided herein, the use by the Government, or third

person authorized by the Government shall be subject, where applicable, to
the following provisions:

(a) In situations of national emergency or other circumstances of

extreme urgency as provided under Sec. 74, 1 (c), the right holder
shall be notified as soon as reasonably practicable;

(b) In the case of public non-commercial use of the patent by the

patentee, without satisfactory reason, as provided under Sec. 74.1
(d), the right holder shall be informed promptly: Provided, That, the
Government or third person authorized by the Government, without
making a patent search, knows or has demonstrable ground to know
that a valid patent is or will be used by or for the Government;

(c) If the demand for the patented article in the Philippines is not
being met to an adequate extent and on reasonable terms as
provided under Sec. 74.1

(d) the right holder shall be informed promptly;

(e) The scope and duration of such use shall be limited to the
purpose for which it was authorized;

(f) Such use shall be non-exclusive;

(g) The right holder shall be paid adequate remuneration in the

circumstances of each case, taking into account the economic value
of the authorization; and

(h) The existence of a national emergency or other circumstances of

extreme urgency, referred to under Sec. 74.1 (c), shall be subject to
the determination of the President of the Philippines for the purpose of
determining the need for such use or other exploitation, which shall be
immediately executory.

3. All cases arising from the implementation of this provision shall be

cognizable by courts with appropriate jurisdiction provided by law. No court,
except the Supreme Court of the Philippines, shall issue any temporary
restraining order or preliminary injunction or such other provisional remedies
that will prevent its immediate execution.

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4. The Intellectual Property Office (IPO), in consultation with the appropriate

government agencies, shall issue the appropriate implementing rules and
regulations for the use or exploitation of patented inventions as contemplated
in this section within one hundred twenty (120) days after the effectivity of
this law. (Sec. 74)

(n). Patent infringement

(n.1) Tests in patent infringement

i. Literal infringement

―Resort must be had, in the first instance, to the words of the claim. If
accused matter clearly falls within the claim, infringement is made out and
that is the end of it." To determine whether the particular item falls within the
literal meaning of the patent claims, the court must juxtapose the claims of
the patent and the accused product within the overall context of the claims
and specifications, to determine whether there is exact identity of all material
elements.‖ (Pascual Godines vs CA, GR No. 97343, Sept. 13, 1993)

ii. Doctrine of equivalents

"An infringement also occurs when a device appropriates a prior invention by
incorporating its innovative concept and, albeit with some modification and
change, performs substantially the same function in substantially the same
way to achieve substantially the same result." (Pascual Godines vs CA, GR
No. 97343, Sept.13, 1993)

(n.2) Civil action for infringement

1. The making, using, offering for sale, selling, or importing a patented

product or a product obtained directly or indirectly from a patented process,
or the use of a patented process without the authorization of the patentee
constitutes patent infringement: Provided, That, this shall not apply to
instances covered by Sec. 72.1 and 72.4 (Limitations of Patent Rights); Sec.
74 (Use of Invention by Government), Sec. 93.6 (Compulsory Licensing);
and Sec. 93-A (Procedures on Issuance of a Special Compulsory License
under the TRIPS Agreement) of this Code.

2. Any patentee, or anyone possessing any right, title or interest in and to

the patented invention, whose rights have been infringed, may bring a civil
action before a court of competent jurisdiction, to recover from the infringer

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such damages sustained thereby, plus attorney‘s fees and other expenses of
litigation, and to secure an injunction for the protection of his rights.

3. If the damages are inadequate or cannot be readily ascertained with

reasonable certainty, the court may award by way of damages a sum
equivalent to reasonable royalty.

4. The court may, according to the circumstances of the case, award

damages in a sum above the amount found as actual damages sustained:
Provided, That the award does not exceed three (3) times the amount of
such actual damages.

5. The court may, in its discretion, order that the infringing goods, materials
and implements predominantly used in the infringement be disposed of
outside the channels of commerce or destroyed, without compensation.

6. Anyone who actively induces the infringement of a patent or provides the

infringer with a component of a patented product or of a product produced
because of a patented process knowing it to be especially adopted for
infringing the patented invention and not suitable for substantial non-
infringing use shall be liable as a contributory infringer and shall be jointly
and severally liable with the infringer. (Sec. 76)

(n.3) Criminal Action for Repetition of Infringement

If infringement is repeated by the infringer or by anyone in connivance with

him after finality of the judgment of the court against the infringer, the
offenders shall, without prejudice to the institution of a civil action for
damages, be criminally liable therefor and, upon conviction, shall suffer
imprisonment for the period of not less than six (6) months but not more than
three (3) years and/or a fine of not less than one hundred thousand pesos
(P100,000) but not more than three hundred thousand pesos (P300,000), at
the discretion of the court. The criminal action herein provided shall
prescribe in three (3) years from date of the commission of the crime. (Sec.
84)
(n.4) Prescriptive period

