SAINT LOUIS UNIVERSITY

2012 BAR OPERATIONS

COMMERCIAL LAW
 TABLE OF CONTENTS

Code of Commerce……………………………………………………………………………………………………..3
Merchants and Commercial Transactions……………………………………………………………………………4
I. Letters Of Credit……………………………………………………………………………………………..7
II. Warehouse Receipts Law…………………………………………………………………………………9
General Bonded Warehouse Act………………………………………………………………….18
III. Trust Receipts Law………………………………………………………………………………………….19
IV. Negotiable Instruments Law……………………………………………………………………………….21
V. Insurance Code………………………………………………………………………………………………50
VI. Transportation Laws……………………………………………………………………………………….71
VII. Corporation Code of the Philippines………………………………………………………………….103
The Insolvency Law…………………………………………………………………………………154
Rules of Procedure on Corporate Rehabilitation………………………………………………..167
Interim Rules of Procedure on Corporate Rehabilitation (2000)………………………………181
Proposed Interim Rules of Procedure Governing Intra-Corporate Controversies …………..192
VIII. Securities And Exchange Commission Reorganization …………………………………………….202
Securities Regulation Code………………………………………………………………………….203
IX. A. The New Central Bank Act ……………………………………………………………………………..212
IX. B. Secrecy of Bank Deposits Law………………………………………………………………………...225
Unclaimed Balances Law……………………………………………………………………………226
IX. C. The General Banking Law of 2000……………………………………………………………………227
Financing Company Act……………………………………………………………………………..244
Rural Banks Act Of 1992……………………………………………………………………………..245
An Act to Ordain A Cooperative Code of the Philippines………………………………………249
Foreign Currency Deposit Act……………………………………………………………………….250
Thrift Banks Act Of 1995………………………………………………………………………………252
IX. D. The Philippine Deposit Insurance Corporation Act………………………………………………….256
Philippine Deposit Insurance Corp.Charter Amendments………………………………………..258
Bank Receivership and Liquidation…………………………………………………………………263
X. Intellectual Property Code……………………………………………………………………………………269
XI. A. Chattel Mortgage Law……………………………………………………………………………………279
XI. B. Real Estate Mortgage……………………………………………………………………………………282
Extrajudicial Foreclosure of Real Estate Mortgage………………………………………………..284
XI. C. The Truth in Lending Act……………………………………………………………………………….285
XI. D. Anti-Money Laundering Act ……………………………………………………………………………..286
Bulk Sales Law……………………………………………………………………………………………………………291
Electronic Commerce Act………………………………………………………………………………………………..293
Compilation of Jurisprudence in Commercial Law…………………………………………………………………..307
Random Questions and Answers in Mercantile Law…………………………………………………………………371
Frequently Asked Questions in Commercial Law…………………………………………………………………….394

2012 Commercial Law Syllabus

2011 Commercial Law Bar MCQs
  
 
Sources of Commercial laws
CODE OF COMMERCE 1. Principal –
a. Statute law
Commerce b. Agreements
It is the exchange of goods, productions, or c. Customs
property of any kind. It is intercourse by way of trade d. Court decisions
traffic between different peoples or states and the 2. Auxiliary –
citizens or inhabitants thereof, including not only the a. Natural law
purchase, sale, and exchange of commodities, but b. Scientific law
also the instrumentalities and agencies by which it is c. Foreign statutory law and judicial
promoted and the means and appliances by which it decisions
is carried on, and transportation of persons as well d. Opinions of authorities
as goods. (Black’s Law Dictionary)
It is that branch of human activity, the Characteristics of Commercial Law
purpose of which is to bring products to the 1. Uniform – act or contract is governed by the
consumer by means of exchanges or operations same set of rules
which tend to supply and extend to him, habitually, 2. Universal / International – exists in every
with intent to gain, at the proper time and place and civilized society
in good quality and quantity. (1 Blanco 36) 3. Equitable – involve the exchange of values
or consideration
Commercial law 4. Customary – embody rules that are followed
It is a phrase used to designate the whole from time to time or are invoked in everyday
body of substantive jurisprudence applicable to the transactions
rights, intercourse, and relations of persons engaged 5. Progressive – accumulates new ideas and
in commerce, trade, or mercantile pursuits. (Black’s keeps abreast with contemporary
Law Dictionary) development
It is that branch of private law which
regulates the juridical relations arising from Constitutional Provisions on Commerce and
commercial acts. Trade
It includes trade (business traffic within the 1. Sec. 1, A. XII and Secs. 19 & 20, A. II
limitations of the state) and commerce (intercourse - Economic nationalism as constitutional
with foreign states). Policy on national economy and commerce
2. Secs. 9 & 10, A. II
Law Merchant (Lex Mercatoria) - Equitable distribution of wealth
It is an old international law of merchants 3. Secs. 10 & 12, A. XII
and mariners growing out of their customary - Filipino First policy and nationalization
practices; a law practiced and enforced by 4. Sec. 1, A. VIII
businessmen and ship owners in their own courts - Power of judicial review in key economic
without professional judges or lawyers. (Mellinkoff’s and commercial matters
Dictionary of American Legal Usage)
Portions of the Code of Commerce still in force
Acts of commerce / Commercial Transactions 1. Merchants, Books of Merchants and
The Code of Commerce does not attempt General Provisions on Contracts (Arts. 1-63)
anywhere to define what commercial transactions 2. Joint Account Associations (Arts. 239-243)
are. It only specifies two general classes: 3. Commercial Barter (Art. 346)
(1) Those contained in the Code of Commerce 4. Transfers of Non-negotiable Credits (Arts.
and 347-348)
(2) All others of analoguous character. 5. Commercial Contracts of Overland
An act need not be performed by a merchant in Transportations (Arts. 349-379)
order that it may be considered an act of commerce. 6. Letters of Credit (Arts. 567-572)
7. Maritime Commerce (Arts. 573-869)
They are governed by: 8. Charter Party
(1) Code of Commerce, 9. Respondentia
(2) by commercial usages observed in each 10. Averages
place, in the absence of (1), and 11. Bottomry
(3) by the rules of civil law, in the absence of (1) 12. Bill of Lading
& (2). 13. Aval
14. Crossed Checks
 Saint Louis University COMMERCIAL LAW 4
2012 BAR OPERATIONS

15. Arrival Under Stress 2. Commercial or Industrial associations

16. Collision organized in accordance with the Code of
Commerce.
Provisions in the Code of Commerce which have
been repealed by the New Civil Code Classes of Merchants
1. Sales 1. Foreign Merchants
2. Partnership 2. Filipino Merchants
3. Agency 3. Commercial and Industrial companies
4. Loan created in accordance with the Code of
5. Deposit and Commerce and by special laws
6. Guaranty
Essential Requisites to be considered a
Special Commercial Laws: Merchant
1. Corporation Code 1. Legal capacity
2. Negotiable Instruments Law 2. Habitually engaged in commerce
3. Insurance Code
4. Public Service Law  The legal presumption of habitually engaging
5. General Banking Law in commerce shall exist from the time the
6. Securities Regulation Code person who intends to engage therein gives
7. Insolvency Law announcement, by means of circulars,
8. Retail Trade Nationalization Law newspapers, handbills, poster exhibited to the
9. Chattel Mortgage Law public, or by other means whatsoever of an
10. Warehouse Receipts Law establishment, the purpose of which is to
conduct commercial transaction
CIVIL LAW CODE OF COMMERCE
Acceptance made by Essential Requisites of a Merchant (accdg. to
letter/telegram does class)
NOT bind the offeror 1. Foreign Merchants
Contracts are perfected
EXCEPT from the time it a) Engaging in Commerce
from the moment an
came to his knowledge; Foreigners and companies created abroad
answer is made
contract is presumed to may engage in commerce in the Philippines
accepting the offer
have been entered into subject to (1) the laws of their country with
(Theory of Manifestation)
in the place where the respect to capacity to contract and
offer was made (Theory to the (2) provisions of the Code of
of Cognition) Commerce as regards the creation of their
Obligation without a establishment in foreign territory, mercantile
fixed period operations and the jurisdiction of the courts
demandable: of the Philippines (3) Corporation Code and
If the obligation does not other laws
a) 10 days after
fix a period, action filed - There is a need to obtain license from the
perfection, if it gives rise
with the court for the SEC
to an ordinary action
fixing of the period - However, the Board of Investment may
b) on the next day, if it
involves immediate impose requirements other that those set by
action the Corporation Code (172 S 490)
Default depends on the
actuations of the obligee b) Investing in the Philippines
Every debtor in default Under the Foreign Investments Act of 1991,
or creditor; no liability if
without need of demand foreigners are allowed to invest up to 100%
no demand EXCEPT if
(mora ex re) of the capital needs of the firm
time is of the essence in
the contract However, they are still prohibited from
  investing in industries covered by the
negative list which includes:
MERCHANTS AND COMMERCIAL TRANSATIONS  a. Those provided in the Constitution
(Code of Commerce Articles 1‐63) and other Philippine laws
Merchants b. Defense related industries
1. Those who having capacity to engage in c. Those with health and moral
commerce, habitually devote themselves implications
thereto.
 Saint Louis University COMMERCIAL LAW 5
2012 BAR OPERATIONS

d. Those with needing capital of not

more than $500,000 Commercial Registries
e. Industries in areas already adequately It is a book where entries are made of
covered merchants and of documents affecting their
commercial transactions; or an office established for
2. Filipino Merchants the purpose of copying and recording verbatim
a) Individual certain classes of documents of commercial value.
i. Legal capacity to engage in
commerce Rules on Commercial Registries
ii. Habitual engagement therein A. Individual Merchants
iii. Completed the age of 18 (as  Optional
amended by R.A. 6809)  Registration at the Bureau of Domestic
iv. Free disposition of his property Trade (Metro Manila) or Register of Deeds
b) Association (provinces)
i. Commercial or industrial company  No registration = no request of inscription of
ii. Created in accordance with existing any document in mercantile registry; no
legislation availment of effects of registration
iii. Legal capacity to engage in B. Juridical Persons
commerce  Compulsory for corporations and
iv. Habitual engagement therein partnerships with capital of P3,000 or more,
or contributions of real estate
Persons disqualified to be merchants  Registration at the SEC
1. ABSOLUTELY disqualified  No registration = no creation of corporation;
 Incapacity extends throughout the no effect on the existence of a partnership’s
Philippines juridical personality
 Effect of act: null and void C. Shipowners
i. Persons serving penalty of civil  Compulsory for Philippine vessels with gross
interdiction tonnage of more than 3 tons
ii. Insolvents  Issuance of Certificate of Philippine Registry
iii. Those absolutely disqualified by special – compulsory if more than 15 tons gross;
laws optional if 15 tons gross or less
2. RELATIVELY disqualified
 Incapacity extends only to the territory Books of Merchant
where the officer s exercising his functions A. Code of Commerce
 Effect of act: violator subjected to 1. Book of inventories and balances
disciplinary action / punishment containing a statement of assets,
i. judicial and prosecuting officials in liabilities and capital
active service (Rule 5.02, Code of 2. Journal containing day-to-day
Judicial Conduct) operations
ii. administrative, economic and military 3. Ledger containing the accounts
chiefs classified as to objects or persons,
iii. government collection agents and transferred from the journal
custodian of funds 4. Book for letters or telegrams sent out
iv. stock and commercial brokers 5. Other books required by special laws
v. those who by special laws cannot trade B. Special Laws
in specified territories 1. Book of minutes in case of juridical
vi. Members of the Congress (Sec.14, persons, containing the resolutions
A.VI) passed
vii. President, Vice-President, members of 2. Stock and Transfer Book if the juridical
the Cabinet and their person is a corporation
deputies/assistants (Sec.13, A.VII) C. National Internal Revenue Code
viii. Members of Constitutional Commission 1. Bookkeeping records authorized by the
(Sec.2, A.IX) Finance Department if merchant, natural
ix. Ombudsman and (f)(g)(h) with respect or juridical, has gross quarterly sales,
to any loan, guaranty or other form of earnings, receipts or output NOT
financial accommodation for any exceeding P5,000
business purpose by any government-
owned or controlled bank (Sec. 16, A.XI)
 Saint Louis University COMMERCIAL LAW 6
2012 BAR OPERATIONS

2. Journal or ledger if the gross quarterly is proves by some means established by the
sales, earning, receipts or output civil law EXCEPT
exceed P5,000 bur are below P25,000 a. Contracts which must be in form
3. Books must be audited and examined necessary for their validity as provided
by an independent certified public by the Code of Commerce or special
accountant if the amount exceeds law, or
P25,000 b. Contracts executed abroad which
require instruments, forms or
Probative Value of Merchant’s Books formalities for their validity, although
1. Evidence against the merchants themselves Philippine law does not so require
2. Conflict between books of two merchants: 3. Unlawful Agreements
those kept properly shall prevail These cannot serve as the basis of any
3. If one merchant keeps books and the other obligation or cause of action even they involve
does not (and cannot explain their absence), commercial transactions
the books of the former shall be admitted 4. Contracts through correspondence
against the latter; Contracts through entered into through
4. If both keep their books properly but the correspondence shall be perfected from the
entries conflict, the court shall accept other time an answer is made accepting the
proofs proposition or the conditions by which the
latter may be modified.
Commercial Contract 5. Availment of indemnification clause
It is an agreement between two or more The aggrieved party may take legal steps to
merchants or non-merchants binding themselves to demand (1) fulfillment of the contract or (2) the
give to do something in commercial transactions indemnity as provided in the contract.
6. Standard Compliance
Contract of Correspondence It shall be executed and complied with in good
It is a contract entered into by faith according to the terms in which they are
correspondence like letters, telegrams, by drafted, without evading the honesty, proper
messengers, etc. but not including those made by and usual meaning of written and spoken
phone or through agents . words with arbitrary interpretations, nor limiting
the effects which are naturally derived from
When is a mercantile contract by the manner in which the contracting parties
correspondence perfected? may have explained their wishes and
Under the Code of Commerce, it is perfected contracted their obligations
from the moment the offeree accepts the offer, 7. Commencement date of effects of default –
EVEN BEFORE KNOWLEDGE of said acceptance a. In contracts in which a day is fixed for their
by the offeror. compliance by will of the parties or by law,
This rule is applicable to all commercial on the day following the one they fall due
contracts except in deposit, guaranty, sale, loan, b. In contracts in which no such day is fixed,
agency, and partnership where the Civil Code rule (1)from the day on which the creditor
as to the perfection is applicable legally makes demand upon the debtor or
(2) notifies him of the protest of losses and
Rules to be observed with respect to commercial damages made against him before a
contracts justice, notary or other public official
1. Governing law authorized to admit the same
Commercial contracts shall be governed by
the Code of Commerce; in default of such Joint Account Partnership or Joint Partnership
provisions, by the commercial usages It is a business arrangement whereby two or
observed in each place; and in the absence of more persons interested themselves in the business
both, by the general rules of civil law. of another making contribution thereto and
2. Formalities and exceptions participating in the results of the business.
Commercial contracts shall be valid and A joint account is a transaction of merchants
create an obligation and cause of action in where other merchants agree to contribute the
suits, whatever may be the form or in amount of capital agreed upon, and participating in
whatever language they may be executed, the the favorable and unfavorable results thereof in the
class to which they correspond, and the proportion they may determine. (UP law center)
amount involved, PROVIDED their existence
Features
 Saint Louis University COMMERCIAL LAW 7
2012 BAR OPERATIONS

1. It may be formed without any formality and commitment fees mutually agreed upon. (Prudential
may be privately contracted orally or in Bank vs. IAC GR no 74886 December 8, 1992)
writing It is a financial device developed by
2. Only one ostensible member; others are merchants as a convenient and relatively safe mode
silent of dealing with sales of goods to satisfy the
3. Only the ostensible partner can sue and seemingly irreconcilable interests of a seller, who
be sued refuses to part with his goods before he is paid, and
4. No common name a buyer, who wants to have control of the goods
5. No common fund before paying. To break the impasse, the buyer may
be required to contract a bank to issue a letter of
Joint account/ credit in favor of the seller so that, by virtue of the
Commercial
joint letter of credit, the issuing bank can authorize the
Partnership
adventure seller to draw drafts and engage to pay them upon
None – it is in their presentment simultaneously with the tender of
Common the name of documents required by the letter of credit. The buyer
Yes and the seller agree on what documents are to be
name the ostensible
partner presented for payment, but ordinarily they are
Common fund None Yes documents of title evidencing or attesting to the
Juridical shipment of the goods to the buyer. Once the credit
None Yes is established, the seller ships the goods to the
personality
Only in the buyer and in the process secures the required
Capacity to It may under the shipping documents or documents of title. To get
name of the
sue and be partnership paid, the seller executes a draft and presents it
ostensible
sued name together with the required documents to the issuing
partner
Liability of Only the bank. The issuing bank redeems the draft and pays
All general cash to the seller if it finds that the documents
partners to 3rd ostensible
partners submitted by the seller conform to what the letter of
persons partner
Made by the May be credit requires. The bank then obtains possession of
Liquidation ostensible entrusted to a the documents upon paying the seller. The
partner partner/s transaction is completed when the buyer reimburses
Continuing the issuing bank and acquires the documents
Transaction Often limited to business of entitling him to the goods. Under this arrangement,
involved one transaction various the seller gets paid only if he delivers the documents
transactions of title over the goods, while the buyer acquires the
All partners said documents and control over the goods only
By the participate after reimbursing the bank. (Bank of America vs. CA
Management ostensible unless there is a GR no. 105395 December 10, 1993)
partner alone managing
partner Stages
1. Contract of sale between the buyer and seller
2. Application for LC by the buyer with the bank
I. LETTERS OF CREDIT  3. Issuance of LC by the bank
(Code of Commerce Articles 567‐572)  4. Shipping of goods by the seller
5. Execution of draft and tender of documents by
the seller
Letter of Credit
6. Redemption of draft (payment) and obtaining of
It is a letter issued by one merchant to
another for the purpose of attending to a commercial documents by the issuing bank
transaction (A. 567, Code of Commerce) 7. Reimbursement to the bank and obtaining of
documents by the buyer
It is an engagement by a bank or other
person made at the request of a customer that the
issuer will honor drafts or other demands for Nature of letters of credit
payment upon compliance with the conditions 1. It is an accessory contract.
specified in credit Through a letter of credit, the bank 2. It is NOT a negotiable instrument because it
does NOT have all the requisites of
merely substitutes its own promise to pay for the
promise to pay of one of its customers who in return negotiability.
promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or  What characterizes letters of credit, as
distinguished from other accessory contracts, is
 Saint Louis University COMMERCIAL LAW 8
2012 BAR OPERATIONS

the engagement of the issuing bank to pay the  Bank in the city of the beneficiary which
seller once the draft and the required shipping buys or discounts the drafts contemplated
documents are presented to it. In turn, this by the LC, if such draft is to be drawn on the
arrangement assures the seller of prompt opening bank or on another designated
payment, independent of any breach of the main bank NOT in the city of the beneficiary
sales contract. (Ibid)
How the parties’ respective relationships are
Essential conditions of a letter of credit governed:
1. That it be issued in favor of a definite person 1. Bank and Importer/applicant
and not to order  by the terms of the application and
2. That it be limited to a fixed and specified amount agreement for the issuance of letters of
or to one or more undeterminable amounts but credit
within the maximum limits of which has to be 2. Bank and Exporter/beneficiary
stated exactly.  by the terms of the letter of credit issued by
3. Duration the bank
a. 6 mos. if used in the Philippines or 3. Applicant and Beneficiary
b. 1 year if used abroad,  by the contract of sale
Unless the parties provide for a different
period. Independent contracts in a letter of credit
1. Contract of sale between the buyer and the
 It becomes VOID in fact and in law when it is seller
not used within the period agreed upon or 2. Contract of the buyer with the issuing bank
within the duration aforementioned as 3. LC proper in which the bank promises to pay the
provided by law. seller pursuant to the terms and conditions
stated therein (with a pour atrui stipulation in
Parties to a letter of credit favor of the seller)
1. Buyer/importer/applicant
a. procures the letter of credit and Independence principle
b. obliges himself to reimburse the issuing The bank determines compliance with the
bank upon receipt of the documents of title. letter of credit only by examining the shipping
2. Issuing/opening bank documents presented; it is precluded from
a. issues the letter of credit and determining whether the main contract is actually
b. undertakes to pay the seller upon receipt of accomplished or not. (Bank of America supra)
the draft and proper documents of titles and In the operation of a letter of credit, the
to surrender the documents to the buyer involved banks deal only with documents and NOT
upon reimbursement. on goods described in those documents. (Ibid, BPI
3. Seller/exporter/beneficiary vs. De Reny GR no. l-24821 October 16, 1970)
a. in compliance with the contract of sale ships
the goods to the buyer and Rule of Strict Compliance
b. delivers the documents of title and draft to Documents tendered by the
the issuing bank to recover payment seller/beneficiary must strictly conform to the terms
4. Advising/notifying bank of the LC. They must include all the documents
 Correspondent bank of the opening bank required by the letter of credit. (Feati Bank vs. CA,
through which it advises the beneficiary of April 30,1991).
the letter of credit A correspondent bank which departs from
 NOT liable for a breach of the LC; bound what has been stipulated under the letter of credit
only to check the apparent authenticity of acts on its own risk and may not thereafter be able
the LC to recover from the buyer or the issuing bank the
5. Confirming bank money thus paid to the beneficiary. (Ibid.)
 Bank which confirms the LC issued upon the
request of the beneficiary Fraud Exception Principle
 Liable for a breach of the LC The untruthfulness of a certificate
6. Paying bank accompanying a demand for payment under a
 Bank on which the drafts are to be drawn, standby credit may qualify as FRAUD sufficient to
which may be the opening bank or another support an injunction against payment.
bank NOT in the city of the beneficiary The remedy of injunction is availing when
7. Negotiating bank the following are present:
1. Clear proof of fraud
 Saint Louis University COMMERCIAL LAW 9
2012 BAR OPERATIONS

2. Fraudulent abuse of the independent II. WAREHOUSE RECEIPTS LAW 

purpose of the LC (not fraud under the main
(Act no. 2137)
agreement)
3. Irreparable injury might follow if injunction is
not granted; or the recovery of damages Purposes
would be seriously damaged. (Transfield 1. To regulate the status, rights and liabilities of the
Phil. Inc. vs. Luzon Hydro Corp., November parties in a warehousing contract
22, 2004) 2. To protect those who, in good faith and for
value, acquire negotiable warehouse receipts by
Types of letters of credit negotiation
IRREVOCABLE REVOCABLE 3. To render the title o, and right of possession of,
obligates the issuing bank property stored in warehouses more easily
can be cancelled or
to honor drafts drawn in convertible
amended at any time
compliance with the credit 4. To facilitate the use of warehouse receipts
before payment; it is
and can neither be
intended to serve as a
cancelled nor modified
means of arranging Applicability
without the consent of all
parties, including the
payment but not as a  To ALL warehouses, public/private, bonded
guarantee of payment or not
beneficiary
CONFIRMED UNCONFIRMED  Articles 1507-1520 of the Civil Code apply in
issued by one bank can be all other cases where receipts are NOT
confirmed by another, in issued by a warehouseman.
which case both banks are obligation is only of the
obligated to honor drafts issuing bank Definition of terms:
drawn in compliance with 1. Warehouseman
the credit  person lawfully engaged in the business
REVOLVING NON-REVOLVING of storing goods for profit
valid for several valid for one transaction
 only a warehouseman may
transactions over a given only
period of time
issue warehouse receipts; those
CUMULATIVE NON-CUMULATIVE not issued by a warehouseman
are NOT warehouse receipts.
a revolving letter of credit in (Sec. 1)
a revolving letter of credit in which case any amount not
which case the undrawn used by the beneficiary
 but a duly authorized officer or
amount amounts is carried during the specified period agent of a warehouseman may
over to future periods may not be drawn against a validly issue a warehouse
later period receipt (National Bank vs.
BACK TO BACK LETTER OF CREDIT Producer’s Warehouse
credit with identical documentary requirements and Association, January 9, 1922)
covering the same merchandise as another LC, except for 2. Warehouse
a difference in the price of the merchandise as shown by  the building or place where goods are
the invoice and the draft; the second letter can be deposited and stored for profit
negotiated only after the first is negotiated 3. Warehouse receipts
STANDBY LETTER OF CREDIT  written acknowledgement by a
 a bank-issued option on a loan under the terms of warehouseman that he has received
which, the beneficiary has the right to “take down the and holds certain goods therein
loan” if the account party (party requesting for the described in store for the person to
issuance of SLC) fails to meets its commitment, in which
whom it is issued; a written contract
case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan to its between the owner of the goods and the
customer, account party warehouseman to pay the
 while SLCs are a security arrangement as they secure compensation for that service
obligation of the borrowers to the lender, they are not 4. Non-negotiable receipts
converted thereby into contracts of guaranty. That  receipt in which it is stated that the
would make them ulra vires acts, (as the banks are not goods received will be delivered to the
allowed under sec 745 of the General Banking Act to depositor, or to any other specified
enter into a contract of guaranty or suretyship except in person
certain instances) rather than a letter of credit which is
5. Negotiable receipts
within the powers of a bank. SLCs are primary
obligations and not accessory contracts (Insular Bank of  receipt in which it is stated that the
Asia and America vs. IAC November 17, 1988) goods received will be delivered to the
 Saint Louis University COMMERCIAL LAW 10
2012 BAR OPERATIONS

bearer or to the order of any person 1. Those contrary to the provisions of the
named in such receipt Warehouse Receipts Law
2. Those contrary to law, morals, good
Functions of warehouse receipts customs, public order or public policy
1. They are simple CONTRACTS evidencing 3. Those exempting the warehouseman from
the underlying contract of deposit/carriage. liability for misdelivery or for not giving
2. They are EVIDENCE of receipt of goods. statutory notice in case of sale of the goods
3. Under A.1636 of the New Civil Code, they 4. Those exempting the warehouseman from
are DOCUMENTS OF TITLE to goods. liability for negligence
5. Those which may impair the obligation of the
Contents warehouseman to exercise that degree of
1. Location of the warehouse where goods are care in the safekeeping of goods entrusted
stored to him
2. Date of issue of the receipt
 Degree of care required of a warehouseman in
3. Consecutive number of the receipts the safekeeping of goods entrusted to him
4. Statements whether the goods received will be The warehouseman is required to exercise
delivered to the bearer, to a specified person, or that degree of care which a reasonably careful man
to a specified person or his order would exercise in regard to similar goods of his own.
5. Rate of storage charges
6. Description of the goods or of the packages Form
containing them Generally, the warehouse receipt is not
 The mere fact that the goods deposited are required to be in any particular form. However it
incorrectly described does not make should contain the above cited contents.
ineffective the receipt, when the identity of
the goods is fully established by evidence. Negotiability of warehouse receipts
Its indorsement and delivery shall constitute 1. Warehouse receipts are NOT negotiable
a sufficient transfer of the title of the goods. instruments under the Negotiable Instruments
(American Foreign Banking Corporation vs. Law.
Herridge, December 20, 1924) 2. The warehouse receipt is negotiable under this
7. Signature of the warehouseman which may be Act; in the passage of the warehouse receipts
made by his authorized agent through the channels of commerce, the law
8. Warehouseman’s ownership of or interest in the regards the property which they describe as
goods following them and gives to their regular transfer
9. Statement of advances made and liabilities by endorsement the effect of manual delivery of
incurred the things specified in them.
No provision shall be inserted in a negotiable receipt
 These are required for the protection of the that it is non-negotiable. Such provision, if inserted,
depositor and those succeeding to his rights. shall be void.
 If the warehouseman omits any of the required
information and injury is caused thereby to a
person: Negotiable Warehouse Receipt
(a) the warehouseman shall be liable to the said Instruments
person for ALL damages caused by such The subject is money The subject is
omission merchandise
(b) the validity and negotiability of the receipt The instrument itself is The goods are the object
are NOT affected the object of value of value
(c) the contract is converted to ordinary deposit Intermediate parties Intermediate parties are
(Gonzales vs. Go Fiong & Luzon Surety Co., become secondarily NOT liable for the
August 30, 1958) liable warehouseman’s failure
to deliver the goods.
Deliberate alteration Valid if altered BUT
Inclusion of other terms makes it null and void enforceable only in
 General Rule: accordance with its
The warehouseman may insert any other original tenor
terms and conditions. If originally a bearer Converted to an order
 Exceptions: instrument, it will instrument IF specially
remain as such indorsed
 Saint Louis University COMMERCIAL LAW 11
2012 BAR OPERATIONS

Holder in due course HDC obtains only the title 1. It protects a purchaser for value and in good
may obtain a better title which the party faith
negotiating had over the 2. The goods covered by the receipt cannot be
goods garnished or levied upon under execution
unless it is surrendered, impounded or its
Kinds of receipts a warehouseman may issue negotiation enjoined;
1. NON-NEGOTIABLE 3. In case of negotiation, the holder acquires the
 one which provides that the goods will be direct obligation of the warehouseman to hold
delivered to the depositor or to any other possession of the goods for him without notice
specified person to such warehouseman.
 should be stamped on its face “non- 4. The goods it covers are not subject to seller
negotiable”; otherwise, a holder believing it lien or stoppage in transit
to be negotiable may treat it as such (Sec.
7) NEGOTIATION (Negotiable warehouse receipts)
 acquired through transfer and assignment,
NOT through negotiation; vests the A. HOW NEGOTIATED
transferee with the ff. rights: 1. DELIVERY, when the goods are deliverable to
a. right of title to the goods, as against a) the bearer, or
the transferor b) a specified person or order, and the latter or
b. right to notify the warehouseman of a subsequent indorsee indorses it in blank
the transfer and acquire the direct or to bearer
obligation of the warehouseman to 2. INDORSEMENT + DELIVERY
hold the goods for him  If the receipt is indorsed to a specified
 goods represented can be subject to person, it becomes an order receipt and
attachment or levy by execution (Sec.42) negotiation can only be effected by the
indorsement of such person in blank, to
2. NEGOTIABLE bearer or to another specified person
 one which that the goods will be delivered to  Delivery alone is not sufficient
the bearer or to the order of any person  Effects of delivery without indorsement:
named in the receipt a) Transferee acquires title against
 failure to mark it as “negotiable” does NOT transferor
render it non-negotiable for as long as it b) Transferee can compel the transferor to
contains words of negotiability (Sec. 5) complete the negotiation by
 acquired through negotiation; vests the indorsement
holder with the ff. rights: c) Warehouseman has no direct obligation
a. right of title to the goods of: 3. PLEDGE
i. the person negotiating the receipt  Negotiation of a receipt may also be by way
ii. the person to whose order the of pledge; as to the legal title to the property
goods were to be delivered covered by a warehouse receipt, a pledge is
b. right to have the warehouseman on the same footing as a vendee EXCEPT
directly obligated to hold possession that the former is under obligation of
of the goods for him, as if the surrendering his title over the goods upon
warehouseman directly contracted payment of the debt secured. (BPI vs.
with him Herridge, December 20, 1924)
 goods represented cannot be subject to  BUT the pledgee or mortgagee does NOT
attachment or levy by execution UNLESS in automatically become the owner of the
proper circumstances (Sec.49) goods, but merely retains the right to keep
 when more than one is issued for the same them and sell them (with consent of the
goods, the word “duplicate” should be owner) so as to satisfy the obligation from
placed upon the face of every receipt, the proceeds (PNB vs. Sayo, July 9, 1998)
except on the first one issued; otherwise, the  If the property is lost without the fault or
warehouseman shall be liable to a holder for negligence of the pledgee or mortgagee, it is
value even after delivery is made to the regarded as lost on account of the real
holder of the original receipt (Sec.6) owner, mortgagor or pledgor

Advantages of a negotiable receipt from a non- B. WHO MAY NEGOTIATE

negotiable receipt 1. Owner
 Saint Louis University COMMERCIAL LAW 12
2012 BAR OPERATIONS

2. Any person to whom the possession or custody parties had been to transfer without a receipt of
of the receipt has been entrusted by the owner the goods represented thereby
IF
a) by the terms of the receipt, the goods are  The indorser does NOT warrant the
deliverable to the order of the person to warehouseman’s complicity with the latter’s
whom the possession/custody of the receipt duties.
has been entrusted, or  A holder for security who in good faith
b) the receipt is in such form that it may be accepts payment of a debt does NOT
negotiated by delivery warrant:
3. Even a thief or fraud can negotiate the receipt if a. The genuineness of the receipt
it is in such a form that he need not forge any b. The quality or quantity of the goods
signature (bearer instrument). described therein

C. EFFECTS F. WARRANTIES IN DUPLICATE RECEIPTS

1. Negotiation produces the effect of delivery: the Sec 15 provides that if the term “duplicate’ is
transferee becomes the owner of the goods. indicated in the receipts it warrants the ff:
2. Negotiation carries with it BOTH title to and a. That the duplicate is an accurate
possession of the property. copy of the original receipt; and
b. Such original receipt is uncancelled
D. RIGHTS at the date of the issue of the
1. Person to whom a negotiable receipt has been duplicate
negotiated: (Sec41)
a. The title of the person negotiating the receipt G. EFFECT OF VENDOR’S LIEN
over the goods covered by the receipt; Where a negotiable receipt has been issued for the
b. The title of the person (depositor or owner) goods:
to whose order by the terms of the receipt a. No seller’s lien or right of stoppage in transitu
the goods were to be delivered over such shall defeat the rights of any purchaser for value
goods; and in good faith to whom such receipt has been
c. The direct obligation of the warehouseman negotiated whether it be prior or subsequent to
to hold possession of the goods for him, as if the notification to the warehouseman who
the warehouseman directly contracted with issued such receipt;
him. b. The warehouseman shall NOT be obliged to
2. Transferee of a negotiable receipt delivered deliver or justified in delivering the goods to an
WITHOUT endorsement: (Sec43) unpaid seller unless the receipt is first
a. The right to the goods as against the surrendered for cancellation.
transferor; and
b. The right to compel the transferor to indorse TRANSFER (Non-negotiable warehouse receipts)
the receipt
 The negotiation shall take effect as of the
time when the endorsement is actually A. HOW TRANSFERRED/ASSIGNED
made.  Delivery to the transferee accompanied by a
 The endorsement of a receipt shall not make deed of assignment, donation or other form of
the endorser liable for any failure on the part transfer
of the warehouseman or previous endorsers
of the receipt to fulfill their respective B. TO WHOM DELIVERED
obligations. (Sec45) 1. Depositor
2. Any other specified person
E. WARRANTIES OF THE PERSON
NEGOTIATING/ TRANSFERRING C. NON-NEGOTIABLE MARK
1. That the receipt is genuine  A non-negotiable receipt shall have plainly
2. That he has legal right to negotiate/transfer it placed upon its face by the warehouseman
3. That he has NO knowledge of defects that may issuing it as “non-negotiable” or “not negotiable”
impair the validity or worth of the receipt  Failure to do so, the holder of the receipt
4. That he has a right to transfer title to the goods believing it to be negotiable may, AT HIS
and that the goods are merchantable or fit for a OPTION, treat it as imposing upon the
particular purpose whenever such warranties warehouseman the same liabilities he would
would have been implied, if the contract of the have incurred had the receipt been negotiable
 Saint Louis University COMMERCIAL LAW 13
2012 BAR OPERATIONS

D. RIGHTS OF THE TRANSFEREE (Sec42) would be necessary for negotiation of

1. The title to the goods as against the transferor; the receipts
2. The right to notify the warehouseman of the c. a readiness and willingness to sign,
transfer thereof; and when the goods are delivered, an
3. The right, thereafter, to acquire the obligation of acknowledgment that the goods had
the warehouseman to hold the goods for him. been delivered
 The right of the transferee is not absolute as 3. Ownership is NOT a defense for the refusal
it is subject to the terms of any agreement to deliver goods
with the transferor. He merely steps into the  When the warehouseman has rendered
shoes of the transferor. it beyond his power to deliver the goods,
demand may be dispensed with.
Rights of a warehouseman (A.1169,NCC)
1. To be paid  Refusal or failure to deliver: the burden
2. To exercise his lien on the goods deposited shall be upon the warehouseman to
in case of non-payment establish the existence of a lawful
3. To refuse delivery in proper legal excuse for the refusal.
circumstances  Neither can the warehouseman, as a
depositary for hire, set up an adverse
Obligations of a warehouseman title in another as an excuse for his
A. To issue a warehouse receipt in the required failure to deliver the property to his
form for goods received, and mark them bailor on demand. (Sec.19)
accordingly (i.e. non-negotiable, duplicate)  DOCTRINE OF ESTOPPEL:
B. To exercise reasonable diligence towards such The warehouseman cannot refuse to
goods deliver the goods on the ground that he
C. To insure the goods in the following has acquired title or right to the
circumstances: possession of the same unless such title
1. Where the law provides; or right is derived:
2. Where it was an inducement for the a. Directly or indirectly from a transfer
depositor to enter into the contract; made by the depositor at the time of
3. Where it is an established practice the deposit for storage or
4. Where the warehouse receipt contains a subsequent thereto;
representation to that effect b. From the warehouseman’s lien.
D. To give up the proper notice in case of sale of (Sec.16)
the goods, as provided 4. The warehouseman may legally refuse to
E. To NOT commingle the goods deposited deliver goods in the following circumstances:
UNLESS they are fungible and of the same kind a. When the holder of the receipt does
and grade (co-ownership applies) NOT satisfy the conditions prescribed in
F. To deliver the goods to the person lawfully Section 8 of the Act
entitled b. When the warehouseman has legal title
1. A warehouseman is bound to deliver the in himself on the goods, such title or
goods UPON A DEMAND made either by: right being derived directly or indirectly
a. The person lawfully entitled to the from the transfer made by the depositor
possession of the goods or his agent at the time or subsequent to the deposit
(e.g. buyer in an auction sale, donee of for storage, or from the
the goods) warehouseman’s lien (Sec.16)
b. A person who is entitled to delivery by c. If the warehouseman had been
the terms of the non-negotiable receipt requested by a person lawfully entitled
or who has written authority from the to a right of property or possession in
person so entitled either indorsed or the goods NOT to make delivery to any
written upon another paper person (Sec.10)
c. A person in possession of a negotiable d. If he had information that the delivery to
receipt be made was to one NOT lawfully
2. Such demand must accompanied by: entitled to the possession of the goods
a. an offer to satisfy the warehouseman’s (Sec.10)
lien e. Where the goods have already been
b. an offer to surrender the receipt, if lawfully sold to third persons to satisfy
negotiable with such endorsements as the warehouseman’s lien; or disposed of
 Saint Louis University COMMERCIAL LAW 14
2012 BAR OPERATIONS

because of their perishable or authorized, the warehouseman is liable

hazardous nature (Sec.36) according to the terms of the receipt as
f. In case of adverse claimants (Secs.17 altered.
and 18) 3. If the alteration is MATERIAL BUT
g. In the valid exercise of the INNOCENTLY MADE THOUGH
warehouseman’s lien (Sec.31) UNAUTHORIZED, the warehouseman is
h. Delivery to a claimant with a better right liable on the altered receipt according to its
i. Attachment/levy of the goods by a original tenor; and
creditor where the document is 4. If the alteration is MATERIAL AND
surrendered/ impounded or its FRAUDULENTLY MADE, the
negotiation enjoined (Sec.25) warehouseman is liable according to the
j. Where the document of title is attached original tenor of the receipt to a purchaser of
by a creditor (Sec.26) the receipt for value without notice and even
k. Failure was not due to any fault of the to the alterer and subsequent purchases
warehouseman (Sec.26) with notice.
G. To take up and cancel the warehouse receipt
when the goods are delivered C. Liability for lost or destroyed receipts
If the receipt is claimed to have been lost or
Liabilities of a warehouseman destroyed, it is essential that the court shall pass
A. Liability for misdelivery or conversion upon the question and make sure that the receipt is
1. A warehouseman would be liable for really lost or destroyed before the goods are
misdelivery or conversion if he delivers the delivered or a new receipt is issued; a competent
goods to one who is not in fact lawfully court may order the delivery of the goods only:
entitled to the possession of the goods 1. Upon proof of the loss or destruction of the
 Conversion is an unauthorized receipt; and
assumption and exercise of the right of 2. Upon the giving of a bond with sufficient
ownership over goods belonging to sureties to be approved by the court
another through the alteration of their
condition or exclusion of the owner’s D. Liability as to duplicate
right. 1. Failure to place the word “duplicate” in a
2. He would also be liable for misdelivery even duplicate receipt will make the warehouseman
if he delivers to a person holding a non- liable for all the damages to anyone who
negotiable receipt or a negotiable receipt if purchased such receipt believing it to be an
prior to such delivery he had either: original, even if the purchase be after the
a. Been requested, by or on behalf of the delivery of the goods by the warehouseman to
person lawfully entitled to a right or the holder of the original receipt. (Sec 6)
property or possession in the goods, not 2. He shall be guilty of a crime punishable by fine
to make such delivery; or or imprisonment, or both, if he issues a duplicate
b. Had information that the delivery about or additional negotiable receipt for goods
to be made was to one not lawfully knowing that a former negotiable receipt for the
entitled to the possession of the goods same goods or any part of then is outstanding or
3. Steps a warehouseman may take to protect and uncancelled, without plainly placing upon
him from misdelivery: the face of the receipt the word duplicate,
a. He could ascertain the validity of the EXCEPT in the case of a lost or destroyed
adverse claim or to bring legal receipt after proceedings.
proceedings to compel claimants to
interplead (sec 17) E. Liability to rightful claimants
b. He may require the claimants to 1. INTERPLEADER – this is a remedy given to the
interplead (sec 18) warehouseman in case there is more than one
person who claims title or possession of the
B. Liability for alteration of receipts goods either as a defense to an action brought
1. If the alteration is IMMATERIAL, that is, the against him for non-delivery or as an original
tenor of the receipt is not changed, whether suit; this would require the different claimants to
fraudulent or not, authorized or not, the litigate among themselves.
warehouseman is liable on the altered 2. Sec.18 provides that if someone other than the
receipt according to its original tenor depositor or person claiming has a claim to the
2. If the alteration is MATERIAL, that is the title or possession of the goods, the
tenor of the receipt is changed, but warehouseman shall be excused from liability for
 Saint Louis University COMMERCIAL LAW 15
2012 BAR OPERATIONS

refusing to deliver the goods until he has a liabilities he would have incurred had the receipt
reasonable time to ascertain the validity of the been negotiable.
adverse claim or bring legal proceedings to  The “holder” referred herein cannot be the
compel claimants to interplead. original holder because, as the depositor, he is
presumed to know whether he is getting a
F. Liability for non-existence or misdescription negotiable or a non0negotiable receipt.
of goods
 GR: The warehouseman is under obligation to J. Failure to take up and cancel a negotiable
deliver the identical property stored with him and receipt when goods are delivered, OR
if he fails to do so, he is liable directly to the failure to take up and cancel a negotiable
owner or holder of a receipt for damages. receipt or to place upon it a statement of
 EXC: If the description consists merely of marks what goods have been delivered, when the
or labels upon the goods or upon the packages goods are partly delivered
containing them, the warehouseman is not liable  GR: The warehouseman shall be liable for
even if the goods are not of the kind as indicated failure to deliver the goods to any one who
in the marks or labels. purchases for value in good faith such receipt
whether the purchaser acquired title to the
G. Liability for loss due to lack of care receipt before or after delivery of the goods by
 GR: The warehouseman is required to exercise the warehouseman. He shall also be guilty in
ordinary or reasonable care in the custody of such case of crime punishable by fine or
goods, that is, the care a reasonably careful imprisonment.
owner would exercise over similar goods of his  Exceptions:
own. This is the “diligence of a good father of a 1. Where the goods have been lawfully sold to
family” satisfy a warehouseman’s lien; or
 EXC: In the absence of any agreement to the 2. Where the goods have been lawfully sold or
contrary, the warehouseman is not liable for any disposed of because of their perishable or
loss or injury to the goods which could not have hazardous nature.
been avoided by the exercise of such care.
K. Liability for issuing receipts for goods not
H. Liability to depositors of commingled goods received by him or are not under his actual
 PURPOSE: to permit at all times the control at the time of issuance of the receipt
identification and redelivery of the goods
deposited L. Liability for issuing receipts for the
 GR: A warehouseman shall keep the goods so warehouseman’s goods which do not state
far separate from goods of other depositors, and that fact
from other goods of the same depositor for  A warehouseman shall be guilty of a crime
which a separate receipt has been issued. punishable by fine or imprisonment, or by
 EXC: both, if he issues a negotiable receipt for the
1. If authorized by agreement or by custom, or same goods deposited with or held by him of
2. If the goods are fungible goods with other which he knows he is the owner, solely or
goods of the same kind and grade. jointly or in common with others, if he fails to
a. The various depositors of the mingled state such ownership in the receipt
goods shall own the entire mass in
common and each depositor shall be M. Liability for delivery of goods without
entitled to such portion as the amount obtaining negotiable receipt or knowing
deposited by him bears to the whole. that a negotiable receipt is outstanding and
b. The warehouseman shall be severally uncancelled
liable to each depositor for the care  Exceptions:
and redelivery of his share of such 1. Where the goods have been lawfully sold to
mass to the same extent and under satisfy a warehouseman’s lien or
the same circumstances as if the 2. The goods have been lawfully sold or
goods had been kept separate. disposed of because of their perishable or
hazardous nature or
I. Liability for failure to mark a receipt intended 3. In case of lost or destroyed receipt after
to be non-negotiable as “non-negotiable” proceedings
 The holder of the receipt believing it to be
negotiable may, at his option, treat it as Attachment or levy of goods deposited
imposing upon the warehouseman the same A. Negotiable receipt
 Saint Louis University COMMERCIAL LAW 16
2012 BAR OPERATIONS

 The warehouseman has the direct obligation to B. Against what enforced

hold possession of the goods for the original  The warehouseman’s lien can be enforced
owner or for the person to whom the negotiable against:
receipt of title has been duly negotiated.(Sec 41) 1. The goods of the depositor who is liable to
 GR: While in possession of such, the goods the warehouseman as debtor whenever
CANNOT be attached or levied upon under an such goods are deposited; and
execution unless: 2. The goods of other persons stored by the
1. The document be first surrendered; or depositor who is liable to the warehouseman
2. The negotiation is enjoined; as debtor with authority to make a valid
3. The document is impounded by the court. pledge.
 EXCEPTIONS:  Purpose of the law: to give the warehouseman a
1. If the person depositing is not the owner of lien for charges against goods of persons who
the goods or one who has no right to convey are primarily liable for the charge incurred, and
title to the goods binding upon the owner; who by their agreement create the relation of
2. Actions for recovery or manual delivery of debtor and creditor.
goods by the real owner;
3. Cases where the attachment is made before C. Remedies for enforcement
the issuance of the negotiable receipt of title 1. Refusing to deliver the goods until the lien is
 A creditor whose debtor is the owner of a satisfied;
negotiable receipt CAN attach the negotiable 2. Causing the extrajudicial sale of the property
receipt in the debtor’s possession and NOT the and applying the proceeds to the value of the
goods covered by such receipt. (Sec.26) This lien; and
provision expressly gives the court full power to 3. Filing a civil action for the unpaid charges or by
aid by injunction and otherwise a creditor way of counterclaim in an action to recover the
seeking to get a negotiable receipt covering property from him.
such goods.  Whether a warehouseman has or has not lien
 The prohibition is for the protection of the upon the goods, he is entitled to all remedies
warehouseman since he could be made liable to allowed by law to a creditor against his debtor,
a subsequent purchaser for value in good faith. for the collection from the depositor of all the
B. Non-negotiable receipt charges and advances which the depositor has
 The goods can be attached, provided it is done expressly or impliedly contracted with the
prior to the notification of the warehouseman of warehouseman to pay. (Sec 32)
the transfer (Sec.42)
 Absent such notice, both the warehouseman D. Loss
and the sheriff have a right to assume that the  The lien may be lost by:
goods are still owned by the person whose 1. Surrendering possession of goods
name appears in the receipt.  a warehouseman loses his lien upon the
goods by voluntary surrendering the
The warehouseman’s lien possession without requiring payment of
A. Extent the lien, it will be presumed that the lien
 The warehouseman has a lien on goods has been waived or abandoned where
deposited or on the proceeds thereof in his the warehouseman permits a depositor
hands for: to remove the goods BUT NOT where
1. All lawful charges for storage and the property is taken without
preservation of the goods warehouseman’s consent or by force
2. All lawful claims for money advanced, 2. Wrongfully refusing to deliver goods when
interest, insurance, transportation, labor, demand is made with which he is bound to
weighing, cooperating and other charges or comply under provisions of Sec.8
expenses in relation to the goods
3. All reasonable charges and expenses for E. Satisfaction by sale
notice and advertisements of sale, and 1. PROCEDURE: (Sec.33)
4. Sale of goods where default has been made a. The warehouseman shall give a WRITTEN
in satisfying the warehousing lien. NOTICE to the person on whose account
 The warehouseman’s lien over the goods the goods were held or to any person who
deposited with him is his security for the has a claim or interest in the goods. The
payment of the charge, money advanced and notice shall be given either by delivery in
other expenses. person or by registered mail to the last
 Saint Louis University COMMERCIAL LAW 17
2012 BAR OPERATIONS

known place of business or abode. The  In cases of perishable and hazardous goods, the
notice shall contain the following: warehouseman may give notice to the owner, or
i. An itemized statement of the to the person in whose name the goods are
warehouseman’s claim, the sum stored, to satisfy the lien upon such goods and
due and the date(s) when it became to remove them from the warehouse. Failure to
due. do so may entitle the warehouseman to sell the
ii. A brief description of the goods goods at public or private sale without
against which the lien exists. advertisements. In case he was unable to sell,
iii. A demand that the amount of the he may dispose of them in any lawful manner,
claim shall be paid on or before a and shall incur no liability by reason thereof.
day mentioned (not less than 10  Perishable and hazardous goods are goods
days from the delivery of the notice which by keeping will deteriorate greatly in
if personally delivered or from the value, or by odor, leakage, inflammability or
time when the notice should reach explosive nature and will make
its destination if the notice is sent by warehouseman liable in case it will injure
mail) other property.
iv. A statement that unless the claim is
paid within the time specified, the Effect of subsequent negotiation by seller of a
goods will be advertised for sale and receipt
sold by auction at a specified time  There is a duty upon the purchaser, mortgagee,
and place. or pledgee of goods for which a negotiable
b. In accordance with the terms of the notice, a receipt has been issued, to require the
sale of the goods by auction may be had to negotiation of the receipt to him; otherwise, his
satisfy any valid claim of the warehouseman failure will have the same effect as an express
for which he has a lien over the goods. authorization on his part to the seller, mortgagor
c. After the time for payment ahs elapsed, an or pledgor in possession of such receipt to make
advertisement of the sale, describing the any subsequent negotiation.
goods to be sold and stating the name of the
owner or person on whose account the Criminal Offenses: Who are liable
goods has been held and the time and place 1. Warehouseman, or any officer, agent or servant
of the sale. of the warehouseman, who issues or aids in
d. The ad shall be published once a week for issuing a receipt knowing that the goods have
two consecutive weeks in a newspaper not actually been received or are not under his
published in the place where the sale shall actual control at the time of issuing of such
be held. It can be in the place where the lien receipt
was acquired or if such place is manifestly  LIABILITY: Imprisonment not exceeding 5
unsuitable, at the nearest suitable place. yrs or by a fine not exceeding P10, 000.00,
 If there is no newspaper published in or by both.
such place, the advertisement shall be
posted at least 10 days before such sale 2. Warehouseman, or any officer, agent or servant
in not less than six (6) conspicuous of warehouseman, who fraudulently issues or
places therein. aids in fraudulently issuing a receipt for goods
e. The sale shall be held not less than 15 days knowing that it contains any false statements
from the time of the first publication.  LIABILITY: Imprisonment not exceeding 1
f. From the proceeds of the sale the yr, or by a fine not exceeding P2,000.00, or
warehouseman shall satisfy his lien by both.
including the reasonable charges of notice,
advertisement and sale. 3. Warehouseman, or any officer, agent or servant
g. The balance, if any, shall be held by the of warehouseman, who issues or aids in issuing
warehouseman, and delivered on demand to a duplicate or additional negotiable receipt for
the person to whom he would have been goods knowing that a former negotiable receipt
bound to deliver the goods. for the same goods is outstanding and
uncancelled, without plainly placing “duplicate”
2. EFFECT (except in case of loss or destroyed receipts)
 The warehouseman shall not thereafter be liable  LIABILITY: Imprisonment not exceeding 5
for failure to deliver the goods to the depositor or yrs, or by a fine not exceeding P10,000.00,
owner of the goods even if such receipt be or by both.
negotiable.
 Saint Louis University COMMERCIAL LAW 18
2012 BAR OPERATIONS

4. If there are goods deposited or held by the

warehouseman as an owner, either solely or A warehouseman is a A warehouseman is a
jointly with others: that warehouseman, or any person engaged in the person lawfully engaged in
officer, agent or his servant, knowing such business of receiving the business of storing
commodity for storage. goods for profit
ownership who, issues or aids in issuing a
negotiable receipt not stating such ownership.
 LIABILITY: Imprisonment not exceeding 1 Applicability
yr, or by a fine not exceeding P2,000.00, or 1. Warehouseman engaged in the business of
by both. receiving commodity for storage,
2. Including contracts or transactions wherein:
5. Warehouseman, or any officer, agent or servant a. The warehouseman is obligated to return
of warehouseman, who delivers goods out of the the very same commodity delivered to him
possession of such warehouseman, knowing or to pay its value
that a negotiable receipt is outstanding and b. The commodity delivered is to be milled for
uncancelled, without obtaining the possession of the owner thereof
such receipt at or before the time of delivery c. The commodity delivered is commingled
 LIABILITY: Imprisonment not exceeding 1 with the commodity belonging to other
yr, or a fine not exceeding P2,000.00, or by persons, and the warehouseman is
both. obligated to return commodity of the same
kind or to pay its value
6. Any person who deposits goods to which he has
no title, or upon which there is a lien or Commodities which may be stored in a bonded
mortgage, and who takes, for such goods a warehouse
negotiable receipt which he afterwards  Generally, these commodities could be any raw,
negotiates for value without disclosing his want processed, manufactured or finished product or
of title or existence of the lien or mortgage. by-product, goods, article, or merchandise,
LIABILITY: Imprisonment not exceeding 1 yr, or by a either domestic or of foreign production or origin,
fine not exceeding P2,000.00, or by both. which may be traded or dealt in openly and
legally.
GENERAL BONDED WAREHOUSE ACT   Prohibited substances, the possession of which
(ACT NO 3893 as amended by RA 247)  is prohibited by law, may NOT be validly
received for storage in a bonded warehouse.
Purposes of the law Bond required to be put by the warehouseman
1. To protect depositors by giving then recourse in 1. The bond may either be cash or property bond
case of the insolvency of the warehouseman or bond issued by a duly authorized bonding
against the bond filed by him company
 To achieve this purpose, any person who
wants to engage in the business of receiving
commodities for storage is required by the 2. The amount of the bond must not be less than
Act to first secure a license therefore from 33 1/3% of the market value of the maximum
the Department of Trade and Industry. quantity of the commodity to be received by the
2. To regulate the business of receiving warehouseman.
commodities for storage 3. It shall be conditioned as to respond for the
3. To encourage the establishment of more market value of the commodity actually
warehouse delivered and received at any time by the
warehouseman in case the latter is unable to
GENERAL BONDED WAREHOUSE return the commodity or to pay its value.
WAREHOUSE ACT RECEIPTS LAW
Prescribes the mutual Duties of a bonded warehouseman
duties and rights of a 1. To secure a license from the Bureau of
Regulates and supervises warehouseman who issues
Domestic Trade (DTI);
warehouses which put up a warehouse receipts, and
bond his depositor; covers all
2. To give the necessary bond;
warehouses, whether 3. To insure the commodity received for
bonded or not storage against fire;
4. To receive for storage any commodity:
a. of the kind customarily stored by him in
the warehouse,
 Saint Louis University COMMERCIAL LAW 19
2012 BAR OPERATIONS

b. so far as his license or the capacity of 3. To declare the misuse or misappropriation of

the warehouse will permit, goods or the proceeds realized from the sale of
c. without making any discrimination goods released under trust receipts as an
between persons desiring to avail offense punishable under A.315 of the Revised
themselves of warehouse facilities Penal Code
 A fine for double the market value of the 4. To punish the dishonesty and abuse of
commodity so received is imposed in confidence in the handling of money or goods to
case of excess of the authorized the prejudice of another regardless of whether or
quantity. (Sec.12) not the latter is the owner
5. To keep complete record of all commodities
received by him, of the receipts issued Other purposes
therefore, of the withdrawals, of the 1. In the case of goods or documents
liquidation, and of all receipts returned to a. To sell the goods or procure their sale;
and canceled by him; b. To manufacture or process the goods with
6. To observe the rules and regulations of the the purpose of ultimate sale (here the
Bureau of Domestic Trade (DTI) entruster shall retain its title over the goods
whether in its original or processed form
Right of a person injured by the breach by the until the entrustee has complied fully with his
warehouseman of any of his obligation under the obligation under the trust receipt) or
act: c. To load, unload, ship or transship or
 He may sue on the bond put up by the otherwise deal with them in a manner
warehouseman to recover the damages he may preliminarily or necessary to their sale
have sustained on account of such breach. 2. In the case of instruments
 In case the bond given is not sufficient to cover a. To sell or procure their sale or exchange; or
the full market value of the commodity stored, he b. To deliver them to a principal; or
may sue on any property or assets of the c. To effect the consummation of some
warehouseman not exempt by law from transaction involving delivery to a depository
attachment and execution. or register; or
d. To effect their presentation, collection or
Offenses penalized under the act renewal
A. Civil
‐ Breach of obligations secured by the bond Constitutionality/Validity
B. Criminal  The Court has consistently declared that it does
1. Engaging in the business of receiving NOT violate the constitutional proscription
commodities for storage without the proper against imprisonment for non-payment of debts.
license  The Trust Receipts Law is a declaration by the
2. Receiving a quantity of commodity greater legislative authority that, as a matter of public
that that specified in the license of the policy, the failure of a person to turn over the
warehouseman proceeds of the sale of goods covered by a trust
Conniving or entering into a combination with an receipt or to return said goods if not sold is a
unlicensed warehouseman for the purpose of public nuisance to be abated by the imposition
avoiding compliance with the requirement of of penal sanctions. (Tiomico vs. CA, March 4,
obtaining a license before engaging in the business 1999)
of receiving commodities for storage  It does NOT seek to enforce payment of a loan.
The practice of banks of making borrowers sign
III. TRUST RECEIPTS LAW  trust receipts to facilitate collection of loans and
place them under the threats of criminal
(PD 115) 
prosecution should they be unable to pay it may
be unjust and inequitable, if not reprehensible.
Purposes
1. To encourage and promote the use of trust Trust Receipt
receipts as an additional and convenient aid to It is a written or printed document signed by
commerce and trade the entrustee in favor of the entruster containing
2. To regulate trust receipts transactions in order to terms and conditions substantially complying with
assure the protection of the rights and the the provision of the decree.
enforcement of the obligations of the parties
involved therein Trust Receipt Transaction
 Saint Louis University COMMERCIAL LAW 20
2012 BAR OPERATIONS

It is any transaction by and between an

entruster and entrustee, whereby the entruster, who Denominated currency of the trust receipt
owns or holds absolute title over certain specified The trust receipt may be in:
goods, documents or instruments, releases the 1. Philippine currency or
same to the possession of the entrustee upon the 2. Any foreign currency acceptable and eligible
latter’s execution and delivery to the entruster of a as part of international reserves of the
trust receipt. Philippines.

Parties to a trust receipt transaction: In case of trust receipts denominated in foreign

1. ENTRUSTEE currency, payment shall be made in its equivalent in
‐ Borrower/buyer/importer Philippine currency computed at the prevailing
‐ person having or taking possession of exchange rate on the date the proceeds of the sale
goods, documents or instruments under a are turned over to the entruster.
trust receipt transaction, and any successor-
in-interest of such person for the purpose(s) Rights of the parties
specified in the trust receipt agreement A. Entrustee (Borrower/Buyer/Importer)
‐ owner of the goods purchased 1. To receive the surplus from the public sale
2. ENTRUSTER 2. To have possession of the goods as a
‐ Lender/financier condition for his liability under this law
‐ person holding title over the goods, B. Entruster (Lender/Financier)
documents, or instruments subject of a trust 1. The entruster shall be entitled to the
receipt transaction and any successor-in- following:
interest of such person a. Proceeds from the sale of the goods,
‐ mere holder of security interest and NOT the documents or instruments released
owner of the goods under a trust receipt to the entrustee
 Security Interest – a property interest in b. Return of the goods, documents or
goods, documents or instruments to instruments in case of non-sale and
secure performance of some obligation c. Enforcement of all other rights conferred
of the entrustee or of some third person on him in the trust receipt provided such
 Seller of the goods is a party to the are not contrary to the provisions of this
contract of sale with the buyer/importer, decree.
NOT a party to the trust receipt 2. May cancel the trust and take possession of
transaction the goods, documents or instruments
subject of the trust or of the proceeds
Form and contents of the trust receipt realized therefrom at any time upon default
A trust receipt need not be in any particular or failure of the entrustee to comply with any
form, BUT every such receipt must substantially of the terms and conditions of the trust
contain the following: receipt; or
1. A description of the goods, documents or 3. On or after default, give notice to the
instruments subject of the trust receipt; entrustee of the intention to sell, and may,
2. The total invoice value of the goods and the not less than 5 days after serving or sending
amount of the draft to be paid by the entrustee; of such notice, sell the goods at a public or
3. An undertaking or a commitment of the private sale, and the entruster may, at a
entrustee to: public sale, become a purchaser.
a. Hold in trust for the entrustee the goods, 4. The entruster’s security interest in goods,
documents or instruments therein described; documents or instruments pursuant to the
b. Dispose of them in the manner provided for written terms of a trust receipt shall be valid
in the trust receipt; and as against all creditors of the entrustee for
c. Turn over the proceeds of the sale to the the duration of the trust receipt agreement.
entruster to the extent of the amount owing 5. The entruster holding a security interest
to the entruster or as appears in the trust shall NOT, merely by virtue of such interest
receipt or return the same in the event of or having given the entrustee liberty of sale
non-sale within a specified period. or other disposition of the goods, documents
 The trust receipt may contain other terms and or instruments under the terms of the trust
conditions agreed upon by the parties provided receipt transaction, be responsible as
that such shall not be contrary to the provisions principal or as vendor under any sale or
of this law, any existing laws, public policy or contract to sell made by the entrustee.
morals, public order or good customs.
 Saint Louis University COMMERCIAL LAW 21
2012 BAR OPERATIONS

 Right of purchaser in good faith not sold or disposed of in accordance

Any purchaser of goods, documents or with the terms of the trust receipt.
instruments, who buys such for value and in  If a corporation, partnership, association
good faith from the entrustee, acquires said or other juridical entities commit the
goods, documents or instruments free from the violation; the penalty shall be imposed
entruster’s security interest. upon the directors, officers, employees
or other officials responsible for the
Obligations of the parties offense.
A. Entrustee (Borrower/Buyer/Importer)
1. Hold the goods, documents or instruments  The breach of obligation under a trust
in trust for the entruster and shall dispose of receipt agreement is separate and distinct
them strictly in accordance with the terms from any criminal liability for misuse and/or
and conditions of the trust receipt; misappropriation of goods or proceeds
2. Receive the proceeds in trust for the realized from the sale of goods, documents
entruster and turn over the same to the or instruments released under trust receipts,
entruster to the extent of the amount owing punishable under Sec.13 of the Trust
to the entruster or as appears in the trust Receipts Law in relation to A.315(1)(b) of
receipt; the RPC. Being based on an obligation ex
3. Insure the goods for their total value against contractu and not ex delicto, the civil action
loss from fire, theft, pilferage or other may proceed independently of the criminal
casualties; proceedings instituted against petitioners
4. Keep said goods or proceeds thereof regardless of the result of the latter.
whether in money or whatever form, (Sarmiento, Jr. vs CA, December 27, 2002)
separate and capable of identification as
property of entruster; B. Entruster (Lender/Financier)
5. Return the goods, documents or instruments  NO liability under any sale or contract to
in the event of non-sale or upon demand of sell made by the entrustee
the entruster; and
6. Observe all other terms and conditions of Public sale of the goods by the entruster
the trust receipt not contrary to the 1. Notice of the sale shall be deemed sufficiently
provisions of this decree. given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary
B. Entruster (Lender/Financier) mail to the entrustee’s last known address.
1. Give possession of the goods to the 2. The proceeds of such sale, whether public or
entrustee; and private, shall be applied to the following:
2. Give at least 5 days notice to the entrustee a. Payment of the expenses thereof;
of the intention to sell the goods at an b. Payment of the expenses of re-taking,
intended public sale keeping and storing of goods, documents or
instruments;
Liabilities of the parties c. Satisfaction of the entrustee’s indebtedness
A. Entrustee (Borrower/Buyer/Importer) to the entruster.
1. CIVIL: 3. Excess/Deficiency
a. Liability for loss a. Excess (surplus) – entrustee is entitled to it
 Loss pending their disposition, b. Deficiency – entruster is entitled to it
irrespective of whether or not it was (entrustee to pay balance to entruster)
due to the fault or negligence of the
entrustee, shall NOT extinguish his IV. NEGOTIABLE INSTRUMENTS LAW 
obligation to the entruster for the value
Act No. 2031 
thereof.
b. Liability for damages under A.33 of the
NCC; because it is malum prohibitum, Negotiable Instrument
there is no need of proof of intent to A negotiable instrument is a written contract for
defraud the payment of money which complies with the
2. CRIMINAL: Estafa requirements of Sec. 1 of the Negotiable
 If there is failure on the part of the Instruments Law, which, by its form and on its face is
entrustee to turn over the proceeds of intended as a substitute for money and passes from
the sale or to return said goods, hand to hand as money, so as to give the holder in
documents or instruments if they were
 Saint Louis University COMMERCIAL LAW 22
2012 BAR OPERATIONS

due course the right to hold the instrument free from A prior party does
defenses available to prior parties. not warrant
A prior party may
Warranty payment but
warrant payment
Functions merely the
1. To supplement the currency of the government; legality of his title
2. To substitute for money and Law that Negotiable
3. To increase the purchasing medium. New Civil Code
governs Instruments Law
 A negotiable instrument is NOT legal tender.
Classes of Instrument
Principal Features and Characteristics 1. Promissory Note
1. Negotiability ‐ It is an unconditional promise in writing by
‐ A bill, note or check may pass from hand to one person to another signed by the maker
hand so as to give the holder in due course engaging to pay on demand or at a fixed or
the right to hold the instrument and to collect determinable future time, a sum certain in
the sum payable for himself free from money, to order or to bearer. (Sec. 184)
defenses 2. Bill of Exchange
2. Accumulation of secondary contracts ‐ It is an unconditional order in writing
‐ When negotiable instruments are transferred addressed by one person to another, signed
through negotiation, secondary contracts are by the person giving it, requiring the person
accumulated because the indorsers become whom it is addressed to pay on demand or
secondarily liable not only to their immediate at a fixed or determinable future time a sum
transferees, but also to any holder certain in money to order or to bearer. (sec
126)
Non-negotiable documents and instruments:
These are some documents very similar to, PROMISSORY NOTE BILL OF EXCHANGE
but not, negotiable instruments, because they lack
one, some, or all the requirements of a negotiable It contains an It contains an
instrument under Section 1 of the Negotiable unconditional promise unconditional order
Instruments Law.
There are two (2) There are three (3) original
Examples: original parties, viz; parties, viz; drawer,
1. Treasury Warrants maker and payee drawee and payee
2. Money Orders
The original issuer The original issuer
3. Warehouse Receipts (maker) is primarily (drawer) is secondarily
4. Bills of Lading liable liable
5. Trust Receipts At least two (2)
presentments (for
NON- Only one presentment
NEGOTIABLE acceptance and for
(for payment) is needed
Basis NEGOTIABLE payment) are generally
INSTRUMENT
INSTRUMENT needed.
Does not have
any, some or all 3. Check
Contains all the
of the - It is a bill of exchange drawn on a bank
Requisites requisites of Sec.
requisites payable on demand. (Sec. 185)
1 of the NIL.
mentioned in the - It is a written order addressed to a bank
N.I.L. or person carrying on the business of
Transfer By negotiation By assignment banking, by a party having money in
A transferee their hands, requesting them to pay on
A holder in due
acquires presentment, to a person named therein
Rights course can have
rights no better or to bearer or order, a named sum of
acquired rights better than
than money. (Moran v. CA, 230 SCRA 799).
his transferor
his transferor
 Saint Louis University COMMERCIAL LAW 23
2012 BAR OPERATIONS

(Relate with Sec. 191)

BILL OF EXCHANGE CHECK 2. It must contain an unconditional promise or
It is necessary that a order to pay a sum certain in money;
Not necessarily drawn on a check is drawn on a 3. It must be payable on demand, or at fixed or
deposit. The drawee need bank deposit. The determinable future time; and
not be a bank. drawee is always a
4. It must be payable to order or to bearer.
bank.
Death of a drawer of a Death of the drawer of
BOE, with the knowledge of a check, with the Requisites of a Negotiable Bill of Exchange:
the bank, does not revoke knowledge of the bank 1. It must be in writing and signed by the drawer;
the authority of the payee to revokes the authority 2. It must contain an unconditional order to pay a
pay. of the banker to pay. sum certain in money;
May be presented for 3. It must be payable on demand or at a fixed or
Must be presented for determinable future time;
payment within a
payment within a 4. It must be payable to order or to bearer; and
reasonable time after its last
reasonable time after
negotiation because it may 5. The drawee must be named or otherwise
its issue.
be further negotiated. indicated therein with reasonable certainty.
May be payable on demand
Always payable on The validity and negotiable character of a
or at a fixed or determinable
demand. negotiable instrument are NOT affected by the
future time
fact that:
1. It is not dated;
Other forms of negotiable instruments:
2. It does not specify the place where it is drawn or
1. Certificate of deposit issued by banks, payable
where it is payable;
to the depositor or his order, or to bearer
3. It bears a seal;
(CALTEX v. CA, 212 SCRA 471)
4. It designates a particular kind of current money
2. Trade Acceptance;
in which payment is to be made ; and
3. Bonds, which are in the nature of a promissory
5. It does not specify the value given, or that any
notes;
value had been given therefore.
4. Drafts which are bills of exchange drawn by one
bank upon another;
Unconditional promise or order
 All of these comply with Sec. 1 NIL.
Where the promise or order is made to
 Letters of Credit are NOT negotiable.
depend on a contingent event, it is conditional, and
makes the instrument non-negotiable.
Legal tender An instrument which contains an order or
It is that kind of money which the law
promise to do any act in addition to the payment of
compels a creditor to accept in payment of his debt
money is NOT negotiable.
when tendered by the debtor in the right amount.
A negotiable instrument is NOT legal tender.
The conditional nature of the promise or order is
not affected by:
FORM AND INTERPRETATION  a. An indication of a particular fund from which the
OF NEGOTIABLE INSTRUMENTS  maker or acceptor reimburses himself after
paying the holder;
b. A statement of the transaction which gives rise
Requisites of Negotiability in General (Sec. 1)
to the instrument. (Sec. 3)
An instrument to be negotiable must conform to the
c. A provision which gives the holder an election to
following requirements:
require something to be done in lieu of payment
1. It must be in writing and signed by the maker or
of money. (Sec 5 par d)
drawer;
2. It must contain an unconditional promise or
FUND FOR PARTICULAR FUND FOR
order to pay a sum certain in money;
REIMBURSEMENT PAYMENT
3. It must be payable on demand or at a fixed or
There is only one act- the
determinable future time; Drawee pays the payee
drawee pays directly from
4. It must be payable to order or to bearer; from his own funds;
the particular fund
5. Where the instrument is addressed to a drawee, afterwards, the drawee
indicated. Payment is
he must be named or otherwise indicated pays himself from the
subject to the condition that
particular fund indicated.
therein with reasonable certainty. the fund is sufficient.

Requisites of a Negotiable Promissory Note:

1. It must be in writing and signed by the maker;
 Saint Louis University COMMERCIAL LAW 24
2012 BAR OPERATIONS

Particular fund indicated is It is a clause in the face of the instrument

Particular fund indicated is that extend the maturity dates:
not the direct source of
the direct source of
payment but only the a. At the option of the holder; or
payment.
source of reimbursement. b. At the option of the maker or acceptor;
Indication in the instrument or
does not affect the Indication in the instrument c. Automatically upon or after a specified
unconditional character or makes the promise or order act or event.
unconditionality of the conditional.
promise or order Payable in money
 General Rule:
Certainty of sum If some other act besides payment of money
- The sum is certain if the amount is fixed. is promised or ordered, the instrument becomes
- The certainty is NOT affected although it is to be non-negotiable.
paid:  Exceptions:
1. with interests; 1. Authorizes the sale of collateral securities on
2. by stated installments; default;
3. by stated installments with acceleration 2. Authorizes confession of judgment on
clause; default;
4. with exchange (fixed or current rate); 3. Waives the benefit of law intended to protect
5. with cost of collection or attorney’s fees. the debtor/obligor;
(Sec. 2) 4. Allows the holder the option to require
something to be done in lieu of money.
The presence of an escalation clause or a de-
escalation clause or both in the instrument does Payable on demand
NOT affect the negotiable character of the An instrument is payable on demand:
instrument. 1. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
Escalation Clause 2. In which no time for payment is expressed.
It is an agreement pertaining to a loan or
forbearance of money, goods or credits which Payable on a determinable future time
stipulates that the rate of interest agreed upon may Future time is determinable in the following
be increased in the event that the applicable cases:
maximum rate of interest is increased by law or by a. At a fixed period after date or sight;
the Monetary Board. b. On or before a specified fixed or
determinable future time;
De-escalation Clause c. On or at a fixed period after the occurrence
It is an agreement pertaining to a loan or of a specified event, certain to happen,
forbearance of money, goods or credits may although the exact date of happening is not
stipulate that the rate of interest agreed upon may certain.
be reduced in the event that the applicable
maximum rate of interest is decreased by law or by An instrument payable upon a contingency is not
the Monetary Board. negotiable, and the happening of the event does not
cure the defect. (Sec 4)
Acceleration Clause
It is a provision that upon default in payment Payable to order
of any installment or of interest, the whole shall - The instrument is payable to order where drawn
become due. payable to the order of a specified person, or
when drawn payable to a specified person or to
Insecurity Clause his order.
It is a provision in the contract which allows - The payee must be named or otherwise
the holder to accelerate payment if he deems indicated therein with reasonable certainty.
himself insecure. - It may be drawn payable to the order of:
The instrument is rendered non-negotiable a) A payee who is not maker, drawer, or
because the holder’s whim and caprice prevail drawee; or
without the fault and control of the maker. b) The drawer or maker; or
c) The drawee; or
Extension Clause d) Two or more payees jointly; or
e) One or some of several payees; or
f) The holder of an office for the time being.
 Saint Louis University COMMERCIAL LAW 25
2012 BAR OPERATIONS

instrument, and if the instrument is undated,

Payable to bearer from the issue thereof.
- The instrument is payable to bearer: h. When a promissory note is payable on demand,
a) When it is expressed to be so payable; the date of its issuance is important in relation to
b) When payable to a person named therein or when it should be presented for payment. Sec.
bearer; 71 provides: “where a promissory note is
c) When payable to the order of a fictitious or payable on demand, presentment for payment
non-existing person, and such fact was must be made within a reasonable time after its
known to the drawer or maker; issue.
d) When the name of the payee does not i. When a bill of exchange is payable on demand,
purport to be the name of any person; or the date of its last negotiation is important in
e) When the only OR last indorsement is an relation to when it should be presented for
indorsement in blank. payment. Sec. 71 provides: In the case of a bill
- An original bearer instrument remains to be a of exchange which is payable on demand,
bearer instrument even if indorsed specially and presentment for payment will be sufficient if
thus can be further negotiated by mere delivery. made within a reasonable time after the last
- When the payee is vaguely designated, the loss negation thereof.
will be borne by the party who caused it – the
drawer. (Equitable Bank v. IAC, 161 SCRA 518). Rules on interpretation of instruments
1. Discrepancy between the amount in figures and
Rules as to dates that in words
a. Where the instrument is dated, such date is  The words prevail, but if the words are
deemed prima facie to be the true date of the ambiguous, reference will be made to the
making (of the PN) or drawing (of the Bill of figures to fix the amount.
Exchange). (Sec. 11) 2. Instrument NOT dated
b. Where an acceptance of a bill is dated, such  considered dated on the date of issue
date is deemed prima faice to be the true date of 3. Conflict between written and printed provisions
acceptance thereof. (Sec. 11)  written provisions prevail
c. Where any indorsement of a note or bill is dated, 4. Interest provided for, BUT no starting date was
such date is deemed prima facie to be the true specified
date of the indorsement. (Sec. 11)  starting date is the date of the instrument, in
d. Where an instrument expressed to be payable at the absence of said date, from date of issue
a fixed period after date is issued undated, any 5. Instrument is ambiguous
holder may insert therein the true date of issue  if the instrument is ambiguous such that
and the instrument shall be payable accordingly. there is doubt whether it is a bill or note, the
(Sec. 13) holder may treat it either as a note or a bill at
e. Where the acceptance of an instrument payable his option.
at a fixed period after sight is undated, any 6. Signature on instrument does not indicate
holder may insert therein the true date of capacity in which made
acceptance and the instrument shall be payable  Where it cannot be determined in what
accordingly. (Sec. 13) capacity a person affixed his signature to a
 The insertion of a wrong date in d. and e. negotiable instrument, he is deemed to have
above does not avoid the instrument in the signed as an indorser. As indorser, his
hands of a subsequent holder in due course; liability under the instrument is secondary,
but as to him, the date so inserted is to be meaning that if the party primarily liable
regarded as the true date. cannot pay, the indorser can be made to pay
f. Antedating or postdating an instrument does not by the holder of the instrument.
affect the validity or negotiability thereof unless 7. Where promissory note worded “Promise to
done for an illegal or fraudulent purpose. Pay” is signed by two (2) or more makers, they
 The person to whom an ante-dated or post- are jointly and severally liable
dated instrument is delivered acquires title  Under Section 17 (g) of the NIL and Article
thereto as of the date of delivery. (Sec. 12) 1216 of the Civil Code, where the
promissory note was executed jointly and
g. Where the instrument provides for the payment severally by two or more persons, the payee
of interest, the interest runs from the date of the promissory note had the right to hold
specified in the instrument as the starting point any one of the two (2) signers of the
for the running of the interest. If the instrument promissory note responsible for the payment
does not specify the date from which interest is of the whole amount of the note. (Philippine
to run, the interest runs from the date of the National Bank v. Conception Milling Co., 5 SCRA 745).
 Saint Louis University COMMERCIAL LAW 26
2012 BAR OPERATIONS

It is any consideration sufficient to support a

INCIDENTS IN THE LIFE   simple contract. An antecedent or pre-existing debt
OF A NEGOTIABLE INSTRUMENT  constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
1. Issue (Sec 25)
2. Negotiation  Every negotiable instrument is deemed
3. Presentment for acceptance, in certain kinds prima facie to have been issued for a
of bills of exchange valuable consideration; and every person
4. Acceptance whose signature appears thereon to have
5. Dishonor by non-acceptance become a party thereto for value. (Sec 24)
6. Presentment for payment
7. Dishonor by non-payment Holder for value
8. Notice of dishonor Where value has at any time been given for
9. Discharge the instrument, the holder is deemed a holder for
ISSUE value in respect to all parties who become such prior
to that time. ( Sec 26)
Issue
The first delivery of the instrument, complete When lien on instrument constitutes holder for
in form, to a person who takes it as a holder. (Sec. value
191) Where the holder has a lien on the
instrument arising either from contract or by
Delivery implication of law, he is deemed a holder for value to
It is transfer of possession, actual or the extent of his lien. (Sec 27)
constructive, from one person to another for the
purpose of giving effect thereto. (Sec. 191) Effect of want of consideration
Absence or failure of consideration is a
Kinds of Instruments which are issued: matter of defense as against any person not a
1. complete instrument holder in due course; and partial absence or
2. incomplete instrument consideration is a defense pro tanto, whether the
absence or failure is an ascertained and liquidated
Incomplete Instrument, how completed: amount or otherwise. (Sec. 28)
 It must be filled up strictly in accordance with the
authority given and within a reasonable time. Accommodation
(Sec 14) A. Definition
 Where an instrument expressed to be payable at Accommodation is a legal arrangement
a fixed period after date is issued undated, or under which a person called the accommodation
where the acceptance of an instrument payable party lends his name and credit to another called
at a fixed period after sight is undated, any the accommodated party, without consideration.
holder may insert therein the true date of issue B. Effect
or acceptance, and the instrument shall be A person to whom the instrument thus
payable accordingly. The insertion of a wrong executed is subsequently negotiated, has a right
date does not avoid the instrument in the hands of recourse against the accommodation party
of a subsequent holder in due course; but as to inspite of the former’s knowledge that no
him, the date so inserted is to be regarded as consideration passed between the
the true date.(Sec 13) accommodation and accommodated parties.
 If after completion, an incomplete instrument is C. Requisites
negotiated to a holder in due course, it is valid 1. The accommodation party must sign as
and effectual for all purposes in his hands, and maker, drawer, acceptor or indorser;
he may enforce it as if it had been filled up 2. No value is received by the accommodation
strictly in accordance with the authority given party from the accommodated party; and
and within a reasonable time. (Sec 14) 3. The purpose is to lend the name. (Crisologo-
 Where an incomplete instrument has not been Jose v. CA, 177 SCRA 594).
delivered, it will not, if completed and negotiated D. Accommodation Party
without authority, be a valid contract in the Is one who has signed the instrument as
hands of any holder, as against any person maker, drawer, acceptor, or indorser, without
whose signature was placed thereon before receiving value therefor, and for the purpose of
delivery. (Sec 15) lending his name to another person.