No damages can be recovered for acts of infringement committed more than

four (4) years before the institution of the action for infringement. (Sec. 79)

(n.5) Defenses in action for infringement

In an action for infringement, the defendant, in addition to other defenses

available to him, may show the invalidity of the patent, or any claim thereof,

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on any of the grounds on which a petition of cancellation can be brought

under Section 61 hereof. (Sec. 81)

(o) Licensing

(1) Voluntary

To encourage the transfer and dissemination of technology, prevent or

control practices and conditions that may in particular cases constitute an
abuse of intellectual property rights having an adverse effect on competition
and trade, all technology transfer arrangements shall comply with the
provisions of this Chapter. (Sec. 85)
b. Compulsory

Grounds for Compulsory Licensing

The Director General of the Intellectual Property Office may grant a license
to exploit a patented invention, even without the agreement of the patent
owner, in favor of any person who has shown his capability to exploit the
invention, under any of the following circumstances:

1. National emergency or other circumstances of extreme urgency;

2. Where the public interest, in particular, (a) national security, (b) nutrition,
(c) health or (d) the development of other vital sectors of the national
economy as determined by the appropriate agency of the Government, so
requires; or

3. Where a judicial or administrative body has determined that the manner

of exploitation by the owner of the patent or his licensee is anti-competitive;
or
4. In case of public non-commercial use of the patent by the patentee,
without satisfactory reason;

5. If the patented invention is not being worked in the Philippines on a

commercial scale, although capable of being worked, without satisfactory
reason: Provided, That the importation of the patented article shall
constitute working or using the patent. (Sec. s. 34, 34-A, 34-B, R.A. No.
165a) and

6. Where the demand for patented drugs and medicines is not being met to
an adequate extent and on reasonable terms, as determined by the
Secretary of the Department of Health. (Sec. 93)

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(p) Assignment and transmission of rights

Patents or applications for patents and invention to which they relate, shall
be protected in the same way as the rights of other property under the Civil
Code.
Inventions and any right, title or interest in and to patents and inventions
covered thereby, may be assigned or transmitted by inheritance or bequest
or may be the subject of a license contract. (Sec. 103)

An assignment may be of the entire right, title or interest in and to the patent
and the invention covered thereby, or of an undivided share of the entire
patent and invention, in which event the parties become joint owners thereof.
An assignment may be limited to a specified territory. (Sec. 104)

The assignment must be in writing, acknowledged before a notary public or

other officer authorized to administer oath or perform notarial acts, and
certified under the hand and official seal of the notary or such other officer.
(Sec. 105)

The Office shall record assignments, licenses and other instruments relating
to the transmission of any right, title or interest in and to inventions, and
patents or application for patents or inventions to which they relate, which
are presented in due form to the Office for registration, in books and records
kept for the purpose. The original documents together with a signed
duplicate thereof shall be filed, and the contents thereof should be kept
confidential. If the original is not available, an authenticated copy thereof in
duplicate may be filed. Upon recording, the Office shall retain the duplicate,
return the original or the authenticated copy to the party who filed the same
and notice of the recording shall be published in the IPO Gazette.

Such instruments shall be void as against any subsequent purchaser or

mortgagee for valuable consideration and without notice, unless, it is so
recorded in the Office, within three (3) months from the date of said
instrument, or prior to the subsequent purchase or mortgage. (Sec. 106)

Trademarks

1. Definitions of marks, collective marks, and trade names

(a) ―Mark‖ means any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall include a
stamped or marked container of goods; (Sec. 121.1)

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(b) ―Collective mark‖ means any visible sign designated as such in the
application for registration and capable of distinguishing the origin or any
other common characteristic, including the quality of goods or services of
different enterprises which use the sign under the control of the registered
owner of the collective mark; (Sec. 121.2)

(c). ―Trade name‖ means the name or designation identifying or

distinguishing an enterprise; (Sec. 121.3)

2. Acquisition of ownership of mark

Section 122. How Marks are Acquired. — The rights in a mark shall be
acquired through registration made validly in accordance with the provisions
of this law. (Sec. 122)

3. Acquisition of ownership of trade name

A name or designation may not be used as a trade name if by its nature or

the use to which such name or designation may be put, it is contrary to
public order or morals and if, in particular, it is liable to deceive trade circles
or the public as to the nature of the enterprise identified by that name. (Sec.
165.1)

(a) Notwithstanding any laws or regulations providing for any obligation to

register trade names, such names shall be protected, even prior to or without
registration, against any unlawful act committed by third parties.

(b) In particular, any subsequent use of the trade name by a third party,
whether as a trade name or a mark or collective mark, or any such use of a
similar trade name or mark, likely to mislead the public, shall be deemed
unlawful. (Sec. 165.2)

The remedies provided for in Sections 153 to 156 and Sections 166 and 167
shall apply mutatis mutandis. (Sec. 165.3)

Any change in the ownership of a trade name shall be made with the transfer
of the enterprise or part thereof identified by that name. The provisions of
Sub-sections 149.2 to 149.4 shall apply mutatis mutandis. (Sec. 165.4)

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Non-registrable marks

A mark cannot be registered if it:

(a) Consists of immoral, deceptive or scandalous matter, or matter which
may disparage or falsely suggest a connection with persons, living or dead,
institutions, beliefs, or national symbols, or bring them into contempt or
disrepute;

(b) Consists of the flag or coat of arms or other insignia of the Philippines or
any of its political subdivisions, or of any foreign nation, or any simulation
thereof;

(c) Consists of a name, portrait or signature identifying a particular living

individual except by his written consent, or the name, signature, or portrait of
a deceased President of the Philippines, during the life of his widow, if any,
except by written consent of the widow;

(d) Is identical with a registered mark belonging to a different proprietor or a

mark with an earlier filing or priority date, in respect of:

(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or
cause confusion;

(e) Is identical with, or confusingly similar to, or constitutes a translation of a

mark which is considered by the competent authority of the Philippines to be
well-known internationally and in the Philippines, whether or not it is
registered here, as being already the mark of a person other than the
applicant for registration, and used for identical or similar goods or services:
Provided, That in determining whether a mark is well-known, account shall
be taken of the knowledge of the relevant sector of the public, rather than of
the public at large, including knowledge in the Philippines which has been
obtained as a result of the promotion of the mark;

(f) Is identical with, or confusingly similar to, or constitutes a translation of a

mark considered well-known in accordance with the preceding paragraph,
which is registered in the Philippines with respect to goods or services which
are not similar to those with respect to which registration is applied for:
Provided, That use of the mark in relation to those goods or services would
indicate a connection between those goods or services, and the owner of the
registered mark: Provided, further, That the interests of the owner of the
registered mark are likely to be damaged by such use;

(g) Is likely to mislead the public, particularly as to the nature, quality,

characteristics or geographical origin of the goods or services;
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(h) Consists exclusively of signs that are generic for the goods or services
that they seek to identify;

(i) Consists exclusively of signs or of indications that have become

customary or usual to designate the goods or services in everyday language
or in bona fide and established trade practice;

(j) Consists exclusively of signs or of indications that may serve in trade to

designate the kind, quality, quantity, intended purpose, value, geographical
origin, time or production of the goods or rendering of the services, or other
characteristics of the goods or services;

(k) Consists of shapes that may be necessitated by technical factors or by

the nature of the goods themselves or factors that affect their intrinsic value;

(l) Consists of color alone, unless defined by a given form; or

(m) Is contrary to public order or morality. (Sec. 123.1)

As regards signs or devices mentioned in paragraphs (j), (k), and (l), nothing
shall prevent the registration of any such sign or device which has become
distinctive in relation to the goods for which registration is requested as a
result of the use that have been made of it in commerce in the Philippines.
The Office may accept as prima facie evidence that the mark has become
distinctive, as used in connection with the applicant‘s goods or services in
commerce, proof of substantially exclusive and continuous use thereof by
the applicant in commerce in the Philippines for five (5) years before the date
on which the claim of distinctiveness is made. (Sec. 123.2)

The nature of the goods to which the mark is applied will not constitute an
obstacle to registration. (Sec. 123.3)

Prior use of mark as a requirement

The applicant or the registrant shall file a declaration of actual use of the
mark with evidence to that effect, as prescribed by the Regulations within
three (3) years from the filing date of the application. Otherwise, the
application shall be refused or the mark shall be removed from the Register
by the Director. (Sec. 124.2)
Tests to determine confusing similarity between marks

(a) Dominancy test

If the competing trademark contains the main or essential or dominant

features of another and confusion and deception is likely to result,
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infringement takes place. (Asia Brewery Inc., vs CA, GR No. 103543, July
5, 1993)
(b) Holistic test

It considers the entirety of the marks, including the labels and packaging, in
determining confusing similarity. The focus is not only on the predominant
words but also on the features appearing on the labels. (Diaz vs People,
691 SCRA 139)
(c) Idem sonans

A mark with a different spelling but is similar in sound with a registered mark
when read, may be ruled as being confusingly similar with the said registered
mark or senior mark. (Amigo Manufacturing Inc. vs. Cluett Peabody Co.,
Inc., GR No. 139300, March 14, 2001)
Internationally well-known marks