Value
 Saint Louis University COMMERCIAL LAW 27
2012 BAR OPERATIONS

 A corporation cannot act as an from the other solidary accommodation

accommodation party. Such is an ultra maker, in the absence of a contrary
vires act. (Crisologo-Jose v CA, 117SCRA594) agreement between them. This right springs
E. Liability of the Accommodation Party from an implied promise between the
1. The accommodation party is liable on the accommodation makers to share equally the
instrument to a holder for value burdens resulting from their execution of the
notwithstanding that such holder at the time note. They are joint guarantors of the
of taking the instrument knew him to be only principal debtor. (Sadaya v. Sevilla)
an accommodation party. It is NOT a valid G. A solidary accommodation maker may:
defense that the accommodation party did a. demand from the principal debtor
not receive any valuable consideration when reimbursement of the amount which he paid
he executed the instrument. He is liable to a on the promissory note and
holder for value by virtue of his being an b. demand contribution from his co-
accommodation party. accommodation maker, without first directing
2. An accommodation party to a negotiable his action against the principal debtor,
instrument, in spite of the lack of PROVIDED that:
consideration between him and the b.1. he made the payment by virtue of a
accommodated party, is liable to any other judicial demand, or
holder NOT to the accommodated party. b.2. the principal debtor is insolvent.
(Travel-On, Inc. v. CA, et al, 210 SCRA 351).
3. An accommodation party’s liability as a NEGOTIATION
solidary party is unconditional party is
unconditional and is not affected by an Negotiation
extension of payment granted by the creditor An instrument is negotiated when it is
to the debtor. HOWEVER, where the holder transferred from one person to another in such
allowed payments by the drawer direct to manner as to constitute the transferee the holder
the contractor without availing of the deed of thereof. If payable to bearer, it is negotiated by
assignment in its favor, said holder is a bad delivery; if payable to order, it is negotiated by the
faith holder, NOT a holder in due course indorsement of the holder and completed by
against whom an extension to pay granted delivery. (Sec 30)
by the drawer is a defense by the
accommodation party. (Prudencio v. CA, 143 Negotiation of the whole instrument
SCRA 6).
As a rule the whole instrument must be indorsed –
4. The liability of an accommodation party does EXCEPT when it was partially paid, in which case,
not extend to corporate accommodation the remainder can be indorsed.
because the act of the corporate officers is
ultra vires. However, these officers are Rights Transferred by Negotiation
personally liable. (Crisologo-Jose v. CA, 177 SCRA - Negotiation constitutes the transferee a holder of
594).
5. A promissory note, with an accommodation the instrument. A holder is entitled to collect the
co-maker, used to settle an estafa case, has instrument from the party primarily liable, and if
an illegality of cause, and does not make the dishonored, from the secondary parties. He can sue
accommodation co-maker liable. (United in court on the instrument. If the holder is a holder in
General Industries v. Paler, 112 SCRA 404) due course, he takes the instrument free from the
6. A promissory note with an accommodation defects of title of prior parties, free from personal
maker, utilized to settle an estafa case, has defenses of prior parties among themselves, and he
an illegal consideration, and does not make can enforce the instrument for the full amount
the co-maker liable. (United general Industries v. thereof against all parties liable thereon.
Paler, 112 SCRA 404)
F. Rights of an accommodation party Classes of Negotiation
1. Against the Accommodated Party 1. By Mere Delivery of the Instrument
- the accommodation party, if obliged to pay - Negotiation of negotiable instrument may be
to a holder of value, can seek effected by the delivery alone of the
reimbursement from the accommodated instrument to the transferee in those
party. negotiable instruments which are:
2. Against the Co-accommodation Party a. originally payable to bearer, or
- where a solidary accommodation maker b. originally payable to order instruments
paid to the bank the balance due on a where the last indorsement is an
promissory note, he may seek contribution
 Saint Louis University COMMERCIAL LAW 28
2012 BAR OPERATIONS

indorsement in blank or where the only  But the mere absence of words implying
indorsement is an indorsement in blank. power to negotiate does not make an
2. By Indorsements Followed by Delivery indorsement restrictive. (Sec 36)
- A negotiable instrument payable to the order  Effect of restrictive indorsement; rights
of a specified person, or to him or his order, of restrictive indorsee
may be negotiated by the payee by - A restrictive indorsement confers upon the
indorsement followed by delivery of the indorsee the right:
instrument to the indorsee. Subsequent a. to receive payment of the
negotiation must be made in this manner if instrument;
the holder who indorses acquired the b. to bring any action thereon that the
instrument under a special indorsement. indorser could bring;
- The payee of the negotiable instrument c. to transfer his rights as such
acquires no interest with respect thereto indorsee, where the form of the
until its delivery to him. (Development Bank of indorsement authorizes him to do
Rizal v. Sima Wei) so. But all subsequent indorsees
acquire only the title of the first
indorsee under the restrictive
INDORSEMENT indorsement.(Sec 37)
4. Qualified indorsement
Indorsement - constitutes the indorser a mere assignor of
It is the legal transaction effected by the the title to the instrument. It may be made by
writing of one’s own name at the: adding to the indorser's signature the words
3. back of the instrument or "without recourse" or any words of similar
4. upon a paper (allonge) attached thereto import. Such an indorsement does not
with or without additional words impair the negotiable character of the
specifying the person to whom or to instrument.(Sec 38)
whose order the instrument is to be 5. Conditional Indorsement
payable whereby one not only transfers - Where an indorsement is conditional, the
legal title to the paper transferred but party required to pay the instrument may
likewise enters into an implied guaranty disregard the condition and make payment
that the instrument will be duly paid. to the indorsee or his transferee whether the
(sec 31) condition has been fulfilled or not. But any
- General Rule: Indorsement must be of the person to whom an instrument so indorsed
entire instrument. is negotiated will hold the same, or the
- Exception: Where instrument has been proceeds thereof, subject to the rights of the
paid in part, it may be indorsed as to the person indorsing conditionally. (Sec 39)
residue. (Sec 32) 6. Unconditional or absolute indorsement
Kinds: 7. Irregular indorsement
1. Special Indorsement - Where a person, not otherwise a party to an
- specifies the person to whom, or to whose instrument, places thereon his signature in
order, the instrument is to be payable, and blank before delivery, he is liable as
the indorsement of such indorsee is indorser, in accordance with the following
necessary to the further negotiation of the rules:
instrument. (Sec 34) a. If the instrument is payable to the
2. Indorsement in blank order of a third person, he is liable
- specifies no indorsee, and an instrument so to the payee and to all subsequent
indorsed is payable to bearer, and may be parties.
negotiated by delivery. (Sec 34) b. If the instrument is payable to the
3. Restrictive Indorsement order of the maker or drawer, or is
- an indorsement is restrictive when it payable to bearer, he is liable to all
a. Prohibits the further negotiation of parties subsequent to the maker or
the instrument; or drawer.
b. Constitutes the indorsee the agent c. If he signs for the accommodation of
of the indorser; or the payee, he is liable to all parties
c. Vests the title in the indorsee in trust subsequent to the payee. (Sec 64)
for or to the use of some other 8. Joint Indorsement
persons.
 Saint Louis University COMMERCIAL LAW 29
2012 BAR OPERATIONS

- Where an instrument is payable to the order  The indorsement or assignment of the

of two or more payees or indorsees who are instrument by a corporation or by an infant
not partners, all must indorse unless the one passes the property therein, notwithstanding
indorsing has authority to indorse for the that from want of capacity, the corporation or
others. (Sec 41) infant may incur no liability thereon.

Indorsement of instrument payable to bearer  An instrument negotiable in its origin continues

Where an instrument, payable to bearer, is to be negotiable until it has been restrictively
indorsed specially, it may nevertheless be further indorsed or discharged by payment or
negotiated by delivery; but the person indorsing otherwise.
specially is liable as indorser to only such holders as
make title through his indorsement.(Sec 40) Effect of Indorsement on Instrument Negotiable
by DELIVERY
Effect of instrument drawn or indorsed to a Where an instrument negotiable by delivery is
person as cashier indorsed by the holder, he becomes liable as
Where an instrument is drawn or indorsed to an indorser.
a person as "cashier" or other fiscal officer of a bank
or corporation, it is deemed prima facie to be Effect of Lack of Indorsement on an Instrument
payable to the bank or corporation of which he is Negotiable by INDORSEMENT Followed by
such officer, and may be negotiated by either the Delivery
indorsement of the bank or corporation or the Where a holder of an instrument payable to
indorsement of the officer. (Sec 42) order transfers it for value without indorsing it,
the transferee is vested with the title, and
Indorsement where name is misspelled, and so acquires the right to have the indorsement of
forth the transferor. For the purpose of determining
Where the name of a payee or indorsee is whether the transferee is a holder in due
wrongly designated or misspelled, he may indorse course or not, the negotiation takes effect on
the instrument as therein described adding, if he the date the indorsement was actually made.
thinks fit, his proper signature. (Sec 43)
Striking out of indorsements
Indorsement in representative capacity The holder may STRIKE OUT indorsements
Where any person is under obligation to NOT NECESSARY TO HIS TITLE. The
indorse in a representative capacity, he may indorse indorser whose indorsement is struck out and
in such terms as to negative personal liability. (Sec all indorsers subsequent to him are relieved
44) from liability on the instrument.

Requisites in indorsements made by an agent:  Where an instrument is negotiated

1. The agent must be authorized. back to a prior party, such party may,
2. He must disclose his principal. subject to the provisions of this Act,
3. He must sign for and in behalf of his reissue and further negotiate the
principal. same. But he is not entitled to enforce
payment thereof against any
Signature per Procuration intervening party to whom he was
- A signature per procuration is one made by an personally liable.
agent with a limited authority to sign, and the
principal is bound only if the agent acts within
the limits of the authority. PRESENTMENT FOR PAYMENT
- It is made by adding “per procuration”, “per In Promissory Notes
proc”, “p.p.” under the agents signature. Purpose

 Every negotiation is deemed prima facie to Not necessary to make the maker liable, but
have been effected before the instrument is necessary to make the secondary parties liable.
was overdue. Requisites
 Every indorsement is presumed prima facie For a valid presentment for payment of a
to have been made at the place where the promissory note, the following are necessary:
instrument is dated. a. made within a reasonable time after issue;
b. by the holder or his agent;
 Saint Louis University COMMERCIAL LAW 30
2012 BAR OPERATIONS

c. to the party primarily liable under it; Purpose

d. at a reasonable hour on a business day; and
- To get acceptance of the drawee for the purpose
e. at the proper place as defined by the NIL.
of making him liable primarily as an acceptor.
- It is also a pre-requisite to the accrual of
 The holder must exhibit the instrument to the secondary liability against the drawer and the
debtor and should deliver it to said debtor if the indorser.
latter pays.
When necessary
When NOT required
It is necessary in the following cases:
Presentment is NOT required:
a. to fix the maturity date;
1. when after due diligence presentment b. where the bill expressly stipulated
cannot be made; presentment;
2. when presentment is waived, and c. where the bill is drawn payable elsewhere
3. when the indorser is an accommodated than at the residence or place of business of
party. the drawee.

When Instrument Considered Dishonored Requisites

The instrument is considered dishonored: Presentment for acceptance must be
1. when after due presentment for payment, 1. made within a reasonable time,
payment is refused, and 2. by the holder, or his agent,
2. when presentment being excused, the 3. to the drawee or his agent
instrument is overdue and unpaid. 4. at a reasonable hour on a business day,
5. before the bill is overdue.

PRESENTMENT FOR ACCEPTANCE

When excused
1. where the drawee is dead, hides or is a
Presentment for Acceptance
fictitious or incapacitated person;
It is the production of a bill of exchange to 2. when after due diligence presentment
the drawee for his acceptance or payment. cannot be made;
3. when acceptance is refused on another
ground although presentment is irregular.
General rule:
Presentment for acceptance is NOT
necessary to render any party to the bill liable. When Instrument Dishonored By Non-
Acceptance
Exceptions:
The instrument is considered dishonored by non-
1. Where the bill is payable after sight, or in any
acceptance:
other case, where presentment for acceptance
is necessary in order to fix the maturity of the 1. where such acceptance is refused or cannot
instrument; or be obtained, and
2. Where the bill is expressly stipulates that it shall 2. where acceptance being excused, the bill is
be presented for acceptance; or not accepted.
3. Where the bill is drawn payable elsewhere than
at the residence or place of business of the PRESENTMENT
drawee.
How made
 In those instances found in Section 143 – it is Presentment MUST be made by or on
NECESSARY, in order to charge persons behalf of the holder:
secondarily liable:
a. to make presentment for acceptance Requisites:
or 1. It must be presented at a reasonable hour;
b. to negotiate the bill within a 2. It must be presented on a business day; and
reasonable time. (Sec. 144) 3. It must be presented before the bill is
overdue.
 Saint Louis University COMMERCIAL LAW 31
2012 BAR OPERATIONS

3. must NOT express that the drawee will

To WHOM presented perform his promise by means other
1. To the DRAWEE or some person authorized than money payment; and
to ACCEPT or REFUSE ACCEPTANCE on 4. it must be communicated or delivered to
his BEHALF; and the holder.
2. Where a bill is addressed to two or more
drawees who are not partners; presentment
How made
must be made to them all unless one has
authority to accept or refuse acceptance for The acceptance may be on the bill, or on a
all, in which case presentment may be made separate paper (allonge), and may even be in writing
to him only; before the bill is drawn.
3. Where the drawee is dead presentment may
be made to his personal representative;
4. Where the drawee has been adjudged a a. Express acceptance
bankrupt or an insolvent or has made an - The drawee, if he wants to accept, must
assignment for the benefit of creditors, do so expressly within twenty-four (24)
presentment may be made to him or to his hours from presentment to him, or within
trustee or assignee. the period allowed him by the holder.
b. Implied or constructive acceptance
When made: - If he destroys the bill, or refuses to
1. A bill may be presented for acceptance on return the bill accepted or not accepted
ANY DAY on which negotiable instruments within said period of twenty-four hours,
may be presented for payment. or other period allowed him by the
2. When saturday is not otherwise a holiday, holder, he is deemed to have accepted
presentment for acceptance may be made the bill.
before twelve o’clock noon on that day.

 The only difference between Section 72 and  A sight draft (usually accompanying a letter of
85 is that under Section 146 there is no credit in importations) is payable on demand and
distinction between the instruments payable needs no acceptance by the drawee. (Prudential
Bank v. IAC)
at a fixed or determinable future time and  It is usually done by writing across the face of
instruments payable on demand. the bill the word “ACCEPTED” or words of
similar import, e.g. “HONORED”, “I WILL PAY
 Where the holder of a bill drawn payable THE BILL”, “SEEN” followed by the signature of
elsewhere other than the place of business the drawee.
or the residence of the drawee has no time,  The drawee must sign because without his
with the exercise of reasonable diligence to signature he would not be bound – See Section
present the bill for acceptance before 18, NIL.
presenting it for payment on that day it falls  Acceptance by telegram has been held
due – the delay caused by presenting the bill sufficient.
for acceptance before presenting it for
payment is excused and does NOT
discharge the drawers and indorsers. Classes of Acceptance
A. General and Qualified
1. GENERAL
ACCEPTANCE
- assents without qualification to the order of
the drawer.
Acceptance
- An acceptance to pay at a particular place is
It is the signification by the drawee of his a general acceptance unless it expressly
assent to the order of the drawer. states that the bill is to be paid there only
and not elsewhere. (Sec.140)
- The holder of the bill has the right to require
Requisites general acceptance – thus he may refuse to
The acceptance must be take qualified acceptance and if he does not
obtain an unqualified acceptance – he may
1. in writing; treat the bill as dishonored by non-
2. signed by the drawee; acceptance – accordingly the holder must
give notice of dishonor.
 Saint Louis University COMMERCIAL LAW 32
2012 BAR OPERATIONS

- The payment of a check does NOT include or

2. QUALIFIED imply its acceptance in the sense that this word
- varies the effect of the bill as drawn is used in Section 62, NIL.
- kinds:
Where acceptance may be written:
a. Conditional – one which makes payment
by the acceptor dependent on the Acceptance may be made
fulfillment of a condition therein stated;
b. Partial – an acceptance to pay part only 1. on the bill itself, or
of the amount for which the bill is drawn; 2. on a separate paper; and if on a separate
c. Local – an acceptance to pay only at a paper
a. it may be acceptance as to an
particular place;
d. Qualified as to time existing bill; or
e. The acceptance of some or more b. it may be acceptance as to a future
drawees but NOT of ALL. or non-existing bill.
- Effect of taking qualified acceptance:
Where a qualified acceptance is taken – If the bill is non-existent, the acceptance on a
the drawer and indorsers are discharged separate paper must comply with following
from liability on the bill unless they have requirements:
expressly or impliedly authorized the holder 1. That the contemplated drawee shall
to take qualified acceptance or subsequently describe the bill to be drawn and promise to
assents thereto. accept it.
2. That the bill shall be drawn within a
- When the drawer or indorser receives notice
of qualified acceptance – he must – within a reasonable time after such promise is
reasonable time – express his dissent to the written; and
3. That the holder shall take the bill upon the
holder or he will be deemed to have
assented thereto. credit of the promise.

The drawee is allowed twenty-four hours after

B. Express and Constructive
1. EXPRESS presentment in which to decide whether or not he
- written on the instrument by the drawee will accept the bill; the acceptance if given, dates as
2. CONSTRUCTIVE of the day of presentation.
- NOT in writing,
a. Where the drawee to whom the bill is NOTE: The time allowed begins from the time of
delivered for acceptance, destroys it; or delivery and not after demand for a return of the bill
b. Where the drawee refuses, within 24 and the time for returning the bill to the holder does
not begin to run from the demand for its return but
hours after such delivery or within such
time as is given him, to return the bill from the date of its delivery.
accepted or not accepted.
Drawee bank is NOT entitled to 24 hours to decide
 If the holder should demand its return before whether to pay or not. But, if the check is presented
twenty-four hours, the drawee would be for certification, this ruling will not apply, as
required to comply on pain of being held as certification is equivalent to acceptance.
an acceptor; but return within twenty-four
hours unaccepted would not be a dishonor. Instances when a bill may be accepted:
 In all the foregoing, the drawee will be 1. Before the bill has been signed by the
deemed to have accepted the bill even if drawer;
there is no actual written acceptance by him. 2. Even when the bill is otherwise incomplete;
3. Even when the bill is overdue;
Effect of acceptance: 4. Even after it has been dishonored by non-
- Upon acceptance, the drawee becomes liable acceptance or by non-payment.
on the bill. The bill becomes in effect a note, the
acceptor standing in the place of the maker, and Instances when presentment for acceptance is
the drawer, in the place of the first indorser. excused and a bill may be treated as dishonored
by non-acceptance:
- But should the drawee refuse to accept, the 1. Where the drawee is dead, or has
payee or the holder has no recourse against him absconded, or is a fictitious person or a
but only against the drawer and indorsers, if any. person not having capacity to contract by
bill;
 Saint Louis University COMMERCIAL LAW 33
2012 BAR OPERATIONS

2. Where, after the exercise of reasonable 2. The acceptor for honor must be a person not a
diligence, presentment cannot be made; party already liable thereon, that is, a stranger to
3. Where, although presentment has been the bill;
irregular, acceptance has been refused on 3. The bill is not overdue at the time of the
some other ground. acceptance for honor;
4. The acceptor for honor must be a stranger to the
When a bill is dishonored by non-acceptance bill; and
1. When it is duly presented for acceptance 5. The holder must give his consent.
and such an acceptance as is prescribed by
this Act is refused or cannot be obtained; or
2. When presentment for acceptance is How made (Formal Requisites of Acceptance for
excused and the bill is not accepted. Honor)
1. It must be in writing;
Duty of the holder where bill is not accepted 2. It must indicate that it is an acceptance for
Where a bill is duly presented for honor;
acceptance and is not accepted within the 3. It must be signed by the acceptor for honor;
prescribed time, the person presenting it must treat 4. It must contain an express/implied promise to
the bill as dishonored by non-acceptance or he loses pay in money; and
the right of recourse against the drawer and 5. The accepted bill for honor must be delivered to
indorsers. the holder.

How bill is treated as dishonored by non- NOTE:

acceptance It is necessary that the acceptor for honor MUST
APPEAR before a notary public and declare that he
1. by giving NOTICE OF DISHONOR; or
accepts the protested bill in honor of the drawer or
2. by making a PROTEST when required
indorser, as the case may be, and that he will pay it
at the appointed time.
Right of holder where bill is NOT accepted:
An immediate right of recourse against the
 Where an acceptance for honor does not
drawer and indorsers accrues to the holder and NO
expressly state for whose honor it is made, it
PRESENTMENT for payment is necessary.
is deemed to be an acceptance for the
*The immediacy is subject to the giving of honor of the drawer.
notice of dishonor to the drawer and the indorsers.
Liability of the acceptor for honor
ACCEPTANCE FOR HONOR - Secondary, NOT primary or absolute.
- The acceptor for honor is liable to the holder
Definition and all parties to the bill subsequent to the
- Acceptance of a bill made by a stranger to it party for whose honor he had accepted.
before maturity, where the drawee of the bill
refused to accept it, and the bill has been
Acceptor for honor agrees to pay if
protested for non-acceptance or where the bill 1. presentment for payment has been
has been protested for better security made;
2. the drawee does not pay;
Purpose 3. the bill is protested for non-payment;
- to save the credit of the parties to the instrument and
or some party to it, as the drawer, drawee, or 4. notice of dishonor is given to him.
indorser, or somebody else
Maturity of a bill payable after sight which has
 Where a bill is accepted for honor, been accepted for honor
consideration is presumed, and the - Maturity is calculated from the date of noting
presumption is that acceptor has
for the non-acceptance and NOT from the
funds/money of the party for whose honor date of the acceptance for honor.
he accepts.
Bills which must be protested for non-payment
Requisites before it will be presented for payment
1. The bill must have been previously protested 1. Where a dishonored bill has been accepted for
(a) for non-acceptance or honor supra protest; or
b) for better security;
 Saint Louis University COMMERCIAL LAW 34
2012 BAR OPERATIONS

2. Where a dishonored bill contains a referee in  The acceptor is precluded from asserting the
case of need. following defenses:
*Reason: In order to fix the liability of the indorsers. 1. That the drawer is fictitious or non-
existent; or
LIABILITIES OF PARTIES 2. That the drawer’s signature is a forgery;
or
General rule 3. That he has no funds in his hands
Only persons whose signature appear on belonging to the drawer with which to
the negotiable instrument are liable thereon. (Sec. pay the bill; or
18) 4. That the drawer has overdrawn his
account; or
Exceptions 5. That the drawer has no capacity to
1. where a person uses an assumed name or trade contract or has no authority to draw the
name (Sec. 18); bill
2. the principal is liable if an authorized agent signs
in his behalf (Sec. 19); B. Parties Secondarily Liable
3. in case of forgery, the forger is liable even if his 1. THE DRAWER
signature does not appear on the instrument; a. Admits the existence of the payee and
4. a person who negotiates by mere delivery his capacity to endorse.
b. Engages that the instrument will be
Instances where a person’s signature appears accepted or paid by the party primarily
on a negotiable instrument and yet he is not liable.
liable thereon c. Engages that if the instrument is
1. in case of an undelivered and incomplete dishonored and proper proceedings are
instrument the person whose signature is placed brought, he will pay to the party entitled
thereon before delivery (Sec. 15); to be paid.
2. in case of a signature by an authorized agent
(Sec. 19); 2. THE GENERAL INDORSER
3. in case of indorsement by a minor or - A person placing his signature upon an
incapacitated person (sec. 22); instrument other than as maker, drawer, or
4. in case of forgery, the person whose name acceptor, is deemed to be indorser unless
appears on the instrument but forged is not he clearly indicates by appropriate words his
liable thereon. intention to be bound in some other
capacity. [Sec 63]
A. Parties PRIMARILY Liable
1. MAKER a. Warrants
a. Engages to pay according to the tenor of the i. the genuineness of the instrument
instrument and in all respects what it purports to be,
b. Admits the existence of the payee and his ii. his good title to it,
capacity to indorse. iii. the capacity to contract of all
prior parties, and
 The liability of two or more co-makers using iv. the instrument is valid and
the words “I promise to pay” is solidary while subsisting.
the liability of two or more co-makers using b. Engages that the instrument will be paid
the words “We promise to pay” is joint and by the party primarily liable.
therefore liable for their proportionate share. c. Engages that if the instrument is
dishonored, and proper proceedings are
2. ACCEPTOR / DRAWEE WHO ACCEPTS THE taken, he will pay to the other party
INSTRUMENT entitled to be paid.
a. Engages to pay according to the tenor of his
acceptance.  The collecting bank or last endorser
b. Admits the existence of the drawer, the generally suffers the loss because it has
genuineness of his signature, and his the duty to ascertain the genuineness of
capacity and authority to draw the all prior indorsements considering that
instrument. the act of presenting the check for
c. Admits the existence of the payee and his payment to the drawee is an assertion
capacity to indorse. that the party making the presentment
 Saint Louis University COMMERCIAL LAW 35
2012 BAR OPERATIONS

has done its duty to ascertain the b. That he has a good title to it;
genuineness of the indorsements. c. That all prior parties had capacity to
contract;
 Aside from the warranties as an d. That he has no knowledge of any fact
indorser, the collecting bank is made which would impair the validity of the
liable because it is privy to the depositor instrument, or render it valueless.
who negotiated the check because it - A qualified indorsement constitutes the
knows him, his address and history for indorser a mere assignor of the title to the
being a client thereof. Thus, it is in a instrument; it may be made by adding to the
better position to detect forgery or indorser’s signature the words “without
irregularity in the indorsement. (Associated recourse”, “sans recourse” or any other word
bank v. CA, 252 SCRA 620). aka “Doctrine of of similar import.
Comparative Negligence”
- “Recourse” means resort to a person who is
secondarily liable after the default of the
3. THE IRREGULAR INDORSER person who is primarily liable; by indorsing
- An irregular indorser is one who not the note “with recourse”, does not make the
otherwise a party to an instrument, affixes indorser a qualified indorser but a general
his signature in blank on an instrument indorser who is secondarily liable
before delivery.
- Liability: 2. PERSON NEGOTIATING BY DELIVERY
a. Instrument payable to order of third - Warranties:
person a. That the instrument is genuine and in all
- irregular indorser liable to payee and to respect what it purports to be;
subsequent parties b. That he has a good title to it;
b. Instrument payable to order of maker or c. That all prior parties had capacity to
drawer contract;
- liable to all parties subsequent to the d. That he has no knowledge of any fact
maker or drawer; which would impair the validity of the
c. Irregular indorser signs for instrument, or render it valueless.
accommodation of payee - Warranties extended to immediate
- liable to all parties subsequent to the transferee only.
payee.
When Secondary Liability Attaches
 Liability of GUARANTOR: Acts needed before secondary liability attaches
- “I hereby guarantee payment of this a. Presentment for payment in notes and
instrument” is written at the back of the presentment for acceptance and/or payment
instrument in bills of exchange;
- NOT discharged from liability merely b. Dishonor by non-payment in notes and
because of the lack of due presentment dishonor by non-acceptance and/or non-
or due notice of dishonor payment in bills of exchange;
- liable only subsidiarily after the assets of c. Notice of dishonor to secondary parties.
the principal debtor have been
exhausted Order in which the indorsers are liable
- Indorses for identification only; he is a - They are liable in the ORDER in which their
guarantor not an indorser indorsements appear in the instrument; the latter
ones have a right of recourse against the prior
 Liability of SURETY ones
- primarily and absolutely liable with the
debtor without benefit of exhaustion of RIGHTS OF A HOLDER
the properties of the latter and also
without the necessity of presentment or Holder
notice of dishonor - a payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof
C. Parties With Limited Liability - the holder of a negotiable instrument may sue
1. THE QUALIFIED INDORSER thereunder in his own name, and payment to
- Warranties: him in due course discharges the instrument
a. That the instrument is genuine and in all
respect what it purports to be;
 Saint Louis University COMMERCIAL LAW 36
2012 BAR OPERATIONS

 If a promissory note is non-negotiable, personal defenses of prior parties

subsequent holders can never be holders in due among themselves, and he may enforce
course, but are mere assignees against whom payment of the instrument for the full
defenses may be raised by prior parties. amount thereof, against all parties liable
(Consolidated Plywood v. IFC Leasing, 149 SCRA 448). thereon.
Classes of holders *N.B. The fact that the postdated checks
1. HOLDER IN DUE COURSE were merely issued as security is not a
- one who takes the instrument “in good faith ground for the discharge of the instrument
and for value [Section 52 (c)] as against a holder in due course. The only
- in order that one may be a holder in due grounds are those outlined in Section 119 of
course, it is necessary that at the time the the NIL. (State Investment House, Inc. v. CA, 217
instrument was negotiated to him he had no SCRA 32)
notice of any xxx defect in the title of the
person negotiating it [Section 52 (d)] 2. HOLDER NOT IN DUE COURSE
- every holder is deemed prima facie to be a - A holder not in due course is one who
holder in due course (Section 59; Vicente R. de became a holder of an instrument without
Ocampo & Co. v. Gatchalian, 3 SCRA 596)
any, some, or all of the requisites under
 However, when it is shown that the title Section 52 of the NIL
of any person who has negotiated the - Where a holder’s title is defective or
instrument was defective, the burden is suspicious, it cannot be stated that the
on the holder to prove that he or some payee acquired the check without the
person under whom he claims acquired knowledge of said defect in the holder’s title
the title as holder in due course. (Bataan and for this reason the presumption that it is
Cigar and Cigarette Factory, Inc. v. CA, 230 SCRA
647). a holder in due course or that it acquired the
instrument in good faith does not exist.
- What constitutes a holder in due course: (Vicente R. Ocampo v. Gatchalian, 3 SCRA 596)
A holder in due course is a holder who has
taken the instrument under the following - Rights of holder not in due course
conditions: a) A holder not in due course can enforce
1. That it is complete and regular upon the instrument and sue under it in his
its face; own name. Prior parties, however, even
2. That he became the holder of it through remote, can avail against him
before it was overdue and without any defense among these prior parties
notice that it had been previously and prevent the said holder from
dishonored if such was the fact; collecting in whole or in part the amount
3. That he took it for value and in good stated in said instrument.
faith; b) That a holder is not a holder in due
4. That at the time it was negotiated to course does not mean that he cannot
him he had no notice of any infirmity recover under the instrument.
in the instrument or defect in the title c) A holder not in due course who derives
of the person negotiating it. title through a holder in due course and
who is not himself a party to any fraud
 To constitute notice of defect in or illegality affecting the instrument, has
the title of the person negotiating all the rights of such former holder in
the same, the person to whom it is respect of all parties prior to the latter.
negotiated must have actual
knowledge of such facts that his * HOLDER FOR VALUE
action in taking the instrument - one who has all the requisites for a holder in
amount to bad faith. (Constructive due course EXCEPT notice of want of
knowledge). consideration
- he is not necessarily a holder in due course,
hence, prior parties may avail of defenses
- Rights of a holder in due course: against said holder (Prudencio v. CA, 143 SCRA
7)
a) Like any other holder, a holder in due
course may enforce the instrument and  In a sale on installment, financed by a financing
sue thereon in his own name. company, the latter is not a holder in due
b) He also holds the instrument free any course, and the defense of failure of
defect of title of prior parties, free from
 Saint Louis University COMMERCIAL LAW 37
2012 BAR OPERATIONS

consideration may be invoked against it, if the 13. Right to enforce payment of materially altered
goods bought are defective and cannot be used instrument according to its original tenor (Sec.
by the buyer for the purpose for which he bought 124);
it. (Consolidated Plywood v. IFC Leasing, 149 SCRA 448). 14. Right to resort to the referee in case of need
(Sec. 131);
 A person who became a holder of a cashier’s  Referee in case of need is the person whose
check indorsed by the person who stole it, is not name was inserted by the drawer of the bill
a holder in due course, and the issuing bank and any indorser to whom the holder may
may refuse to pay the same. (Mesina v. IAC, 145 resort in case of need – that is in case the
SCRA 497) bill is dishonored by non-acceptance or by
non-payment.
 Where the payee acquired the check under 15. Right of the holder of a bill presenting the same
circumstances which should have put it to for acceptance to require that the acceptance be
inquiry, why the holder had the check and used written of the face of the bill (Sec. 133);
it to pay his own personal account, the duty 16. Right of a holder of a bill to allow a period for the
devolved upon it to prove that it actually drawee to accept other than 24 hours (Sec. 136
acquired said check in good faith. in rel. to Sec. 137)
17. Right of a holder of a bill dishonored but
 Where a note is acquired by the contract of subsequently accepted to have the bill accepted
merger or sale between two banks, and the note as of the date of presentment (Sec. 138);
is subject to a Holdout Agreement, the holder of 18. Right of holder of a bill to refuse to take a
that note is NOT a holder in due course. (BPI v. qualified acceptance and to treat the bill as
CA, 232 SCRA 305)
dishonored by non-acceptance if he does not
obtain an unqualified acceptance (Sec. 142);
 The indorsee of a crossed check is a holder 19. Right of a holder of a bill required to be
NOT in due course, and is subject to the presented for acceptance either to present it for
defenses as if the instrument is non-negotiable. acceptance or negotiate it within a reasonable
time (Sec. 144)
 The only disadvantage of a holder who is not a 20. Right of a holder of a bill dishonored by non-
holder in due course is that the instrument is acceptance to have immediate recourse against
subject to defenses as if it were non-negotiable. the drawer and indorsers (Sec. 151);
(Bataan Cigar and Cigarette Factory, Inc. v. CA, 230 SCRA
647) 21. Right of holders to whom different parts of a bill
in set are negotiated (Sec. 179);
Situational Rights of a Holder: 22. Right of a holder of a bill to allow acceptance of
1. Right to insert true date of issue (Sec. 13); the same for honor
2. Right to insert true date of acceptance (sec. 13);
3. Right to complete an incomplete instrument
(Sec. 14); PRESENTMENT FOR PAYMENT
4. Right to treat an ambiguous instrument as either
a bill or a note (Sec. 17, {e});
5. Right to sign in a trade name or assumed name Purpose
(Sec. 18); - The purpose of presentment for payment of
6. right to strike out any indorsement not necessary an accepted bill is to collect from the
to his title (Sec. 48) acceptor; and if refused, to collect from the
7. Right to convert a blank indorsement into a secondary parties.
special one (Sec. 35); - Other purposes of presentment for payment
8. Right to discharge instrument by intentional are:
cancellation thereof (Sec. 119); 1. to receive payment for the negotiable
9. Right to discharge a person secondarily liable by instrument;
intentional cancellation of his signature (Sec. 2. to afford the person under the obligation
120 {b}); of paying the instrument an opportunity
10. Right to release the principal debtor and to ascertain the genuineness of the
consequently discharge persons secondarily paper, the amount thereon, and the
liable (Sec. 120{e}); authority of the one making the
11. Right to extend the time of payment (Sec. 120 presentment; and
{f}); 3. to permit the surrender of the paper on
12. Right to renounce his rights against any party to payment of the amount due it.
the instrument (Sec. 122);
 Saint Louis University COMMERCIAL LAW 38
2012 BAR OPERATIONS

When excused at any hour before the bank is closed on that

day is sufficient. (Sec. 75)
Presentment for payment is excused;
a) when after due diligence, it cannot be made;
Presentment where the principal debtor is dead
b) when the drawee is a fictitious person; and
c) where there is a waiver of presentment. - Presentment for payment must be made to the
deceased’s personal representative, if such
there be, and if, with the exercise of reasonable
When should be made
diligence, he can be found
a) where the instrument is not payable on
demand, presentment must be made on the
Presentment to persons liable as partners
day it falls due.
b) where it is payable on demand, presentment - Presentment for payment may be made to any
must be made within a reasonable time after one of them, even though there be a dissolution
its issue, except that in the case of a bill of of the firm
exchange, presentment for payment will be
sufficient if made within a reasonable time
Presentment to joint debtors who are not
after the last negotiation thereof. (Sec. 71)
partners
- Presentment must be made to all of the debtors
What constitutes sufficient presentment
It must be made: When presentment for payment is not required in
order to charge the drawer
1. by the holder, or by some person authorized to
- Presentment for payment is not required in order
receive the payment in his behalf;
to charge the drawer where he has no right to
2. at a reasonable hour on a business day;
expect or require that the drawee or acceptor
3. at a proper place as defined in the NIL;
will pay the instrument.
4. to the person primarily liable on the instrument,
or if he is absent or inaccessible, to any person
When presentment for payment is not required
found at the place where the presentment is
to charge the indorser
made (Sec. 72)
- Presentment for payment is not required in order
to charge an indorser where the instrument was
Proper place for presentment made or accepted for his accommodation and
he has no reason to expect that the instrument
a) Where a place of payment is specified in the will be paid if presented.
instrument and it is there presented;
b) Where no place is specified, but the address of
When an instrument is dishonored by non-
the person to make payment is given in the
payment
instrument and it is there presented; 1. It is duly presented for payment and payment is
c) Where no place for payment is specified and no refused or cannot be obtained; or
address is given and the instrument is presented 2. Presentment is excused and the instrument is
at the usual place of business or residence of
overdue and unpaid. (Sec. 83)
the person to make payment; and  When an instrument is dishonored by
d) In any other case, if presented to the person to nonpayment, an immediate right of recourse
make payment wherever he can be found, or if
(subject to the giving of notice of dishonor)
presented at his last known place of business or to all parties secondarily liable thereon
residence (sec. 73) accrues to the holder. (Sec. 84)
 The instrument must be exhibited to the
person from whom payment is demanded,
Time of maturity
and when it is paid, must be delivered up to - Every negotiable instrument is payable at the
the party paying it. (Sec. 74)
time fixed therein without grace
- RULES:
Presentment where instrument is payable to a 1. When the day of maturity falls upon Sunday,
bank or a holiday, the instrument is payable on
the next succeeding business day.
- Presentment for payment must be made during 2. Instrument falling due or become payable on
banking hours, unless the parson to make Saturday are to be presented for payment
payment has no funds there to meet it at any on the next succeeding business day,
time during the day, in which case presentment
 Saint Louis University COMMERCIAL LAW 39
2012 BAR OPERATIONS

except that instruments payable on demand - In a promissory note, dishonor by non-

may, at the option of the holder, be payment takes place when
presented for payment before 12 o’clock a. it is duly presented for payment and
noon on Saturday when that entire day is payment is refused or cannot be
not a holiday (Sec. 85) obtained; or
- COMPUTATION OF TIME: b. if presentment is excused, the
 Where the instrument is payable at a fixed instrument is overdue and unpaid.
period after date, after sight, or after the
happening of a specified event, the time of
2. In bills of exchange
payment is determined by excluding the day
from which the time is to begin to run, and - In bills of exchange, there is dishonor by
by including the date of payment (Sec. 86) non-acceptance
a. where the bill is presented for
 Where the instrument is made payable at a acceptance and is returned dishonored,
bank, it is equivalent to an order to the bank or
to pay the same for the account of the b. within twenty four hours from
principal debtor thereon (Sec. 87) presentment or any other period as the
holder may allow, is not returned
Payment in Due Course accepted or unaccepted
- Payment made at or after the maturity of the - There is dishonor by non-payment
instrument to the holder thereof in good faith and a. if the bill, after it has been accepted is
without notice that his title is defective not paid when presented for payment, or
- Requisites of payment in due course b. presentment being excused, is not paid
1. Made at or after maturity. on the date of maturity.
2. Made to the holder.
3. In good faith and without notice that the
holder’s title is defective. (Sec. 88) NOTICE OF DISHONOR
- Good faith refers to the paying maker or Definition
acceptor and not to the holder.
- Notice of dishonor is bringing, either verbally or
Presentment for payment to acceptor for honor, in writing, to the knowledge of the drawer or the
how made indorser of an instrument, the fact that a
1. It must be presented in the place where the specified negotiable instrument, upon proper
protest for non-payment was made – it must be proceedings taken, has not been accepted, or
presented NOT LATER than the day following its has not been paid, and that the party notified is
maturity; expected to pay it.

2. If it is to be presented in some other place other To whom given

than the place where it was protested, then it
must be forwarded within the time specified in - To the drawer and to each indorser
Section 104. (Sec. 168)  any drawer or indorser to whom such
notice is not given is discharged
Delay, when excused - Notice of dishonor is not necessary to hold
- Delay in making presentment is excused when parties primarily liable
the delay was caused by events which are
beyond the control of the holder and not Purpose
imputable to default, misconduct or negligence.
- To inform the party notified that the paper has
 When the cause of delay ceases to operate, the been dishonored and that he is looked to for
bill must be noted/ protested with reasonable payment and the purpose of requiring it is to
diligence. enable him to protect his rights against others
who are antecedent to him on the instrument
 When a bill is dishonored by the acceptor for and to afford him an opportunity to discharge it
honor – it must be protested for non-payment by before suit is filed to enforce payment thereon,
him. with consequent costs

DISHONOR Effect of failure to give notice of dishonor

1. In promissory notes
 Saint Louis University COMMERCIAL LAW 40
2012 BAR OPERATIONS

- Any drawer or indorser to whom such notice of To whom may be given

dishonor is not given is discharged from liability
- either
a) to the party himself, or
Who may give notice of dishonor b) to his agent in that behalf
1. The holder;
2. Someone acting on behalf of the holder; Notice where party is dead
3. Any party to the instrument
- When a party is dead, and his death is known to
a) who might be compelled to pay it to the
the party giving notice, the notice must be given
holder, and
a) To a personal representative if there be one,
b) who upon taking it up, would have a right to
and if with reasonable diligence he can be
reimbursement from the party to whom the
found.
notice is given;
b) If there be no personal representative,
4. Someone acting on behalf of such party
notice may be sent to the last residence or
last place of business of the deceased
 Notice of dishonor may be given by an agent Notice to partners
either in his own name or in the name of any
- Where the parties to be notified are partners,
party entitled to give notice, whether that
notice to any partner is notice to the firm even
party be his principal or not (Sec. 91)
though there has been a dissolution

 Where notice is given by or on behalf of the

Notice to persons jointly liable
holder, it inures to the benefit of all
subsequent holders and all prior parties who - Notice to joint parties who are not partners must
have a right of recourse against the party to be given to each of them, UNLESS one of them
whom notice is given. has authority to receive such notice for the
others
 Where notice is given by or on behalf of a
party entitled to give notice, it inures to the Notice to a bankrupt party
benefit of the holder and all parties
subsequent to the party whom notice is - Where a party has been adjudged bankrupt or
given an insolvent, or has made an assignment for the
benefit of creditors, notice may be given either to
the party himself or to the trustee or assignee
When agent may give notice
- When the instrument has been dishonored in the Time within which notice must be given
hands of an agent,
a) he may either himself give notice to the - General Rule:
 Notice must be given as soon as the
parties liable thereon, or
b) he may give notice to his principal. instrument is dishonored and unless delay is
excused as herein provided must be given
within the time fixed by the Act
When notice is sufficient
- A written notice need NOT be signed, and an - Other Rules:
insufficient written notice may be supplemented 1. Where parties reside in the same place
and validated by verbal communication.
- A misdescription of the instrument NOT vitiate
the notice UNLESS the party to whom the notice a) If given at the place of business of the
person to receive notice, it must be
is given is in fact misled thereby.
given before the close of business hours
on the following day;
Form of notice b) If given at his residence, it must be
given before the usual hours of rest of
1. It may be in writing or merely oral
the day following;
2. It may be given in any terms which sufficiently
c) If sent by mail, it must be deposited in
identify the instrument and indicate that it has
the post-office in time to reach him in
been dishonored by non-acceptance or non-
usual course of the day following
payment;
3. It must be delivered personally or through mail
 Saint Louis University COMMERCIAL LAW 41
2012 BAR OPERATIONS

2. Where parties reside in different places 1. Where the waiver is embodied in the instrument
a) if sent by mail, it must be deposited in itself, it is binding upon all parties; but
the post office, in time to go by mail the 2. Where it is written above the signature of an
following day of dishonor, or if there be indorser, it binds himself only.
no mail at a convenient hour on that
day, by the next mail thereafter;
Effect of waiver of protest
b) if given otherwise than through the post
office, then within the time that notice - a waiver of protest, whether in the case of a
would have been received in due course foreign bill of exchange or other negotiable
of mail, if it had been deposited in the instrument, is deemed waiver not only of a
post office within the time specified in formal protest but also of
the last subdivision. 1. presentment, and
2. notice of dishonor.
When sender is deemed to have given due notice
When notice is dispensed with
- Where notice of dishonor is duly addressed and
deposited in the post office, the sender is - When after the exercise of due diligence, notice
deemed to have given due notice, cannot be given to or does not reach the parties
notwithstanding the miscarriage of mails sought to be charged.

 Notice is deemed to have been deposited in Delay in giving notice, when excused
the post office when deposited in any branch
post office or in any letter box under the - When the delay is caused by circumstances
control of the post office department. beyond the control of the holder, AND not
imputable to his default, misconduct or
negligence
Time of Notice to subsequent party
- Where a party receives notice of dishonor, he When notice of dishonor is not required to be
has after the receipt of such notice, the same given to the drawer
time for giving notice to antecedent parties that
the holder has after the dishonor. 1. Where the drawer and the drawee are the
same person;
2. When the drawee is a fictitious person or a
Where notice must be sent person not having capacity to contract;
3. When the drawer is the person to whom the
1. Where a party has added an address to his
instrument is presented for payment;
signature, notice of dishonor must be sent to
4. Where the drawer has no right to expect or
that address.
require that the drawee or acceptor will honor
2. If no address was given, notice must be sent as
the instrument;
follows
5. Where the drawer has countermanded
a) Either to the post office nearest to his place
payment
of residence ot to the post office where he is
accustomed to receive his letters; or
b) If he lives in one place, and he has a place
When notice of dishonor is not required to be
of business in another, notice may be sent
given to an indorser
to either place; or
c) If he is sojourning in another place, notice 1. Where the drawee is a fictitious person or a
may be sent to the place where he is person not having the capacity to contract, and
sojourning. the indorser was aware of that fact at the time
he indorsed the instrument;
2. Where the indorser is the person to whom the
Waiver of notice
instrument is presented for payment;
- Notice of dishonor may be waived either before 3. Where the instrument was made or accepted for
the time of giving notice has arrived or after the his accommodation.
omission to give due notice and the waiver may
be express or implied.
Notice of non-payment where acceptance is
refused
Who are affected by waiver of notice
 Saint Louis University COMMERCIAL LAW 42
2012 BAR OPERATIONS

- Where due notice of dishonor by non- 4. Where the bill contains a referee in case of
acceptance has been given, notice of a need, it must be protested for non-payment
subsequent dishonor by non-payment is not before it is presented for payment to the referee
necessary, UNLESS in the meantime the in case of need.
instrument has been accepted
Protest, how made:
- The protest must be annexed to the bill or must
Effect of omission to give notice of dishonor by
contain a copy thereof, and must be under the
non-acceptance
hand and seal of the notary making it and must
- Does not prejudice the rights of a holder in due specify:
course subsequent to the omission. 1. The time and place of presentment;
2. The fact that presentment was made and
the manner thereof;
PROTEST 3. The cause or reason for protesting the bill;
4. The demand made and the answer given, it
Definition any, or the fact that the drawee or acceptor
- It is a formal statement in writing made by a could not be found.
notary public or other competent person under
his seal of office at the request of the holder of a
Protest may be made by
bill or note, in which it is declared that the same a. A notary public; Or
was on a certain day presented for payment (or b. By any respectable resident of the place where
acceptance as the case may be), and such
the bill is dishonored, in the presence of two or
payment (or acceptance) was refused, more credible witnesses.
whereupon the notary protests against all parties
to such instrument and declares that they will be
Protest, when made
held responsible for all loss or damage arising 1. Protest must be made on the day of its dishonor
from its dishonor. unless delay is excused.
- It means all the steps or acts accompanying the
2. When a bill has been duly noted – the protest
dishonor of a bill or note necessary to charge an may be subsequently extended as of the date of
indorser. the noting.
- Duly noted means that a notary public
Necessity jots down a note on the bill or on paper
- Protest is required only for foreign bills, but NOT attached thereto, or in his registry book,
for inland bills or notes. consisting of his initials or signature and
- However, they may also be protested if desired. those matters required to be stated in
- Omission of protest, where protest is required,
section 153.
will discharge the drawer and the indorsers.
Protest, where made:
Purpose - GR: The protest must be made at the place
- Protest is required: where the instrument is dishonored.
1. for uniformity in international transactions - EXC: When the bill drawn payable at the place
because most countries require it and of business or residence of some person other
2. in order to furnish authentic and satisfactory than the drawee has been dishonored by non-
evidence of the dishonor to the drawer who, acceptance
from his residence abroad, may experience  It must be protested for non-payment at the
difficulty in verifying the matter and may be place where it is expressed to be payable,
forced to rely on the representation of the and no further presentment for payment to,
holder.
or demand on, the drawee is necessary.
Instances when protest is required:
1. Where the foreign bill is dishonored by non- - A bill which has been protested for non-
acceptance; acceptance may be subsequently protested for
2. Where the foreign bill is dishonored by non- non-payment.
payment, it not having been dishonored by non-
acceptance; Protest for better security
3. Where the bill has been accepted for honor, it - DEFINITION
must be protested for non-payment to the  A bill protested before maturity
- REQUISITES
acceptor for honor; or
 A protest for better security must be made:
 Saint Louis University COMMERCIAL LAW 43
2012 BAR OPERATIONS

a. After acceptance; 3. ANY PERSON, even a party thereto may pay

b. But before the date of maturity; and supra protest.
c. When the acceptor has been adjudged 4. The payment must be attested by notarial act of
bankrupt and insolvent or has made an honor which may be appended to the protest, or
assignment for the benefit of creditors. form an extension to it; and
- Protest is dispensed with by any circumstances 5. The notarial act of honor must be based on the
which would dispense with notice of dishonor. declaration made by the payer for honor or his
agent declaring his intention to pay the bill for
Protest may be made on a copy or written honor and for whose honor he pays.
particulars thereof when:
1. A bill is lost or destroyed ; or - As distinguished from acceptance for honor –
2. A bill is wrongfully detained from the person the acceptor for honor must be a stranger. In
entitled to hold it payment for honor – the payor supra protest –
may even be a party to the instrument.
DISCHARGE
Procedure
Definition
1. The payer or his agent goes to a notary public
- A release of all the parties liable from obligations and declares his intention to pay the bill and for
arising thereunder. whose honor he pays.
- It renders the instrument without force and effect 2. The notary then records the declaration in the
and, consequently, it can no longer be protest or in a separate paper attached to it.
negotiated. 3. The payor then notifies the person for whose
honor he pays within reasonable time.
How a negotiable instrument is discharged
Purpose
1. By payment in due course by or on behalf of the - Instead of simple negotiation to the person
principal debtor; desiring to pay, payment for honor may be
2. By payment by accommodated party, where the availed of when the holder does not want to
instrument is made or accepted for his indorse the bill and thereby incur the liabilities of
accomodation; an indorser or of one negotiating by mere
3. By the intentional cancellation thereof by the delivery.
holder;
4. By any other act which will discharge a simple Preference of parties offering to pay for honor
contract for the payment of money; - The person whose payment will discharge most
 The law on Obligations and Contracts parties to the bill is to be given the preference.
applies (Art 1231, NCC):
a) Loss of the thing due Effects on subsequent parties where bill is paid
b) Condonation or remission for honor
c) Confusion or merger 1. All parties subsequent to the party for whose
d) Compensation honor it is paid are discharged.
e) Novation 2. The payer for honor is subrogated for and
f) Annulment succeeds to both the rights and duties of the
g) Rescission holder as regards the party for whose honor he
h) Fulfillment of resolutory condition pays and all parties liable to the latter.
i) Prescription
5. When the principal debtor becomes the holder of Effect if the holder refuses to receive payment
the instrument at or after maturity in his own supra protest
right. (Sec. 119) - He loses his right of recourse against any party
6. By renunciation of the holder’s rights against the who would have been discharged by such
principal debtor under the terms of Sec. 122. payment.

Rights of payer for honor:

PAYMENT FOR HONOR 1. He acquires the rights of the holder under
Section 175; and
Requisites 2. He has also the right to receive both the bill and
1. The bill has been dishonored by non-payment; the protest.
2. The bill has been protested for non-payment;
 Saint Louis University COMMERCIAL LAW 44
2012 BAR OPERATIONS

DEFENSES OF PRIOR PARTIES g) Filling up of blank contrary to authority given

AGAINST THE HOLDER or not within reasonable time, where the
instrument is delivered;
Classes of Defenses h) Fraud in inducement;
1. Real or Absolute Defenses i) Insertion of wrong date in an instrument,
- Defenses which attach to the instrument where it is payable at a fixed period after
irrespective of the parties and are predicated on date and it is issued undated or where it is
the principle that the right sought to be enforced payable at a fixed period after sight and the
has never existed or has ceased to exist. acceptance is undated;
- Available against ALL HOLDERS, whether in j) Intoxication;
due course or not. k) Insanity where there is no notice of insanity
- Real defenses: (WAD FIMMU WIFE) on the part of the one contracting with the
a) Want of delivery of an incomplete insane person;
instrument; l) Illegality of contract where the form or
b) Alteration; consideration is illegal;
c) Duress amounting to forgery; m) Negotiation in breach of faith;
d) Fraud in factum or fraud in esse contractus; n) Negotiation under circumstances that
e) Insanity where the insane person has a amount to fraud;
guardian appointed by the court; o) Mistake;
f) Minority; p) Ultra vires acts of corporations where the
g) Marriage in case of a wife; corporation has the power to issue
h) Ultra vires acts of a corporation; where the negotiable paper but the issuance was not
corporation is absolutely prohibited by its authorized for the particular purpose for
charter or statute from issuing any which it was issued.
commercial paper under any circumstances;
i) Want of authority of agent, real or apparent; Abnormal and similarly deficient negotiable
j) Illegality of contract where it is the contract instrument
or instrument itself which is expressly made A. Causes for Abnormality and Deficiency
illegal by statute; 1. Lack of Essential Requisites to a contract,
k) Forgery; which are:
l) Execution of instrument between public a. Lawful subject matter
enemies b. Consideration
c. Consent
2. Personal or Equitable Defenses 2. Lack of regularity in issue by absence of
- a personal or equitable defense is one growing a. The material particulars of the
out of an agreement or conduct of a particular questioned instrument, or in their
person in regard to an instrument which renders correctness;
it inequitable for him although owner of it, to b. Delivery of instrument made with the
enforce it against the defendant. knowledge and/or conformity of the
- The defense is available against all holders NOT maker or the drawer and with
in due course EXCEPT those who derive their intention of making the transferee a
rights from holders in due course and who are holder of the instrument.
not parties to any fraud or illegality affecting the
instrument. Effects of defenses
- Personal defenses: (W2A4F2I4N2MU)
a) Want of delivery of complete instrument; A. Incomplete but delivered NI (Sec 14)
b) Want of authority of agent where he has 1. Holder has prima facie authority to complete
apparent authority. the instrument;
c) Absence or failure of consideration, partial 2. Completion must be done strictly within a
or total; reasonable time and according to the
d) Acquisition of the instrument by force, authority given;
duress or fear; 3. Holder in due course of the instrument
e) Acquisition of the instrument by unlawful previously completed in breach of
means; instructions can enforce the same as if
f) Acquisition of the instrument for an illegal regularly completed.
consideration;
B. Incomplete and undelivered NI (Sec 15)
 Saint Louis University COMMERCIAL LAW 45
2012 BAR OPERATIONS

- If completed and delivered without authority, i. Those who warrant or admit the
not a valid contract against a person who genuineness of the signature in
has signed before delivery even in the question. This includes indorsers,
hands of HIDC but subsequent holders are persons negotiating by delivery and
liable. acceptors.
ii. Those who, by their acts, silence, or
C. Complete but Undelivered Instrument (Sec 16) negligence are estopped from
- Between immediate parties and a remote setting up the defense of forgery.
party not a holder in due course, delivery to
be effectual must be made by or under the 3. Forgery in checks:
authority of the maker, drawer, acceptor or a) Forgery in Signature of the DRAWER on a
indorser, as the case may be; Check
a. If the instrument is in the hands of a - the drawer is NOT liable and his drawee
holder in due course, all prior bank cannot charge the drawer’s account for
deliveries are conclusively said check because a bank is supposed to
presumed valid; know the signatures of its customers, and
b. If the instrument is out of the hands bears the damage in case it pays under a
of the person who signed it, a valid forged signature of its drawer-customer.
and intentional delivery is disputably - the drawee bank is considered as paying out
presumed. of its own funds and cannot charge the
drawer’s account. (PNB v. CA, 25 SCRA 693)
D. Absence or Failure of Consideration  Doctrine of Comparative Negligence –
1. Absence of consideration is the lack or want the party whose negligence is the
of consideration proximate cause of loss bears the loss.
2. Failure of consideration is failure of agreed - the risk of loss must perforce fall on the
consideration to materialize. drawee bank. However, if the drawee bank
3. Both absence and failure of consideration can prove a failure by the customer/drawer
are defenses personal to the prejudiced to exercise ordinary care that substantially
party, and available against any person not contributed to the making of the forged
a holder in due course. signature, the drawer is precluded from
4. Partial failure of consideration is a defense asserting the forgery. If at the same time the
pro tanto, whether the failure is an drawee bank was also negligent to the point
ascertained and liquidated amount or of contributing to the loss, then such loss
otherwise. from the forgery can be apportioned
between the negligent drawer and the
E. Forgery negligent bank. (Associated Bank v. CA, 252 SCRA
1. Definition 620).
- Forgery is the counterfeit making or fraudulent b) Forgery in the Signature of INDORSERS
alteration of any writing. - As a matter of practical significance,
- It may consist of: problems arising from forged indorsements
a) Signing of another’s name with intent to of checks may generally be broken into two
defraud. (Sec. 23) (2) types of cases:
b) Alteration of an instrument in the name, i. where forgery was accomplished by
amount, description of payee, etc. with intent a person not associated with the
to defraud. (Sec. 124; N.B. the name for this drawer- for example a mail robbery;
defense is fraudulent alteration) and
ii. where the indorsement was forged
2. Governing rules by an agent of the drawer.
(Gempesaw v. CA, 218 SCRA 682).
a) GR: The signature is wholly inoperative, and
no right to retain the instrument, or to give a
discharge therefor, or to enforce payment  As a rule, a drawee bank who has paid a check
thereof against any party to it, is acquired on which an indorsement has been forged
through or under such signature. cannot charge the drawer’s account for the
b) EXC: The party against whom it is sought to amount of said check. An EXCEPTION to this
enforce such right is precluded from setting rule where the drawer is guilty of such
up the defense of forgery or want of negligence which causes the bank to honor such
authority. (Sec. 23) a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot
 Saint Louis University COMMERCIAL LAW 46
2012 BAR OPERATIONS

possibly discover the forged indorsement by

mere examination of his cancelled check. 3. BANKER’S ACCEPTANCE
- a draft or a bill of exchange of which the
F. Material Alteration acceptor is a bank or banker engaged generally
- Any alteration which changes the: in the business of granting banker’s acceptance
1. date, credit. It is similar to a trade acceptance, the
2. sum payable, fundamental difference being that the banker’s
3. time or place of payment, acceptance is drawn against a bank instead of
4. number or relation of the parties, the buyer.
5. medium or currency of payment, 4. TRUST RECEIPT
6. adds a place of payment where none is - the written or printed document signed by the
specified, entrustee in favor of the entruster containing
7. which alters the effect of the instrument in terms and conditions substantially complying
any respect. with the provisions of PD 115 (Trust Receipt
- Effect: Law, which took effect on January 21, 1973). No
1. Alteration by a party further formality of execution or authentication
 Material alteration avoids the instrument shall be necessary to the validity of the trust
EXCEPT as against the party who receipt.
made, authorized or assented to the  It is the ENTRUSTEE NOT the
alteration, and subsequent indorsers ENTRUSTER who is the real owner of the
 Where the altered instrument, however, goods covered by the trust receipt.
is in the hands of a holder in due  The liability of the entrustee to the entruster
course, not a party to the alteration, he is EX CONTRACTU not ex delicto.
may enforce payment thereof according 5. TREASURY WARRANTS
to its original tenor regardless of - a treasury warrant bearing on its face the words
whether the alteration was innocent or “payable from the appropriation for food
fraudulent. administration” is actually an order for payment
2. Alteration by a stranger (spoliation) out of a particular fund and is NOT
- same effect with that alteration made a unconditional, and does not fulfill one of the
party. (Sec. 124) essential requirements of a negotiable
instrument. (Abubakar v. Auditor General)
6. MONEY ORDER
BILLS OF EXCHANGE - a species of draft drawn by the post-office upon
another for an amount of money deposited at
Definition the first post office by the person purchasing the
- it is an unconditional order in writing, addressed money order and payable at the second office to
by one person to another, signed by the person a payee named in the order.
giving it, requiring the person to whom it is - Money order is NOT negotiable.
addressed to pay on demand or at a fixed or 7. CLEAN AND DOCUMENTARY BILLS OF
determinable future time a sum certain in money EXCHANGE
to order or to bearer. (Sec. 126) a) Clean bill of exchange
- is one to which are not attached
Types documents of title to be delivered to the
1. DRAFT person against whom the bill is drawn
- a common term for all bills of exchange and when he either accepts or pays the bill.
they are used synonymously. b) Documentary bill of exchange
 In bank drafts, DRAWER and DRAWEE - is one to which are attached documents
are liable to purchaser of draft for not of title to be delivered and surrendered
complying with his instructions. to the drawee when he accepts or pays
2. TRADE ACCEPTANCE the bill.
- a bill of exchange payable to order and at a 8. D/A AND D/P BILLS OF EXCHANGE
certain maturity, drawn by a seller against a) Documents Against Payment Bill or D/P Bill
the purchaser of goods as drawee, for a - is a sight or time bill to which are
fixed sum of money, showing on its face the attached documents to be delivered and
acceptance of the purchaser of the goods surrendered to the drawee when he has
and that it has arisen out of a purchase of paid the corresponding bill.
goods by the acceptor. b) Documents Against Acceptance Bill or D/A
Bill
 Saint Louis University COMMERCIAL LAW 47
2012 BAR OPERATIONS

- is a time bill to which are attached Purpose

documents to be delivered and - To increase the probability of the bill reaching its
surrendered to the drawee when he destination.
accepts the bill.
9. TIME OR USANCE BILLS Right of holders where different parts are
- are bills which are payable at a fixed future time negotiated
or at a determinable future time. - Where two or more parts are negotiated to
10. SIGHT BILLS different holders in due course – the holder
- are bills which are payable upon presentation or whose title first accrues – as between such
at sight or on demand. holders – is the true owner of the bill.

Liability of holder who indorses two or more

11. INLAND BILL OF EXCHANGE parts of a set to different persons
- is a bill which is or on its face purports to be a) He is liable on every such part; and
BOTH drawn and payable within the Philippine b) Every indorser subsequent to him is liable on the
Islands. part he has himself indorsed – as if such parts
12. FOREIGN BILL OF EXCHANGE were separate bills.
- is a bill which is, or on its face purports to be,
drawn or payable outside the Philippine Islands. Acceptance of bills in set
a. to be drawn in the Philippines but payable - The acceptance may be written on any part and
outside thereof; or it must be written on ONE PART only.
b. to be payable in the Philippines but drawn
outside thereof. Effect if the drawee accepts more than one part
- If the drawee accepts more than one part and
Importance of the distinction: such accepted parts are negotiated to different
1. The distinction is important because foreign bills holders in due course, he is liable on every part
are required to be protested. Failure to protest as if it were a separate bill.
foreign bills will discharge persons secondarily
liable thereon. Payment by acceptor of bills drawn in sets
2. The distinction is also important for the - When the acceptor of a bill drawn in a set pays it
determination of the law applicable. without requiring the part bearing his acceptance
to be delivered up to him, and the part at
When a bill may be treated as promissory note maturity is outstanding in the hands of a holder
1. Where the drawer and the drawee are the same in due course – he is liable to the holder thereof.
person such as, in a draft drawn by an agent on
his principal by authority of the principal. Effect of discharging one of a set:
2. Where the drawee is a fictitious person. - Where one part of a bill drawn in a set is
3. Where the drawee has no capacity to contract. discharged by payment or otherwise – the whole
bill is discharged – except as otherwise
Referee in case of need provided.
- is the person whose name was inserted by the
drawer of the bill and any indorser to whom the
holder may resort in case of need – that is in PROMISSORY NOTES AND CHECKS
case the bill is dishonored by non-acceptance or
by non-payment. Promissory Note
- It is the option of the holder to resort to the - An unconditional promise in writing made by one
referee in case of need or not as he may person to another, signed by the maker,
see fit. engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in
money to order or bearer.
BILLS IN SET
 Where a note is drawn to the maker’s own
Definition order, it is NOT complete until indorsed by
- One composed of various parts, each part being him.
numbered and containing a reference to the
other parts, all of which parts constitute but one Special types of promissory notes
bill. 1. CERTIFICATE OF DEPOSIT
 Saint Louis University COMMERCIAL LAW 48
2012 BAR OPERATIONS

-is a written acknowledgment by a bank of 8. JUDGMENT NOTE

the receipt of money on deposit which the
bank promises to pay to the depositor, Check
bearer, or to some other person or order. - A bill of exchange drawn on a bank payable on
- It is NOT ipso facto negotiable – it must first demand.
comply with the requirements provided
under Section 1, NIL.  Acceptance is NOT required for checks for the
2. BONDS same are PAYABLE ON DEMAND.
- A promise, under seal, to pay money.
- The bond certifies that the issuing company  A check is a bill of exchange payable on
is indebted to the bondholder for the amount demand – is intended for immediate use and
specified on the face of the bond, and NOT to circulate as a promissory note.
contains an agreement of the company to
pay the sum at a specified time in the future, Special types of checks
and meanwhile to pay a specified interest on 1. CASHIER’S CHECK
the principal amount at regular intervals, - It is a check drawn by the cashier of a bank
generally six months apart. They are in the name of the bank against the bank
negotiable if all the requisites in Section 1, itself payable to a third person or order.
NIL are complied with. 2. MANAGER’S CHECK
- Classes of bonds: - Drawn by the manager of a bank in the
a) Mortgage bonds; name of the bank against the bank itself
b) Equipment Bonds; payable to a third person.
c) Collateral trust bonds; - It is similar to the cashier’s check as to effect
d) Guaranteed bonds; and use.
e) Debentures; and 3. MEMORANDUM CHECK
f) Income bonds; - a check on which is written the word
g) Convertible bonds; “memorandum”, “memo”, and “mem”,
h) Redeemable Bonds; signifying that the drawer engages to pay
i) Registered Bonds; and the bona fide holder absolutely and not upon
a condition to pay upon presentment and
j) Coupon Bonds non-payment.
 Those to which are attached a sheet 4. CERTIFIED CHECK
of dated, numbered and similarly - a check on which the drawee bank has
printed coupons which the written an agreement whereby it undertakes
bondholder may cut off when due or to pay the check at any future time when
thereafter. presented for payment, such as, by
 Such coupons may be served and stamping on the check the word “certified”
deposited in a bank, negotiated and underneath it is written the signature of
before the maturity of the interest the cashier.
they represent, and transferred just 5. TRAVELER’S CHECK
like any commercial paper. - one in which the holder’s signature must
 They are negotiable if all the appear twice, one to be affixed by him at the
requisites in Section 1, NIL are time it is issued and the second or counter-
complied with. signature to be affixed by him in the
3. BANK NOTES presence of the payee before it is paid,
- Are promissory notes of the issuing bank otherwise, it is incomplete.
payable to bearer on demand and intended 6. CROSSED CHECK
to circulate as money. They are regarded as - How is crossing of check done:
cash and pass from hand to hand without  it is usually done by drawing two parallel
any evidence of title in the holder than that lines transversally on the face of the
which arises form possession. However, check. A check may be crossed (1)
they are not money. specially or (2) generally.
4. DUE BILLS - Crossing specially
- Is an instrument whereby one person  a check is crossed specially when the
acknowledges his indebtedness to another. name of a particular banker or a
5. MORTGAGE NOTE company is written between the parallel
6. TITLE RETAINING NOTE lines drawn transversally on the face of
7. COLLATERAL NOTE the check.
 Saint Louis University COMMERCIAL LAW 49
2012 BAR OPERATIONS

- Crossing generally sufficient certification under modern banking

 a check is crossed generally when only practice.
the words “and company” are written - Effect of Certification:
between the parallel lines, or when 1. It is equivalent to acceptance and is the
nothing is written at all between the operative act that makes the drawee bank
parallel lines. liable;
- Under crossed checks, the payee has the 2. It operates as an assignment of the funds of
duty to ascertain the holder’s title to checks. the drawer in the hands of the drawee bank;
- The holder should not present for 3. If obtained by the holder, it discharges
encashment a crossed check but deposit the persons secondarily liable thereon;
same for collection. 4. The payee or holder, for all intents and
- Where other than payee of crossed checks purposes, becomes the depositor of the
presented it for payment, there is no proper drawee bank, with rights and duties of one in
presentment and drawer is not liable such a situation; and
thereon. 5. The drawee may not issue a stop payment
- Advantages of crossing check: order on the certified check.
 it is a good precaution when it is to be - Effect where the holder of check procures it to
forwarded by mail or when it is entrusted be certified:
to an agent and the drawer wants to be a) Where the holder of a check procures it to
sure that it will be paid to the rightful be accepted or certified, the drawer and all
owner. indorsers are discharged from liability
thereon.
Check – when it should be presented for b) Indorsers subsequent to the certification are
payment not discharged.
- A check MUST be presented for payment within
a reasonable time after its issue or the drawer When check operates as an assignment
will be discharged from liability thereon to the - A check of itself does not operate as assignment
extent of the loss caused by the delay. (Sec. 186) of any part of the funds to the credit of the
- Must be presented within six (6) months – drawer with the bank, and the bank is not liable
otherwise it will become stale. to the holder unless and until it accepts or
- a check under BP 22 must be presented for certifies the check.
payment to the bank within 90 days from date so
that the holder will enjoy the benefit of the prima
facie presumption that the maker, drawer, or DEFINITION OF TERMS
issuer knows at the time of issue that he does
not have sufficient funds in or credit with the 1. ACCEPTANCE
drawee bank for payment of such check. - an acceptance completed by delivery or
notification.
Effect if the check was allowed to become stale 2. ACTION
- The drawer is discharged but only to the extent - includes counterclaim and set-off.
of the loss caused by the delay. 3. BANK
- Hence, if no loss or injury is shown, the drawer - includes any person or association of
is not discharged. persons carrying on the business of
banking, whether incorporated or not.
Certification of check 4. BEARER
- is an agreement whereby the bank against - the person in possession of a bill or note
whom a check is drawn, undertakes to pay it at which is payable to bearer.
any future time when presented for payment. 5. BILL
 A bank is NOT obliged to the depositor to - bill of exchange; and “NOTE” means
certify checks. negotiable promissory note.
- The certification of a check is equivalent to an 6. DELIVERY
acceptance. - transfer of possession, actual or
- Form of certification: constructive, from one person to another.
 No particular form is required – but it must
be in writing. 7. HOLDER
 The letters “O.K.”, with the initials of the - the payee or indorsee of a bill or note who is
cashier of a bank do not constitute a in possession of it, or the bearer thereof.
8. INDORSEMENT
 Saint Louis University COMMERCIAL LAW 50
2012 BAR OPERATIONS

- an indorsement completed by delivery.

9. INSTRUMENT Officer in charge with the implementation of laws
- negotiable instrument. of the Insurance Code
10. ISSUE The officer-in-charge is the Insurance Commissioner
- first delivery of the instrument, complete in of the Insurance Commission
form, to a person who takes it as a holder.
11. PERSON Administrative functions of the Insurance
- includes a body of persons, whether Commissioner
incorporated or not; The Commissioner has the following functions:
12. VALUE A. Administrative function (CRISPFe)
- valuable consideration. 1. To issue Certificate of authority to
13. WRITTEN qualified insurers
- includes printed manner; and “WRITING” 2. To Regulate the sale and issuance of
includes print variable contracts, to license persons
selling them and to issue rules and
regulations governing the same
 
 
3. To Issue rulings, instructions circulars,
V. INSURANCE CODE  orders and decisions for the
PD 1460  enforcement of the provisions of the
code subject to approval of the
Secretary of Finance.
LAWS GOVERNING THE INSURANCE 4. To stop the operation of an insolvent
CONTRACTS insurance company and determine
within 30 days whether to rehabilitate or
1. Insurance Code of 1978 (PD No. 1460), which liquidate the company.
superseded PD No. 612 as amended and 5. To impose appropriate fines and
special laws. Penalties on insurance companies and
2. Civil Code on their officers and agents for refusal to
a) Article 739 and 2012 on void donations comply with any order, instruction… of
b) Article 2011 applicability of the Civil Code the Commissioner , or for
c) Articles 2021-2027 Life annuity Contracts mismanagement
d) Article 2186 Compulsory Motor Vehicle 6. To see that all insurance laws are
Liability Insurance Faithfully executed
e) Article 2207- insurer’s right of subrogation 7.
3. Special laws- Article 2011 of the Civil Code B. Adjudicative function (Jurisdiction)
a) Insurance Code of 1978 PD1460 The Commissioner has the power to adjudicate
b) The Revised Government Service Insurance claims and complaints for amounts not
Act of 1977 PD No. 1146 with respect to the exceeding P100k per claim involving:
insurance of Government employees. 1. Loss, damage or liability of insurer
c) Social security act of 1954 RA No. 1161 with under any policy or insurance contract
respect to insurance of employees in private 2. Liability of a reinsurer
employment. 3. Liability under the contract of suretyship
d) Code of CommercE 4. Liability of a mutual benefit association
4. Others to its members
a) RA No. 656 as amended by PD No.245- 5. Counterclaims against the insured
Property Insurance Law 6. Cross-claims against a co-party
b) RA No. 4898 as amended by RA No. 5756 7. Third party claims by the insurer against
providing life, disability and accident another party.
insurance coverage to barangay officials.  This authority is concurrent with the
c) Executive Order No. 250 (July 25, 1987) courts, but filing of the complaint with
increase, integrates and rationalizes the the Commissioner shall preclude the
insurance benefits of barangay officials civil courts from taking cognizance.
under RA No. 4898 and members of the  The final order or decision of the
Sanggunian under PD No. 1147 Commissioner shall have the force and
d) RA No. 3591 as amended-establish the effect of a judgment, and may be
Philippine Deposit Insurance Corporation appealed to the Court of Appeals within
which insures the deposits of all banks 15 days from notice of the award
which are entitled to the benefits of
insurance under this act
 Saint Louis University COMMERCIAL LAW 51
2012 BAR OPERATIONS

judgment, or of denial of motion for  Under the Motor Vehicle Insurance,

reconsideration or new trial. Third Party Liability Insurance is
 The decision may be subject of a writ of mandatory for vehicle registration
execution 6. Aleatory – depends on some contingent
 Claims in excess of P100k – RTC event
 Cause of action commences from the 7. Personal – it binds only the parties to it and
time of the denial of his claim by the their assignees
insurer, express or implied (Sun vs. CA  Exception: When there is a Stipulations
195 SCRA 193) pour autrui or a provision in favor of a
third person not a party to the contract.
Contract of Insurance Under this doctrine, a third person is
- an agreement allowed to avail himself of a benefit
- whereby one undertakes for a consideration to granted to him by the terms of the
indemnify another contract, provided that the contracting
- against (1) loss, (2) damage or (3) liability parties have clearly and deliberately
- arising from an (1) unknown or (2) contingent conferred a favor upon such person
event. 8. Contract of perfect good faith for both
parties (uberrimae fidei)
"Doing an insurance business" or "transacting 9. It is not a wagering contract- the insurer
an insurance business" shall include (RISO) does not insure the happening or non-
(a) doing any kind of business, including a happening of an unknown or contingent
Reinsurance business, specifically event.
recognized as constituting the doing of an 10. It is a risk contributing device- to persons
insurance business within the meaning of similarly situated covering the same risk.
this Code; 11. It is a contract of adhesion-interpreted
(b) making or proposing to make, as insurer, strictly against the maker of the contract.
any Insurance contract;
(c) making or proposing to make, as surety, any Classes of Insurance
contract of Suretyship as a vocation and 1. Life Insurance
not as merely incidental to any other 2. Non-life Insurance
legitimate business or activity of the surety; a. Fire Insurance
(d) Others - doing or proposing to do any b. Marine Insurance
business in substance equivalent to any of c. Casualty Insurance
the foregoing in a manner designed to d. Suretyship
evade the provisions of this Code.
 The fact that no profit is derived from the Elements of Contract of Insurance
making of insurance contracts, 1. Insurable interest of the insured – interest
agreements or transactions or that no of some kind susceptible of pecuniary or
separate or direct consideration is monetary estimation
received therefor, shall not be deemed 2. Insured subject to loss through the
conclusive to show that the making destruction or impairment of that interest
thereof does not constitute the doing or by the happening of designated perils
transacting of an insurance business. 3. Insurer assumes the risk of loss
-Such assumption is part of a general
Characteristics of an Insurance Contract scheme to distribute actual losses among a
(C3UVAP2) large group of persons bearing somewhat
1. Consensual – perfected by the meeting of similar risk
minds 4. Payment of premium – ratable contribution
2. Conditional – subject to conditions – to a general insurance fund as consideration
happening of the event insured against to the insurer’s promise
and/or other conditions like payment of
premium Requisites of contract of Insurance
3. Contract of Indemnity – promise of insurer to 1. Subject matter in which the Insured has an
make good a loss insurable interest
4. Unilateral – impose legal duties only on the 2. Peril Insured against – contingent or
insurer who promises to indemnify in case of unknown event, past or future and a
loss duration for the risk thereof
5. Voluntary – willingness of the parties
 Saint Louis University COMMERCIAL LAW 52
2012 BAR OPERATIONS

3. A promise to damnify in a fixed or ‐ An Insurance agent should perform the function

ascertainable amount for a compensation
4. Payment of premium
5. Meeting of minds of the parties INSURED
Note: No policy of insurance shall ‐ Generally, any person with capacity to contract
be issued or delivered unless in the and having an insurable interest in the life and
form previously approved by the property insured may be the insured
Insurance Commissioner. ‐ A married woman may take insurance on her life
or on that of her children without need of her
What may be insured against husband’s consent
1. A Future Contingent Event resulting in loss ‐ A public enemy cannot be insured.
or damages ‐ Public enemy means any citizen or juridical
- e.g. destruction of a building from fire in entity of the country with which the Philippines
Fire Insurance or the death of the may be at war
insured in a Life Insurance policy
- Note that the word “Loss” embraces Effects of War on Insurance Contracts
injury or damage. A loss may be partial 1. War prevents an insurance contract from being
or total entered into between citizens and juridical
2. A Past Unknown Event resulting in loss or entities of the warring states
damage 2. For existing insurance contracts, the rules are:
- This is best exemplified in a Marine a. Property Insurance – war abrogates the
Insurance where at the time the policy is contract (Kentucky Rule)
executed, the vessel subject of the b. Life Insurance – war terminates the policy,
insurance may have already sunk, but but the insured is entitled to the equitable
that fact was unknown to the parties at value of the policy arising from the
the time of the execution of the policy premiums actually paid, when commercial
3. Contingent Liability relations are resumed (U.S. Rule)
- This is best illustrated in Reinsurance
where the liability of the insurer is in turn BENEFICIARY
insured by him with a second insurer. ‐ The insurance proceeds shall be applied
exclusively to the proper interest of the person in
 Drawing of any lottery, or for/against any whose name or for whose benefit it is made
chance or ticket in a lottery drawing a unless otherwise specified in the policy
prize may not be insured. A contract of ‐ The beneficiary is the person designated to
insurance is a contract of indemnity and receive the proceeds of the policy when the risk
not a wagering or gambling contract attaches.
‐ He may be the (1) insured himself in the
Parties to an Insurance Contract property insurance or (2) the insured or (3)a
1. Insurer third person in life insurance
2. The Insured ‐ The father or mother of a minor who is an
3. Beneficiary insured or beneficiary of a life policy, may
exercise, for said minor, all rights under the
INSURER policy up to P20k without the need of a court
‐ is the person, natural or juridical, who holds a authority or a bond (sec 180)
certificate of authority from the Insurance
Commissioner and who undertakes to indemnify A. Beneficiary of one who insures his own life
another by a contract of insurance ‐ As a general rule, the insured who insures
‐ Banks cannot be insurers his own life may designate any person,
‐ Paid-up capital requirement for insurance including his estate as his beneficiary,
companies whether or not the beneficiary has an
o P2M and a contributed surplus of insurable interest in the life of the insured
o P1M for life insurance ‐ The Insured has the right to change the
o P500k for non-life insurance designation of the beneficiary, unless he has
o P5M in case of reinsurance co. expressly designated an irrevocable
‐ For Insurance Cooperative, recommendation beneficiary in his policy
from the Cooperative Development Authority is
required Effects if the designation of beneficiary is
irrevocable
 Saint Louis University COMMERCIAL LAW 53
2012 BAR OPERATIONS

The insured cannot (a) Where a specified person is beneficiary,

1. Assign the policy the proceeds will inure to the
2. Take the cash surrender value beneficiary.
3. Allow his creditors to attach or execute on the Q: A took out a life insurance policy and
policy designated his wife, B, as the sole
4. Add a new beneficiary or beneficiary. All the premiums of the
5. Change the irrevocable designation to policy were paid out from his salaries. A
revocable, even though the change is just and died intestate leaving B and 3 children.
reasonable Divide the proceeds of the policy (1961
 Ratio: The irrevocability of the Bar)
designated beneficiary and his heirs A: All of the proceeds of the policy will
have acquired from the date of the go to the designated policy, B. The
policy vested rights over the policy source of the premium here is
(Philam vs. Pineda 175 SCRA 201) immaterial (Miravite, 2002ed., p200)
(b) If the premiums are paid from (1)
 General rule: salaries of the insured or (2) other
‐ the proceeds of a life insurance policy conjugal properties or funds, and the
belong to the designated beneficiary to the beneficiary is the estate of the insured,
exclusion of the heirs of the insured (Picar the proceeds of the life insurance policy
vs GSIS 33 SCRA 324) is considered conjugal.
 Exception: Persons Disqualified as
Beneficiaries
‐ A beneficiary in life insurance is like a B. Beneficiary of Life Insurance on the life of
donee, hence, the civil code provision on the another person.
disqualifications of a donee shall apply. Where a policy is taken by a third person on
Donations made between the following the life of the insured, and said third person
persons are void designates himself as the beneficiary, the third
1. Donation between persons guilty of person must have an insurable interest on the
adultery or concubinage life of the insured, at the time the policy became
2. Donations between persons found effective.
guilty of the same criminal offense,
in consideration thereof C. Beneficiary of Property Insurance
3. Donations made to a public officer The beneficiary of the property insurance must
or his wife, descendants and have an insurable interest over the subject
ascendants, by reason of his office. matter of the insurance existing at the time the
policy was taken and at the time the loss took
When interest of the beneficiary is forfeited place
‐ The interest of the beneficiary in a life insurance
policy shall be forfeited when the beneficiary is
the Principal, Accomplice, or accessory in INSURABLE INTEREST
willfully bringing about the death of the insured
‐ In this event, he nearest relative of the insured - Insurable interest is a right or relationship
shall receive the proceeds of said insurance if - In regard to the subject matter of the insurance
not otherwise disqualified - Such that the insured will derive
‐ The nearest relatives of the insured in the order 1. pecuniary benefit or advantage from its
of enumeration are the following: preservation and
1. Legitimate children 2. will suffer pecuniary loss or damage from its
2. Parents destruction or injury
3. Grandparents illegitimate children - by the happening of the event insured against
4. Surviving spouse
5. Brothers and sisters of the full blood A. Insurable Interest in Life
6. Brothers and sisters of the half
blood Insurable interest in life is the interest which a
7. Nephews and nieces. person has
1. In his life or
NOTES: 2. In the lives of other persons
a. Of his spouse and of his children
 Saint Louis University COMMERCIAL LAW 54
2012 BAR OPERATIONS

b. On whom he depends wholly or in part for 3. An expectance coupled with an existing

education or support (Wife insuring interest in that out of which the expectance
Husband’s life) arises
c. Under legal obligation to him to pay money,
to deliver property or to render service Examples of an insurable inchoate right in the
(Creditor insuring the life of its Debtor) property
d. Upon whose file any estate or interest 1. Contractor’s interest to the completed
vested upon him. (Legatee of a usufruct building for unpaid construction cost
insuring the life of the usufructuary) 2. Lessor’s interest on the improvements made
by the lessee
 A corporation has an insurable interest in the 3. Naked owner’s interest over the property
lives of its officers when the death or illness of which another person has beneficial title
said officers would materially and injuriously
affect the corporation. A mere contingent or expectant interest in anything,
 The corporation and the heirs of the manager not founded on an actual right to the thing, nor upon
can insure the life of the manager-decedent in any valid contract for it, is not insurable (e.g.
agreed proportion, since both have insurable property which one expects to inherit or that of a
interest over the life of the latter general or unsecured creditor insuring the property
of his debtor who is alive even though destruction of
such property would render worthless any judgment
When Insurable Interest should exist he might obtain note further in the latter case, the
It must exist at the time the insurance is taken. creditor can insure the property of a deceased
debtor since all personal liability ceases with the
B. Insurable Interest in property death of the debtor. The proceedings to subject the
estate to the payment of the debt of the deceased
Rule: No contract or policy of insurance on property are against all who have an interest in the property.
shall be enforceable except for the benefit of some Of course, an unsecured creditor has an insurable
person having insurable interest in the property interest in the life of his debtor )
insured
The vendee-consignee of goods in transit under a
Insurable interest perfected contract of sale is vested with an equitable
Life insurance Property Insurance title to the goods even before receipt by him of the
goods to constitute an insurable interest in the
Insurable interest Insurable interest must property (Fil Merchants vs CA 179 SCRA 638)
must exist only at the exist at the time the policy
time the policy is is taken and at the time A carrier or depositary of any kind has an insurable
taken the loss occurs interest in a thing held by him as such, to the extent
The beneficiary need The beneficiary must of his liability but not exceed the value thereof.
not have an insurable have an insurable interest
interest on the in the property insured Extent of insurable interest of a mortgagor/ee in
insured’s life a mortgaged property
There is no limit to the Insurable interest is a. The mortgagor has an insurable interest on his
amount of insurable limited to the actual value property as owner up to the full value of his
interest of the interest in the property, irrespective of any mortgage on said
property property in general.
b. The insurable interest of a mortgagee is up to
What is considered as insurable interest in the extent of his credit.
property
Insurable interest in property is every interest in  Each may take separate insurances over the
property whether real or personal, or any relation same property up to the extent of their
thereto, or liability in respect thereof, of such a respective insurable interests.
nature that the contemplated peril might directly
cause damage to the insured  Where the mortgagee independently of the
mortgagor insured his own interest in the
What insurable interest in property consists of mortgaged property, he is entitled to the
An insurable interest in property consist of proceeds of the policy in case of loss before
1. An existing interest payment of the mortgage. But in such case, the
2. An inchoate interest founded on an existing mortgagee is not allowed to retain his claim
interest
 Saint Louis University COMMERCIAL LAW 55
2012 BAR OPERATIONS

against the mortgagor but it passes by a. The Policy itself which transfers the fights to
subrogation to the insurer to the extent of the the contract to another insured
insurance paid. In other words, the payment of b. The proceeds of the policy after the loss
the insurance to the mortgagee does not relieve has happened , which involves a money
the mortgagor from his principal obligation but claim under, or a right of action on the policy
only changes the creditor. c. The subject matter of the insurance, such
as a house insured under a fire policy which
When insurance is on the interest of the has the effect of suspending the insurance
mortgagor (loss payable clause/ standard (infra)
mortgage clause) (Sec. 8)
‐ The insurance is on the mortgagor’s interest When insurable interest should exist
where the mortgagor takes insurance on the It must exist at the time the policy is taken and at the
property in his own right making the loss time the loss incurred but it need not exist in the
payable to the mortgagee meantime
‐ The mortgagor may:
i. Take insurance on the property, and Ratio: To prevent a person from taking out an
assign the same to the mortgagee (this insurance policy on property upon which he has
operates merely as an equitable transfer no insurable interest and collecting the proceeds
of the policy so as to enable the of said policy in case of loss of the property. In
assignee to recover the proceeds) such a case, the contract of insurance is a mere
ii. Constitute the mortgagee as beneficiary wager which is void. (Cha vs CA 277 SCRA
as his interest may appear 690)
iii.
 In case of fire, marine and casualty Effect of a change of interest on the thing
insurance, the assignment must be with the insured
consent of the insurer because it is a ‐ A change in the interest in any part of a thing
personal contract. (Note that life insurance insured unaccompanied by a corresponding
may be freely assigned before or after loss change of interest in the insurance, suspends
occurs to any person whether he has an the insurance to an equivalent extent, until the
insurable interest or not) interest in the thing and the interest in the
insurance are vested in the same person.
Effects of insurance taken on the interest of the
mortgagor  Mere transfer of a thing insured does not
a. Mortgagor continues to be a party to the contract transfer the policy but suspends it until the
b. Any act by the mortgagor prior to the loss which same person becomes the owner of both the
would avoid the policy, will thus avoid the policy, policy and the thing insured. For a
even if the property is in the hands of the transferee to have an insurable interest over
mortgagee a policy undertaken by the transferor, the
c. Any act which under the contract of insurance is insurance policy should be assigned to him,
to be performed by the mortgagor (e.g. payment when he bought the property.
of premium) may be performed by the
mortgagee with the same effect, as if performed  A change of interest in a thing insured, after
by the mortgagor. the occurrence of an injury which results in a
d. In case of loss, the mortgagee is entitled to the loss, does not affect the right of the insured
proceeds to the extent of his credit, to indemnity for the loss
consequently, the debt is extinguished.
 A change of interest, by will or succession,
Effect if the mortgagor assigns the policy to the on the death of the insured, does not avoid
mortgagee with the insurer’s consent, but the an insurance; and his interest in the
latter imposes new conditions on the assignee insurance passes to the person taking his
(union mortgage clause) (Sec. 9) interest in the thing insured. Otherwise
If at the time of the assent, the insurer imposes stated, the insurance on property passes
further obligations on the assignee making a new automatically, upon the death of the insured
contract with him, the act of the mortgagor cannot , to the heir, legatee or devisee who
affect the rights of said assignee. acquires interest in the thing insured.

 Take note of the distinctions between the  A transfer of interest by one of several
assignment or transfer of: partners, joint owners etc. who are jointly
 Saint Louis University COMMERCIAL LAW 56
2012 BAR OPERATIONS

insured, will not avoid the insurance even In case of partial loss - open policy – P6,000 –
though it has been agreed that the the actual partial loss not exceeding the face
insurance shall cease upon an alienation of value of the policy
the thing insured. In case of partial loss – valued policy – 6/10 of
P8,000 or P4,800- the amount in proportion
 A change of interest where there are several to his loss and the market value of the
things separately insured by one policy, property as against the to face value of the
does not avoid the insurance as to the policy.
others
Example: A insured his car for P100k
and jeep for P85k under the single CONCEALMENT
policy, the sale of one will not affect the Concealment is a neglect to communicate that which
insurance of the car. a party knows and ought to communicate to the
BUT if the car and jeep were not other party.
separately valued in the policy , the sale
of the jeep without the insurer’s consent Requisites for concealment
affects also the insurance of the car For concealment to vitiate a contract of insurance,
the following must be present
Stipulations prohibited in an insurance policy 1. the matter concealed must be material
1. Stipulations for the payment of loss whether the 2. there must be an obligation for the insured
person insured has or has not any interest in the to reveal the concealed matter to the insurer
subject matter of the insurance
2. Stipulation that the policy shall be received as Matters that must be communicated even in the
proof of insurable interest. absence of inquiry
Each party to a contract of insurance must
Amount of insurance communicate in good faith all facts within his
The measure of an insurable interest in property is knowledge only when:
the extent to which the insured might be damnified 1. They are material to the contract
by loss or injury thereof. 2. The other has not the means of ascertaining
the said facts
Rules to be followed in cases where the property 3. As to which the party with the duty to
is insured for less than its true or market value communicate makes no warranty.
 In case of total loss: The property owner is
entitled to receive the face value of the policy Test of materiality
but in no case exceeding the market value of A fact is material if knowledge of it would have
the property. affected the decision of the insurer to enter into the
 In case of partial loss: The property owner contract, in estimating the risk, or in fixing the
is entitled only the amount in proportion to his premium
loss and the market value of the property as
against the to face value of the policy. Ratio  Matters relating to the health of the insured are
An owner of property who insures the same material and relevant to the approval and
for less that its true value is co-insurer for the issuance of the life insurance policy as they
uninsured portion of the property if the policy definitely affect the insurer’s action on the
is a valued one. application (Sunlife vs CA 245 SCRA 268)
 HOWEVER if the policy is an open one, the
owner can collect the actual partial loss not  It is well-settled that the insured need not die of
exceeding the face value of the policy the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
Example: misled the insurer in forming his estimates of the
X has a property worth P10,000. He insures it risk of proposed insurance policy or in making
against fire for P8,000. How much shall he inquiries (ibid)
collect from then insurance in case of total
loss? If there is Partial loss in the amount of  Lack of understanding by the illiterate insured of
P6,000? the statements and her application as to her
In case of total loss – P 8,000 – face value of the state of good health does not negate the
policy insurer’s right to rescind (Tang vs CA 90 SCRA
236)
 Saint Louis University COMMERCIAL LAW 57
2012 BAR OPERATIONS

 Concealment exists where the assured had the policy due to fraudulent concealment or
knowledge of a fact material to the risk, and misrepresentation of the insured.
honesty, good faith, and fair dealing requires
that he should communicate it to the assured, If the insured dies within two years from the
but he designedly and intentionally withholds the effectivity of the policy, rescission due to
same. concealment or misrepresentation of material
matters may still be invoked by the insurer,
Matters which one has no duty to disclose provided done within two years from the
Neither party to a contract of insurance is bound to effectivity of the policy
communicate information of the matters following,
except in answer to the inquiries of the other: 2. Certain concealments in Marine Insurance
1. Those which are already known to the insurer The following matters although concealed will
2. Those which, in the exercise of ordinary care, not vitiate the contract of marine insurance
are ought to be known to the insurer or his except when they are caused the loss.
agent, a. National character of insured
3. Those undisclosed facts which are not material b. Liability of insured thing to capture or
4. Those which each party is bound to know: detention
- general causes – eg. public events; and c. Liability to seizure from breach of
- general usages of trade - eg. rules of foreign laws
navigation all risks connected with navigation) d. Want of necessary documents
5. Information or the nature or amount of the e. Use of false or simulated papers
interest of one insured except if insured is a
lessee or a mortgagee (read sec 51)
6. Those of which the insurer waives REPRESENTATION
communication
 The right to information of material A representation is an oral or written statement of a
facts may be waived, either: fact or condition made by the insured at the time of
a. Expressly – by the terms of the or prior to the issuance of the policy, affecting the
insurance risk made by the insured to the insurer, tending to
b. Impliedly – by neglect to make induce the insurer to assume the risk
inquiry as to such facts, where they
are distinctly implied in other facts of Misrepresentation vs. Concealment
which information is communicated
(Fact disclosed that one was
confined in the hospital. The insurer Misrepresentation Concealment
did not inquire as to the cause of Insured makes a Insured maintains
confinement, the latter is in statement of fact which is silence when he ought to
estoppel) untrue speak
7. Judgment upon the matters in question – eg.
Opinion, speculation or expectation (How long Kinds of representation
will you live?) 1. Oral
2. Written
Consequences of concealment 3. Affirmative representation
‐ The rule is concealment whether intentional or 4. Promissory representation
unintentional entitles the injured party to rescind
a contract of insurance. Affirmative representation
‐ However, an intentional and fraudulent ‐ It is any allegation as to the existence or non-
omission, on the part of one insured, to existence of a fact when the contract begins
communicate information of matters proving or
tending to prove the falsity of a warranty is Promissory representation
required to entitle the insurer to rescind ‐ It is any promise to be fulfilled after the contract
‐ Good faith is no defense in concealment (Sunlife has come into existence or any statement
vs CA 245 SCRA 268) concerning what is to happen during the
existence of the insurance. A promissory
Exceptions: representation is substantially a condition or a
1. Incontestability clause: warranty.
In life insurance, after a policy has been in force
for at least two years, the insurer cannot rescind A promissory representation maybe:
 Saint Louis University COMMERCIAL LAW 58
2012 BAR OPERATIONS

1. Used to indicate a parole or oral promise 3. where such fact in either case is material to
made in connection with the insurance, but the risk
not incorporated in the policy.
- the non-performance of such a promise  An insured who has no personal knowledge
cannot be shown by the insurer in defense of a fact may communicated such
of an action on the policy, but proof that the information which he has, and believes it to
promise was made with fraudulent intent will be true, upon the subject matter with the
serve to defeat the insurance explanation that said information was
2. As an undertaking by the insured, inserted in obtained from 3rd persons. In this case he is
the policy but not specifically made a not responsible if the information turns out to
warranty. be false.
 Except if the information proceeds from an
Warranty vs. Representation agent of the insured whose duty is to give
information to his principal. This is so
Warranty Representation because knowledge of the agent is also
It is mere collateral knowledge of the principal
inducement, but it
It is part of contracts Effect of false representation or
may qualify an implied
warranty misrepresentation
It is expressly set forth ‐ If the representation is false on a material point,
in the policy itself or It may be oral or written the injured party is entitled to rescind from the
incorporated therein by in another instrument time when the representation becomes false.
reference ‐ HOWEVER, the right to rescind given to the
It is conclusively It must be proved to be insurer is waived by the acceptance of premium
presumed material material payments despite knowledge of the ground of
rescission
It requires only
It must be strictly
substantial truth or
complied with Test of materiality
compliance
‐ Materiality is determined by the probable and
reasonable influence of the facts on the party to
When representation is made
whom communication is due, in forming his
‐ A representation may be made at the time of or
estimate of the contract, the risk and the
before issuance of the policy. It may be altered
premium
or withdrawn before issuance of the policy, but
not afterwards.
‐ When the original contract of insurance was
 A representation must be presumed to refer to
modified by reason of concealment or
the date on which the contract goes into effect
misrepresentation on the part of the insured
Hence:
especially when modification pertains to material
1. There is NO FALSE representation if it is
points, upon discovery of such concealment or
true at the time the contract takes effect
misrepresentation, the insurer is allowed to
although false at the time it was made.
rescind said modification.
2. There is FALSE representation if it is true
at the time it was made but false at the
Right to rescind – when available
time the contract takes effect – in this case
‐ In order that the insurer may rescind a contract
the insurer is entitled to rescind
of insurance, such right must be exercised prior
to the commencement of an action on the
When representation is deemed false
contract. (Example, if the insured filed an action
‐ A representation is deemed to be false when the
to collect amount of the insurance, it can no
facts fail to correspond with its assertions or
longer rescind the contract)
stipulations.
Incontestability clause
Misrepresentation
‐ Incontestability means that after the requisites
A misrepresentation in insurance is a statement:
are shown to exist, the insurer shall be estopped
1. As a fact of something which is untrue
from contesting the policy or setting up any
2. Which the insured states with knowledge
defense, except when allowed on the ground of
that it is untrue and with intent to deceive, or
public policy.
which he states positively as true without
‐ Requisites:
knowing it to be true and which has the
1. The policy is a life insurance policy
tendency to mislead
 Saint Louis University COMMERCIAL LAW 59
2012 BAR OPERATIONS

2. It is payable on the death of the insured Kinds of warranties

3. It has been in force during the lifetime of the 1. Affirmative warranty
insured for at least 2 years from its date of ‐ where the insured asserts the existence
issue or of its last reinstatement of a matter at or before the issuance of
NOTE: The period of two years for the policy
contesting a life insurance policy may be 2. Promissory warranty
shortened but it cannot be extended by ‐ where the insured promise or
stipulation undertakes that certain matters shall
exist or will be done or omitted after the
Effect when the policy becomes incontestable policy takes effect
‐ When the policy of life insurance becomes 3. Express warranty
incontestable, the insurer may not refuse to pay ‐ where the assertion or promise is clearly
the same by claiming that: set forth in the policy or incorporated
1. The policy is void ab initio (voidable) therein by reference
2. It is rescissible by reason of the fraudulent 4. Implied warranty
concealment of the insured or his agent or ‐ where the assertion or promise is not
3. It is rescissible by reason of the fraudulent expressly set forth in the policy, but
misrepresentations of the insured or by his because of the general tenor of the
agent terms of the policy, or from the very
nature of the insurance contract, a
Defenses NOT barred by incontestability clause warranty is necessarily inferred or
‐ The incontestability of a policy under the law is understood.
not absolute. The insurer may still contest the
policy on the following grounds: Required form to create a warranty
1. That the person taking the insurance lacked ‐ There is no particular form or words necessary
insurable interest as required by law; to create a warranty. Whether a warranty is
2. The cause of the death of the insured is an constituted or not depends upon the intention of
excepted risk; the parties, the nature of the contract or the
3. That the premiums have not been paid words used thereto. In case of doubt, the
4. That the conditions of the policy relating to statement is presumed to be a mere
military or naval service have been violated; representation and not a warranty.
5. The fraud is of a particularly vicious type, as
when the policy was taken out in furtherance When an express warranty should be made
of a scheme to murder the insured, or where ‐ It should be made at or before the execution of a
the insured substitutes another person for policy
the medical examination or where the
beneficiary feloniously killed the insured; Where an express warranty should be contained
6. The beneficiary failed to furnish proof of Express warranty may be contained either:
death or to comply with any condition 1. In the policy itself
imposed by the policy after the loss has 2. In another instrument signed by the insured
happened; and referred to in the policy as making part
7. The action was not brought within the time of it. Mere reference is not sufficient to give
specified. warranty.

WARRANTIES  A statement in a policy, of a matter relating

to the person or thing insured, or to the risk
A warranty is a statement or promise stated in the as a fact is an express warranty. A
policy itself or incorporated therein by reference, statement which is in the nature of an
whereby the insured expressly contracts as to the opinion or belief is not a warranty
present or future existence or certain facts,
circumstances or conditions, the literal truth of which Promissory warranty
is essential to the validity of the contract of ‐ It is a statement in a policy that a thing which is
insurance material to the risk is intended to be done or not
to be done after the policy takes effect.
What warranty relates to ‐ As a general rule: the non-performance of a
‐ It may relate to the past, the present, the future promissory warranty entitles the other party to
or to any or all of these. rescind the contract:
‐ Exceptions to the rule are:
 Saint Louis University COMMERCIAL LAW 60
2012 BAR OPERATIONS

1. Loss occurs before the time arrives for the ‐ As a general rule, these attached papers
performance of the promissory warranty become part of a contract of insurance. However
2. Performance becomes unlawful before the it will not bind the insured unless it is properly
time arrives for the performance of the referred to therein in the policy. If the rider, etc.
promissory warranty is issued after the original policy was in force, it
3. Performance becomes impossible before shall not bind the insured unless it is
the time arrives for the performance of the countersigned by the insured.
promissory warranty
Cover notes or interim policies
What happens when there is violation of material ‐ Cover notes or interim policies or binding slips
warranty or to other material provisions of the may be issued to bind the parties temporarily
policy? pending the issue of the policy. It is intended to
give temporary protection pending the
 All breaches of warranty give to the insurer the investigation of the risk by the insurer or until the
right to rescind the contract. This rule is true issue of formal policy.
even if the violation of the material warranty did ‐ These notes are good for 60 days only, unless
not contribute to the loss. renewed with the written approval of the
Insurance Commissioner
 If fraud intervenes in the breach, the insurer is
freed from liability from the start, as the contract Contents of the policy
is fraud ab initio. The insured is not entitled to A policy contains, among others the following
the return of the premiums paid. 1. The parties
2. Amount of insurance (except in open or
 If there is no fraud in the breach, the insurer is running policies)
freed from the contract the moment the breach 3. Rate of premium
occurs, and is entitled to retain the premiums 4. The property or life insured
corresponding to the period up to the time of the 5. The interest of the insured in the property if
breach. But if the breach was done at the time of he is not the owner
the inception of the policy, the insured cannot 6. Risk insured against
recover for any loss arising thereafter, but all 7. Duration of the insurance
premiums should be returned to the insured
May an agent undertake a contract of insurance in
POLICY OF INSURANCE favor of its principal?
‐ Yes. The agent or trustee when making an
‐ A policy of insurance is the written instrument in insurance contract for and in behalf of his
which a contract of insurance is set forth. It is principal should indicate that he is merely acting
the formal written instrument evidencing the in a representative capacity by signing as such
contract of insurance entered between the agent or trustee, or by other general terms in the
insured and the insurer. policy

Form May a partner in a partnership insure partnership

‐ The policy shall be in printed form which may property?
contain blank spaces on which words, numbers ‐ Yes. Insurable interest in the property of a
and other matters necessary to complete the partnership exists in both partnership and the
contract of insurance shall be written on. partners and a partner has an insurable interest
However, group insurance and group-annuity in the firm’s property which will support a policy
policies may be typewritten and need not be in taken out thereof for his own benefit
printed form.

Rider in a contract of insurance What extent does the contract of insurance cover
‐ A rider is a printed or typed stipulation contained undertaken by a partner?
on a slip of paper attached to the policy and ‐ A partner who insures partnership property in his
forming an integral part of the policy. own name limits the contract to his individual
share unless the terms of the policy clearly show
Effect of a rider, clause, warranty or that the insurance was meant to cover also the
endorsement purporting to be a part of the shares of the other partners.
contract and pasted on the policy
 Saint Louis University COMMERCIAL LAW 61
2012 BAR OPERATIONS

How ambiguities in an insurance contract are Requisites for a valid cancellation of non-life
construed insurance
‐ Contract of insurance is a contract of adhesion, 1. Written prior notice to the insured, stating the
thus any ambiguity therein should be resolved facts and
against the insurer, otherwise stated, it should 2. For any of the following grounds
be construed liberally in favor of the insured and a. Non-payment of premium
against the insurer b. Conviction of a crime arising out of acts
increasing the hazard insured against
 In Cebu vs William 306 SCRA 762 the Supreme c. Discovery of fraud or material
Court held: “although in this jurisdiction, misrepresentation
contracts of adhesion have been consistently d. Discovery of willful or reckless acts or
upheld as valid per se as binding as an ordinary omissions increasing the hazard insured
contract, the court recognizes instances when against
reliance on such contracts cannot be favored e. Physical changes in the property insured
especially where the facts and circumstances which result in the property becoming
warrant that subject stipulations be disregarded. uninsurable
The facts and circumstances vis-à-vis the nature f. A determination by the commissioner that
of the provision sought to be enforced should be the policy would violate the insurer
considered, bearing in mind the principles of
equity and fair play.”
PREMIUM
 In Rizal vs CA 336 SCRA 12, Supreme court ‐ Premium is the consideration paid an insurer for
said: “ it is settled that the terms in an insurance undertaking to indemnify the insured against a
policy, which are ambiguous, equivocal, or specified peril
uncertain are to be construed strictly and most
strongly against the insurer, and liberally in favor When is the insurer entitled to payment of the
of the insured so as to effect the dominant premium?
purpose of indemnity or payment to the insured, ‐ As soon as the thing insured is exposed to the
especially where forfeiture is involved, and the peril insured against
reason for this is that the insured usually has no
voice in the selection or arrangement of the Effect of the nonpayment of premium
words employed and that the language of the ‐ GR: The policy or contract of insurance is not
contract is selected with great care and valid and binding.
deliberation by experts and legal advisers ‐ Exceptions:
employed by and acting exclusively in the 1. Life and Industrial Life policy whenever the
interest of the insurance company. grace period provision applies(sec 77)
2. Written acknowledgment of the receipt of
Kinds/classes of policies in non-life insurance premium by insurer (sec 78)
1. Open or unvalued policy is one in which 3. Payment in installments of the premium and
the value of the thing insured is not agreed partial payment made at the time of loss
upon, but is left to be ascertained in case of 4. Credit extension for the payment of premium
loss. In other words, it is one in which a 5. Estoppel – reliance in good faith on the
certain agreed sum is written on the face of practice of the insurance company
the policy not as the value of the property
insured, but as the maximum limit of  Grace period:
recovery in case of destruction the peril a) Life insurance – 30 days or 1 month within
insured against. which the payment of any premium after the
2. Valued policy is one which expresses on its first may be made
face an agreement that the thing insured b) Industrial life insurance – 4 weeks and
shall be valued at a specified sum. In the where the premiums are payable monthly,
absence of fraud or mistake, such value will either 30 days or 1 month
be paid in case of total loss of the property,
unless the insurance is for a lower amount.  Written acknowledgment in a policy or contract
3. Running policy is one which contemplates of insurance of the receipt or premium is
successive insurances and which provides conclusive evidence of its payment, so far as to
that the subject of the policy may from time make the policy binding, notwithstanding any
to time be defined stipulation therein that it shall not be binding
until the premium is actually paid
 Saint Louis University COMMERCIAL LAW 62
2012 BAR OPERATIONS

Effect of nonpayment X insures his house which has an insurable value of

1. Of First premium – prevents the inception of P1,500,000 as follows:
the policy Insurer Amt of Premiums paid
2. Of subsequent premiums- it does not affect Insurance
the validity of the contract unless, by
express stipulation, it is provided that the A Co. P 1,200,000 P 24,000
policy shall in any event be suspended or
shall lapse. B. Co 600,000 12,000

When the insured is entitled to recover

premiums Aggregate sum P1,800,000.
The insured is entitled to a return of the whole
premium: In this case, there is an over insurance of P300,000,
1. If the thing insured was never exposed to the amount by which the aggregate sum insured in
the risk insured against the two policies exceeds the insurable value of the
2. When the contract is voidable due to the house. The proportion is P300k to P1800k or 1/6.
fraud or misrepresentation of the insurer or Hence, 1/6 of P24k or P4k is what A co must return;
his agent and 1/6 of P12k or P2k is what B co must return
3. When the contract is voidable because of
the existence of facts of which the insured is DOUBLE INSURANCE
ignorant without his fault
A double insurance exists where the same person is
4. When the insurer never incurred any liability
insured by several insurers separately in respect to
under the policy because of the default of
the same subject and interest
the insured other than actual fraud
The insured is entitled to a ratable return of premium
Requisites
on the following cases:
There is no double insurance unless the following
1. Where the insurance is made for a definite
requisites exist:
period of time and the insured surrenders
1. The person insured is the same
policy before termination
2. Two or more insurers insuring separately
2. Where there is over-insurance by several
3. The subject matter is the same
insurers
4. The interest insured is also the same and
5. The risk or peril insured against is likewise
Where the insurance is for a definite period of time
the same
and the insured cancels his policy by surrendering
the policy, the insured is entitled to recover the
Double Insurance vs Over-insurance
premiums already paid equivalent to the unexpired
term at a pro rata rate Double Insurance Over-Insurance
Exception to this rule:
a. Where the insurance is not for a definite In double insurance, There is over-insurance
period there may be no over- when the amount of the
b. Where the policy is a life policy insurance as when the insurance is beyond the
c. Where a short period rate has been sum total of the amounts value of the insured’s
agreed upon of the policies issued insurable interest
- Short period rate is that percentage, as does not exceed the
agreed upon by the parties and insurable interest of the
appearing on the face of the policy, insured
which the insurer shall retain from the There are always several There may be only one
premium in the event that the policy is insurers insurer involved
surrendered by the insured for THEREFORE, double insurance and over-insurance
cancellation. may exist at the same time or neither may exist at
all
The premiums to be returned where there is over-
insurance by several insurers shall be proportioned Binding effect of stipulation against double
to the amount by which the aggregate sum insured insurance
in all the policies exceeds the value of the thing ‐ A policy which contains no stipulation against
additional insurance is not invalidated by the
Example: procuring of such insurance. However, a
stipulation that insurance shall be avoided if
 Saint Louis University COMMERCIAL LAW 63
2012 BAR OPERATIONS

additional insurance is procured without the assumes or undertakes to act as insurer to the
insurer’s consent is valid and reasonable, and extent of the deficiency in the insurance of the
any breach thereof will prevent a recovery on insured property. In case of loss or damage, the
the policy insurer will be liable only for such proportion of
the loss or damage as the amount of insurance
Effects of Double insurance bears to the designated percentage of the value
a) The insured can insure with two or more of the property insured.
companies unless prohibited by prior policy ‐ Reinsurance is where the insurer procures a
b) Where he is allowed, but over-insurance results, third party, called the reinsurer, to insure him
he can claim in case of loss, only up to the against liability by reason of such original
agreed valuation (in valued policy) or up to the insurance. Basically, a reinsurance is an
full insurable value (in open policy) from any, insurance against liability which the original
some or all insurers, without prejudice to the insurer may incur in favor of the original insured
insurers ratably apportioning the payments
c) The insured can also claim a ratable return of Distinguish Reinsurance vs Reinsurance Treaty
the premiums on the over-insured amount
d) Unrevealed other insurances, when required, is Reinsurance Reinsurance Treaty
a material concealment/misrepresentation and
gives to the insurer the right to rescind A reinsurance treaty is
merely an agreement
A reinsurance policy is
between two insurance
a contract of indemnity
companies where one
REINSURANCE one insurer makes with
agrees to cede and the
Reinsurance is a contract by which an insurer another to protect the
other to accept
procures a third person to insure him against loss or first insurer from a risk it
reinsurance business
liability by reason of such original insurance has already assumed
pursuant to provisions
specified in the treaty.
Nature of contract of reinsurance It is a Contract of It is a contract for
‐ A reinsurance is presumed to be a contract of insurance insurance
indemnity against liability and not merely against
damage.
Matters which the reinsured must communicate
‐ The subject of the contract of reinsurance is the to the reinsurer
insurer’s risk and not the property insured under
‐ The insurer who obtains reinsurance, except
the original policy. The reinsurer agrees to
under automatic reinsurance treaties, must
indemnify the insurer , not against the actual communicate the following to the reinsurer:
payment made but against liabilities incurred
a. All the representations of the original insured
b. All the knowledge and information he
Distinguish Reinsurance vs. Double Insurance
possesses, whether previously or
subsequently acquired, which are material to
Reinsurance Double Insurance the risk
The insurer becomes The insurer remains as
the insured in relation the insurer Automatic reinsurance treaties
to the reinsurer ‐ This refers to a case when two or more
The subject of the The subject of the insurance companies agree in advance that
insurance is the original insurance is the each will reinsure a part of any line of insurance
insurer’s risk property taken by the other, such contract is self
It is an insurance of It involves the same executing and the obligation attaches
different interest interest automatically on acceptance of a risk by the
The original insured The insured is the party reinsured. In this case, the obligation to
has no interest in the in interest in all the communicate is not necessary due to the self-
contract of reinsurance contracts executing and automatic feature of such
which is independent of insurance.
the original contract of
insurance Facultative reinsurance agreement
‐ A facultative reinsurance agreement is a
Reinsurance vs. Co-insurance contract wherein the reinsurer may or may not
‐ Co-insurance is the percentage in the value of accept participation in the risk insured.
the insured property which the insured himself ‐ The term “facultative” is used in reinsurance
contracts and it is so used in this particular case
 Saint Louis University COMMERCIAL LAW 64
2012 BAR OPERATIONS

merely to define the right of the reinsurer to 4. Loss in the course of efforts to rescue the
accept or not to accept participation in the risk thing from the peril insured against although
insured. But once the share is accepted, the the cause of loss is not a peril insured
obligation is absolute and the liability assumed against.
thereunder can be discharged by the one and
only way – payment of the share of losses. Loss which incurs liability
There is neither alternative nor substitute 1. Loss by the insured’s willful act
prestation (Equitable Insurance vs Rural Insurance 4 2. Loss due to connivance of the insured; and
SCRA 343) 3. Loss where the excepted peril is the
proximate cause
Does the original insured have interest in a contract
of reinsurance? Prerequisites for the recovery of loss in
‐ None. The original insured has no interest in a insurance against fire
contract of reinsurance. 1. Notice of loss which must be immediately given
‐ Reinsurance is a contract solely between the unless delay is waived expressly or impliedly by
reinsured and the reinsurer and creates no the insurer
privity of contract between the reinsurer and the 2. Proof of loss according to the best evidence
original insured. However, if the contract of obtainable. Delay may also be waived expressly
reinsurance is made directly for the benefit of or impliedly by the insurer
the reinsured’s policyholders or if the reinsurer
assumes and agrees to perform the reinsured’s  All defects in a notice of loss, or in preliminary
contracts, the reinsurer becomes directly liable proof thereof, which the insured might remedy,
to the policyholders. It is necessary for the and which the insurer omits to specify to him,
original insured to accept and communicate within reasonable time, as grounds of objection,
acceptance of such benefit to the reinsurer are waived.
before revocation
When the insurer of property against fire is
 A reinsurer is entitled to avail of every defense exonerated from liability
which the reinsured may avail of against the ‐ When no notice is given by the insured or by any
original insured (Gibson vs Revilla 38 SCRA other person entitled to the benefit of the
219) insurance, within a reasonable time.

LOSS IN CONTRACT OF INSURANCE Proof needed for preliminary proof of loss

‐ Loss is the injury or damage sustained by the When preliminary proof of loss is required in the
insured from the perils insured against policy, it is sufficient that the insured gives the best
evidence which he has in his power and not
evidence necessary in a court of justice.
Proximate cause
Proximate cause is the active efficient cause which
sets in motion a train of events which in turn brings PAYMENT OF CLAIMS
about a result without the intervention of any force
operating and working actively from a new and
A. Life Insurance
independent force
1. Where insured outlives maturity date,
the claim is payable immediately on
Remote cause
maturity of the policy. This is true in
Remote cause is a cause that does not necessarily
endowment insurance
or immediately produce an event or injury
2. Where policy matures by Insured’s
death, the claim is payable within 60
When the insurer becomes liable for losses
days after presentation of the claim and
The insurer is liable for:
filing of proof of death of the insured. In
1. Loss the proximate cause of which is the
case of unreasonable delay, the insured
peril insured against although the peril not
is entitled to (1) Attorney’s fees (2)
contemplated by the contract may not have
expenses incurred by reason of the
been a remote cause of the loss
unreasonable withholding (3) interest at
2. Loss the immediate cause of which is the
the legal interest rate (6%) per annum
peril insured against except where the
as fixed by the monetary board
proximate cause is an excepted peril
(4)amount of the claim., (5) moral
3. Loss through the negligence of the insured
damages if bad faith or fraud is present
or of the insured’s agents or others, and
 Saint Louis University COMMERCIAL LAW 65
2012 BAR OPERATIONS

and (6) exemplary damages if the act is against the wrongdoer or the person who has
wanton and oppressive. violated the contract.” The insurer who pays the
3. Please note that for cases involving insured is an assignee in equity of the insured
loss or injury, any person having any against the offender. (Malayan vs CA 165 SCRA
claim upon the policy shall, without 536)
delay present a written notice of claim
within six (6) months from date of As a general rule: Payment by the insurer to the
accident to the insured, otherwise, the insured for loss under the policy entitles the insurer
claim shall be deemed waived. Action to be subrogated to the rights of the insured against
or suit for recovery of damages due to the wrongdoer.
loss or injury must be brought, in proper The exceptions are:
cases, with the Commissioner of the 1. Where the insured releases the wrongdoer
Courts within one (1) year from denial of from liability
claim, otherwise, the claimant’s right of 2. Where the insurer pays without notifying the
action shall prescribe carrier, which in good faith had already paid
the insured, and
B. Property Insurance 3. Where the insurer pays the insured for a
1. If amount of loss is determined by loss which is not included in the risk insured
agreement or by arbitration, the claim against, by the policy
is payable within 30 days after proof of (Pan Malayan vs. CA 184 SCRA 54)
loss is received by the insurer.
2. If ascertainment of loss is not made Where the insured was paid by the insurer, the latter
within 60 days, the claim is payable is subrogated to all rights of the former against the
within 90 days from receipt of proof of wrongdoer. If the insured after being paid by the
loss by the insurer, if not paid, insurer, releases the wrongdoer without the insurer’s
unreasonable delay is presumed consent, the insurer loses his right of subrogation
(Cathay vs CA 174 SCRA 11) against the wrongdoer. The insurer will however be
3. Please note the 1 year prescriptive entitled to recover from the insured what the insured
period to file an action after denial of originally received from the insurer as the proceeds
claim. of the policy (Manila vs. CA 154 SCRA 650)
The prescriptive period is not
suspended by the filing of a request for
reconsideration after denial of claim CLASSES OF INSURANCE
(Sun vs CA 195 SCRA 193)
MARINE INSURANCE
C. Compulsory Motor vehicle liability Insurance Insurance against risks connected with navigation,
1. The insurance company will indemnify to which a ship, cargo, freightage, profits or others
any authorized driver who is driving the insurable interest in movable property, may be
motor vehicle of the insured and in the exposed during a certain voyage or a fixed period of
event of death of said driver, the time.
company shall likewise indemnify his
personal representatives and the
company may at his option make Coverage of Marine Insurance
indemnity payable directly to the 1. Loss or damage to aircraft
claimants or heirs of claimants. In other 2. Loss or damage to goods & merchandise for
words, under the compulsory vehicle shipment
liability insurance, direct payments may 3. Persons in connection w/ marine insurance
be made by the insurer to an accident 4. Precious stones, jewels, jewelry, precious
victim of an insured vehicle metals
2. Pour autrui clauses inure to the benefit 5. Bridges, tunnels, & other instrumentalities of
of any person injured by the person navigation
insured as if he were named in the
policy Perils of Navigation
‐ perils in making landings in river navigation and
Article 2207 of the Civil Code makes it clear that the damage from rain in consequence of improper
insurance company that has paid the indemnity for stowage.
the injury or loss sustained by the property insured
“shall be subrogated to the rights of the insured War risks
 Saint Louis University COMMERCIAL LAW 66
2012 BAR OPERATIONS

‐ perils due directly to some hostile action, military -difference between the actual value of the
maneuver, operational war danger vessel and the loan on bottomry.
2.Creditor
Builders risks -amount of the loan
‐ damage to ways from launching as well as
damage to the ship. Right of insurer & lender in case of loss
- value of what may be saved/salvaged shall be
Perils of the sea divided between the lender & insurer, in
‐ all kinds of marine casualties & damages done proportion to the legitimate interest of each one.
to the ship or goods at sea by the violent action
of the winds or waves; not foreseen & not Freightage
attributable to the fault of anybody. - benefits derived by the owner, either from:
a) chartering of the ship
Perils of the ship b) its employment for the carriage of his own
‐ losses or damages resulting from: goods or those of others.
a) natural and inevitable action of the sea
b) ordinary wear and tear of ship Time when Insurable Interest on Freightage
c) negligent failure of the ship's owner to provide exists
the vessel w/ proper equipment to convey the a) In case of a charter party, from the time the
cargo under ordinary conditions. vessel has broken ground on the chartered
voyage
Inchmaree clause b) If no charter party & price is to be paid for the
‐ provision in the policy that the insurance shall carriage of goods, from the time said goods are
cover loss of, damage to, the hull or machinery actually on board the vessel or from the time
through negligence of the master, charterers, both ship & goods are ready for specified
engineers, or pilots, or through explosions, voyage.
bursting of boilers, breakage of shafts, or
through any latent defect in the machinery or  In Marine Insurance, insured is required to
hull not resulting from want of due diligence. reveal all information which he possesses
material to the risk.
Insurable Interest in Marine Insurance
1) Ship owner Concealment that does not vitiate the contract
- over the vessel, except that if chartered, the except when they caused the loss
insurance is only up to the amount not 1. national character of the insured
recoverable from the charterer 2. liability of the thing insured to capture and
- he also has an insurable on expected detention
freightage; no insurable interest if he will be 3. liability to seizure from beach of foreign laws of
compensated by charterer in case of loss. trade.
4. want of necessary documents
2) Cargo owner 5. use of false & simulated papers
- over the cargo & expected profits
Effect of concealment of matters
3) Charterer - exonerates the insurer from a loss
- over the amount he is liable to the ship
owner, if the ship is lost or damaged during Effect if misrepresentation is intentionally false
the voyage. - rescission of contract by insurer

Loan on Bottomry/Respondentia Effect of falsity of representation as to

‐ loan in which under any condition whatever, the expectation
repayment of the sum loaned, and of the - non-avoidance of a contract of insurance
premium stipulated, depends upon the safe
arrival in port of the goods on which it is made, Implied warranties in marine insurance
or of the price they may receive in case of a) the ship is seaworthy
accident. b) no improper deviation from the agreed voyage
will be made
Insurable interest on vessel hypothecated by c) vessel will not engage in illegal venture
bottomry d) where nationality or neutrality of a ship or cargo
1.Owner/debtor is expressly warranted
 Saint Louis University COMMERCIAL LAW 67
2012 BAR OPERATIONS

or lost or when it is so damaged as no

Seaworthiness longer to exist in its original charter) is
- relative term depending of the NATURE of the caused by:
ship, the VOYAGE, & the SERVICE in which a. total destruction of the thing insured
she is at the time engaged. b. irretrievable loss of the thing by sinking,
- Reasonable fitness to perform the service & to or by leaving broken up
encounter the ordinary perils of the voyage c. any damage to the thing which renders
contemplated by the parties. it valueless
d. other event which effectively deprives
Effect of violation of implied warranty of the owner of the possession
seaworthiness 2. Constructive total loss ("technical total loss")
- insurer will not be liable for a loss - one that gives to a person insured a
right to abandon
When requirement of seaworthiness satisfied B. PARTIAL LOSS
‐ General Rule: - loss other than a total loss
Seaworthiness of the vessel is required only at
the commencement of the risk.  Presumption of actual loss: continued absence
‐ Exceptions: of a ship without being heard.
1. insurance is made for a specified length of
time Continuation of liability of insurer
2. insurance is upon the cargo required to be - whenever the ship upon which the cargo insured
transshipped at an immediate port was loaded cannot continue the voyage due to
the peril insured against, & cargo is loaded on
Course of the voyage insured another vessel
a) one agreed upon by the parties
b) in the absence of agreement, the course of  Abandonment - necessary only in
sailing fixed by mercantile usage constructive total loss
c) if the course of sailing is not fixed by mercantile
usage, one which to a master of ordinary skill Average
and direction, would seem the most natural, - extraordinary/accidental expense incurred
direct & advantageous during the voyage for the preservation of the
vessel, cargo, or both and all damages to the
Deviation vessel & cargo from the time it is loaded and the
a) departure from the course of the voyage insured voyage commenced until it ends & the cargo
b) unreasonable delay in pursuing the voyage unloaded.
c) commencement of an entirely different voyage
Kinds of average:
When deviation is proper 1. GROSS/GENERAL AVERAGES
a) when caused by circumstances over which - include all the damages & expenses which
neither the master nor the owner of the ship has are deliberately caused in order to save the
any control vessel, its cargo, or both at the same time,
b) when necessary to comply with warranty, or to from real & known risk
avoid a peril, whether or not the peril is insured - Requisites to the Right to claim general
against average contribution:
c) when made in good faith, & upon reasonable a. common danger to the vessel/cargo
grounds of belief in its necessity to avoid a peril b. part of the vessel/ cargo was sacrificed
d) when made in good faith, for the purpose of deliberately
saving human life, or relieving another vessel in c. sacrifice must be for common
distress. safety/benefit of all
d. must be made by the master or upon his
Effect of improper deviation authority
- insurers become immediately absolved from e. not be caused by any fault of the party
further liability asking the contribution
f. must be successful
LOSS g. must be necessary
A. TOTAL
1. Actual total loss ( exists when the subject 2. SIMPLE/PARTICULAR AVERAGE
matter of the insurance is wholly destroyed
 Saint Louis University COMMERCIAL LAW 68
2012 BAR OPERATIONS

- includes all the expenses & damages 1. if more than 3/4 of the value of the thing insured
caused to the vessel or to her cargo which is actually lost
have not inured to the common benefit & 2. if more than 3/4 of the value of the thing insured
profit of all the persons interested in the would have to be expended to recover it from
vessel & her cargo. the peril
- Partial loss caused by a peril insured 3. if it is injured to such an extent as to reduce its
against, which is not a general average loss value by more than 3/4
4. if the thing is insured is a ship & the
FPA CLAUSE contemplated voyage cannot be lawfully
- a situation wherein the insured & insurer performed without incurring an expense to be
stipulated in the policy that the vessel/cargo insured of more than 3/4 the value of the thing
insured shall be free from particular average abandoned.
- effects: 5. If the thing insured is a ship and the
a. if damage to the thing insured is a contemplated voyage cannot be lawfully
PARTICULAR average, the insurer shall performed without incurring risk which a prudent
not be liable UNLESS the loss suffered man would not take under the circumstances
is total 6. If the thing insured, being cargo or freightage,
b. if damage to the thing insured is a the voyage cannot be performed nor another
GENERAL average, insurer shall be ship procured by the master within reasonable
liable whether the loss is partial or total time & with reasonable diligence
or for the condition of the insured for his
proportion of all general average losses Right of recovery
assessed upon the thing insured which 1. abandonment is made
was saved. - recovery of TOTAL LOSS, insurer acquires
all interest of the insured
 There is an ACTUAL TOTAL LOSS if the 2. no abandonment
insured is effectively deprived of the use & - recovery only of ACTUAL LOSS
possession of the property, whether by
seizure/capture followed by When abandonment becomes ineffectual
condemnation/theft. - information which formed the basis of
abandonment proved to be incorrect & there
Abandonment was in fact no total loss
- act of the insured by which, after a constructive
total loss, he declares the relinquishment to the Form of Notice of Abandonment
insurer of his interest in the thing insured - no particular form; may be made orally unless
- effect: insured is surrendering to the insurer required to be in writing, even notice by
whatever is left of the property insured, & telegraph is sufficient if it complies with
resorting to the policy for indemnity, insurer then requirements
becomes the owner of whatever may remain of - if done orally, insured must submit to the
the insured thing & the insured may recover a insurer within 7 days from such oral notice, a
total loss. written notice of the abandonment.

Requisites for valid abandonment Effects of acceptance of abandonment

1. actual relinquishment by the person insured of 1. becomes irrevocable UNLESS the ground upon
his interest in the thing insured which it owes made proven to be unfounded
2. constructive total loss 2. conclusive upon parties
3. abandonment must be neither partial nor 3. admission of the loss & sufficiency of
conditional abandonment
4. made within a reasonable time after receipt of
reliable information of the loss How acceptance of abandonment made
5. factual a) express
6. made by giving notice to the insurer which may b) implied from the acts of the insurer
be done orally or in writing - mere silence of the insurer for an
7. notice of abandonment must be explicit & must unreasonable length of time after notice
specify the particular cause of the abandonment shall be construed as acceptance

When abandonment may be made Effect of valuation

- conclusive between the parties provided
 Saint Louis University COMMERCIAL LAW 69
2012 BAR OPERATIONS

a) the insured has some interest at the risk all insurance by the policy shall immediately
b) there is no fraud on his part. cease.

Co-insurance Option to Rebuild Clause

- form of insurance in which the person who - option of insurer to repair, rebuild or replace
insures his property for less than the entire value buildings/structures wholly or partially damaged
is understood to be his own insurer for the or destroyed, instead of the payment of the loss.
difference which exists between value of - Alternative obligation, either pay the amount of
property and amount of insurance the loss/ rebuild the building damaged

Requisites for application CASUALTY INSURANCE

1. insured taken is less than the actual value of the - includes all forms of instrument against loss or
thing insured liability arising from accident/mishap other than
2. loss is partial those within the scope of other types of
insurance
Marine insurance vs fire insurance
General division of casualty insurance
1. insurance against specified hazards which may
MARINE INSURANCE FIRE INSURANCE
affect the person/property of the insured
No co-insurance - e.g. personal accident, robbery/theft,
There is always co- damage to or loss of motor vehicle
UNLESS expressly
insurance
stipulated in the policy
2. insurance against specified hazards which may
give rise to liability on the part of the insured for
Fire insurance claims for injuries to others/damages to their
‐ a contract by which the insurer for a property
consideration agrees to indemnify the insured - e.g. workmen's compensation, motor vehicle
against loss, or damage to, property by fire, but liability
may include loss by lightning, windstorm,
tornado & earthquake & other allied risks, when Life Insurance vs Accident/ Health Insurance
such risks are covered by extension to fire
insurance policies/ under separate policies
ACCIDENT/HEALTH
LIFE INSURANCE
INSURANCE
Alteration
- alteration in the use or condition of thing insured Usual object is to
will entitle the insurer to rescind the contract provide fund for the
provided following requisites are present: Protect against not a
benefit of the
a) use or condition of the thing is specifically loss of life but a loss of
estate/heirs
limited/stipulated in the policy. time, earning capacity
beneficiaries of
b) such case/condition as limited by the policy and expenses
insured after the death
is altered of the insured
c) the alteration is made without the consent of
the insurer
d) alteration is made by means within the Suretyship
control of the insured - contract whereby a person binds himself
e) the alteration increases the risk solidarily with principal debtor for the fulfillment
f) violation of a policy provision of an obligation

Co-insurance clause Nature of liability of surety

- clause requiring the insured to maintain 1. solidary
insurance to an amount equal to a specified 2. limited to the amount of the bond
percentage of the value of the insured property 3. determined by the terms of the contract of
under penalty of becoming co-insurer to the suretyship in relation to the principal contract
extent of such deficiency between obligor and obligee

Fall-off Building Clause Surety vs guarantor

- clause in fire insurance policy that if the building
or any part thereof falls, except as a result of fire,
 Saint Louis University COMMERCIAL LAW 70
2012 BAR OPERATIONS

contingently on the continuance or cessation of

SURETY GUARANTOR life.
- Nature:
insurer of solvency of 1. liability absolutely certain
insurer of debt
debtor 2. amount of insurance generally no limit
Binds himself to pay if 3. direct pecuniary loss not required
Undertakes to pay if
principal is unable to
principal does not pay
pay KINDS OF LIFE INSURANCE
primary Secondary 1. GENERAL, ordinary or old line life insurance
Can not be compelled - fixed for a premium payable, without
to pay the creditor condition, at stated intervals, a sum certain
No such rights unless the latter has is to be paid on death, without condition
exhausted all the
properties of the debtor 2. limited payment life insurance
- specified premiums are to be paid for a
Surety vs Property Insurance specified period or until the death of insured
if it occurs before the expiration of such
PROPERTY period, and under which insurer is obligated
SURETY to pay a specified sum on the death of the
INSURANCE
insured
Accessory contract Principal contract
3 parties: surety, 2 parties: insurer and 3. ENDOWMENT INSURANCE
obligor and obligee insured - contract to pay a certain sum to the insured
if he lives a certain length of time, or if he
Credit accommodation Contract of Indemnity dies before that time, to some other person
Surety can recover No such right, only right indicated as beneficiary
from principal of subrogation
Bond can be cancelled May be cancelled 4. TERM LIFE INSURANCE
only with consent of unilaterally either by - insurance for a term of years only, or until
the oblige, insured or insurer on insured shall have arrived at a certain age
commissioner or the grounds provided by
court law 5. ADVANCE INSURANCE
Risk-distributing - contract which provides for the payment to
Risk-shifting device the insured of a lump sum immediately, in
device, premium paid
premium paid being in consideration of his agreement to make
as a ratable
the nature of a service certain periodical payments to the insurer for
contribution to a
fee a specified period, or for that end of the
common fund
No need for period, the performance of insured's
Requires acceptance obligation being secured by mortgage or
acceptance by any
of the oblige to be valid deed of trust
third party

When surety entitled to service fee only 6. TONTINE INSURANCE

a) when contract of suretyship/ bond is not - form of life insurance by which the
accepted by obligee policyholder under the same plan, that no
b) when contract of suretyship/ bond is not filed dividends, return premium, or surrender
with obligee value shall be received for a term of years
called the "tontine period," the entire surplus
Types of surety bonds from all sources being allowed to
1. Contract bonds accumulate to the end of that period, and
a. Performance bonds then divided among all who have maintained
b. Payment bonds their insurance in force and who have
2. Official survived.
3. Judicial

Life Insurance No-fault Clause

- insurance payable on the death of a person or - any claim for death or injury shall be paid up to
on his surviving a specified period or otherwise p5,000 without necessity of proving negligence
 Saint Louis University COMMERCIAL LAW 71
2012 BAR OPERATIONS

or fault, provided the following proofs of loss the courts within one year from the denial of the
under oath are submitted: claim, otherwise the claimant's right of action
1. police report of accident shall prescribe
2. death certificate and evidence sufficient to
establish proper payee Functions of the commissioner
3. medical report and evidence of medical or 1. Adjudicatory functions
hospital disbursement 2. Administrative Functions
- includes suspension or revocation of
CLAIMS UNDER CMVLI license, power to examine books and
- a claim shall lie against the insurer of the vehicle records
in which the occupant is riding, mounting or
dismounting from in any other case, against the Effect of death of insured through suicide
insurer of the directly offending vehicle - in life insurance contract, the insurer is liable in
case of suicide in the following cases:
Authorized driver clause 1. if committed after two years from the date of
- the clause means that it indemnifies the insured the policy's issue or its last reinstatement
owner against loss or damage to the car but 2. if committed after a shorter period provided
limits the use of the insured vehicle to the in the policy
insured himself or any person who drives on his 3. if committed in a state of insanity regardless
order or with his permission of the date of the commission unless suicide
- the requirement that the person driving the is an excepted peril
insured vehicle is permitted in accordance with
the licensing laws or other laws or regulations to - Any stipulation extending the 2-year period
drive the motor vehicle. It is applicable only if the is null and void
person driving is other than the insured
- where the car is unlawfully and wrongfully taken COMPULSORY MOTOR VEHICLE LIABILITY
without the owner's consent or knowledge, such INSURANCE (CMVLI)
taking constitutes theft, and thus, it is the theft - is a protection coverage that will answer for legal
clause and not the "authorized driver clause" liability for losses and damages for bodily
that should apply. injuries or property damage that may be
sustained by another arising from the use and
Cooperation Clause operation of motor vehicle by its owner
- clause in an automobile insurance policy which - Purpose: to give immediate financial assistance
provides in essence that the insured shall give to victims of motor vehicle and/or their
all such information and assistance as the dependents, especially if they are poor
insurer may require, usually requiring regardless of the financial capability of motor
attendance at trials or hearings vehicle owners or operators responsible for the
accident sustained.
Liability of insurer if insured was committing a
felony  
 

- liabilities arising out of acts of negligence, which VI. TRANSPORTATION LAWS 

are also criminal, are also insurable on the
ground that such acts are accidental. Thus, a
motor insurance policy covering the insured’s COMMON CARRIERS (ARTICLES 1732-1766)
liability for accidental injury caused by his - are persons, corporation, firms, or associations
negligence, even though gross and attended by engaged in carrying or transporting passengers
criminal consequences such as homicide or goods or both, by land, water, or air for
through reckless imprudence, will not be void as compensation of offering their services to the
against public policy. But liability consequences public.
of deliberate criminal acts are not insurable
Extraordinary diligence is required to common
Jurisdiction of the insurance commissioner carriers in transporting goods and passengers
- Original exclusive jurisdiction with the Insurance Reasons:
Commissioner 1. nature of the business
- Notice of claim must be filed within six months 2. public policy
from the date of accident. Otherwise the claim
shall be deemed waived. Action or suit must be
brought in proper cases, with the Commission or
 Saint Louis University COMMERCIAL LAW 72
2012 BAR OPERATIONS

Registered owner primarily and solidarily with driver VOID STIPULATIONS LIMITING CARRIER'S
under the KABIT SYSTEM. Kabit system is contrary LIABILITY:
to public policy; therefore, void and inexistent. 1. the goods are transported at the risk of the
shipper
CIRCUMSTANCES UNDER WHICH COMMON 2. that the shipper is not liable for any loss or
CARRIERES CANNOT BE HELD LIABLE FOR destruction of the goods
THE LOSS/DESTRUCTION OF GOODS: 3. that the common carrier need not observed any
1. flood, storm, earthquake, or other natural diligence and less than that of good father of a
calamities family
2. act of public enemy in war, either international or 4. that the common carrier shall not be responsible
local for any acts of its employee
3. act or omission of the shipper or owner of the
goods The law of the country to which the goods are to be
4. character of the goods or defects of the packing transported shall govern the liability of common
5. order of competent authority carrier for their loss, destruction, or deterioration.

Extraordinary diligence lasts from the time the The act of the thief or robbers who entered the
cargoes are loaded in the vessel until they are common carrier's vehicle is not deemed force
discharged and delivered to the consignee. majeure UNLESS it is done with the use of arms or
through irresistible force.
Air carriers can terminate services of pilots for
serious misconduct and drunkenness because of its A common carrier is bound to carry the passengers
extraordinary diligence. safely as far as human care and foresight can
provide using the utmost diligence of a very cautious
INSTANCES WHICH ARE NOT CASO FORTUITO: person with a regard of circumstances.
1. hijacking
2. acts of strangers like thieves or robbers acted In case of death or injuries to passengers, common
with grave or violence carriers are presumed to be at fault UNLESS proved
3. accidents due to defects of carrier that they observe extra ordinary diligence.
4. where tie blow-out

 Fire is not a natural disaster LAST CLEAR CHANCE

 Notice of arrival of goods amounts to - this principle applies only in a suit between
constructive delivery owners and drivers of two colliding vehicles.
 Shipper bound to observe all diligence in This is not applicable to Contract of Carriage.
obtaining delivery of goods
 Common Carriers may be exempted from Carrier not ordinarily liable for injuries to passengers
responsibility PROVIDED that natural disaster is due to fires, and explosions caused by articles
the proximate and only cause of the loss. brought into conveyance by other passengers.
STIPULATIONS LIMITING LIABILITY IS VALID Ticket is a complete written contract by and
PROVIDED THAT: between the shipper and passenger for it
1. the stipulation be in writing signed by both contains:
parties 1. consent of the contracting parties
2. the stipulation be supported by a valuable 2. cause or consideration which is the fare paid by
consideration other than the service rendered the
by common carrier 3. passengers
3. the stipulation be reasonable, just and not 4. object which is the transportation of the
contrary to public policy passenger from
5. the place of departure to the place of
SOME VALID STIPULATIONS LIMITING destination.
CARRIER'S LIABILITY:
1. account as strikes or riot Reduction of fare does not justify any limitation of
2. value of the goods appearing in bill of lading the common carrier's liability.
UNLESS shipper declares a greater value
3. contract fixing the sum that may be recovered Passenger bound notwithstanding his failure to sign
plane ticket containing stipulation limiting liability
known as contract of adhesion.
 Saint Louis University COMMERCIAL LAW 73
2012 BAR OPERATIONS

(2), the transportation of air shall comprise the

The extraordinary diligence required for carriage period during which the baggage or goods are in the
of passengers cannot be dispensed with: charge of the carrier whether an airport or on board
1. by stipulation an aircraft or in case of landing outside an airport.
2. by posting of notices (3), the period of transportation by air shall not
3. by statement of tickets extend to any transportation by land, sea, or river
4. otherwise however as an exception, parties may outside an airport.
stipulate limiting carrier's liability where the
passenger is carried gratuitously Article 19, the carrier shall be liable for damages
occasioned by delay in transportation by air of
Common Carrier is liable for damages for passengers, baggage, or goods.
defects of its equipment.
Common Carrier is liable for the misconduct of its DAMAGES RECOVERABLE WHEN DEATH
employees done in their own interest. OCCURS DUE TO COMMISSION OF A CRIME:
Reason: the servant is clothed with the delegated 1. indemnity for death of a victim
authority and charged with duty by the carrier to 2. indemnity for loss of earning
execute his undertakings to carry the passenger 3. moral damages
safely. 4. exemplary damages
5. attorney's fees and expenses of litigation,
Carrier exempt from acts of employees not done in 6. interest and properties
line of duty.
FACTORS TO BE CONSIDERED IN AWARDING
The passenger must observe the diligence of a good DAMAGES ARISING FROM DEATH:
father of a family or ordinary diligence to avoid injury 1. number of years on the basis of which the
to himself. damages shall be computed
2. rate at which the losses sustained should be
EFFECTS OF NEGLIGENCE- where the proximate fixed
cause of the death/ injury to the passenger is his
own negligence, common carrier is exempted from For fixed indemnity for death, there is no need to
liability. interrogate witness.

EFFECT OF PASSENGER'S CONTRIBUTORY Common carrier not liable for moral damages to
NEGLIGENCE- passenger's contributory negligence passenger s injured due to negligence of driver.
does not justify carrier's exemption from liability.
However, the damages will be equitably reduced.
Carrier is liable when it issues to passenger a
confirmed ticket for a particular ticket if he is not put
A common carrier is responsible for injuries suffered
in that flight.
by a passenger on account of the lawful
acts/negligence of other passengers or of strangers
Carrier liable only for damages that are natural and
provided that the employees could have prevented
probable consequence and breach of contract which
the act or omission through the exercise of a good
includes medical, hospital and other expenses.
father of a family.
Degree of diligence required of carriers employees-
ITEMS INCLUDED IN ACTUAL DAMAGES:
merely that of the good father of a family or ordinary
1. income to be earned upon completion of studies
diligence.
2. the sum being carried by deceased passenger
which was lost
Liability of air carrier under Warsaw Convention of
3. amount spend to her funeral
October 12,1929, article 17, the carrier shall be
4. attorney's fees and court expenses
liable for damages sustained in the event of death or
5. loss of the merchandise carried by the deceased
injury of a passenger if accident took place on board
6. loss of baggage containing medicine, boxes,
the aircraft or in the course of embarking or
and suitcases of personal belongings
disembarking.
EXCEPTIONS TO RULE THAT CARRIER NOT
Article 18(1), the carrier shall be liable for damages
LIABLE FOR MORAL DAMAGES IN BREACH OF
sustained in the event of destruction or loss of or of
CONTRACT:
damage to any checked baggage or any goods in
1. where the mishap results in the death of
the course of transportation.
passenger
 Saint Louis University COMMERCIAL LAW 74
2012 BAR OPERATIONS

2. where it is proved that the carrier is guilty of ‐ Ambiguity is construed against the carrier, the
fraud or bad faith even if death does not result contract being one of adhesion.
3. where the passenger suffers social humiliation, ‐ Not essential to contract.
wounded feelings, anxiety and mental anguish
Kinds of Bills of Lading
Surviving passenger is not entitled to moral (1). Negotiable bill of Lading – one in which it is
damages. Mere carelessness of the carrier does not stated that the goods referred to therein will be
per se constitute an inference of malice or bad faith delivered to the bearer, or to the order of any
on its part. person named in such document.
(2). Non–Negotiable bill of Lading – the goods
Carrier subsidiary liable for moral damages in
referred to therein will be delivered to a specified
actions ex delicto.
person.
Exemplary damages cannot be recovered as a (3). Clean bill of Lading – One which does not
matter of right. indicate any defect in the goods

Nominal and exemplary damages awarded for willful (4). Foul bill of Lading – Contains a notation
breach of contract committed through agent or indicating that the goods are in bad Condition.
employee. (5). Spent bill of Lading – Covers goods that
have already been delivered by the carrier
Carrier incurring only delay not liable for moral and without a surrender of a signed copy of the
exemplary damages but only to the limited amount Lading.
printed in the plane ticket.
(6). Through bill of Lading – Issued by a carrier
Exemplary damages is allowable under Kabit who is obliged to use the facilities of other
System. carriers.
(7). On Board bill of lading – one in which it is
Common Carrier in Nominal Damages for failure of stated that the goods have been received on
carrier to bring passenger to his destination but board the vessel which is to carry the goods.
mere violation of a Contract of Carriage does not
warrant recovery for moral damages. (8). Received for Shipment bill of lading – it is
stated that the goods have been received for
In case of breach of the carrier's contractual shipment with or without specifying the vessel by
obligation to carry his passenger safely to their which the goods are to be shipped.
destination, the carrier is solidarily liable for his (9). Custody bill of Lading – issued by the carrier
driver's negligence. Exercise of due diligence in to the whom the goods have been delivered for
selecting driver is not a defense. shipment but the vessel indicated in the bill of
leading which is to carry the goods has not yet
Preponderance of evidence sufficient to prove civil reached the port where the goods are held for
liability arising from negligence. shipment.
(10). Port bill of Lading – one which is issued by
the carrier to whom the goods have been
OVER LAND TRASPORTATION delivered, and the vessel to carry the goods is
(Arts. 349–379, Code of Commerce) already in the port where the goods are held for
shipment.
Effect of Civil Code on the provisions of the
Code of Commerce on Overland Transportation
‐ The NCC does not expressly repeal the Three–Fold nature of bills of Lading
provisions of the Code of Commerce on (1). A contract in itself and the parties are bound
overland transportation. Instead, it makes such by its terms;
provision suppletory to the provisions of the
NCC on common carriers (2). A receipt; and
(3). A symbol of the covered by it
Bill of Lading, Defined
‐ Written acknowledgement of receipt of goods and  They are also documents of title,
agreement to transport them to a specific place to and if negotiable in form they can
a person named or to his order or bearer. constitute negotiable documents of title.
 Saint Louis University COMMERCIAL LAW 75
2012 BAR OPERATIONS

Legal effect of the Issuance of Bill of Lading Limitation as to carrier’s liability

Bill of lading constitute the legal evidence of the (1). No Liability
contract between the shipper and the carrier by
– The carrier will not be liable at all for
the contents of which the disputes which may
the negligent acts of its crew and
arise regarding their execution and performance
employees. This is NULL and VOID for
shall be decided, no exception being admissible
being contrary to public policy
other than those of falsity and material error in
(2). Limited Liability
the drafting.
– Regardless of the value of the
cargo, the maximum liability of the
Effect of absence of a bill of lading carrier will be, for example, P500. This
id VOID for being contrary to public
It does not preclude liability on a contract of
policy.
transportation. The disputes shall be
(3). Qualified Liability
determines by the legal proofs which the parties
may present in support of their respective – A stipulation in the bill of lading
claims, according to the general provisions limiting the liability of the carrier to a
established in the Code for commercial valuation unless the shipper declares a
contracts. higher value and pays a higher rate of
freight is valid.
 However, the carrier cannot
When responsibility of carrier begins limit its liability for injury to, or loss
of, good shipped where such injury
The responsibility of carrier commences from the
or lose was caused by its own
moment he receives the merchandise. The Delivery negligence’s.
to him must be made either to him personally, or
through his duly authorized agent.
Recovery of Damages from carriers for
carriage of goods:
Right to refuse packages (1) Inter-island – if gods arrived in damaged
Gen. Rule: – a common carrier cannot ordinarily condition:
refuse to carry a particular class of gods to the  If damage is apparent, the shipper
prejudice of the traffic in those goods. must file a claim immediately.
 If damage is Not apparent he should
Exception: However, under Art. 365, carrier are
file a claim within 24 hours from
authorized to refuse packages if they are unfit
delivery.
for transportation.
 The filing of claim is a condition
precedent for recovery.
 If the claim is filed, but the carrier
Time for delivery of goods
refuses to pay:
 Where no period fixed – Enforce carriers liability in court
– The carrier shall be bound to forward by filing a case:
them in the first shipment of the same or  Within 6 years, if no bill of
similar goods, which he makes to the lading has been issued, or
points where he must deliver them.  Within 10 years, if a bill
Should he not do so, the damages lading has been issued.
caused by the delay shall be for his (2) Overseas – Where goods arrived in a
account. damaged condition from a foreign port to a
 Where for delivery of goods Philippines Port of Entry:
– The carrier must deliver the goods
 Upon discharge of goods, if the
within the time fixed. For failure to do
damage is apparent claim should be
so, the carriers shall pay the indemnity
filed immediately;
stipulated in the bill of lading. Also,
damages shall be paid if the carrier  If damage is not apparent, claim
refuses to pay the stipulated indemnity should be filed within 3 days from
or is quality of fraud in the fulfillment of delivery.
his obligation.
 Saint Louis University COMMERCIAL LAW 76
2012 BAR OPERATIONS

When may a consignee of goods abandon PERSONAL- but they partake to a certain extent, of
the goods and recover the value thereof from the nature and conditions of real property, on
the carrier? account of their value and importance of the world of
commerce.
In any of the following cases:
(1) Under Art. 363, in case of partial non- CHARACTERISTICS OF MARITIME
delivery, where the consignee proves that TRANSACTIONS:
he cannot make use of the goods capable of 1. Real- similar to transactions over real property
delivery independently of those not with respects too effectively against third
delivered. persons, which is done through registration. The
(2) Under Art. 365, where the goods are evidence of real nature is shown by (1) the
rendered useless for sale and consumption limitation of the liability of the agents to the
for the purpose for which they are properly actual value of the vessel and the freight money
destined; or and (2) the right to retain the cargo and embargo
(3) Under Art. 371, where there is delay through and detention of the vessel.
the fault of the carrier. 2. Hypothecary- the liability of the owner of the
value of the vessel is limited to the vessel itself.
3. Preference of credits- Mortgage of a vessel
Two special sanctions for the enforcement properly registered becomes of preferred
by the carrier of the payment of expenses mortgage lien which shall have priority over all
and transportation charges. claims against the vessel in an extrajudicial
They Are: foreclosure for:
a. credit in favor of the public treasury
(1). Under Art. 374, judicial sale of the goods b. judicial cost of the proceedings;
transported; and c. pilotage and tonnage charges and other sea
(2). Under Art. 375, by creating a lien in favor of and port changes;
the carrier on the goods transported. d. salaries of depositories and keepers of the
vessel
e. captain and crew's wages;
Exemption from liability of the common f. general average
carrier g. salvage including contract salvage;
h. maritime liens arising prior in time to the
– A common carrier may be freed from liability recording of the preferred mortgage;
for loss or damage if it proves any of the i. damages arising out of tort; and
following: j. Preferred mortgage registered prior in time.
(a) Natural disaster
(b) Act of the Public enemy in war DOCTRINE OF LIMITED LIABILITY:
General Rule: The liability of ship owners is limited
© Act or omission of the shipper to the amount of interest in said vessel such that
(d) Defect in the packing and character of the where vessel is entirely lost, the obligation is
goods extinguished. The interest extends to (1) the vessel
itself, (2) equipment, (30 freightage and (4)
(e) Order of competent public authority insurance proceeds.
Exceptions:
1. claims under Workmen's Compensation
MARITIME COMMERCE 2. injury or damage due to ship owners fault
3. the vessel is insured
I. VESSELS (in general) 4. expenses for repair on vessel before loss;
-extends to everything floating in and on the 5. the vessel is not abandoned
water, built in the form of vessel and used
for navigation regardless of form, right or PHILIPPINE COAST GUARD (PCG)
motive power. -vested with exclusive authority over the registration
and documentation of Philippine vessels, issuance
MERCHANT VESSELS- engaged in the of all certificates, licenses or documents, necessary
transportation of passengers and freight from one or incident to registration.
port to another or from one place to another.
VESSELS REQUIRED TO BE REGISTERED:
*Are vessels real or personal property? 1. All vessels used in Philippine water.
 Saint Louis University COMMERCIAL LAW 77
2012 BAR OPERATIONS

2. Vessels of 3 tons gross shall not be registered 3. proof of damage and impossibility of the repair
UNLESS the owner shall so desire. of the vessel
3. All undocumented vessels. 4. order for the sale of vessel at public auction

Where Registration to be effected? RULES FOR THE SALE OF VESSEL AT PUBLIC

- at its home port (when a coast guard district or AUCTION:
station is on the same port); if none, at the 1. articles of the vessel shall be appraised after
nearest COAST GUARD DISTRICT OR making an inventory
STATION). 2. posting of the order of the auction
3. announcement
OPTIONS AS TO SMALL BOATS: 4. auction shall be held on the day fixed
1.) If vessel is of domestic ownership and 15 tons 5. Observance of special provisions, governing the
gross or less certificate of Philippine registry is sale of the vessel while it is on the foreign
optional. country.
Purpose: declare nationality of a vessel
2.) Vessel (5 tons gross or less) & no certificate of 2 METHODS OF SALE:
Philippine registry  certificate of ownership is 1. judicial
optional. 2. voluntary
Privileges: right to engage in Phil. Coastwise
trade and protection of the authorities and the
flag is also subject to the same privileges. EFFECT OF REGISTRATION OF JUDICIAL SALE
3.) Vessel (3 tons gross or less)  not be - extinguish all other liabilities of the vessel
registered unless the owner shall so desire. *Effect of Registration of Voluntary Sale
- if it take place while the vessels is on a voyage,
PURPOSE OF REGISTRATION: the preferred & hypotyhecary nature of the credit
- Purchaser's rights maybe maintained against a subsists against the vessel until after its return to
claim filed by the THIRD PERSON. the port of registry and 3 months after the
inscription of the sale in the registry of vessels or
*Who shall be entitled to the freightage and who after the return, so as to prevent the possibility
shall be obliged to pay the crew and other persons of fraud upon creditors through voluntary sale.
who make up the compliment of the vessel?
A: It depends upon the time of the sale. PARTICIPANTS IN MARITIME COMMERCE:
If made while it is on a voyage, freightage shall a. shipowners and ship agents
pertain entirely to PURCHASER and payment of the b. captains and masters of the vessel
crew and other persons who make up its compliment c. officers and crew of the vessel
for same voyage shall be for his account. c.1 sailing (1st mate)
If made after the vessel has arrived at the port of its c.2 quartermaster (2nd mate)
destination, freightage shall pertain to the VENDOR c.3 engineer
and other individuals who make up its complement d. seamen
shall be for his account, UNLESS the contrary is e. supercargoes
stipulated in either case.
A. SHIPOWNERS AND SHIP AGENTS
FORMALITIES FOR VOLUNTARY SALE Ship owner- person who has possession control in
ABROAD: management of the vessel and the consequent right
1. Execution of the bill of sale before consul of the to direct her navigation and receive freight earned
Philippines at the port where it terminates its and paid, while his possession continues.
voyage. Ship agent-person entrusted with provisioning and
2. Inscription in the registry of the consulate representing the vessel in the port in which it may be
3. Forwarding by the consul of a true copy of the found; also includes the ship owner
instrument of purchase and sale to the registry
of vessel. LIABILITY OF SHIPOWNER AND SHIPAGENT:
4. Statement whether the vendor receives its price 1. for the acts of the captain
in whole or in part. 2. contracts entered into by the captain to repair,
equip, and provision the vessel PROVIDED that
FORMALITIES FOR SALE WHEN VESSEL the amount claimed was invested for the benefit
RENDERED USELESS: of the vessel
1. application for examination
2. notification of the consignee/ insurer
 Saint Louis University COMMERCIAL LAW 78
2012 BAR OPERATIONS

3. Indemnities in favor of third person that may

arise from the conduct of the captain in the care B. CAPTAINS AND MASTERS OF THE VESSEL
of goods and safety of passengers transported. Captain- who govern vessels that navigate the high
4. Tort or quasi-delict committed by captain seas or ships of large dimensions and importance,
EXCEPT collision with another vessel. although engaged in the coastwise trade
5. Damages in case of collision due to the fault, Masters- who command smaller ships engaged
negligence or want of skill of captain, sailing exclusively in the coastwise trade
mate or by other member of the complement.
NATURE OF POSITION:
SHIPAGENT'S AND OWNERS LIABILITY 1. General agent of the ship owner
LIMITED: 2. Technical Director of the vessel
- By abandoning the vessel with all her equipment 3. Representative of the Government of the
and the freight it may have earned during the country under whose flag he navigates
voyage(by NECESSARY IMPLICATION);
limited to the value of the vessel or its insurance QUALIFICATIONS:
in view of the so-called REAL AND 1. Filipino citizen
HYPOTHECARY nature of maritime law. 2. Legal capacity to contract
- Effect: cessation of the responsibility of the 3. Must have passed the required physical, mental
owner examination required for licensing him as such

POWER AND FUNCTIONS AND LIABILITIES OF INHERENT POWERS OF THE CAPTAIN:

SHIP AGENT: 1. appoint crew in the absence of ship agent
1. capacity to trade; 2. command and direct crew
2. discharge duties of the captain in case of the 3. impose correctional punishment on those who
latter's absence; while on board vessel fail to comply with his
3. contract in the name of the owners with respect orders or are wanting in discipline
to repairs, details of equipment, armament, and 4. make contracts for the charter of vessel in the
all that relate to the requirements of navigation; absence of ship agent
4. order of new voyage and make a new charter or 5. supply, equip, and provision the vessel
insure the vessel after obtaining authorization 6. order repair of vessel to enable it to continue its
from the ship owners. voyage

DUTY OF SHIPAGENT TO DISCHARGE THE SOURCES OF FUNDS TO COMPLY WITH THE

CAPTAIN AND MEMBERS OF THE CREW: INHERENT POWERS OF THE CAPTAIN:
- If the seamen contract is not for a definite period 1. from the consignee of the vessel
or voyage, he mat discharge them at his discretion 2. from the consignee of the cargo
- If for a definite period, he may not discharge 3. by drawing on the ship agent
them until after the fulfillment of their contracts 4. by a loan on bottomry
EXCEPT on the ff. Grounds: 5. by sale of part of the cargo
a. insubordination in serious matters
b. robbery DUTIES OF THE CAPTAIN:
c. theft 1. bring on board the proper certificate and
d. habitual drunkenness document and a copy of the Code of Commerce
e. damage caused to the vessel or to its cargo 2. keep a logbook, accounting book and freight
through malice, manifest or proven book
negligence 3. examine before the voyage
4. stay on board during the loading and unloading
of the cargo
EFFECT/LOSS/DESTRUCTION OF VESSEL: 5. be on deck while leaving or entering the port
1. extinguishes liability arising from the conduct of 6. seeks protest, arrival under stress and in case of
the captain in the vigilance of the goods and for shipwreck
the safety of the passengers and for any liability 7. follow instruction of and render accounting to the
arising from negligent acts of the captain ship agent
2. extinguishes liability for the wages for the 8. save the vessel lost in case of wreck
captain and the crew and for advances made by 9. hold in custody properties left by deceased by
the ship agent if the vessel is lost by shipwreck passengers and crew members
or capture 10. comply with the requirements of customs,
3. liability for collision health, etc. at the port of arrival
 Saint Louis University COMMERCIAL LAW 79
2012 BAR OPERATIONS

6. such authority shall also make statements of

LIABILITIES OF THE SHIPAGENT/SHIPOWNER what may be the result of the proceeding in the
FOR ACTS DONE BY THE CAPTAIN TOWARDS logbook and in that of the sailing mate
PASSENGERS AND CARGOES MAKING THEM 7. he shall deliver the original records to the
SOLIDARILY LIABLE TO THE LATTER: captain
1. damages to vessel and to cargo due to lack of 8. captain must ratify the protest
skill and negligence
2. theft and robbery of the crew C. OFFICERS AND CREW
3. losses and fines in violation of laws
4. damages due to mutinies 1. Sailing mate/First mate
5. damages due to misuse of power - second chief of the vessel who takes the place
6. deviations of the captain in case of absence, sickness, or
7. arrival under stress death and shall assume all of his duties, powers,
8. damages due to non-observance of marine and responsibilities
regulations
DUTIES:
NO LIABILTY FOR THE FOLLOWING: 1. provide himself with maps, and charts with
1. damages caused to the vessel by force astronomical tables necessary for the
majeure discharge of his duties
2. obligations contracted for the repair, equipment 2. keep the Binnacle book
and provisioning of the vessel UNLESS he has 3. Change the course of the voyage on
expressly bound himself personally or has signed a consultation with captain and the officers of
bill of exchange or promissory note in his name the boat, following the decision of the
captain in case of disagreements.
CARGO- which includes all goods, wares and 4. Responsible for all the damages caused to
merchandise aboard a ship which do not from part of the vessel or to the cargo by reason of his
the ship's stores. negligence

REQUIREMENTS FOR DEFENSE OF PUBLIC 2. Second mate

ENEMY: - takes command of the vessel in case of the
1. act of public enemy in war was the proximate inability or disqualification of the captain and the
and only cause of the loss sailing mate, assuming in such case their
2. common carrier exercise due diligence to powers and responsibilities and duties
prevent, minimize loss before, during, and after
occurrence of the act of the public enemy in war DUTIES:
1. preserve the hull and rigging of the vessel
FORMALITIES REQUIRED WHERE VESSEL HAS 2. arrange well the cargo
GONE THROUGH HURRICANE 3. discipline the crew
1. Captain must make a protest before competent 4. assign work to crew members
authority at the first port he touches 5. Inventory the rigging and equipment of the
2. Such a protest must be made within 24 hours vessel, if laid up.
following his arrival
3. captain must ratify it within some period when he 3. Engineers
arrives at his destination - Officers of the vessel but have no authority
4. he must immediately proceed with the proof of EXCEPT in matters to motor apparatus. When 2
the facts or more are hired, one of them should be the
Chief Engineer
FORMALITIES REQUIRED WHERE VESSEL
SHIPWRECKED: DUTIES:
1. captain must make a protest before the nearest 1. in charge of motor apparatus, spare parts,
competent authority and other instruments pertaining to the
2. protest be made within 24 hours following his engines
arrival 2. keep the engines and boilers in good
3. make sworn statement of the facts condition
4. authority/consul abroad shall verify said facts 3. not to change or repair the engine without
5. such authority shall take other steps in carrying authority of the captain
at the facts 4. inform the captain of any damage to the
motor apparatus
 Saint Louis University COMMERCIAL LAW 80
2012 BAR OPERATIONS

5. keep an Engine book - All persons on board, from the captain to the
6. supervise all personnel maintaining the cabin boy, necessary for the management,
engine maneuvers, and service, thus including the
crew, the sailing mates, engineers, stalkers and
4. Members of the Crew other employees on board not having specific
- hired by the ship agent. Where he is present and designations
in his absence, the captain hires them preferring - It does not include the passengers or the person
Filipinos, and in their absence, he ,ay take in whom the vessel is transported
foreigners but not exceeding 1/5 of the crew.
FORMALITIES REQUIRED FOR SEAMAN'S
CLASSES OF SEAMAN'S CONTRACT: AGREEMENT:
1. by the voyage 1. reduced to writing in Accounting Book
2. by the month 2. signed by parties
3. by share of profits or freightage 3. visaed by marine authority if executed in
Philippine territory/consul or consular agents if
JUST CAUSES FOR THE DISCHARGE OF executed abroad
SEAMAN WHILE CONTRACT SUBSISTS: 4. read to the seaman concerned and such fact
1. perpetration of a crime must be stated in the agreement
2. repeated insubordination, want of discipline
3. repeated incapacity and negligence Interdiction of Commerce
4. habitual drunkenness - a governmental prohibition of commercial
5. physical incapacity intercourse intended to bring about an entire
6. desertion cessation for the time being of all trade

CAUSES OF REVOCATION OF VOYAGE: Embargo

1. war - a proclamation or order of the State usually
2. blockade issued in time of war/ threatened hostilities
3. prohibition to receive cargo at destination prohibiting the departure ships/ goods from
4. embargo some or all the ports of such State until further
5. inability of the vessel to navigate order

RULES IN CASE OF DEATH OF A SEAMAN: Blockade

- The seaman's heirs are entitled to the payment - a sort of circumvallation of place by all foreign
as follows: connections and correspondence is as far as
1. if death is natural: human power can affect it to be cut-off
a. compensation up to time of death if
engaged on voyage D. SUPERCARGOES
b. if by voyage- half of amount if death - person who discharge administrative duties
occurs on voyage out; and full if on assigned to him by ship agent or shippers,
voyage in keeping an account and record of transaction as
c. if by shares- none if before departure; required in the accounting book of the captain
full if after departure
2. if death is due to defense of vessel- full payment
3. if captured in defense of vessel- full payment CHARTER PARTY
4. if captured due to carelessness- wages up to the - contract by virtue of which the owner or agent
date of the capture binds himself to transport merchandise or
persons of a fixed price
NO LIABILY UNDER THE FOLLOWING
CIRCUMSTANCES:
CLASSES OF CHARTER PARTY
1. If before beginning voyage, captain attempts to
change it or a naval war with the power to which 1. As to extent of vessel hired
was destined occurs a. total- whole of the vessel is chartered
2. If a disease breaks out and be officially declared b. partial- only part of the vessel is chartered
an epidemic in the port of destination
3. If the vessel change owner or captain 2. As to time
a. until a fixed day/ for a determined number of
days and months
COMPLEMENT OF THE VESSEL b. for a voyage(outgoing/return/roundtrip)
 Saint Louis University COMMERCIAL LAW 81
2012 BAR OPERATIONS

7. To bring cargo to nearest neutral port in

3. As to freightage case of war or blockade
a. for a fixed amount for the whole cargo
b. for a fixed amount per ton B. Of the charterer
c. for an amount per month 1. to pay the agreed charter price
2. to pay freightage or unboarded cargoes
FORMAILITIES REQUIRED FOR A CHARTER 3. to pay losses to others for loading
PARTY: uncontracted cargo and illicit cargo
1. in writing 4. to wait if the vessel needs repair
2. drawn in duplicate 5. to pay expenses for deviation
3. signed by the parties
4. contain stipulation
 not all requisites are essential for the validity of RESCISSION OF CHARTER PARTY
charter party A. At charterer's request
1. by abandoning the charter and paying half of
Primage the freightage
- belongs to owner/ freighters; 2. error in tonnage or flag
- increase of the freight rate 3. failure to place the vessel at the charterer's
- considered gratuity to master if is stipulated disposal
4. return of the vessel due to pirates, enemies
Demurrage or bad weather
- sum which is fixed by the contract of carriage, or 5. arrival at the port for repairs
which is allowed, as remuneration to the owner
of a ship for the detention of his vessel beyond B. At ship owner’s request
the number of days allowed by the charter party 1. If the extra lay days terminate without cargo
for loading/unloading/sailing. being placed alongside the vessel
2. Sale by the owner of the vessel before
"Lay days" loading
- days allowed to charter parties for loading and
unlading C. Fortuitous causes
1. war
"Extra Lay Days" 2. blockade
- days which followed after lay days have elapsed 3. prohibition to receive cargo
4. embargo
GOODS TRANSFERRED MAY BE: 5. inability of the vessel to navigate
1. sold by captain to necessary repairs
2. jettisoned for the common safety Loan on Bottomry
3. loss by reason of shipwreck/stranding - loan made by ship owner or ship agent
4. seized by pirates/enemies guaranteed by vessel itself and repayable upon
5. suffer deterioration/diminutions arrival of vessel at destination
6. increase by natural cause and weight or size

Loan on Respondentia
RIGHTS AND OBLIGATIONS OF CHARTER
- loan , taken on security of the cargo laden on
PARTY:
the vessel, and repayable upon safe arrival of
A. Of the ship owner or ship agent
cargo at safe designation
1. If the vessel chartered wholly not to accept
cargo from others
2. To observe represented capacity
COMMON ELEMENTS OF LOANS ON
3. To unload cargo clandestinely placed
BOTTOMRY AND RESPONDENTIA
4. To substitute another vessel if load is less
1. exposure of security or marine peril
than 3/5 of capacity
2. obligation of the debtor conditioned only upon
5. To leave the port if the charter does not
safe arrival of security at the point of destination
bring the cargo within the lay days and extra
lay days allowed.
EXCEPTIONS TO THE HYPOTHECARY NATURE
6. To place in a vessel in a good condition to
OF BOTTOMRY AND RESPONDENTIS:
navigate
1. loss due to inherent defect
2. loss due to the barratry on the part of the captain
 Saint Louis University COMMERCIAL LAW 82
2012 BAR OPERATIONS

3. loss due to the fault or malice of the borrower 3. defect due to improper repair
4. that the vessel is engaged in contraband 4. malice, negligence, lack of foresight, lack of
5. that the cargo loaded on the vessel be different skill
from that agreed upon
III. COLLISION
ACCIDENTS IN MARITIME COMMERCE: - impact of two vessels both of which are moving
1. AVERAGES
2. ARRIVAL UNDER STRESS ALLISION
3. COLLISION - impact between a moving vessel and stationary
4. SHIPWRECK one

I. Averages ZONES OF TIME IN COLLISION OF VESSELS:

- an extraordinary or accidental expense incurred 1. First zone- all time up to the moment when risk
during the voyage in order to preserve the of collision begins
cargo, vessel or both and all damages or 2. Second Zone- time between moment when risk
deterioration suffered by the vessel from of collision begins and moment it becomes a
departure to the port of destination and to the practical certainty
cargo from the port of loading to the port of 3. Third Zone- time when collision is certain and
consignment time of impact

CLASSES: CASES COVERED BY COLLISION AND

1. Particular/Simple ALLISION:
- damage / expenses caused to the vessel or 1. one vessel at fault- such vessel is liable for
cargo that did not inured to the common benefit damage caused to innocent vessel as well as
and borne by respective owner damages suffered by owners of cargo of both
- the owner of the goods which give rise to vessels
expense or suffer damage shall bear this 2. both vessels at fault- each vessel must bear its
average own loss but the shippers of both vessel may go
against the ship owner who will be solidarily
2. Gross/ General liable
- damage/ expenses deliberately caused in order 3. vessel at fault not known- same as rule 2
to save the vessel, its cargo or both from real or 4. third vessel at fault- same rule 1
known risk 5. fortuitous event- no liability, each bear its own
loss
-REQUISITES:
a. common danger IV. SHIPWRECK
b. deliberate sacrifice - loss of the vessel at sea as a consequence of its
c. success grounding or running against an object in sea or
d. proper formalities and legal steps on the coast
- if the wreck was due to malice, negligence or
ORDER OF GOODS TO BE CAST OVERBOARD lack of skill of the captain, the owner of the
IN CASE OF JETTISON: vessel may demand indemnity from said
1. those which are on the deck, preferring the captain.
heaviest one with the least utility of value
2. those which are below the upper deck beginning
with the one with greatest weight and smallest
value COMMON CARRIERS
( ARTICLES 1732-1766)

II. Arrival Under stress Common Carriers

- arrival of a vessel at a port of destination on - are PERSONS, CORPORATION, FIRMS, or
account of lack of provision, well-founded fear of ASSOCIATIONS engaged in CARRYING or
seizure, pirates, or accidents in sea disabling TRANSPORTING PASSENGERS or GOODS or
navigation BOTH, by LAND, WATER, or AIR for
- when unlawful: COMPENSATION OF OFFERING THEIR
1. lack of provisions due to negligence to carry SERVICES TO THE PUBLIC.
according to usage and customs
2. risk of enemies not well-known or manifest
 Saint Louis University COMMERCIAL LAW 83
2012 BAR OPERATIONS

Extraordinary diligence is required to common

carriers in transporting goods and passengers SOME VALID STIPULATIONS LIMITING
Reasons: CARRIER'S LIABILITY:
1. nature of the business 1. account of strikes or riot
2. public policy 2. value of the goods appearing in bill of lading
UNLESS shipper declares a greater value
Registered owner primarily and solidarily with driver 3. contract fixing the sum that may be
under the KABIT SYSTEM. Kabit system is contrary recovered
to public policy; therefore, void and inexistent.
VOID STIPULATIONS LIMITING CARRIER'S
CIRCUMSTANCES UNDER WHICH COMMON Liability:
CARRIERES CANNOT BE HELD LIABLE FOR 1. the goods are transported at the risk of the
THE LOSS/DESTRUCTION OF GOODS: shipper
1. flood, storm, earthquake, or other natural 2. that the shipper is not liable for any loss or
calamities destruction of the goods
2. act of public enemy in war, either international 3. that the common carrier need not observed
or local any diligence and less than that of good
3. act or omission of the shipper or owner of the father of a family
goods 4. that the common carrier shall not be
4. character of the goods or defects of the packing responsible for any acts of its employee
5. order of competent authority
The law of the country to which the goods are to be
Extraordinary diligence lasts from the time the transported shall govern the liability of common
cargoes are loaded in the vessel until they are carrier for their loss, destruction, or deterioration.
discharged and delivered to the consignee.
The act of the thief or robbers who entered the
Air carriers can terminate services of pilots for common carrier's vehicle is not deemed force
serious misconduct and drunkenness because of its majeure UNLESS it is done with the use of arms or
extraordinary diligence. through irresistible force.