The persons who may question the mark (that is, oppose registration,
petition for the cancellation thereof, sue for unfair competition) include
persons whose internationally well-known mark, whether or not registered, is
identical with or confusingly similar to or constitutes a translation of a mark
that is sought to be registered or is actually registered.
There is also protection for internationally well-known marks registered in the
Philippines for goods that are not similar with respect to which registration is
applied for.
The Supreme Court ruled that foreign marks that are not registered are still
accorded protection against infringement and/or unfair competition under the
Paris Convention and Nice Convention. (Ecole de Cuisine Manille versus
Renau Contreau & Cie, G.R. No. 185830, June 5, 2013)
Indeed, Sec. 123.1(e) of R.A. No. 8293 now categorically states that "a mark
which is considered by the competent authority of the Philippines to be well-
known internationally and in the Philippines, whether or not it is registered
here," cannot be registered by another in the Philippines. Sec. 123.1(e)
does not require that the well-known mark be used in commerce in the
Philippines, but only that it be well-known in the Philippines. Moreover, Rule
102 of the Rules and Regulations on Trademarks, Service Marks, Trade
Names and Marked or Stamped Containers, which implement R.A. No.
8293, provides:
―Rule 102. Criteria for determining whether a mark is well-known. In
determining whether a mark is well-known, the following criteria or any
combination thereof may be taken into account:
(a) the duration, extent and geographical area of any use of the mark,
in particular, the duration, extent and geographical area of any
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promotion of the mark, including advertising or publicity and the

presentation, at fairs or exhibitions, of the goods and/or services to
which the mark applies;
(b) the market share, in the Philippines and in other countries, of the
goods and/or services to which the mark applies;
(c) the degree of the inherent or acquired distinction of the mark;
(d) the quality-image or reputation acquired by the mark;
(e) the extent to which the mark has been registered in the world;
(f) the exclusivity of registration attained by the mark in the world;
(g) the extent to which the mark has been used in the world;
(h) the exclusivity of use attained by the mark in the world;
(i) the commercial value attributed to the mark in the world;
(j) the record of successful protection of the rights in the mark;
(k) the outcome of litigations dealing with the issue of whether the
mark is a well-known mark; and
(l) the presence or absence of identical or similar marks validly
registered for or used on identical or similar goods or services and
owned by persons other than the person claiming that his mark is a
well-known mark.
Since "any combination" of the foregoing criteria is sufficient to
determine that a mark is well-known, it is clearly not necessary that
the mark be used in commerce in the Philippines. Thus, while under
the ―territoriality principle‖ a mark must be used in commerce in the
Philippines to be entitled to protection, internationally well-known
marks are the exceptions to this rule.
Rights conferred by registration

Except in cases of importation of drugs and medicines allowed under Sec.

72.1 of this Act and of off-patent drugs and medicines, the owner of a
registered mark shall have the exclusive right to prevent all third parties not
having the owner‘s consent from using in the course of trade identical or
similar signs or containers for goods or services which are identical or similar
to those in respect of which the trademark is registered where such use
would result in a likelihood of confusion. In case of the use of an identical
sign for identical goods or services, a likelihood of confusion shall be
presumed.

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There shall be no infringement of trademarks or tradenames of

imported or sold patented drugs and medicines allowed under Sec.
72.1 of this Act, as well as imported or sold off-patent drugs and
medicines: Provided, That, said drugs and medicines bear the
registered marks that have not been tampered, unlawfully modified, or
infringed upon, under Sec. 155 of this Code. (Sec. 147.1)

The exclusive right of the owner of a well-known mark defined in Sub-section

123.1(e) which is registered in the Philippines, shall extend to goods and
services which are not similar to those in respect of which the mark is
registered: Provided, That use of that mark in relation to those goods or
services would indicate a connection between those goods or services and
the owner of the registered mark: Provided, further, That the interests of the
owner of the registered mark are likely to be damaged by such use. (Sec.
147.2)

Use of Indications by Third Parties for Purposes Other than those for
which the Mark is Used

Registration of the mark shall not confer on the registered owner the right to
preclude third parties from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact indications concerning the kind,
quality, quantity, destination, value, place of origin, or time of production or of
supply, of their goods or services: Provided, That such use is confined to the
purposes of mere identification or information and cannot mislead the public
as to the source of the goods or services. (Sec. 148)
Infringement

Any person who shall, without the consent of the owner of the registered
mark:
(1) Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant feature
thereof in connection with the sale, offering for sale, distribution, advertising
of any goods or services including other preparatory steps necessary to
carry out the sale of any goods or services on or in connection with which
such use is likely to cause confusion, or to cause mistake, or to deceive;
(Sec. 155.1) or