INSTANCES WHICH ARE NOT CASO FORTUITO: A common carrier is bound to carry the passengers
1. hijacking safely as far as human care and foresight can
2. acts of strangers like thieves or robbers provide using the utmost diligence of a very cautious
acted with grave or violence person with a regard of circumstances.
3. accidents due to defects of carrier
4. where tie blow-out In case of death or injuries to passengers, common
carriers are presumed to be at fault UNLESS proved
Fire is not a natural disaster that they observe extra ordinary diligence.

Notice of arrival of goods amounts to constructive

delivery LAST CLEAR CHANCE
- this principle applies only in a suit between
Shipper bound to observe all diligence in obtaining owners and drivers of two colliding vehicles.
delivery of goods This is not applicable to Contract of Carriage.
Common Carriers may be exempted from Carrier not ordinarily liable for injuries to passengers
responsibility PROVIDED that natural disaster is the due to fires, and explosions caused by articles
proximate and only cause of the loss. brought into conveyance by other passengers.
STIPULATIONS LIMITING LIABILITY IS VALID Ticket is a complete written contract by and
PROVIDED THAT: between the shipper and passenger for it
1. the stipulation be in writing signed by both contains:
parties 1. consent of the contracting parties
2. the stipulation be supported by a valuable 2. cause or consideration which is the fare paid
consideration other than the service by the passengers
rendered by common carrier 3. object which is the transportation of the
3. the stipulation be reasonable, just and not passenger from the place of departure to the
contrary to public policy place of destination.
 Saint Louis University COMMERCIAL LAW 84
2012 BAR OPERATIONS

liable for damages sustained in the event of death or

Reduction of fare does not justify any limitation of injury of a passenger if accident took place on board
the common carrier's liability. the aircraft or in the course of embarking or
disembarking.
Passenger bound notwithstanding his failure to sign
plane ticket containing stipulation limiting liability Article 18(1), the carrier shall be liable for damages
known as contract of adhesion. sustained in the event of destruction or loss of or of
damage to any checked baggage or any goods in
The extraordinary diligence required for carriage the course of transportation.
of passengers cannot be dispensed with: (2), the transportation of air shall comprise the
1. by stipulation period during which the baggage or goods are in the
2. by posting of notices charge of the carrier whether an airport or on board
3. by statement of tickets an aircraft or in case of landing outside an airport.
4. otherwise however as an exception, parties (3), the period of transportation by air shall not
may stipulate limiting carrier's liability where extend to any transportation by land, sea, or river
the passenger is carried gratuitously outside an airport.

Common Carrier is liable for damages for defects of Article 19, the carrier shall be liable for damages
its equipment. occasioned by delay in transportation by air of
passengers, baggage, or goods.
Common Carrier is liable for the misconduct of its
employees done in their own interest. DAMAGES RECOVERABLE WHEN DEATH
Reason: the servant is clothed with the delegated OCCURS DUE TO COMMISSION OF A CRIME:
authority and charged with duty by the carrier to 1. indemnity for death of a victim
execute his undertakings to carry the passenger 2. indemnity for loss of earning
safely. 3. moral damages
4. exemplary damages
5. attorney's fees and expenses of litigation,
Carrier exempt from acts of employees not done in
6. interest and properties
line of duty.
FACTORS TO BE CONSIDERED IN AWARDING
The passenger must observe the diligence of a good DAMAGES ARISING FROM DEATH:
father of a family or ordinary diligence to avoid injury 1. number of years on the basis of which the
to himself. damages shall be computed
2. rate at which the losses sustained should be
EFFECTS OF NEGLIGENCE- where the proximate fixed
cause of the death/ injury to the passenger is his
own negligence, common carrier is exempted from For fixed indemnity for death, there is no need to
liability. interrogate witness.

EFFECT OF PASSENGER'S CONTRIBUTORY Common carrier not liable for moral damages to
NEGLIGENCE- passenger's contributory negligence passenger s injured due to negligence of driver.
does not justify carrier's exemption from liability.
However, the damages will be equitably reduced.
Carrier is liable when it issues to passenger a
confirmed ticket for a particular ticket if he is not put
A common carrier is responsible for injuries suffered
in that flight.
by a passenger on account of the lawful
acts/negligence of other passengers or of strangers
Carrier liable only for damages that are natural and
provided that the employees could have prevented
probable consequence and breach of contract which
the act or omission through the exercise of a good
includes medical, hospital and other expenses.
father of a family.
ITEMS INCLUDE IN ACTUAL DAMAGES:
Degree of diligence required of carriers employees-
1. income to be earned upon completion of
merely that of the good father of a family or ordinary
studies
diligence.
2. the sum being carried by deceased
passenger which was lost
Liability of air carrier under Warsaw Convention of
3. amount spend to her funeral
October 12,1929, article 17, the carrier shall be
4. attorney's fees and court expenses
 Saint Louis University COMMERCIAL LAW 85
2012 BAR OPERATIONS

5. loss of the merchandise carried by the

deceased
6. loss of baggage containing medicine, boxes, INTRODUCTION:
and suitcases of personal belongings
PUBLIC SERVICE OR PUBLIC UTILITY DEFINED
EXCEPTIONS TO RULE THAT CARRIER NOT
LIABLE FOR MORAL DAMAGES IN BREACH OF  Public Service- includes every person that
CONTRACT: now or hereafter may own, operate, manage
1. where the mishap results in the death of or control in the Philippines for hire or
passenger compensation, with general or limited
2. where it is proved that the carrier is guilty of clientele, whether permanent, occasional or
fraud or bad faith even if death does not accidental, and done for general business
result purposes, any common carrier, shipyard, ice
3. where the passenger suffers social plant, electric light, heat and power or any
humiliation, wounded feelings, anxiety and other utility, (Sec. 13 b, C.A. 146 as
mental anguish amended).

Surviving passenger is not entitled to moral  Public Utility- a business or service engaged
damages. Mere carelessness of the carrier does not in supplying the public with some commodity
per se constitute an inference of malice or bad faith or service of public consequence. (Albano v.
on its part. Reyes, 175 SCRA 264)

Carrier subsidiarily liable for moral damages in ORDINARY AND PRIMARY PURPOSE OF THE
actions ex delicto. PUBLIC SERVICE LAW
 ORDINARY PURPOSE:
Exemplary damages cannot be recovered as a
To subject public services to state control
matter of right.
and regulation.
Nominal and exemplary damages awarded for willful
 SPECIFIC PURPOSES:
breach of contract committed through agent or
employee.
1. To secure adequate, sustained
service for the public at the least
Carrier incurring only delay not liable for moral and
possible cost, and protect the public
exemplary damages but only to the limited amount
against unreasonable charges and
printed in the plane ticket.
poor inefficient service.
2. To protect and conserve
Exemplary damages is allowable under Kabit
investments which have already
System.
been made for public service, and
prevent ruinous competition.
Common Carrier in Nominal Damages for failure of
carrier to bring passenger to his destination but
BASIS OF THE LEGISLATIVE POWER TO
mere violation of a Contract of Carriage does not
REGULATE PUBLIC SERVICES:
warrant recovery for moral damages.

In case of breach of the carrier's contractual  POLICE POWER, for the protection of the
obligation to carry his passenger safely to their public as well as the utilities themselves.
destination, the carrier is solidarily liable for his (Pantranco v. P.S.C., 70 Phil 221)
driver's negligence. Exercise of due diligence in
selecting driver is not a defense.  CONSTITUTIONAL BASIS:
1. ARTICLE XII, SECTION 11:
Preponderance of evidence sufficient to prove civil > A franchise, certificate, or any other
liability arising from negligence. form of authorization for the operation of
public utility shall be granted to:
PUBLIC SERVICE LAW
- Filipino Citizens
(C.A. No. 146 as amended and modified by - Corporations or
PD No. 1 Integrated Reorganization Plan and associations organized
E.O.546) under Philippine Laws
where at least 60% of the
 Saint Louis University COMMERCIAL LAW 86
2012 BAR OPERATIONS

capital is owned by Filipino  The DOTC shall be the primary

Citizens. entity in Transportation and
- 100% Filipino Management Communication

> Mass media and commercial

telecommunications shall be: LIMITATIONS ON THE POWERS OF THE
- 100% Filipino Capital, and REGULATORY BOARDS, COMMISSIONS AND
- 100% Filipino management COUNCILS:

2. ARTICLE XII, SEC 17: 1. General: Powers are limited from those granted
In times of national emergency, when the in the legislation creating the body.
public interest so requires, the State may
during the emergency and under reasonable 2. Constitutional:
terms, temporarily take over or direct the Regulations imposed must not have the effect of
operation of any private owned public utility depriving an owner of his property without due
or business affected with public interests. process of lawnor confiscating or appropriating
private property without just compensation.
3. ARTICLE XII, SECTION 18
The state may, in the interest of national 3. Judicial:
welfare or defense, establish and operate Boards, commissions are not judicial tribunals
vital industries and upon payment of just and therefore cannot determine judicial
compensation, transfer to public ownership questions such as validity of contract.
utilities and other private enterprises to be
operated by the government. 4. Jurisdiction: Extends only to persons engaged
in public utilities, or over a public utility, which
4. ARTICLE XII, SECTION 19 holds a Certificate of Public Convenience.
The state shall regulate or prohibit
monopolies when the public interest so B. JURISDICTION
requires; no combination in restraint of trade
or unfair competition shall be allowed
 General Rule: Over persons engaged in
public utilities, or over a public utility, which
OFFICES NOW CHARGED WITH ENFORCEMENT holds a Certificate of Public Convenience.
OF PUBLIC SERVICE LAW  Exemption: violators of a valid regulation
promulgated under the law
The Public Service Commission has been abolished.
The following replaced it:
C. GENERAL POWERS OF THE
1. LAND TRANSPORTATION- Department of COMMISSION
Transportation and Communication (DOTC)
and the Land Transportation Franchising 1. ISSUE CERTIFICATES
and Regulatory Board (LTFRB)
2. WATER TRANSPORTATION- Maritime  CERTIFICATE OF PUBLIC CONVENIENCE
Industry Authority (MARINA) (CPC)
3. AIR TRANSPORTATION- Air Transportation An authorization issued by the commission for
Office (ATO) headed by an assistant the operation of public services for which no
secretary and the Civil Aeronautics Board, franchise either municipal or legislative is required
which has been placed under the DOTC as by law.
an attached agency.
4. TELECOMMUNICATIONS- National  CERTIFICATE OF PUBLIC CONVENIENCE &
Telecommunications Commission, which NECESSITY (CPCN)
has been placed under the DOTC as an
attached agency. An authorization issued by the commission
5. ENERGY- Board of Energy but transferred for the operation of public services for which a
to the Energy Regulatory Board (ERB) franchise is required by law.
6. WATERWORKS- National Water Resources
Council
1. NATURE OF A CERTIFICATE OF
PUBLIC CONVENIENCE
 Saint Louis University COMMERCIAL LAW 87
2012 BAR OPERATIONS

It constitutes neither a PRIOR APPLICANT RULE

FRANCHISE nor a CONTRACT. It Priority in the filing of application for a CPC
confers no property rights and is a mere is, other conditions being equal, an important factor
license or privilege. in determining the rights of the public service
companies, and in the granting or refusal of a
2. GENERAL RULE: NECESSITY OF certificate. (Batangas Trans Co. v Orlanes, 52 Phil
CERTIFICATE OF PUBLIC 455)
CONVENIENCE or CERTIFICATE OF
PUBLIC CONVENIENCE &
NECESSITY PRIOR OPERATOR RULE
Unless otherwise exempt, no The law contemplates that the first licensee
public service shall operate without will be protected in his investment and will not be
having been issued a certificate of subjected to a ruinous competition. It is not therefore
public convenience (no franchise is the policy of the law to issue a CPC to a second
required by law) or a certificate of public operator to cover the same field and in competition
convenience and necessity (a prior with a first operator who is rendering sufficient,
franchise is required by law). adequate and satisfactory service, and who in all
things and respects is complying with the rules and
regulations of the commission. The old operator
3. EXCEPTIONS (Section 14, Public must be given the opportunity to improve and extend
Service Law) his lines. (Batangas Trans Co. v Orlanes, 52 Phil
455)
Certificate of public convenience, not necessary BASIS OF THE PRIOR OPERATOR RULE
in the following: Prevent ruinous and wasteful competition
a. Warehouses and interest of public will be preserved.
b. Animal drawn vehicles, bancas powered by oar
or sail; tugboats, lighters or pedal driven EXCEPTIONS TO THE PRIOR OPERATOR RULE:
vehicles
c. Airships except as to fixing of rates 1. Operator fails/ neglects to make improvement
d. Radio Companies, except as to fixing of rates or effect the increase in service when
e. Public utilities operated by the National given the opportunity.
Government
2. When Prior operator offers to meet increases
f. Government or political subdivisions except as
in demand only when another operator offered
to rates
to render additional service
g. Iceplants
3. Abandonment of operation
h. Public Markets
4. Prior operators did not oppose application
5. Prior operator cannot satisfy needs of the
public
4. REQUISITES BEFORE A 6. When opportunity to improve service is raised
CERTIFICATE OF PUBLIC
by prior operator only on appeal.
CONVENIENCE MAY BE GRANTED: 7. CPC granted to the applicant is a maiden
franchise covering a new route, albeit
a. CITIZENSHIP – Filipino Citizen;
overlapping with that of the old operator
Filipino Corporations/ 8. Expiration of corporate existence of prior
Associations operator.
b. FINANCIAL CAPACITY 9. Monopoly
c. PUBLIC NECESSITY 10. Passage through private subdivision which
d. PUBLIC CONVENIENCE granted permit to another
 Considerations: 2. TO APPROVE – ANY FRANCHISE OR
a) FINANCIAL RESPONSIBILITY OF PRIVILEGE GRANTED BY ANY POLITICAL
APPLICANTS SUBDIVISION OF THE PHILIPPINES WHEN IN ITS
a) RELIABILITY OF THE APPLICATION JUDGMENT SUCH FRANCHISE OR PRIVILEGE
b) PRIORITY OF FILING THE APPLICATION WILL PROPERLY CONSERVE THE PUBLIC
c) PRIORITY OF OPERATION INTEREST.

 Requirement of previous notice and hearing.

 Saint Louis University COMMERCIAL LAW 88
2012 BAR OPERATIONS

 The exercise of the said power is it discretionary

as it is - subject to conditions, equipment, N.B.
maintenance, service and operation; The holder of a legislative franchise
has preference over the holder of a
 In the exercise of the above-mentioned power it municipal franchise granted more than a
is also necessary to determine whether the year later.
exercise of the rights or privileges granted by the
franchise are necessary and adequate for the If the holder of a municipal franchise
public convenience. was subsequently granted with a legislative
franchise the former will be repealed by the
latter.
NATURE OF FRANCHISE:
Franchise is NOT exclusive in nature. A municipality does not have the
Section 11, Article XII, 1987 legal right to nullify a legislative franchise by
Philippine Constitution – “No franchise, arbitrarily refusing to approve plans of the
certificate, or any other form of authorization for company receiving the legislative franchise
the operation of a public utility shall be granted made pursuant to a provision therein.
except to citizens of the Philippines or to
corporations or associations organized under Note however that the Commission
the laws of the Philippines at least sixty per may disapprove a municipal franchise and it
centum of whose capital is owned by such may deny an application without infringing
citizens, nor shall such franchise, certificate, the legislative prerogative of the municipal
or authorization be exclusive in character or council, because the Commission merely
for a longer period than fifty years.” exercises a power granted by law.
PSC has power to regulate manner
Franchise subject to amendment and repeal. of disconnecting services by MERALCO to
Section 11, Article XII, 1987 delinquent customer. It can compel
Philippine Constitution - Neither shall such MERALCO that before it can effect
franchise or right be granted except under the disconnection of it services to a delinquent
condition that it shall be subject to amendment, customer it is required that it must first give
alteration, or repeal by the Congress when the a written notice of disconnection 48 hours in
common good so requires. advance.

General Rule: 3. THE COMMISSION HAS ALSO THE POWER TO

Exclusivity of franchise is not favored – FIX AND DETERMINE INDIVIDUAL AND JOINT
that is why in all grants by the government to RATES, TOLLS, CHARGES, CLASSIFICATIONS
private corporations – the interpretation of rights OR SCHEDULES THEREOF, KILOMETRAGE,
privileges or franchises is taken against the AND OTHER SPECIAL RATES. (Section 16 (c)
grantee. (PBQ – Bar 2000)

HOWEVER – if exclusivity is given by  That before the Commission can fix rates
law – it should be with the understanding there must first be a notice and hearing.
that the company enjoying it is self sufficient
and capable of supplying the needed service  HOWEVER, the Commission in its
or product at moderate or reasonable prices. discretion can PROVISSIONALY approve
rates proposed by public services
In reality a franchise is a contract WITHOUT NOTICE AND HEARING
between the State and the grantee. PROVIDED that WITHIN THIRTY (30)
DAYS THEREAFTER A HEARING MUST
Question: Since a franchise is a BE HELD UPON PREVIOUS
contract is this governed by the non- PUBLICATION AND NOTICE TO THE
impairment clause of the Constitution? CONCERNS OPERATING IN THE
TERRITORY AFFECTED.
Answer: No, while it is true that a
franchise is in the nature of a contract, E.g. ERB has authority to issue an
which the parties to it must respect – it order granting provisional increase of prices
is not a contract such as is protected even without notice and hearing.
from impairment by the Constitution.
Saint Louis University COMMERCIAL LAW 89
2012 BAR OPERATIONS

discretion and unless there is an abuse of

 EXTENT OF THE POWER OF THE that discretion
COMMISSION TO FIX RATES.
1. Rates are submitted by the public carriers  REQUIREMENTS FOR A JUST AND
but are subject to approval by the PSC REASONABLE RATE
which is NOT limited in the selection of the
old or the new rates but could NOT establish 1. One which yields to the carrier a fair return
such rates as are proper under the evidence upon the value of the property employed in
presented. performing the service;
2. The maximum rate fixed in a franchise, 2. One which is fair to the public for the
which its holder is authorized to collect, is services rendered.
always subject to a revision and regulation
by the PSC. E.g. of circumstances justifying increase
3. The PSC has also the power to order the of rates – “exigencies of the present and the
refund of overcharges. – The requirement is future – viewed in the light of recent
not in the nature of a penalty – but is merely developments and the experience gained in
a measure by which the public services connection with the operation of another public
concerned are asked to return what they did utility analogously situated –“
not have the right to collect.
4. In another case, the Court also said that 4. TO FIX JUST AND REASONABLE
when the Commission is empowered by law STANDARDS, CLASSIFICATIONS,
to fix the rates of freight which vessels may REGULATIONS, PRACTICES, MEASUREMENTS,
charge, it is implied that the vessels may not OR SERVICE TO BE FURNISHED, IMPOSED,
legally demand more than those rates. OBSERVED, AND FOLLOWED THEREAFTER BY
5. The Commission has the power to alter the ANY PUBLIC SERVICE. (SECTION 16 (D))
established rates in a certificate of public
convenience, especially where the order 5. TO ASCERTAIN AND FIX ADEQUATE AND
fixing the rates is in the nature of an SERVICEABLE STANDARDS FOR THE
experiment for a period of four months.\ MEASUREMENT OF QUANTITY, QUALITY,
6. Where it appears that a proposed joint fate PRESSURE, INITIAL OR SERVICE RENDERED
system with transfers in relation to a point of BY ANY PUBLIC SERVICE AND TO PRESCRIBE
contract between two transportation lines REASONABLE REGULATIONS FOR THE
would serve the convenience of the public, EXAMINATION AND TEST OF SUCH PRODUCT
the PSC has authority to find a public need OR SERVICE, AND TO PRESCRIBE
and thereafter to approve such joint fare REASONABLE REGULATIONS FOR THE
system. EXAMINATION AND TEST OF SUCH PRODUCT
7. But the PSC cannot delegate to a public OR SERVICE AND FOR THE MEASUREMENT
service its power to fix and determine the THEREOF. (SECTION 16 (E))
rates.
6. TO ESTABLISH REASONABLE RULES AND
 DETERMINATION OF JUST AND REGULATIONS, INSTRUCTIONS,
REASONABLE RATES. SPECIFICATIONS, AND STANDARDS, TO
SECURE THE ACCURACY OF ALL METERS AND
The fixing of rates is a legislative APPLIANCES FOR MEASUREMENTS. (SECTION
and governmental power over which the 16 (F))
government has complete control. BUT it
has no power to fix rates which are 7. TO COMPEL ANY PUBLIC SERVICE TO
unreasonable or to regulate them arbitrarily, FURNISH SAFE, ADEQUATE, AND PROPER
and that as to whether a given rate is fair SERVICE AS REGARDS THE MANNER OF
and reasonable is a judicial question over FURNISHING THE SAME AS WELL AS THE
which the courts have complete control. MAINTENANCE OF THE NECESSARY MATERIAL
AND EQUIPMENT. (SECTION 16 (G))
N.B. There is a legal presumption
that the rates are reasonable and it must be NOTES:
conceded that the fixing of rates by the The Commission has no power to
government through its authorized agent, change procedure relative to inspection and
involves the exercise of reasonable repair of water meters.
 Saint Louis University COMMERCIAL LAW 90
2012 BAR OPERATIONS

The PSC is in duty bound to see to PSC can permit applicant to operate
it that persons or companies, holding shorter route than that applied by him when
certificates of public convenience, render the circumstances so demand and it is NOT
within a reasonable time the public service for the oppositor to insist that he
that they have been authorized to render for Commission should have conceded the
the benefit of the public. applicant a longer route.

The PSC shall see to it that the

companies holding Certificates of Pubic 9. TO DIRECT ANY RAILROAD, STREET
Convenience render their service with in a RAILWAY OR TRACTION COMPANY TO
REASONABLE TIME. ESTABLISH AND MAINTAIN AT ANY JUNCTION
OR POINT OF CONNECTION OR INTERSECTION
WITH ANY OTHER LINE OF SAID ROAD OR
TRACK, OR WITH ANY OTHER LINE OF ANY
8. TO REQUIRE ANY PUBLIC SERVICE TO OTHER RAILROAD, STREET, RAILWAY OR
ESTABLISH, CONSTRUCT, MAINTAIN AND TRACTION TO PROMOTE THE CONVENIENCE
OPERATE ANY REASONABLE EXTENSION OF OF SHIPPERS OF PROPERTY, OR
ITS EXISTING FACILITIES – SUCH EXTENSION PASSANGERS. SECTION 16 (I)
IS REASONABLE AND PRACTICABLE AND WILL
FURNISH SUFFICIENT BUSINESS TO JUSTIFY
THE CONSTRUCTION OF THE SAID PUBLIC 10. TO AUTHORIZE, IN ITS DISCRETION, ANY
SERVICE REASONABLE WARRANTS THE RAILROAD, STREET RAILWAY OR TRACTION
ORIGINAL EXPENDITURE REQUIRED IN COMPANY TO LAY ITS TRACKS ACROSS THE
MAKING AND OPERATING SUCH EXTENSION. TRACKS OF ANY RAILROAD, STREET RAILWAY
(SECTION 16 (H)) OR TRACTION COMPANY OR ACROSS ANY
PUBLIC HIGHWAY. SECTION 16 (J)
NOTES:
Before the PSC can exercise the
above-mentioned duty – there must first 11. TO DIRECT ANY RAILROAD OR STREET
be notice and hearing. RAILWAY COMPANY TO INSTALL SUCH
SAFETY DEVICES OR ABOUT SUCH OTHER
Thus, the PSC has ample powers to REASONABLE MEASURES AS MAY IN THE
require and authorize public services which JUDGMENT OF THE COMMISSION BE
certificates of public convenience to extend NECESSARY FOR THE PROTECTION OF THE
their service when the necessity of the PUBLIC AT PASSING GRADE CROSSING OF
public so demands.
(1) public highways and railroads;
PSC may grant extension to (2) public highways and street railway; or
applicant whose certificate is subject to (3) railway and street railways.
condition of non-extension if the
Commission is satisfied that public service 12. TO FIX AND DETERMINE PROPER AND
or convenience requires or demands that ADEQUATE RATES OF DEPRECIATION OF THE
the line of such extension be run, operated PROPERTY OF ANY PUBLIC SERVICE WHICH
and served and that the applicant is WILL BE OBSERVED IN A PROPER AND
financially capable of operating it, the ADEQUATE DEPRECIATION ACCOUNT TO BE
Commission has the power to grant a CARRIED FOR THE PROTECTION OF
certificate of public convenience to the STOCKHOLDERS, BONDHOLDERS OR
applicant for the operation of such extension CREDITORS.
line.
THE INCOME FROM INVESTMENTS OF
The PSC has also the power to MONEY IN SUCH FUND SHALL LIKEWISE BE
compel a public service auto-bus operator to CARRIED IN SUCH FUND. THIS FUND SHALL
change its route in view of the fact that NOT BE EXPENDED OTHERWISE THAN FOR
whatever rights the operator has to the DEPRECIATION, IMPROVEMENTS, NEW
utilization of the streets of a locality is only CONSTRUCTION, EXTENSIONS OR CONDITIONS
by virtue of the Certificate granted by the TO THE PROPERTY OF SUCH PUBLIC SERVICE.
Commission. SECTION 16 (L)
 Saint Louis University COMMERCIAL LAW 91
2012 BAR OPERATIONS

NOTES: the certificate holder has violated or deliberately

The rate base is PRESENT VALUE, refused to comply with the orders, rules and
and it would be wholly illogical to adopt a regulations of the Commission.
different rule for depreciation. b. There must be notice and hearing before the
revocation can be effected.
If the rate base is present fair value,
then the depreciation base as to depreciable - Without notice and hearing? The Order
property is the same thing. canceling the Certificate is void.

13. TO AMEND, MODIFY OR REVOKE AT ANY E.g. A single hold-up incident is not a ground for
TIME CERTIFICATE ISSUED WHENEVER THE revoking a certificate of public convenience.
FACTS AND CIRCUMSTANCES ON THE
STRENGTH OF WHICH SAID CERTIFICATE WAS N.B.
ISSUED HAVE BEEN MISREPRESENTED OR The grant of authority regarding
MATERIALLY CHANGED. SECTION 16 (M) unfranchised operation requires notice and
hearing.

14. TO SUSPEND OR REVOKE ANY Instances when NO NOTICE AND HEARING are
CERTIFICATE ISSUED WHENEVER THE necessary.
HOLDER THEREOF HAS VIOLATED OR
WILLFULLY AND CONTUMACIOUSLY REFUSED 1. Where the order is a mere order of investigation
TO COMPLY WITH ANY ORDER, RULE OR preparatory to the final hearing and decision of
REGULATION OF THE COMMISSION. SECTION the application.
16 (N) 2. Where the modification of the certificate is only
in form and not in substance, such as, an order
PROVIDED THAT THE COMMISSION FOR granting an application for substitution.
GOOD CAUSE MAY PRIOR TO THE HEARING 3. Where the order is merely to give additional time
SUSPEND FOR A PERIOD NOT TO EXCEED to register vehicles.
THIRTY (30) DAYS ANY CERTIFICATE OR THE 4. An order for good cause suspending for a period
EXERCISE OF ANY RIGHT OR AUTHORITY not to exceed thirty days any certificate or the
ISSUED OR GRANTED BY IT. exercise or authority to issued or granted.
5. Where the authorized line of the oppositor are
15. TO FIX, DETERMINE, AND REGULATE, AS different from those for the applicant, the former
THE CONVENIENCE OF THE STATE MAY cannot be considered to have substantial
REQUIRE, A SPECIAL TYPE OF AUTO-BUSSES, interest in the application so as to require his
TRUCKS, AND MOTOR TRUCKS TO BE personal notification of the hearing.
HEREAFTER CONSTRUCTED, PURCHASED,
AND OPERATED BY OPERATORS AFTER THE NOTE: That lack of notice is deemed
APPROVAL OF THIS ACT; cured where the petitioners were able to
timely oppose petitions. They are
TO FIX AND THE DETERMINE THE deemed to have been given due process of
SPECIAL REGISTRATION FEE FOR AUTO- law which simply means the opportunity to
BUSSES, TRUCKS, AND MOTOR TRUCKS SO be heard.
CONSTRUCTED AND OPERATED.
Where the Commission entered its
PROVIDED: THAT SAID FEES SHALL BE order without notice and hearing, the defect,
SMALLER THAN THOSE CHARGED FOR AUTO- if any, is cured by a hearing on the
BUSSES, TRUCKS, AND MOTOR TRUCKS OF petitioner’s motion to reconsider the order.
TYPES NOT MADE REGULATION UNDER THIS However, the defect is waived where the
SUBSECTION. SECTION 16 (O) applicant petitions for another extension of
sixty (60) days in which to install its
franchise.
LIMITATIONS ON THE POWER TO AMEND
PSC has the power to re-open case,
a. That before a modification, amendment, or under its power to revoke and modify.
revocation shall be allowed, it must be shown
that the conditions from which the certificate was  GROUNDS FOR SUSPENSION OR
granted no longer exist or have altered, or that REVOCATION OF CERTIFICATE
 Saint Louis University COMMERCIAL LAW 92
2012 BAR OPERATIONS

c. From time to time apprise and value the property

The right to operate a public utility is a of any public service, whenever in the judgment
privilege granted by the state. Thus it can be of the Commission it shall be necessary so to
revoked when the holder: do, for the purpose of carrying out any of the
provisions of this Act, and in making such
1. Violates contumaciously refuses to comply with valuation the Commission may have access to
any rule, order or regulation of the commission and use any books, documents, or records in
2. Is a mere dummy the possession of any department, bureau,
3. Ceases operation by placing his bus in storage office, or board of the government of the
4. Abandons the service Philippines or any political subdivision thereof;
d. To provide, on motion by or at the request of any
 NO REVIVAL OF THE CPC DUE TO THE consumer or user of a public service, for the
FOREGOING. examination and test of any appliance used for
measuring of any product or service of a public
The right to a certificate of public service;
convenience which has been forfeited by the e. To permit any street railway or traction company
holder’s voluntary and unauthorized to change its existing gauge to standard steam
abandonment of his service and failure to railroad gauge, upon such terms and conditions
register his equipment should not be revived as the Commission shall prescribe.
simply because the government would not be f. To grant to any public service special permits to
able to collect his tax liabilities. make extra or special trips within the territory
covered by its certificate of public convenience,
The mere failure of the Government to collect and make special excursion trips outside of its
the tax liabilities of a holder of a certificate of own territory if the public interest or special
public convenience is not a sufficient ground for circumstances required it: Provided, however,
revoking the Commission’s decision to cancel that in case a public service cannot render such
his certificate where the reasons therefore are extra service on its own line or in its own
that the holder has completely and voluntarily territory, a special permit for such extra service
abandoned, without authority, the services may be granted to any other public service;
required by his certificate. g. To require any public service to keep its books,
records, and accounts so as to afford an
intelligent understanding of the conduct of its
Stoppage of operations sufficient ground
business and to that end to require every public
for cancellation of certificate. But the mere
service of the same class to adopt a uniform
failure in good faith to operate temporarily is
system of accounting;
NOT a ground for cancellation of the CPC.
h. To require any pubic service to furnish annual
reports of finances and operations.
i. To require every public service to file with the
D. PROCEEDINGS OF COMMISSION
Commission a statement in writing, verified by
WITHOUT PREVIOUS HEARING.
the oaths of the owner of the president and the
The Commission shall have power,
secretary thereof, if a corporation, setting forth
without previous hearing, subject to
the name, title of office or position, and post
established limitations and exceptions
office address and the authority, power and
and saving provisions to the contrary:
duties of every officer, member of the board of
directors, trustees executive committee,
a. To investigate, upon its own initiative, or upon
superintendent, chief or head of construction
complaint in writing, any matter, concerning any
and operation thereof;
public service as regards matters under its
j. To require any public service to comply with the
jurisdiction;
laws of the Philippines and with any provincial
b. To require any public service to pay the actual
resolution or municipal ordinance relating
expenses incurred by the Commission in any
thereto and to conform to the duties imposed
investigation if it shall be found in the same that
upon it thereby or by the provisions of its own
any rate, toll, charge, schedule, regulation,
character, whether obtained under any general
practice, act or service thereof is in violation of
or special law of the Philippines;
any provision of this act or service thereof, is in
k. To investigate any or all accidents that may
violation of any provision of this Act or of any
occur on the property of any public service or
certificate, order, rule, regulation or requirement
directly or indirectly arising from or connected
issued or established by the Commission;
with its maintenance or operation in the
 Saint Louis University COMMERCIAL LAW 93
2012 BAR OPERATIONS

Philippines; to require any public service to give b. Special excursion trips outside of the
the Commission immediate and effective notice territory of the public service if public
of all or any such accidents, and to make such interest or special circumstances require
order or recommendation with respect thereto as it.
the public interest may warrant or require; c. It is a “well settled doctrine that for a
l. To require every public service as herein defined provisional permit an ex parte hearing
to file with it complete schedules of every suffices. The decisive consideration is
classification employed and of every individual the existence of a public need.”
or joint rate, toll fare or charge made, charged or
exacted by it for any product supplied or
rendered within the Philippines and, in the case OPERATIONS OF PUBLIC SERVICE
of public carriers, to file with it a statement REGULATIONS AND PROHIBITIONS
showing the itineraries or routes served as
specified in such requirement.
SECTION 18.
NOTES: It shall be unlawful – to engage in any public service
The Commission not only has the business without having first secured from the
general supervision over all public commission a certificate of public convenience or
utilities and the power to investigate, certificate of public convenience and necessity as
upon its own initiative or a complaint in provided for in this act, except grantees of legislative
writing, any just causes or grievances franchises expressly exempting such grantees from
against any of them, to make and enforce the requirement of securing a certificate from this
reasonable rules and regulations, and grant commission as well as concerns at present existing
relief in all proper cases and that it not expressly exempted from the jurisdiction of the
only has the power to make and enforce commission, either totally or in part, by the
all reasonable rules and regulations for provisions of section 13 of this act.
the operation of any public utility,
including water crafts, vessels and SECTION 19.
steamships. It shall be unlawful for any public
service:
The Commission can appoint a. To provide or maintain any service that is
members of the PNP stationed in the unsafe, improper or inadequate, or
provinces, as officials in charge with withhold or refuse any service which can
enforcing its regulations. be reasonably demanded and furnished;
b. To make or give directly or indirectly, by
itself or through its agents, attorneys or
The Commission has also the
brokers, or any of them, discounts or
express power to charge the expense of an
rebates on authorized rates or grant
investigation against the operators found
credit for the payment of freight charges;
guilty of violation of the conditions of his
c. To refuse or neglect, when requested by
certificate or of a law or ordinance, as it has
the director of posts or his authorized
power, for the same cause, to suspend or
representative, to carry public mail in the
revoke a certificate of public convenience.
regular trips of any public land
transportation service maintained or
POWER TO GRANT COMMISSION TO
operated by any such public service,
upon such terms and conditions and for
GRANT PERMITS WITHOUT HEARING.
a consideration in such amount as may
be agreed upon between the director of
 General Rule: posts and the carrier.
The Commission has no power to
grant special permits to operate a public
service without NOTICE AND HEARING.  NOTES:
The law does not require that the
 Exceptions: same charge be made for carrying
a. Permit to make extra or special trips passengers or property, unless all the
within the territory covered by the conditions are alike and contemporaneous.
certificate of public convenience; and It does not prohibit the charging of a
different rate for carrying passengers or
 Saint Louis University COMMERCIAL LAW 94
2012 BAR OPERATIONS

property when the actual cost of handling (Zamboanga Trans Co v Bachrach Motor
and transporting the same is different. It is Co, 52 Phil 244)
when the prove charged is for the
purpose of favoring persons or localities  Criterion for approval of a sale or
or particular kinds of merchandise that encumbrance of a certificate of public
the law intervenes and prohibits. It is convenience
favoritism and discrimination which the law
prohibits. Under Sec. 20(g), the Commission (now
regulatory boards, commissions and
SECTION 20. councils) has the power and authority to
The following are the acts which requires approve a sale or transfer of a CPC if:
approval of the commission: 1. There are just and
reasonable grounds for
a. To adopt, establish, fix, impose, maintain, collect making the transfer
or carry into effect any individual or joint rates, 2. The sale or transfer is not
communication, mileage or other special rate, detrimental to the public
toll, fare, charge, classification or itinerary. interest.
b. To establish, construct, maintain, or operate new This provision, it is believed is applicable to
units or extend existing facilities or make any all regulatory boards, commissions and
other addition to or general extension of the councils, as a result of the transfer of
service; powers and functions. The jurisdiction and
c. To abandon any railroad station or stop the sale supervision and control over all public
of passenger tickets, or cease to maintain an services originally vested in the Public
agent to receive and discharge freight at any Service Commission have been distributed
station now or hereafter established at which among the various regulatory boards,
passenger tickets are now or may hereafter be commissions and councils.
regularly sold, or at which such agent is now or
may hereafter be maintained, or make any  The effect of a sale of public service
permanent change in its time tables or itineraries property without the approval of the
on any railroad or in its service; pertinent public service regulatory body
d. To lay any railroad or street railway across any
highway; Such transfer is not binding against
e. Hereafter to issue any stock or stock certificates said commission and against third
representing an increase of capital; or issue any persons, and the original grantee
share of stock without par value; or issue bonds continues to be responsible upon the
or other evidence of indebtedness payable in franchise. Such approval is not however
more than one year from the issuance thereof; a condition precedent to the validity of
f. To capitalize franchise in excess of the amount, the contract. The approval is only
inclusive of any tax or annual charge actually necessary to protect public interest. And
paid to the government of the Philippines or any as between the parties, the contract is
other political subdivision thereof as the valid and binding even without such
consideration of the said franchise; approval. (Darang v Belizar, January 31,
g. To sell alienate, mortgage, encumber or lease 1967)
its property, franchises, certificates privileges or The transferor continues to be
rights, or any part thereof, with those of any regarded as operator – where the
public service. transfer is without PSC’s approval.
In a transfer NOT APPROVED by the
PSC, for damage caused a passenger the
 When may the public Service REGISTERED OWNER is DIRECTLY
Commission or Regulatory Board LIABLE to the passenger, BUT the
approve sale or mortgage of public TRNSFEREE is liable to the
service property? TRANSFEROR

The approval may be given before or after

the consummation of the sale or mortgage. h. To sell or register in its books the transfer or
If the approval takes place after the transfer, sale of shares of its capital stock, if the result of
the effect thereof is or may be retroactive. that sale in itself or in connection with another
previous sale, shall be to vest in the transferee
Saint Louis University COMMERCIAL LAW 95
2012 BAR OPERATIONS

more than forty percentum of the subscribed 1. The approval by the Commission is
capital of said public service. discretionary.
2. The approval by the Commission may be
i. To sell, alienate or in any manner transfer given before or after the consummation of
shares of its capital stock to any alien if the the alienation in question. If the approval
result of that sale, alienation, or transfer in itself takes place after the transfer, the effect
in itself or in connection with another previous thereof is or may be retroactive.
sale shall be the reduction to less that 60% of 3. The PSC has also jurisdiction to approve the
the capital stock belonging to Philippine citizens. sale of Certificate of Public Convenience
under receivership as well as the assigned
j. To issue, give or tender directly or made by the purchaser of his rights to such
indirectly, any free ticket, free pass or free or certificates to authorize an appellee to
reduced rate of transportation for passengers, operate the transportation lines covered
except to the following persons: thereby.
(1) officers, agents employees, 4. Certificates of Public Convenience are
attorneys, physicians and included in the term property- thus- it is
surgeons of said public service, liable to execution.
and members of their families; 5. In case of sale of CPC the approval of the
(2) inmates of hospitals or charity PSC is NOT a mere formality that could be
institutions and persons dispensed with or taken for granted.
engaged in charitable work;
(3) indigent, destitute and homeless  Since a franchise is personal in
persons when transported by nature, any transfer or lease thereof
charitable societies or hospitals, should be notified to the PSC so
and the necessary agents that the latter may take proper
employed in such transportation; safeguards to protect the interest of
(4) the necessary caretakers, going the public.
and returning, of livestock,  PSC not the courts, proper place to
poultry, fruit and other freight obtain conveyance of certificate and
under uniform and non- thresh out rights of parties in sale
discriminatory regulation; thereof.
(5) employees of sleeping car  Pendency in court of validity of
corporations and telegraph and transfer of franchise does not
telephone corporations, railway deprive PSC of power to approve
and marine mail service transfer thereof.
employees when traveling in  PSC has power to approve or
their official duty; disapprove sale even of Certificates
(6) post office inspectors, custom under judicial attachment.
officers and inspectors, and  PSC has power to approve or
immigration inspectors when disapprove sale even of certificate
engaged in inspection; subject of pending cancellation
(7) witnesses attending any legal proceedings in PSC.
investigation in which public
service is an interested party;  Court rulings as to the procedure for
(8) persons injured in accidents or obtaining approval.
wrecks, and physicians and 1. Under par g of Section 20, the approval
nurses attending such persons; required shall be given after notice to
(9) peace officers and men of the public and after hearing the persons
regularly constituted fire interested at a public hearing;
departments. 2. As to notice, it has been held that notice
of sale by publication is sufficient.
NOTES: 3. As to persons who may oppose the
Rules relative to the extent of the approval, it has been held that a party
power of the PSC with regard to approval of the not affected by the sale cannot legally
sale, alienation, or mortgage of public service oppose it.
property: 4. The requirement regarding publication
of the sale of the certificate of public
convenience only refers to an
 Saint Louis University COMMERCIAL LAW 96
2012 BAR OPERATIONS

application for the final approval of a 1. The RTC has concurrent jurisdiction
deed of sale and to an ex parte petition with the Commission over cases of
for provisional approval, and the an operator violating his or its
memorandum order of the Commission certificate.
only refers to the ale of temporary 2. However, the filing of the case before
certificates of 5 to 10 years life and not the Commission must not be
to those issued for a normal life of 25 premature.
years; 3. RTC may grant an injunction against
5. Moreover, the requirement regarding public service operators;
publication contained in the 4. RTC may grant the injunction against
memorandum order is merely directory a public service without authority to
which can be waived by the operate.
Commission if it finds good reasons for 5. The disobedience to an order of a
doing as to promote public interest. court forbidding a pubic service
company to collect a fare less than
that authorized by the PSC
PENALTIES FOR VIOLATIONS constitutes criminal contempt.
6. RTC may issue mandatory injunction
Section 21. to compel an operator to furnish
The Commission has the power to impose service.
FINES not exceeding P200.00 per day for every day
during which such default or violation continues – Cases where the RTC cannot grant injunctions:
which fine can be impose only AFTER DUE NOTICE 1. The RTC cannot issue injunctions against
AND HEARING. the orders of the Commission.
2. The RTC cannot enjoin an operator from
Effect if fine is not paid? doing what the Commission has authorized.
FAILURE to pay the FINE shall be DEEMED
GOOD AND SUFFICIENT REASON FOR THE Section 23.
SUSPENSION OF THE CERTIFICATE OF SAID Any public service corporation that shall:
PUBLIC SERVICE UNTIL PAYMENT SHALL BE a. perform, commit, or do any act
MADE. or thing forbidden or prohibited;
or
NOTES: b. shall neglect fail or omit to do or
 Where the PSC is empowered by perform any act or thing herein
franchise of operator only to fix to be done or performed
the rates – it has no authority to SHALL BE PUNISHED:
impose fines on said holder of a. a fine NOT exceeding
franchise. P25,000.00; or
 In order that a respondent public b. Imprisonment NOT exceeding 5
service may be held criminally years; or
liable – the act committed by it c. BOTH in the discretion of the
must be expressly prohibited. In court.
the absence of said express
prohibition the holder of the Section 24.
franchise cannot be held Any public service person shall:
criminally liable. a. perform, commit, or do any act
or thing forbidden or prohibited; or
Section 22. c. shall neglect fail or omit to do or
Observance of the orders, decisions, and perform any act or thing herein
regulations of the Commission and of the terms and to be done or performed SHALL
conditions of any certificate may also be enforced by BE PUNISHED by
mandamus or injunction in appropriate cases.
PROVIDED, that the Commission may compromise a. a fine NOT exceeding
any case that may arise under this Act in such P2,000.00; or
manner and for such amount as it may deem just b. Imprisonment NOT exceeding 2
and reasonable. years; or
c. BOTH in the discretion of the
NOTES: court.
 Saint Louis University COMMERCIAL LAW 97
2012 BAR OPERATIONS

NOTES:
PROVIDED:
*Prescription of crime.
That for operating a private
passenger automobile as a public service The period of prescription commences to
without having a certificate of public run from the day on which the crime is discovered by
convenience for the same the offender shall the offended party, the authorities or their agents.
be subject to the penalties provided for in The commencement of a criminal action interrupts
Section 67 (j) of Act 3992. the running of the period of prescription.

NOTE: The 60 day prescription period under

Section 26 of the Public Service Law is available
A person permitting his privately defense only in criminal or penal proceedings.
owned and registered car to be used for hire
is punishable under this Section. PROCEDURE AND REVIEW

Section 25. Section 29.

Any person who shall knowingly and willfully All hearings and investigations before the
neglect, fail or omit to do or perform or who shall Commission shall be governed by rules adopted by
knowingly and willfully cause or join or participate the Commission – and in the conduct thereof the
with others in causing any public service corporation Commission shall not be bound by the technical
or company to neglect, fail or omit to do or perform rules of legal evidence:
xxx shall be PUNISHED
a. a fine NOT exceeding PROVIDED: That the Public Service
P2,000.00; or Commissioner may summarily punish any person
b. Imprisonment NOT exceeding 2 who is guilty of misconduct in the presence of the
years; or presence of the Commissioner for CONTEMPT:
c. BOTH in the discretion of the
court. PENALTY: FINE – not exceeding P200.00
or for IMPRISONMENT – not exceeding 10 days or
Section 26. BOTH.
Any person who shall destroy, injure, or
interfere with any apparatus or appliance owned or To enforce the provisions of this Section, the
operated by or in charge of the Commission or its Commission may, if necessary request the
agents, shall be deemed guilty of a misdemeanor assistance of the MUNICIPAL POLICE for the
and upon conviction shall be PUNISHED execution of any order made for said purpose.
a. a fine NOT exceeding
P1,000.00; or NOTES:
b. Imprisonment NOT exceeding 6
months; or  The Rules of Court is suppletory to the
c. BOTH in the discretion of the rules of the Commission.
court.

Section 27.
The Act shall NOT have the effect to release COURT RULINGS AS TO PARTIES.
or waive any right of action by the Commission or by
any person xxx.
1. While the Commission is authorized to make
rules for the conduct of their business, it could
Section 28.
not seat at naught the fundamental rule of all
Violations of the orders, decisions, and
proceedings that only parties having a real
regulations of the Commission and of the terms and
interest will be heard.
conditions of any certificate issued by the
Commission shall prescribe after 60 days and
2. A party NOT affected or prejudiced cannot file
violations of the provisions of this Act shall
an opposition.
prescribed after 180 days.
 Saint Louis University COMMERCIAL LAW 98
2012 BAR OPERATIONS

3. One public service corporation cannot assume 2. The report of an inspector of the Commission
the name and be substituted in the place of must be made before the Court and subjected to
another public service corporation. cross examination.

4. A legal representative of the estate of the 3. The Commission in the exercise of its quasi-
deceased applicant may be substituted for the judicial and administrative functions.
latter.
4. Reception of evidence may be delegated to the
5. One who has been granted a legislative Chief Attorney of the Commission or an
franchise to operate an ice plant, although not assistant to a Commissioner.
yet an operator of such public utility.
5. The parties must be given opportunity to present
6. The fact that a party is the lessee of a line does their evidence.
not bar him from applying for a certificate of its
own in the same line. 6. The Commission may also bake notice of certain
facts.
7. A case involving the grant of Certificate of Public
Convenience to the respondent becomes moot
and academic where the respondent ceases to
be a bus operator, and it should be dismissed. COURT RULINGS AS TO REQUIREMENTS OF
PUBLICATION OF APPLICATION FOR HEARING
8. The PSC has no authority to authorize one
corporation to assume the name of another. 1. Among the rules adopted by the PSC is that
which requires that the order setting an
COURT RULINGS AS TO NOTICE application for hearing be published in two
newspapers of general circulation at least 10
1. A public service is entitled to notice as to the days prior to the date of the hearing.
charges against it, and to have an opportunity to
answer such charge and to defend itself against 2. But where the corresponding notice of the
it. application was published and served upon the
parties and the application was amended by
2. A party affected by an order amending a reducing the same line applied for, the failure to
certificate is entitled to a notice. publish notice of the amendment cannot
possibly impair the rights of any operator or
3. An interested party who is not given notice is affect the jurisdiction of the PSC to entertain the
not bound by the decision. petition as amended and to grant the same.

4. In certain cases, a defect in the order of a 3. The rules of procedure in the Commission
publication for a certificate of public convenience require an applicant for a certificate to operate a
will not vitiate the certificate. bus or TPU auto-truck service to publish in two
newspapers of general circulation the order
5. Notice of hearing may however be waived. setting his application for hearing and in addition
to sent by registered mail copy of the application
6. Where personal notice is required by the notice and the order of hearing to all operators who
of hearing by the notice of hearing itself, failure may be affected thereby as appearing in the list
to do so vitiates decision not withstanding furnished by the Commission.
publication of notice.
COURT RULINGS AS TO PSC DECISION

1. A decision of the Commission must have some

COURT RULINGS AS TO RECEPTION OF evidence to support it.
EVIDENCE
2. But a finding of fact is not necessary for the
1. The Commission cannot dismiss a case validity of the Commission’s decisions.
provisionally without receiving evidence.
3. A decision of the Commission must be based on
conditions at the time of hearing or decision.
 Saint Louis University COMMERCIAL LAW 99
2012 BAR OPERATIONS

4. A decision of the Commission cannot include in manner or inquiry pending before the
a certificate a line excluded during the hearing. Commission and require the production of
books, papers, tariffs, contracts,
5. There is no time fixed for the Commission within agreements, and all other documents which
which to render its decisions. the Commission may deem necessary in
any proceeding.
6. And the fact that the decision was rendered
before the filing of the memorandum of the 2. Any person who shall neglect or refuse to
parties is no ground for its reversal. answer lawful inquiry or produce before the
Commission books, papers, tariffs,
7. Unless actually without basis, the interpretation contracts, agreements, and all other
documents; or to answer any lawful inquiry
based upon its orders by the PSC should not be
shall be punished by a fine not exceeding
disturbed by the Supreme Court.
P5,000.00 or by imprisonment not
exceeding 1 year, or both, in the discretion
8. PSC is empowered to approve provisional rates of the court.
of utilities without prior hearing.
3. The Commissioner and associate
9. Law confines in administrative office questions commissioners, the chiefs of divisions, the
of facts, jurisdictions of such office over the attorneys of the Commission, and the
Courts. deputy secretaries shall have the power to
administer oaths in all matters under the
 Contempt Proceedings jurisdiction of the Commission.

Under Section 29 – the Commission may 4. Any person who shall testify falsely or make
summarily punish a person for direct contempt any false affidavit or oath before the
but not for indirect contempt – at least insofar as Commission or before any of its members
their jurisdiction over public services is shall be guilty of perjury, and upon
concerned. conviction thereof in a court of competent
jurisdiction, shall be punished as provided
Direct Contempt by law.

- Direct contempt may consists in: 5. Witnesses appearing before the

Commission in obedience to subpoena or
1. misconduct in the presence of the subpoena duces tecum, shall be entitled to
Commissioners or so near them as to interrupt receive the same fees and mileage
the hearing or session or any proceedings allowance as witnesses attending RTC civil
before them; cases.

2. refusal to be sworn as a witness or to answer as 6. Any person who shall obstruct the
such when lawfully required to do so. Commission or either of the Commissioners
while engaged in the discharge of official
Indirect Contempt duties or who shall conduct himself in a
rude, disorderly or disrespectful manner
- Indirect contempt may consists of: before the Commission – upon conviction of
the same shall be punished for EACH
1. failure to obey a subpoena issued by the offense by a FINE not exceeding P1,000.00
Commission requiring the attendance and or by IMPRISONMENT not exceeding 6
testimony of a witness of the production of months, or BOTH in the discretion of the
necessary books, papers and documents, court.

2. refusal to comply with any order or decision Section 31.

lawfully entered by the Commission.
No person shall be excused from a
Section 30. subpoena or subpoena duces tecum issued by the
Commission EXCEPT when the testimony or
1. The Commission may issue subpoena and evidence required of him may tend to incriminate
subpoena duces tecum, for witnesses in any him.
 Saint Louis University COMMERCIAL LAW 100
2012 BAR OPERATIONS

Without the consent of the interested party The right to be heard and present
NO member or employee of the Commission shall evidence in support of the allegations,
be compelled or permitted to give testimony in any contained in his motion of intervention,
civil suit to which the Commission is not a party, with naturally follows, provided the motion for
regard to secrets obtained by him in the discharge of intervention or reconsideration state facts
his official duty. sufficient to justify a reconsideration of the
questioned order and the granting of a new
Section 32. hearing.

The Commission is also allowed to take Section 35.

deposition of witnesses who are residing within or
without the Philippines to be taken in the manner The Supreme Court is hereby given
prescribed by the Rules of Court. jurisdiction to review any order, ruling or decision of
the Commission and to modify or set aside such
(See: Deposition of Witnesses - Rules 23 to 29 – order, ruling or decision when it clearly appears that
1997 Rules on Civil Procedure). there is no evidence before the Commission to
support reasonably such order, ruling, or decision, or
Section 33. that the same is contrary to law, or that it was
without jurisdiction of the Commission.
Every order made by the Commission shall
be served upon the person or public service affected NOTES:
thereby, within 10 days from the time said order is
filed by personal delivery or by ordinary mail, upon An unverified Motion for
the attorney of record or in case there be no attorney Reconsideration containing generalities
of record, upon the party interested; and in case cannot justify setting aside of a decision
such certified copy is sent by registered mail, the handed down in response to a clear public
registry mail receipt shall be the prima facie need, where there is evidence that the
evidence of the receipt of such order by the public buses operated by the movant cannot
service in due course of mail. accommodate all the passengers on those
lines.
Section 34.
Remedies to set aside order of Commission.
Any interested party may request the
reconsideration of any order, ruling, or decision of There are only two remedies available in the
the Commission by means of a petition filed not later Supreme Court to set aside an order of the
than 15 days after the date of the notice of the order, Public Service Commission.
ruling, or decision in question.
1. Petition for review – see Rule 45, Rules
NOTES: of Court

Limitation on Commission’s power to order 2. Petition for Certiorari – see Rule 65,
rehearing. Rules of Court

A rehearing cannot be granted by N.B.

the PSC for the reconsideration of a
question which has been decided by the SC RTC not the CA has jurisdiction over actions to
on appeal to that tribunal. annul orders of the Commission – because even
the above mentioned remedies was indicated to
While the Commission is given wide be available only to the SC – still you need to
power to grant rehearing, a distinction must follow the Rules on Hierarchy of Courts which
be made between those orders that remain provides that Petition for Review or on Certiorari
entirely within the powers of the Commission shall first be filed before the RTC, to CA and then
and those orders which are brought to the to SC.
SC for review and final decision.
 As a rule, Court does not interfere
Motion must be based on facts. with administrative action prior to
its completion and finality.
 Saint Louis University COMMERCIAL LAW 101
2012 BAR OPERATIONS

 Construction given by an the PSC must be dismissed with

administrative agency possessed costs.
of the necessary special
knowledge, expertise and Section 37.
experience deserves great weight
and respect, term radiotelephony The institution of a writ of certiorari or other
includes cellular phones. (PLDT special remedies in the Supreme Court shall in no
v. NTC, 190 SCRA 717). case supersede the Supreme Court shall so direct,
and the appellant may be required by the Supreme
Section 36. Court to give bond in such form and of such amount
as may be deemed proper.
Any order, ruling, or decision of the
Commission may be reviewed on the application of Section 38.
any person or public service may be reviewed on the
application of any person or public service affected The Chief of the legal division or any other
thereby, by certiorari in appropriate cases, or by attorneys of the Commission shall represent the
petition to be known as petition for review, which same in all judicial proceedings. It shall be the duty
shall be filed within 30 days from the notification of of the Sol Gen to represent the Commission in any
such order, ruling or decision. judicial proceedings if, for special reason, the
Commissioner shall request his intervention.
NOTES:
Section 39.
The rule on the 15 day and 30 day
period is the same in the Energy Any proceeding in any court of the
Regulatory Period. But as to the LTFRB Philippines directly affecting an order of the
and the NTC – the period within which Commission or to which the Commission is a party,
appeal may be made is within 30 days shall have preference over all other civil proceedings
from notice. pending in such court, EXCEPT election case.

As to the National Water

Resources Council – now Board- appeals
CONVENTION FOR THE UNIFICATION OF
to the RTC must be made within 15 days
CERTAIN RULES RELATING TO
from the date the party appealing
INTERNATIONAL CARRIAGE BY AIR, SIGNED
receives a copy of the decision.
AT WARSAW ON OCT. 12 1929 (WARSAW
CONVENTION)
As to the Maritime Industry Authority –
appeal may be made within 30 days from notice.
I) Scope
 Petition for review filed seven (7)
months after receipt of notice of
denial is considered to have been This Convention applies to all international
filed out of time. carriage of persons, luggage, or goods performed by
aircraft for reward. It applies equally to gratuitous
 Objections not raised in the carriage by aircraft performed by an air transport
Commission cannot be raised on undertaking.
appeal.

 Compromise agreement of parties >This also applies to carriage performed by the

bars certiorari or review. State or by legally constituted public bodies provided
it complies with the condition of the above stated.
 Motion for reconsideration not a
condition precedent for appeal.
>This does not apply however to carriage performed
 If the petitioner shows lack of under the terms of any international postal
interest in the case – the petitioner convention.
has no standing in the Court, and
his petition for review of an order of
 Saint Louis University COMMERCIAL LAW 102
2012 BAR OPERATIONS

“International carriage: means any carriage in C) Air consignment note

which according to the contract made by the parties,
the place of departure and the place of destination,
Every carrier of goods has the right to require
whether or not situated either within the territories of
the consignor to make out and deliver to him an
two High Contracting parties, or within the territory of
“Air consignment note” And every consignor has
a single High Contracting party, if there in agreed
the right to require the carrier to accept this
stopping place within the territory subject to the to
document.
the laws of the state.

>The absence or irregularity or loss of this note

>A carriage without such agreed stopping place
shall not affect the validity and existence of the
between territories subject to the law of the
contract. Provided that if the carrier accepts
contracting parties is not deemed to be international
goods without the air consignment note or the
for the purposes of this act.
particulars such as the place of destination,
name and address of the consignee, apparent
condition of the goods quantity and volume of
A carriage to be performed by several
the goods, the carrier cannot avail of the
successive air carriers is deemed, for the purpose of
provision limiting his liability in case of a loss or
this act to be one undivided carriage, if it has been
damage to the goods.
regarded by the parties as a single operation,
whether it had been agreed upon under the form of
a single contract or of a series of contract.
> The air consignment note is prima pacie
evidence of the conclusion of the contract, of
the receipt of the goods and of the condition of
II) Documents of carriage
carriage.

A) Passenger ticket
For the carriage of passenger the carrier must D) Rights of the consignor
deliver a passenger ticket which shall include the
place and date of issue, destination and date of
1) Consignor is responsible for the correctness
departure, agreed stopping place, and the liability or
of the particulars of the goods
the carrier under international law.
2) Liable for damage suffered by the carrier or
any other person by reason of the
irregularity, incorrectness, or
>The absence, irregularity, or loss of the passenger
incompleteness of the said particulars and
ticket does not affect the existence and the validity
statements.
of the contract.
3) Right of stoppage or to withdraw the goods
>Should the carrier accept passenger without ticket, at the aerodrome of departure or destination
the carrier cannot avail of the provision of this or to be delivered to other person other than
Convention to exclude or limit his liability. the consignee.

>If it is impossible to carry out the orders of the

B) Luggage ticket consignor the carrier must inform him of such
For the carriage of luggage, other than small impossibility.
personal objects of which the passenger takes
charge himself, the carrier must issue a luggage
ticket. which shall be in duplicate, one part for the
> If it involves the disposition of the goods the carrier
passenger and the other for the carrier.
must demand the consignment note, otherwise the
>The absence, irregularity, or loss of the carrier is liable to the consignee or to anyone in
luggage ticket does not affect the validity of the possession of the goods in case of damage to the
contract unless in case the carrier did not deliver a goods.
ticket, or the ticket did not contain the statement of
the number and weight of the luggage and the
statement that the carriage is subject to the rules >The right of the consignor ceases at the moment
relating to liability established by this convention, the the consignee received the goods.
carrier cannot avail of the provision of the
convention limiting his liability.
 Saint Louis University COMMERCIAL LAW 103
2012 BAR OPERATIONS

E) Right of the consignee to have arrived, or from the time the carrier was
1) To deliver to him the goods upon arrival at the stopped.
place of the destination.
2) To deliver to him the consignment note  
 

3) To be given notice of the arrival of the goods. VII. CORPORATION CODE of the Philippines 

4) Right to enforce liability against the carrier in (BP Blg. 68, effective May 01, 1980) 
case of loss.

I. General Provisions
F) Liability of the carrier
II. Incorporation and Organization of
1) Liable for damage in the event of death or Private Corporations
wounding of passenger or any other bodily injury III. Board of Directors/Trustees/Officers
if the injury or damage take place on board or in IV. Powers of Corporation
the course of the operation of embarking or V. By-Laws
disembarking. VI. Meetings
2) To damages if the goods were damaged during VII. Stocks and Stockholders
the carriage by air. VIII. Corporate Books and Records
>The period of carriage does not extend to carriage IX. Merger and Consolidation
by land or by sea except if the carriage by land… is X. Appraisal Right
for the purpose of loading, delivery, transshipment, XI. Non-Stock Corporations
any damage is presumed to have been the result of a. Members
an event which took place during the carriage by air. b. Trustees and Officers
c. Distribution of Assets in Non-Stock
3) Liable for damage in case of delay in the Corporations
carriage of the goods or luggage. XII. Close Corporations
XIII. Special Corporations
F) Carrier is not liable. a. Educational Corporations
1) If the carrier act with necessary measure to b. Religious Corporations
avoid the damage XIV. Dissolution
2) If the carrier proves that the damage loss was XV. Foreign Corporations
due to negligence in the handling of the aircraft XVI. Miscellaneous Provisions
or pilotage.
3) May be exonerated wholly or partially if carrier
proves contributory negligence on the part of the I. GENERAL PROVISIONS
injured person.
A. CORPORATION DEFINED
 The carrier cannot avail of the provision of this
Corporation
convention in limiting or excluding him from any
-It is an artificial being created by operation
liability if the damage was caused by the willful
of law, having the right of succession and the
misconduct on his part.
powers, attributes and properties expressly
 Carrier is not entitled to the provision limiting his
authorized by law or incident to its existence (Sec.
liability if the damage was caused by the agent
2).
of the carrier acting within the scope of his
employment.
Attributes of a Corporation (CAPS)
1. Created by operation of law
G) Venue of action. 2. Artificial being
1) RTC where the business of the carrier is 3. Powers, attributes and properties expressly
located authorized by law or incident to its existence
2) RTC of the place where the contract was made 4. Right to Succession
3) Court of the place of destination
4) Court of the place of departure a. Created by operation of law. No Private
5) Court where the place has stopped over Corporation could validly exist unless there is a
law that creates it. Consent of the state is
needed. If not made by operation of law, it
H) Presciption of action.
becomes a corporation by estoppel.
Within two (2) years from the date of arrival
at the destination, or from the time the aircraft ought
 Saint Louis University COMMERCIAL LAW 104
2012 BAR OPERATIONS

b. Artificial being. It is not a natural person. It is not anxiety, mental anguish or moral shock.
liable for the acts of its stockholders or Mental suffering can be experienced only by
members. one having a nervous system.
c. Powers, attributes and properties. Acquire - Exception: If the good reputation of a
real/personal properties. corporation is debased or besmirched resulting
Powers: in social humiliation, this may be a ground for
(a) Those expressly authorized by law. recovery of moral damages and attorney’s fees.
1. Secs. 36-44 Corporation Code;
2. Articles of Incorporation/By laws; Doctrine of separate personality
(b) Those incidental to its existence; - A corporation has a juridical personality
1. Those implied from its express powers; separate and distinct from that of its
2. Those fairly related or incidental to its stockholders or members.
existence, direct or immediate to the - Used for purposes of convenience and to
furtherance of the corporation’s business. subserve the ends of justice
Requirements so that a private corporation - Consequences:
could hold real properties in the 1. Ownership of property, capacity to sue and
Philippines: be sued in its own right (Art. 46, NCC);
1. 60% shareholdings should at least 2. Entitlement to constitutional rights; eg. Due
belong to Filipinos. It is the extent of process, equal protection;
shareholdings and not the number of 3. Liability for crimes or torts;
persons. 40% shareholdings for aliens; 4. Cannot always claim equal rights with
2. Place of incorporation should be in the natural persons; i.e. entitlement to moral
Philippines. If incorporated outside the damages.
Philippines even if 60% of the
shareholdings is Filipino owned, it is a Piercing the veil of corporate fiction
foreign corporation. - This doctrine allows the State to disregard the
 If incorporated in the Philippines but fiction of juridical personality of the corporation
less 60% stock is Filipino owned it is where the entity is formed or used for non-
a Philippine (domestic) corporation, legitimate purposes.
but it could not acquire real - Grounds:
properties in the Philippines. 1. Where corporate fiction is used to defeat
 Acquired properties belong to the public convenience;
corporation, not to the  Corporate Fiction is a personality
stockholders/members, because of separate from the
its separate and distinct personality. stockholders/members.
d. Right to succession. The corporation is not  Public Convenience: Instead of dealing
affected by anything that happens to its with all the individual stockholders, it is
stockholders (insolvency, death, incapacity, for public convenience to deal with the
etc). It continues to exist for the term stated corporation alone.
in its articles of incorporation except when 2. Where corporate fiction is used to justify a
earlier dissolved. wrong, to protect fraud, or to defend a crime;
3. Where the corporation serves as a mere
Right of Stockholders in Corporate Property alter ego of another person;
a. There is no real interest in the corporate 4. Where the corporation serves merely as an
property. It is a mere expectancy inchoate in instrument of another corporation.
nature; 5. Where the corporation is controlled by
b. It ripens into real right only upon dissolution aliens, in violation of the law as where it was
of the corporation on the assumption that all organized under Philippine laws but most of
debts are already paid; its stockholders are Germans (normally a
Filipino corporation), the Supreme Court
Suit went beyond the corporate fiction during the
- A corporation cannot represent its stockholders war and considered it as an enemy
in a suit. corporation.
- Gen. Rule: A corporation is not entitled to a
claim for moral damages. Alter Ego or Instrumentality Rule
 Reason: Being an artificial person, it cannot - Requisites:
experience physical suffering or such 1. There must be control, not merely majority
sentiments as wounded feelings, serious or complete stock control, but complete
 Saint Louis University COMMERCIAL LAW 105
2012 BAR OPERATIONS

domination, not only of finances but of policy – a corporation (1) which has capital stock
and business practice in respect to the divided into shares and (2) is authorized to
transaction attacked so that the corporate distribute to the shareholders dividends or
entity as to this transaction had at the time allotments of the surplus profits on the basis
no separate mind, will or existence of its of the shares held. (Sec. 3)
own; (control) b. Non-Stock Corporation
2. Such control must have been used by the – a corporation which does not issue stock
defendant to commit fraud or wrong, to and distribute dividends to its members.
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and 2. As to number of persons composing the
unjust act in contravention of plaintiff’s legal corporation
right (breach of duty) ; and a. Corporation Aggregate
3. Such control and breach of duty must – a corporation consisting of more than one
proximately cause the injury to the plaintiff. member or corporator.
b. Corporation Sole
 In piercing the veil, the stockholders become – a religious corporation which consists of
liable instead of the corporation. one member or corporator only and his
successors, such as a bishop. (Sec. 110)
 Do not immediately pierce the veil just because
a ground exists. Determine first the facts and 3. As to legal status
circumstance. a. De Jure Corporation – organized in
accordance with the requirements of law;
 Steps: existing both in fact and in law.
A. Determine first the following Items: b. De Facto Corporation – organized with a
1. Common Ownership colorable compliance with the requirements
2. Identity of directors; of a valid law; existing in fact but not in law.
3. Manner of keeping records; Its existence cannot be inquired collaterally.
4. Manner of conducting business. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding. (Sec.
B. Is there a misuse of corporate fiction? 20)
- The mere control by a single person of the  Why quo warranto?
majority shares is not a ground to pierce 1. It is the State’s right and authority
the veil [Sunio vs. NLRC, 127 SCRA 390 (1984)] which are invaded and usurped;
- Evidence of fraud must be proven clearly 2. It would produce endless confusion
and convincingly [Del Rosario vs. NLRC, 182 and hardship and probably destroy
SCRA 777 (1990)] the corporation if the legality of its
existence could be questioned in
Purpose of Piercing the Veil every suit;
1. To seek satisfaction of an obligation directed 3. The rule is in the interest of the
against the stockholders; public and is essential to the validity
2. Direct always the action against the of business transactions with
stockholders: If directed against the corporation, corporations.
you cannot anymore pierce the veil. A suit
cannot be brought against the corporation to  How can there be a de facto status?
satisfy the obligation of its stockholders. {Umali 1. Defect in the acknowledgement;
case [182 SCRA 529 (1990)]}
2. Incomplete requirements;
3. Residency requirement is
Net Effect of Piercing the Veil overlooked;
a) Only One Corporation: Liability attaches to its but it was still issued a certificate of
stockholders; incorporation.
b) Two or more Corporations: The court treats
them as only one.  Requisites of a de facto corporation:
1. Existence of a valid law under which it
may be incorporated;
B. CLASSES OF CORPORATIONS 2. A bona fide attempt in good faith to
incorporate under such law;
1. As to existence of shares of stock 3. Actual use or exercise in good faith of
a. Stock Corporation corporate powers; and
 Saint Louis University COMMERCIAL LAW 106
2012 BAR OPERATIONS

4. Issuance of a certificate of incorporation Parent company demand representation in

by the SEC as a minimum requirement the Board meetings of its subsidiary.
of good faith.
5. As to place of incorporation
 A de jure corporation can successfully a. Domestic Corporation
resist a suit by the State brought to – a corporation formed, organized, or
challenge its existence; a de facto existing under Philippine laws.
cannot sustain its right to exist. b. Foreign Corporation
– a corporation formed, organized or
c. Corporation by Estoppel existing under any laws other than those of
- a group of persons that assumes to act as the Philippines. (Sec. 123)
a corporation knowing it to be without
authority to do so, and enters into a 6. As to Functions
transaction with a third person on the a. Public Corporation
strength of such appearance. It is precluded – one formed or organized for the
to deny its existence in an action under said government of a portion of the State for the
transaction. It is neither a de jure nor de general good and welfare.
facto corporation. (Sec. 21) b. Private Corporation
 Doctrinal Basis: It is founded on – those formed for private purpose, usually
principles of equity and is designed to for profit-making.
prevent injustice and unfairness. It  Private corporation includes:
applies when persons assume to form a 1. Government –owned or
corporation and exercise corporate controlled corporation – one
functions and enter into business created or organized by the
relations with third persons. government or of which the
government is the majority
d. Corporation by Prescription – one which stockholder; it is not for the
has exercised corporate powers for an government of a portion of the
indefinite period without interference on the State, e.g. GSIS, SSS, PNRC
part of the sovereign power and which by 2. Quasi-Public Corporation (a.k.a.
fiction of law is given the status of a “public utility” or “public service
corporation, e.g. Roman Catholic Church. corporation”)– a private corporation
which have accepted from the State
4. As to relationship of management and control the grant of franchise or contract
a. Parent/Holding Corporation involving the performance of public
– one which controls another as a subsidiary duties but which are organized for
by the power, either directly or indirectly, to profit. – e.g. electric, water,
elect management. It is one that holds telephone and transportation
stocks in other companies for purposes of companies.
control rather than for mere investment.  Officers and employees of
GOCCs with original Charter
b. Subsidiary Corporation (created by special law) =
i. Majority-owned Subsidiary – its under Civil Service
capital stock (51% to 94%) is owned  Those incorporated under the
by another corporation. Corporation Code, governed by
ii. Wholly-Owned Subsidiary – its the Labor Code. (Const., Art IX-
capital stock (95% to 100%) is owned B, Sec. 2 [1])
by another corporation.
c. Affiliates Tests to determine the nationality of
– companies subject to the common control corporations
of the Holding Corporation. 1. INCORPORATION TEST
d. Parent and Subsidiary Corporation – determined by the state of incorporation,
– separate entities with power to contract regardless of the nationality of the stockholders.
with each other. The BOD of the Parent 2. DOMICILE TEST
Company determines its representatives to – determined by the State where it is domiciled.
attend and vote in the stockholders’ meeting 3. CONTROL TEST or WAR-TIME TEST
of its subsidiary. The stockholders of the
 Saint Louis University COMMERCIAL LAW 107
2012 BAR OPERATIONS

– determined by the nationality of the controlling 2. 70% Filipino owned

stockholders or members. It is applied in times a. Advertising Industry
of war. b. Banks other than rural banks and new
banks established by consolidation of
Domicile branches or agencies of foreign banks in the
– the domicile of a corporation is the place fixed by Philippines
law creating or recognizing it, in the absence c. Private development Banks
thereof, it shall be understood to be the place where d. Savings and Loan associations
its legal representation is established or where it 3. 60% Filipino owned
exercises its principal functions (Art. 51, New Civil a. Financing companies - 60 % of its capital
Code) stock
b. Fishing and business activity relating to
Corporation as a Philippine national (under RA fishing Industry – 60% of its capital stock
7042, Foreign Investment Act of 1991) c. Exploration, Development, and Utilization
1. A corporation organized under the law of the of Natural Resources
Philippines of which at least 60% of the d. Owners of lands
outstanding capital stock entitled to vote is e. Operation of Public Utility
owned by Filipino citizens; f. Educational institutions other than those
2. A foreign corporation licensed as doing business established by religious groups
in the Philippines of which 100% of the g. Any business reserved by Congress
outstanding capital stock entitled to vote is 4. Majority Owned by Filipinos
wholly owned by Filipinos; and a. Investment House
3. Where a corporation and its non-Filipino
stockholders own stocks in a SEC-registered Advantages of a corporation over an
enterprise, at least 60% of the capital stock unregistered association
outstanding and entitled to vote of both 1. Enjoys perpetual succession under corporate
corporations and at least 60 % of the members name and in an artificial form;
of the Board of Directors of both corporations 2. Can take and grant property;
must be Filipino citizens (Double 60% Rule) 3. Can contract obligations;
 The law applies the Control Test both 4. Can sue and be sued in its corporate name as a
with respect to the ownership of shares juridical person;
entitled to vote and the membership in 5. Capacity to receive and enjoy common grants
the BOD. and privileges and immunities;
6. No personal liability beyond value of their
Grandfather rule shares.
- The method by which the percentage of Filipino
equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, C. CLASSIFICATION OF SHARES
provided for under the constitution and other
nationalization laws, is computed, where there 1. Common Shares
are corporate shareholders. – the basic class of stock ordinarily and usually
- Shares belonging to corporations or issued without extraordinary rights and
partnerships at least 60 % of the capital of which privileges, and the owners thereof are entitled to
is owned by Filipino citizens shall be considered a pro rata share in the profits of the corporation
as of Philippine nationality. and in its assets upon dissolution and, likewise,
- But if the percentage of Filipino ownership in the in the management of its affairs without
corporation or partnership is less than 60%, only preference or advantage whatsoever.
the number of shares corresponding to such
percentage shall be counted as of Philippine 2. Preferred Shares
nationality. – those issued wit par value, and preferences
either with respect to (a) payment of dividends
Nationalized corporations: (b) distribution of assets after dissolution, or (c)
1. 100% Filipino owned: such other preferences as may be stated in the
a. Mass media (radio, TV, and printed) Articles of Incorporation which are not violative
b. Rural Banks – 100% of its capital stock of the Corporation Code.
c. Rice and corn industry – Kinds of Preferred Shares:
d. Security, watchman, and detective a) Preferred share as to assets
agency b) Preferred share as to Dividends
 Saint Louis University COMMERCIAL LAW 108
2012 BAR OPERATIONS

- Cumulative Preferred Share Incorporation, unless otherwise provided

– a share which entitles the holder thereof in the Corporation Code.
not only to the payment of current  Redeemable shares may be redeemed
dividends but also to dividends in arrears. regardless of the existence of unrestricted
If the stipulated dividend is not paid in a retained earnings provided that the
given year, it shall be added to the corporation has, after such redemption,
dividend which shall be due the following sufficient assets in its books to cover debts
year and the accumulated dividends must and liabilities inclusive of capital stock.
be paid to the shareholder before any  Redemption may not be made where the
dividend may be paid to common corporation is:
stockholders. a. insolvent; or
- Non-Cumulative Preferred Share b. if such redemption would cause
– It is a share which entitles the holder insolvency or inability of the corporation
thereof to the payment of current to meet its debts as they mature.
dividends only in preference to common
stockholders. 5. Treasury Shares
- Participating Preferred share – Shares which have been lawfully issued by the
– A share which gives the holder thereof corporation and fully paid for and later
not only the right to receive the stipulated reacquired it either by purchase, redemption,
dividends but also to participate with the donation, forfeiture or other lawful means.
holders of common shares in the  If purchased from stockholders: The
remaining profits pro rata after the transaction in effect is a return to the
common shares have been paid the stockholders of the value of their investment
amount of the stipulated dividend at the in the company and a reversion of the
same preferred rate. shares to the corporation. The corporation
- Non-Participating Preferred Share must have surplus profits with which to buy
– It is a share which entitles the holder the shares so that the transaction will not
thereof to receive the stipulated preferred cause impairment of the capital.
dividends and no more. The balance, if  If acquired by donation from the
any, is given entirely to the common stockholders: The act would amount to
stocks. surrender of their stock without getting back
- Cumulative –Participating Preferred their investments that are, instead voluntary
Share given to the corporation.
– The holder is entitled not only to  Treasury shares need not be sold at par or
dividends in arrears but also, after issued value but may be sold at the best
receiving his preferred share of dividends, price obtainable, provided it is reasonable.
to participation with the holders of When treasury shares are sold below their
common stocks in the remaining profits. par or issued value, there can be no
watering of stock because such watering
3. Deferred Shares contemplates an original issuance of shares.
– Those shares in which the payment of
dividends upon them is expressly postponed 6. Founder’s Shares
until the preferred and common shares are paid. – shares issued to organizers and promoters of
a corporation in consideration of some supposed
4. Redeemable Shares right or property. Shares classified as such in
– those which permit the issuing corporation to the AI which may be given special preference in
redeem or purchase its own shares. voting rights and dividend payments. But if an
 Limitations: exclusive right to vote and be voted for as
a. Redeemable shares may be issued only director is granted, it needs the approval of the
when expressly provided for in the SEC, and cannot exceed 5 years from the date
Articles of Incorporation; of approval.
b. The terms and conditions affecting such
shares must be stated both in the 7. Par Value Shares
articles of Incorporation and in the – Shares with a value fixed in the certificates of
certificates of stock representing such stock and in the Articles of Incorporation.
shares;
c. Redeemable shares may be deprived of 8. No Par Value Shares
voting rights in the Articles of
 Saint Louis University COMMERCIAL LAW 109
2012 BAR OPERATIONS

– Shares having no par value but have issued issued value of said stock. Both par and no
value stated in the certificate or AI. par stocks can thus be watered stocks.
 Limitations:
a. No par value shares cannot have an 12. Escrow stock
issued price less than P5.00; – deposited with a third person to be delivered to
b. The entire consideration for its issuance a stockholder or his assign after complying with
constitutes capital so that no part of it certain conditions, usually payment of
should be distributed as dividends; subscription price.
c. They cannot be issued as preferred
stocks; 13. Convertible Shares
d. They cannot be issued by banks, trust – shares that are changeable by the stockholder
companies, insurance companies, from one class to another at certain price and
public utilities and building and loan within a certain period.
associations;  Convertibility of Shares
e. The AI must state the fact that it issued a. Preferred to Common – in the absence
no par value shares as well as the of an express provision in the AI as to
number of shares; that convertibility, preferred shares
f. Once issued, they are deemed fully paid cannot be converted to common.
and non-assessable. (Sec. 6) b. No Par Value to Par Value – allowed by
SEC provided there would be no change
9. Voting Shares in the stockholders’ percentage interest
– shares with a right to vote. in the total assets of the corporation.

10. Non-Voting Shares 14. Street Certificate

– shares without right to vote. – a stock certificate endorsed by the registered
 The law only authorizes the denial of holder in blank and the transferee can command
voting rights in the case of redeemable its transfer to his name from the issuing
shares and preferred shares, provided corporation.
there shall always be a class or series of
shares which have complete voting 15. Over-issued/Spurious Stock
rights. – stock issued in excess of the authorized
 These redeemable or preferred shares, capital stock. Its issuance is null and void.
when such voting rights are denied, are
still entitled to vote on the following: 16. Fractional Share
a. Amendment of Articles of – a share with a value less than one full share.
Incorporation;
b. Adoption and amendment of by- Doctrine of equality of shares
laws; - Where the Articles of Incorporation do not
c. Sale or disposition of all or provide for any distinction of the shares of stock,
substantially all of corporate all shares issued by the corporation are
property; presumed to be equal and enjoy the same rights
d. Incurring, creating or increasing and privileges and are also subject to the same
bonded indebtedness; liabilities (Sec. 6).
e. Increase or decrease of capital
stock;
f. Merger or consolidation or II. INCORPORATION AND ORGANIZATION OF
corporations; PRIVATE CORPORATIONS
g. Investments of corporate funds in
another corporation; A. Theories on the Formation of a Corporation
h. Dissolution of corporation. (Sec. 6) 1. Concession Theory
– espouses that a corporation is an artificial
11. Watered Stock creature without any existence until it has
– a stock issued not in exchange for its received the imprimatur of the State acting
equivalent either in cash, property, share, stock according to law, through the SEC.
dividends, or services. 2. Theory of corporate enterprise or economic
 “Water” in stock represents the difference unit
between the fair market value at the time of – espouses that the corporation is not
the issuance of the stock and the par or merely an artificial being, but more of an
 Saint Louis University COMMERCIAL LAW 110
2012 BAR OPERATIONS

aggregation of persons doing business, or – They are those mentioned in the article of
an underlying business unit. Incorporation as originally forming and
composing the corporation, having signed
B. Steps in the Creation of a Corporation (Sec. the AI and acknowledged the same before a
10) notary public. They have no powers beyond
1. Promotion those vested in them by the statute.
- is a number of business operations peculiar  Stockholders/Shareholders
to the business world by which the company – owners of shares in a corporation which
is brought into existence. has a capital stock.
- Procuring necessary legislation;  Members
- Getting incorporations together; – corporators of a corporation which has no
- Procuring necessary subscribers to the capital stock.
articles of incorporation.  Corporators
 This can, however, be dispensed with if – those whose comprise the corporation
the persons promoting have sufficient whether as stockholders or members.
capital or funds; hence, there is no need
to attract prospective investors to come C. Franchises of a Corporation
in. 1. Primary Franchise
- Right or privilege granted by the State to
2. Incorporation Proper (Sec. 10): individuals to exist and act as a corporation
- Drafting and execution of the Articles of after its incorporation. It is inalienable. It is a
Incorporation part of the corporation and cannot be sold or
- Filing with the SEC of the Articles of assigned; otherwise, a corporation would be
Incorporation accompanied by an affidavit created without the consent of the
showing that at least 25% of the entire legislature.
authorized shares has been subscribed and 2. Secondary Franchise
at least 25% of the entire subscription has - The special right or privilege conferred upon
been paid in cash. an existing corporation to the business for
- If governed by a special law, a favorable which it was created. May ordinarily be
recommendation of the appropriate conveyed/mortgaged under the general
government agency is needed in filing the power granted to a corporation to dispose of
Articles of Incorporation. its property, except such franchises charged
- Payment of filing and publication fees. with a public use (e.g., to operate a
- Issuance of Certificate of Incorporation by messenger and express delivery service, to
the SEC (within a period of two years). use the streets of a city to lay pipes or
tracks).
3. Formal Organization and Commencement of
Business Operations (Sec.22): Primary Franchise vs. Secondary Franchise
- Election of Board of Directors/Trustees, its
corporate officers (President, Vice Primary Franchise Secondary Franchise
President, Secretary, Treasurer) within 2
years from date of incorporation. 1. refers to the franchise 1. refers to the exercise
- If it fails, then: of being or existing as a of rights. Example:
a. corporate powers cease; corporation eminent domain
b. corporation can be deemed dissolved. 2. vested in the 2. deemed vested in the
- If it commenced transaction of business but individuals who compose corporation
subsequently becomes inoperative for a the corporation
period of at least 5 years, the same shall be 3. It cannot be sold or 3. It may be sold or
a ground for the suspension of its corporate transferred because it is transferred, subject to
franchise (Certificate of Incorporation). inseparable from the sale on execution or levy
corporation itself.
 Promoter
– a person who, acting alone or with others, D. Number & Qualifications of Incorporators
takes initiative in founding and organizing 1. Not less than 5 but not more than 15
the business or enterprise of the issuer and incorporators who must be natural persons
receives consideration therefor. - Reason: Artificial persons, without brain or
 Incorporators body and existing only on paper through
 Saint Louis University COMMERCIAL LAW 111
2012 BAR OPERATIONS

legislative command, cannot create other

artificial persons. 5. Each of the incorporators of a Stock
- Exception: Rural Banks Act of 1992 (Sec. 4, Corporation must own or be a subscriber to
RA No. 7353). Duly established at least one (1) share of the capital stock of
cooperatives and corporations primarily the corporation.
organized to hold equities in rural banks - Reason: The presumption is that where an
and/or subscribe shares of stocks of a rural incorporator has a pecuniary interest in the
bank can be incorporators of rural banks. corporation, he will be concerned with the
- Exception to the number requirement: a management of its affairs.
corporation sole which is incorporated by
only one person, e.g., bishop, priest, rabbi E. Corporate term (limitations [sec. 11])
- A corporation may become a stock holder in 1. Shall not exceed 50 years at any given time.
another corporation by subscribing or 2. Extension may be made by amendment of the
purchasing the latter’s stocks for the power Articles of Incorporation.
of one corporation to own a stock in another - When:
corporation is entirely different from its a. Within the period of 5 years before the
power to create or itself become one of the expiry date.
incorporators of another corporation. b. Earlier than 5 years could be made if
- A cooperative cannot be a corporation there is a justifiable reason as
because a corporation must be formed determined by the SEC.
under the Corporation Code, but it has a - Procedure for Extension (Sec. 37)
separate legal existence from its members. a. Amendment of the Articles of
Incorporation to be approved by a
2. Incorporators must have the capacity to majority vote of the Board of
enter into a valid contract. Directors/Trustees (board resolution)
- Reason: an act of forming a corporation is and ratified at a meeting of stockholders
contractual in nature. representing at least 2/3 of the capital
- It must be acknowledged before a notary stock (or 2/3 of the members).
public (its articles of incorporation). b. Written notice of the proposed action,
- It is also to secure the State and all time, place of the meeting must be
concerned individuals against the possibility addressed to each stockholder as
of any fictitious name being subscribed to shown in the corporate books;
the articles and to furnish proof of the c. Delivery of the notice to the stockholder
genuineness of the signatures. by depositing the same to the
addressee in the post office with
3. Majority of the incorporators must be postage prepaid, or served personally
residents of the Philippines. d. Amendments (with appropriate
- A corporation composed of entirely aliens markings) will be submitted to the SEC
may be incorporated as long as a majority of attached to the original copy.
the incorporators are residents of the e. Amendment is effected before the
Philippines, except in cases of nationalized corporate term of existence, for after
corporations. dissolution by expiration of the corporate
- Reasons for Residence Requirement: term, no more corporate life to extend:
a. Because they transact business in the
Philippines.  Doctrine of Relation: Where the delay in
b. So that they could be easily notified (as effecting the amendment is due to the
when there are special or regular neglect of the officer with whom the
meetings). application is required to be filed or to a
wrongful refusal on his part to receive it, the
4. Citizenship Requirement same will be treated as having been filed
- It is a necessary qualification for before the expiry date. But the occurrence of
incorporators in corporations in which a a fortuitous event or force majeure may
certain percentage of the capital stock is justify the doctrine. The doctrine does not
required to be owned by Filipino Citizens. apply if the delay is attributable to the
This rule applies to directors and trustees. corporation.
- Reason: Certain nationalized activities are  Appraisal Right of Dissenting Stockholder:
exclusively reserved to Filipino Citizens like He can demand payment for the full value of
quasi-public corporations. his share if he does not wish to join.
 Saint Louis University COMMERCIAL LAW 112
2012 BAR OPERATIONS

1. Where capital stock consists of par

F. Corporate Structure of a Stock Corporation value shares:
 Definition of Terms: The minimum subscription should be
1. CAPITAL – The value of the actual property or 25% of the amount of the authorized
estate of the corporation whether in money or capital stock or 25% of the aggregate
property. Its net worth or stockholder’s equity is its value of all the shares of stock the
assets less liabilities. corporation is authorized to issue.
2. CAPITAL STOCK – The amount fixed in the In par value stock corporations, the
articles of incorporation, to be subscribed and paid percentage subscription requirement
in or agreed to be paid in by the stockholders of a shall always be based on the amount of
corporation, in money, property, services, or other the authorized capital stock irrespective
means at the organization of the corporation or of the class, number, and par value of
afterwards and upon which it is to conduct its the shares.
business, such contribution being made either 2. Where the capital stock consist of no
through directly through stock subscription or par value shares:
indirect through the declaration of stock dividends. The 25% requirement shall be
3. AUTHORIZED CAPITAL STOCK – The capita computed on the basis of the entire
stock divided into shares with par values. Par value number of authorized shares.
stocks are required in the case of corporations Corporations whose shares have no par
issuing preferred shares, as well as in the case of value have no authorized capital stock
banks, trust companies, insurance companies, the issued price of no par value shares
building and loan associations, and public utilities. It need to be fixed in the articles of
is the total amount in the charter which may be incorporation.
raised by the corporation for its operations. 3. Where the capital stock is divided into
4. SUBSCRIBED CAPITAL STOCK – The total par value shares and no par value
amount of the capital stock subscribed whether fully shares:
paid or not. The requirement as to par value shares
5. PAID-UP CAPITAL STOCK – The amount paid is as indicated above and for the no par
by the stockholders on subscriptions from unissued value shares, the 25% is based on the
shares of the corporation. number of the said no par value shares.
6. OUTSTANDING CAPITAL STOCK – The total
amount of the capital stock issued to subscribers b. Minimum Paid-Up Capital – At least 25%
except treasury shares. of the total subscription must be paid upon
7. UNISSUED CAPITAL STOCK – That portion of subscription but must not be less than P5,
the capital stock that is not issued or subscribed. It 000.00.
does not vote and draws no dividends. - Reason: To give assurance to the investing
8. LEGAL CAPITAL – The amount equal to the public dealing with the new corporation that
aggregate par value and/or issued value of the it is financially and actually able to operate
outstanding capital stock. and undertake to do business as they arise
from the start of its operations.
(1) Minimum Capital Stock - Exception: when special laws require
a. General Rule: No minimum capital stock is higher minimum capitalization such as:
required for stock corporations incorporated 1. Insurance Corporations – P5 million
under the Corporation Code as long as the 2. Pawnshop established as a corporation
paid-up capital is not less than P5,000.00 – P100,000.00
Exception: Filipino percentage ownership 3. Financial Intermediary applying for
requirement regarding corporate capital in authority to perform quasi-banking
nationalized corporations. functions – P50 million

(2) Minimum Subscription and Paid-Up Capital Ways of increasing capital stock:
for Incorporation 1. By increasing the number of shares and
a. Minimum Subscribed Capital – At least retaining the par value;
25% of the authorized capital stock as 2. By retaining the number of shares and
stated in the Articles of Incorporation must increasing the par value;
be subscribed at the time of incorporation; 3. By increasing the number of shares and
Computation of the 25% subscription increasing the par value;
requirement: 4. By reinvesting retained earnings to the capital
and issuing stock dividends.
 Saint Louis University COMMERCIAL LAW 113
2012 BAR OPERATIONS

4. The articles of incorporation must state the

Tools available to the stockholders to replenish amount of its capital or money contributed or
capital donated by specified persons.
1. Additional subscription to shares of stock of the 5. Sworn statement of the treasurer elected by
corporation by the stockholders or by investors; the subscribers showing
2. Advances by the stockholders to the a. A copy of the articles filed which is
corporation; returned with the certificate of
3. Payment of unpaid subscription by the incorporation issued by the SEC under
stockholders. its official seal becomes its corporate
charter.
b. Corporation created by special law has
G. Articles of incorporation (AI) no articles of incorporation. It draws its
life not from a general law, but from a
Articles of Incorporation direct act of Congress.
- The document prepared by the persons c. If that corporation is regulated by a
establishing a corporation and filed with the SEC government agency, submit also a
containing the matters required by the favorable recommendation of that
Corporation Code. agency.

Significance Corporate name

- Its issuance signals the birth of the corporation’s - Necessity of putting the corporate name:
juridical personality. 1. The corporation acquires juridical
personality under the name stated in the
Language Used articles of Incorporation;
- Any of the official languages duly signed and 2. The corporation has the power to
acknowledged by all of the incorporators. succession thru that name;
3. It identifies and distinguishes it from other
Contents: corporations;
- Generally 4. By its name it is authorized to transact
1. Name of the corporation; business;
2. Specific purpose for which the corp. is being 5. Corporate/trade name is a property right, a
incorporated; right in which it may assert and protect
3. Location of principal office which must be against the whole world.
within the Philippines; - Guidelines for Corporate Name (Sec. 18)
4. Corporate term; 1. Not identical or deceptively or confusingly
5. Incorporators’ names, nationalities and similar to that of another existing corporation
residences; or to any other name already protected by
6. Number of Directors or trustees, which shall law.
not be less than 5 nor more than 15; 2. Not patiently deceptive or contrary to
7. Names, nationalities and residences of existing law;
persons acting as directors/trustees until the 3. The name of the corporation must end with
first regular directors/trustees are duly word “Incorporated” or “Inc.” unless it
elected and qualified; includes the word “corporation”.
- If stock corp: 4. Prohibited Use of Certain Words:
1. Amount of its authorized capital stock in a. Emblem, official seal, and the name of
lawful money of the Philippines; the United Nations both in its full or
2. Number of shares into which it is divided; abbreviated form for commercial
3. If par value shares, the par value of each, purposes (RA No. 226);
names, nationalities and residences of the b. Unlawful to use the word “Bonded”, in
original subscriber, the amount subscribed part or in whole as business name of
and paid; those maintaining any warehouse not
4. If some or all of the shares are without par licensed under the General Bonded
value. Warehouse Act (Act No. 3893).
- If non-stock corp: c. Using the word “bank”, “banking”,
1. The amount of its capital; banker”, “building and loan association”,
2. Names, nationalities, and residences of the “trust corporation”, “trust company”, or
contributors; and words of similar import, when not
3. The amount contributed by each. conducting the business of commercial
 Saint Louis University COMMERCIAL LAW 114
2012 BAR OPERATIONS

banking corporation, trust corporation, been used so long and so exclusively by one
savings and mortgage bank, or building producer with reference to his article, that in that
and loan association; trade or to that branch of the purchasing public,
d. Using the words “Rural Bank”, when not the word or phrase has come to mean that the
authorized under the Rural Banks Act article was his product. Ex. “Ang Tibay,” merely
(RA No. 7353); descriptive, but its products are already
e. Using the term “savings and loan associated with it.
association” when not organized under - Test of infringement: Whether the similarity is
the Savings and Loan Association Act such as to mislead a person using ordinary care
(RA No. 3779), or the term and discrimination. The right to the exclusive
“development bank” unless organized use of a corporate name with freedom from
under the Private Development Banks infringement is determined by priority of
Act (RA No. 4093); adoption.
f. Using the word “National” as portion of  Remedy in case of infringement: Injunction.
their name or title, except the
Philippines National Bank (PD 694), due Corporate purpose:
to its connotation of being a government - It must be specified with sufficient clarity to
agency or a government-owned or define with certainty the scope of its business. If
controlled corporation; more than one purposes, state the primary and
g. “UN”, “Olympic”, and Bureau in full or the secondary purpose.
abbreviated form or business purposes; - The law allows a corporation to have secondary
h. “Financing Company”, “Finance purposes because the primary purpose may not
Investment Company”, unless organized turn out to be profitable, and in such case, all it
as a financing company (RA No. 5980); has to do is to invest its funds in any such
i. “Engineer”, or “Architect” unless used by purposes instead of organizing a new
persons properly registered and corporation.
licensed as civil engineers or architects  Reasons:
(RA Nos. 544, 545); a. A person who intends to invest his
j. “Geodetic Engineers” is prohibited money in the business corporation will
except when majority of the members of know where and in what kind of
the partnership or corporation are business or activity his money will be
properly registered and licensed as invested;
geodetic engineers (RA No. 4374); b. The directors and officers of the
k. subsidiary corporation of a foreign firm corporation will know within what scope
may carry the name of the principal of business are they authorized to act;
company with the word “Phil.” Or and
“Philippines” affixed to the firm name, c. A third person who has dealings with the
with the written consent of the mother corporation will know by perusal of the
company. articles whether the transaction or
l. The name of an internationally known dealing he has with the corporation is
foreign corporation or one similar to it within the authority of the corporation or
may not be used by a domestic not.
corporation without the prior consent of
the former; Principal place
m. If the full name of a person forms part of - The articles of incorporation must state the
the corporate name, the consent of such principal place where the principal office of the
person or his heir must be obtained; and corporation is to be established or located, in
n. The word “State”, “National”, “Maharlika” which place, must be within the Philippines. The
and the “Barangay” cannot be used as place to be designated is the city or municipality
part of the corporate name since these where the principal office is to be located.
are reserved for the exclusive use of the Purpose of the requirement for definite place: For
government. effective regulation and supervision of the
corporation.
Doctrine of secondary meaning
- A word or phrase originally incapable of AMENDMENTS OF THE ARTICLES OF
exclusive appropriation with reference to an INCORPORATION (PROCEDURE): (Sec. 16)
article on the market, because geographically, or
otherwise descriptive, might nevertheless have
 Saint Louis University COMMERCIAL LAW 115
2012 BAR OPERATIONS

1. Board of Directors convene to a meeting and 1. Not substantially in compliance with the form
make a proposal for amendments to be prescribed by the Code;
converted into a board resolution; 2. Purpose/purposes are patently
2. The resolution stating such amendments must unconstitutional, illegal, immoral or contrary
be approved by a majority vote of the Board of to government rules and regulations;
Directors/Trustees; 3. Treasurer’s affidavit concerning the amount
3. The approved resolution must be submitted to of capital stock subscribed and/or paid is
the stockholders for ratification; false;
4. The required vote for ratification is the approval 4. Required percentage of ownership of the
of stockholders representing at least 2/3 of the capital stock to be owned by citizens of the
outstanding capital stock or 2/3 of the members Philippines has not been complied with as
(for non-stock); a meeting to that effect may not required by existing laws or the Constitution.
be necessary since they can just submit their Ex. Monetary Board of the Central Bank for
written assent representing at least 2/3 of the banking institutions.
outstanding capital stock.  However, if the corporation is involved in a
Note: Written assent is not allowed in (a) public utility the SEC may give such
extending or shortening the corporate term (Sec. corporation a reasonable time to modify the
37); (b) decreasing or increasing the capital objectionable portion.
stock and (c) in close corporations (Sec. 103), a
meeting of the stockholders is always Grounds for Suspension/Revocation of
necessary. Certificate
5. The articles, as amended, must be indicated by 1. Fraud in procuring the certificate of
underscoring the change or changes made, a incorporation (ex. Paid-up capital);
copy thereof must be certified under oath by the 2. Serious misrepresentation causing great
corporate secretary and the fact that it has been damage and prejudice to the public;
duly approved by the required vote of the 3. Refusal to comply with a lawful order of the
stockholders/members. SEC;
6. Submission to the SEC; and 4. Continuous inoperation for a period of at
7. It takes effect upon approval by the SEC or from least 5 years;
the date of filing if not acted upon within 6 5. Failure to file by-laws within the required
months if the delay is not attributable to the period; and
corporation. Failure to file required reports in appropriate forms
 This rule does NOT apply if the amendment as determined by the SEC within the prescribed
is intended to dissolve the corporation. You period.
have to wait for the approval of the SEC.
There can be no presumption that when 6 ARTICLES OF INCORPORATION vs. BY-LAWS
months have already lapsed, it is deemed
approved. The reason being that dissolution ARTICLES OF BY-LAWS
must be made at the consent of the State. INCORPORATION
1. It constitutes the charter 1. It is merely for the
Non-amendable Facts in the Articles of or fundamental law of the internal government of the
corporation; a contract corporation but has the
Incorporation
between: force and effect of a
- Those matters referring to facts existing as of a. the corporation and the contract between:
the date of the incorporations such as: stockholders/members; a. the corporation and the
1. Names of incorporators; b. between and among the stockholders /members;
2. Names of original subscribers to the capital stockholders/ members; and
stock and their subscribed and paid-up and b. between and among the
capital; c. the corporation and the stockholders/ members
3. Treasurer elected by the original State
subscribers; 2. It is executed before 2. It may be executed after
4. Members who contributed to the initial incorporation incorporation; it may be
filed simultaneously with
capital of a non-stock corporation;
the AI
5. Date and place of execution of the AI; 3. It is a condition 3. It is a condition
6. Witnesses to the signing and precedent in the acquisition subsequent; its absence
acknowledgment of the AI. of corporate existence merely furnishes a ground
for the revocation of the
Grounds for the Disapproval of the Articles of franchise.
Incorporation 4. It is amended by a 4. It may be amended by a
 Saint Louis University COMMERCIAL LAW 116
2012 BAR OPERATIONS

majority vote of the majority vote of the of its corporate franchise (certificate of
BOD/BOT, and BOD/BOT, and majority incorporation).
stockholders representing vote of the outstanding
at least 2/3 of the capital stock, or a majority  The rule that a corporation must formally
outstanding capital, or 2/3 of members in case of non-
organize and commence the transaction of its
of the members in case of stock corporations
non-stock corporations business or the construction of its works within 2
5. The power to 5. The power to years from the date of its incorporation (the
amend/repeal the AI amend/repeal the by-laws exercise of its secondary franchise) does not
cannot be delegated by the or adopt new by-laws may apply to:
stockholders/ members to be delegated by the 2/3 of 1. Special Corporations, because the law
the BOD/BOT the outstanding capital creating them provides for the
stock or 2/3 of the members commencement of their juridical personality;
incase of non-stock 2. Corporation Sole, the person incorporating
corporations.
is not required to wait for the certificate of
incorporation. Mere filing of the Articles of
Incorporation makes it incorporated already.
Rules on conversion (SEC Opinion)
1. Stock to non-stock corporation
- May be made by mere amendment of the
articles of Incorporation.
III. BOARD OF
2. Non-stock to stock corporation
DIRECTORS/TRUSTEES/OFFICERS
- The corporation must first be dissolved;
mere amendment of the AI would not suffice
Subject structure: components of a corporation
because the conversion would change the
1. Promoter
corporate nature from non-profit to monetary
2. Incorporators
gain.
3. Corporators
a. Stockholders
 The conversion without dissolving it first would
b. Members
be tantamount to distribution of its assets or
4. Governing Body (absolute control and direction)
income to its members inasmuch as after its
a. Board of Directors
conversion, the asset of the non-stock
b. Board of Trustees
corporation would now be treated as payment to
5. Managing and Administrative Body
the subscriptions of the members who will now
a. Executive committee
become stockholders of the corporation.
b. Contracted Mangers
6. Corporate Officers
Formal organization and commencement of the
transaction of the business (sec. 22)
A. Qualifications of Directors/Trustees
- These are conditions subsequent which may be
1. Every director (including incorporating director)
satisfied by substantial compliance in order that
must own at least one share of the capital stock,
a corporation may legally continue as such.
and if ceases to own at least one share in his
- Acts of Constituting Formal Organization
own name, he automatically ceases to be a
1. Adoption of by-laws and filing of the same
director (Sec 23). For non-stock corporation,
with the SEC;
only members of the corporation can be elected
2. Election of the Board of Directors and
to seat in the Board of Trustees.
officers by the board pursuant to the by-
 Person in whose name it has been issued is
laws;
the one to be elected
3. Establishment of principal office;
 Q. When is it necessary that he is the
4. Subscription and payment of the capital
owner?
stock, etc…
A: At the time of assumption of office
 Note: Both husband and wife own share –
Effects of Subsequent Continuous Inoperation
either can be elected at any given time.
1. If the corporation does not formally organize
2. A majority of the directors/trustees must be
and commence transaction within a period
residents of the Philippines
of 2 years, corporate powers cease and
3. He must not have been convicted by final
corporation is deemed dissolved;
judgment of an offense punishable by
2. If it commenced transaction but
imprisonment for a period exceeding 6 years or
subsequently becomes continuously
a violation of the Corporation Code committed
inoperative for a period of 5 years, it serves
as a ground for the suspension or revocation
 Saint Louis University COMMERCIAL LAW 117
2012 BAR OPERATIONS

within 5 years from the date of his election (Sec.

27). Three-Fold Duties of Directors
4. Only natural persons can be elected 1. Duty of Obedience
directors/trustees. - To direct the affairs of the corporation only in
5. Other qualifications as may be prescribed in the accordance with the purposes for which it
by-laws of the corporation (e.g. must not be was organized
engaged in business in competition with the 2. Duty of Diligence
corporation) (Gokongwei case, 89 SCRA 336) 3. Duty of Loyalty

B. BOD/BOT as repository of corporate powers Obligation and liabilities of the board of

- Gen. Rule: directors, trustees and officers (sec. 31)
 The corporate powers of the corporation, all 1. Liability for Damages (director/trustee)
business conducted and all property of such - Solidary liability
corporation controlled and held by the a. Willfully and knowingly votes or assents to
BOD/BOT (Sec. 23) patently unlawful acts of the corporation,
- Exceptions: b. Gross negligence or bad faith in directing
1. In case of an Executive Committee duly the affairs of the corporation;
authorized in the by-laws; c. Acquiring any personal or pecuniary interest
2. In case of a contracted manager which may in conflict with his duty as such director or
be an individual, a partnership, or another trustee.
corporation. (Note: In case the contracted d. Agreeing or stipulating in a contract to hold
manager is another corporation – special himself liable with the corporation
rule: Sec. 44 applies) e. Consenting to the issuance of a watered
3. In case of close corporations, the stocks, or, having knowledge thereof, failing
stockholders may manage the business of to file objections with the corporate secretary
the corporation instead by a board of (Sec.65) (Personal Liability)
directors, if the Articles of Incorporation f. By virtue of specific provision of law.
provide.
2. Liability for Bad Faith or Gross Negligence
C. Nature of Powers of the Board (BOD/trustees/officers)
1. They are original and undelegated - Personal Liability
 Theory of Original Power: the powers of the a. Any wrongful disposition of corporate assets
board are original and undelegated. The and for any loss or injury to the corporation
stockholders or members do not confer, nor arising from their gross negligence or
can they revoke, those powers. unauthorized acts of violation of their duties;
2. They are derivative only in the sense of being b. Termination of employees which are done
received from the State in the act of with malice or in bad faith.
incorporation
3. They are directly conferred by statute; 3. Liability for secret profit (BOD/ Trustees/officers)
4. Can bind the corporation only by action taken at a. Profits which otherwise would have accrued
a board meeting. to the corporation;
 Reasons: b. Profits derived from ultra vires transaction.
a. A meeting is necessary in order that any
action may be deliberately adopted, Remedies in case of mismanagement:
after opportunity for discussion and an 1. Derivative suit or complaint
interchange of views, and 2. Injunction, if the act has not yet been done
b. As agents of the corporation managing 3. Receivership
its affairs, directors/trustees have no 4. Dissolution if the abuse amounts to a ground for
power to act other than as a board. quo warranto but the Solicitor general refuses to
act
Business judgment rule
The BOD/BOT is the body entrusted with the Special fact doctrine
general control and management of the business of - Director takes advantage of an information by
the corporation having plenary power and authority virtues of his office to the disadvantage of the
to transact the ordinary business of the corporation corporation.
within the scope of its charter power. The SEC,
court, and stockholders cannot overrule a pure Inherent power of amotion
business judgment.
 Saint Louis University COMMERCIAL LAW 118
2012 BAR OPERATIONS

- It is the power to remove directors, trustees or Non stock corporation

officers prior to the expiration of their term - As many votes as there are trustees to be
elected but can give only 1 vote per trustee
D. Election of directors or trustees (sec. 24) - If shares are delinquent-can’t vote
a. Stock Corporation - Q. Can a holder of preferred shares vote?
- directors elected among the holders of stocks A. No, not allowed to vote in the election of
b. Non-stock corporation BOD
- trustees elected from among the members of the - Q. Can one vote by zones:
corp. A. No, implied from Sec. 24-election
requires the majority of the capital stock or
Requirements majority of the members entitled to vote.
1. Presence of majority stockholders/members in - TERM: shall hold office for 1 year until their
person or by proxy (written/authorized) successors are elected and qualified.
2. By balloting if requested by any voting
stockholders/members, otherwise by viva voice Hold-over principle
Upon failure of a quorum at any meeting of the
Methods of Voting stockholders or members called for an election, the
1. Straight Voting directorate naturally holds over and continuous to
- Every stockholder may vote such number of function until another directorate is chosen and
shares for as many persons as there are qualified. The failure to elect does not terminate the
directors to be elected. terms of incumbent officers nor dissolve the
- Illustration: corporation.
X owns 100 shares in ABC
Corporation. If there are 5 directors to be  Corporate Elections - only means by which
chosen, X is entitled to 500 votes obtained stockholders can control the composition and
by multiplying 100 by 5. He may give to the the action of the Board.
5 candidates he wants to be elected 100
votes each. Number
Under this method, the votes are a. Stock Corporation – not less than 5 but not more
distributed equally among the 5 candidates than 15 (Sec. 14[6])
without preference. b. Non-Stock Corporation – not less than 5 (or 3?)
but may be more than 15 with the term of office
2. Cumulative Voting of 1/3 of their number expiring every year (Sec.
a. Cumulative Voting for one candidate 92 [1])
- A stockholder gives to one candidate as c. Close Corporation – no board (no limit) or can
many votes as the number of directors have if pass a resolution
to be elected multiplied by the number d. Corporation Sole =1
of his shares shall equal.
- In the above example, X gives 500 Corporate officers (Sec. 25)
votes to one candidate. - Those whose offices are created by the
b. Cumulative Voting by Distribution Corporation Code or the corporation’s by-
- A stockholder cumulates his shares by laws. They do not enjoy security of tenure,
multiplying also the number of his and their incumbency is within the business
shares by the number of directors to be judgment discretion of the BOD/BOT. Their
elected and distribute the same among removal is considered an intra-corporate
as many candidates as he shall see fit. controversy and beyond the reach of labor
- Also in the illustration above, with 100 tribunals.
shares, X is entitled to 500 votes if there - Immediately after their election, the directors
are 5 directors to be elected. X may must formally organize by the election of:
distribute his votes to candidates D= 1. President – must be a director
100; E=100; F=100; G = 150; H = 250. 2. Treasurer – may or may not be a
Any combination is allowed provided the director; as a matter of sound corporate
total of votes cast by him does not practice, must be a resident of the
exceed 500 votes. Philippines
- Rationale: To enable minority 3. Secretary – must be a resident and
stockholders to have adequate citizen of the Phils.; need not be a
representation in the board. director unless required by the by-laws
4. Other officers provided for in the by-laws
 Saint Louis University COMMERCIAL LAW 119
2012 BAR OPERATIONS

Report of election of BOD/BOT and Officers (Sec.

 Two or more position maybe held 26)
concurrently by the same person - Secretary or other officer of the corporation to
 President and Treasurer at the same submit with SEC the names, nationalities, and
time but NOT President and Secretary. residences of the directors, trustees and officers
elected within 30 days after the election.
 Officers are elected by the Board in a valid - Director/trustee/officer – dies, resigns or in any
meeting. manner ceases to hold office – his heir, the
secretary or any other officer of corporation or
Quorum the director, trustee or officer himself, to
- Such number of the membership of a collective immediately report such fact to the SEC. (as the
body as is competent to transact its business or case may be)
do any other corp. act.
- Gen. Rule: Simple majority can act on any Removal of directors or trustees (Sec. 28)
matter. 1. Hold a meeting – regular or special
- Exception: in the election of corporate officers Regular meeting – as provided in the by-laws/AI
which shall require the vote of a majority of all 2. Prior notice to stockholders of the intention to
the members of the Board (all of them are remove a director
present) -by the SEC upon orders of the President or
majority of members
Requisites for a valid board meeting 3. Notice must contain the particular purpose-
1. Meeting of the directors or trustees duly removal specified
assembled as a board; 4. Vote – stockholders representing 2/3 of
2. Presence of the required quorum; outstanding capital stock, or in non-stock
3. Decision of the majority of quorum or, in other corporations, by 2/3 of the members entitled to
cases, a majority of the entire board; and vote
4. Meeting at the place, time and manner provided
in the by-laws.  A special meeting called for the removal of a
director/trustee must be called
No proxy in a board meeting 1. By the SECRETARY on order of the
- directors or trustees cannot validly act by President, or
proxy on account of 2. On the written demand of stockholders
a. their responsibility to the corporation holding or representing at least a
and MAJORITY of the outstanding capital stock
b. their being voted into office presumably (or on the written demand of at least
because of their personal qualifications. MAJORITY members entitled to vote)

 For spouses who own the same share jointly,  If the Secretary fails or refuses to call a
only one of them can be elected on the board. special meeting upon such demand or
refuses to give the notice, or if there is no
Valid corporate acts Secretary, the call for the meeting may be
- Gen. Rule: All corporate acts to be valid must addressed directly to the stockholders or
be from a board meeting. members by ANY stockholder or member
- Exceptions: (Board meeting not required for signing the demand.
validity)
1. Directors are the only stockholders  The vacancy resulting from the removal may be
2. When a corporate act is undertaken by a filled:
person already authorized by the Board a. by election at the same meeting without
3. If the necessity of a Board meeting is further notice, or
waived. b. at any regular or special meeting called for
4. Act done or authorized by the BOD without a the purpose, after giving notice
valid board meeting is ratified unanimously
by the stockholders.  Removal may be with or without cause; BUT a
5. Management contract minority director can only be removed with
6. Executive Committee acts within the power cause.
delegated to it.
Vacancies in the office of director/trustee (Sec.
29)
 Saint Louis University COMMERCIAL LAW 120
2012 BAR OPERATIONS

- Vacancy other than removal by the SH/member (investment in another corporation competing
(Death, Resignation, Abandonment, directly with the corporation.)
Disqualification, or Expiration of term) is filled by
at least majority of the remaining  The erring board members shall be held jointly
directors/trustees, if still constituting a quorum. and severally liable for all the damages resulting
therefrom suffered by the corporation, its
Vacancies to be filled by a vote of stockholders SH/members or other persons.
or members:
1. In case of removal of a director or trustee; Liability of a director/trustee, or officer as a
2. If the remaining directors or trustees do not trustee for the corporation
constitute a quorum and therefore could not fill 1. When a director, trustee or officer attempts to
the vacancies created by death, resignation, acquire or acquires, in violation of his duty, any
disqualification, abandonment or expiration of interest adverse to the corporation
the term of a director or trustee; 2. In respect to any matter which has been
3. If the vacancy is created because of increase in reposed in him in confidence, as to which equity
the number of directors/trustees at any time of imposes a disability upon him to deal in his own
the year. behalf.
 he must account for the profits which
Compensation of directors (Sec. 30) otherwise would have accrued to the
- Gen. Rule: “BOD/BOT are not entitled to corporation.
compensation except for reasonable per diems.
- Exceptions (that they can receive  The effects under Sec. 31 and 34 applies
compensation): even if he uses his own money; if violated,
1. If provided for in the by-laws; or no ratification
2. By a vote of stockholders representing at SEC 31: Violated is a specific trust reposed
least a majority of the outstanding capital upon a director
stock. SEC 34: Violated is general trust reposed on
- Limitation (in case they are compensated): all directors
The yearly compensation of directors shall in no  Applies also if no specific instructions given (no
case exceed 10% of the NET income before decision made by Board)
income tax of the corporation during the  Doctrine of Corporate opportunity will not apply if
preceding year. the director acted in good faith
 But a corporate officer who is not a director may  Acquisition is not vested to any activity of the
be compensated as an employee of the corporation
corporation.  If corporation is unable to acquire opportunity –
 A corporate officer who is also a director may no prohibition imposed upon him
likewise be compensated, in addition to his per
diems, the amount to be fixed by a board Special rules on contracts entered into by
resolution in the absence of provision to the directors/trustees or officers:
contrary in the by laws and subject to the
limitation. 1. Contracts of Self-Dealing Directors (Sec.
32)
Liability of directors/trustees (Sec. 31) - Contracts which are entered into by the
- Nature of Directors/Trustee’s Position corporation with one or more of its own
 They are agents of the corporation; they directors/trustees, or officers are voidable,
also occupy a fiduciary relation to the UNLESS:
corporation. a) The presence of such director/trustee in
the board meeting approving the
Instances when directors/trustees maybe held contract was not necessary to constitute
liable for damages a quorum for such meeting;
1. He willfully and knowingly votes or assents to b) The vote of such director/trustee in the
patent unlawful acts of the corporation board meeting approving the contract
2. He is guilty of gross negligence or bad faith in was not necessary for the approval of
directing the affairs of the corporation-refuse to the contract;
make a decision/withholds the vote required. c) The contract is fair and reasonable
3. He acquires any personal or pecuniary interest under the circumstances;
in conflict with his duty as such director/trustee. d) In case of an officer, there was previous
authorization by the BOD/BOT.
Saint Louis University COMMERCIAL LAW 121
2012 BAR OPERATIONS

- If any of the first 2 conditions is absent, in d. If no prohibition is imposed upon

the case of a contract with a director/trustee, him
the contract may be ratified by the vote of e. If the prohibition imposed upon him
the stockholders representing at least 2/3 of is related but there is ratification
the OCS or of 2/3 of the members in a
meeting called for the purpose, PROVIDED: Rationale of applying sec. 32
a) That full disclosure of the adverse - As if the corporation is dealing with its own
interest of the dir/trustee involved is directors
made at such meeting.
b) That the contract is fair and reasonable Section 35: Executive Committee
under the circumstances - Body given corporate powers which is
- Although not all the said conditions are composed of not less than 3 as provided for in
present, the corporation may elect NOT to the by-laws to assume
attack or question the validity of the contract, - Provided for in the by-laws
without prejudice, however , to the liability of - Not less than 3 members of the board to be
the director/trustee for damages under Sec. appointed by the board.
31. - Gen. Rule: An act by majority vote, all other
matters delegated by the by-laws or on a
2. Contracts of Interlocking Directors (Sec. majority vote of the board.
33) - Exceptions:
- Contracts entered into between corporations 1. approval of any action for which
with interlocking directors (interest of said shareholders approval is also required
directors is substantial – exceeding 20% of 2. the filling of vacancies in the board
the outstanding capital stock) are VALID 3. the amendment or repeal of by-laws in the
provided that: adoption of new by laws
a) The contract is not fraudulent; and 4. the amendment or repeal of any resolution
b) The contract is fair and reasonable of the board or by its express terms is not so
under the circumstances. amendable or repealable
- If interest in both corporation are nominal 5. a distribution of cash dividends to the
(less than 20% of OCS), the contract is valid shareholders.
- If both substantial, the contract is valid
- If one is nominal and the other is substantial Purpose of creating executive committee
, the contract is valid if all the conditions set - To assure prompt and speedy action and
in Sec 32 are present with respect to the solution to important matters with the need for a
corporation in which he has nominal interest board meeting especially where such meeting
cannot readily be held
3. Doctrine of Corporate Opportunity (Sec.
34)
- Disloyalty of a Director
- Unless his act is ratified, a director shall
refund to the corporation all the profits he IV. POWERS OF CORPORATION
realizes on a business opportunity which:
a) The corporation is financially able - EXPRESS POWERS
to undertake; - granted by law, Corporation Code, and its
b) from its nature, is in line with the Articles of Incorporation
corporation’s business and is of - INHERENT/INCIDENTAL POWERS
practical advantage to it; and - not expressly stated but are deemed to be
c) the corporation has an interest or a within the capacity of corporate entities.
reasonable expectancy. - IMPLIED/NECESSARY POWERS
- The rule shall apply notwithstanding the fact - exist as a necessary consequence of the
that the director risked his own funds in the exercise of the express powers of the
venture. corporation or the pursuit of its purposes as
- When doctrine is NOT applicable: provided for in the Articles of Incorporation.
a. If the director acted in good faith
b. Acquisition is not related to any Theory of general capacity
activity of the corporation - A corporation is said to hold such powers as are
c. If the corporation is unable to not prohibited or withheld from it by general law
acquire the opportunity (everything is allowed except when prohibited)
 Saint Louis University COMMERCIAL LAW 122
2012 BAR OPERATIONS

3. To incur, create or increase bonded

General Powers and Capacity (Sec 36) indebtedness
Express powers: 4. To deny pre-emptive right
1. To sue and be sued 5. To sell, dispose, lease, encumber all or
2. Of succession substantially all of corporate assets;
3. To adopt and use of corporate seal 6. To purchase or acquire own shares provided:
4. To amend its Articles of Incorporation a. there is an unrestricted retained
5. To adopt its by-laws earnings
6. For stock corporation – to issue and sell b. it is for a legitimate purpose
stocks to subscribers and treasury stock, for 7. To invest corporate funds in another corporation
non-stock corporations – to admit members; or business for other purpose other than primary
7. To purchase, receive, take or grant, hold, purpose;
convey, sell, lease, pledge, mortgage and 8. To declare dividends out of unrestricted
otherwise deal with such real and earnings
personal property, including securities and 9. Enter into management contract with another
bonds; corporation (not with an individual or a
8. To enter into merger or consolidation; partnership – within general powers) whereby
9. To make reasonable donations to one corporation undertakes to manage all or
a. public welfare substantially all of the business of the other
b. hospital corporation for a period not longer than 5 years
c. charitable for any one term. (Sec. 37)
d. cultural
e. scientific  Right of appraisal is available in case of
f. civic extension (Sec. 37) and also available in
g. similar purposes shortening the corporate term (Sec. 81[1]).
Provided NO donation is given to any:
a. Political party Sec. 38 – Power to increase or decrease capital
b. Candidates stock; incur, create or increase bonded
c. Partisan political activity indebtedness
10. To establish pension, retirement, and other - Requires:
plans for the benefit of directors, trustees, 1. Proposed action approved by a majority vote of
officers and employees the BOD
11. To exercise other powers essential or 2. Written notice of the proposed action and of the
necessary to carry out its purposes. time and place of the stockholder’s meeting to
be addressed to each stockholder
Two sources of express powers of a corporation: 3. Approved by stockholders representing 2/3 of
1. Those enumerated in Sec. 36 OCS
2. Purpose clause of the AI 4. A certificate in duplicate of said corporate act
shall be signed by majority of the BOD and and
Theory of special capacity countersigned by the Chairman and the
- A corporation cannot exercise powers except Secretary of the stockholders’ meeting
those expressly or impliedly given (everything is 5. A certificate of increase must be accompanied
prohibited except when allowed) by the Treasurer’s affidavit showing that at least
25% of such increased capital stock has been
subscribed and that at least 25% of the amount
Special powers (Secs. 37 – 44) subscribed has been paid.
1. To extend or shorten corporate term
Requirements:  Corporate act to take effect from and after the
a. Amendment of articles of incorporation approval of the SEC.
b. Approval of the amendment by majority  No decrease in capital stock shall be approved
vote of the BOD/BOT by SEC if it will prejudice corporate creditors
c. Written notice of the proposed action  Bonds issued by the corporation shall be
and of the time and place of the meeting registered with the SEC which is given the
to each stockholder or member. power to determine the sufficiency of the terms
d. Ratification in the meeting by of such bonds
stockholders representing at least 2/3  Where a corporation increase capital stock. SH
of OCS or at least 2/3 of members are entitled to a pre-emptive right to subscribe to
2. To increase or decrease capital stock; a sufficient number of shares in order to
 Saint Louis University COMMERCIAL LAW 123
2012 BAR OPERATIONS

maintain their previous relative voting power. reasonable in purpose (to ensure the stability of
The corporation must give the SH a reasonable the corporation during the critical period of
period which to exercise such right. development) and is reasonable in period.
 Right of appraisal NOT available in this Sec. 38. - By-laws of a corporation cannot be the source of
limit to restrict the right of the SH to transfer
 Non-stock corporation may incur or create shares of stocks which are personal property.
bonded indebtedness, or increase the same with Restrictions on transfer of shares can be
the approval of: provided only in the law or the charter of the
1. majority vote of the BOT and corporation, and would be invalid if provided for
2. at least 2/3 vote of the members in a in the by-laws.
meeting duly called for the purpose. - Pre-emptive right is not available in case of
shares issued to obtain loans or to obtain the
Power to deny pre-emptive right (Sec. 39) services of technical men.
- All SH of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or Sale or other disposition of assets (Sec. 40)
disposition of shares on any class, in proportion - Requisites:
to their respective shareholdings. 1. The sale or other disposition must be
approved by a majority vote of the
Pre-emptive right shall not extend to: BOD/BOT;
1. Shares to be issued in compliance with laws 2. The action of the board must be authorized
requiring stock offering or minimum stock by the vote of stockholders representing at
ownership by the public; least 2/3 of OCS including holders of non-
2. Shares issued in good faith with the approval of voting shares or 2/3 of the members; and
the SH representing 2/3 of the OCS, in 3. The authorization must be done at a
exchange for property needed for corporate stockholders’ or members’ meeting duly
purposes called for the purpose after written notice.
3. Shares issued in payment of a previously
contracted debt.  Appraisal right can be exercised
4. In case the right is denied in the AI.  Despite approval by the SH or members, it is not
mandatory for the board to continue with the
*Pre-emptive right includes re-issuance of treasury disposition.
shares.  Substantially all – where the sale or other
disposition would render the corporation
Pre-emptive right or right of pre-emption incapable of continuing the business or
- The stockholder’s right to subscribe to all issues accomplishing the purpose for which it as
or disposition of shares of any class in incorporated.
proportion to his stockholdings, the purpose  This section covers not only sale but also lease,
being to enable the shareholder to retain his exchange, mortgage or pledge. But disposition
proportionate control in the corporation and to of properties in the course of business does not
retain his equity in the surplus. need approval by or authority of SH members.
- Pre-emptive right granted in favor of the
corporation only is null and void, because it Stock Certificate
unduly inhibits the SH’s right to dispose of their - Written acknowledgement by the corporation of
shares in the manner they desire. However, if in the stockholder’s interest in the corporation.
the subscription agreement, the SH waives his - It is personal property and be mortgaged or
pre-emptive right, this is valid because this has pledged.
been individually and freely bargained for.
Waiver of a right is valid and is not prohibited. Power to acquire own shares (Sec. 41)
What is prohibited is the blanket restriction in the - When may a corporation reacquire its own
by-laws. stocks?
- A contract entered into between the two majority 1. To eliminate fractional shares arising out of
SH of the corporation providing for suspension stock dividends
of the right to dispose shareholding during the 2. To collect or compromise an indebtedness
limited period provided for in the agreement and to the corporation, arising out of unpaid
imposes a penalty if any of the parties should subscription, in a delinquency sale, and to
dispose of their shareholdings within the limited purchase delinquent shares sold during said
period, is a valid agreement and not violative of sale; and
the policy against restraint of trade since it is
 Saint Louis University COMMERCIAL LAW 124
2012 BAR OPERATIONS

3. To pay dissenting or withdrawing SH entitled 1. Redemption of redeemable shares (Sec. 8)

to payment for their shares under the 2. In close corporation, when there is a
provisions of this Code. deadlock and the SEC orders the payment
- Other instances when the corporation may of the appraised value of the stockholder’s
acquire its own shares: share (Sec. 104).
1. Reacquisition of treasury shares (Sec. 9);
2. Purchase of redeemable shares by the Power to invest corporate funds in another
corporation regardless of the existence of corporation or business for any other purpose
unrestricted retained earnings (URE) in its (Sec. 42)
books (Sec. 8); - Requires majority vote of BOD, ratified by 2/3
3. To effect a decrease in the capital stock of OCS/members, to invest for purposes other than
the corporation (Sec. 38); primary purpose. But where the investment
4. In a close corporation, where there is (even in another corporation) is reasonably
deadlock respecting the management of its necessary to accomplish the primary purpose, a
business, the SEC may order the purchase board resolution is sufficient.
at their fair value of shares of any - Example: A sugar company invests in another
stockholder by the corporation regardless of company engaged in the manufacture of sacks
the availability of URE in its books (Sec. for sugar, this was done pursuant to its primary
104, par. 1[4]). purpose so a Board resolution will do.
- BUT where the purchase of another
Trust fund doctrine corporation’s shares is done solely for
- The subscribed capital stock of the corporation investment and not to accomplish the purpose of
is a trust fund for the payment of debts of the its incorporation, the 2/3 vote of SH is required.
corporation which the creditors have the right to
look up to satisfy their credits, and which the Power to declare dividends (Sec. 43)
corporation may not dissipate. The creditors - The BOD of a stock corporation may declare
may sue the stockholders directly for the latter’s dividends out of the unrestricted retained
unpaid subscription. earnings which shall be payable in cash, in
- The capital stock, property and other assets of a property, or in stock to all SH on the basis of
corporation are regarded as equity in trust for outstanding stock held by them:
the payment of corporate creditors. a) Provided, that any cash dividends due on
- Hence, dividends are declared only if there is an delinquent stock shall first be applied to the
unrestricted retained earnings, and that no unpaid balance, while stock dividends shall
distribution of corporate property except upon be withheld from the delinquent stockholder
dissolution and after payment of all its debts and until his unpaid subscription is fully paid:
liabilities. b) Provided further, that no stock dividend shall
be issued without the approval of SH
Application of the Trust Fund Doctrine: representing not less than 2/3 of the OCS at
1. Where the corporation has distributed its a regular or special meeting duly called for
capital among the stockholders without the purpose.
providing for the payment of creditors;
2. Where the corporation has transferred its - Stock corporations are prohibited from
property in fraud of its creditors; retaining surplus profit in excess of 100% of
3. Where the corporation had released the their paid-in capital stock, EXCEPT:
subscribers to the capital stock from their 1. When justified by definite corporate
subscriptions; and expansion program or programs
4. Where the corporation is insolvent. approved by the BOD
2. When the corporation is prohibited
Coverage of the Trust Fund Doctrine: under any loan agreement with any
1. If the corporation is solvent, the TFD financial institution or creditor, whether
extends to the capital stock represented by local or foreign, from declaring dividends
the corporation’s legal capital. without its/his consent, and such
2. If the corporation is insolvent, the TFD consent has not yet been secured.
extends to the capital stock of the 3. When it can be clearly shown that such
corporation and to all of its property and retention is necessary under special
assets. circumstances obtaining in the
corporation, such as when there is a
Exceptions to the Trust Fund Doctrine:
 Saint Louis University COMMERCIAL LAW 125
2012 BAR OPERATIONS

need for special reserve for probable - The right to dividends is based on duly recorded
contingencies. stockholdings; accordingly, the corporation is
prohibited from entitling thereto to anyone else.
- It is mandatory to declare dividends:
a) Cash dividends – declared by the BOD Sources of Dividends:
only - Gen. Rule: Dividends can only be declared and
b) Stock dividends – BOD, approved by paid out of actual and bona fid unrestricted
2/3 OCS retained earnings.
- Special Rules:
Dividends 1. Where a corporation sold its real property,
- That part of the profits or unrestricted returned which is not being used for business, at a
earnings of a corporation set aside, declared gain, the income derived therefrom may be
and ordered by the directors to be paid ratably to availed of for dividend distribution.
the stockholders on demand or at a fixed time, in 2. Increase in the value of a fixed asset as a
the form of cash, property or stocks. result of its revaluation is NOT retained
earning. However, increase in the value of
Kinds of Dividends: fixed assets as a result of revaluation
1. Cash Dividend – payable in cash. (“revaluation surplus”) may be declared as
2. Property Dividend – distributed to stockholders cash or stock dividends provided that the
in the form of property, real or personal, such as company:
warehouse receipts, or shares of stock of a) has sufficient income from
another corporation. operations from which the
3. Stock dividend – payable in unissued or depreciation on the appraisal
increased or additional shares of the increase was charged;
corporation. b) has no deficit at the time the
4. Optional Dividend – gives the stockholder an depreciation on the appraisal
option to receive cash or stock dividend. increase was charged to operations;
5. Composite Dividend – partly in cash and partly and
in stocks. Here, there is no option involved. c) such depreciation on appraisal
6. Preferred or Preferential Dividend – payable, increase previously charged to
by virtue of contract, to one class of operations has not been impaired by
stockholders in priority to that to be paid to losses.
another class. 3. Dividends can be declared out of the
7. Cumulative Dividend – contracted to be paid at amount received in excess of the par value
a certain rate at stated times and, if net earnings of shares (“paid-in surplus”) when:
at any dividend period are insufficient to pay the a) They are declared only as stock
contract dividend, it is to be made out of dividends and not cash;
subsequent net earnings. b) No creditors are prejudiced; and
8. Scrip Dividend – one in the form of a writing or c) There is no impairment of capital.
certificate issued to a stockholder entitling him to
the payment of money, stock or other benefit at - Note that unlike par value shares, when no
some future time inasmuch as the corporation at par shares are sold at a premium, the entire
the time such dividends are declared has profits consideration paid is considered capital,
not in cash or has no sufficient cash, or has the hence the same cannot be declared as
cash but wishes to reserve it for some corporate dividends.
purposes. It is in the form of a promissory note or 4. Reduction surplus can be a source of
a promise to pay and may be issued to bear dividends. Rule on paid-in surplus is
interest. applicable.
9. Bond Dividend – A dividend distributed in bonds 5. Money cannot be borrowed for the payment
of the corporation to the stockholders. The of dividends because an indebtedness is not
bondholder becomes a creditor of the corporation a retained earning o f the corporation.
to the extent of the amount of the bond. 6. Corporate earnings which have not yet been
10. Liquidating Dividends – These are actually received even though they consist in money
distributions of assets of the corporation upon which is due, cannot be included in the
dissolution or winding of the same. They are not profits out of which dividends may be paid.
paid on account of earnings or profits, but as a 7. Profits realized from sale of Treasury Shares
return of capital invested. are part of capital and cannot be declared as
cash or stock dividend as purchase and sale
 Saint Louis University COMMERCIAL LAW 126
2012 BAR OPERATIONS

of such shares are regarded as contractions conferred by this Code or by its AOI and except
and expansions of paid-in capital. such as are necessary or incidental to the
8. No dividends can be declared out of capital exercise of the powers so conferred.
except only in two instances:
a) liquidating dividends; and Ultra vires act
b) dividends from investments in - “beyond powers”
wasting asset corporation. - An act which although not prohibited by law, the
corporation cannot perform because it is not
- Retained earnings = Assets – liabilities and within its express, incidental or implied
legal capital powers. It is not necessarily illegal although an
illegal act is always ultra vires.
Wasting assets doctrine - An ultra vires act may be that of:
- A wasting assets corporation, such as a mining 1. The corporation;
or timbercutting company, the capital of which is 2. The Board of Directors; and
necessarily exhausted in the carrying on of its 3. The corporate officers.
operations, may rightfully declare and pay
dividends out of net income without making up Types of Ultra Vires Cases
for the loss of its capital which is thus being 1. Acts done beyond the powers of the
constantly diminished. corporation as provided in the law or its AI;
- A mining company, for example, is not formed 2. Acts or contracts entered into in behalf of a
for the purpose of permanently using the corporation by persons who have nor
property in which its capital is invested, but for corporate authority (This is technically ultra
the purpose of investing in property which, in the vires acts of officers and not of the
nature of things, will be gradually consumed in corporation);
making profits, and in estimating the profits of 3. Acts and contracts which are per se illegal
such company for the purpose of determining as being contrary to law.
whether it may lawfully declare a dividend, no
deduction is to be made for depreciation in the Test whether a corporation may perform an act:
value of its mine by reason of its use and - Consider the logical and necessary relation
consumption in taking out the ore or other between the act questioned and the corporate
minerals. Dividends may be lawfully declared purpose expressed by law or in the charter. If
out of the net proceeds of its operations after the act is lawful in itself and not prohibited, and
deducting expenses and debts and a reasonable is done for the purpose of serving corporate
fund for contingencies. ends, and reasonably contributes to the
promotion of those ends in a substantial and not
Power to enter into management contract (Sec. in a remote and fanciful sense (Montelibano
44) Doctrine)
- Requires:
1. Resolution of the BOD/Trustees, and Effects of Ultra Vires Act on:
2. Majority vote of the OCS/members 1. Wholly executed contract
Except: (2/3 vote shall be necessary if:) - shall not be interfered with as between the
a) The SH represents the interest of both parties or persons whose rights are derived
corporations owns 1/3 of the OCS of the therefrom, but the State can always question
managing corporation. said contract or act.
b) Majority of the members of he board of 2. Wholly executory contracts
the managing corporation compose also - cannot be enforced, even at the suit of either
majority of the members of the board of party (void and unenforceable) nor can
the managed corporation. damages be recovered for its breach.
3. Part executed and part executory
- Management contract is a device for tax - principle of “no unjust enrichment at the
avoidance, resulting in splitting of income. But expense of another” shall apply, and
when the conditions set herein are complied recovery can be had by one or whose part it
with, then there is no legal basis to pierce the was executed.
veil of corporate entity. 4. Executory contracts apparently authorized but
ultra vires
Ultra vires acts of corporations (Sec. 45 ) - the principle of estoppel shall apply and the
- No corporation under this Code shall possess or title of a corporation to property cannot be
exercise any corporate power except those questioned on the ground that it was
 Saint Louis University COMMERCIAL LAW 127
2012 BAR OPERATIONS

acquired through an ultra vires contract of - Held: The corporate secretary is the
transfer. custodian of corporate records and if she
Ratification of ultra vires acts certifies that a certain action had been taken
1. If act or contract is illegal per se, it is null by the board, such certification is binding
and void and cannot be ratified. upon the corporation although the same
2. If act or contract is bot illegal per se but may have been erroneously made. The
merely beyond the power of a corporation, reason for this is that the corporate
the same is merely VOIDABLE secretary is clothed with apparent authority.

Requirements for the ratification of an ultra vires Derivative suit

act: - the principal defense of the minority SH against
1. The act must be consummated, not the abuses of the majority. It is a remedy
executory designed by equity for those situations where
2. The creditors are not prejudiced, or all of the the management, through fraud, neglect of duty,
creditors have given their consent or other cause, declines to take the proper and
3. The rights of the public or the State are not necessary step to assert the corporation’s rights.
involved
4. All the SH must give their consent Requisites for the proper filing of a derivative
suit:
‐ Corporations cannot validly enter into a 1. The party bringing suit should be a SH as of the
partnership because in a partnership, all the time of the act or transaction complained of
other partners can bind the partnership and the 2. He has exhausted intra-corporate remedies (i.e.,
other partners, which would be violative of the has made a demand on the BOD for the
principle in Corporation Law that only the BOD appropriate relief but the latter has failed or
can bind the corporation. refused to heed his plead.)
3. The cause of action actually devolves on the
 Case: corporation, the wrongdoing or harm having
- X company agreed to post a bond for a been caused to the corporation and not the
postmaster in case of malversation for the particular SH bringing the suit.
opening of a post office within X Company’s
compound to facilitate mail of the employees
living therein, after conferring with the
Postmaster General. The postmaster V. BY-LAWS
malversed public funds, so the Postmaster
General sued on the bond posed by X Co. By – laws
but X Co. raised the defense of ultra vires These are rules of action adopted by a corporation
act, that it was not authorized to file a bond for its internal government and for the government of
for a public officer such as the postmaster its stockholders or members and those having the
and, therefore, such act did not bind the direction, management and control of its affairs in
corporation. their relation to the corporation and as among
- Held: The filing of the surety bond is ultra themselves.
vires, but not illegal per se, and which was
ratified by the acceptance by X company of Binding Effect of by-laws:
the benefits attendant to the opening of a 1. As to members and corporation
post office in its compound, is binding on - They have the force of contract between the
the corporation. members themselves.
- They are binding only upon the corporation
 Case: and on its members and those having
- Y cannot pay her loan from the GSIS with direction, management and control of its
her house as mortgage so she proposed a affairs.
scheme to the GSIS Board by which she 2. As to third persons
can liquidate her claim. It was rejected by - Third persons are not bound to know the by-
the Board, but the secretary erroneously laws which are merely provisions for the
sent a message to Y that the proposal was government of a corporation and notice to
accepted. Subsequently, Y received a them will not be presumed.
summons for foreclosure. Y sued GSIS for -Why? By-laws have no extra-corporate
damages. force and are not in the nature of legislative
 Saint Louis University COMMERCIAL LAW 128
2012 BAR OPERATIONS

enactments so far as third persons are

concerned. Amendments to by-laws (Sec. 48)
‐ By a vote of the majority of the BOD/BOT and
When by-laws are adopted the owners of at least a majority of the
‐ It may be before or after incorporation. OCS/members, at a regular or special meeting
‐ Generally every corporation formed under this DULY called for the purpose.
Code must, within one (1) month after receipt of
official notice of the issuance of its Certificate of May the voting right of the SH be delegated?
Incorporation by the SEC adopt a code of by-laws ‐ Yes. The owners of 2/3 of the OCS or members
for its government not inconsistent with this may delegate to the BOD or trustees the power
Code. to amend or repeal any by-laws PROVIDED, the
‐ However, by-laws may be adopted and filed prior power delegated is deemed revoked whenever
to incorporation; in such case, such by-laws shall the stockholders owning or representing a
be approved and signed by all the incorporators majority of the OCS or a majority of the
and submitted to the SEC, together with the members in non-stock corporations, shall so
Articles of Incorporation. vote at a regular or special meeting.

When by-laws are effective ‐ The power to revoke may happen at any time
‐ In all cases, by-laws shall be effective only upon even if not among the agenda in a regular or
the issuance by the SEC of a certification that the special meeting. Notice that the rule did not
by-laws are not inconsistent with this Code. specifically provide that the regular or special
meeting must be duly called for the purpose.

Effectivity of amended by-laws

How by-laws are adopted ‐ The amended or new by-laws shall only be
a) Affirmative vote of majority of the OCS/members effective upon the issuance by the SEC of a
b) Signed by stockholders/members voting for Certification that the same are not inconsistent
them and shall be kept in the principal office of with the Code.
the corporation, subject to inspection of the
stockholders or members during office hours
c) Duly certified to by a majority of the directors or
trustees and countersigned by the secretary of VI. MEETINGS
the corporation. MEETING SH/MEMBERS BOD
d) Filed with the SEC, which shall be attached to Held annually
the original articles of incorporation. on a date fixed
in the by- laws;
Special Corporations if not so fixed, Held monthly or
‐ SEC not to accept for filing the by- laws of any Regular on any date in as provided in
special corporation governed by special laws April of every the by laws.
unless accompanied by a certificate of the year as
appropriate government agency to the effect that determined by
such are in accordance with law. the Board
Held at any Held at anytime
Validity of By-Laws time deemed upon the call of
1. They must not be contrary to law and not Special necessary or as the President or
inconsistent with the Corporation Code; provided in the as provided in
 Not contrary to law – although allowed in the by- laws. the by- laws.
by-laws, a BOD must always be a natural NOTICE SH/MEMBERS BOD
person. He cannot be a representative of a 1 day notice
juridical person (Grace Nat. High vs. CA 281 SCRA 2 weeks prior to
prior to the
133). the meeting
scheduled
2. Must not be contrary to morals and public policy; unless a
Regular meeting unless
3. Must not impair obligations of contracts; different period
otherwise
4. Must be general and uniform in their operation is required by
provided in the
and not directed against particular individuals; the by-laws.
by-laws.
5. Must be consistent with the charter or articles of
incorporation; 1 week written 1 day notice
6. Must be reasonable (capable of compliance). Special notice, unless prior to the
otherwise scheduled
 Saint Louis University COMMERCIAL LAW 129
2012 BAR OPERATIONS

provided in the meeting unless office of the

by-laws. otherwise corporation
provided in the (Sec. 51)
by-laws. (the Majority of the Majority of all
same as in OCS or members of the
regular members in Board of
meeting) case of non- directors or
stock unless trustees.
QUORUM
otherwise
‐ Notice of any meeting, either SH/Member’s or provided for in
BOD’s meeting, may be waived, expressly or the Corporation
impliedly by the SH/Member or BOD/trustee. Code or in the
by-laws.
Who presides at meetings
‐ The President Requisites of Notice of Meeting
‐ Exceptions: 1. Issued by one who has authority to issue it;
a) When the by -laws provide otherwise; 2. Must be in writing;
b) the petitioning stockholder/member – When 3. Must state the time, date and place of the
there is no person authorized to call a meeting, unless otherwise provided in the by-
meeting, a SH/member may petition the laws;
SEC upon showing of good cause therefor. 4. Must state the business to be transacted
SEC to issue an order to the petitioning thereat;
stockholder or member directing him to call 5. Must be sent at a certain time before the
a meeting of the corporation by giving scheduled meeting as fixed by law, unless a
proper notice required by the Corporation different period is required by the by-laws.
Code or the by-laws. The petitioning 6. The notice must comply with any other
stockholder or member shall preside thereat requirements prescribed by the law or by the by-
until at least a majority of the SH/members laws of the Corporation.
present have chosen one of their number as
presiding officer (Sec. 50(4)). May the BOD change or postpone the date of
meetings fixed in the by-law?
Proper Person to Call the Meeting ‐ Yes, but not the annual meeting.
1. Person designated in the by-laws – normally ‐ Exception: Annual meetings may be postponed
it is the Corporate Secretary if there are justifiable reasons for its
2. In the absence of the secretary, a postponement as when the annual meetings
director/trustee or by an officer with interest cannot be held in the date fixed by the by -laws
in the management of the corporation unless for some valid or justifiable reasons. However,
there is a prohibition in the by-laws. no postponement is allowed if the effect is to
3. A SH or member on order of the SEC prolong the term of the directors.
whenever for any cause, no person
authorized to call a meeting. ‐ Meetings held in the absence of some of the
Special meeting for the removal of director/trustee directors and without any notice to them is illegal
may be called by the Secretary or by the and the action at such meeting is invalid, unless
SH/member as provided by Sec. 28. subsequently ratified or waived.

Place and Time of Meetings/Quorum Requisites for a valid meeting of Stockholders

or members:
SH/MEMBER BOD/BOT 1. It must be held at the proper place;
(Regular or May be held 2. It must be held on stated date and at the
special) -city or anywhere in or appointed time or at a reasonable time
municipality outside of the thereafter;
where the Philippines, 3. It must be called by the proper person;
principal office unless the by- 4. There must be a previous notice of meeting;
PLACE
of the laws provide 5. There must be a quorum.
corporation is otherwise (Sec.
located, and if 53) When a meeting is not required
practicable in 1. Amendment of the AI (sec. 16)
the principal
 Saint Louis University COMMERCIAL LAW 130
2012 BAR OPERATIONS

2. Sec. 101 – action by the directors of a close 4. A continuing proxy may be for a period not
corporation without a meeting but ratified exceeding five (5) years at any one time,
3. When there is agreement. otherwise it shall not be a valid and effective
after such period.
Right to vote  Directors or trustees cannot attend or vote
‐ An inherent right of the stockholders or by proxy at Board meetings. (Sec. 25, last
members in the management of the corporation. paragraph)

May a stockholder be compensated for his time in Kinds of Proxy

coming to the corporation to vote? 1. General Proxy
‐ No, because voting is a right hence one is not ‐ Confers a general discretionary power of
paid for exercising such right. attorney to attend and vote at an annual
meeting with all the powers the undersigned
Who are entitled to vote would possess if personally present, to vote
‐ The SH/Members (record date). for directors and all ordinary matters that may
‐ Except the ff. properly come before a regular meeting.
1. Delinquent 2. Limited Proxy
2. Treasury shares ‐ The power has a limited.
3. Non -voting shares, except under those 8
instances enumerated under sec. 6 Rules on Proxy
“A2MI3DS” 1. 1 proxy is given to 2 or more persons:
‐ Gen. Rule:
 The following persons are not stockholders or  All must agree upon the vote.
members but may vote.  If they cannot agree, rule of the majority
1. Pledgor or mortgagor under sec. 55 applies.
‐ A pledgor or mortgagor of shares remain ‐ Exception:
entitled to vote on shares given as  if the proxies discriminate
security unless an express written  This means that the proxies determined
authority to vote is given to pledgee or the manner on how they should vote.
mortgagee this authority being required by ‐ The stockholder’s instruction, if any,
law to be registered in corporate books at prevails.
the instance of the pledgor or mortgagor. 2. When several proxies are submitted:
2. Executors, administrators, receivers, and a. Where proxies are dated
the other legal representatives duly  Latest proxy revokes the earlier proxy.
appointed by the court (sec. 55) b. Where proxies are undated
‐ Legal representatives (like executors,  If proxy is mailed to the corporation –
receivers, etc.) vote by legal mandate the one having the latest time of day of
(without need of proxy) on shares postmark
subject to their administration.  If submitted in person – one presented
latest.
2 Ways of Voting By the Stockholder or member  Dated proxies prevail over undated proxies
1. In person
2. By proxy Right to appoint a proxy
‐ The right to appoint a proxy cannot be denied in
Proxy a stock corporation but maybe denied in a non-
‐ Is the formal authority given by the holder of the stock corporation.
stock, who has a right to vote it, or by a member, ‐ Reason for the distinction:
to another person to exercise the voting rights of  In a stock corporation, the stockholder has
the former. an investment that he is protecting; the
same is not true in a non-stock corporation.
Requisites/limitations of a valid Proxy
1. It shall be in writing and signed by the SH or Revocation of proxies
member; ‐ Gen. Rule:
2. It must be filed before the scheduled meeting  Revocation takes place at any time.
with the corporate secretary; ‐ Exception:
3. Unless otherwise provided in the proxy, it shall  When the proxy is coupled with an interest
be valid only for the meeting for which it is (Proxy has parted with value or incurred
intended or valid only for the specified meeting; liability at the SH’s request, looking to the
 Saint Louis University COMMERCIAL LAW 131
2012 BAR OPERATIONS

exercise or the proxy as the means of 5. It shall be subject to examination by any

reimbursement or indemnity. E.g. Where D stockholder of the corporation in the same
borrows money from C and D pledges his manner as any other corporate book or record:
certificates of stock to C for the debt, giving Provided that both the transferor and the trustee
C a written continuing proxy to attend and or trustees may exercise the right of inspection
vote the shares at meetings of stockholders of all corporate books and records in
until the debt is paid. It is clear that D cannot accordance with the provision of the code;
revoke the proxy unless he first pays C.) 6. Unless expressly renewed, all rights granted in a
VTA shall automatically expire at the end of the
agreed period, and the voting trust certificates
as well as the certificates of stock in the name of
How to revoke a proxy agreement the trustees shall thereby be deemed cancelled
‐ In any manner either expressly or impliedly, and new certificates of stock shall be reissued in
hence notice is not actually required as when it the name of the transferors.
was orally revoked
1. Formal notice/expressly; How VTA works
2. Orally/impliedly; 1. Certificate of stock covered by the VTA shall
3. By conduct, as when during the be cancelled and new ones shall be issued
meeting the SH appears, in this in the name of the trustee or trustees stating
case the proxy is deemed revoked; that they are issued pursuant to said
4. Issuance of a subsequent proxy; OR agreement.
5. Sale of shares of stockholder.  NOTE: In the books of the corporation, it
shall be noted that the transfer in the name
VOTING TRUST AGREEMENT (VTA) of the trustee or trustees is made pursuant
‐ It is an agreement in writing whereby one or to said VTA.
more stockholders of a stock corporation  EFFECT: The trustor becomes the beneficial
transfer his or their shares to any person or owner. A stockholder of a stock corporation
persons or to a corporation having authority to parts with the voting power only but retains
act as a trustee for the purpose of vesting or the beneficial ownership of the stock. A
conferring upon a trustee or trustees the right to voting trustee therefore is only a share
vote and other rights pertaining to the shares for owner vested with apparent legal title for the
a period not exceeding 5 years at any one time. sole purpose of voting upon stocks that he
does not own.
Rationale of VTA  HOWEVER, the transferring stockholder,
a) Such an agreement makes possible a unified although he has ceased to be the
control of the affairs of the corporation and stockholder of record, retains the right of
consistent policy by binding the SH to vote as a inspection of corporate books, which he can
unit. exercise concurrently with the voting trustee.
b) It also makes it possible for a majority group of 2. Trustee(s) shall execute and deliver to the
shareholders to dispose of the beneficial interest transferor a voting trust certificates (VTC), which
in a large proportion of their shares and still shall be transferable in the same manner and
retains control of the corporation through the with the same effect as certificates of stock.
voting trustee.  EXPLANATION: In return for the certificates
of stock, the voting trustee executes and
Limitations of a VTA delivers to the stockholders voting trust
1. It shall be good for a period not exceeding five certificates to show that the latter are in
(5) years at any one time BUT if required by a reality the owners of the shares held by the
loan agreement, the period may go beyond five voting trustee. The owners are thus enabled
(5) years but the trust shall automatically cease to claim the dividends when they are
upon full payment of the loan; collected by the trustee and to recover their
2. It must be in writing and duly notarized; stocks at the expiration of the trust.
3. It shall not be entered to circumvent laws
against monopolies and illegal combinations in Effects of the executing and delivering VTA to
restraint of trade nor shall it be used for the Stockholder (transferor)
purposes of fraud; 1. To show that the SH is in reality the owner of the
4. A certified copy of such agreement shall be filed shares held by the voting trustee
with the corporation and with the SEC, otherwise 2. To enable him to claim the right to the dividend
said agreement is ineffective and unenforceable; when they are collected by the trustee.
 Saint Louis University COMMERCIAL LAW 132
2012 BAR OPERATIONS

3. To inspect corporate books 7. Filed with the SEC 7. Filed only with the
4. To recover his shares of stock at the expiration otherwise it is ineffective Corporate secretary.
of the trust. and unenforceable. Filing with the SEC not
needed.
Rights of voting trustee(s) 8. The agreement must 8. The proxy need not be
1. The trustee(s) shall possess the right to vote be notarized notarized
and other rights pertaining to the shares so 9. The voting right is 9. The right to vote is
transferred and registered in his or their names divorced from the inherent and inseparable
subject to the terms and conditions of and for ownership of stocks from the right to stock
the period specified in the agreement. ownership.
2. When he votes, he may vote in person or by 10. The trustee votes as 10. The proxy holder
proxy unless the agreement provides otherwise. owner rather than as votes as agent
3. They may exercise, like the transferor, the rights mere agent
of inspection of all corporate booked and
records.  The maximum duration of both cannot
4. He is the legal title holder or owner of the shares exceed five (5) years at any one time.
so transferred under the agreement. Hence he
can be voted. If so then he is also qualified to be
a director (Sec. 23)
VII. STOCKS AND STOCKHOLDERS
Cancellation of the VTA
‐ Unless expressly renewed, all rights granted in a Ways by which a person becomes a Stockholder
voting trust agreement shall automatically expire 1. By Subscription
at the end of the agreed period, and the voting 2. By Purchase/transfer
trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall Subscription contract
thereby be deemed cancelled and new ‐ It is any contract for the acquisition of unissued
certificates of stocks shall be reissued in the stock in an existing corporation or a corporation
name of the transferors. still to be formed.
‐ Subscription pertains only to unissued stocks.
VOTING TRUST vs. PROXY
Kinds of Subscription
VOTING TRUST PROXY 1. Pre-incorporation subscription contract (Sec.
1. Trustee acquires legal 1. Proxy has no legal 61)
title to the shares of the title to the shares of the ‐ One entered into before incorporation. It
transferring stockholder principal constitutes a binding contract among the
2. Generally, the 2. Generally revocable subscribers. (Sec. 61) This is mandatory.
agreement is irrevocable except when coupled (Sec. 13) [25%/25% requirement]
for a definite and limited with interest. ‐ Gen. Rule:
period of time.  A subscription for shares of stock of a
3. Trustee can act in all 3. Proxy can only act at corporation still to be formed shall be
meetings during the a specified meeting irrevocable for a period of at least 6
lifetime of the VTA. unless otherwise months from the date of subscription.
provided (continuing)  Rationale of the GR: To ensure that the
4. Trustee can vote and 4. Proxy can only vote if corporation shall have the capital to
exercise all the rights of in the absence of the undertake the business of which it is
the transferring owner of the stock. established.
stockholder even when Reason: Presence of SH ‐ Exceptions:
the latter is present. in a meeting is an a. When all of the other subscribers
implied revocation of the consent to the revocation; or
proxy. b. The incorporation of the corporation fails
5. A VTA must not 5. A proxy is usually to materialize within said period or within
exceed 5 years at any shorter in duration a longer period as may be stipulated in
one time except when although it cannot the contract of subscription.
the same is made a exceed 5 years at any ‐ Notice that the 6 months period as provided
condition of a loan. one time (Sec. 58) in the Gen. Rule applies only if no stipulation
6. There is transfer of 6. No transfer of share is made in the subscription contract. The 6
share
 Saint Louis University COMMERCIAL LAW 133
2012 BAR OPERATIONS

months may also be shortened if so

stipulated in the subscription contract. Consideration for stocks (sec. 62)
‐ When is the Pre-incorporation Subscription ‐ Rule:
Contract absolutely irrevocable?  Stocks shall not be issued for a
 After the submission of the AI to the consideration less than the par or issued
SEC. price thereof.
 In Ong Yong vs. CA (02/01/02), the SC  If less than its par or issued price – watered
allowed the rescission of a pre- stock
incorporation subscription contract on ‐ Consideration for the issuance of stock may
the ground of substantial breach of be any or a combination of any two or more of the
obligations as provided in Art. 1191 of following:
the NCC. 1. Actual cash;
 The SC recognized the nature of a pre- 2. Property, tangible or intangible,
incorporation subscription contract as a a. actually received by the corporation
reciprocal obligation by the original b. and necessary or convenient for its use
subscribers with the corporation and lawful purposes
intended to be formed as a beneficiary c. at a fair valuation equal to the par or
of pour autri stipulation in such issued value of the stock issued;
agreement. 3. Labor performed for, or services actually
rendered to, the corporation;
2. Post-incorporation subscription contract 4. Previously incurred indebtedness by the
‐ One entered into after the incorporation corporation;
for the acquisition of unissued stock. 5. Amounts transferred from unrestricted
retained earnings to stated capital; (increase
Stock option of capital by declared stock dividends)
‐ Is a privilege granted to a party to subscribe to a 6. Outstanding shares exchanged for stocks in
certain portion of the unissued capital stock of a the event of reclassification or conversion,
corporation within a certain period and under the e.g. common shares of stock.
terms and conditions of the grant exercisable by
the grantee at any time within the period  Promissory notes or future services cannot be
granted. It is a contract to buy or purchase made as payment for shares of stock.
whereas in SUBSCRIPTION, the contract is
already executed. May postdated checks be accepted as payment?
‐ No. As a rule the corporation must actually
Purchase or transfer receive the cash or property.
‐ Buying issued shares from a stockholder or from
the corporation itself. Who determines the valuation if the consideration is
‐ Pertains to issued shares in contradistinction other than cash?
with subscription. ‐ Where the consideration is other than cash or
consists of intangible property such as patents
Sources of Corporate Capital or copyrights, the valuation thereof shall initially
1. Funds furnished by shareholders be determined by the incorporators or the board
2. Borrowings of directors, subject to approval by the SEC.
3. Profits and stock dividends ‐ Hence, there must be a valuation fixed by the
Board, approved by the SEC before the property
Warrant is accepted as consideration. If accepted as
- A type of security which entitles the holder the consideration and no valuation, the stock is
right to subscribe to the unissued capital stock of considered as watered. (sec. 65)
a corporation OR to purchase issued shares in
the future, evidenced by a Warrant Certificate, What about no par value shares, how are their
whether detachable or not, which may be soled issued price determined?
or offered for sale to the public. ‐ The issued price of no-par value shares may be:
a. fixed in the Articles of Incorporation;
Shares of stock or
‐ Interest or right which the owner has in the b. by the BOD pursuant to authority
management of the corporation, and its surplus, conferred upon it by the AI or the
profits, and, on dissolution, in all of its assets by-laws or in the absence thereof,
remaining after the payment of its debt.
 Saint Louis University COMMERCIAL LAW 134
2012 BAR OPERATIONS

c. by the stockholders representing at ‐ This is a written instrument signed by the proper

least a majority of the OCS at a officer (president or the vice president) of a
meeting duly called for the purpose corporation stating or acknowledging that the
person named thereon is the owner of a
Bonds designated number of shares of its stock.
‐ The same consideration as provided for in this
section (Sec. 62) insofar as they may be  Stockholder has the right to a certificate of stock
applicable, may be used for the issuance of  Upon full payment of the amount of the
bonds by the corporation. subscription together with the interest and
expenses (in case of delinquent shares) if
When one is supposed to pay? any.
‐ At the date fixed in the subscription contract or,
if no date is fixed, upon CALL (demand to pay) Formal requisites of a certificate of stock
by the board. 1. Signed by the President or VP.
2. Countersigned by the Secretary or asst.
What happens if there was failure to pay on the date secretary.
fixed or upon call? 3. Issued in accordance with the by-laws.
‐ Failure to pay on such date shall render the 4. It contains the corporate seal.
entire balance due and payable and shall make
the stockholder liable for interest at the legal rate  Where the stock certificate reflects a greater
of interest as provided in the by-laws, computed volume of shares than the actual number of
from such date until full payment. shares issued or to be issued, the following
‐ Within 30 days after the call or after the date rules may be considered:
fixed in the by-laws, there was still failure to pay, 1. To the extent that there was an over-issue,
the shares shall become delinquent shares. the excess issuance (over the authorized
capital stock or stated capital) shall be void
Purpose of a call as being ultra vires.
‐ To fix the date of payment 2. If there is no over-issue, but no payment has
been made to cover the par or stated value
Requisites of a valid call of the excess shares, the latter would
1. It must be made by the board through a constitute “watered” stocks.
resolution 3. If there is no over-issue and watering of
2. It must operate uniformly either to all or a stocks, the corporation may be bound to
particular class or species of share. honor the certificate (if duly signed and
released by its authorized officers) in the
Is a call absolutely necessary? hands of a holder in good faith, reserving a
‐ No, call is not necessary in the following right of recourse that an aggrieved party
instances: may pursue against the culpable or unjustly
a. If corporation is already insolvent; enriched party.
b. Subscriber is insolvent;
c. If there is a date fixed in the subscription How partial payments are treated
contract. ‐ Partial payment must be applied on the number
of shares covered by it BUT in the case of
What one is supposed to pay Baltazar (14 SCRA 522); “Partial payment must
a. Amount of unpaid subscription be pro-rated among all the shares”
b. The interest on all unpaid subscriptions from ‐ Eg. If A subscribed 500 shares at 100 peso per
the date of subscription, if so required by, share and he paid only 25,000 pesos. He is
and at the rate of interest fixed in, the by- deemed to have paid only 50 pesos of the 100
laws. If no rate of interest is fixed in the by- peso per share subscription price. This doctrine
laws, such rate shall be deemed to be the was however decided under the old laws but
legal rate. there may still be corporations existing that are
governed by the old law.
 Now that one has paid, he is now entitled to
shares of stocks and the corresponding  Once the stocks are issued in the name of the
certificate of stocks. stockholder, the shares of stocks so issued
become his personal property.
Stock certificate
 Saint Louis University COMMERCIAL LAW 135
2012 BAR OPERATIONS

 Effect: It being his personal property, he 2. Invalid as against the corporation until notice is
may transfer the same if he wants to given.
(remember that transfer or purchase is one 3. Invalid as against the corporate creditors.
of the modes by which one becomes a ‐ Under the doctrine of Piercing the Veil of
stockholder) Corporate Entity. Remember that the
purpose of the same is to make the
Requisite of a valid transfer stockholders liable.
‐ It should be recorded in the books of the 4. Invalid as against creditors of transferor
corporation. 5. Transferor continues the right to vote and be
‐ Exception: Sole Corporation voted until he is challenged.
6. Transferor continues to enjoy the right to receive
Who should do the recording? the dividends until there is recording.
‐ The corporate secretary. Other than him the
recording is ineffective. Subscriber vs. Stockholder
‐ However, another person may do it provided it is a) A subscriber is one who has not yet fully paid his
done under his supervision. (278 SCRA 792) subscription, whereas a stockholder is one who
has paid his subscription.
When may the corporate secretary refuse the b) Holders of subscribed shares not fully paid
recording? which are not delinquent (CF) shall have all the
‐ Corporate secretary may refuse or the rights of a stockholder (Sec. 72)
corporation may oppose recording or transfer
when the corporation holds an unpaid claim  In the case of First Phil. Holding, 253 SCRA, a
against the shares of stocks. (sec. 63) stock certificate is not necessary to establish the
‐ In the Chinabank case (270 SCRA 503) the relationship of a Stockholder with the
shares of stock against which the corporation corporation. The evidence is now the receipt of
holds an unpaid claim is defined as a payment.
delinquency.
If the stocks are fully paid but the certificate of stocks
Is it not that under section 64 stock certificate shall is not yet issued is one already considered a
be issued only when they are fully paid? stockholder?
‐ Yes, but the unpaid claims as hereto referred ‐ Yes, because if section 72 considers one to be a
arises from instances where by honest mistake stockholder even if he has not yet fully paid then
the corporation issued a stock certificate to a with more reason that a person who has fully
subscriber unknowingly that he has not yet fully paid his subscription be considered a
paid his subscription. stockholder.