(2) Reproduce, counterfeit, copy or colorably imitate a registered mark or a

dominant feature thereof and apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages, wrappers, receptacles
or advertisements intended to be used in commerce upon or in connection
with the sale, offering for sale, distribution, or advertising of goods or
services on or in connection with which such use is likely to cause confusion,
or to cause mistake, or to deceive, shall be liable in a civil action for
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infringement by the registrant for the remedies hereinafter set forth:

Provided, That the infringement takes place at the moment any of the acts
stated in Sub-section 155.1 or this subsection are committed regardless of
whether there is actual sale of goods or services using the infringing
material. (Sec. 155.2)

Actions, and Damages and Injunction for Infringement

The owner of a registered mark may recover damages from any person who
infringes his rights, and the measure of the damages suffered shall be either
the reasonable profit which the complaining party would have made, had the
defendant not infringed his rights, or the profit which the defendant actually
made out of the infringement, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty, then the court may
award as damages a reasonable percentage based upon the amount of
gross sales of the defendant or the value of the services in connection with
which the mark or trade name was used in the infringement of the rights of
the complaining party. (Sec.156.1)

On application of the complainant, the court may impound during the

pendency of the action, sales invoices and other documents evidencing
sales. (Sec. 156.2)

In cases where actual intent to mislead the public or to defraud the

complainant is shown, in the discretion of the court, the damages may be
doubled. (Sec. 156.3)

The complainant, upon proper showing, may also be granted injunction.

(Sec. 156.4)

Requirement of notice

Damages; Requirement of Notice

In any suit for infringement, the owner of the registered mark shall not be
entitled to recover profits or damages unless the acts have been committed
with knowledge that such imitation is likely to cause confusion, or to cause
mistake, or to deceive. Such knowledge is presumed if: (a) the registrant
gives notice that his mark is registered by displaying with the mark the words
‗‖Registered Mark‖ or (b) the letter ‗R’ within a circle or (c) if the defendant
had otherwise actual notice of the registration. (Sec. 158)

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Penalties

Independent of the civil and administrative sanctions imposed by law, a

criminal penalty of imprisonment from two (2) years to five (5) years and a
fine ranging from fifty thousand pesos (P50,000) to two hundred thousand
pesos (P200,000), shall be imposed on any person who is found guilty of
committing any of the acts mentioned in Sec. 155, Sec. 168 and Sub-section
169.1. (Arts. 188 and 189, Revised Penal Code). [Sec. 170]
Unfair Competition, Rights, Regulation and Remedies
A person who has identified in the mind of the public the goods he
manufactures or deals in, his business or services from those of others,
whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will be
protected in the same manner as other property rights (Sec. 168.1)
.
Any person who shall employ deception or any other means contrary to good
faith by which he shall pass off the goods manufactured by him or in which
he deals, or his business, or services for those of the one having established
such goodwill, or who shall commit any acts calculated to produce said
result, shall be guilty of unfair competition, and shall be subject to an action
therefor. Sec. 168.2)

In particular, and without in any way limiting the scope of protection against
unfair competition, the following shall be deemed guilty of unfair
competition:

(a) Any person, who is selling his goods and gives them the general
appearance of goods of another manufacturer or dealer, either as to
the goods themselves or in the wrapping of the packages in which
they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence
purchasers to believe that the goods offered are those of a
manufacturer or dealer, other than the actual manufacturer or dealer,
or who otherwise clothes the goods with such appearance as shall
deceive the public and defraud another of his legitimate trade, or any
subsequent vendor of such goods or any agent of any vendor
engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any
other means calculated to induce the false belief that such person is
offering the services of another who has identified such services in the
mind of the public; or

(c) Any person who shall make any false statement in the course of
trade or who shall commit any other act contrary to good faith of a
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nature calculated to discredit the goods, business or services of

another. (Sec. 168.3)

The remedies provided by Sec. 156, 157 and 161 shall apply mutatis
mutandis. (Sec. 168.4)

Mutatis mutandis literally means ―with the necessary changes having been
made.” It is usually used when saying that a principle or rule is applicable to
another case that is similar or analogous.

Registration of marks under the Madrid Protocol

Coverage

Nationals of any of the contracting countries may, in all the other countries
party to this Agreement, secure protection for their marks applicable to
goods or services, registered in the country of origin, by filing the said marks
at the International Bureau of Intellectual Property (hereinafter
designated as ―the International Bureau‖) referred to in the Convention
establishing the World Intellectual Property Organization (hereinafter
designated as ―the Organization‖), through the intermediary of the Office of
the said country of origin. (Art. 1, (2))
Rights conferred [Effects of International Registration]