How transfer is made Rights of stockholders

‐ Transfer is made by endorsement and delivery 1. Managerial Rights
of the certificate. a. Voting rights; and
b. Right to remove directors
Reasons for Requiring Registration of Stock 2. Appraisal Rights
transfer 3. Proprietary Rights
1. To enable the corporation to know at all times a. Right to dividends;
who are its stockholders because mutual rights b. Right to issuance of certificate of stock for
and obligations exist between the corporation fully paid shares;
and its stockholders. c. Proportionate participation in the distribution
2. To afford the corporation an opportunity to of assets in liquidation;
object or refuse to the transfer in case it has a d. Right to transfer of stocks in corporate
claim against the stock sought to be transferred, books;
or for any valid reason. e. Pre-emptive right;
3. To avoid fictitious or fraudulent transfers. f. Right to recover stocks unlawfully sold for
delinquent payment of subscription;
Can a subscription be transferred? g. Right to be furnished of the most recent
‐ Yes, but with consent of the corporation. This is financial statement/ financial report.
in effect a novation. 4. Inspection Right – right to inspect books and
records
Effects of Unregistered Transfer 5. Remedial rights
1. Valid only between transferor and transferee
 Saint Louis University COMMERCIAL LAW 136
2012 BAR OPERATIONS

a. Individual suit – a suit instituted by a

shareholder for his own behalf against the  Extent of liability in these instances
corporation; ‐ The director or officer shall be solidarily
b. Representative suit – a suit filed by a liable with the stockholder concerned to the
shareholder in his behalf and in behalf of corporation and its creditors for the
other stockholders similarly situated and difference between the fair value received at
with a common cause against the the time of issuance of the stock and the par
corporation; and or issued value of the same.
c. Derivative suit – a suit filed in behalf of the ‐ Section 64 does not apply.
corporation by its stockholders (not ‐ Section 65 does not also distinguish whether
creditors whose remedies are merely the issuance of a watered stock is deliberate
subsidiary such as accion subrogatoria and or not.
accion pauliana) upon a cause of action
belonging to the corporation, but not duly Coverage of watered stocks
pursued by it, against any person, director, ‐ Only originally issued shares may be watered.
officer and/or controlling shareholders of the Hence, it arises only in a transaction between
corporation. the corporation and a subscriber.
‐ Any subsequent appreciation in value of the
What is the presumption if one is issued his shares will not cure the defect.
certificate of stock?  Reason: The liability for watered stocks
‐ The presumption is that he has fully paid his arises from the time the stocks are issued.
subscription.

Watered stocks DELINQUENT SHARES

‐ These are stocks issued not in exchange for its
equivalent. Effects of Declaration of Delinquency (Sec. 71)
‐ Includes: 1. Delinquent stocks cannot be voted for
1. Stock issued without consideration 2. Cannot vote in any election
2. Issued as fully paid when the corporation 3. No representation at any stockholder’s meeting
has received a less sum of money than its 4. Not entitled to any of the right of the stockholder
par or issued value except the right to receive dividends but subject
3. Other than cash but valuation less than the to the rules under sec. 43.
par or issued value
4. Issued as stock dividend when there are no Procedure for delinquency sale: (Sec 68)
sufficient retained earnings or surplus (as if 1. There must be a board resolution ordering the
not paid the full amount of subscription) sale stating 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 30 days nor more than 60 days
Who are primarily liable? from the date the stocks became delinquent.
‐ The holder of the watered stock shall be liable to 2. Notice of sale, with a copy of the resolution
the corporation and its creditors for the given to the delinquent SH personally or by
difference between the fair values received at registered mail. This must also be published
the time of issuance of the stock and the par or once a week for 2 consecutive weeks in the
issued value of the same. province or city where the principal office of the
corporation is located.
Instances when not only the SH is liable 3. Auction sale whereby the stocks are sold to the
1. When a director or officer of a corporation highest bidder.
consented to the issuance of stocks for a ‐ HIGHEST BIDDER
consideration less than its par or issued value or  He is the person offering at the sale to
for a consideration in any form other than cash, pay the full amount of the balance on
valued in excess of its fair value, or the subscription together with the
2. Who having knowledge thereof, does not accrued interest if any, cost of
forthwith express his objection in writing and file advertising and expenses of the sale, for
the same with the corporate secretary (This is the smallest number of shares or
the remedy of a director or officer if he wants to fraction of a share (Why smallest
avoid liability arising from the issuance of a number of share – to give possibility for
watered stock of which he has knowledge.)
 Saint Louis University COMMERCIAL LAW 137
2012 BAR OPERATIONS

the subscriber to have something left for - Holders of subscribed shares not fully paid
him). which are not delinquent shall have all the rights
 Illustration: At public auction sale, M of a stockholder.
offers to pay P800 for 1,000 shares, L,
P800 for 900 shares and T, P800 for
800 shares. T is the highest bidder and Lost, stolen or destroyed certificate of stock
the remaining 200 shares shall go to X, (sec. 73)
the original subscriber. Procedure:
1. The registered owner of the certificate or his
 The stock so purchased shall be transferred to legal representative shall file with the
such purchaser in the books of the corporation corporation an affidavit in triplicate, setting forth
and a certificate for such stock shall be issued in if possible, the circumstances as to:
his favor. a) how the certificates were lost, stolen or
 The remaining shares, if any, shall be credited in destroyed,
favor of the delinquent stockholder who shall b) the number of shares represented by each
likewise be entitled to the issuance of a certificate,
certificate of stock covering such shares. c) the name of the corporation which issued
the same, and
When auction may be cancelled d) Such other information and evidence which
1. If the delinquent SH pays to the corporation, on he may deem necessary.
or before the date specified for the sale, the 2. The corporation shall publish a notice in a
balance due on his subscription plus accrued newspaper of general circulation once a week
interest, cost of advertisement plus expenses of for 3 consecutive weeks at the expense of the
the sale. registered owner.
2. If the Board otherwise orders.
When a corporation may issue a new certificate
What happens if there are no bidders? of stock
‐ The corporation may purchase the delinquent ‐ After the expiration of 1 year from the date of
stocks. The purchase must be made out of its last publication.
net earnings in view of the trust fund doctrine - If no contest has been presented to said corp.
(Sec. 41[2]). after the expiration of 1 year – the right to make
‐ Advertisements for bidders are simply invitations the contest shall be barred.
to make proposals, and the advertiser is not - If contest has been presented to the corp. or an
bound to accept the highest or lowest bidder, action is pending in court regarding the
unless the contrary appears (Art. 1326,NCC) ownership, the issuance of a new certificate
shall be suspended until final determination by
When may the auction sale be questioned? the court regarding the ownership of the lost,
‐ When there is irregularity or defect in the notice stolen or destroyed certificate.
of sale, or in the sale itself of the delinquent
stock.  Gen. Rule: No action may be brought against
‐ Remedy: Recovery of the stocks any corp. for the issuance of a new certificate
 Exceptions: in case of fraud, bad faith or
Requisites before one may file an action to negligence on the part of the corp. and officers.
recover
a. The party seeking to maintain such action must May the requirement of publication be dispensed
first pay or tender to the party holding the stocks with?
the sum for which the same was sold with ‐ Yes, if bond or surety is filed by shareholder
interest from the date of sale at the legal rate. running for a period of 1 year, in which case a
b. The action must be filed within 6 months from new certificate may be issued even before the
the date of sale. expiration of 1 year

Can the corporation dispense with the auction sale

as a remedy? VIII. CORPORATE BOOKS AND RECORDS
‐ Yes, by first filing a judicial action to collect the
amount due in any unpaid subscription with Books and Records to be Kept by the
accrued interest, costs and expenses. Call is still Corporation (Sec. 74):
necessary. 1. A record of all business transactions;
Rights of Unpaid Shares (Sec. 72) 2. Minutes of all meetings – contents
 Saint Louis University COMMERCIAL LAW 138
2012 BAR OPERATIONS

- set forth in details the time and place of 1. If owned entirely by the corp. of which he is
meeting whether regular or special a shareholder
- those present and absent 2. Both corporations use the same office
- every act ordered at the meeting 3. Both corporations have identical directors
- upon demand, time when
director/shareholder/members entered or Rights to financial statements (Sec. 75)
left, yes or no vote or protest When is a corp. mandated to furnish its recent
3. Stock and transfer books, in case of stock financial statement?
corporation - Within 10 days from receipt of a written request
- records of all stocks and names of of any shareholder or member
shareholder
- installments paid and unpaid in all stock for What are included in the written statement
which subscription has been made 1. Balance sheet as of the end of the last
- Kept in principal office of the corp. or office taxable year
of the stock or transfer agent 2. Profit or loss statement for said taxable year
showing in reasonable details its assets and
 Non-stock corp. do not have stock and transfer liabilities and result of its operation
books.
 Sole corp. may not have all these books  OBLIGATION OF THE BOARD
‐ Financial report of the operations of the
Inspection rights of a stockholder corp. for the preceding year, which shall
Limitations: include financial statement, duly signed and
a. The right must be exercised during reasonable certified by an independent CPA
hours on business days;
b. The person demanding the right has not  PAID- UP CAPITAL OF CORP.
improperly used any information obtained ‐ Less than 50T, financial statements may be
through any previous examination of the books certified under oath by the treasurer or any
and records of the corporation; and responsible officer of the corporation.
c. The demand is made in good faith or for a
legitimate purpose.

 OFFICER/AGENT of corp. who refuses to allow IX. MERGER AND CONSOLIDATION

examination and copying of excerpts – liable for
damages and guilty of violation of the Merger
Corporation Code; if acting based on a board ‐ A union whereby one or more existing
resolution or order of directors, liability attaches corporations are absorbed by another
to the directors who voted for the refusal. corporation which survives and continues the
 Mandamus – available remedy of the combined business.
stockholder or member if wrongfully refused to
exercise the right. Consolidation
‐ The union of two or more existing corporations
Stocks and transfer agent to form a new corporation called the
‐ One engaged principally in the business of consolidated corporation.
registering transfer of stocks in behalf of a stock ‐ Reasons:
corp. 1. expansion,
‐ Allowed to operate in the Philippines if he 2. profitability,
secures a license from the SEC and pays a fee 3. effective loss management,
which shall be renewed annually. 4. lesser cost

 Stock corp is not precluded from making transfer Procedure (Sec. 76-79)
of its own stocks 1. Board of each constituent corp. execute a plan
of merger or consolidation – contents of plan
A Corp. – B Corp.: X shareholder of A Corp.; A Corp. a. Names of the corporations proposing to
is a shareholder of B Corp merge/consolidate
‐ Gen Rule: No right of inspection by X to the b. The terms of the merger or consolidation
books of B Corp. and the mode of carrying the same into
‐ Except: If it is wholly – owned subsidiary effect
‐ Conditions: (89 SCRA 336)
 Saint Louis University COMMERCIAL LAW 139
2012 BAR OPERATIONS

c. A statement in the changes of AI of the 1. The constituent corporations shall become a

surviving corp. in case of merger and with single corporation which, in case of merger shall
respect to the consolidated corp., in case of be the surviving corporation, and in case of
consolidation, all the statements required to consolidation, shall be the consolidated
be set forth in the AI corporation;
d. Such other provisions with respect to the 2. Separate existence of the constituent
proposed merger or consolidation as are corporations shall cease, except that of the
deemed necessary or desirable surviving or consolidated corporation;
2. Approval by majority of each of the board of the 3. The surviving or consolidated corporation shall
constituent corporations possess all the rights, privileges, immunities and
3. Submitted for approval to powers and shall be subjected to all the duties
shareholders/members of each of such and liabilities of a corporation;
corporations at separate meetings 4. The surviving or consolidated corporation shall
- notice given at least 2 weeks prior to the possess all the rights, privileges, immunities and
date of the meeting / include a summary of franchise of each of the constituent corporations;
the plan 5. All property, real or personal, and all receivables
- Q: May the right of Appraisal be taken due to, and all other interest of, each constituent
away? corporation shall be deemed transferred to and
A: Yes when the board decided to abandon vested in such surviving or consolidated
the plan after approval by the shareholder corporation without further act or deed –
of such plan (transfer is automatic);
- Amendment to the plan of merger or 6. The surviving or consolidated corporation shall
consolidation be responsible for all the liabilities and
a) approval of majority vote of the boards of obligations of each of the constituent
all constituent corps. corporations.
b) ratified by the shareholder representing 2/3 7. Any claim, action or proceeding pending by or
of the OCS against any of such constituent corporations
4. Execution of articles of merger or consolidation may be prosecuted by or against the surviving or
by each of the constituent corp. consolidated corporation;
‐ signed by the President or VP and certified 8. The rights of creditors or lien upon the property
by the Secretary or Asst. Secretary by each of any of each of the constituent corporations
corp. setting forth: shall NOT be impaired by such merger or
a) the plan of merger or consolidation consolidation
b) as to stock corp., the number of shares
outstanding, in case of non-stock the SALE
number of members ‐ Gen. Rule: When one corporation buys all the
c) as to each corp. the number of shares or shares of another corporation, this will not
members voting for or against such plan operate to dissolve the other corporation and as
5. Approval by the SEC (in quadruplicate) the two corporations still maintaining their
‐ if banks or banking institutions, building and separate corporate entities, one will not answer
loan associations, trust co., insurance co,. for the debts of the other.
public utilities, educational institutions and ‐ Exceptions as to non-assumption of liabilities:
other special corps. governed by special 1. If there is an express assumption of
laws, FAVORABLE recommendation of the liabilities;
appropriate government agency be obtained 2. If there is a consolidation or merger;
first. 3. If the purchase was in fraud of creditors; and
6. Issuance of the certificate of merger / 4. If the purchaser is merely a continuation of
consolidation the seller.
‐ upon such time merger or consolidation
shall be effective MERGER/CONSOLIDATION vs. SALE OF
ASSETS
 If SEC has reason to believe that the proposed
merger or consolidation is contrary law: Merger/Consolidation Sale of Assets
- set a hearing for the corp. to be heard 1. Sale of assets is not 1. Sale of assets is
- notice be given at least 2 weeks prior to the always involved always involved
hearing 2. There is automatic 2. The purchasing corp
assumption by the is not generally liable for
Effects of Merger or Consolidation (Sec. 80) surviving/ consolidated the duties and liabilities
 Saint Louis University COMMERCIAL LAW 140
2012 BAR OPERATIONS

corp of the liabilities of of the selling corp  importance of surrender Sec. 86: so that
the constituent corp. shareholder rights will not be terminated
3.There is a continuance 3. The selling corp. 4. All rights accruing to the shares from demand for
of the enterprise and of ordinarily contemplates a payment until either abandonment of the
the shareholders thereon liquidation of the corporate action involved or the purchase of said
though in an altered form enterprise shares by the corp. shall be suspended (30
4.The title to the assets 4.Transfer of title is by days)
of the corp. is by virtue of contract  including voting and dividend rights
operation of law EXCEPT the right to receive the payment of
transferred to the new fair value.
corp.  Note: Failure to make a written demand
5. Constituent corps. are 5. The selling corp is not within 30 days shall be deemed a waiver of
automatically dissolved dissolved by the mere appraisal right
transfer of its property  If the withdrawing shareholder and corp.
cannot agree on the fair value of the shares
within 60 days – appraised by 3
disinterested persons (1 by shareholder, 1
IX. APPRAISAL RIGHT by corp, 1 chosen by the 2) findings of the
majority of the appraisers shall be final and
Appraisal right (Sec. 81) the award be paid by the corp within 30 days
‐ right of shareholder to demand payment of the after award is made.
fair value of his shares after dissenting from a 5. Corp. pays the shareholder the fair market value
proposed corporate action involving a of the share
fundamental change in the corporation in the  fair value as of the day prior to the date on
cases provided by law. which the vote was taken, excluding any
appreciation or depreciation in anticipation
Instances when the appraisal right may be of such corporate action
exercised 6. Upon payment, shareholder shall transfer his
1. In case of any amendment to the AI which has shares to the corp.
the effect of changing or restricting the rights of  effect if dissenting shareholder Is not paid
any shareholder or class of shares, or the value of his shares within 30 days after
authorizing preferences in any respect superior the award
to those of outstanding shares of any class;  His voting and dividend rights shall
2. Amendment which has the effect of extending immediately be received (back as
or shortening the term of corporate existence; shareholder)
3. In case of sale, lease, exchange, transfer,
mortgage, pledge, or other disposition of all or Extinguishment of right of payment
substantially all of corporate property and ‐ Gen Rule: No demand of payment of the FV of
assets; shares may be withdrawn
4. In case of merger or consolidation; ‐ Exceptions:
5. Investment of corporate funds to another 1. Such shareholder withdraws his demand for
corporation or business for any purpose other payment and the corporation consents
than its primary purpose; thereto;
6. Shareholder of any close corporation may 2. Proposed corporate action is abandoned or
compel the corporation to allow him to exercise rescinded by the corporation;
the right when the corporation has sufficient 3. The proposed corporate action is
assets in the books to cover its debts and disapproved by SEC, where its approval is
liabilities exclusive of capital stock. (Sec. 85) necessary;
4. The SEC determines that such shareholder
How to exercise appraisal right (Sec. 82) is not entitled to appraisal right.
1. By voting against the proposed action
2. By making a written demand within 30 days after Effects when right of payment has ceased
the vote was taken. 1. Restored as shareholder
3. By surrendering the Certificate of Stock within 2. All dividends which would have accrued in
10 days from demand his shares shall be paid to him
 for notation only – that such is dissenting
share, once noted, return to shareholder Who bears the cost of appraisal (Sec. 85)
1. the corporation
 Saint Louis University COMMERCIAL LAW 141
2012 BAR OPERATIONS

a. Where the price offered by the STOCK CORPORATION vs. NON-STOCK

stockholder is approximately the CORPORATION
same as the FV ascertained by the
appraisers; or SC NSC
b. In case of an action to recover such 1. Has capital stock 1. Does not have shares
FV is filed by the dissenting divided into shares and and may not distribute
shareholder and his refusal to with authority to profits to its members
accept payment is found by the distribute to its
court to be justified. stockholders
2. the Stockholder 2. Stockholders may 2. Members cannot
a. Where the price offered by the transfer their shares transfer their
corporation is approximately the membership unless
same as the FV ascertained by the allowed by the AI or by-
appraisers; or laws
b. In case of an action to recover such 3. Cumulative voting is 3. cumulative voting not
FV is filed by the dissenting available in the election available unless
shareholder and his refusal to of directors otherwise provided in the
accept payment is found by the AI or by-laws
court to be unjustified. 4. Directors cannot 4. Trustees may exceed
exceed 15 in number 15 in number
Effects of Transfer of Shares/COS 5. The term of a director 5. The term of a trustee
1. The rights of transferor as dissenting is 1 year is 3 years; 1/3 of the
shareholder shall cease and transferee shall Board shall be elected
have all the rights of a regular shareholder. annually
2. All dividends which or would have accrued 6. Stockholders may 6. Members may be
to such shares shall be paid to transferee. vote by proxy deprived of the right to
- purchasing the dissenting shares is vote by proxy in the AI or
an indication on the part of the by-laws
transferee to become a shareholder 7. Officers are elected by 7. Officers may be
which is in contrast to the right of the Board of Directors directly elected by the
appraisal. members unless
otherwise provided in the
AI or by-laws
8. Stockholders and 8. Members may be
XI. NON-STOCK CORPORATIONS directors must act in a allowed by the by-laws
meeting, except where a to vote by mail or other
Non-stock corporation (Sec. 87) mere written assent is similar means.
‐ one where no part of its income is distributable sufficient or a formal
as dividends to its members, trustees, or meeting unnecessary
officers, subject to the provisions of the 9. Stockholders meeting 9. Members meeting in
Corporation Code on dissolution to be held at the place or out of the place where
‐ Any profit obtained as an incident to its where the principal office the principal office is
operations shall be used for the furtherance of is located located.
the purpose(s) for which it was organized.
‐ Purposes (Sec. 88): charitable, religious,
educational, professional, cultural, recreational, Right to vote (Sec. 89)
fraternal, literary, scientific, social, civil service, ‐ Gen Rule: Each member regardless of class,
or similar purposes, like trade, industry, shall be entitled to 1 vote
agricultural and like chambers or combination ‐ Except: If limited, broadened or denied by the AI
thereof. or by-laws
‐ Power of Courts: Courts have no power to strip
 NSCs are governed by the same rules a member of his membership therein without
established for stock corporations, whenever cause.
pertinent, subject, however, to a number of
special features. Who can be trustees?
‐ Any member of the NSC
  ‐ Vacancy – filled by election only for unexpired
term
 Saint Louis University COMMERCIAL LAW 142
2012 BAR OPERATIONS

b) issued stock s are subject to one or

Place of meetings (Sec. 93:) more restrictions, with a right of
‐ Members’ meeting preemption in favor of the
 In or out of the place where the principal stockholders or the corporation; and
office of the corporation is located, so long c) the corporation shall not be listed in
as it is within the Philippines the stock exchange or its stocks
‐ Notice should not be publicly offered; AND
 sent to all members indicating the date, time 2. whose 2/3 of the voting stocks or voting
and place of meeting. rights is NOT owned or controlled by
Distribution of assets (Sec. 93) another corporation which is not a close
‐ Dissolution – execute a plan of distribution of corporation.
assets
‐ Procedure: What kind of restrictions can the corporation put?
1. Adoption of a resolution recommending a ‐ Any restriction provided it does not violate Sec.
plan of distribution by or majority vote of the 98:
BOT. 1. Restrictions on the right to transfer shares
2. Submission for voting at a regular or special must appear in the AI or By-Laws and in the
meeting. Certificate of Stock, otherwise not binding
3. Written notice to each member entitled to upon a purchaser in good faith.
vote, set forth the proposed plan or 2. Restrictions shall not be more onerous than
summary thereof; date, time and place of granting the existing shareholder or the
meeting. corporation the option to purchase the
4. Adoption of the plan upon approval of at shares of the transferring shareholder with
least 2/3 of the members having voting such reasonable terms, conditions or period
rights present or by proxy. stated thereon.
e.g.
Conversion of NSC to SC a) FMV of shares = 100 if sold less
‐ Dissolution of NSC before organizing a stock 10% ( can’t because it is more
corporation. burdensome)
b) Transferring without prior consent of
Conversion of SC to NSC the board
‐ Mere amendment of AI If corp. fails to exercise the option –
Shareholder may now transfer to third
Rules on distribution (Sec. 94) person who wishes to buy.
1. All liabilities shall be paid or satisfied for 3. Close Corp. may not list in a stock exchange
adequate provisions. or make any public offering of its shares.
2. Assets held subject to return upon dissolution - Corp. must be listed in the Phil Stock
shall be delivered back to their respective Exchange (reason: shares may be held by
transferors; anybody who is unknown/not denied)
3. Assets held for charitable, religious, etc, without
a condition for their return on dissolution shall be  Public Offering – offering one’s share for the
conveyed to one or more organizations engaged unknown public
in similar activities as the dissolved corporation;
4. Other assets shall be distributed to members as Can a corp. be part of a close corp.?
provided for in the AI or by-laws; ‐ Yes, provided it does not own or control 2/3 of
5. In any other case, assets may be distributed as OCS of a close corporation or control 2/3 of
provided in the plan of distribution. stocks having voting rights.

Right of First Refusal

‐ The shareholder who wants to sell his shares
XII. CLOSE CORPORATIONS must first offer it either to the corporation or to
the other existing shareholders. If the
Close corporation (Sec. 96) corporation or existing shareholders fail to
‐ A special kind of stock corporation: exercise the option to purchase within the period
1. whose Articles of Incorporation provide that: stated (1 month) the transferring shareholder
a) all shares except treasury shares may sell his shares to any third person.
are held on record by persons not ‐ Gen Rule: Any corporation may be incorporated
exceeding 20; as a close corporation
 Saint Louis University COMMERCIAL LAW 143
2012 BAR OPERATIONS

‐ Exceptions: 5. That all officers or employees or that

1. mining companies; specified officers or employees shall be
2. oil companies; elected or appointed by the stockholders
3. stock exchanges; instead of the BOD.
4. banks;
5. insurance companies; Terms of directors
6. public utilities; ‐ 1 year
7. education institutions;
8. other corporations declared to be vested Issuance or Transfer of Stock of a Close
with public interest Corporation in Breach of Qualifying Conditions
(Sec. 99):
Characteristics of close corporations: 1. A person holding stocks
1. Stockholders may act as directors without need - if the qualification for ownership is
of election and therefore are liable as directors; conspicuously stated in the certificate of
2. Stockholder who are involved in the stock, the person holding such certificate is
management of the corporation are liable in the conclusively presumed to have knowledge
same manner as directors are; of such qualification.
3. Quorum may be greater than mere majority; - Effect: Corp at its option may refuse the
4. Transfers of stocks to others, which would transfer in its favor
increase the number of stockholders to more 2. If the AI states the number of persons not in
than the maximum, are invalid; excess of 20 to be entitled to be holders on
5. Corporate actuations may be binding even record of its stock and the certificate
without a formal board meeting, if the conspicuously states such numbers, the person
stockholder had knowledge or ratified the to whom such stock is issued in excess of the
informal action of the others; nos. required is conclusively presumed to have
6. Preemptive right extends to all stock issues; knowledge of the fact.
7. Deadlocks in board are settled by the SEC, on ‐ Effect: Corp. may refuse to record the
the written petition by any stockholder; and transfer to its books
8. A stockholder may withdraw and avail of his 3. If a stock certificate conspicuously shows a
right of appraisal. restriction on transfer of stocks, transferee is
conclusively presumed to have notice of the fact
Articles of Incorporation (Sec. 97): that he has acquired stock in violation of the
‐ Aside from the general matters of Art. 14, the AI restriction, if such acquisition violates the
of a close corporation may provide: restriction.
1. For a - If transfer actually violates the restriction –
a) classification of shares or rights without prejudice to the right of transferee to
b) prescribe qualification for proceed against transferor
owning/holding shares
c) restrictions on their transfer Effect of Violation of the Presumption
2. For a classification of directors into one or ‐ Gen. Rule:
more classes, each of which may be voted  The corporation may at its option, refuse to
for and elected solely by a particular class of register the transfer of the stock in the
stocks; name of the transferee
3. For a greater quorum or voting requirements ‐ Except:
in meetings of stockholders or directors 1. if the transfer of the stock has been
4. That the business of the corporation shall be consented to by all shareholders of the close
managed by the stockholders rather than corporation; or
the BOD so long as this provision continues 2. if the corporation has amended its AI.
in effect:
a) No meeting of stockholders need be  Transfer – not limited to a transfer for value
called to elect directors;
b) Unless the context clearly requires  Note: It is better to dissolve the corp. and
otherwise, the stockholders shall be incorporate again if it wants to convert it into
deemed to be directors for all intents another kind
c) The stockholders and the corporation
shall be subject to all liabilities of  Amendment that may terminate the status of a
directors. close corporation
 2 kinds:
 Saint Louis University COMMERCIAL LAW 144
2012 BAR OPERATIONS

1. To delete/remove any of the provisions 5. Stockholders who actively engage in the

under the title; management or operation of the business and
2. To reduce the quorum or voting affairs of the corporation shall be held to strict
requirement fiduciary duties to each other and among
- reduction of what is required by law themselves
to ordinary shareholder 2/3 to effect  Corporate torts – shareholders are
amendment personally liable UNLESS the
- include all shareholder with or corporation has obtained reasonably
without voting rights adequate liability insurance

Rights of transferee not impaired by the When Board Meeting Is Unnecessary Or

provisions of this section Improperly Held (Sec. 101)
1. Right to rescind the transaction; or
2. Right to recover under any applicable warranty, ‐ Gen Rule: Any action by the director without a
express or implied. meeting shall be valid if the following conditions
are present:
Rules on Agreements By Stockholders (Sec. 100) 1. Before or after such action is taken, written
1. Agreements by and among shareholders before consent thereto is signed by all the directors;
the formation and organization of a close or
corporation signed by all stockholders: 2. All the stockholders have actual or implied
‐ survive the incorporation of such corporation knowledge of the action and make no
and prompt objection thereto in writing; or
‐ valid and binding, if not inconsistent with the 3. The directors are accustomed to take
AI, irrespective if embodied in AI or not, informal action with the express or implied
except those required by the Corporation acquiescence of all stockholders; or
Code to be embodied in the AI. 4. All the directors have express or implied
 Prior to incorp. – Shareholder can enter into knowledge of the action in question and
any agreement as long as it is legal. none of them makes prompt objection
 After incorp. – agreement continues to thereto in writing.
subsist/ valid and binding ‐ Exception: If by- laws provide otherwise
2. Shareholders’ agreement, in writing and signed
by the parties thereto, may provide that in  Ordinary corp. without / improper meeting –
exercising any voting rights, the shares held by question of impropriety
them shall be voted:  If a directors’ meeting is held without a proper
a) as therein provided; call or notice, an action taken therein within the
b) as they may agree; or corporate powers is deemed ratified by a
c) as determined in accordance with a director who failed to attend UNLESS he
procedure agreed upon by them promptly files his written objection with the
 How shares will be voted? Secretary of the corporation after having
- Agree at the time of voting how to vote knowledge thereof.
- Procedure to determine how they will
vote Preemptive Right In Close Corporation (Sec. 102)
- Voting trust / voting by proxy – as ‐ Extend to all kinds of stock, including reissuance
equivalent in ordinary situation of treasury shares, unless the AI provide
otherwise (ordinary corp. – extend only to new
3. No provision in any written agreement signed by issuances)
stockholders, relating to any phase of the
corporate affairs, shall be invalidated between Deadlocks (Sec. 104)
the parties on the ground that its effect is to ‐ If the directors or stockholders are so divided
make them partners among themselves. respecting the management of the corporation’s
 must be consistent with the AI business and affairs that the votes required for
4. Shareholders’ agreement restricting or any corporate action cannot be obtained with the
interfering with the discretion and powers of the consequence that the business and affairs of the
BOD – it will not be invalidated but the corporation can no longer be conducted to the
stockholders who are parties thereto shall be advantage of the shareholders generally. The
liable for managerial acts imposed by the SEC, with the power to arbitrate, upon written
Corporation Code on directors petition of any shareholder shall have authority
 Saint Louis University COMMERCIAL LAW 145
2012 BAR OPERATIONS

to make such orders as it deems appropriate, ORDINARY STOCK CORPORATION VS. CLOSE
including an order: CORPORATION
1. Canceling or altering any provision
contained in AI or By-Laws or any ORDINARY STOCK CLOSE
stockholders’ agreement; CORPORATION CORPORATION
2. Canceling, altering, or enjoining any 1. Its AI need only 1. Aside from the
resolution, or other act of the corporation or contain the general general matters in Sec.
its BOD, officers or stockholders; matters enumerated in 14, its AI must contain
3. Directing or prohibiting any act of the Sec. 14 of the the special matters
corporation or its BOD, stockholders, Corporation Code prescribed by Sec. 97.
officers or other persons party to the action; Failure to do so
4. Requiring the purchase at their fair value of precludes a de jure close
shares of any stockholder, either by the corporation status
corporation regardless of the availability of 2. Its status as an 2. The 2/3 of its voting
unrestricted retained earnings in its books, ordinary stock stock or voting rights
or by other stockholders; corporation is not must not be owned or
5. Appointing a provisional director; affected by the controlled by another
6. Dissolving the corporation; OR ownership of its voting corporation which is not
7. Granting such other relief as the stock or voting rights a close corporation
circumstances may warrant. 3. Its AI cannot classify 3. Its AI may classify its
its directors directors
Provisional director (Sec. 104) 4. Business of the 4. Business of the
‐ An impartial person who is neither a stockholder corporation is managed corporation may be
nor a creditor of the corporation, and whose by the BOD managed by the
further qualifications, if any, may be determined stockholders if the AI so
by the SEC. provide, but they are
‐ He is NOT a receiver of the corporation and liable as directors
does not have the title and powers of a 5. The corporate officers 5. Its AI may provide that
custodian or receiver. and employees are any or all of the
‐ He shall have all the rights and powers of a duly elected by a majority corporate officers or
elected director, including the right to notice of vote of all the directors employees may be
and to vote at meetings of directors, until such elected or appointed by
time as he shall be removed by order of the SEC the stockholders
or by all the stockholders. 6. The pre-emptive right 6. The pre-emptive right
is subject to the is subject to no
Remedies in case of deadlocks exceptions found in Sec. exceptions unless
1. Written petition with SEC for it to arbitrate 39 denied in the AI
2. Withdrawal – Shareholder may for any reason 7. The appraisal right 7. The appraisal right
compel the corporation to purchase his shares may be exercised by a may be exercised and
at the FMV provided the close corp. has stockholder only in the compelled against the
sufficient assets in its books to cover its debts case provided in Secs. corporation by a
and liabilities exclusive of capital stocks (Sec 81 and 42 of the stockholder for any
105) Corporation Code reason
3. Written petition with SEC to compel dissolution 8. Except as regards 8. In case of an
on grounds of the acts of the directors, officers redeemable shares, the arbitration of an intra-
or those in control of the corporation is : purchase of the corporate deadlock by
a) Illegal, corporation of its own the SEC, the corporation
b) fraudulent, stock must always be may be ordered to
c) dishonest, made from the purchase its own shares
d) oppressive or unfairly prejudicial to the unrestricted retained from the stockholders
corporation or any stockholder, or earnings regardless of the
e) whenever corporate assets are being availability of
misappropriated or wasted. unrestricted retained
earnings
9. Arbitration of intra- 9. Arbitration of intra-
corporate deadlock by corporate deadlock by
the SEC is not a remedy the SEC is an available
in case the directors or remedy in case the
 Saint Louis University COMMERCIAL LAW 146
2012 BAR OPERATIONS

stockholders are so directors or stockholders ‐ refers to the extinguishment of its franchise to be

divided respecting are so divided respecting a corp. and the termination of its corporate
management of the the management of the existence
corporation corporation ‐ Corp ceases its operation altogether, BUT it
continues to exist for 3 years for purposes of
  winding up of its affairs
XIII. SPECIAL CORPORATIONS ‐ Steps:
1. Termination
1. EDUCATIONAL CORPORATION (Sec. 106) 2. Winding up
- A stock or non-stock corporation organized to 3. Liquidation
provide facilities for teaching or instructions
- must obtain favorable recommendation from Kinds of dissolution
DECS for the approval of its AI and By-Laws by 1. Voluntary dissolution
SEC. [DepEd = Elementary and High School; 2. Involuntary dissolution
CHED = Tertiary]
- it is primarily governed by special laws and, Voluntary dissolution
suppletorily, by the provisions of the Corporation ‐ by the act of the corporation
Code
- Board of Trustees (NSEC) – not less than 5 a. If there are no creditors who are prejudiced,
members and not more than 15 – the term of dissolution may be effected:
office is 5 years i. by the majority vote of BOD/BOT, and
 It is different from an ordinary non-stock ii. by a resolution duly adopted by the
corporation organized for educational purposes. affirmative vote of the stockholders owning
at least 2/3 of the OCS or of at least 2/3
2.RELIGIOUS CORPORATION (Sec. 109) members at a meeting duly called for the
‐ A corporation composed entirely of spiritual purpose after notice of the meeting was
persons which is organized for the furtherance published in a newspaper of general
of a religion or for perpetuating the rights of the circulation.
church or for the administration of church or
religious work or property  Procedure
‐ It is different from an ordinary non-stock i. File with the SEC the resolution duly
corporation organized for religious purposes, like certified by the Board and countersigned
the Knights of Columbus, Opus Dei etc. by the Secretary
‐ Kinds: ii. Issuance by the SEC of a certificate of
a. Corporation Sole dissolution – dissolution takes effect
‐ incorporated by one person and
consist of one member or corporator b. If there are creditors affected, by judgment of
only and his successors, such as a the SEC after hearing of the petition for
bishop voluntary dissolution. (Sec. 119)
a) can sell, acquire, encumber  Procedure:
property 1. Petition filed with SEC
b) to dissolve, file a declaration to 2. If petition is sufficient in form and
that effect substance, the SEC, by an order reciting
b. Religious Society the purpose of the petition, shall fix a
‐ a non-stock corporation governed by a date on or before which objections
board but with religious purposes. It is thereto may be filed, but which shall not
incorporated by an aggregate of be less than 30 days nor more than 60
persons, e.g. religious order, diocese, days after the entry of the order;
synod, sect, etc. 3. Publication of the SEC order at least
‐ Articles of incorporation - submit to SEC with once a week in 3 consecutive weeks in
affidavit of affirmations a newspaper of general circulation, and
a similar copy shall be posted for 3
consecutive weeks in 3 public places, in
the municipality or city where the
principal office of the corporation is
XIV. DISSOLUTION
situated;
4. Five days after the expiration of the date
Dissolution
set for filing objections, the SEC shall
 Saint Louis University COMMERCIAL LAW 147
2012 BAR OPERATIONS

hear the petition and try any issue made restraining the commission of an act
by objections filed; which would amount to a grave violation
5. Dissolution takes effect upon judgment of its franchise
by SEC ordering distribution of assets of d) continuous inoperation for 5 years
corp. e) failure to file BL within the required
period
c. by amending the AI to shorten the corporate f) failure to file reports in appropriate form
term (Sec. 120) within the presented period
 Procedure:
1. Amendment of the AI approved by the Kinds of Involuntary Dissolution
Board and ratified by stockholders 1. Expiration of the corporate term – corp.
owning at least 2/3 of OCS or 2/3 of the continues to operate for a period of 3 years for
members purposes of winding up its affairs
2. Submit the amended AI to the SEC 2. Legislative enactment – except: it must not
 The Rule that when the SEC does impair any right or remedy
not take action in 6 months from the 3. Failure to organize and commence
date of filing for a cause not transaction within 2 years from incorporation
attributable to the corporation the (However, the SEC has opined that the
amendment is deemed effective, is dissolution in this case is not automatic. The
not applicable in this case. corporation continues to exist as such,
 Submit also an affidavit of notwithstanding its non-operational status until
publication setting forth that the the SEC orders its dissolution after notice and
corporation has amended its articles hearing)
to shorten the term to effect 4. Dissolution by judicial decree – forfeiture of its
dissolution upon arrival of date privilege or franchise as non user
stated 5. Quo warranto suit against a de facto
3. Dissolution takes effect upon approval corporation
of the amendment or expiration of the 6. Minority stockholder’s suit for dissolution on
shortened term. justifiable grounds
7. SEC dissolution, upon complaint and after
If there are creditors what is the proper way of notice and hearing, on the following grounds:
dissolving? a) The corporation was illegally organized;
‐ Any of the 3 ways so long as creditors are not b) Continuous inactivity (subsequent to
prejudiced. incorporation, organization and
‐ In case of corporation sole, dissolution is commencement of business) for at least 5
effected by submitting to the SEC a verified years;
declaration of dissolution for approval. c) Serious dissension in the corporation; or
d) Commission by the corporation of illegal or
ultra vires acts or violations of the
Involuntary dissolution Corporation Code.
‐ Brought about by filing of a verified complaint
with SEC and after proper notice and hearing on Effects of dissolution
the grounds provided for by existing laws, rules 1. Legal title to corporate assets is vested in the
and regulations. shareholder, who become co-owners thereof
‐ Grounds: 2. The corporation ceases as a body politic or to
1. Violation of the corporation code continue the business for which it was
2. When there is a deadlock in a close corp. established
3. When a close corp. is mismanaged 3. Can no longer be revived (but may
4. When the certificate of registration is reincorporated by filing a new AI and BL)
suspended or revoked in ff. instances: 4. The dissolution does not by itself imply the
a) when there is fraud in processing its extinction of rights demandable against the
certificate of registration corporation
b) when there is serious misrepresentation 5. Ceases to have any personality whatsoever
as to what the corp. can do or is doing after the expiration of the 3-year winding
to the great prejudice of or damage to period and as a general rule it can no longer
the general public sue or be sued as such
c) refusal to comply or defiance of any
lawful order of the commission LIQUIDATION
 Saint Louis University COMMERCIAL LAW 148
2012 BAR OPERATIONS

‐ The winding up of the affairs of the corporation  Upon winding up of the corporate affairs, any
by reducing its assets in money, settling with asset distributable to any creditor of shareholder
creditors and debtors, and apportioning the or member who is unknown or cannot be found
amount of profit and loss. shall be escheated to the city or municipality
where such asset is located.
Methods of Liquidation
1. Liquidation by the corporation itself  General Rule:
- converts assets with cash, settle with creditors,  Dissolution – authority given to the
apportion profit and loss corporation to distribute assets to
2. Liquidation by a duly appointed trustee shareholders or members
- transfer assets in the name of the trustee, has  Except: (even if no dissolution, the corp. can
responsibility to liquidate the corporation. distribute assets)
3. Liquidation by a management committee or  Exceptions to the Trust Fund Doctrine
rehabilitation receiver appointed by the SEC. 1. Decrease of capital stock (Sec. 38)
2. When corp. is redeemed by redeemable
 The 3-year period of liquidation does not apply shares
to Methods 2 and 3 as long as the trustee or 3. When corporation is purchasing treasury
receiver is appointed within the said period. shares (Sec. 42)
4. When the corporation is acquiring its own
If corp. cannot wind up its affairs within 3 years shares, converting it into treasury shares
a. It is best to appoint a trustee or receiver (Sec. 42)
because he can act as such even beyond 3 5. When declared as dividends (Sec 43)
years, (the corp. can only act for 3 years) 6. When there is withdrawal from a close corp
b. If the property liquidation is transmitted to a (Sec 105)
trustee or a receiver, the corporation ceases,
legal interest vests in the trustee and beneficial
interest in the stockholders, members, or
creditors. XV. FOREIGN CORPORATION
 The termination of the life of a juridical entity Foreign corporation
does not by itself cause the extinction or ‐ One formed, organized or existing under any
diminution of the rights and liabilities of such laws other than those of the Philippines, and
entity nor those of its owners and creditors alike whose laws allow Filipino citizens and
(Sec. 145). corporations to do business in its own country or
 Where, in the case of a corporation, the 3-year State. (Sec. 123)
extended life has expired without a trustee or ‐ This definition espouses the incorporation test
receiver having been expressly designated and the reciprocity rule and is significant for
within the said period, those who have been licensing purposes. It does not say that it is
charged to wind up its affairs or, in their required that the laws under which foreign
absence, the BOD/BOT should be permitted to corporations are formed give Philippine national
continue as “trustees” by legal implication to reciprocal rights.
complete the corporate liquidation. ‐ A foreign corporation shall have the right to
transact business in the Phil. after obtaining a
How to Distribute Assets license to transact business in this country and a
In the following order: certificate of authority from the appropriate
1. Creditors government agency concerned. (Sec. 123)
2. Shareholders/members who are likewise ‐ Test: Incorporation Test (Place of incorporation),
creditors regardless of the nationality of the shareholders
3. Shareholders in proportion to their shareholding ‐ During wartime, the control test will apply, that
preference is, a domestic corp. controlled by enemy aliens
shall be deemed a foreign corporation with a
Amount shareholder is entitled to nationality identical with that of its controlling
‐ Fair Market Value of the shares of stock. shareholder
‐ If there is a loss – below FMV. ‐ becomes a Philippine resident the moment it is
‐ If there are profits – in proportion to their granted a license to transact business in the
shareholdings Philippines. Corporate residence is where its
business is transacted
 Saint Louis University COMMERCIAL LAW 149
2012 BAR OPERATIONS

Objectives of regulation of foreign corporation shares which the corporation has

1. To place them in equal footing with domestic authority to issue;
corporation; 8. A statement of its OCS and the
2. To subject them to inspection so that their aggregate number of shares which the
condition may be known; corp. has issued;
3. To protect the residents of the State doing 9. A statement of the amount actually paid
business with them by subjecting them to the in; and
courts of the State. 10. Such additional information as may be
necessary in order to enable the SEC to
determine whether such corp. is entitled
FOREIGN INVESTMENT ACT OF 1991 (RA 7092) to a license to transact business in the
‐ A foreign corporation may now acquire and own Philippines and to determine and assess
100% Filipino corporation. the fees payable.
‐ Except when limited by Constitution (owning
land) II. Submit Articles of Incorporation and By-laws, duly
certified and their translation to an official language
 Problem: Corporation A with Shareholder = 31% in the Phil.
Filipino and 69% owned by Corporation B ( 47%
Fil and 53% Alien), engaged in partially III. Submit and attach a certificate under oath by an
nationalized industry authorized official of the jurisdiction of its
Q: Is the 60% requirement met? incorporation attesting to the fact that the laws of the
A: Yes, requirement met country or state of the applicant allow Filipino
citizens and corporation to do business therein and
 Because a FC cannot extend its jurisdiction the applicant is an existing corp. of good standing
beyond its limits, it exist only in contemplation of with a translation of the certificate in English under
law and by the consent of such state or country oath of the translator if it is in foreign language

APPLICATION FOR A LICENSE (Sec. 125) IV. A statement under oath of the President or any
authorized officer of the corp. showing to the
Procedure for the Issuance of License satisfaction of the SEC and other government
I. Submit application with SEC which shall be under agency in proper cases that the applicant is solvent
oath and specifically set forth the following unless and in sound financial condition and setting forth its
stated in its AI: assets and liabilities for the previous year
1. The date and term of incorporation;
2. The address including the street number V. Other requirement provided by law – a certificate
of the principal office of the corporation of Authority from the appropriate government
in the country or state of incorporation; agency whenever required by law
3. Name and address of its resident agent
authorized to accept summons and VI. Power (written) of Attorney designating a
process in all legal proceedings and, resident agent on whom summons and other legal
pending the establishment of a local processes against the corp. may be served and a
office, all notices affecting the written agreement and stipulation consenting that
corporation; such services may be made upon the SEC, if
4. The place in the Philippines where the anytime, it shall cease to transact business in the
corporation intends to operate; Phils. or shall be without resident agent (Rule XIV,
5. The specific purposes of the corporation Sec 13).
which it intends to pursue in the
transactions of its business in the Resident agent
Philippines. Provided that said purpose ‐ An individual, who must be of good moral
are those specifically stated in the character and of sound financial standing,
certificate of authority issued by the residing in the Philippines, or a domestic
appropriate government agency; corporation lawfully transacting business in the
6. The names and addresses of the Philippines, designated by a written power of
present directors and officers of the attorney by a foreign corporation authorized to
corporation; do business in the Philippines, on whom any
7. A statement of its authorized capital summons and other legal processes may be
stock and the aggregate number of served in all actions or other legal proceedings
against the foreign corporation. (Secs. 127 -128)
 Saint Louis University COMMERCIAL LAW 150
2012 BAR OPERATIONS

a. additional deposit of securities

 When a corporation has designated a person to equivalent in actual market value of
receive service of summons pursuant to the 2% of the amount by which the
Corporation Code, that designation is exclusive license’s gross income for that
and service of summons on any other person is fiscal year exceeds 5M – if less
inefficacious. than 5M no additional
b. If the market value of the deposit
Service of summons to a corp. with license (In the ff. decreased by at least 10% of such
order) value at the time they were
1. Resident agent – exclusive deposited , the deposit shall be
2. SEC ( If no resident agent and the corp increased; if the deposit increased
ceases to transact business –SEC by 10% - allowed to withdraw
transmit within 10 days from receipt a Can you exchange the deposits
copy of such summons to the corp. at its with another one? Yes, substitution
home or principal office (act of mailing can be allowed provided the corp. is
within 10 days complete the service – solvent.
expenses born by the party on whose c. If there are dividends/interest due
instance the service is made) on the deposited securities, the
3. Officers or agent in the Philippines. license shall be entitled to collect
d. Deposits be returned when the
 Note: the above order of examination is to license ceases to do business in
be followed only if a foreign corp. is the Phils. provided it is able to show
transacting business in the Phils. with a the absence of any liability to Phil
license (Wang Labora vs. Mendoza) residents including the Government
of the Pgils.
 If without license – service be made upon 4. It must comply with the provisions of
any agent of the corp. existing laws, rules and regulations
 If domestic corp. –Rules of Court will apply otherwise its license may be revoked,
suspended or annulled by SEC
Conditions imposed subsequent to the issuance
of license: Effect of issuance of license:
1. The FC shall transact business and for the ‐ FC may now commence to transact its business
purpose/s for which it is authorized under in the Philippines for as long the corporation
its license; continues to exist as a corporation under the
2. Within 60 days after the issuance of its laws of its State of incorporation EXCEPT when
license, it shall deposit with SEC the license is surrendered, revoked, suspended,
satisfactorily securities in the actual market or annulled.
value of at least P100k consists of:
a. bonds or other evidence of TESTS OF DOING OR TRANSACTING BUSINESS
indebtedness of the government of IN THE PHILIPPINES:
the Phils, its political subdivisions
and instrumentalities or of A. JURSIPRUDENTIAL TESTS:
government owned or controlled 1. Twin Characterization Test
corporation; a) Whether the foreign corporation is
b. shares of stock in “Registered maintaining or continuing in the Philippines the body
Enterprises” (registered under or substance of the business for which it was
Omnibus Investment Code) organized or whether it has substantially retired
c. Shares of stock in domestic from it and turned it over to another (Substance
corporation registered in the stock Test); and
exchange b) Whether there is continuity of commercial
d. Shares of stock in domestic dealings and arrangements, contemplating to some
insurance co. and banks extent the performance of acts or works or the
e. Any combination of these kinds of exercise of some functions normally incident to and
securities EXCEPT foreign banking in progressive prosecution of the purpose and object
or insurance corp. of its organization (Continuity Test).
3. Within 6 months after the end of each fiscal
year of the license 2. Contract Test
 Saint Louis University COMMERCIAL LAW 151
2012 BAR OPERATIONS

- Whether the contracts entered into by the ‐ Except: (Governed by the state of Incorp.)
foreign corporation, or by an agent acting under the 1. Matters relative to formation, creation,
control and direction of the foreign corporation, are organization or dissolution of corporation
consummated in the Philippines. 2. The relations, liabilities, responsibilities or
duties of shareholders, members or officers
B. STATUTORY TESTS of corp. to each other or to the corp.
1. Foreign Investment Act of 1991 (RA 7042) (Citibank vs. Chilia)
Acts constituting “doing business”: - By laws of a FC can be given
a) Soliciting orders, service contracts, application without approval by the
opening offices, whether called “liaison” SEC since the SEC grants a
offices or branches; license only when the FC has
b) Appointing representatives or distributors complied with all the requirements
domiciled in the Philippines or who in any of law, it follows that when it
calendar year stay in the country for a period decides to issue such license, it is
or periods totaling to 180 days or more; deemed to have approved its
c) Participating in the management, foreign enacted by laws
supervision or control of any domestic
business, firm or entity or corporation in the Amendments to articles of incorporation or by-
Philippines; laws of foreign corporations (Sec. 130)
d) Any other act or acts that imply a ‐ Note: The law that governs the amendment of
continuity of commercial dealings or AI of the FC is the law of State of its
arrangements, and contemplate to that incorporation
extent the performance of acts or works, or ‐ Limitation in the amendments of AI/BL of FC: it
the exercise of some of the functions shall not of itself enlarge or alter the purpose/s
normally incident to, and in progressive for which such corporation is authorized to
prosecution of, commercial gain or of the transact business in the Philippines.
purposes of the business organization.
Amended license (Sec 131)
2. Implementing Rules of RA 7042 Q: When is it required?
- Acts NOT constituting “doing business”: A: 1. The FC changes its corporate name
a) Mere investment as a shareholder in a 2. The FC desires to pursue in the Phils. other or
domestic corporation and/or the exercise of additional purposes
the rights of such investor;  How – by submitting an application thereof
b) Appointing a representative or distributor to the SEC favorably endorsed by the
domiciled in the Philippines which transacts appropriate government agency in the
business in its own name and for its own proper cases
account;  Merger/Consolidation involving a FC
c) Publication of a general advertisement licensed in the Phils.
through any print or broadcast media; - FC merged/consolidated with a
d) Maintaining a stock of goods in the domestic corp – laws of the Phils
Philippines solely for the purpose of having will be followed as to requirements
the same processed by another entity in the or merger or consolidation
Philippines; - If FC with another FC – such FC
e) Consignment by the foreign corporation of licensed to do business in the Phil.
equipment with a local company to be used within 60 days after such
in the processing of products for export; merger/consolidation becomes
f) Collecting information in the Philippines; effective, file with the SEC and in
and appropriate cases, with the proper
g) Performing services auxiliary to an government agency, a copy of the
existing isolated contract of sale which are articles of merger or consolidation
not on a continuing basis. duly authenticated by the proper
official of the State under the laws
Law Applicable (Sec 129) of which such merger or
‐ Gen. Rule: consolidation was effected.
 Any FC lawfully doing business in the Phils. - If FC with another FC – if the one
shall be bound by all laws, rules and absorbed is the corp. licensed to do
regulations applicable to domestic business in the Phils. – it shall file a
corporation.
 Saint Louis University COMMERCIAL LAW 152
2012 BAR OPERATIONS

petition for the withdrawal of its b) However, it may sue and be sued on
license. isolated transactions, as well as for those which are
REVOCATION OF LICENSE (Sec. 135) casual or incidental thereto.
Grounds
1. Failure to file annual report or pay any fees Doctrine of Isolated Transactions
required by this Code. -Foreign corporations, even unlicensed ones, can
2. Failure to appoint and maintain a resident agent sue or be sued on a transaction or series of
in the Philippines; transactions set apart from their common business
3. Failure after change of its resident agent or of in the sense that there is no intention to engage in a
his address to submit to the SEC a statement of progressive pursuit of the purpose and object of
such change; business transaction.
4. Failure to submit to the SEC an authenticated - However, it is not the lack of the prescribed license
copy of any amendments to its AIC or BL or any to do business in the Philippines but the doing of
articles of merger or consolidation; business without license which bars a foreign
5. A misrepresentation of any material matter in corporation from access to Philippine courts. An
any application, report, affidavit or other unlicensed foreign corporation is not ipso facto
documents submitted by such corporation barred from bringing an action. The legal prohibition
pursuant to this title; is confined to cases relating to its business activity in
6. Failure to pay any and all taxes imposed, the country.
penalties and assessments, if any, lawfully due
to the Philippine government or any of its Instances when a foreign corporation may sue in
agencies or political subdivisions; the Philippines whether or not licensed to do
7. Transacting business in the Philippines outside business thereat:
of the purpose/s for which such corp. is 1. To seek redress for isolated business
authorized under its license; transaction;
8. Transacting business in the Philippines as agent 2. To protect its corporate name, reputation or
of or acting for and in behalf of any foreign corp. goodwill;
or entity not duly licensed to do business in the 3. To enforce a right not arising out of a
Philippines; business transaction in the Philippines;
9. Any other ground as would render it unfit to 4. When the parties have contractually
transact business in the Philippines. stipulated that the Philippines is the venue of
actions; and
What happens when there is revocation of license? 5. When the party sued is barred by the
‐ The SEC will issue a certificate of revocation, principle of estoppel and/or principle of
furnishing a copy thereof to the appropriate unjust enrichment from questioning the
government agency in the proper cases. SEC capacity of the foreign corporation.
shall mail to the corp. at its registered office in
the Phils. a notice of such revocation B. On contracts
accompanied by a copy of the certificate of - The contracts contemplated are those that satisfy
revocation the “contract test” or those that make a foreign
corporation as one “doing business in the
EFFECTS OF LACK OF LICENSE Philippines.”
A. On suits
1. Foreign corporation doing business in the General Rule: The contracts are unenforceable.
Philippines: They are enforceable only upon securing a license.
a) may not sue in any action in any court or Exception: However, the contracts are null and void
administrative agency of the Philippines; and if they are contrary to law, morals, good customs,
b) may be sued on any valid cause of action public policy and public order.
recognized in the Philippines (under the doctrine of
quasi-estoppel by acceptance of benefits). (Sec. WITHDRAWAL OF FOREIGN CORPORATIONS
133) (Sec. 136)
‐ How to effect surrender/ withdrawal: by filing a
2. Foreign corporation NOT doing business in the petition for withdrawal of license
Philippines:
a) Generally, it may not sue and be sued in Essential Requirements for Withdrawal
any court or administrative agency of the 1. All claims which have accrued in the Philippines
Philippines; have been paid, compromised or settled;
 Saint Louis University COMMERCIAL LAW 153
2012 BAR OPERATIONS

2. All taxes, imposts, assessments and penalties, if e. The continuity of conduct of which an
any, lawfully due the Phil. government or any of intention can be inferred of establishing
its agencies or political subdivisions have been a business in the Phils (JAL)
paid;
3. The petition for withdrawal of license has been 4 Exceptions when FC Without license can sue
published once a week for 3 consecutive weeks I. Isolated business transaction – single
in a newspaper of general circulation in the Phil. transaction
- solicited by domestic corp., entity or
Formal Requirements to Legally Effect the person
Withdrawal of Foreign Corporation’s License - Note: If FC who solicits the
The following must be submitted to the SEC: transaction then it is already
1. The letter – petition of the Resident Agent transacting business in the Phils.
requesting the withdrawal of the license to Rationale for the exceptions: not the
do business intention of law to favor domestic corp.
2. Filing fee of P10.00 3 Requisites (to file an action based on
3. A copy of the resolution of the BOD this)
authorizing the closing of the Phil. branch 1. FC must disclose that it is not doing
and empowering the RA to effectuate the business in the Phils. And it is suing
withdrawal thereof, duly authenticated in under the isolated business
accordance with law to be submitted in transaction – disclose in complaint
triplicate 2. Suing entity must be a FC
4. Latest balance sheet and sworn statement 3. Name its duly authorized
that no creditors will be prejudiced by the representative or RA – for purposes
withdrawal also to be submitted in triplicate of action, it must appoint a resident
5. Proof of publication of the Notice of agent to whom notice upon the FC
withdrawal once a week for 3 consecutive must be served for the purpose of
weeks in a newspaper of general circulation pre trial
in the Phil.
6. The license issued by the commission to the II. To protect corporate name, reputation and
corp. which shall be surrendered goodwill ( Puma vs. IAC)
- Rule NOW, foreign trademarks/ trade names
2 Things to Consider to Determine Whether a 1. owner of the same is domiciled in the
FOREIGN CORPORATION has Access to Phil country of which it is a member of the
Courts treaty agreement on trademarks
1. Does it have license 2. widely known in the Phils.
2. Is it transacting business in the Phil.
‐ How to determine – no hard and fast rule but 2 Requirements BEFORE ( no longer applied)
there are guidelines provided 1. Trade name/trademark registered in the
a. If the FC is continuing the business for Phils.
which it was created in the Phil. then it is 2. Country of the FC allows or gives Filipino
transacting business (Menthrelatura Corp/citizen reciprocal rights
case)
b. If acts of the corp. indicates a purpose III. To enforce a right not arising out of Business
by the corp. to engage in some parts of Transaction
its regular business, then doing - Bulakhidas and Universal Shopping
business (Microwe____ case) – transaction between 2 foreign
c. When a single act is not merely entities
incidental or casual but such but of such IV. Intends to hold person/entity for actionable
character as to distinctly indicate its acts or omission
intention to perform other business in - Rule on equity allows Filipino to sue
the Phils (Way lab) FC
d. The volume of the business does not - Lack of license is not an excuse for
matter, it is the performance of acts for its non-suability (FBA)
which the corp. was created that
determines whether it was transacting  RULES
business (Granger) 1. Burden of proof that it is FC transacting
business without a license suing under
the 4 exceptions is on the FC
 Saint Louis University COMMERCIAL LAW 154
2012 BAR OPERATIONS

2. The defendant must specifically deny the - the inability of a person to pay his debts as they
allegation of FC capacity to sue become due in the ordinary course of business
3. Proof of doing business is not necessary (equity test).
to confer jurisdiction on th FC (Maruber’s - Insolvency law (IL) is subsidiary to the Civil
case and Signetics vs, CA) Code.
- For the (IL) to be applicable: there must be a
proceeding in insolvency in the proper RTC.

XVI. MISCELLANEOUS PROVISIONS Purposes of IL

(1) To effect an equitable distribution of the
Sec 137 bankrupt’s property among his creditors.
‐ OCS – all shares of stock issued to subscribers (2) To benefit the debtor in discharging him from his
or shareholders of a stock corp. whether or nor liabilities and enabling him to start afresh with the
fully paid or partially as long as there is a property set apart to him as exempt.
bonding subscription agreement, except (3) To have a uniform procedure in asserting the
treasury shares. claims against an entity threatened by insolvency in
‐ All OCS are issued because not outstanding if a manner which would prevent creditors from
not issued but not all issued shares of stocks are obtaining any preference by paying one or some
outstanding (e.g. treasury shares issued but not ahead of the others.
OCS)

Nature of the Proceedings Under the IL

OCS Subscribed The proceedings are considered in rem,
Not all OCS are All subscribed capital hence binding upon the whole world. All persons
considered subscribed stocks are considered having an interest on the subject matter involved,
outstanding whether notified or not are equally bound.

 Reason: Because it is possible that shares Remedies open to an insolvent debtor

of stock are fully paid. If fully paid, no longer Under the law, the insolvent debtor may be
considered as subscribed. permitted to:
1. to petition the court to suspend
Sec. 138 payments of his debts; OR
‐ Q: Is it possible for a corp. to have its affairs 2. to be discharged from his debts and
managed by Board of Governors? liabilities by voluntary or involuntary
A: Yes, but only limited to non-stock and special insolvency proceedings. (Sec. 1).
corp. who may designate another name for its
BOT Suspension of payments, Defined
It is the postponement by court order, of the
Sec 142 payments of debts of one who, while possessing
‐ Gen Rule: Examination results of the operation, sufficient property to cover his debts, foresees the
books and records of any corp are strictly impossibility of meeting them when they respectively
confidential fall due. (Sec. 2, par. 1).
Except: When a law requires disclosure
Purpose of Suspension
 
 
- to suspend or delay payments.
THE INSOLVENCY LAW 
(Act No. 1956, as amended)  Basis of Suspension
- the probability of the debtor’s inability to
meet his obligations when they
Insolvency, Defined respectively fall due.
- the state of a person whose liabilities are more
than his assets. It is that relative condition of Procedural Requirements
man’s assets and liabilities that the former if all
made immediately available, would not be The petition should be filed by a debtor—
sufficient to discharge the latter (balance sheet 1. possessing sufficient property to cover all his
test). debts;
 Saint Louis University COMMERCIAL LAW 155
2012 BAR OPERATIONS

2. foreseeing the impossibility of meeting them 4. Meeting of creditors for the consideration of
when they respectively fall due; and debtor’s proposition. (Sec. 4);
3. petitioning that he be declared in the state of 5. Approval by creditors of the debtor’s
suspension of payments. The petition need not proposition. (Sec. 8);
be verified. 6. Objections, if any, made w/in 10 days
following the meeting. (Sec. 11); and
The petition should be accompanied by— 7. Issuance by the court of an order directing
1. a verified schedule containing a full and true that the argument be carried out in case the
statement of the debts and liabilities of the decision is declared valid. (Sec. 11)
petitioner with a list of creditors, residence, sum
due, nature of liability, consideration, existing Rule of DOUBLE MAJORITY in the meeting of
pledge, lien or security. (Sec. 15); creditors
2. a verified inventory containing a list of creditors, The majority shall be 2/3 of the creditors
description of all the property including those voting upon same proposition, which 2/3 represent
exempt from execution and statement as to at least 3/5 of the total liabilities of the debtor. (Sec.
value of each item of property, location and 8[e]).
encumbrances thereon. (Sec. 16);
3. a statement of assets and liabilities; When proposed agreement deemed rejected
4. proposed agreements he requests of his  If the number of the creditors required for
creditors. holding a meeting does not attend thereat.
 The two majorities mentioned in Sec. 8[e]
Effects of Filing of Petition are not in favor of the proposed agreement.
The following are the effects: (Sec. 10).
1. No disposition in any manner of his property
may be made by the petitioner except insofar as Causes for Objection to Decisions of Creditors
concerns the ordinary operations of commerce They are:
or of industry in which he is engaged. (Sec. 3, 1. Defects in the call for the meeting, in the
par. 2). holding thereof, and in the deliberation had
2. No payments may be made by the petitioner thereat which prejudice the rights of the
except in the ordinary course of his business or creditors;
industry. (ibid.); 2. Fraudulent connivance between one or
3. Upon request to the court, all pending more creditors and the debtor to vote in
executions against the debtor shall be favor of the proposed agreement; and
suspended except execution against property 3. Fraudulent conveyance of claims for the
especially mortgaged. (Sec. 6). purpose of obtaining a majority. (Sec. 12).

Creditors affected by the filing of petition Corporate Suspension of Payments

Only those creditors included in the Section 5(d) of PD 902-A has transferred
schedules filed by the debtor shall be cited to appear original and exclusive jurisdiction over petitions for
and take part in the meeting.(Sec. 5). suspensions of payments by corporation to the SEC,
and in addition, it increased the coverage of
Creditors NOT affected by order of suspension “suspension of payments” for corporation to include
of payments a situation when the assets of the debtor-corporation
They are the following: are less than its liabilities, when it is under a
1. Persons having claims for personal labor, management committee or a rehabilitation receiver.
maintenance, expenses of last illness or funeral
of the wife or children of the debtor incurred in  Pursuant to the Subsection 5.2 of the
sixty (60) days immediately preceding the filing Securities Regulation Code, the jurisdiction
of the petition; and of the SEC over corporate suspension of
2. Persons having legal or contractual mortgages. payments proceedings is transferred to the
(Sec. 9). RTCs. Consequently, the existing
jurisprudence on corporate suspension of
Steps in Suspension payments proceedings under Section 5(d) of
1. Filing of petition by the debtor. (Sec. 2); PD 902-A should now apply to the RTC.
2. Issuance by the court of an order calling a
meeting of creditors. (Sec. 3); Power to Appoint Management Committee under
3. Publication of the order and service of PD 902-A
summons. (Sec. 4);
 Saint Louis University COMMERCIAL LAW 156
2012 BAR OPERATIONS

Under Section 6(c) and (d) of PD 902-A, in rehabilitation receiver and there is no directive to
order to effectively exercise its jurisdiction, the RTC have its assets liquidated;
is empowered: 4. The effectiveness of final agreement on the
1. To appoint one or more receivers of the manner of payment of the obligations of the
property, real or personal, which is the subject of corporate debtor is subject to the qualifying
action pending before the RTC in accordance majority votes required under the IL; whereas,
with the pertinent provisions of the Rules of under PD 902-A, the management committee or
Court; the rehabilitation receiver is granted sufficient
2. In appropriate cases, appoint a rehabilitation powers to take such measures as are necessary
receiver of corporations not supervised or to bring back to financial health the distressed
regulated by other government agencies who company without need to obtain approval of the
shall have, in addition to the powers of a regular corporate creditors.
receiver under the provisions of the Rules of
Court, such functions and powers as provided in Corporate Rehabilitation, defined
the Decree; and Corporate rehabilitation as a process “to try
3. Upon petition or motu proprio, to appoint a to conserve and administer the corporation’s assets
management committee, board, or body to in the hope that it may eventually be able to return
undertake the management of corporations not from financial stress to solvency. It contemplates of
supervised or regulated by other government the continuation of corporate life and activities so
agencies in appropriate cases when there is that it may be able to return to its former condition of
imminent danger of dissipation, loss wastage or successful operations and financial stability.”
destruction of assets of other properties or
paralyzation of business operations of such Preference of secured creditors retained
corporations which may be prejudicial to the Secured creditors retain their preference
interest of minority stockholders, parties-litigants over unsecured creditors, but enforcement of such
or the general public. preference is equally suspended upon the
appointment of a management committee,
Legal effect of Appointment of Management rehabilitation receiver board or body. This
Committee/Rehabilitation Receiver suspension shall not prejudice or render ineffective
Section 6(c) of PD 902-A provides that the status of a secured creditor as compared to a
“upon appointment of a management committee, totally unsecured creditor. PD 902-A does not state
rehabilitation receiver, board or body. . . all actions anything to this effect. What it merely provides is
for claims against the corporation. . . under that all actions for claims against the corporation,
management or receivership pending before any partnership or association shall be suspended .This
court, tribunal, board or body shall be suspended should give the receiver a chance to rehabilitate the
accordingly.” corporation if there should still be a possibility for
doing so. The key phrase is equality in equity
Differences between Suspension of Payments However, in the event that the rehabilitation
Proceedings under the Insolvency Law (IL) and is no longer feasible and claims against the
under PD 902-A distressed corporation would eventually have to be
1. The appointment of a management committee settled, the secured creditors shall enjoy preference
or a rehabilitation receiver automatically takes over the unsecured creditors, subject only to the
the case out of the provisions of IL and would provisions of the NCC on Concurrence and
make the provisions of PD 902-A exclusively Preference of Credit.
applicable;
2. Under the IL, the suspensive effect of the order Power to Liquidate Corporate Debtor
issued pursuant to the petition for suspension of Under Sec. 6(d), the RTC may, on the basis
payment does not cover secured creditors, while of the findings and recommendation of the
the suspensive effect under PD 902-A upon management committee, or rehabilitation receiver,
appointment of the management committee or board or body, or in its own findings, determine that
rehabilitation receiver, would cover all corporate the continuance in business or such corporation or
creditors, both secured and unsecured; entity would not be feasible or profitable nor work to
3. Under the IL, in the absence of any agreement the best interest of the stockholders, parties-litigants,
among the corporate creditors, the suspension creditors, or the general public, and order the
would expire after 3 months; whereas, under PD dissolution of such corporation or entity and its
902-A, the suspensive effect has no time limit remaining assets liquidated accordingly.
and would prevail for so long as the corporate
debtor is under a management committee or
 Saint Louis University COMMERCIAL LAW 157
2012 BAR OPERATIONS

VOLUNTARY INSOLVENCY Requisites of Petition for Voluntary Insolvency

The petition, which must be verified, is to be filed
Concept of Voluntary Insolvency –
A voluntary insolvency proceeding is exactly 1. by an insolvent debtor,
what its name implies and the debtor is under no 2. owing debts exceeding in amount the sum of
obligation, and cannot be forced, to bring such P1,000.00,
proceeding; nor with his default, through failure to 3. in the RTC of the province or city in which he
appeal in an involuntary proceeding, convert the has resided for six (6) months next preceding
proceedings to a voluntary ones. the filing of such petition, and
4. setting forth in his petition the following:
Nature of Voluntary Insolvency (a) his place of residence;
An insolvent debtor, owing debts exceeding (b) the period of his residence therein
in amount the sum of P1,000.00 may apply to be immediately prior to the filing of petition;
discharged from his debts and liabilities by petition (c) his inability to pay all his debts in full;
to the RTC of the province or city in which he has (d) his willingness to surrender all his
resided for six (6) months next preceding the filing of property, estate, and effects not exempt
such petition. from execution for the benefit of the
creditors; and
Distinctions between Suspension of Payments (e) an application to be adjudged insolvent
and Insolvency (Sec. 14).
1. In the former, the purpose is to suspend or delay
the payment of debts, while in the latter, to Documents to accompany the Petition
discharge the debtor from the payment of debts; They are the following:
2. In the former, the debtor has sufficient property 1. A verified schedule which must contain –
to pay his debts, while in the latter, the debtor (a) a full and true statement of all debts and
does not have sufficient property to pay all his liabilities of the insolvent debtor; and
debts; (b) an outline of the facts giving rise or
3. In the former, the amount of indebtedness is not which might give rise to a cause of
affected, while in the latter, the creditors receive action against such insolvent debtor
less than their credits, and in case where there (Sec. 15); and
are preferences, some creditors may not receive 2. A verified inventory which must contain –
any amount at all; and (a) an accurate description of all the
4. In the former, the number of the creditors is personal and real property of the
immaterial, while in the case of involuntary insolvent exempt or not from execution
insolvency, three or more creditors are required. including a statement as to its value,
location, and encumbrances thereon;
Steps in Voluntary Insolvency and
Procedure in general for voluntary insolvency: (b) an outline of the facts giving rise or
1. Filing of the petition by the debtor praying for the which might give rise to a right of action
declaration of insolvency (Sec. 14); in favor of the insolvent debtor (Sec.
2. Issuance of an order of adjudication declaring 16).
the petitioner insolvent (Sec. 18);
3. Publication and service of the order declaring a Effect of errors in description or omission of
state of insolvency (Sec. 19); property in inventory
4. Meeting of creditors to elect the assignee in 1. That the property is erroneously or
insolvency (Sec. 30); ambiguously described in the insolvent’s
5. Conveyance of the debtor’s property by the clerk inventory will not affect the title of
of court to the assignee (Sec. 32); purchasers in the insolvency proceedings.
6. Liquidation of the debtor’s assets and payment All the property of the insolvent passes to
of his debts (Sec. 33); his assignee and is administered in the
7. Composition, if agreed upon (Sec. 63); insolvency proceedings regardless of the
8. Discharge of the debtor on his application (Sec. errors in the inventory.
64), except a corporation (Sec. 52); 2. If the insolvent omits property from his
9. Objection to the discharge, if any (Sec. 66); and inventory, through either mistake or fraud, it
10. Appeal in certain cases (Sec. 62) is the duty of the assignee to have the
inventory amended so as to include it and to
take possession and administer it.
 Saint Louis University COMMERCIAL LAW 158
2012 BAR OPERATIONS

3. Even property exempt from execution must It is not a mere personal action against the
be included in order to preclude possible insolvent for the collection of debts; but its purpose
fraudulent omissions under the pretext that is to impound all of his non-exempt property, to
such property is exempt. But where the distribute it equitably among his creditors, and to
petitioner did not attach an inventory to its release him from further liability. It is accordingly a
petition for insolvency, alleging under oath proceeding in rem as well as in personam.
that it had no property to inventory, the lack
of inventory was held not fatal to the petition Steps in Involuntary Insolvency
because it must be assumed, until proven They are the following:
otherwise, that the petitioner was stating the 1. Filing of the petition by three or more creditors,
truth. who are residents of the Philippines, with an
aggregate credit of not less than P1,000.00,
Effect of the Filing of Petition none of whom become a creditor by assignment
Once the petition is filed, it ipso facto takes within thirty (30) days prior to the filing of the
away and deprives the debtor-petitioner of the right petition;
to do or commit any act of preference as to creditors, 2. Issuance of the order requiring the debtor to
pending the final adjudication. show cause why he should not be adjudged
insolvent;
Effect of court order declaring the debtor 3. Service of order to show cause;
insolvent 4. Filing of answer or motion to dismiss;
Upon the filing of the petition, the court, as a 5. Hearing of the case;
matter of course, shall issue an order declaring the 6. Issuance of order or decision adjudging the
petitioning debtor insolvent (Sec. 19). The effects of debtor insolvent;
such order are the following: 7. Publication and service of order;
1. All the assets of the debtor not exempt from 8. Meeting of creditors for election of an assignee
execution are taken possession of by the sheriff in insolvency;
until the appointment of a receiver or assignee 9. Conveyance of the debtor’s property by clerk of
(Ibid.); court to the assignee;
2. The payment to the debtor of any debts due to 10. Liquidation of assets and payment of debts;
him and the delivery to the debtor or to any 11. Composition, if agreed upon;
person for him of any property belonging to him, 12. Discharge of the debtor on his application,
and the transfer of any property by him are except a corporation;
forbidden (Ibid.); 13. Objection to the discharge, if any; and
3. All civil proceedings pending against the 14. Appeal in certain cases.
insolvent debtor shall be stayed (Ibid.); and
4. Mortgages or pledges, attachments or Requisites of Petition for Involuntary Insolvency
executions on property of the debtor duly The petition is to be filed by –
recorded and not dissolved are not, however, 1. Three or more creditors,
affected by the order (Sec. 59). 2. None of whom has become such a creditor by
assignment, within 30 days prior to the filing of
Prohibited Acts of an Insolvent said petition,
The following are forbidden: 3. Whose credits accrued in the Philippines,
1. The payment to the debtor of any debts due him. 4. The total amount of which credits is not less
2. The delivery to the debtor or to any person for than P1,000.00, and
him of any property for him of any property 5. In the RTC of the province or city in which the
belonging to said debtor. debtor resides or has his principal place of
3. The transfer of any property by the debtor. business.
All civil proceedings pending against the
insolvent are stayed, either by forbidding the The petition –
maintenance of such 1. Must be verified by at least three of the
actions, or by authorizing the insolvency court to petitioning creditors,
grant such stay. 2. Must set forth one or more acts of insolvency
mentioned in the law, and
3. Must be accompanied by a bond, approved by
INVOLUNTARY INSOLVENCY the court with at least two sureties, in such a
penal sum as the court shall direct.
Nature of Involuntary Insolvency Proceedings
Acts of Insolvency
 Saint Louis University COMMERCIAL LAW 159
2012 BAR OPERATIONS

The following are acts of insolvency when a 6. In the former, an order of adjudication of
creditor can invoke in filing a petition to declare a insolvency may be granted ex parte, while in the
debtor in a state of involuntary insolvency: latter, it is granted only after hearing;
1. Intention to depart or departure from the 7. In the former, the petition is filed in the RTC of
Philippines to defraud creditors; the province or the city in which the debtor has
2. Absence from the Philippines to defraud resided for 6 months, while in the latter, the
creditors; length of residence is immaterial; and
3. Concealment of debtor to avoid legal process; 8. In the former, the court issues the order of
4. Concealment or removal of his property to avoid adjudication declaring the petitioner insolvent
legal process; upon the filing of the voluntary petition, while in
5. Confession of judgment in favor of a creditor to the latter, the debtor is not adjudicated insolvent
defraud other creditors; until after the hearing of the case.
6. Allowing default judgment in favor of a creditor
to defraud other creditors;
7. Allowing his property to be taken under legal ASSIGNEES
process in preference of a particular creditor to
defraud other creditors; Assignee, Defined
8. Making conveyance, assignment or transfer of A person elected by the creditors or
his property to defraud his creditors; appointed by the court to whom an insolvent debtor
9. Making conveyance, assignment or transfer of makes an assignment of all his property for the
his property in contemplation of insolvency; benefit of his creditors.
10. Default of a merchant or a tradesman to pay his
current obligations for a period of 30 days; Creditors not entitled to vote in the election of
11. Failure to pay money on deposit or received in a assignee
fiduciary capacity for a period of 30 days after They are the following:
demand; and 1. Those who did not file their claims at least two
12. Insufficiency of property to satisfy an execution days prior to the time appointed for such election
issued against him. (Sec. 29);
2. Those whose claims are barred by the statute of
Adjudication of Insolvency limitations (Ibid.);
Where the debtor fails to appear or admits 3. Secured creditors unless they surrender their
the allegations of the petition, or the evidence of the security or lien to the sheriff or receiver or unless
petitioner is sufficient, an adjudication of insolvency they shall first have the value of such security
shall be made. The declaration of insolvency fixed as provided in Section 59; and
retroacts to the date of the filing of the petition for 4. Holders of claims for unliquidated damages
insolvency. arising out of pure tort.
Distinctions between voluntary insolvency and Bond of Assignee
involuntary insolvency After his election, the assignee is required to
1. In the former, one creditor is sufficient, while in give a bond for the faithful performance of his duties.
the latter, three or more creditors are required; To establish his official character and his right to sue
2. In the former, it is filed by the insolvent debtor, in that capacity, it is incumbent on the assignee to
while in the latter, it is filed by three or more show that the bond required has been given.
creditors who possess the qualifications required
by law; Properties if insolvent that pass to the assignee
3. In the former, the debtor must not be guilty of
any of the acts of insolvency enumerated in They are:
Section 20, while in the latter, the debtor must 1. All real and personal property, estate and effects
have committed one or more of such acts of of the debtor including all deeds, books and
insolvency; papers in relation thereto;
4. In the former, the amount of indebtedness must 2. Properties fraudulently conveyed;
exceed P1,000.00, while in the latter, it must not 3. Right of action for damages to real property; and
be less than P1,000.00; 4. The undivided share or interest of the insolvent
5. In the former, a bond is not required, while in the debtor in property held under co-ownership
latter, the petition must be accompanied by a
bond; Properties of insolvent that do not pass to the
assignee
They are:
1. Property exempt from execution;
 Saint Louis University COMMERCIAL LAW 160
2012 BAR OPERATIONS

2. Property held in trust; 5. To redeem all mortgages and pledges and to

3. Property of the conjugal partnership or absolute satisfy any judgment which may be an
community so long as said partnership or encumbrance on any property sold by him;
community exists insofar as the insolvent 6. To settle all accounts between the debtor and
debtor’s obligations have redounded to the his debtors, subject to the approval of the court;
benefit of the former; 7. To compound, under the order of the court, with
4. Property over which a mortgage or pledge exists any person indebted to such debtor; and
unless the creditor surrenders his security or 8. To recover any property fraudulently by the
lien; debtor.
5. After-acquired property except fruits and income
of property owned by the debtor and which had Duties of the assignee
passed to the assignee in insolvency; The assignee shall have the following
6. Non-leviable assets like a life insurance policy duties:
which does not have any cash surrender value; 1. To register the assignment to him of the real
and estate of the debtor;
7. Right of action for tort which is purely personal in 2. To file the schedule and the inventory of the
nature. property of the debtor;
3. To convert, as speedily as possible, the estate,
Effects of assignment real and personal, into money;
They are: 4. To keep a regular account of all moneys
1. The assignee takes the property in the plight received by him as assignee;
and conditions that the insolvent held it; 5. To petition the court to allow the private sale of
2. Upon appointment, the legal title to all the the debtor’s property if it appears that it is for the
property of the insolvent is vested in the best interest of the estate;
assignee, and the control of the property is 6. To file a just and true accounts of all receipts
vested in court; and payments;
3. All actions to recover all the estate, debts and 7. To file accounts upon order of the court on
effects of the insolvent shall be brought by the motion of two or more creditors;
assignee and not by the creditors; and 8. To distribute such dividends as he may be
4. The assignment shall— required; and
- dissolve any attachment levied within 9. To file his final account within one (1) year from
one month next preceding the the date of order of adjudication.
commencement of insolvency
proceedings;
- vacate and set aside judgment entered Sale of assets
in any action commenced within 30 days 1. Generally - The law provided for the reduction
immediately prior to the commencement of the insolvent’s assets into cash by means of
of insolvency proceedings; and public sales. Proceedings for the sale of assets
- vacate and set aside any execution are proceedings in rem. The only question of
issued thereon; and jurisdiction is the power of the court over the
- vacate and set aside any judgment subject matter without regard to the parties who
entered by default or consent of the may have interest in it. There are no adversary
debtor within 30 days prior to the parties to the proceedings.
commencement of insolvency 2. Persons competent to purchase - On the sale
proceedings. in insolvency proceedings, the insolvent will not
generally be permitted to purchase the assets,
Powers of the assignee either in his own name or acting through a
The assignee shall have the power: dummy. If he does so, the property purchased
1. To sue and recover all the estate, debts and becomes subject to the claims of his creditors.
claims belonging to or due to the creditors; But otherwise, any person legally qualified to
2. To take into possession all the estate of the contract may purchase at a judicial sale unless
debtor except property exempt from execution; he has a duty to perform in reference thereto
3. In case of a non-resident or absconding or which is inconsistent with the character of a
concealed debtor, to demand and receive of purchaser or is so connected with the
every sheriff all the property and moneys in his transaction that his individual interest as a
possession belonging to the debtor; purchaser may be inconsistent with his duty.
4. To sell, upon court order, any estate of the 3. Title acquired - As a general rule, the
debtor which has come into his possession; purchaser at a judicial sale takes by virtue of his
 Saint Louis University COMMERCIAL LAW 161
2012 BAR OPERATIONS

purchase all the right, title, and interest of the (4) Credits guaranteed with a pledge so long as the
interest of the parties to the proceedings in and thing pledge are in the hands of the creditor, or
to the property conveyed to him. The those guaranteed by a chattel mortgage, upon
circumstances that an insolvent schedule the things pledged or mortgaged, up to the value
contain an erroneous or ambiguous description thereof;
of certain property does not affect the title of the (5) Credits for the making, repairs, safekeeping or
purchaser. All the property passes to the preservation of personal property, on the
assignee and is sold regardless of its description movable thus made, repaired, kept or
in the schedules possessed;
(6) Claims for laborers’ wages, on the goods
Dividends in insolvency, Defined manufactured or the work done;
A parcel of the fund arising from the assets (7) For expenses of salvage, upon the goods
of the estate, rightfully allotted to a creditor entitled salvaged;
to share in the fund, whether in the same proportion (8) Credits between the landlord and the tenant,
with other creditors or in a different proportion. arising from the agricultural leasehold contract,
It is paid by the assignee only upon the on the share of each in the fruits or harvest;
order of the court. (9) Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and for
CLASSIFICATION AND PREFERENCE OF thirty days thereafter;
CREDITS (10)Credits for lodging and supplies usually
furnished to travelers by hotel-keepers, on the
Preference of credit, defined movables belonging to the guest, as long as
A legal situation whereby one person is such movables are in the hotel, but not for the
given a superior right or claim over another. For this money loaned to the guests;
reason, the law as to preference shall be strictly (11)Credits for seeds and expenses for cultivation
construed. and harvest advanced to the debtor, upon the
fruits harvested;
Concurrence of credits, defined (12)Credits for rent for one (1) year, upon the
Implies the possession by two or more personal property of the lessee existing on the
creditors of equal rights or privileges over the same immovable leased and on the fruits of the same,
property or all of the property of the debtor. but not on the money or instruments of credit;
(13)Claims in favor of the depositor if the depositary
Classification of Credits has wrongfully sold the thing deposited, upon
(Arts. 2241, 2242, 2244, & 2245) the price of the sale.
In the foregoing cases, if the movables to which
I. Preferred and concurring with respect to the lien or preference attaches have been
specific movable property of the debtor (Art. wrongfully taken, the creditor may demand them
2241), which are -- from any possessor, within 30 days from the
(1) Duties, taxes, and fees due thereon to the State unlawful seizure.
or any subdivision thereof;
(2) Claims arising from misappropriation, breach of
trust, or malfeasance by public officials II. Preferred and concurring with respect to
committed in the performance of their duties, on specific immovable and real rights of the debtor
the movables, money or securities obtained by (Art. 2242), which are—
them; (1) Taxes due upon the land or building;
(3) Claims for the unpaid price of movable sold, as (2) For the unpaid price of real property sold, upon
long as they are in the possession of the debtor, the immovable sold;
up to the value of the same; and if the movable (3) Claims of laborers, masons, mechanic and other
has been resold by the debtor and the price is workmen, as well as of architects, engineers and
still unpaid, the lien may be enforced on the contractors, engaged in the construction,
price; this right is not lost by the immobilization reconstruction or repair of buildings, canals, or
of the thing by destination, provided it has not other work, upon said buildings, canals or other
lost its form, substance and identity; neither is works;
the right lost by the sale of the thing together (4) Claims of furnishers of materials used in the
with other property for a lump sum, when the construction, reconstruction, or repair of
price thereof can be determined proportionally; buildings, canals, and other works, upon aid
buildings, canals or other works;
 Saint Louis University COMMERCIAL LAW 162
2012 BAR OPERATIONS