(1) From the date of the registration so effected at the International Bureau
in accordance with the provisions of Articles 3 and 3ter, the protection of the
mark in each of the contracting countries concerned shall be the same as if
the mark had been filed therein direct. The indication of classes of goods or
services provided for in Article 3 shall not bind the contracting countries with
regard to the determination of the scope of the protection of the mark.
(2) Every mark which has been the subject of an international registration
shall enjoy the right of priority provided for by Art. 4 of the Paris Convention
for the Protection of Industrial Property, without requiring compliance with the
formalities prescribed in Section D of that Article. (Art. 4)

Requirements for registration [Contents of Application for International

Registration]

(1) Every application for international registration must be presented on the

form prescribed by the Regulations; the Office of the country of origin of the
mark shall certify that the particulars appearing in such application
correspond to the particulars in the national register, and shall mention the
dates and numbers of the filing and registration of the mark in the country of
origin and also the date of the application for international registration.
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(2) The applicant must indicate the goods or services in respect of which
protection of the mark is claimed and also, if possible, the corresponding
class or classes according to the classification established by the Nice
Agreement concerning the International Classification of Goods and Services
for the Purposes of the Registration of Marks. If the applicant does not give
such indication, the International Bureau shall classify the goods or services
in the appropriate classes of the said classification. The indication of classes
given by the applicant shall be subject to control by the International Bureau,
which shall exercise the said control in association with the national Office. In
the event of disagreement between the national Office and the International
Bureau, the opinion of the latter shall prevail.
(3) If the applicant claims color as a distinctive feature of his mark, he shall
be required:
(a) to state the fact, and to file with his application a notice specifying
the color or the combination of colors claimed;
(b) to append to his application copies in color of the said mark,
which shall be attached to the notification given by the
International Bureau. The number of such copies shall be fixed by the
Regulations.
(4) The International Bureau shall register immediately the marks filed in
accordance with Article 1. The registration shall bear the date of the
application for international registration in the country of origin, provided that
the application has been received by the International Bureau within a period
of two months from that date. If the application has not been received within
that period, the International Bureau shall record it as at the date on which it
received the said application. The International Bureau shall notify such
registration without delay to the Offices concerned. Registered marks shall
be published in a periodical journal issued by the International Bureau, on
the basis of the particulars contained in the application for registration. In the
case of marks comprising a figurative element or a special form of writing,
the Regulations shall determine whether a printing block must be supplied by
the applicant.
(5) With a view to the publicity to be given in the contracting countries to
registered marks, each Office shall receive from the International Bureau a
number of copies of the said publication free of charge and a number of
copies at a reduced price, in proportion to the number of units mentioned in
Article 16(4)(a) of the Paris Convention for the Protection of Industrial
Property, under the conditions fixed by the Regulations. Such publicity shall
be deemed in all the contracting countries to be sufficient, and no other
publicity may be required of the applicant. (Art. 3)

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Term of protection

Registration of a mark at the International Bureau is effected for twenty (20)

years, with the possibility of renewal under the conditions specified in Article
7. (Art. 6)

Renewal of International Registration

Any registration may be renewed for a period of twenty (20) years from the
expiration of the preceding period, by payment only of the basic fee and,
where necessary, of the supplementary and complementary fees provided
for in Article 8(2). (Art. 7)

COPYRIGHT

Basic Principles

(1) Literary and artistic works, hereinafter referred to as ―works‖ are original
intellectual creations in the literary and artistic domain protected from the
moment of their creation (Sec.172.1)

(2) Works are protected by the sole fact of their creation, irrespective of their
mode or form of expression, as well as of their content, quality and purpose.
(Sec. 172.2),

(3) Copyrightable works include:

(a) Original Works shall include in particular:

(1) Books, pamphlets, articles and other writings;

(2) Periodicals and newspapers;
(3) Lectures, sermons, addresses, dissertations prepared for
oral delivery, whether or not reduced in writing or other material
form;
(4) Letters;
(5) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb shows;
(6) Musical compositions, with or without words;
(7) Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or designs
for works of art;

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(8) Original ornamental designs or models for articles of

manufacture, whether or not registrable as an industrial design,
and other works of applied art;
(9) Illustrations, maps, plans, sketches, charts and three-
dimensional works relative to geography, topography,
architecture or science;
(10) Drawings or plastic works of a scientific or technical
character;
(11) Photographic works including works produced by a
process analogous to photography; lantern slides;
(12) Audiovisual works and cinematographic works and works
produced by a process analogous to cinematography or any
process for making audio-visual recordings;
(13) Pictorial illustrations and advertisements;
(14) Computer programs; and
(15) Other literary, scholarly, scientific and artistic works.
(Sec. 172.1)

(b) Derivative Works

The following derivative works shall also be protected by copyright:

(a) Dramatizations, translations, adaptations, abridgments,

arrangements, and other alterations of literary or artistic works;
and
(b) Collections of literary, scholarly or artistic works, and
compilations of data and other materials which are original by
reason of the selection or coordination or arrangement of their
contents. (Sec. 173.1))
The works referred to in paragraphs (a) and (b) of sub-section
173.1 shall be protected as a new works; provided, however, that
such new work shall not affect the force of any subsisting copyright
upon the original works employed or any part thereof, or be construed
to imply any right to such use of the original works, or to secure or
extend copyright in such original works. (Sec. 173.2)

(4) Non-copyrightable works

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Notwithstanding the provisions of Sections 172 and 173, no protection shall

extend, under this law, to any idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such, even if they are
expressed, explained, illustrated or embodied in a work; news of the day and
other miscellaneous facts having the character of mere items of press
information; or any official text of a legislative, administrative or legal nature,
as well as any official translation thereof. (Sec. 175)

(5) Works of the Government. -

(a) No copyright shall subsist in any work of the Government of the

Philippines. However, prior approval of the government agency or office
wherein the work is created shall be necessary for exploitation of such work
for profit. Such agency or office may, among other things, impose as a
condition the payment of royalties. No prior approval or conditions shall be
required for the use for any purpose of statutes, rules and regulations, and
speeches, lectures, sermons, addresses, and dissertations, pronounced,
read or rendered in courts of justice, before administrative agencies, in
deliberative assemblies and in meetings of public character. (Sec. 176.1)

(b) The author of speeches, lectures, sermons, addresses, and

dissertations mentioned in the preceding paragraphs shall have the
exclusive right of making a collection of his works. (Sec. 176.2)

(c) Notwithstanding the foregoing provisions, the Government is not

precluded from receiving and holding copyrights transferred to it by
assignment, bequest or otherwise; nor shall publication or republication by
the Government in a public document of any work in which copyright is
subsisting be taken to cause any abridgment or annulment of the copyright
or to authorize any use or appropriation of such work without the consent of
the copyright owner. (Sec. 176.3)

(6) Rights of copyright owner

(a) Copyright or Economic Rights

Subject to the provisions of Chapter VIII, copyright or economic

rights shall consist of the exclusive right to carry out, authorize
or prevent the following acts:
177.1. Reproduction of the work or substantial portion of the
work;
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177.2. Dramatization, translation, adaptation, abridgment,

arrangement or other transformation of the work;
177.3. The first public distribution of the original and each copy
of the work by sale or other forms of transfer of ownership;
177.4. Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound recording,
a computer program, a compilation of data and other materials
or a musical work in graphic form, irrespective of the ownership
of the original or the copy which is the subject of the rental; (n)
177.5. Public display of the original or a copy of the work;
177.6. Public performance of the work; and
177.7. Other communication to the public of the work. (Sec.
177)
(b) Moral Rights

The author of a work shall, independently of the economic

rights in Section 177 or the grant of an assignment or license
with respect to such right, have the right:
193.1. To require that the authorship of the works be attributed
to him, in particular, the right that his name, as far as
practicable, be indicated in a prominent way on the copies, and
in connection with the public use of his work;
193.2. To make any alterations of his work prior to, or to
withhold it from publication;
193.3. To object to any distortion, mutilation or other
modification of, or other derogatory action in relation to, his
work which would be prejudicial to his honor or reputation; and
193.4. To restrain the use of his name with respect to any work
not of his own creation or in a distorted version of his work.
(Sec. 193)

(7) Rules on ownership of copyright

Copyright ownership shall be governed by the following rules:

(1) Subject to the provisions of this section, in the case of original

literary and artistic works, copyright shall belong to the author of the
work; (Sec. 178.1)

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(2) In the case of works of joint authorship, the co-authors shall be

the original owners of the copyright and in the absence of agreement,
their rights shall be governed by the rules on co-ownership. If,
however, a work of joint authorship consists of parts that can be used
separately and the author of each part can be identified, the author of
each part shall be the original owner of the copyright in the part that
he has created; (Sec. 178.2)

(3) In the case of work created by an author during and in the course
of his employment, the copyright shall belong to:

(a) The employee, if the creation of the object of copyright is

not a part of his regular duties even if the employee uses the
time, facilities and materials of the employer.

(b) The employer, if the work is the result of the performance

of his regularly-assigned duties, unless there is an agreement,
express or implied, to the contrary (Sec. 178.3)

(4) In the case of a work commissioned by a person other than an

employer of the author and who pays for it and the work is made in
pursuance of the commission, the person who so commissioned the
work shall have ownership of the work, but the copyright thereto shall
remain with the creator, unless there is a written stipulation to the
contrary; (Sec. 178.4)

(5) In the case of audiovisual work, the copyright shall belong to the
producer, the author of the scenario, the composer of the music, the
film director, and the author of the work so adapted. However, subject
to contrary or other stipulations among the creators, the producer
shall exercise the copyright to an extent required for the exhibition of
the work in any manner, except for the right to collect performing
license fees for the performance of musical compositions, with or
without words, which are incorporated into the work; (Sec. 178.5)
and

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(6) In respect of letters, the copyright shall belong to the writer

subject to the provisions of Art. 723 of the Civil Code. (Sec. 178)

(7) Anonymous and Pseudonymous Works

For purposes of this Act, the publishers shall be deemed to represent

the authors of articles and other writings published without the names
of the authors or under pseudonyms, unless the contrary appears, or
the pseudonyms or adopted name leaves no doubt as to the author‘s
identity, or if the author of the anonymous works discloses his identity.
(Sec. 179)
(8) Notice of Copyright.