(5) Mortgage credits recorded in the Registry of (8) Legal expenses, and expenses incurred in the
Property, upon the real estate mortgaged; administration of the insolvent’s estate for the
(6) Expenses for the preservation or improvement common interest of the creditors, when properly
of real property when the law authorizes authorized and approved by the court;
reimbursement, upon the immovable preserved (9) Taxes and assessments due the national
or improved; government, other than those mentioned in
(7) Credits annotated in the Registry of Property, in Articles 2241, No. 1, and 2242, No. 1;
virtue of a judicial order, by attachments or (10)Taxes and assessments due any province other
executions, upon the property affected, and only than those referred to in Articles 2241, No. 1,
as to later credits; and 2242, No. 1;
(8) Claims of co-heirs for warranty in the partition of (11)Taxes and assessments due any city or
an immovable among them, upon the real municipality, other than those mentioned in
property thus divided; Articles 2241, No. 1 and 2242, No. 1;
(9) Claims of donors of real property for pecuniary (12)Damages for death or personal injuries caused
charges or other conditions imposed upon the by a quasi-delict;
donee, upon the immovable donated; (13)Gifts due to public and private institutions of
(10)Credits of insurers, upon the property insured, charity or beneficence;
for the insurance premium for two (2) years. (14)Credits which, without special privilege, appear
in (a) a public instrument; or (b) in the final
Those credits which enjoy preference in judgment, if they had been the subject of
relation to specific real property or real rights, litigation. These credits shall have preference
exclude all other to the extent of the value of the among themselves in the order of priority of the
immovable or real right to which the preference dates of the instruments and of the judgments,
refers. (Art. 2248, NCC). respectively

If there are two or more credits with respect The credits enumerated in Articles 2241 and 2242,
to the same specific real property or real rights, although preferred as against other credits in
they shall be satisfied pro rata, after the respect to specific property of the insolvent, do not
payment of the taxes and assessments upon the have preference as among themselves, and shall be
immovable property or real right. (Art. 2249). satisfied pro rata from the specific property, after the
payment of the duties, taxes and fees due the state
III. Preferred insofar as to other real and personal or any subdivision thereof. On the other hand, the
properties of the debtor (Art. 2244). Order of credits enumerated in Article 2244 not only are
preference is observed. These are— preferred as against other credits, but they are
(1) Credits for services rendered the insolvent by preferred as against each other, in the order of
employees, laborers, or household helpers enumeration.
preceding the commencement of the
proceedings in insolvency;
(2) Proper funeral expenses for the debtor, or PARTNERSHIPS AND CORPORATIONS
children under his or her parental authority who
have no property of their own, when approved When partnership may be declared insolvent
by the court; A partnership may be adjudged insolvent
(3) Expenses during the last illness of the debtor or during the continuation of the partnership business
of his or her spouse and children under his or or after its dissolution but before the final settlement
her parental authority, if they have no property of thereof.
their own;
(4) Compensation due to the laborers or their Properties included in the insolvency
dependents under laws providing for indemnity proceedings
for damages in cases of labor accident, or Upon order of the court, the following
illness resulting from the nature of the property shall be taken:
employment; (1) All the property of the partnership; and
(5) Credits and advancements made to the debtor (2) All the separate property of each of the
for the support of himself or herself, and family, partners, except—
during the last year preceding the insolvency; (a) separate properties of limited
(6) Support during the insolvency proceedings, and partners; and
for 3 months thereafter; (b) properties which are exempt by
(7) Fines and civil indemnification arising from a law.
criminal offense;
 Saint Louis University COMMERCIAL LAW 163
2012 BAR OPERATIONS

PROOF OF DEBTS 2. To waive his right under the security or lien and
thereby share in the distribution of the assets of
Provable Debts the debtor, or
The debts which may be proved against the 3. To have the value of the encumbered property
estate of the debtor in insolvency proceedings are appraised and then share in the distribution of
the following: the assets of the debtor with respect to the
1. All debts due and payable from the debtor at the balance of his credit.
time of the adjudication of insolvency.
2. All debts existing at the time of the adjudication
of insolvency but not payable until a future time, COMPOSITION
a discount being made if no interest is payable Composition defined
by the terms of the contract; It is an agreement, made upon a sufficient
3. Any debt of the insolvent arising from his liability consideration, between an insolvent or embarrassed
as indorser, surety, bail or guarantor, where debtor and his creditors, whereby the latter for the
such liability became absolute after the sake of immediate or sooner payment, agree to
adjudication of insolvency but before the final accept a dividend less than the whole amount of
dividend shall have been declared; their claims, to be distributed pro rata, in discharge
4. Other contingent debts and contingent liabilities and satisfaction of the whole debt.
contracted by the insolvent if the contingency
shall happen before the order of final dividend; Requirements for a Valid Offer of Composition
and They are as follows:
5. Any debt of the insolvent arising from his liability 1. The offer of the terms of composition must be
to any person liable as bail, surety, or guarantor made after the filing in court of the schedule of
or otherwise, for the insolvent, who shall have property and submission of the list of creditors;
paid the debt in full or in part. 2. The offer must be accepted in writing by a
majority of the creditors representing a majority
Contingent claim, defined of the claims which have been allowed;
A claim in which liability depends on some 3. It must be made after depositing in such place
future event that may or may not happen and which designated by the court, the consideration to be
makes it uncertain whether there will be any liability. paid and the costs of the proceedings; and
4. The terms of the composition must be approved
Debts that may NOT be proved or confirmed by the court.
The following debts are not provable or
allowed in insolvency proceedings: When court may confirm composition
1. Claims barred by the statute of limitations; The court shall confirm a composition on the
2. Claims of secured creditors with a mortgage or application of the debtor if satisfied that:
pledge in their favor unless they surrender their 1. It is for the best interest of the creditors;
security; 2. The debtor has not been guilty of any of the
3. Claims of creditors who hold an attachment or acts, or of a failure to perform any of the duties
execution on the property of the debtor duly which would create a bar to his discharge; and
recorded and not dissolved; 3. The offer and its acceptance are in good faith
4. Claims on account of which a fraudulent and have not been made or procured in a
preference was made or given; manner forbidden by the Act.
5. Support, as it does not arise from any business
transaction but from the relation of marriage; Effects of the Confirmation of Composition
and
6. A claim for unliquidated damages arising out of The following are the effects:
a pure tort which neither constitutes a breach of 1. The consideration shall be distributed as the
an express contract nor results in any unjust judge shall direct;
enrichment of the tortfeasor that may form the 2. The insolvency proceeding shall be dismissed;
basis of an implied contract. 3. The title to the insolvent’s property shall revest
in him; and
Alternative rights of secured creditor 4. The insolvent shall be released from his debts.
They are the following:
1. To maintain his right under the security or lien When confirmation may be set aside
and ignore the insolvency proceedings, in which The court may, upon application of a party in
case it is the duty of the assignee to surrender to interest, filed at any time within 6 months after the
him the property encumbered; or composition has been confirmed, set the same aside
 Saint Louis University COMMERCIAL LAW 164
2012 BAR OPERATIONS

and reinstate the case if it shall be made to appear (7) Non-disclosure to the assignee of a proven false
upon trial: or fictitious debt within 1 month after acquiring
(1) That fraud was practiced in the procuring of knowledge;
such composition; and (8) Being a merchant, failure to keep proper books
(2) That the knowledge thereof has come to the of accounts;
petitioner since the confirmation of such (9) Influencing the action of any creditor, at any
composition. state of the proceedings, by any pecuniary
consideration;
 the effect of lawful composition is equivalent (10)Effecting any transfer, conveyance or mortgage
to discharge. in contemplation of insolvency;
 the corporation will not be discharged by a (11)Conviction of any misdemeanor under the
lawful composition. It is only for natural Insolvency Law;
person. (12)In case of voluntary insolvency, he has received
the benefit of insolvency within 6 years next
DISCHARGE preceding his application for discharge; and
Discharge defined (13)If insolvency proceedings in which he could
A discharge is the formal and judicial have applied for a discharge are pending by or
release of an insolvent debtor from all his debts against him in the RTC of any other province or
contracted prior to the insolvency proceedings, with city.
the exception of those expressly named by law.
Legal effects of discharge
By discharge, the debtor is released from the (1) It releases the debtor from all claims, debts,
obligation of all his debts which were or might be liabilities and demand set forth in the schedule
proved in the proceedings, so that they are no or which were or might have been proved
longer a charge upon him and so that he may against his estate in insolvency. Hence, non-
thereafter engage in business and acquire provable debts are not affected whether or not
property without its being liable for the they were properly scheduled.
satisfaction of such former debts (2) It operates as a discharge of the insolvent and
future acquisitions, but permits mortgages and
other lien creditors to have their satisfaction out
When to Apply for Discharge of the mortgage or subject of the lien;
A debtor may apply— (3) It is a special defense which may be pleaded
 to the RTC for a discharge, and be a complete bar to all suits brought on
 at any time after the expiration of 3 months any such debts, claims, liabilities or demands;
from the adjudication of insolvency, (4) It does not operate to release any person liable
 BUT not later than 1 year from such for the same debt, for or with the debtor, either
adjudication of insolvency, as partner, joint contractor, indorser, surety, or
 UNLESS the property of the insolvent has otherwise; and
not been converted into money without his (5) The certificate of discharge is prima facie
fault, thereby delaying the distribution of evidence of the fact of release, and the
dividends among the creditors in which case regularity of such discharge.
the court may extend the period.
Where a debtor is judicially declared
Circumstances which bar Discharge insolvent, the remedy of the guarantor or surety
No discharge shall be granted, or if granted, would be to file a contingent claim in the insolvency
shall be invalid, in the following cases: proceeding, if his rights as such guarantor or surety
(1) False swearing; are not to be barred by the subsequent discharge of
(2) Concealment of any part of his estate or effects; the insolvent debtor from all his liabilities.
(3) Fraud or willful neglect in the care of his property
or in the delivery thereof to the assignee; Debts released by discharge
(4) Procuring his property to be attached or seized (1) All claims, debts, and liabilities, and demands
on execution within 1 month before the set forth in the schedule; and
commencement of insolvency proceedings; (2) All claims, debts, liabilities and demands which
(5) Destruction, mutilation, alteration or falsification were or might have been proved against the
of his books, documents or papers; estate in insolvency.
(6) Giving fraudulent preference to a creditor;
Debts not released by discharge
 Saint Louis University COMMERCIAL LAW 165
2012 BAR OPERATIONS

(1) Taxes or assessments due the Government, the benefit of the creditor and a consequent
whether national or local; diminution of the insolvent’s estate with the result
(2) Any debt created by the fraud or embezzlement that such creditor receives a greater proportion of
of the debtor; his claim than other creditors of the same class.
(3) Any debt created by the defalcation of the debtor
as a public officer or while acting in a fiduciary A deposit of money to one’s credit in a bank does
capacity; not create any preference. The estate of the
(4) Debt of any person liable for the same debt, for depositor is not diminished for there is an obligation
or with the insolvent debtor, either as partner, on the part of the bank to pay the amount of the
joint contractor, indorser, surety or otherwise. deposit as soon as the depositor may see fit to draw
(5) Debts of a corporation because is not granted a a check against it.
discharge;
(6) Claim for support; otherwise it will make the law When fraudulent preference exists
a means of avoiding the enforcement of the A fraudulent preference is committed when
obligation, moral and legal, devolving upon the the debtor procures any part of his property to be
husband to support his family; attached, sequestered, or seized on execution or
(7) Discharged debt but revived by a subsequent makes any payment, pledge, mortgage, assignment,
new promise to pay because the discharge does transfer, sale or conveyance of any part of his
not put to an end the moral obligation to pay; property, whether directly or indirectly, absolutely or
(8) Claims for unliquidated damages arising out of a conditionally, to any one under the following
pure tort; circumstances:
(9) Claims of secured creditors; 1. The debtor is insolvent or in contemplation of
(10)Claims not in existence or not mature at the time insolvency;
of the discharge are generally unaffected 2. The transaction in question is made within 30
thereby; and days before the filing of a petition by or against
(11)Claims that are contingent at the time of the the debtor;
discharge are not barred thereby, and 3. It is made with a view to giving preference to any
consequently, an action may be maintained creditor or person having a claim against him;
against the debtor for collection thereof. and
4. The person receiving a benefit thereby has
When discharged may be revoked reasonable cause to believe:
A discharge in insolvency may be revoked a. that the debtor is insolvent; and
by the court which granted it on petition of any b. that the transfer is made with a view
creditor— to prevent his property from coming
1. Whose debt was proved or provable against the to his assignee in insolvency, or to
estate in insolvency, on the ground that the prevent the same from being
discharge was fraudulently obtained; distributed ratably among his
2. Who has discovered facts constituting the fraud creditors, or to defeat the object of
subsequent to the discharged; and provided, or any way hinder the operation of
3. The petition is filed within one year after the date or evade the provisions of the
of the discharge. Insolvency Law.

When presumption of fraud exists

FRAUDULENT PREFERENCES AND If such payment, pledge, mortgage,
TRANSFERS conveyance, sale, assignment, or transfer is not
made in the usual and ordinary course of business
Meaning of transfer of the debtor, or if such seizure is made under a
A transfer within the meaning of the judgment which the debtor has confessed or offered
Insolvency Law, includes the sale and every other to allow, that fact shall be prima facie evidence of
and different modes of disposing of or parting with fraud.
property, or the possession of property, absolutely or
conditionally, as a payment, pledge, mortgage, gift, When fraudulent transfer exists
or security. A fraudulent transfer is any payment,
A deposit of money is not a transfer. pledge, mortgage, conveyance, sale, assignment, or
transfer of property of whatever character made by
When preferential transfer exists the insolvent within 1 month before the filing of a
To constitute a preferential transfer, there petition in insolvency by or against him, except for a
must be a parting with the insolvent’s property for
 Saint Louis University COMMERCIAL LAW 166
2012 BAR OPERATIONS

valuable pecuniary consideration in good faith. Such 3. Suffering loss in any kind of gaming when such
a transfer is void. loss is one of the causes determining the
commencement of insolvency proceedings;
Effect of fraudulent transfer 4. Selling at a loss or for less than the current price
 As against the creditors of the insolvent— any goods brought on credit and still unpaid for;
- any conveyance or assignment or
fraudulently made is void. Hence, no 5. Advancing payment to the prejudice of his
title is acquired by the transferee creditors.

PENAL PROVISIONS III. During proceedings for suspension of

payments—
Acts criminally punishable under this Act 1. Concealing or destroying any property belonging
A debtor who commits any of the following to his estate;
acts shall, upon conviction thereof, be punished by 2. Destroying, altering, mutilating or falsifying any
imprisonment, for not less 3 months nor more than 5 book, deed, document, or writing relating
years for each offense: thereto;
3. Making any payment, sale, assignment, transfer,
I. After the commencement of insolvency or conveyance of any property belonging to his
proceedings -- estate;
(1) Concealing any part of his estate; 4. Spending any part thereof in gaming;
(2) Destroying, altering, mutilating or 5. Falsely swearing to the schedule and inventory
falsifying any book, deed, document, or with intent to defraud his creditors; or
writing relating thereto; 6. Violating in any manner whatsoever the
(3) Removing the same with the intent to injunction issued by the court under Section 3.
prevent or delay its recovery by the
assignee;
(4) Making any payment, gift, sale, MISCELLANEOUS PROVISIONS
assignment, transfer or conveyance of
property belonging to his estate with like Effect of death of insolvent debtor pending
intent; insolvency proceedings
(5) Spending any part thereof in gaming;
(6) Concealing from his assignee or It depends—
omitting from the schedule any part of
1. If the debtor shall die after the order of
his property with intent to defraud;
adjudication, the proceedings shall be continued
(7) Failing to disclose to his assignee the
and concluded in like manner and with like
fact that a person has proved a false or
validity, and effect as if he had lived.
fictitious claim against his estate within 1
2. If the death occurs before the order of
month after coming to the knowledge or
adjudication, the proceedings shall be
belief thereof; or
discontinued. The claims must be filed in the
(8) Attempting to account for any of his
proper testate or intestate proceedings as
property by fictitious losses or
provided by the Rules of Court on the settlement
expenses;
of a decedent’s estate.

II. Within 3 months before commencement of Duty of court where property exempt from
insolvency proceedings— execution
1. Obtaining on credit from any person any goods It shall be the duty of the court having
or chattels with intent to defraud, under the false jurisdiction of the proceedings, upon petition and
pretense of carrying an ordinary course of after hearing held upon due notice, to exempt and
business; set apart, for the use and benefit of the insolvent,
2. Making any pledge or disposition of, otherwise such real and personal property as is by law exempt
than by bona fide transactions in the ordinary from execution.
course of his trade, with intent to defraud, any of
his goods or chattels which have been obtained When insolvency proceedings deemed to
on credit and remained unpaid for; commence
The filing of a petition by or against a debtor
upon which, or upon an amendment of which, an
 Saint Louis University COMMERCIAL LAW 167
2012 BAR OPERATIONS

order of adjudication in insolvency may be made, The Rule shall take effect on January 16, 2009
shall be deemed to be the commencement of following its publication in two (2) newspapers of
proceedings in insolvency under the Act. general circulation.

When petition may be dismissed December 2, 2008

The court, upon giving due notice, may
dismiss the petition and discontinue the proceedings RULES OF PROCEDURE ON CORPORATE
at any time before the appointment of an assignee: REHABILITATION (2008)
1. If it be a voluntary petition, upon the application
of the debtor, if no creditor files written RULE 1
objections; COVERAGE
2. If a creditor’s petition, upon the application of the
petitioning creditors; or Section 1. Scope - These Rules shall apply to
3. By written consent of all creditors filed in court, petitions for rehabilitation of corporations,
in which case, the proceedings may be partnerships and associations pursuant to
dismissed at any time. Presidential Decree No. 902-A, as amended.
After the appointment of an assignee,
dismissal is not allowed without the consent Section 2. Applicability to Rehabilitation Cases
of all parties interested in or affected Transferred from the Securities and Exchange
thereby. Commission. - Cases for rehabilitation transferred
from Securities Exchange Commission to the
When appeal may be taken to the Supreme Court Regional Trial Court pursuant to Republic Act No.
An appeal may be taken to the Supreme 8799, otherwise known as The Securities Regulation
Court in the following cases: Code, shall likewise be governed by these Rules.
(1) From an order granting or refusing an
adjudication in insolvency and in the latter case, RULE 2
from the order fixing the amount of costs, DEFINITION OF TERMS AND CONSTRUCTION
expenses, damages, and attorney’s fees
allowed the debtor; Section 1. Definition of Terms. - For purpose of
(2) From an order allowing or rejecting a creditor’s these Rules:
claim when the amount in dispute exceeds
P300.00; "Administrative Expenses" shall refer to (a)
(3) From an order allowing or denying a claim for reasonable and necessary expenses that are
property not belonging to the insolvent, incurred in connection with the filing of the petition;
presented under Section 48; (b) expenses incurred in the ordinary course of
(4) From an order settling an account of an business after the issuance of the stay order,
assignee; excluding interest payable to the creditors for loans
(5) From an order against or in favor of setting apart and credit accommodations existing at the time of
homestead or other property claimed as exempt the issuance of the stay order, and (c) other
from execution; and expenses that are authorized under this Rules.
From an order granting or refusing a discharge to
the debtor. "Affidavit of General Financial Condition" shall refer
to a verified statement on the general financial
 
 
condition of the debtor requiredin Section 2, Rule 4
RULES OF PROCEDURE ON CORPORATE of these Rules.
REHABILITATION
"Affiliate" is a corporation that directly or indirectly,
through one or more intermediaries, is controlled by,
A.M. No. 00-8-10-SC or is under the common control of another
corporation, which thereby becomes its parent
RESOLUTION corporation.
"Asset" is anything of value that can be in the form of
Acting on the recommendation of the Subcommittee money, such as cash at the bank or amounts owed;
on Special Rules for Special Commercial Courts, fixed assets such as property or equipment; or
submitting for the consideration and approval of the intangibles including intellectual property, the book
Court the Resolved to APPROVED the same. value of which is shown in the last three audited
financial statement immediately preceding the filing
of the petition, In case the debtor is less than three
 Saint Louis University COMMERCIAL LAW 168
2012 BAR OPERATIONS

years in operation, it is sufficient that the book value "Foreign proceeding" means a collective judicial or
is based on the audited financial statement\s for the administrative proceeding in a foreign State, interim
years or year immediately preceding the filing of proceeding, pursuant to a law re solvency in which
petition, as the case may be. proceeding the assets and affairs of the debtor are
subject to control or supervision by a foreign count,
"Board of Directors" shall include the executive for the purpose of rehabilitation or re-organization
committee or the management of partnership or
association "Foreign Representative" means person or entity,
including one appointed on an interim basis,
"Claim" shall include all claims or demands of authorized in a foreign proceeding to administer the
whatever nature or charter against a debtor or its reorganization or rehabilitation of the debtor or act
property, whether for money or otherwise as a representative of the foreign proceeding.
"Group of companies" refers to, and can cover only,
"Control" is the power of a parent corporation to corporation that are financially refers to, and can
direct or govern the financial and operating policies cover only, corporations that are financially rated to
of an enterprise so as to obtain benefits from its one another as parent corporation, subsidiaries and
activities. Control is presumed to exit when the affiliates.
parent owns, directly or indirectly though When the petition covers a group of
subsidiaries, more than one - half (?) of the voting companies, all reference under these Rules to
power of the voting power of an enterprise unless, "debtor" shall include and apply include and apply to
unless, in exception circumstances, it can clearly be the group of companies.
demonstrated that such own ship does not constitute
control. Control also exits even when the parent own "Liabilities" shall refer to monetary claims against the
one-half (1/2) or less of the voting power of an debtor, including stockholders advances that have
enterprise when there is power: been recoded in the debtor's audited financial
statements as advances for subscription.
(A) Over more than one-half (?) of agreement with
investors; "Parent" is a corporation directly or indirectly though
(B) To direct or govern the financial and operating one or more intermediaries.
policies of the enterprise under a statute or
agreement; "Rehabilitation" shall mean the restoration of the
(C) To appoint or remove the majority of the member debtor to a position of successful operation and
of the board of directors or equivalent governing solvency, if it is shown that its continuance of
body; or operation is economically feasible and its creditors
(D) To cast the majority votes at meeting of the can recover by way of the present value of
board of directors or equivalent governing body. payments projected in the plan more if the
corporation continues as a going concern than if it
"Creditor" shall mean any holder of a claim immediately liquidated.

"Court" shall refer to the proper Regional Trial Court "Secured claim" shall refer to any claim whose
designated to hear and decide the cases payment or fulfillment is secured by contract or by
contemplated contemplated under these Rules. law, including any claim or credit enumerated under
Articles 2241 and 2242 of the civil Code and Article
"Days" shall refer to calendar days unless otherwise 110, as amended, of the Labor code of the
provided in these Rules. Philippines.

"Debtor" shall mean any corporation, partnership or "Subsidiary" means a corporation more than fifty
association or a group of companies, whether percent (50%) of the voting stock of which is owned
supervised or regulated by the Securities and or controlled directly or indirectly though one or more
Exchange Commission or other government intermediaries by another corporation
agencies, on whose behalf a petition for
rehabilitation has been filed under these rules. "Unsecured claim" shall mean any claim other than a
secured claim.
"Foreign court" means a judicial or other authority
competent to control or supervise a foreign Section 2. Construction - These Rules shall be
proceeding. liberally construed to carry out the objectives of
Section 5(d), 6(d) and 6(d) of Presidential Decree
No. 902-A, as amended, and to assist the parties in
 Saint Louis University COMMERCIAL LAW 169
2012 BAR OPERATIONS

obtaining a jut, expeditious and inexpensive over the principal office of the parent company, as
determination of case. Where applicable, the Rules specified in its Articles of Incorporation.
of Court shall apply supplementary to proceedings
under these Rules. Section 3. Service of Pleadings and Documents. -
When so authorized by the court, any pleading
RULES 3 and/or document required by these Rules may be
GENERAL PROVISONS filed with the court and/or served upon the other
parties by facsimile transmission (fax) or electronic
Section 1. Nature of Proceeding - Any proceeding mail (e-mail). In such cases, the date of transmission
initiated under these Rules shall be considered in shall be deemed to be the dtae of service. Where
rem. Jurisdiction over all persons affected by the the pleading or document is voluminous, the court
proceeding shall be considered as acquired upon may, upon motion, waive the requirement of service;
publication of the notice of the commencement of provided that a copy thereof together with all its
the proceedings in any newspaper or general attachments is duly filed with the court and is made
circulation in the Philippines in the manner available for examination and reproduction by any
prescribed by these rules. party, and provided, further, that a notice of such
filing and availability is duly served on the parties.
The proceedings shall also be summary and non-
adversarial in nature. The following pleading are Section 4. Trade Secrets and Other Confidential
prohibited: Information. - Upon motion, the court may issue an
(a) Motion to dismiss; order to protect trade secrets or other confidential
(b) Motion for a bill of particulars: research, development or commercial information
(c) Petition for relief; belonging to the debtor.
(d) Motion for extension;
(e) Motion for postponement Section 5. Executory Nature of Orders. - Any order
(f) Third-party complaint; issued by the court under these Rules is
(g) Intervention; immediately executory. A petition to review the order
(h) Motion to hear affirmative defenses; and shall not stay the execution of the order unless
(I) Any pleading or motion which is similar to restrained or enjoined by the appellate court. Unless
or of like effect as any of the foregoing. otherwise provided in these Rules, the review of any
order or decision of the court or an appeal therefrom
Any pleading, motion, opposition, defense or claim shall be in accordance with the Rules of Court;
filed by any interested party shall be supported by provided, however, that the reliefs ordered by the
verified statements that the affiant has read same trial or appellate courts shall take into account the
and that the factual allegations therein are true and need for resolution of proceedings in a just,
correct of his personal knowledge or based on equitable and speedy manner.
authentic records, and correct of his personal
knowledge or based on authentic records, and shall Section 6. Nullification of Illegal Transfers and
contain as annexes such documents as may be Preferences. - Upon motion the court may nullify any
deemed by the party court may be decide matters transfer of property or any other conveyance, sale,
on the basis of affidavits and other documentary payment or agreement made in violation of its stay
evidence. Where necessary, the court shall conduct order or in violation of these Rules.
clarificatory hearings before resolving any matter
submitted to it for resolution. Section 7. Stay Order. - If the court finds the petition
to be sufficient in form and substance, it shall; not
Section 2. Venue. - Petitions for rehabilitation later than five (5) working days from the filing of the
pursuant to these Rules shall be filed in the regional petition, issue an order:
trial court which has jurisdiction over the principal
office of the debtor as specified in its articles of (a) appointing a rehabilitation receiver and fixing his
incorporation or partnership. Where the principal bond;
office of the corporation, partnership or association (b) staying enforcement of all claims, whether for
is registered in the Securities and Exchange money or otherwise and whether such
Commission as Metro Manila, the action must be enforcement is by court action or otherwise,
filed in the regional trial court of the city or against the debtor, its guarantors and persons
municipality where the head office is located. not solidarily liable with the debtor; provided,
that the stay order shall not cover claims against
A joint petition by a group of companies shall be filed letters of credit and similar security
in the Regional Trial Court which has jurisdiction arrangements issued by a third party to secure
 Saint Louis University COMMERCIAL LAW 170
2012 BAR OPERATIONS

the payment of the debtor's obligations; failure to do so will bar them from participating in
provided, further, that the stay order shall not the proceedings; and,
cover foreclosure by a creditor of property not (m) directing the creditors and interested parties to
belonging to a debtor under corporate secure from the court copies of the petition and
rehabilitation; provided, however, that where the its annexes within such time as to enable
owner of such property sought to be foreclosed themselves to file their comment on or
is also a guarantor or one who is not solidarily opposition to the petition and to prepare for the
liable, said owner shall be entitled to the benefit initial hearing of the petition.
of excussion as such guarantor;
(c) prohibiting the debtor from selling, encumbering, The issuance of a stay order does not affect the right
transferring, or disposing in any manner any of to commence actions or proceedings insofar as it is
its properties except in the ordinary course of necessary to preserve a claim against the debtor.
business;
(d) prohibiting the debtor from making any payment Section 8. Service of Stay Order on Rehabilitation
of its liabilities except as provided in items (e), (f) Receiver. - The petitioner shall immediately serve a
and (g) of this Section or when ordered by the copy of the stay order on the rehabilitation receiver
court pursuant to Section 10 of Rule 3; appointed by the court, who shall manifest his
(e) prohibiting the debtor's suppliers of goods or acceptance or non-acceptance of his appointment
services from withholding supply of goods and not later than ten (10) days from receipt of the order.
services in the ordinary course of business for
as long as the debtor makes payments for the Section 9. Period of Stay Order. - The stay order
services and goods supplied after the issuance shall be effective from the date of its issuance until
of the stay order; the approval of the rehabilitation plan or the
(f) directing the payment in full of all administrative dismissal of the petition.
expenses incurred after the issuance of the stay
order; (g) directing the payment of new loans or Section 10. Relief from, Modification, or Termination
other forms of credit accommodations obtained of Stay Order. -
for the rehabilitation of the debtor with prior court (a) The court may, upon motion, terminate, modify,
approval; or set conditions for the continuance of the stay
(h) fixing the dates of the initial hearing on the order, or relieve a claim from the coverage thereof
petition not earlier than forty-five (45) days but upon showing that (1) any of the allegations in the
not later than sixty (60) days from the filing petition, or any of the contents of any attachment, or
thereof; the verification thereof has ceased to be true; (2) a
(i) directing the petitioner to publish the Order in a creditor does not have adequate protection over
newspaper of general circulation in the property securing its claims; (3) the debtor's secured
Philippines once a week for two (2) consecutive obligation is more than the fair market value of the
weeks; property subject of the stay and such property is not
(j) directing the petitioner to furnish a copy of the necessary for the rehabilitation of the debtor; or (4)
petition and its annexes, as well as the stay the property covered by the stay order is not
order, to the creditors named in the petition and essential or necessary to the rehabilitation and the
the appropriate regulatory agencies such as, but creditor's failure to enforce its claim will cause more
not limited to, the Securities and Exchange damage to the creditor than to the debtor.
Commission, the Bangko Sentral ng Pilipinas,
the Insurance Commission, the National (b) For purposes of this Section, the creditor lacks
Telecommunications Commission, the Housing adequate protection if it can be shown that:
and Land Use Regulatory Board and the Energy (1) The debtor fails or refuses to honor a pre-existing
Regulatory Commission; agreement with the to keep the property insured;
(k) directing the petitioner that foreign creditors with (2) The debtor fails or refuses to take commercially
no known addresses in the Philippines be reasonable steps to maintain the property; or
individually given a copy of the stay order at (3) The property has depreciated to an extent that
their foreign addresses; the creditor is undersecured
(l) directing all creditors and all interested parties
(including the regulatory agencies concerned) to (c) Upon showing the creditor's lack of adequate
file and serve on the debtor a verified comment protection, the court shall order the rehabilitation
on or opposition to the petition, with supporting receiver to (1) make arrangements to provide for the
affidavits and documents, not later than fifteen insurance or maintenance of the property, or (2) to
(15) days before the date of the first initial make payments or otherwise provide additional or
hearing and putting them on notice that their replacement security such as that the obligation is
 Saint Louis University COMMERCIAL LAW 171
2012 BAR OPERATIONS

fully secured. If such arrangements are not feasible, under Presidential Decree No. 902-A, as amended,
the court shall modify the stay order to allow the and the Rules of Court.
secured creditor lacking adequate protection to
enforce its claim against the debtor; provided, The rehabilitation receiver shall be considered as an
however, that the court may deny the creditor the officer of the court. He shall be primarily tasked to
remedies in this paragraph if such remedies would study the best way to rehabilitate the debtor and to
prevent the continuation of the debtor as a going ensure that the value of the debtor's property is
concern or otherwise prevent the approval and reasonably maintained pending the determination of
implementation of a rehabilitation plan. whether or not the debtor should be rehabilitated, as
well as implement the rehabilitation plan after its
Section 11. Qualifications of Rehabilitation approval. Accordingly, he shall have the following
Receiver. - powers and functions:

(a) In the appointment of the rehabilitation receiver, (a) To verify the accuracy of the petition, including its
the following qualifications shall be taken into annexes such as the Schedule of Debts and
consideration by the court: Liabilities and the Inventory of Assets submitted
(1) Expertise and acumen to manage and operate a in support to the petition;
business similar in size and complexity to that of the (b) To accept and incorporate, when justified,
debtor; amendments to the Schedule of Debts and
(2) Knowledge in management, finance and Liabilities;
rehabilitation of distressed companies; (c) To recommend to the court the disallowance of
(3) General familiarity with the rights of creditors in claims and rejection of amendments t the
suspension of payments or rehabilitation and Schedule of Debts and Liabilities that lack
general understanding of the duties and obligations sufficient proof and justification;
of a rehabilitation receiver; (d) To submit to the court and make available for
(4) Good moral character, independence and review by the creditors, a revised Schedule of
integrity; Debts and Liabilities;
(5) Lack of conflict of interest as defined in this (e) To investigate the acts, conduct, properties,
Section; and liabilities and financial condition of the debtor,
(6) Willingness and ability to file a bond in such the operation of its business and the desirability
amount as may be determined by the court. of the continuance thereof; and, any other
matter relevant to the proceeding or to the
(b) Without limiting the generality of the following, a formulation of a rehabilitation plan;
rehabilitation receiver may be deemed to have a (f) To examine under oath the directors and officers
conflict of interest if: of the debtor and any other witnesses that he
(1) He is creditor or stockholder of the debtor; may deem appropriate;
(2) He is engaged in a line of business which (g) To make available to the creditors documents
competes with the debtor; and notices necessary for them to follow and
(3) He is, or was within two (2) years from the filing participate in the proceedings;
of the petition, a director, officer, or employee or the (h) To report to the court any fact ascertained by him
auditor or accountant of the debtor; pertaining to the causes of the debtor's
(4) He is or was within two (2) years from the filing of problems, fraud, preferences, dispositions,
the petition, an underwriter of the outstanding encumbrances, misconduct, mismanagement
securities of the debtor; and irregularities committed by the stockholders,
(5) He is related by consanguinity or affinity within directors, management,, or any other person
the fourth civil degree to any creditor, stockholder, against the debtor;
director, officer, employee, or underwriter of the (i) To employ such person or persons such as
debtor; or lawyers, accountants, appraisers and staff are
(6) He has any other direct or indirect material necessary in performing his functions and duties
interest in the debtor or any creditor. as rehabilitation receiver;
(j) To monitor the operations of the debtor and to
Section 12. Powers and Functions of Rehabilitation immediately report to the court any material
Receiver. - The rehabilitation receiver shall not take adverse change in the debtor's business;
over the management and control of the debtor but (k) To evaluate the existing assets and liabilities,
shall closely oversee and monitor the operations of earnings and operations of the debtor;
the debtor during the pendency of the proceedings. (l) To determine and recommend to the court the
For this purpose, the rehabilitation receiver shall best way to salvage and protect the interests of
have the powers, duties and functions of a receiver
 Saint Louis University COMMERCIAL LAW 172
2012 BAR OPERATIONS

the creditors, stockholders and the general guarantee that he will faithfully discharge his duties
public; and obey the orders of the court. If necessary, he
(m) To study the rehabilitation plan proposed by the shall also declare under oath that he will perform the
debtor or any rehabilitation plan submitted duties of a trustee of the assets of the debtor, will act
during the proceedings, together with any honestly and in good faith, and deal with the assets
comments made thereon; of the debtor on a commercially reasonable manner.
(n) To prohibit and report to the court any
encumbrance, transfer or disposition of the Section 14. Fees and Expenses. - The rehabilitation
debtor's property outside of the ordinary course receiver and the persons hired by him shall be
of business or what is allowed by the court; entitled to reasonable professional fees and
(o) To prohibit and report to the court any payments reimbursement of expenses which shall be
outside of the ordinary course of business; considered as administrative expenses.
(p) To have unlimited access to the debtor's
employees, premises, books, records and Section 15. Immunity from Suit. - The rehabilitation
financial documents during business hours; receiver shall not be subject to any action, claim or
(q) To inspect, copy, photocopy or photograph any demand in connection with any act done or omitted
document, paper, book, account or letter, by him in good faith in the exercise of his functions
whether in the possession of the debtor or other and powers herein conferred.
persons;
(r) To gain entry into any property for the purpose of Section 16. Reports. - The rehabilitation receiver
inspecting, measuring, surveying or shall file a written report every three (3) months to
photographing it or any designated relevant the court or as often as the court may require on the
object or operation thereon; general condition of the debtor. The report shall
(s) To take possession, control and custody of the include, at the minimum, interim financial statements
debtor's assets; of the debtor.
(t) To notify counterparties and the court as to
contracts that the debtor has decided to Section 17. Dismissal of Rehabilitation Receiver. - A
continue to perform the breach; rehabilitation receiver may, upon motion, be
(u) To be notified of and to attend all meetings of the dismissed by the court on the following grounds: (a)
board of directors and stockholder of the debtor; if he fails, without just cause, to perform any of his
(v) To recommend any modification of an approved powers and functions under these Rules; or (b) on
rehabilitation plan as he may deem appropriate; any of the grounds for removing a trustee under the
(w) To bring to the attention of the court any material general principles of trusts.
change affecting the debtor's ability to meet the
obligations under the rehabilitation plan; Section 18. Rehabilitation Plan. - The rehabilitation
(x) To recommend the appointment of a plan shall include:
management committee in the cases provided (a) the desired business targets or goals and the
for under Presidential Decree No. 902-A, as duration and coverage of the rehabilitation;
amended; (b) the terms and conditions of such rehabilitation
(y) To recommend the termination of the which shall include the manner of its
proceedings and the dissolution of the debtor if implementation, giving due regard to the
he determines that the continuance in business interests of secured creditors such as, but not
of such entity is no longer feasible or profitable limited, to the non-impairment of their security
or no longer works to the best interest of the liens or interests;
stockholders, parties-litigants, creditors or the (c) the material financial commitments to support the
general public; rehabilitation plan;
(z) To apply to the court for any order or directive (d) the means for the execution of the rehabilitation
that he may deem necessary or desirable to aid plan, which may include debt to equity
him in the exercise of his powers and conversion, restructuring of the debts, dacion en
performance of his duties and functions; and pago or sale exchange or any disposition of
(aa) To exercise such other powers as may from assets or of the interest of shareholders,
time to time be conferred upon him by the court. partners or members;
(e) a liquidation analysis setting out for each creditor
Section 13. Oath and Bond. - Before entering upon that the present value of payments it would
his powers, duties and functions, the rehabilitation receive under the plan is more than that which it
receiver must be sworn in to perform them faithfully, would receive if the assets of the debtor were
and must post a bond executed in favor of the sold by a liquidator within a six-month period
debtor in such sum as the court may direct, to
 Saint Louis University COMMERCIAL LAW 173
2012 BAR OPERATIONS

from the estimated date of filing of the petition; (c) Disapproval of the rehabilitation plan by the
and, court;
(f) such other relevant information to enable a (d) Failure to achieve the desired targets or goals as
reasonable investor to make an informed set forth in the rehabilitation plan;
decision on the feasibility of the rehabilitation (e) Failure of the debtor to perform its obligations
plan. under the plan;
(f) Determination that the rehabilitation plan may no
Section 19. Repayment Period. - If the rehabilitation longer be implemented in accordance with its
plan extends the period for the debtor to pay its terms, conditions, restrictions or assumptions; or
contractual obligations, the new period should not (g) Successful implementation of the rehabilitation
extend beyond fifteen (15) years from the expiration plan.
of the stipulated term existing at the time of filing of
the petition. Section 24. Discharge of Rehabilitation Receiver. -
Upon termination of the rehabilitation proceedings,
Section 20. Effects of Rehabilitation Plan. - The the rehabilitation receiver shall submit his final report
approval of the rehabilitation plan by the court shall and accounting with such period of time as the court
result in the following: will allow him. Upon approval of his report and
(a) The plan and its provisions shall be binding upon accounting, the court shall order his discharge.
the debtor and all persons who may be affected
thereby, including the creditors, whether or not RULE 4
such persons have participated in the DEBTOR-INITIATED REHABILITATION
proceedings or opposed the plan or whether or
not their claims have been scheduled; Section 1. Who May Petition. - Any debtor who
(b) The debtor shall comply with the provisions of the foresees the impossibility of meeting its debts when
plan and shall take all actions necessary to carry they respectively fall due, may petition the proper
out the plan; regional trial court for rehabilitation.
(c) Payments shall be made to the creditors in
accordance with the provisions of the plan; A group of companies may jointly file a petition for
(d) Contracts and other arrangements between the rehabilitation under these Rules when one or more
debtor and its creditors shall be interpreted as of its constituent corporations foresee the
continuing to apply to the extent that they do not impossibility of meeting debts when they
conflict with the provisions of the plan; and respectively fall due, and the financial distress would
(e) Any compromises on amounts or rescheduling of likely adversely affect the financial condition and/or
timing of payments by the debtor shall be operations of the other member companies of the
binding on creditors regardless of whether or not group is essential under the terms and conditions of
the plan is successfully implemented. the proposed rehabilitation plan.

Section 21. Revocation of Rehabilitation Plan on Section 2. Contents of Petition. -

Grounds of Fraud. - Upon motion, within ninety (90) (a) The petition filed by the debtor must be verified
days from the approval of the rehabilitation plan, and and must set forth with sufficient particularity all
after notice and hearing, the court may revoke the the following material facts: (1) the name and
approval thereof on the ground that the same was business of the debtor; (2) the nature of the
secured through fraud. business of the debtor; (3) the history of the
debtor; (4) the cause of its inability to pay its
Section 22. Alteration or Modification of debts; (5) all the pending actions or proceedings
Rehabilitation Plan. - An approved rehabilitation plan known to the debtor and the courts or tribunals
may, upon motion, be altered or modified if, in the where they are pending; (6) threats or demands
judgement of the court, such alteration or to enforce claims or liens against the debtor; and
modification is necessary to achieve the desired (7) the manner by which the debtor may be
targets or goals set forth therein. rehabilitated and how such rehabilitation may
benefit the general body of creditors, employees
Section 23. Termination of Proceedings. - The court and stockholders.
shall, upon motion or upon recommendation of the
rehabilitation receiver, terminate the proceeding in (b) The petition shall be accompanied by the
any of the following cases: following documents:
(a) Dismissal of the petition; (1) An audited financial statement of the debtor at
(b) Failure of the debtor to submit the rehabilitation the end of its last fiscal year;
plan;
 Saint Louis University COMMERCIAL LAW 174
2012 BAR OPERATIONS

(2) Interim financial statements as of the end of the and by-laws or articles of partnership; increase
month prior to the filing of the petition; or decrease in the authorized capital stock;
(3) A Schedule of Debts and Liabilities which lists all issuance of bonded indebtedness; alienation,
the creditors of the debtor, indicating the name transfer, or encumbrance of assets of the
and last address of record of each creditor; the debtor; and modification of shareholders' rights.
amount of each claim as to principal, interest, or
penalties due as of the date of filing; the nature (c) Five (5) copies of the petition shall be filed with
of the claim; and any pledge, lien, mortgage the court.
judgement or other security given for the
payment thereof; Section 3. Verification by Debtor. - The petition filed
(4) An Inventory of Assets which must list with by the debtor must be verified by an affidavit of a
reasonable specificity all the assets of the responsible officer of the debtor and shall be in a
debtor, stating the nature of each asset, the form substantially as follows:
location and condition thereof, the book value or
market value of the asset, and attaching the "I, ___________________, (position) of (name of
corresponding certificate of title thereof in case petitioner), do solemnly swear that the petitioner has
of real property, or the evidence of title or been duly authorized to file the petition and that the
ownership in case of movable property, the stockholders and board of directors (or governing
encumbrances, liens or claims thereon, if any, body) have approved and/or consented to,
and the identities and addresses of the accordance with law, all actions or matters
lienholders and claimants. The Inventory shall necessary or desirable to rehabilitate the debtor.
include a Schedule of Accounts Receivable The petition is being filed to protect the interests of
which must indicate the amount of each, the the debtor, the stockholders, the inventors and the
persons from who due, the date of maturity and creditors of the debtor, which warrant the
the degree of collectibility categorizing them as appointment of a rehabilitation receiver. There is no
highly collectible to remotely collectible; petition for insolvency filed with any other body,
(5) A rehabilitation plan which conforms with the court of tribunal affecting the petitioner. The
minimal requirements set out in Section 18 of Inventory of Assets and the Schedule of Debts and
Rule 3; Liabilities contains a full, correct and true description
(6) A Schedule of Payments and Disposition of of all debts and liabilities and of all goods, effects,
Assets which the debtor may have effected estate and property of whatever kind of class
within three (3) months immediately preceding belonging to petitioner. The Inventory also contains
the filing of the petition; a full, correct and true statement of all debts owing
(7) A Schedule of Cash Flow of the debtor for three or due to petitioner, or to any person or persons in
(3) months immediately preceding the filing of trust for petitioner and of all securities and contracts
the petition, and a detailed schedule of the whereby any money may hereafter become due or
projected cash flow for the succeeding three (3) payable to petitioner or by or through which any
months; benefit or advantage may accrue to petitioner. The
(8) A Statement of Possible Claims by or against the petition contains a concise statement of the facts
debtor which must contain a brief statement of giving rise, or which might give rise, to any cause of
the facts which might give rise to the claim and action in favor of petitioner. Petitioner has no land,
an estimate of the probable amount thereof; money, stock, expectancy, or property of any kind,
(9) An Affidavit of General Financial Condition which except those set forth in the Inventory of Assets.
shall contain answers to the questions or Petitioner has, in no instance, created or
matters prescribed in Annex "A" hereof; acknowledged a debt for a greater sum than the true
(10) At least three (3) nominees for the position of and correct amount. Petitioner, its officers, directors
rehabilitation receiver as well as their and stockholders have not, directly or indirectly,
qualifications and addresses, including but not concealed, fraudulently sold or otherwise
limited to their telephone numbers, fax numbers fraudulently disposed of, any part of petitioner's real
and e-mail address; and or personal property, estate, effects or rights of
(11) A certificate attesting under oath that (i) the action, and petitioner, its officers, directors and
filing of the petition has been duly authorized; stockholders have not in any way compounded with
and (ii) the directors and stockholders of the any of its creditors in order to give preference to
debtor have irrevocably approved and/or such creditors, or to receive or to accept any profit or
consented to, in accordance with existing laws, advantage therefrom, or to defraud or deceive in any
all actions or matters necessary and desirable to manner any creditor to whom petitioner is indebted.
rehabilitate the debtor including, but not limited Petitioner, its officers, directors, and stockholders
to, amendments to the articles of incorporation
 Saint Louis University COMMERCIAL LAW 175
2012 BAR OPERATIONS

have been acting in good faith and with due

diligence. Section 7. Order After Initial Hearing. -
Section 4. Opposition to or Comment on Petition. - (a) Within twenty (20) days after the last hearing, the
Every creditor of the debtor or any interested party court shall issue an order which shall:
shall file his verified opposition to or comment on the (1) Give due course to the petition and immediately
petition not later than fifteen (15) days before the refer the petition and its annexes to the
date of the initial hearing fixed in the stay order. rehabilitation receiver who shall evaluate the
After such time, no creditor or interested party shall rehabilitation plan and submit his
be allowed to file any comment thereon or recommendations to the court not later than
opposition thereto without leave of court. ninety (90) days from the date of the last initial
If the Schedule of Debts and Liabilities omits a claim hearing, if the court is satisfied that there is merit
or liability, the creditor concerned shall attach to its to the petition, otherwise the court shall
comment or opposition a verified statement of the immediately dismiss the petition; and
obligations allegedly due it. (2) Recite in detail the matters taken up in the initial
hearing and the action taken thereon, including
Section 5. Initial Hearing. - a substitute rehabilitation plan contemplated in
(a) On or before the initial hearing set in the order Sections 5 (b)(7) and (8) of this Rule;
mentioned in Section 7 of Rule 3, the petitioner (b) If the debtor and creditors agree on a new
shall file a publisher's affidavit showing that the rehabilitation plan pursuant to Section 5 (b)(7) of
publication requirements and a petitioner's this Rule, the order shall so state the fact and
affidavit showing that the notification require the rehabilitation receiver to supply the
requirement for foreign creditors had been details of the plan and submit it for the approval
complied with, as required in the stay order. of the court not later than sixty (6) days from the
date of the last initial hearing. The court shall
(b) Before proceeding with the initial hearing, the approve the new rehabilitation plan not later
court shall determine whether the jurisdictional than ninety (90) days from the date of the last
requirements set forth above had been complied initial hearing upon concurrence of the following:
with. After finding that such requirements are (1) Approval or endorsement of creditors holding at
met, the court shall ensure that the parties least two-thirds (2/3) of the total liabilities of the
consider in detail all of the following: debtor including secured creditors holding more
(1) Amendments to the rehabilitation plan proposed than fifty percent (50%) of the total secured
by the debtor; claims of the debtor and unsecured creditors
(2) Simplification of the issues; holding more than fifty percent (50%) of the total
(3) The possibility of obtaining stipulations and unsecured claims of the debtor;
admission of facts and documents, including (2) The rehabilitation plan complies with the
resort to request for admission under Rule 26 of requirements specified in Section 18 of Rule 3;
the Rule of Court; (3) The rehabilitation plan would provide the
(4) The possibility of amicably agreeing on any issue objecting class of creditors with payments
brought up in the comments on, or opposition to, whose present value projected in the plan would
the petition; be greater than that which they would have
(5) Referral of any accounting, financial and other received if the assets of the debtor were sold by
technical issues to an expert; a liquidator within a six (6) month period from
(6) The possibility of submitting the petition for the date of filing of the petition; and
decision on the basis of the comments, (4) The rehabilitation receiver has recommended
opposition, affidavit and other documents on approval of the plan.
record;
(7) The possibility of a new rehabilitation plan The approval by the court of the new rehabilitation
voluntarily agreed upon by the debtor and its plan shall have the same effect as approval of a
creditors; and rehabilitation plan under Section 20 of Rule 3.
(8) Such other matters as may aid in the speedy and
summary disposition of the case. Section 8. Creditors' Meetings. - If no new
rehabilitation plan is agreed upon by the debtor and
Section 6. Additional Hearings. - The court may hold the creditors, the rehabilitation receiver, at any time
additional hearings as part of the initial hearing before he submits his evaluation on the debtor-
contemplated in these Rules but the initial hearing proposed rehabilitation plan to the court as
must be concluded not later than ninety (90) days prescribed in Section 7(a)(1) of this Rule, shall,
from the initial date of the initial hearing fixed in the either alone or with the debtor, meet with the
stay order. creditors or any interested party t discuss the plan
 Saint Louis University COMMERCIAL LAW 176
2012 BAR OPERATIONS

with a view to clarifying or resolving any matter RULE 5

connected therewith. CREDITOR-INITIATED REHABILITATION

Section 9. Comments on or Opposition to Section 1. Who May Petition. - Any creditor or

Rehabilitation Plan. - Any creditor or interested party creditors holding at least twenty percent (20%) of the
of record may file comments on or opposition to the debtor's total liabilities may file a petition with the
proposed rehabilitation plan, with a copy given to the proper regional trial court for rehabilitation of a
rehabilitation receiver, not later than sixty (60) days debtor that cannot meet its debts as they
from the date of the last initial hearing. The court respectively fall due.
shall conduct summary and non-adversarial
proceedings to receive evidence, if necessary, in Section 2. Requirements for Creditor-Initiated
hearing the comments on and opposition to the plan. Petitions. - Where the petition is filed by a creditor or
creditors under this Rule, it is sufficient that the
Section 10. Modification of Proposed Rehabilitation petition is accompanied by a rehabilitation plan and
Plan. - The debtor may modify its rehabilitation plan a list of at least three (3) nominees to the position of
in the light of the comments of the rehabilitation rehabilitation receiver and verified by a sworn
receiver and creditors or any interested party and statement that the affiant has read the petition and
submit a revised or substitute rehabilitation plan for that its contents are true and correct of his personal
the final approval of the court. Such rehabilitation knowledge or based on authentic records and that
plan must be submitted to the court not later than the petition is being filed to protect the interests of
ten (10) moths from the date of filing of the petition. the debtor, the stockholders, the investors and the
creditors of the debtor.
Section 11. Approval of Rehabilitation Plan. - The
court may approve a rehabilitation plan even over Section 3. Applicability of Provisions Relating to
the opposition of creditors of the debtor if, in its Debtor-Initiated Rehabilitation. - The provisions of
judgement, the rehabilitation of the debtor is feasible Sections 5 to 12 of Rule 4 shall apply to
and the opposition of the creditors is manifestly rehabilitation under this Rule.
unreasonable if the following are present:
RULE 6
(a) The rehabilitation plan complies with the PRE-NEGOTIATED REHABILITATION
requirements specified in Section 18 of Rule 3;
(b) The rehabilitation plan would provide the Section 1. Pre-negotiated Rehabilitation Plan. - A
objecting class of creditors with payments debtor that foresees the impossibility of meeting its
whose present value projected in the plan would debts as they fall due may, by itself or jointly with
be greater than that which they would have any of its creditors, file a verified petition for the
received if the assets of the debtor were sold by approval of a pre-negotiated rehabilitation plan. The
a liquidator within a six (6)-month period from petition shall comply with Section 2 of Rule 4 and be
the date of filing of the petition; and supported by an affidavit showing the written
(c) The rehabilitation receiver has recommended approval or endorsement of creditors holding at least
approval of the plan. two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty
In approving the rehabilitation plan, the court shall percent (50%) of the total secured claims of the
ensure that the rights of the secured creditors are debtor and unsecured creditors holding more than
not impaired. The court shall also issue the fifty percent (50%) of the total unsecured claims of
necessary orders or processes for its immediate and the debtor.
successful implementation. it may impose such
terms, conditions, or restrictions as the effective Section 2. Issuance of Order. - If the court finds the
implementation and monitoring thereof may petition sufficient in form and substance, it shall, not
reasonably require, or for the protection and later than five (5) working days from the filing of the
preservation of the interests of the creditors should petition, issue an order which shall:
the plan fall.
(a) Identify the debtor, its principal business or
Section 12. Period to Decide Petition. - The court activity/ies and its principal place of business;
shall decide the petition within one (1) year from the (b) Direct the publication of the order in a newspaper
date of filing of the petition, unless the court, for of general circulation once a week for at least
good cause shown, is able to secure an extension of two (2) consecutive weeks, with the first
the period from the Supreme Court. publication to be made within seven (7) days
from the time of its issuance;
 Saint Louis University COMMERCIAL LAW 177
2012 BAR OPERATIONS

(c) Direct the service by personal delivery of a copy as long as the debtor makes payments for the
of the petition on each creditor who is not a services and goods supplied after the issuance
petitioner holding at least five percent (5%) of of the stay order;
the total liabilities of the debtor, as determined in (l) Direct the payment in full of all administrative
the schedule attached to the petition, within expenses incurred after the issuance of the stay
three (3) days; order; and
(d) Direct the petitioner to furnish a copy of the (m) Direct the payment of new loans or other forms
petition and its annexes, as well as the stay of credit accommodations obtained for the
order, to the relevant regulatory agency; rehabilitation of the debtor with prior court
(e) State that copies of the petition and the approval.
rehabilitation plan are available for examination
and copying by any interested party; Section 3. Approval of Plan. - Within ten (10) days
(f) Direct creditors and other parties interested from the date of the second publication of the order
(including the Securities and Exchange referred to in Section 2 of this Rule, the court shall
Commission and the relevant regulatory approve the rehabilitation plan unless a creditor or
agencies such as, but not limited to, the Bangko other interested party submits a verified objection to
Sentral ng Pilipinas, the Insurance Commission, it in accordance with the next succeeding section.
the National Telecommunications Commission,
the Housing and Land Use Regulatory Board Section 4. Objection to Petition or Rehabilitation
and the Energy Regulatory Commission) in Plan. - Any creditor or other interested party may
opposing the petition or rehabilitation plan to file submit to the court a verified objection to the petition
their verified objections thereto or comments or the rehabilitation plan. The objection shall be
thereon within a period of not later than twenty limited to the following:
(20) days from the second publication of the (a) The petition or the rehabilitation plan or their
order, with a warning that failure to do so will bar attachments contain material omissions or are
them from participating in the proceedings; materially false or misleading;
(g) Appoint the rehabilitation receiver named in the (b) The terms of rehabilitation are unattainable; or
plan, unless the court finds that he is not (c) The approval or endorsement of creditors
qualified under these Rules in which case it may required under Section 1 of this Rule has not
appoint a qualified rehabilitation receiver of its been obtained
choice;
(h) Stay enforcement of all claims, whether for Copies of any objection to the petition or the
money or otherwise and whether such rehabilitation plan shall be served on the petitioning
enforcement is by court action or otherwise, debtor and/or creditors.
against the debtor, its guarantors and persons
not solidarily liable with the debtor; provided, Section 5. Hearing on Objections. - The court shall
that the stay order shall not cover claims against set the case for hearing not earlier than ten (10)
letters of credit and similar security days and no longer than twenty (20) days from the
arrangements issued by a third party to secure date of the second publication of the order
the payment of the debtor's obligations; provided mentioned in Section 2 of this Rule on the objections
further, that the stay order shall not cover is in accordance with the immediately preceding
foreclosure by a creditor of property not section, it shall direct the petitioner to cure the defect
belonging to a debtor under corporate within a period fifteen (15) days from receipt of the
rehabilitation; provided, however, that where the order.
owner of such property sought to be foreclosed
is also a guarantor or one who is not solidarily Section 6. Period for Approval of Rehabilitation
liable, said owner shall be entitled to be benefit Plan. - The court shall decide the petition not later
of excussion as such guarantor; than one hundred twenty (120) days from the date of
(i) Prohibit the debtor from selling, encumbering, the filing of the petition. If the court fails to do so
transferring, or disposing in any manner any of within said period, the rehabilitation plan shall be
its properties except in the ordinary course of deemed approved.
business;
(j) Prohibit the debtor from making any payment of Section 7. Effects of Approval of Rehabilitation
its liabilities outstanding as of the date of filing of Plan. - Approval of the rehabilitation plan under this
the petition; Rule shall have the same legal effect as approval of
(k) Prohibit the debtor's suppliers of goods or a rehabilitation plan under Section 20 of Rule 3.
services from withholding supply of goods and
services in the ordinary course of business for
 Saint Louis University COMMERCIAL LAW 178
2012 BAR OPERATIONS

Section 8. Revocation of Approved Rehabilitation (b) A certificate from the foreign court affirming the
Plan. - Not later than thirty (30) days from the existence of the foreign proceeding and of the
approval of a rehabilitation plan under this Rule, the appointment of the foreign representative; or
plan may, upon motion and after notice and hearing, (c) In the absence of evidence referred to in
be revoked on the ground that the approval was subparagraph (a) and (b), any other evidence
secured by fraud or that the petitioner has failed to acceptable to the court of the existence of the
cure the defect ordered by the court pursuant to foreign proceeding and of the appointment of the
Section 5 of this Rule. foreign representative.

Section 9. Effect of Rule on Pending Petitions. - Any Section 4. Recognition of Foreign Proceeding. - A
pending petition for rehabilitation that has not foreign proceeding shall be recognized if:
undergone the initial hearing prescribed under the (a) The proceeding is a foreign proceeding as
Interim Rules of Procedure for Corporate defined herein;
Rehabilitation at the time of the effectivity of these (b) The person or body applying for recognition is a
Rules may be converted into a rehabilitation foreign representative as defined herein; and
proceeding under this Rule. (c) The petition meets the requirements of Section 3
of this Rule;
RULE 7
RECOGNITION OF FOREIGN PROCEEDINGS Section 5. Period to Recognize Foreign Proceeding.
- A petition for recognition of a foreign proceeding
Section 1. Scope of Application. - This Rule applies shall be decided within thirty (30) days from the filing
where (a) assistance is sought in a Philippine court thereof.
by a foreign court or a foreign representative in
connection with a foreign proceeding; (b) assistance Section 6. Notification to Court. - From the time of
is sought in a foreign State in connection with a filing the petition for recognition f the foreign
domestic proceeding governed by these Rules; or proceeding, the foreign representative shall inform
(c) a foreign proceeding and a domestic proceeding the court promptly of:
are concurrently taking place. (a) Any substantial change in the status of the
foreign proceeding or the status of the foreign
The sole fact that a petition is filed pursuant to this representative's appointment; and
Rule does not subject the foreign representative or (b) Any other foreign proceeding regarding the same
the foreign assets and affairs of the debtor to the debtor that becomes known to the foreign
jurisdiction of the local courts for any purpose other representative.
than the petition.
Section 7. Provisional Relief that May be Granted
Section 2. Non-Recognition of Foreign Proceeding. upon Application for Recognition of Foreign
- Nothing in this Rule prevents the court from Proceeding. - From the time of filing a petition for
refusing to take an action governed by this Rule if recognition until the same is decided upon, the court
(a) the action would be manifestly contrary to the may, upon motion of the foreign representative
public policy of the Philippines; and (b) if the court where relief is urgently needed to protect the assets
finds that the country of which the petitioner is a of the debtor or the interests of the creditors, grant
national does not grant recognition to a Philippine relief of a provisional nature, including:
rehabilitation proceeding in a manner substantially in (a) Staying execution against the debtor's assets;
accordance with this Rule. (b) Entrusting the administration or realization of all
or part of the debtor's assets located in the
Section 3. Petition for Recognition of Foreign Philippines to the foreign representative or
Proceeding. - A foreign representative may apply another person designated by the court in order
with the Regional Trial Court where the debtor to protect and preserve the value of assets that,
resides for recognition of the foreign proceeding in by their nature or because of other
which the foreign representative has been circumstances, are perishable, susceptible to
appointed. devaluation or otherwise in jeopardy;
A petition for recognition shall be accompanied by: (c) Any relief mentioned in Section 9(a)(1), (2) and
(7) of this Rule.
(a) A certified copy of the decision commencing the
foreign proceeding and appointing the foreign Section 8. Effects of Recognition of Foreign
representative; or Proceeding. - Upon recognition of a foreign
proceeding:
 Saint Louis University COMMERCIAL LAW 179
2012 BAR OPERATIONS

(a) Commencement or continuation of individual (a) In granting or denying relief under this Rule or in
actions or individual proceedings concerning the modifying or terminating the relief under
debtor's assets, rights, obligations or liabilities is paragraph (c) of this Section, the court must be
stayed; provided, that such stay does not affect satisfied that the interests of the creditors and
the right to commence individual actions or other interested persons, including the debtor,
proceedings to the extent necessary to preserve are adequately protected.
a claim against the debtor. (b) The court may subject the relief granted under
(b) Execution against the debtor's assets is stayed; Section 7 or Section 9. Of this Rule to conditions
and it considers appropriate.
(c) The right to transfer, encumber or otherwise (c) The court may, upon motion of the foreign
dispose of any assets of the debtor is representative or a person affected by the relief
suspended. granted under Section 7 or Section 9 of this
Rule, or on its own motion, modify or terminate
Section 9. Relief That May be Granted After such relief.
Recognition of Foreign Proceeding. -
(a) Upon recognition of a foreign proceeding, where Section 11. Actions to Avoid Acts Detrimental to
necessary to protect the assets of the debtor or Creditors. - Upon recognition of a foreign
the interests of the creditors, the court may, proceeding, the foreign representative acquires the
upon motion of the foreign representative, grant standing to initiate actions to avoid or otherwise
any appropriate relief including: render ineffective acts detrimental to creditors that
(1) Staying the commencement or continuation of are available under these Rules.
individual actions or individual proceedings
concerning the debtor's assets, rights, Section 12. Intervention by Foreign Representative
obligations or liabilities to the extent they have in Philippine Proceedings. - Upon recognition of a
not been stayed under Section 8(a) of this Rule; foreign proceeding, the foreign representative may
(2) Staying execution against the debtor's assets to intervene in any action or proceeding in the
the extent it has not been stayed under Section Philippines in which the debtor is a party.
8(b) of this Rule;
(3) Suspending the right to transfer, encumber or Section 13. Cooperation and Direct Communication
otherwise dispose of any assets of the debtor to with Foreign Courts and Foreign Representatives. -
the extent this right has not been suspended In matters covered by this Rule, the court shall
under Section 8(c) of this Rule; cooperate to the maximum extent possible with
(4) Providing for the examination of witnesses, the foreign courts or foreign representatives.
taking of evidence or the delivery of information The court is entitled to communicate directly with, or
concerning the debtor's assets, affairs, rights, request information or assistance directly from,
obligations or liabilities; foreign courts or foreign representatives.
(5) Entrusting the administration or realization of all Section 14. Forms of Cooperation. - Cooperation
or part of the debtor's assets located in the may be implemented by any appropriate means,
Philippines to the foreign representative or including but not limited to the following:
another person designated by the court; (a) Appointment of a person or body to act at the
(6) Extending the relief granted under Section 7 of discretion of the court;
this Rule; (b) Communication of information by any means
(7) Granting any additional relief that may be considered appropriate by the court;
available to the rehabilitation receiver under (c) Coordination of the administration and
these laws. supervision of the debtor's assets and affairs;
(d) Approval or implementation by courts of
(b) Upon recognition of a foreign proceeding, the agreements concerning the coordination of
court may, at the request of the foreign proceedings;
representative, entrust the distribution of all or (e) Coordination of concurrent proceedings
part of the debtor's assets located in the regarding the same debtor;
Philippines to the foreign representative or (f) Suspension of proceedings against the debtor;
another person designated by the court; (g) Limiting the relief of assets that should be
provided that the court is satisfied that the administered in a foreign proceeding pending in
interests of local creditors are adequately a jurisdiction other than the place where the
protected. debtor has its principal place of business
(foreign non-main proceeding) or information
Section 10. Protection of Creditors and Other required in that proceeding; and
Interested Persons. -
 Saint Louis University COMMERCIAL LAW 180
2012 BAR OPERATIONS

(h) Implementation of rehabilitation or re- Section 1. Severability. - If any provision or section

organization plan for the debtor. of these Rules is held invalid, the other provisions or
sections shall not be affected thereby.
Nothing in this Rule limits the power of the court to Section 2. Transitory Provision. - Unless the court
provide additional assistance to the foreign orders otherwise to prevent manifest injustice, any
representative under other applicable laws. pending petition for rehabilitation that has not
undergone the initial hearing prescribed under the
Section 15. Commencement of Local Proceeding Interim Rules of Procedure for Corporate
after Recognition of Foreign Proceeding. - After the Rehabilitation at the time of the effectivity of these
recognition of a foreign proceeding, a local Rules shall be governed by these rules.
proceeding under these Rules may be commenced
only if the debtor is doing business in the Section 3. Effectivity. - These Rules shall take affect
Philippines, the effects of the proceedings shall be on 16 January 2009 following its publication in two
restricted to the assets of the debtor located in the (2) newspapers of general circulation in the
country and, to the extent necessary to implement Philippines.
cooperation and coordination under Sections 13 and
14 of this Rule, to the other assets of the debtor that, ANNEX "A"
under local laws, must be administered in that AFFIDAVIT OF GENERAL FINANCIAL
proceeding. CONDITION

Section 16. Local and Foreign Proceedings. - (1) Are you an officer of the debtor referred to in
Where a foreign proceeding and a local proceeding these proceedings?
are taking place concurrently regarding the same (2) What is your full name and what position do you
debtor, the court shall seek cooperation and hold in the debtor?
coordination under Section 13 and 14 of this Rule. (3) What is the full name of the debtor and what is
Any relief granted to the foreign proceeding must be the address of its head office?
made consistent with the relief granted in the local (4) When was it formed or incorporated?
proceeding. (5) When did the debtor commence business?
(6) What is the nature of its business? What is the
RULE 8 market share of the debtor in the industry in
PROCEDURAL REMEDIES which it is engaged?
(7) Who are the parties, members, or stockholders?
Section 1. Motion for Reconsideration. - A party How many employees?
may file a motion for reconsideration of any order (8) What is the capital of the debtor?
issued by the court prior to the approval of the (9) What is the capital contribution and what is the
rehabilitation plan. No relief can be extended to the amount of the capital, paid and unpaid, of each
party aggrieved by the court's order on the motion of the partners or shareholders?
through a special civil action for certiorari under Rule (10) Do any of these people hold the shares in trust
65 of the rules of Court. Such order can only be for others?
elevated to the Court of Appeals as an assigned (11) Who are the directors and officers of the
error in the petition for review of the decision or debtors?
order approving or disapproving the rehabilitation (12) Has the debtor any subsidiary corporation? If
plan. so, give particulars?
An order issued after the approval of the (13) Has the debtor properly maintained its books
rehabilitation plan can de reviewed only through a and are they updated?
special civil action for certiorari under Rule 65 of the (14) Were the books audited annually?
Rules of Court. (15) If so, what is the name of the auditor and when
was the last audited statement drawn up?
Section 2. Review of Decision or Order on (16) Have all proper returns been made to the
Rehabilitation Plan. - an order approving or various government agencies requiring same?
disapproving a rehabilitation plan can only be (17) When did the debtor first become aware of its
reviewed through a petition for review to the Court of problems?
Appeals under Rule 43 of the Rules of Court within (18) Has the debtor within the twelve months
fifteen (15) days from notice of the decision or order. preceding the filing of the petition:
(a) made any payments, returned any goods
RULE 9 or delivered any property to any of its
FINAL PROVISIONS creditors, except in the normal course of
business?
 Saint Louis University COMMERCIAL LAW 181
2012 BAR OPERATIONS

(b) executed any mortgage, pledge, or SECTION 1. Scope — These Rules shall apply to
security over any of its properties in favor of petitions for rehabilitation filed by corporations,
any creditor? partnerships, and associations pursuant to
(c) transferred or disposed of any of its Presidential Decree No. 902-A, as amended.
properties in payment of any debt?
(d) sold, disposed of, or removed any of its SEC. 2. Applicability to Rehabilitation Cases
property except in the ordinary course of Transferred from the Securities and Exchange
business? Commission.— Cases for rehabilitation transferred
(e) sold any merchandise at less than fair from the Securities and Exchange Commission to
market value or purchased merchandise or the Regional Trial Courts pursuant to Republic Act
services at more than fair market value? No. 8799, otherwise known as The Securities
(f) made or been a party to any settlement of Regulation Code, shall likewise be governed by
property in favor of any person? these Rules.
If, so, give particulars.
(19) Has the debtor recorded all sales or Rule 2
dispositions of assets?
DEFINITION OF TERMS AND CONSTRUCTION
(20) What were the sales for the last three years and
what percentage of the sales represented the
profit or markup? SECTION 1. Definition of Terms.— For purposes
(21) What were the profits or losses for the debtor of these Rules:
for the last three years?
“Administrative Expenses” shall refer
(22) What are the causes of the problems of the
debtor? Please provide particulars? to those expenses incurred in the
(23) When did you first notice these problems and ordinary course of business of the debtor
after the issuance of the stay order,
what actions did the debtor take to rectify them?
(24) How much do you estimate is needed to excluding interest payable to creditors.
rehabilitate the debtor? “Affidavit of General Financial
(25) Has any person expressed interest in investing Condition” shall refer to a verified
new money into the debtor? statement on the general financial
(26) Are there any pending and threatened legal condition of the debtor required in section
actions against the debtor? If so, please provide 2, Rule 4 of these Rules.
particulars.
(27) Has the debtor discussed any restructuring or “Board of Directors” shall include the
repayment plan with any of the creditors? executive committee or the management
Please provide status and details. of a partnership or association.
(28) Has any creditor expressed interest in “Claim” shall include all claims or
restructuring the debts of the debtor? If so, demands of whatever nature or character
please give particulars. against a debtor or its property, whether
(29) Have employees' wages and salaries been kept for money or otherwise.
current? If not, how much are in arrears and
what time period do the arrears represent? “Creditor” shall mean any holder of a
(30) Have obligation to the government and its Claim.
agencies been kept current? If not, how much are in “Court” shall refer to the proper Regional
arrears and what time period do the arrears Trial Court designated to hear and decide
represent? the cases contemplated under these
Rules.
“Debtor” shall mean any corporation,
INTERIM RULES OF PROCEDURE ON partnership, or association, whether
CORPORATE REHABILITATION supervised or regulated by the Securities
and Exchange Commission or other
(2000) government agencies, on whose behalf a
petition for rehabilitation has been filed
under these Rules.
(Effective December 15, 2000)
“Stockholder” shall include a member of
a non-stock corporation or association, or
Rule 1
a partner in a partnership.
COVERAGE
 Saint Louis University COMMERCIAL LAW 182
2012 BAR OPERATIONS