Each copy of a work published or offered for sale may contain a notice
bearing the name of the copyright owner and the year of its first publication,
and, in copies produced after the creator‘s death, the year of such death.
(Sec. 192)

(9 ) Term of copyright

(a) The copyright of works under Sections 172 and 173 shall be
protected during the life of the author and for fifty (50) years after his
death. (Sec. 213.1)
The term of protection subsequent to the death of the author shall run
from the date of his death or of publication, but such terms shall be
deemed to begin on the first day of January of the year following the
event which gave rise to them. (Sec. 214)
(b) The right of an author under Sec. 193.1 shall last during the lifetime
of the author and in perpetuity after his death while the rights under
Sections 193.2, 193.3 and 193.4 shall be co-terminous with the
economic rights. (Sec. 198.1)

(10) Limitations on copyright

A. Fair Use

The fair use of a copyrighted work for criticism, comment, news reporting,
teaching including multiple copies for classroom use, scholarship, research,
and similar purposes is not an infringement of copyright. Decompilation,
which is understood here to be the reproduction of the code and translation
of the forms of the computer program to achieve the inter-operability of an
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independently created computer program with other programs may also

constitute fair use. In determining whether the use made of a work in any
particular case is fair use, the factors to be considered shall include:
(a) The purpose and character of the use, including whether such use
is of a commercial nature or is for non-profit educational purposes;

(b) The nature of the copyrighted work;

(c) The amount and substantiality of the portion used in relation to the
copyrighted work as a whole; and

(d) The effect of the use upon the potential market for or value of the
copyrighted work. (Sec. 185.1)

The fact that a work is unpublished shall not by itself bar a finding of fair use
if such finding is made upon consideration of all the above factors. (Sec.
185.2)

11. Copyright infringement; Remedies

(a) Civil liabilities

Any person infringing a right protected under this law shall be liable:

(a) To an injunction restraining such infringement. The court may also order
the defendant to desist from an infringement, among others, to prevent the
entry into the channels of commerce of imported goods that involve an
infringement, immediately after customs clearance of such goods.

(b) Pay to the copyright proprietor or his assigns or heirs such actual
damages, including legal costs and other expenses, as he may have
incurred due to the infringement as well as the profits the infringer may have
made due to such infringement, and in proving profits the plaintiff shall be
required to prove sales only and the defendant shall be required to prove
every element of cost which he claims, or, in lieu of actual damages and
profits, such damages which to the court shall appear to be just and shall not
be regarded as penalty.

(c) Deliver under oath, for impounding during the pendency of the action,
upon such terms and conditions as the court may prescribe, sales invoices
and other documents evidencing sales, all articles and their packaging
alleged to infringe a copyright and implements for making them.

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(d) Deliver under oath for destruction without any compensation all infringing
copies or devices, as well as all plates, molds, or other means for making
such infringing copies as the court may order.

(e) Such other terms and conditions, including the payment of moral and
exemplary damages, which the court may deem proper, wise and equitable
and the destruction of infringing copies of the work even in the event of
acquittal in a criminal case. (Sec. 216.1)

In an infringement action, the court shall also have the power to order the
seizure and impounding of any article which may serve as evidence in the
court proceedings. (Sec. 216.2)

(b) Criminal penalties

Any person infringing any right secured by provisions of Part IV of this Act or
aiding or abetting such infringement shall be guilty of a crime punishable by:
(a) Imprisonment of one (1) year to three (3) years plus a fine ranging
from Fifty thousand pesos (P50,000) to One hundred fifty thousand
pesos (P150,000) for the first offense.
(b) Imprisonment of three (3) years and one (1) day to six (6) years
plus a fine ranging from One hundred fifty thousand pesos (P150,000)
to Five hundred thousand pesos (P500,000) for the second offense.
(c) Imprisonment of six (6) years and one (1) day to nine (9) years
plus a fine ranging from Five hundred thousand pesos (P500,000) to
One million five hundred thousand pesos (P1,500,000) for the third
and subsequent offenses.
(d) In all cases, subsidiary imprisonment in cases of insolvency.
(217.1)

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