SEC. 2. Construction.— These Rules shall be filed with the court and/or served upon the other
liberally construed to carry out the objectives of parties by facsimile transmission (fax) or electronic
sections 5(d), 6(c) and 6(d) of Presidential Decree mail (e-mail). In such cases, the date of transmission
No. 902-A, as amended, and to assist the parties in shall be deemed to be the date of service. In case of
obtaining a just, expeditious, and inexpensive a voluminous pleading or document, the court may,
determination of cases. Where applicable, the Rules motu proprio or upon motion, waive the requirement
of Court shall apply suppletorily to proceedings of service, provided, a copy thereof together with all
under these Rules. its attachments is duly filed with the court and is
made available for examination and reproduction by
Rule 3 any party, and provided, further, that a notice of
such filing and availability is duly served on the
GENERAL PROVISIONS
parties.
SECTION 1. Nature of Proceedings.— Any
SEC. 4. Trade Secrets and Other Confidential
proceeding initiated under these Rules shall be
Information.— On motion or on its own initiative,
considered in rem. Jurisdiction over all those
the court may issue an order to protect trade secrets
affected by the proceedings shall be considered as
or other confidential research, development, or
acquired upon publication of the notice of the
commercial information belonging to the debtor.
commencement of the proceedings in any
newspaper of general circulation in the Philippines in
SEC. 5. Executory Nature of Orders.— Any order
the manner prescribed by these Rules.
issued by the court under these Rules is
The proceedings shall also be summary and
immediately executory. A petition for review or an
non-adversarial in nature. The following pleadings
appeal therefrom shall not stay the execution of the
are prohibited:
order unless restrained or enjoined by the appellate
a. Motion to dismiss; court. The review of any order or decision of the
b. Motion for a bill of particulars; court or an appeal therefrom shall be in accordance
c. Motion for new trial or for reconsideration; with the Rules of Court; Provided, however, that the
d. Petition for relief; reliefs ordered by the trial or appellate courts shall
e. Motion for extension; take into account the need for resolution of
f. Memorandum; proceedings in a just, equitable, and speedy
g. Motion for postponement; manner.
h. Reply or Rejoinder;
i. Third party complaint; and Rule 4
j. Intervention.
REHABILITATION
Any pleading, motion, opposition, defense, or
SECTION 1. Who May Petition.— Any debtor who
claim filed by any interested party shall be supported
foresees the impossibility of meeting its debts when
by verified statements that the affiant has read the
they respectively fall due, or any creditor or creditors
same and that the factual allegations therein are true
holding at least twenty-five percent (25%) of the
and correct of his personal knowledge or based on
debtor’s total liabilities, may petition the proper
authentic records and shall contain as annexes such
Regional Trial Court to have the debtor placed
documents as may be deemed by the party
under rehabilitation.
submitting the same as supportive of the allegations
in the affidavits. The court may decide matters on
SEC. 2. Contents of the Petition.— The petition
the basis of affidavits and other documentary
filed by the debtor must be verified and must set
evidence. Where necessary, the court shall conduct
forth with sufficient particularity all the following
clarificatory hearings before resolving any matter
material facts: (a) the name and business of the
submitted to it for resolution.
debtor; (b) the nature of the business of the debtor;
(c) the history of the debtor; (d) the cause of its
SEC. 2. Venue.— Petitions for rehabilitation
inability to pay its debts; (e) all the pending actions
pursuant to these Rules shall be filed in the
or proceedings known to the debtor and the courts
Regional Trial Court having jurisdiction over the
or tribunals where they are pending; (f) threats or
territory where the debtor’s principal office is
demands to enforce claims or liens against the
located.
debtor; and (g) the manner by which the debtor may
be rehabilitated and how such rehabilitation may
SEC. 3. Service of Pleadings and Documents.—
benefit the general body of creditors, employees,
When so authorized by the court, any pleading
and stockholders.
and/or document required by these Rules may be
The petition shall be accompanied by the
 Saint Louis University COMMERCIAL LAW 183
2012 BAR OPERATIONS

following documents: as their qualifications and addresses,

including but not limited to their telephone
a. An audited financial statement of the
numbers, fax number and e-mail address;
debtor at the end of its last fiscal year;
and
b. Interim financial statements as of the end
k. A Certificate attesting, under oath, that
of the month prior to the filing of the
(a) the filing of the petition has been duly
petition;
authorized; and (b) the directors and
c. Schedule of Debts and Liabilities which
stockholders have irrevocably approved
lists all the creditors of the debtor
and/or consented to, in accordance with
indicating the name and address of each
existing laws, all actions or matters
creditor, the amount of each claim as to
necessary and desirable to rehabilitate
principal, interest, or penalties due as of
the debtor including, but not limited to,
the date of filing, the nature of the claim,
amendments to the articles of
and any pledge, lien, mortgage judgment,
incorporation and by-laws or articles of
or other security given for the payment
partnership; increase or decrease in the
thereof;
authorized capital stock; issuance of
d. An Inventory of Assets which must list
bonded indebtedness; alienation,
with reasonable specificity all the assets
transfer, or encumbrance of assets of the
of the debtor, stating the nature of each
debtor; and modification of shareholders’
asset, the location and condition thereof,
rights.
the book value or market value of the
asset, and attaching the corresponding Five (5) copies of its petition shall be filed with
certificate of title therefor in case of real the court.
property, or the evidence of title or
ownership in case of movable property, SEC. 3. Verification by Debtor.— The petition filed
the encumbrances, liens or claims by the debtor must be verified by an affidavit of a
thereon, if any, and the identities and responsible officer of the debtor and shall be in a
addresses of the lienholders and form substantially as follows:
claimants. The Inventory shall include a
Schedule of Accounts Receivable which “I, _____________________, (position)
must indicate the amount of each, the of (name of petitioner), do solemnly
persons from whom due, the date of swear that the petitioner has been duly
maturity, and the degree of collectibility authorized to file the petition and that the
categorizing them as highly collectible to stockholders and board of directors (or
remotely collectible; governing body) have approved and/or
e. A rehabilitation plan which conforms to consented to, in accordance with law, all
the minimal requirements set out in actions or matters necessary or desirable
section 5, Rule 4 of these Rules; to rehabilitate the debtor. There is no
f. A Schedule of Payments and disposition petition for insolvency filed with any other
of assets which the debtor may have body, court, or tribunal affecting the
effected within three (3) months petitioner. The Inventory of Assets and
immediately preceding the filing of the the Schedule of Debts and Liabilities
petition; contains a full, correct, and true
g. A Schedule of the Cash Flow of the description of all debts and liabilities and
debtor for three (3) months immediately of all goods, effects, estate, and property
preceding the filing of the petition, and a of whatever kind or class belonging to
detailed schedule of the projected cash petitioner. The Inventory also contains a
flow for the succeeding three (3) months; full, correct, and true statement of all
h. A Statement of Possible Claims by or debts owing or due to petitioner, or to any
against the debtor which must contain a person or persons in trust for petitioner
brief statement of the facts which might and of all securities and contracts
give rise to the claim and an estimate of whereby any money may hereafter
the probable amount thereof; become due or payable to petitioner or by
i. An Affidavit of General Financial or through which any benefit or
Condition which shall contain answers to advantage may accrue to petitioner. The
the questions or matters prescribed in petition contains a concise statement of
Annex “A” hereof; the facts giving rise, or which might give
j. At least three (3) nominees for the rise, to any cause of action in favor of
position of Rehabilitation Receiver as well petitioner. Petitioner has no land, money,
 Saint Louis University COMMERCIAL LAW 184
2012 BAR OPERATIONS

stock, expectancy, or property of any Receiver and fixing his bond; (b) staying
kind, except those set forth in the enforcement of all claims, whether for money or
Inventory of Assets. Petitioner has, in no otherwise and whether such enforcement is by court
instance, created or acknowledged a debt action or otherwise, against the debtor, its
for a greater sum than the true and guarantors and sureties not solidarily liable with the
correct amount. Petitioner, its officers, debtor; (c) prohibiting the debtor from selling,
directors, and stockholders have not, encumbering, transferring, or disposing in any
directly or indirectly, concealed, manner any of its properties except in the ordinary
fraudulently sold, or otherwise course of business; (d) prohibiting the debtor from
fraudulently disposed of, any part of making any payment of its liabilities outstanding as
petitioner’s real or personal property, at the date of filing of the petition; (e) prohibiting the
estate, effects, or rights of action, and debtor’s suppliers of goods or services from
petitioner, its officers, directors, and withholding supply of goods and services in the
stockholders have not in any way ordinary course of business for as long as the debtor
compounded with any of its creditors in makes payments for the services and goods
order to give preference to such creditors, supplied after the issuance of the stay order; (f)
or to receive or to accept any profit or directing the payment in full of all administrative
advantage therefrom, or to defraud or expenses incurred after the issuance of the stay
deceive in any manner any creditor to order; (g) fixing the initial hearing on the petition not
whom petitioner is indebted. Petitioner, earlier than forty five (45) days but not later than
its officers, directors, and stockholders sixty (60) days from the filing thereof; (h) directing
have been acting in good faith and with the petitioner to publish the Order in a newspaper of
due diligence.” general circulation in the Philippines once a week for
two (2) consecutive weeks; (i) directing all creditors
SEC. 4. Creditor-initiated Petitions.— Where the and all interested parties (including the Securities
petition is filed by a creditor or creditors, it is and Exchange Commission) to file and serve on the
sufficient that the petition is accompanied by a debtor a verified comment on or opposition to the
rehabilitation plan and a list of nominees to the petition, with supporting affidavits and documents,
position of Rehabilitation Receiver and verified by a not later than ten (10) days before the date of the
sworn statement that the affiant has read the petition initial hearing and putting them on notice that their
and that its contents are true and correct of his failure to do so will bar them from participating in the
personal knowledge or based on authentic records proceedings; and (j) directing the creditors and
obtained from the debtor. interested parties to secure from the court copies of
the petition and its annexes within such time as to
SEC. 5. Rehabilitation Plan.— The rehabilitation enable themselves to file their comment on or
plan shall include (a) the desired business targets or opposition to the petition and to prepare for the initial
goals and the duration and coverage of the hearing of the petition.
rehabilitation; (b) the terms and conditions of such
rehabilitation which shall include the manner of its
implementation, giving due regard to the interests of SEC. 7. Service of Stay Order on Rehabilitation
secured creditors; (c) the material financial Receiver.— The petitioner shall immediately serve a
commitments to support the rehabilitation plan; (d) copy of the stay order on the Rehabilitation Receiver
the means for the execution of the rehabilitation appointed by the court, who shall manifest his
plan, which may include conversion of the debts or acceptance or non-acceptance of his appointment
any portion thereof to equity, restructuring of the not later than ten (10) days from receipt of the order.
debts, dacion en pago, or sale of assets or of the
controlling interest; (e) a liquidation analysis that SEC. 8. Voidability of Illegal Transfers and
estimates the proportion of the claims that the Preferences.— Upon motion or motu proprio, the
creditors and shareholders would receive if the court may declare void any transfer of property or
debtor’s properties were liquidated; and (f) such any other conveyance, sale, payment, or agreement
other relevant information to enable a reasonable made in violation of its stay order or in violation of
investor to make an informed decision on the these Rules.
feasibility of the rehabilitation plan.
SEC. 9. Initial Hearing.— On or before the initial
SEC. 6. Stay Order.— If the court finds the petition hearing, the petitioner shall file the publisher’s
to be sufficient in form and substance, it shall, not affidavit showing that the publication requirements
later than five (5) days from the filing of the petition, specified above had been complied with. If the court
issue an Order (a) appointing a Rehabilitation is satisfied that said jurisdictional requirement had
 Saint Louis University COMMERCIAL LAW 185
2012 BAR OPERATIONS

been complied with, it shall summarily hear the creditor does not have adequate protection over
parties on any matter relating to the petition as well property securing its claim; or (c) the debtor’s
as any comment and/or opposition filed in secured obligation is more than the fair market value
connection therewith. The court may hold additional of the property subject of the stay and such property
clarificatory hearings where there is need to further is not necessary for the rehabilitation of the debtor.
clarify matters but in no event shall such additional For purposes of this section, the creditor shall
hearings be held beyond one hundred eighty (180) lack adequate protection if it can be shown that:
days from the date of the initial hearing.
a. the debtor fails or refuses to honor a pre-
If, after the initial hearing, the court is satisfied
existing agreement with the creditor to
that there is merit in the petition, it shall give due
keep the property insured;
course to the petition and immediately refer the
b. the debtor fails or refuses to take
petition and its annexes to the Rehabilitation
commercially reasonable steps to
Receiver who shall evaluate the rehabilitation plan
maintain the property; or
and submit his recommendations to the court not
c. the property has depreciated to an extent
later than one hundred twenty (120) days from the
that the creditor is undersecured.
date of the initial hearing.
Upon showing of a lack of adequate protection,
SEC. 10. Opposition to or Comment on the the court shall order the rehabilitation receiver to (a)
Petition.— Every creditor of the debtor or any make arrangements to provide for the insurance or
interested party shall file his verified opposition to or maintenance of the property, or (b) to make
comment on the petition not later than ten (10) days payments or otherwise provide additional or
before the date of the initial hearing. After such replacement security such that the obligation is fully
time, no creditor or interested party shall be allowed secured. If such arrangements are not feasible, the
to file any comment or opposition thereto without court shall modify the stay order to allow the secured
leave of court. creditor lacking adequate protection to enforce its
If the Schedule of Debts and Liabilities omits a claim against the debtor; Provided, however, that the
claim or liability, the creditor concerned shall attach court may deny the creditor the remedies in this
a verified statement of the obligations allegedly due paragraph if such remedies would prevent the
it to its comment or opposition. continuation of the debtor as a going concern or
The court shall likewise require the Securities otherwise prevent the approval and implementation
and Exchange Commission to comment on the of a rehabilitation plan.
petition. The Commission shall coordinate with the
government agency concerned in appropriate cases SEC. 13. Qualifications of the Rehabilitation
for purposes of filing its comment. Receiver.— In the appointment of the Rehabilitation
Receiver, the following qualifications shall be taken
SEC. 11. Period of the Stay Order.— The stay into consideration by the court:
order shall be effective from the date of its issuance
until the dismissal of the petition or the termination of a. Expertise and acumen to manage and
operate a business similar in size and
the rehabilitation proceedings.
The petition shall be dismissed if no complexity to that of the debtor;
rehabilitation plan is approved by the court upon the b. Knowledge in management, finance, and
lapse of one hundred eighty (180) days from the rehabilitation of distressed companies;
date of the initial hearing. The court may grant an c. General familiarity with the rights of
extension beyond this period only if it appears by creditors in suspension of payments or
convincing and compelling evidence that the debtor rehabilitation and general understanding
may successfully be rehabilitated. In no instance, of the duties and obligations of a
however, shall the period for approving or Rehabilitation Receiver;
d. Good moral character, independence,
disapproving a rehabilitation plan exceed eighteen
(18) months from the date of filing of the petition. and integrity;
e. Lack of a conflict of interest as defined in
these Rules; and
SEC. 12. Relief from, Modification, or
Termination of Stay Order.— The court may, on f. Willingness and ability to file a bond in
motion or motu proprio, terminate, modify, or set such amount as may be determined by
conditions for the continuance of the stay order, or the court.
relieve a claim from the coverage thereof upon Without limiting the generality of the following,
showing that (a) any of the allegations in the petition, a Rehabilitation Receiver may be deemed to have a
or any of the contents of any attachment, or the conflict of interest if:
verification thereof has ceased to be true; (b) a
a. He is a creditor or stockholder of the
 Saint Louis University COMMERCIAL LAW 186
2012 BAR OPERATIONS

debtor; continuance thereof; and, any other

b. He is engaged in a line of business which matter relevant to the proceeding or to
competes with the debtor; the formulation of a rehabilitation plan;
c. He is, or was within two (2) years from f) To examine under oath the directors and
the filing of the petition, a director, officer, officers of the debtor and any other
or employee of the debtor or any of its witnesses that he may deem appropriate;
present creditors, or the auditor or g) To make available to the creditors
accountant of the debtor; documents and notices necessary for
d. He is, or was within two (2) years from them to follow and participate in the
the filing of the petition, an underwriter of proceedings;
the outstanding securities of the debtor; h) To report to the court any fact ascertained
e. He is related by consanguinity or affinity by him pertaining to the causes of the
within the fourth civil degree to any debtor’s problems, fraud, preferences,
creditor, stockholder, director, officer, dispositions, encumbrances, misconduct,
employee, or underwriter of the debtor; or mismanagement, and irregularities
f. He has any other direct or indirect committed by the stockholders, directors,
material interest in the debtor or any management, or any other person against
creditor. the debtor;
i) To employ such person or persons such
SEC. 14. Powers and Functions of the as lawyers, accountants, appraisers, and
Rehabilitation Receiver.—The Rehabilitation staff as are necessary in performing his
Receiver shall not take over the management and functions and duties as Rehabilitation
control of the debtor but shall closely oversee and Receiver;
monitor the operations of the debtor during the j) To monitor the operations of the debtor
pendency of the proceedings, and for this purpose and to immediately report to the court any
shall have the powers, duties and functions of a material adverse change in the debtor’s
receiver under Presidential Decree No. 902-A, as business;
amended, and the Rules of Court. k) To evaluate the existing assets and
The Rehabilitation Receiver shall be liabilities, earnings and operations of the
considered as an officer of the court. He shall be debtor;
primarily tasked to study the best way to rehabilitate l) To determine and recommend to the
the debtor and to ensure that the value of the court the best way to salvage and protect
debtor’s property is reasonably maintained pending the interests of the creditors,
the determination of whether or not the debtor stockholders, and the general public;
should be rehabilitated, as well as implement the m) To study the rehabilitation plan proposed
rehabilitation plan after its approval. Accordingly, he by the debtor or any rehabilitation plan
shall have the following powers and functions: submitted during the proceedings,
together with any comments made
thereon;
a) To verify the accuracy of the petition,
n) To prohibit and report to the court any
including its annexes such as the
encumbrance, transfer, or disposition of
Schedule of Debts and Liabilities and the
the debtor’s property outside of the
Inventory of Assets submitted in support
ordinary course of business or what is
of the petition;
allowed by the court;
b) To accept and incorporate, when justified,
o) To prohibit and report to the court any
amendments to the Schedule of Debts
payments outside of the ordinary course
and Liabilities;
of business;
c) To recommend to the court the
p) To have unlimited access to the debtor’s
disallowance of claims and rejection of
employees, premises, books, records,
amendments to the Schedule of Debts
and financial documents during business
and Liabilities that lack sufficient proof
hours;
and justification;
q) To inspect, copy, photocopy, or
d) To submit to the court and make available
photograph any document, paper, book,
for review by the creditors, a revised
account, or letter, whether in the
Schedule of Debts and Liabilities;
possession of the debtor or other
e) To investigate the acts, conduct,
persons;
properties, liabilities, and financial
r) To gain entry into any property for the
condition of the debtor, the operation of
purpose of inspecting, measuring,
its business and the desirability of the
 Saint Louis University COMMERCIAL LAW 187
2012 BAR OPERATIONS

surveying, or photographing it or any Receiver shall not be subject to any action, claim, or
designated relevant object or operation demand in connection with any act done or omitted
thereon; by him in good faith in the exercise of his functions
s) To take possession, control, and custody and powers herein conferred.
of the debtor’s assets;
t) To notify counterparties and the court as SEC. 18. Reports.— The Rehabilitation Receiver
to contracts that the debtor has decided shall report every three months to the court or as
to continue to perform or breach; often as the court may require on the general
u) To be notified of, and to attend all condition of the debtor.
meetings of the board of directors and
stockholders of the debtor; SEC. 19. Dismissal of Rehabilitation Receiver.—
v) To recommend any modification of an A Rehabilitation Receiver may be dismissed by the
approved rehabilitation plan as he may court, upon motion or motu proprio, on account of
deem appropriate; conflict of interest, or on any of the grounds for
w) To bring to the attention of the court any removing a trustee under the general principles of
material change affecting the debtor’s trusts.
ability to meet the obligations under the
rehabilitation plan; SEC. 20. Comments on or Opposition to the
x) To recommend the appointment of a Rehabilitation Plan.— Any creditor or interested
management committee in the cases party of record may file comments on or opposition
provided for under Presidential Decree to the proposed rehabilitation plan, with a copy given
No. 902-A, as amended; to the Rehabilitation Receiver, not later than one
y) To recommend the termination of the hundred twenty (120) days from the date of the
proceedings and the dissolution of the initial hearing. The court shall conduct summary and
debtor if he determines that the non-adversarial proceedings to receive evidence, if
continuance in business of such entity is necessary, in hearing the comments and opposition
no longer feasible or profitable or no to the plan.
longer works to the best interest of the
stockholders, parties-litigants, creditors, SEC. 21. Creditors’ Meetings.— At any time before
or the general public; he submits his evaluation on the rehabilitation plan
z) To apply to the court for any order or to the court as prescribed in section 9, Rule 4 of this
directive that he may deem necessary or Rule, the Rehabilitation Receiver may, either alone
desirable to aid him in the exercise of his or with the debtor, meet with the creditors or any
powers and performance of his duties interested party to discuss the plan with a view to
and functions; and clarifying or resolving any matter connected
aa) To exercise such other powers as may therewith.
from time to time be conferred upon him
by the court. SEC. 22. Modification of the Proposed
Rehabilitation Plan.— The debtor may modify its
SEC. 15. Oath and Bond.— Before entering upon rehabilitation plan in the light of the comments of the
his powers, duties, and functions, the Rehabilitation Rehabilitation Receiver and creditors or any
Receiver must be sworn to perform them faithfully, interested party and submit a revised or substitute
and must post a bond executed in favor of the rehabilitation plan for the final approval of the court.
debtor in such sum as the court may direct, to Such rehabilitation plan must be submitted to the
guarantee that he will faithfully discharge his duties court not later than one (1) year from the date of the
and obey the orders of the court. If necessary, he initial hearing.
shall also declare under oath that he will perform the
duties of a trustee of the assets of the debtor, will act SEC. 23. Approval of the Rehabilitation Plan.—
honestly and in good faith, and deal with the assets The court may approve a rehabilitation plan even
of the debtor in a commercially reasonable manner. over the opposition of creditors holding a majority of
the total liabilities of the debtor if, in its judgment, the
SEC. 16. Fees and Expenses.— The Rehabilitation rehabilitation of the debtor is feasible and the
Receiver and the persons hired by him shall be opposition of the creditors is manifestly
entitled to reasonable professional fees and unreasonable.
reimbursement of expenses which shall be In determining whether or not the opposition of
considered as administrative expenses. the creditors is manifestly unreasonable, the court
shall consider the following:
SEC. 17. Immunity from Suit.— The Rehabilitation
a. That the plan would likely provide the
 Saint Louis University COMMERCIAL LAW 188
2012 BAR OPERATIONS

objecting class of creditors with is necessary to achieve the desired targets or goals
compensation greater than that which set forth therein.
they would have received if the assets of
the debtor were sold by a liquidator within SEC. 27. Termination of Proceedings.— In case of
a three-month period; the failure of the debtor to submit the rehabilitation
b. That the shareholders or owners of the plan, or the disapproval thereof by the court, or the
debtor lose at least their controlling failure of the rehabilitation of the debtor because of
interest as a result of the plan; and failure to achieve the desired targets or goals as set
c. The Rehabilitation Receiver has forth therein, or the failure of the said debtor to
recommended approval of the plan. perform its obligations under the said plan, or a
determination that the rehabilitation plan may no
In approving the rehabilitation plan, the court
longer be implemented in accordance with its terms,
shall issue the necessary orders or processes for its
conditions, restrictions, or assumptions, the court
immediate and successful implementation. It may
shall upon motion, motu proprio, or upon the
impose such terms, conditions, or restrictions as the
recommendation of the Rehabilitation Receiver,
effective implementation and monitoring thereof may
terminate the proceedings. The proceedings shall
reasonably require, or for the protection and
also terminate upon the successful implementation
preservation of the interests of the creditors should
of the rehabilitation plan.
the plan fail.
SEC. 28. Discharge of the Rehabilitation
SEC. 24. Effects of the Rehabilitation Plan.— The
Receiver.— Upon termination of the rehabilitation
approval of the rehabilitation plan by the court shall
proceedings, the Rehabilitation Receiver shall
result in the following:
submit his final report and accounting within such
a. The plan and its provisions shall be period of time as the court will allow him. Upon
binding upon the debtor and all persons approval of his report and accounting, the court shall
who may be affected by it, including the order his discharge.
creditors, whether or not such persons
have participated in the proceedings or Rule 5
opposed the plan or whether or not their
FINAL PROVISIONS
claims have been scheduled;
b. The debtor shall comply with the
SECTION 1. Severability.— If any provision or
provisions of the plan and shall take all
section of these Rules is held invalid, the other
actions necessary to carry out the plan;
provisions or sections shall not be affected thereby.
c. Payments shall be made to the creditors
in accordance with the provisions of the
SEC. 2. Effectivity.— These Rules shall take effect
plan;
on December 15, 2000 following its publication in
d. Contracts and other arrangements
two (2) newspapers of general circulation in the
between the debtor and its creditors shall
Philippines.
be interpreted as continuing to apply to
the extent that they do not conflict with
the provisions of the plan; and
ANNEX “A”
e. Any compromises on amounts or
rescheduling of timing of payments by the
AFFIDAVIT OF GENERAL FINANCIAL
debtor shall be binding on creditors
CONDITION
regardless of whether or not the plan is
successfully implemented.
1) Are you an officer of the debtor referred to in
SEC. 25. Revocation of the Rehabilitation Plan
these proceedings?
on Grounds of Fraud.— On motion or motu
proprio, within ninety (90) days from the approval of 2) What is your full name and what position do
the rehabilitation plan, and after notice and hearing, you hold in the debtor?
the court may revoke the approval thereof on the
3) What is the full name of the debtor and what is
ground that the same was secured through fraud.
the address of its head office?
SEC. 26. Alteration or Modification of the 4) When was it formed or incorporated?
Rehabilitation Plan.— An approved rehabilitation
5) When did the debtor commence business?
plan may, on motion, be altered or modified if, in the
judgment of the court, such alteration or modification 6) What is the nature of its business? What is the
 Saint Louis University COMMERCIAL LAW 189
2012 BAR OPERATIONS

market share of the debtor in the industry in the profit or mark-up?

which it is engaged?
21) What were the profits or losses for the debtor
7) Who are the partners, members, or for the last three years?
stockholders? How many employees?
22) What are the causes of the problems of the
8) What is the capital of the debtor? debtor? Please provide particulars.
9) What is the capital contribution and what is the 23) When did you first notice these problems and
amount of the capital, paid and unpaid, of each what actions did the debtor take to rectify
of the partners or shareholders? them?
10) Do any of these people hold the shares in trust 24) How much do you estimate is needed to
for others? rehabilitate the debtor?
11) Who are the directors and officers of the 25) Has any person expressed interest in investing
debtor? new money into the debtor?
12) Has the debtor any subsidiary corporation? If 26) Are there any pending and threatened legal
so, give particulars. actions against the debtor? If so,
please provide particulars.
13) Has the debtor properly maintained its books
and are they updated? 27) Has the debtor discussed any restructuring or
repayment plan with any of the creditors?
14) Were the books audited annually?
Please provide status and details.
15) If so, what is the name of the auditor and when
28) Has any creditor expressed interest in
was the last audited statement drawn up?
restructuring the debts of the debtor? If so,
16) Have all proper returns been made to the please give particulars.
various government agencies requiring the
29) Have employees’ wages and salaries been
same?
kept current? If not, how much are in arrears
17) When did the debtor first become aware of its and what time period do the arrears represent?
problems?
30) Have obligations to the government and its
18) Has the debtor within the twelve months agencies been kept current? If not, how much are in
preceding the filing of the petition: arrears and what time period do the arrears
represent?
a) made any payments, returned any goods
 
or delivered any property to any of its
INTERIM RULES OF PROCEDURE ON
creditors, except in the normal course of
CORPORATE REHABILITATION
business?
(Effective December 15, 2000)
b) executed any mortgage, pledge, or
security over any of its properties in favor Steps:
of any creditor? 1. Filing of a verified petition with the appropriate
c) transferred or disposed of any of its RTC by:
properties in payment of any debt? a) corporate debtor who foresees the
d) sold, disposed of, or removed any of its impossibility of meeting its debts when they
property except in the ordinary course of respectively fall due, or
business? b) creditors holding at least 25% of the debtor’s
e) sold any merchandise at less than fair total liabilities;
market value or purchased merchandise 2. The following shall be annexed to the petition:
or services at more than fair market a) audited financial statement at the end of its
value? last fiscal year;
f) made or been a party to any settlement of b) interim financial statement;
property in favor of any person? c) schedule of debts and liabilities;
d) inventory of assets;
If so, give particulars.
e) rehabilitation plan;
19) Has the debtor recorded all sales or f) schedule of payments and disposition of
dispositions of assets? assets effected within 3 months preceding
the filing of the petition;
20) What were the sales for the last three years g) schedule of cash flow for the last 3 months;
and what percentage of the sales represented h) statement of possible claims;
 Saint Louis University COMMERCIAL LAW 190
2012 BAR OPERATIONS

i) affidavit of general financial condition; (c) pleadings and documents may be filed with the
j) at least 3 nominations for rehabilitation court or served on the other parties, when so
receiver; authorized by the court, by facsimile
k) certificate under oath that directors and transmission (fax) or electronic mail (email)
stockholders have irrevocably (Rule 3, Sec. 3);
approved/consented to all actions/matters (d) incase of voluminous pleading or document, the
necessary under the rehabilitation plan. court may, motu proprio or upon motion, waive
3. The court shall issue the stay order not later the requirement of service, provided that a copy
than 5 days from the filing of the petition, which thereof, together with all its attachments, is duly
among others, shall: filed with the court and made available for
4. Publication of the stay order in a newspaper of a examination and reproduction by any party, and
general circulation once a week for 2 provided, further that a notice of such filing and
consecutive weeks; availability is duly served on the parties (Rule 3,
5. Referral of rehabilitation plan to rehabilitation Sec. 5); and
receiver; (e) any order issued by the court under the rules is
6. Meetings between corporate debtor with immediately executory, and a petition for review
creditors and discussions on the rehabilitation or appeal therefrom shall not stay the execution
plan; of the order unless restrained or enjoined by the
7. Submission of final rehabilitation plan to the appellate court (Rule 3, Sec. 5).
RTC for approval;
8. The petition shall be dismissed (which results Who may petition for rehabilitation? (Rule 4, Sec.
into the automatic lifting of the stay order unless 1)
RTC ordered otherwise) if no rehabilitation plan (a) any debtor who foresees the impossibility of
is approved after 180 days from initial hearing; meeting its debts when they respectively fall
9. Approval or disapproval of the rehabilitation plan due; or
by the RTC. (b) any creditor or creditors holding at least 25% of
the debtor’s total liabilities.
What is the scope of the rules? (Rule 1, Sec. 2)
The rules apply to petitions for rehabilitation Where should a petition for rehabilitation be
filed by corporations, partnerships and associations filed? (Rule 3 Sec. 2)
pursuant to PD 902-A, as amended. Petitions for rehabilitation shall be filed in the
appropriate Regional Trial Court having jurisdiction
How should the rules be construed? (Rule 2, Sec. over the territory where the debtor’s principal office
2) is located.
The rules are to be liberally construed in
order to carry out the objectives of Sections 5(d) and Are the Rules of Court applicable to the
6(c) and (d) of PD 902-A, and to assist the parties in proceedings? (Rule 2, Sec. 2)
obtaining a just, expeditious and inexpensive Yes, the Rules of Court, where appropriate,
determination of cases. shall apply suppletorily to proceedings under the
rules.

What is the nature of the proceedings under the What are the contents of the petition filed by the
rules? (Rule 3) debtor? (Rule 4, Sec. 2)
The proceedings under the rules shall be in (a) name and business of the debtor;
rem. Jurisdiction over all those affected by the (b) nature of debtor’s business;
proceedings shall be considered as acquired upon (c) history of the debtor;
publication of the notice of the commencement of (d) cause of the debtor’s inability to pay its debts;
the proceedings in a newspaper of a general (e) all the pending actions or proceedings known to
circulation in the Philippines. the debtor and the courts or tribunals where they
The proceedings shall also be summary and are pending;
non-adversarial in nature. For example- (f) threats or demands to enforce claims or liens
(a) motions to dismiss, for bills of particulars, for against the debtor;
new trail or for reconsideration, among others, (g) the manner by which the debtor may be
are prohibited (Rule 3,Sec. 1); rehabilitated and how such rehabilitation may
(b) the court may decide matters on the basis of benefit the general body of creditors, employees
affidavits and other documentary evidence ( and stockholders.
Rule 3, Sec. 1);
 Saint Louis University COMMERCIAL LAW 191
2012 BAR OPERATIONS

What should be attached to the petition filed by against the debtor, its guarantors and sureties
the debtor?(Rule 4, Sec.4) not solidarily liable with the debtor;
(a) audited financial statements as of the end of the (c) prohibit the debtor from selling, encumbering,
debtor’s last fiscal year; transferring or disposing in any manner any of
(b) interim financial statements as of the end of the its properties except in the ordinary course of
month prior to the filing of the petition; business;
(c) schedule of debts and liabilities; (d) prohibit the debtor from making any payment of
(d) inventory of assets; its outstanding liabilities as of the date of filing of
(e) rehabilitation plan; the petition;
(f) schedule of the debtor’s cash flow; (e) prohibit the debtor’s suppliers of goods or
(g) affidavit of general financial condition; services from withholding supply of goods or
(h) names of at least three nominees for the services in the ordinary course or business for
position of rehabilitation receiver, including their as long as the debtor makes payments from the
qualifications and contact information; services and goods supplied after the issuance
(i) certificate under oath attesting to the fact that (i) of the stay order;
the filing has been duly authorized, and (ii) the (f) fix the initial hearing on the petition not earlier
directors and stockholders have irrevocably than 45 days but not later than 60 days from the
approved and/or consented to all actions or filing thereof;
matters necessary and desirable to rehabilitate (g) direct the petitioner to publish the order in a
the debtor including, but not limited to, newspaper of general circulation in the
amendments to the articles of incorporation and Philippines once a week for two consecutive
by-laws (or articles of partnership); increase or weeks;
decrease in the authorized capital stock; (h) direct all creditors and interested parties
issuance of bonded indebtedness; alienation, (including the SEC) to file and serve on the
transfer or encumbrance of assets of the debtor, debtor a verified comment or opposition to the
and modification of shareholder’s rights. petition, with supporting affidavits and
documents, not later than 10 days before the
What are the attachments to the petition filed by date of the initial hearing and putting them on
creditor(s)? (Rule 4 Sec. 4) notice that their failure to do so will bar them
(a) rehabilitation plan; from participating in the proceedings.
(b) list of nominees to the position of rehabilitation
receiver; For how long the stay holder to be
effective?(Rule 4, Sec. 11)
Under what circumstance could the petition be The stay order shall be effective from the
dismissed? (Rule 4, Sec. 11) date of its issuance until the dismissal of the petition
The petition shall be dismissed if no or termination of the rehabilitation proceedings.
rehabilitation plan is approved by the court upon the
lapse of 180 days from the date of initial hearing. Could the stay order be modified or terminated?
The court may grant an extension beyond this period Could conditions be set for its continuance?
if it appears by convincing and compelling evidence Could a claim be relieved from the coverage of
that the debtor may be rehabilitated. In no instance, the order?(Rule 4, Sec 12)
however, shall the period for approving or Yes, to all the questions. The court may, on
disapproving a rehabilitation plan exceed 18 months motion or motu proprio, terminate, modify, or set
from the date of filing of the petition. conditions for the continuance of the stay order, or
relieve a claim from the coverage thereof, upon
What are the contents of the order that the court showing that-
shall issue if it finds the petition for rehabilitation (a) any of the allegations of the petition, or any
to be sufficient in form and substance? (Rule 4, of the contents of any attachment, or the verification
Sec. 6 and 11) thereof, has ceased to be true;
If the court finds the petition to be sufficient (b) a creditor does not have adequate
in form and substance, it shall, not later than 5 days protection over property securing its claim; or
from the filing of the petition issue an order which (c) the debtor’s secured obligation is more than
shall, among others: the fair market value of the property subject of the
(a) appoint a rehabilitation receiver and fix his bond; stay and such property is not necessary for the
(b) stay enforcement of all claims, whether for rehabilitation of the debtor.
money or otherwise and whether such
enforcement is by court action or otherwise, What is the concept of adequate protection over
property?(Rule 4, Sec 12)
 Saint Louis University COMMERCIAL LAW 192
2012 BAR OPERATIONS

A creditor does not have adequate plan and its provisions being binding upon the
protection over property securing its claim if it can be debtor and all the persons who may be affected by
shown that- it, including the creditors, whether or not such
persons have participated in the proceedings or
(a) the debtor fails or refuses to honor a pre-existing
opposed the plan or whether or not their claims have
agreement with the creditor to keep the property
been scheduled.
insured;
(b) the debtor fails or refuses to take commercially
What is the primary task of the rehabilitation
reasonable steps to maintain the property; or
receiver? Does he take over the management
(c) the property has depreciated to the extent that
and control of the debtor? (Rule 4, Sec 14)
the creditor is undersecured.
The rehabilitation receiver implements the
rehabilitation plan after its approval by the court. His
What are the contents of the rehabilitation plan?
primary task is to study the best way to rehabilitate
(Rule 4, Sec 5)
the debtor and to ensure that the value of the
(a) the desired business targets or goal, and the
debtor’s property is reasonably maintained pending
duration and coverage of the rehabilitation;
the determination of whether or not the debtor
(b) the terms and conditions of such rehabilitation;
should be rehabilitated.
(c) the material financial commitments to support
the rehabilitation plan; He does not take over the management and
(d) the means for the execution of the rehabilitation control of the debtor but simply oversees and
plan, e.g. conversion of debts into equity, monitors closely the operations of the debtor during
restructuring the debts, dacion en pago, sale of the pendency of the proceedings. This reflects the
assets or controlling interest; concept of debtor-in-place. For this purpose, he has
(e) liquidation analysis, i.e. an estimate of the been granted the powers, duties and functions of a
proportion of the claims that the creditors and receiver under PD 1402-A, as amended, and the
stockholders would receive if the debtor’s Rules of Court.
properties were liquidated;
(f) other relevant information to enable a  

reasonable investor to make an informed Proposed Interim Rules Of Procedure

decision on the feasibility of the rehabilitation Governing Intra-Corporate Controversies
plan. Under R.A. No. 8799
A.M. No. 01-2-04-SC
What is the power of the court to cram down a (Effective April 1, 2001)
rehabilitation plan?(Rule 4, Sec. 23)
The power of the court to cram down a
rehabilitation plan refers to its authority to approve a RULE I
rehabilitation plan even over the opposition of the
creditors holding a majority of the total liabilities of GENERAL PROVISIONS
the debtor if, in its judgment, the rehabilitation of the
debtor is feasible and the opposition of the creditors SECTION 1. (a) Cases covered. - These Rules
is manifestly unreasonable. In determining whether shall govern the procedure to be observed in civil
or not the opposition of the creditor is manifestly cases involving the following:
unreasonable, the court shall consider the following:
(a) the plan would likely provide the objecting class (1) Devices or schemes employed by, or any
of the creditors with compensation greater than act of, the board of directors, business
that which they would have received if the associates, officers or partners, amounting
assets of the debtor were sold by the liquidator to fraud or misrepresentation which may be
within a three-month period; detrimental to the interest of the public
(b) that the shareholders or owners of the debtor and/or of the stockholders, partners, or
lost at least their controlling interest as a result members of any corporation, partnership, or
of the plan; and association;
(c) that the rehabilitation receiver has (2) Controversies arising out of intra-corporate,
recommended approval of the plan. partnership, or association relations,
between and among stockholders,
What is the effect of the approval of the court of members, or associates; and between, any
the rehabilitation plan on the debtor and or all of them and the corporation,
creditors?(Rule 4, Sec. 24) partnership, or association of which they are
The approval of the rehabilitation plan by the stockholders, members, or associates,
court shall result, among other effects, in the said respectively;
 Saint Louis University COMMERCIAL LAW 193
2012 BAR OPERATIONS

(3) Controversies in the election or appointment mail). In such cases, the date of transmission shall
of directors, trustees, officers, or managers be deemed to be prima facie the date of service.
of corporations, partnerships, or
SEC. 7. Signing of pleadings, motions and other
associations;
papers. - Every pleading, motion, and other paper of
(4) Derivative suits; and
a party represented by an attorney shall be signed
(5) Inspection of corporate books.
by at least one attorney of record in the attorney’s
(b) Prohibition against nuisance and individual name, whose address shall be stated. A
harassment suits. - Nuisance and harassment suits party who is not represented by an attorney shall
are prohibited. In determining whether a suit is a sign the pleading, motion, or other paper and state
nuisance or harassment suit, the court shall his address.
consider, among others, the following:
The signature of an attorney or party constitutes
(1) The extent of the shareholding or interest of a certification by the signer that he has read the
the initiating stockholder or member; pleading, motion, or other paper; that to the best of
(2) Subject matter of the suit; his knowledge, information, and belief formed after
(3) Legal and factual basis of the complaint; reasonable inquiry, it is well grounded in fact and is
(4) Availability of appraisal rights for the act or warranted by existing law or a good faith argument
acts complained of; and for the extension, modification, or reversal of existing
(5) Prejudice or damage to the corporation, jurisprudence; and that it is not interposed for any
partnership, or association in relation to the improper purpose, such as to harass or to cause
relief sought. unnecessary delay or needless increase in the cost
of litigation.
In case of nuisance or harassment suits, the
court may, motu proprio or upon motion, forthwith If a pleading, motion, or other paper is not
dismiss the case. signed, it shall be stricken off the record unless it is
promptly signed by the pleader or movant, after he is
SEC. 2. Suppletory application of the Rules of
notified of the omission.
Court. - The Rules of Court, in so far as they may be
applicable and are not inconsistent with these Rules, SEC. 8. Prohibited pleadings. - The following
are hereby adopted to form an integral part of these pleadings are prohibited:
Rules.
(1) Motion to dismiss;
SEC. 3. Construction. - These Rules shall be (2) Motion for a bill of particulars;
liberally construed in order to promote their objective (3) Motion for new trial, or for reconsideration of
of securing a just, summary, speedy and judgment or order, or for re-opening of trial;
inexpensive determination of every action or (4) Motion for extension of time to file pleadings,
proceeding. affidavits or any other paper, except those
filed due to clearly compelling reasons.
SEC. 4. Executory nature of decisions and
Such motion must be verified and under
orders. - All decisions and orders issued under these
oath; and
Rules shall immediately be executory. No appeal or
(5) Motion for postponement and other motions
petition taken therefrom shall stay the enforcement
of similar intent, except those filed due to
or implementation of the decision or order, unless
clearly compelling reasons. Such motion
restrained by an appellate court. Interlocutory
must be verified and under oath.
orders shall not be subject to appeal.
SEC. 5. Venue. - All actions covered by these
SEC. 9. Assignment of cases. - All cases filed
Rules shall be commenced and tried in the Regional
under these Rules shall be tried by judges
Trial Court which has jurisdiction over the principal
designated by the Supreme Court to hear and
office of the corporation, partnership, or association
decide cases transferred from the Securities and
concerned. Where the principal office of the
Exchange Commission to the Regional Trial Courts
corporation, partnership or association is registered
and filed directly with said courts pursuant to
in the Securities and Exchange Commission as
Republic Act No. 8799, otherwise known as the
Metro Manila, the action must be filed in the city or
Securities and Regulation Code.
municipality where the head office is located.
SEC. 6. Service of pleadings. - When so RULE 2
authorized by the court, any pleading and/or
COMMENCEMENT OF ACTION
document required by these Rules may be filed with
AND PLEADINGS
the court and/or served upon the other parties by
facsimile transmission (fax) or electronic mail (e-
 Saint Louis University COMMERCIAL LAW 194
2012 BAR OPERATIONS

SECTION 1. Commencement of action. - An (b) Service upon foreign private juridical entity. -
action under these Rules is commenced by the filing When the defendant is a foreign private juridical
of a verified complaint with the proper Regional Trial entity which is transacting or has transacted
Court. business in the Philippines, service may be made on
its resident agent designated in accordance with law
SEC. 2. Pleadings allowed. - The only
for that purpose, or, if there be no such agent, on the
pleadings allowed to be filed under these Rules are
government official designated by law to that effect,
the complaint, answer, compulsory counterclaims or
or on any of its officers or agents within the
cross-claims pleaded in the answer, and the answer
Philippines.
to the counterclaims or cross-claims.
SEC. 6. Answer. - The defendant shall file his
SEC. 3. Verification. - The complaint and the
answer to the complaint, serving a copy thereof on
answer shall be verified by an affidavit stating that
the plaintiff, within fifteen (15) days from service of
the affiant has read the pleading and the allegations
summons.
therein are true and correct based on his own
personal knowledge or on authentic records. In the answer, the defendant shall:
SEC. 4. Complaint. - The complaint shall state (1) Specify each material allegation of fact the
or contain: truth of which he admits;
(2) Specify each material allegation of fact the
(1) the names, addresses, and other relevant
truth of which he does not admit. Where the
personal or juridical circumstances of the
defendant desires to deny only a part of an
parties;
averment, he shall specify so much of it as
(2) all facts material and relevant to the
true and material and shall deny only the
plaintiff’s cause or causes of action, which
remainder;
shall be supported by affidavits of the
(3) Specify each material allegation of fact as to
plaintiff or his witnesses and copies of
which truth he has no knowledge or
documentary and other evidence supportive
information sufficient to form a belief, and
of such cause or causes of action;
this shall have the effect of a denial;
(3) the law, rule, or regulation relied upon,
(4) State the defenses, including grounds for a
violated, or sought to be enforced;
motion to dismiss under the Rules of Court;
(4) a certification that (a) the plaintiff has not
(5) State the law, rule, or regulation relied upon;
theretofore commenced any action or filed
(6) Address each of the causes of action stated
any claim involving the same issues in any
in the complaint;
court, tribunal or quasi-judicial agency, and,
(7) State the facts upon which he relies for his
to the best of his knowledge, no such other
defense, including affidavits of witnesses
action or claim is pending therein; (b) if there
and copies of documentary and other
is such other action or claim, a complete
evidence supportive of such cause or
statement of the present status thereof; and
causes of action;
(c) if he should thereafter learn that the
(8) State any compulsory counterclaim/s and
same or similar action or claim has been
cross-claim/s; and
filed or is pending, he shall report that fact
(9) State the relief sought.
within five (5) days therefrom to the court;
and The answer to counterclaims or cross-claims
(5) the relief sought. shall be filed within ten (10) days from service of the
answer in which they are pleaded.
SEC. 5. Summons. - The summons and the
complaint shall be served together not later than five SEC. 7. Effect of failure to answer. - If the
(5) days from the date of filing of the complaint. defendant fails to answer within the period above
provided, he shall be considered in default. Upon
(a) Service upon domestic private juridical
motion or motu proprio, the court shall render
entities. - If the defendant is a domestic corporation,
judgment either dismissing the complaint or granting
service shall be deemed adequate if made upon any
the relief prayed for as the records may warrant. In
of the statutory or corporate officers as fixed by the
no case shall the court award a relief beyond or
by-laws or their respective secretaries. If the
different from that prayed for.
defendant is a partnership, service shall be deemed
adequate if made upon any of the managing or SEC. 8. Affidavits, documentary and other
general partners or upon their respective evidence. - Affidavits shall be based on personal
secretaries. If the defendant is an association, knowledge, shall set forth such facts as would be
service shall be deemed adequate if made upon any admissible in evidence, and shall show affirmatively
of its officers or their respective secretaries. that the affiant is competent to testify on the matters
 Saint Louis University COMMERCIAL LAW 195
2012 BAR OPERATIONS

stated therein. The affidavits shall be in question SECTION 1. Pre-trial conference; mandatory
and answer form, and shall comply with the rules on nature. - Within five (5) days after the period for
admissibility of evidence. availment of, and compliance with, the modes of
discovery prescribed in Rule 3 hereof, whichever
Affidavits of witnesses as well as documentary
comes later, the court shall issue and serve an order
and other evidence shall be attached to the
immediately setting the case for pre-trial conference
appropriate pleading; Provided, however, that
and directing the parties to submit their respective
affidavits, documentary and other evidence not so
pre-trial briefs. The parties shall file with the court
submitted may be attached to the pre-trial brief
and furnish each other copies of their respective pre-
required under these Rules. Affidavits and other
trial brief in such manner as to ensure its receipt by
evidence not so submitted shall not be admitted in
the court and the other party at least five (5) days
evidence, except in the following cases:
before the date set for the pre-trial.
(1) Testimony of unwilling, hostile, or adverse
The parties shall set forth in their pre-trial briefs,
party witnesses. A witness is presumed
among other matters, the following:
prima facie hostile if he fails or refuses to
execute an affidavit after a written request (1) Brief statement of the nature of the case,
therefor; which shall summarize the theory or theories
(2) If the failure to submit the evidence is for of the party in clear and concise language;
meritorious and compelling reasons; and (2) Allegations expressly admitted by either or
(3) Newly discovered evidence. both parties;
(3) Allegations deemed admitted by either or
In case of (2) and (3) above, the affidavit and
both parties;
evidence must be submitted not later than five (5)
(4) Documents not specifically denied under
days prior to its introduction in evidence.
oath by either or both parties;
(5) Amendments to the pleadings;
(6) Statement of the issues, which shall
RULE 3 separately summarize the factual and legal
MODES OF DISCOVERY issues involved in the case;
(7) Names of witnesses to be presented and the
SECTION 1. In general. - A party can only avail summary of their testimony as contained in
of any of the modes of discovery not later than their affidavits supporting their positions on
fifteen (15) days from the joinder of issues. each of the issues;
(8) All other pieces of evidence, whether
SEC. 2. Objections. - Any mode of discovery documentary or otherwise and their
such as interrogatories, request for admission, respective purposes;
production or inspection of documents or things, (9) Specific proposals for an amicable
may be objected to within ten (10) days from receipt settlement;
of the discovery device and only on the ground that (10)Possibility of referral to mediation or other
the matter requested is patently incompetent, alternative modes of dispute resolution;
immaterial, irrelevant or privileged in nature. (11)Proposed schedule of hearings; and
The court shall rule on the objections not later (12)Such other matters as may aid in the just
than fifteen (15) days from the filing thereof. and speedy disposition of the case.
SEC. 3. Compliance. - Compliance with any SEC. 2. Nature and purpose of pre-trial
mode of discovery shall be made within ten (10) conference. - During the pre-trial conference, the
days from receipt of the discovery device, or if there court shall, with its active participation, ensure that
are objections, from receipt of the ruling of the court. the parties consider in detail all of the following:
SEC. 4. Sanctions. - The sanctions prescribed (1) The possibility of an amicable settlement;
in the Rules of Court for failure to avail of, or refusal (2) Referral of the dispute to mediation or other
to comply with, the modes of discovery shall apply. forms of dispute resolution;
In addition, the court may, upon motion, declare a (3) Facts that need not be proven, either
party non-suited or as in default, as the case may because they are matters of judicial notice
be, if the refusal to comply with a mode of discovery or expressly or deemed admitted;
is patently unjustified. (4) Amendments to the pleadings;
(5) The possibility of obtaining stipulations and
admissions of facts and documents;
RULE 4 (6) Objections to the admissibility of testimonial,
documentary and other evidence;
PRE-TRIAL
 Saint Louis University COMMERCIAL LAW 196
2012 BAR OPERATIONS

agreed upon by the parties.

(7) Objections to the form or substance of any
Only persons whose affidavits were submitted
affidavit, or part thereof;
may be presented as witnesses, except in cases
(8) Simplification of the issues;
specified in section 8, Rule 2 of these Rules. The
(9) The possibility of submitting the case for
affidavits of the witnesses shall serve as their direct
decision on the basis of position papers,
testimonies, subject to cross-examination in
affidavits, documentary and real evidence;
accordance with existing rules on evidence.
(10)A complete schedule of hearing dates; and
(11)Such other matters as may aid in the speedy SEC. 2. Trial schedule. - Unless judgment is
and summary disposition of the case. rendered pursuant to Rule 4 of these Rules, the
initial hearing shall be held not later than thirty (30)
SEC. 3. Termination. - The preliminary
days from the date of the pre-trial order. The
conference shall be terminated not later than ten
hearings shall be completed not later than sixty (60)
(10) days after its commencement, whether or not
days from the date of the initial hearing, thirty (30)
the parties have agreed to settle amicably.
days of which shall be allotted to the plaintiffs and
SEC. 4. Judgment before pre-trial. - If, after thirty (30) days to the defendants in the manner
submission of the pre-trial briefs, the court prescribed in the pre-trial order. The failure of a
determines that, upon consideration of the party to present a witness on a scheduled hearing
pleadings, the affidavits and other evidence date shall be deemed a waiver of such hearing date.
submitted by the parties, a judgment may be However, a party may present such witness or
rendered, the court may order the parties to file witnesses within his remaining allotted hearing
simultaneously their respective memoranda within a dates.
non-extendible period of twenty (20) days from
SEC. 3. Written offer of evidence. - Evidence
receipt of the order. Thereafter, the court shall
not otherwise admitted by the parties or ruled upon
render judgment, either full or otherwise, not later
by the court during the pre-trial conference shall be
than ninety (90) days from the expiration of the
offered in writing not later than five (5) days from the
period to file the memoranda.
completion of the presentation of evidence of the
SEC. 5. Pre-trial order; judgment after pre-trial. party concerned. The opposing party shall have five
- The proceedings in the pre-trial shall be recorded. (5) days from receipt of the offer to file his comments
Within ten (10) days after the termination of the pre- or objections. The court shall make its ruling on the
trial, the court shall issue an order which shall recite offer within five (5) days from the expiration of the
in detail the matters taken up in the conference, the period to file comments or objections.
actions taken thereon, the amendments allowed in
SEC. 4. Memoranda. - Immediately after ruling
the pleadings, and the agreements or admissions
on the last offer of evidence, the court shall order the
made by the parties as to any of the matters
parties to simultaneously file, within thirty (30) days
considered. The court shall rule on all objections to
from receipt of the order, their respective
or comments on the admissibility of any
memoranda. The memoranda shall contain the
documentary or other evidence, including any
following:
affidavit or any part thereof. Should the action
proceed to trial, the order shall explicitly define and (1) A “Statement of the Case,” which is a clear
limit the issues to be tried and shall strictly follow the and concise statement of the nature of the
form set forth in Annex “A” of these Rules. action and a summary of the proceedings;
(2) A “Statement of the Facts,” which is a clear
The contents of the order shall control the
and concise statement in narrative form of
subsequent course of the action, unless modified
the established facts, with reference to the
before trial to prevent manifest injustice.
testimonial, documentary or other evidence
After the pre-trial, the court may render in support thereof;
judgment, either full or partial, as the evidence (3) A “Statement of the Issues,” which is a clear
presented during the pre-trial may warrant. and concise statement of the issues
presented to the court for resolution;
(4) The “Arguments,” which is a clear and
RULE 5
concise presentation of the argument in
TRIAL support of each issue; and
(5) The “Relief,” which is a specification of the
SECTION 1. Witnesses. - If the court deems order or judgment which the party seeks to
necessary to hold hearings to determine specific obtain.
factual matters before rendering judgment, it shall, in
No reply memorandum shall be allowed.
the pre-trial order, set the case for trial on the dates
 Saint Louis University COMMERCIAL LAW 197
2012 BAR OPERATIONS

SEC. 5. Decision after trial. - The court shall SEC. 7. Effect of failure to answer. - If the
render a decision not later than (90) days from the defendant fails to file an answer within the period
lapse of the period to file the memoranda, with or above provided, the court shall, within ten (10) days
without said pleading having been filed. from the lapse of said period, motu proprio or on
motion, render judgment as may be warranted by
RULE 6
the allegations of the complaint, as well as the
ELECTION CONTESTS affidavits, documentary and other evidence on
record. In no case shall the court award a relief
SECTION 1. Cases covered. - The provisions of beyond or different from that prayed for.
this rule shall apply to election contests in stock and
non-stock corporations. SEC. 8. Trial. - If the court deems it necessary
to hold a hearing to clarify specific factual matters
SEC. 2. Definition. - An election contest refers before rendering judgment, it shall, within ten (10)
to any controversy or dispute involving title or claim days from the filing of the last pleading, issue an
to any elective office in a stock or non-stock order setting the case for hearing for the purpose.
corporation, the validation of proxies, the manner The order shall, in clear and concise terms, specify
and validity of elections, and the qualifications of
the factual matters the court desires to be clarified
candidates, including the proclamation of winners, to and the witnesses, whose affidavits have been
the office of director, trustee or other officer directly submitted, who will give the necessary clarification.
elected by the stockholders in a close corporation or
by members of a non-stock corporation where the The hearing shall be set on a date not later than
articles of incorporation or by-laws so provide. ten (10) days from the date of the order, and shall be
completed not later than fifteen (15) days from the
SEC. 3. Complaint. - In addition to the
date of the first hearing. The affidavit of a witness
requirements in section 4, Rule 2 of these Rules, the who fails to appear for clarificatory questions of the
complaint in an election contest must state the court shall be ordered stricken off the record.
following:
SEC. 9. Decision. - The Court shall render a
(1) The case was filed within fifteen (15) days decision within fifteen (15) days from receipt of the
from the date of the election if the by-laws of last pleading, or from the date of the last hearing as
the corporation do not provide for a
the case may be. The decision shall be based on
procedure for resolution of the controversy, the pleadings, affidavits, documentary and other
or within fifteen (15) days from the resolution evidence attached thereto and the answers of the
of the controversy by the corporation as
witnesses to the clarificatory questions of the court
provided in its by-laws; and given during the hearings.
(2) The plaintiff has exhausted all intra-
corporate remedies in election cases as
provided for in the by-laws of the RULE 7
corporation.
INSPECTION OF CORPORATE BOOKS
SEC. 4. Duty of the court upon the filing of the AND RECORDS
complaint. - Within two (2) days from the filing of the
complaint, the court, upon a consideration of the
SECTION 1. Cases covered. - The provisions of
allegations thereof, may dismiss the complaint
this Rule shall apply to disputes exclusively involving
outright if it is not sufficient in form and substance,
the rights of stockholders or members to inspect the
or, if it is sufficient, order the issuance of summons
books and records and/or to be furnished with the
which shall be served, together with a copy of the
financial statements of a corporation, under sections
complaint, on the defendant within two (2) days from
74 and 75 of Batas Pambansa Blg. 68, otherwise
its issuance.
known as the Corporation Code of the Philippines.
SEC. 5. Answer. - The defendant shall file his
SEC. 2. Complaint. – In addition to the
answer to the complaint, serving a copy thereof on
requirements in section 4, Rule 2 of these Rules, the
the plaintiff, within ten (10) days from service of
complaint must state the following:
summons and the complaint. The answer shall
contain the matters required in section 6, Rule 2 of (1) The case is for the enforcement of plaintiff’s
these Rules. right of inspection of corporate orders or
records and/or to be furnished with financial
SEC. 6. Affidavits, documentary and other
statements under sections 74 and 75 of the
evidence. - The parties shall attach to the complaint
Corporation Code of the Philippines;
and answer the affidavits of witnesses, documentary
(2) A demand for inspection and copying of
and other evidence in support thereof, if any.
books and records and/or to be furnished
 Saint Louis University COMMERCIAL LAW 198
2012 BAR OPERATIONS

with financial statements made by the copying, and state, in clear and categorical terms,
plaintiff upon defendant; the limitations and conditions to the exercise of the
(3) The refusal of defendant to grant the right allowed or enforced.
demands of the plaintiff and the reasons
given for such refusal, if any; and
RULE 8
(4) The reasons why the refusal of defendant to
grant the demands of the plaintiff is DERIVATIVE SUITS
unjustified and illegal, stating the law and
jurisprudence in support thereof. SECTION 1. Derivative action. - A stockholder
or member may bring an action in the name of a
SEC. 3. Duty of the court upon the filing of the corporation or association, as the case may be,
complaint. - Within two (2) days from the filing of the provided, that:
complaint, the court, upon a consideration of the
allegations thereof, may dismiss the complaint (1) He was a stockholder or member at the time
outright if it is not sufficient in form and substance, the acts or transactions subject of the action
or, if it is sufficient, order the issuance of summons occurred and at the time the action was
which shall be served, together with a copy of the filed;
complaint, on the defendant within two (2) days from (2) He exerted all reasonable efforts, and
its issuance. alleges the same with particularity in the
complaint, to exhaust all remedies available
SEC. 4. Answer. – The defendant shall file his under the articles of incorporation, by-laws,
answer to the complaint, serving a copy thereof on laws or rules governing the corporation or
the plaintiff, within ten (10) days from service of partnership to obtain the relief he desires;
summons and the complaint. In addition to the (3) No appraisal rights are available for the act
requirements in section 6, Rule 2 of these Rules, the or acts complained of; and
answer must state the following: (4) The suit is not a nuisance or harassment
(1) The grounds for the refusal of defendant to suit.
grant the demands of the plaintiff, stating the In case of nuisance or harassment suit, the court
law and jurisprudence in support thereof; shall forthwith dismiss the case.
(2) The conditions or limitations on the exercise
of the right to inspect which should be SEC. 2. Discontinuance. - A derivative action
imposed by the court; and shall not be discontinued, compromised or settled
(3) The cost of inspection, including manpower without approval of the court. During the pendency
and photocopying expenses, if the right to of the action, any sale of shares of the complaining
inspect is granted. stockholder shall be approved by the court. If the
court determines that the interest of the stockholders
SEC. 5. Affidavits, documentary and other or members will be substantially affected by the
evidence. – The parties shall attach to the complaint discontinuance, compromise or settlement, the court
and answer the affidavits of witnesses, documentary may direct that notice, by publication or otherwise,
and other evidence in support thereof, if any. be given to the stockholders or members whose
SEC. 6. Effect of failure to answer. – If the interests it determines will be so affected.
defendant fails to file an answer within the period
above provided, the court, within ten (10) days from RULE 9
the lapse of the said period, motu proprio or upon
motion, shall render judgment as warranted by the MANAGEMENT COMMITTEE
allegations of the complaint, as well as the affidavits,
documentary and other evidence on record. In no SECTION 1. Creation of a management
case shall the court award a relief beyond or committee. - As an incident to any of the cases filed
different from that prayed for. under these Rules or the Interim Rules on Corporate
SEC. 7. Decision. – The court shall render a Rehabilitation, a party may apply for the
decision based on the pleadings, affidavits and appointment of a management committee for the
documentary and other evidence attached thereto corporation, partnership or association, when there
within fifteen (15) days from receipt of the last is imminent danger of:
pleading. A decision ordering defendants to allow (1) Dissipation, loss, wastage or destruction of
the inspection of books and records and/or to furnish assets or other properties; and
copies thereof shall also order the plaintiff to deposit (2) Paralyzation of its business operations
the estimated cost of the manpower necessary to which may be prejudicial to the interest of
produce the books and records and the cost of the minority stockholders, parties-litigants or
 Saint Louis University COMMERCIAL LAW 199
2012 BAR OPERATIONS

the general public. charged with mismanagement, dissipation or

wastage of the properties of the entity under
SEC. 2. Receiver. - In the event the court finds
management; or
the application to be sufficient in form and
(3) He is related by consanguinity or affinity
substance, the court shall issue an order: (a)
within the fourth civil degree to any director,
appointing a receiver of known probity, integrity and
officer or stockholder charged with
competence and without any conflict of interest as
mismanagement, dissipation or wastage of
hereunder defined to immediately take over the
the properties of the entity under
corporation, partnership or association, specifying
management.
such powers as it may deem appropriate under the
circumstances, including any of the powers specified SEC. 5. Powers and functions of the
in section 5 of this Rule; (b) fixing the bond of the management committee. - Upon assumption to
receiver; (c) directing the receiver to make a report office of the management committee, the receiver
as to the affairs of the entity under receivership and shall immediately render a report and turn over the
on other relevant matters within sixty (60) days from management and control of the entity under his
the time he assumes office; (d) prohibiting the receivership to the management committee.
incumbent management of the company,
The management committee shall have the
partnership or association from selling,
power to take custody of and control all assets and
encumbering, transferring or disposing in any
properties owned or possessed by the entity under
manner any of its properties except in the ordinary
management. It shall take the place of the
course of business; and (e) directing the payment in
management and board of directors of the entity
full of all administrative expenses incurred after the
under management, assume their rights and
issuance of the order.
responsibilities, and preserve the entity’s assets and
SEC. 3. Receiver and management committee properties in its possession.
as officers of the court. - The receiver and the
Without limiting the generality of the foregoing,
members of the management committee in the
the management committee shall exercise the
exercise of their powers and performance of their
following powers and functions:
duties are considered officers of the court and shall
be under its control and supervision. (1) To investigate the acts, conduct, properties,
liabilities, and financial condition of the
SEC. 4. Composition of the management
corporation, association or partnership
committee. - After due notice and hearing, the court
under management;
may appoint a management committee composed of
(2) To examine under oath the directors and
three (3) members chosen by the court. In the
officers of the entity and any other witnesses
appointment of the members of the management
that it may deem appropriate;
committee, the following qualifications shall be taken
(3) To report to the court any fact ascertained
into consideration by the court:
by it pertaining to the causes of the
(1) Expertise and acumen to manage and problems, fraud, misconduct,
operate a business similar in size and mismanagement and irregularities
complexity as that of the corporation, committed by the stockholders, directors,
association or partnership sought to be put management or any other person;
under management committee; (4) To employ such person or persons such as
(2) Knowledge in management and finance; lawyers, accountants, auditors, appraisers
(3) Good moral character, independence and and staff as are necessary in performing its
integrity; functions and duties as management
(4) A lack of a conflict of interest as defined in committee;
these Rules; and (5) To report to the court any material adverse
(5) Willingness and ability to file a bond in such change in the business of the corporation,
amount as may be determined by the court. association or partnership under
management;
Without limiting the generality of the following, a
(6) To evaluate the existing assets and
member of a management committee may be
liabilities, earnings and operations of the
deemed to have a conflict of interest if:
corporation, association or partnership
(1) He is engaged in a line of business which under management;
competes with the corporation, association (7) To determine and recommend to the court
or partnership sought to be placed under the best way to salvage and protect the
management; interest of the creditors, stockholders and
(2) He is a director, officer or stockholder the general public, including the
 Saint Louis University COMMERCIAL LAW 200
2012 BAR OPERATIONS

rehabilitation of the corporation, association functions as may be necessary to operate the

or partnership under management; business of the entity under management and
(8) To prohibit and report to the court any preserve its assets.
encumbrance, transfer, or disposition of the
SEC. 7. Transactions deemed to be in bad faith.
debtor’s property outside of the ordinary
- All transactions made by the previous management
course of business or what is allowed by the
and directors shall be deemed fraudulent and are
court;
rescissible if made within thirty (30) days prior to the
(9) To prohibit and report to the court any
appointment of the receiver or management
payments made outside of the ordinary
committee or during their incumbency as receiver or
course of business;
management committee.
(10)To have unlimited access to the employees,
premises, books, records and financial SEC. 8. Fees and expenses. - The receiver or
documents during business hours; the management committee and the persons hired
(11)To inspect, copy, photocopy or photograph by it shall be entitled to reasonable professional fees
any document, paper, book, account or and reimbursement of expenses which shall be
letter, whether in the possession of the considered as administrative expenses.
corporation, association or partnership or
other persons; SEC. 9. Immunity from suit. - The receiver and
(12)To gain entry into any property for the members of the management committee and the
purposes of inspecting, measuring, persons employed by them shall not be subject to
surveying, or photographing it or any any action, claim or demand in connection with any
act done or omitted by them in good faith in the
designated relevant object or operation
thereon; exercise of their functions and powers. All official
(13)To bring to the attention of the court any acts and transactions of the receiver or management
committee duly approved or ratified by the court
material change affecting the entity’s ability
to meet its obligations; shall render them immune from any suit in
(14)To revoke resolutions passed by the connection with such act or transaction.
Executive Committee or Board of SEC. 10. Reports. - Within a period of sixty (60)
Directors/Trustees or any governing body of days from the appointment of its members, the
the entity under management and pass management committee shall make a report to the
resolution in substitution of the same to court on the state of the corporation, partnership or
enable it to more effectively exercise its association under management. Thereafter, the
powers and functions; management committee shall report every three (3)
(15)To modify, nullify or revoke transactions months to the court or as often as the court may
coming to its knowledge which it deems require on the general condition of the entity under
detrimental or prejudicial to the interest of management.
the entity under management;
(16)To recommend the termination of the SEC. 11. Removal and replacement of a
proceedings and the dissolution of the entity member of the management committee. - A member
if it determines that the continuance in of the management committee is deemed removed
business of such entity is no longer feasible upon appointment by the court of his replacement
or profitable or no longer works to the best chosen in accordance with section 4 of this Rule.
interest of the stockholders, parties-litigants, SEC. 12. Discharge of the management
creditors or the general public; committee. - The management committee shall be
(17)To apply to the court for any order or discharged and dissolved under the following
directive that it may deem necessary or circumstances:
desirable to aid it in the exercise of its
powers and performance of its duties and (1) Whenever the court, on motion or motu
functions; and proprio, has determined that the necessity
(18)To exercise such other powers as may, from for the management committee no longer
time to time, be conferred upon it by the exists;
court. (2) By agreement of the parties; and
(3) Upon termination of the proceedings.
SEC. 6. Action by management committee. - A
majority of its members shall be necessary for the Upon its discharge and dissolution, the
management committee to act or make a decision. management committee shall submit its final report
The chairman of the management committee shall and render an accounting of its management within
be chosen by the members from among themselves. such reasonable time as the court may allow.
The committee may delegate its management
 Saint Louis University COMMERCIAL LAW 201
2012 BAR OPERATIONS

RULE 10 effect on 1 April 2001 following its publication in two

(2) newspapers of general circulation in the
PROVISIONAL REMEDIES
Philippines.

SECTION 1. Provisional remedies. - A party

may apply for any of the provisional remedies Annex “A”
provided in the Rules of Court as may be available
for the purposes. However, no temporary restraining Republic of the Philippines
order or status quo order shall be issued save in _______ Judicial Region
exceptional cases and only after hearing the parties Regional Trial Court
and the posting of a bond. Branch ___

RULE 11
NAME(s) OF PLAINTIFF/S,
SANCTIONS Plaintiff/s,
- versus - Case No. __________
SECTION 1. Sanctions on the parties or
NAME(s) OF DEFENDANT/S,
counsel. - In any of the following cases, the court
Defendant/s.
may, upon motion or motu proprio, impose
x———————————x
appropriate sanctions:
(1) In case the court determines in the course of PRE-TRIAL ORDER
the proceeding that the action is a nuisance
or harassment suit; I. Summary of the Case
(2) In case a pleading, motion or other paper is
filed in violation of section 7, Rule 1 of these II. Preliminary Matters
Rules; A. Amendments allowed in the pleadings
(3) In case a party omits or violates the B. Rulings on all objections to or comments on
certification required under section 4, Rule 2 admissibility of any documentary or other
of these Rules; evidence
(4) In case of unwarranted denials in the C. Other matters taken up in conference not
answer to the complaint; covered by the subsequent items and
(5) In case of willful concealment or non- actions taken thereon.
disclosure of material facts or evidence;
III. Statement of the Facts
The sanctions may include an order to pay the A. Admitted
other party or parties the amount of the reasonable B. Disputed
expenses incurred because of the act complained
1. Version of the Plaintiff
of, including reasonable attorney’s fees. 2. Version of the Defendant
SEC. 2. Disciplinary sanctions on the judge. -
The presiding judge may, upon a verified complaint IV. Issues to be Resolved
filed with the Office of the Court Administrator, be A. Factual
subject to disciplinary action under any of the B. Legal
following cases:
V. Applicable Laws
(1) Failure to observe the special summary
procedures prescribed in these Rules; or VI. Evidence for the Parties
(2) Failure to issue a pre-trial order in the form
prescribed in these Rules. All evidence to be adduced and presented by
both parties shall be limited to those identified
RULE 12 below. All documentary evidence have already
been pre-marked and copies thereof, after
FINAL PROVISIONS comparison with the original, have been given the
other party or such party has been given an
SECTION 1. Severability. - If any provision or opportunity to examine the same in cases when
section of these Rules is held invalid, the remaining generating copies proves impractical. The
provisions or sections shall not be affected thereby. testimonies of the witnesses have all been reduced
SEC. 2. Effectivity. - These Rules shall take to affidavit form in accordance with these Rules and
 Saint Louis University COMMERCIAL LAW 202
2012 BAR OPERATIONS

copies thereof given to the other party. scheduled not later than thirty (30) days from the
No other evidence shall be allowed other than completion at the pre-trial, shall be strictly followed
those indicated below except in accordance with and all postponements by either party shall be
section 8, Rule 2 of the Interim Rules of Procedure deducted from such party’s allotted time to present
for Intra-Corporate Controversies. evidence.)

A. Evidence of the Plaintiff A. Schedule of Plaintiff’s Presentation of Evidence

1. Documentary Evidence
a) Document No. 1 (Exh. ___ ) B. Schedule of Defendant’s Presentation of
(1) Name/Type Evidence
(2) Pre-Marking Number
(3) Summary
(4) Purpose  
 

b) Document No. 2 (Exh. ___ ) VIII. Securities and Exchange Commission

(1) Name/Type Reorganization Decree
(2) Pre-Marking Number Revised Securities Act
(3) Summary PD 902-A
(4) Purpose
(Additional documentary evidence shall be
similarly presented)
SEC
2. Testimonial Evidence
a) Name of First Witness ‐ agency entrusted with the enforcement of all
(1) Purpose of the testimony laws affecting corps., partnership and
(2) Estimated length of testimony association
b) Name of Second Witness ‐ Composition:
(1) Purpose of the testimony  5 Commissioners – 1 chair (7 years)
(2) Estimated length of testimony  4 Associate Com
(Additional witnesses shall be similarly o 2 (3 years)
presented) o 2 (5 years)
3. Other Evidence
B. Evidence of the Defendant Quorum
1. Documentary Evidence ‐ The presence of 3 Comm is sufficient to
a) Document No. 1 (Exh. ___ ) constitute quorum. In the absence of the
(1) Name/Type chairman – presiding officer will the most Senior
(2) Pre-Marking Number Officer
(3) Summary
(4) Purpose  Q: Can the SEC form a committee to hear a
b) Document No. 2 (Exh. ___ ) dispute?
(1) Name/Type A: Yes, because in the exercise of its authority, it
(2) Pre-Marking Number shall have the power to unlist the aid and
(3) Summary support of and to deputize any and all
(4) Purpose enforcement agencies of the gov’t, civil or
(Additional documentary evidence shall be military as well as any private institution, corp.,
similarly presented) form, association or person
2. Testimonial Evidence  If there is dispute = heard by SEC/SEC division
a) Name of First Witness – within 30 days – appealable with the
(1) Purpose of the testimony commission en banc – within 20 days – to the
(2) Estimated length of testimony CA on Petition for Review (BP 129 does not
b) Name of Second Witness apply)
(1) Purpose of the testimony  Can the RTC issue an injunction directed to the
(2) Estimated length of testimony SEC? No, because they are of co-equal rank.
(Additional witnesses shall be similarly
presented) Original and exclusive jurisdiction of the
3. Other Evidence regional trial courts (Sec. 5 of PD 902-A in relation
to Sec. 5.2 of RA 8799):
VII. Hearing Dates 1. Fraudulent devices and schemes employed by
directors detrimental to the public interest and
(These hearing dates, which should be to other firms;
 Saint Louis University COMMERCIAL LAW 203
2012 BAR OPERATIONS

2. Intra-corporate controversies and with the state 1. To take custody of, and control over, all existing
in relation to their franchise and right to exist as assets and properties of such entities under
such; management;
 4 Kinds of Relationship that will constitute an 2. To evaluate the existing assets and liabilities,
intra-corporate relationship (Union Cola vs. earnings and operations of such corporations,
SEC): partnerships or other associations;
a. between the corp. and the public; 3. To determine the best way to salvage and
b. between the corp. and shareholders, protect the interest of the investors and
members and officers; creditors;
c. between the corp. and the state in so far 4. To study, review and evaluate the feasibility of
as its permits, franchise, or license to continuing operation and restructure and
operate is concerned – right to exist rehabilitate such entities if determined to be
d. between and among shareholders feasible by the RTC;
3. Controversies in election or appointment of 5. To report and be responsible to the RTC until
directors, trustees, officers and managers dissolved; and
4. Petitions declaring corp. in a state of 6. May overrule or revoke the actions of the
suspension of payments previous management and board of directors of
 2 Situations that will allow the filing of petition the entity under management, notwithstanding
for suspension of payments: any provision of law, articles of incorporation or
a. Corp. has sufficient assets to cover by-laws to the contrary.
liabilities but foresees the impossibility,
when they fall due – simple suspension Rehabilitation receiver/ management committee
b. No asset or insufficient asset but under ‐ Not subject to any action, claim or demand for or
the management of a rehabilitation in connection with any act done or omitted to be
receiver or management committee done by it in good faith in the exercise of its
 When may a receiver be appointed for a function.
corporation?  
 

-Whenever necessary in order to SECURITIES REGULATION CODE

preserve the rights of party litigants and/or RA 8799
protect the interest of the investing public and
creditor.
 If the corp. is regulated by another Definition of Terms:
government agency, a receiver can still be
appointed but a request coming from an 1. SECURITIES – these are shares, participation or
appropriate government agency if necessary interests in a corporation or in a commercial
 When can there be a management enterprise or profit making venture and evidenced by
committee? a certificate, contract, instrument, whether written or
Two instances: electronic in character. It includes:
1. When there is imminent danger of (i) shares of stock, bonds, debentures, notes,
dissipation, loss or wastage or evidences, of indebtedness, asst-backed
destruction of assets or other securities;
properties; (ii) investments contracts, certificates of
2. When there is paralyzation of business interest or participation in a profit sharing
operation which may be prejudicial to agreement, certificates of deposit for a
the interest of minority shareholders, future subscription;
any of the party litigants or the general (iii) fractional undivided interests in oil, gas or
public. other mineral rights;
(iv) derivates like options or warrants;
 Gen. Rule: Petition is necessary before SEC (v) certificates of assignments, certificates of
can appoint management committee participation, trust certificates, voting trust
certificates or similar instruments;
 Except: If in SEC’s opinion there is imminent
(vi) proprietary or nonproprietary membership
danger of dissipation, loss or wastage or
certificates in corporation; and
destruction of assets, or other properties or
(vii) Other instruments as may in be future be
paralyzation of business corp.
determined by the Commission. (Sec. 3.1)
Powers of rehabilitation committee or
2. ISSUER – it is the originator, maker, obligor, or
rehabilitation receiver (Sec. 6[d]):
creator of the security. Securities statures have been
 Saint Louis University COMMERCIAL LAW 204
2012 BAR OPERATIONS

enacted principally to protect the investing public cash or installment at stated prices, with or without
from unscrupulous issuers. (Sec. 3.2) interest or insurance coverage and includes life,
pension, education, interments and other plans
3. BROKER – any person engaged in the business which the commission may from time to time
of buying and selling securities for the account of approve. (Sec. 3.9)
others. (Sec. 3.3)
9. PROMOTER – a person who, acting alone or
4. DEALER – any person who buys and sells with others, takes initiative in founding and
securities for his own account in then ordinary organizing the business or enterprise of the issuer
course of business. Compare with a broker. (Sec. and receives consideration thereof. (Sec. 3.10)
3.4)
10. PROSPECTUS – it is the document made by or
5. CLEARING AGENCY – any person who acts as on behalf of an issuer, underwriter or dealer to sell
intermediary in making deliveries upon payment to or offer securities for sale to the public through a
effect settlement in securities transactions. Just like registration statement filed with the SEC. it is a
an exchange, it is the desire of the SEC that a selling document that contains most of the
clearing agency could develop into a self-regulatory information set out in the registration statement. If a
organization. (Sec. 3.6) potential investor wants information about a new
issue, his broker will hand him a prospectus of the
6. EXCHANGE – an organized market place or issue, not the registration statement of the particular
facility that brings together buyers and sellers and security. (Sec. 3.11)
executes trades of securities and/ or commodities.
Unlike the usual over-the-counter market, an 11. REGISTRATION STATEMENT – it is the
exchange has a physical facility. (Sec. 3.7) application for the registration of securities required
or be filed with the SEC. the protection of the
7. INSIDER – an insider may be: investing public starts with an examination and
(i) The issuer; review by the SEC of an issuer’s registration
(ii) A director or office (or a person statement. (Sec. 3.12)
performing similar functions) of, or a
person controlling the issuer; 12. UNCERTIFICATED SECURITY – it is a security
(iii) a person whose relationship or former evidenced by electronic or similar records. The
relationship to the issuer gives or gave increased difficulty in the issuance and cancellation
him access to material information about of shares after every transaction in the exchange,
the issuer or the security that is not brought about by increase in the volume of
generally available to the public; transactions, has led to the development and
(iv) a government employee, or director, or adoption of the concept of uncertificated securities.
office of an exchange, clearing agency (Sec. 3.13)
and/ or self-regulatory organization who
has access to a material information 13. UNDERWRITER – a person who guarantees on
about an issuer or a security that is not a firm commitment and/ or declared beat efforts
generally available to the public; or basis the distribution and sale of securities of any
(v) A person who learn such information by kind by another company. The firm underwriter takes
a communication from any of the to buy the unsold portion of the issue it handles and
foregoing insiders. (Sec. 3.8) gets paid a higher- fee for its effort than the best
One is not prohibited form being an efforts underwriter who does no make the same
insider. It is not a crime. It is a status. An commitment. (Sec. 3.14)
insider starts to get into trouble when he
acts upon the material nonpublic information
he has and busy or sells shares or, under REGISTRATION OF SECURITIES
Section 27.3, communicates such ‐ Gen rule:
information to another knowing or having A registration statement duly filed and approved
reason to believe that such person will likely by the Sec is necessary before securities may
buy or sell a security. be sold and offered for sale or distribution within
the Philippines. Prior to any sale, information on
8. PRE-NEED PLANS – these are contracts which the securities, in such form and substance
provide for the information of future services or the prescribed by the SEC, shall be made available
payment of future monetary considerations at the to each prospective purchaser. (Sec. 8)
time of actual need, for which plan holders pay in ‐ Exceptions:
 Saint Louis University COMMERCIAL LAW 205
2012 BAR OPERATIONS

1. Exempt securities; and been registered under the SRC or was, when
2. Exempt transactions. sold, exempt from the provisions of the SRC,
and that the security issued and delivered in
EXEMPT SECURITIES (Sec. 9) exchange, if sold at the conversion price, would
1. Any security issued or guaranteed by the at the time of such conversion fall within the
government of the Philippines, or by any political class of securities entitled to registration under
subdivision or agency thereof, or by any person the SRC. Upon such conversion, the par value
controlled or supervised by, and acting as of the security surrendered in such and
instrumentality of said government; delivered in such exchanged and sold);
2. Any security issued or guaranteed by the 8. Broker’s transactions, executed upon
government of any country of which the consumer’s orders, on any registered exchange
Philippines maintains diplomatic relations, or by or other trading market;
any state, province or political subdivision 9. Pre-incorporation subscriptions and subscription
thereof on the basis of reciprocity; provided, that to an increase in its authorized capital stock
the commission may require compliance with the under the Corporation Code;
form and content of disclosures the Commission 10. Exchange of securities by the issuer with its
may prescribed; existing security holders exclusively;
3. Certificates issued by the receiver or by the 11. Sale of securities by an issuer to fewer than 20
trustee in bankruptcy duly approved by the persons in the Philippines during any 12 month
proper adjudicatory body; period;
4. Any security or its derivates the sale or transfer 12. Sale of securities to any number of the following
of which, by law, is under the supervision and qualified buyers:
regulation of the office of the Insurance (i)bank
Commission, Housing and Land Used (ii) registered investment house;
Regulatory Board, or the Bureau of Internal (iii) insurance company;
Revenue; (iv) pension fund or retirement plan
5. Any security issued by the bank except its own maintained by the government of
shares of stock. the Philippines or any political
subdivision thereof or manage by
EXEMPT TRANSACTIONS (Sec. 10) a bank or other persons
1. Judicial sale, or sale by an executor, authorized by the BankoSentral to
administrator, guardian or receiver or trustee in engage in trust functions;
insolvency or bankruptcy; (v) investment company; or
2. Sale of pledged or foreclosed property to (vi) such other person as the
liquidate debts; commission may by rule
3. Sale on isolated transactions by owner or by his determine as qualified buyers, on
representative for the owner’s account; the basis of such factors as
4. Distribution by a corporation, actively engaged in financial sophistication, net worth,
the business authorized by its articles of knowledge, or amount of assets
incorporation, of securities to its stockholders or under management.
other security holders as a stock dividend or
other distribution out of surplus; Initial procedure for the registration of securities
5. Sale of capital stock of a corporation to its own (Sec. 12)
stockholders exclusively, where no commission ‐ All securities required to be registered under
or other remuneration is paid or given directly or section 8.1 of the SRC shall be registered
indirectly in connection with the sale of such through the filing by the issuer in the main office
capital stock ( e.g. the additional issuance of of the SEC of the sworn registration statement
shares by a corporation out of its authorized but with respect to such securities. Unlike the
unissued capital stock); Revised Securities Act, the SRC does not
6. Issuance of bonds or notes secured by specify in great detail the information which must
mortgage upon real state or tangible personal be provided and the documents which must be
property, where the entire mortgage together submitted by the applicant issuer, leaving such
with all the bonds or notes secured thereby are matters, including the form of the application, for
sold to a single purchaser at a single sale; the SEC to prescribe.
7. Issuance and delivery of any security in Who are required to sign the registration statement?
exchange for any other security of the same (Sec. 12.4)
issuer pursuant to a right of conversion ‐ The registration statement shall be signed by the
(Provided, that the security so surrendered has issuer’s principal executive officer, its principal
 Saint Louis University COMMERCIAL LAW 206
2012 BAR OPERATIONS

operating officer, its principal financial officer, its (v) has failed to comply with any
comptroller, its principal accounting officer, its requirement that the commission may
corporate secretary or person’s performing impose as a condition for the
similar functions accompanied by a duly verified registration of the security for which the
resolution of the board of directors of the issuer registration has been filed.
corporation.
(b) the registration statement is on its face
What action may the SEC take on a registration incomplete or inaccurate in any material
statement? (Sec. 12.6) respect or includes any untrue statement of
‐ Within 45 days after the date of filing of the a material fact or omits to state a material
registration statement, or by such later date to fact required to be stated therein or
which the issuer has consented, the SEC shall necessary to make the statements therein
declare the registration statement effective or not misleading or,
rejected, unless the applicant is allowed to (c) the issuer, any officer, director or controlling
amend the registration statement as provided in person of the issuer, or person performing
Section 14 of the SRC. The SEC shall enter an similar functions, or any underwriter has
order declaring the registration statement to be been convicted, by a competent judicial or
effective if it finds that the registration statement administrative body, upon plea of guilty, or
together with all the other papers and otherwise, of an offense involving moral
documents attached thereto is on its face turpitude and/or fraud or is enjoined or
complete and that the requirements have been restrained by the commission or other
complied with. The SEC may impose such terms competent judicial or administrative body for
and conditions as may be necessary or violations of securities, commodities, and
appropriate for the protection of the investors. other related laws.
Note that the SEC does not “”approve” the
registration statement (although Secs. 8.1 and TENDER OFFER
8.2 refer to the registration statement being ‐ A tender offer is a publicly announced intention
“approved” by the SEC) but simply declares it by a person acting alone or in concert with other
“effective.” The non-use of he word “approve” is persons to acquire equity securities of a public
more probably designed to avoid any suggestion company (Sec. 19). It has also been described
that the SEC is endorsing the particular issue. as “an imprecise term widely used in securities
law, generally referring to a quick, enticing
Grounds for Rejecting a Registration Statement proposal to the shareholders of a corporation
(Sec. 13.1) that they tender their shares for purchase by the
‐ The SEC may reject a registration statement offeror at a specified price. Tender offer is an
and refuse registration of the security upside-down term; I make the offer, you make
thereunder, or revoke the affectivity of a the tender. It is usually, not always, part of an
registration statement and the registration of the attempt by the offeror to buy enough stock to
security thereunder, after due notice and control the corporation, i.e., a takeover (also
hearing, by issuing an order to such effect, spelled take-over and take over). Accordingly,
setting forth its findings in respect thereto, if it tender offer is sometimes called takeover offer
finds that: or takeover bid.” (Mellinkoff’s Dictionary of
American Legal Usage, p. 64)
(a) the issuer- ‐ Tender offers are regulated to prevent he
(i) has been judicially declared insolvent; stockholders of the target company from being
(ii) has violated any of the provisions of this misled by the offeror or the target’s
code; the rules promulgated pursuant management. Thus, a principal requirement of
thereto, or any order of the commission the SEC rules on tender offer is the disclosure
of which the issuer has notice in by the offeror of certain information about the
connection with the offering for which offer, with a copy of such information being
the registration statement has been given or sent to the stockholders (Rule 19.1, par.
filed; 7).
(iii) has been or is engaged or is about to
engage in fraudulent transactions; Circumstances where tender offer is mandatory
(iv) has made any false or misleading (Sec. 19.1 (a); SRC Rule 19.1, par. 2)
representation of material facts in any ‐ Except when relief from the mandatory tender
prospectus concerning the issuer or its offer requirement is granted under SRC Rule
securities; 19.1, paragraph 3, a person is required under
 Saint Louis University COMMERCIAL LAW 207
2012 BAR OPERATIONS

the following circumstances to make a tender proxies must be issued and proxy solicitation
offer for equity shares of a public company in an must be made in accordance with SEC rules
amount equal to the number of shares that the (Sec. 20.1). thus, proxies must be in writing,
person intends to acquire: signed by the stockholder or his duly authorized
(a) where the person intends to acquire 15% representative and filed with the corporate
or more of the equity shares of a public secretary before the scheduled meeting (Sec.
company pursuant to an agreement made 20.2); unless otherwise provided in the proxy, it
between or among the person or one or shall be valid only for the meeting for which it is
more sellers; intended; no proxy shall be valid and effective
(b) where the person intends to acquire 30% for a period longer than 5 years at one time
or more of the equity shares of a public (Sec. 20.3); and a broker or dealer can not give
company within a period of 12 months; a proxy in respect of any security it carries fort
and, he account of a customer without the express
(c) where the person intends to acquire written authorization of such customer(Sec.
shares that would result in the ownership 20.4).
of more than 50% of the equity shares of a ‐ The issuance and solicitation of proxies are
public company. regulated to minimize, if not avoid, the abuse
and misuse of the proxy device that may lead to
When would a person be presumed to be making a the self-perpetuation and irresponsibility of
voluntary tender offer? (SRC Rule 19.1, par. 4) management. Management has innate
‐ A person may make a voluntary tender offer. He advantages in the solicitation of proxies; it has
will be presumed to be doing so when some or the stockholder’s list; it benefits from the usual
all of the following factors are present: inertia of stockholders; and it has access to
(a) there is active and widespread solicitation of corporate funds for the normally substantial
public shareholders fort he shares of a costs of solicitation.
public company;
(b) the solicitation is made for a substantial The terms “solicit” and “solicitation” means
percentage of the issuer’s stock; (a) any request for a proxy whether or not
(c) the offer to purchase is made at a premium accompanied by or included in a form of
over the prevailing market price, at firm proxy;
rather than negotiable terms; (b) any request to execute or not to execute, or to
(d) the offer is contingent on the tender of a revoke a, a proxy; or
fixed number of shares; and (c) the furnishing of a form of proxy or other
(e) the offer is only open for a limited period of communication to security holders under
time. circumstance reasonably calculated to result
in the procurement, withholding or revocation
 The foregoing list of factors reflects the so-called of a proxy.
weight-factor Wellman Vs. Dickinson Test
enunciated in an American Case of the same  The approach of the SEC Rules on proxy
name (475F. Supp. 783, 823-824 [S>D>N>Y>, solicitation follows the traditional three-way
1979] involving the coordinated private approach which
solicitations of 30 institutions and 9 individuals, (i) calls for a brief description of the
with a premium price offered and no matters to be considered, together
individualized negotiations (Fundamentals of with the action proposed to be taken
Securities Regulation by Louis Loss and Joel by the holder of the proxy (SRC
Seligman, Little Brown and Company, 3rd Rule 20, pars. 3 and 4);
edition, 1995). (ii) requires the registrant (i.e. the
insurer of the securities in respect of
which proxies are to be solicited), as
What is a proxy and why is its solicitation regulated? a condition of its own solicitation, to
(Sec. 20; SRC Rule 20) mail to record owners the proxy
‐ A proxy is a formal authorization from a material of any stockholder upon his
stockholder that empowers someone to vote in or her request at his or her expense
his or her behalf; the term also refers to the (SRC Rule 2o, par. 6); and
person who is sop authorized to vote on behalf (iii) adopts a general fraud rule
of a stockholder prohibiting the making of any
‐ The SRC regulates the issuance and solicitation materially false or misleading
of proxies. Indeed, it expressly requires that statements (SRC Rule 20, par. 7).
 Saint Louis University COMMERCIAL LAW 208
2012 BAR OPERATIONS

same price and quantity by different but

 No solicitation of proxy shall be made unless colluding parties;
each person solicited is furnished, concurrently (d) Hype and dump- engaging in buying
or earlier, with a written proxy statement activity at increasingly higher prices and
containing the information required by the SEC then selling securities in the market at higher
(SRC Rule 20, par. 3). The form of proxy, shall prices;
be made unless each person solicited or given (e) Wash sales- engaging in transactions in
to stockholders at least 15 business days prior which there is no genuine change in actual
to the meeting date (SRC Rule 20, par. 4.f). ownership of a security;
(f) Squeezing the float- taking advantage of a
shortage of securities in the market by
RECOVERY OF PROFITS controlling the demand side and exploiting
market congestion during such shortages in
When could the profits made by a stockholder, a way as to create artificial prices ;
director or officer in a purchase and sale, or a (g) Boiler room sales- the use of high-pressure
sale and purchase, of any equity security be sales tactics to promote purchases and
recovered? (Sec. 23.2) sales of securities;
‐ For the purpose of preventing the unfair use of (h) Daisy chain- a series of purchases and
information which may have been obtained by a sales of the same at successively higher (or
beneficial owner of equity securities, director or lower) prices, by the same group of people
officer, or officer of the issuer by reason of his with the purpose of manipulating prices and
relationship top the issuer, any profit realized by drawing unsuspecting investors into the
him from any purchase and sale, o any sale and market, leaving them defrauded of their
purchase, of any equity security of such issuer money or securities.
with in any period of less than 6 months, unless
such security was acquired in good faith in THE INSIDER
connection with a debt previously contracted,
shall inure to and be recoverable by the issuer, Prohibited acts of an insider: (Secs. 3.8 and 27)
irrespective of any intention of holding the ‐ While to be an insider in not prohibited, it shall,
security purchased or of not purchasing the however, be unlawful for an insider to sell or buy
security sold for a period exceeding 6 months. A a security of the issuer while in possession of
suit to recover such profit may be instituted material nonpublic information with respect to
before the regional trial court by the issuer, or by the issuer or the security unless-
the owner of any security of the issuer in the (a) the insider is able to prove that the information
name and I behalf of the issuer if the issuer shall was not gained from such relationship, or
fail or refuse to bring such suit within 60 days (b) if the other party selling to or buying from the
after request or shall be brought more than 2 insider (or his agent) is identified, the insider is
years after the date such profit was realized. able to prove (i) the he disclosed the nonpublic
information to the other party, or (ii) that he
MANIPULATION OF SECURITY PRICES had reason to believe that the other party
otherwise is also in possession of the
What are the various ways by which security nonpublic information.
prices may be manipulated? (Sec. 24; SRC Rule
24.1(b)-1, par. 5)  The duty of the insider when trading is to
‐ The following are some examples of the ways by disclose the material nonpublic information to
which security prices may be manipulated: the other party.
(a) Painting the tape- engaging in a series of
transactions in securities that are reported Could an insider be liable even if he does not
publicly to give the impression of activity or trade? (Sec. 27. 3)
price movement in a security; Yes. It shall be unlawful for any insider to
(b) Marking the close- buying and selling communicate material nonpublic information about
securities at the close of the market in an the issuer or security to any person who, by virtue of
effort to alter the closing price of the the communication, becomes an insider as defined
security; in Section 3.8 of the SRC, where the insider
(c) Improper matched orders- engaging in the communicating the information knows or has reason
transaction where both the buy and sell to believe that such person will likely buy or sell a
orders are entered at the same time with the security of the issuer while in possession of such
information.
 Saint Louis University COMMERCIAL LAW 209
2012 BAR OPERATIONS

represent the interests of issuers, investors

Is there a presumption of insider trading? (Sec. and other market participants who are not
27.1) associated with any broker or dealer or
Yes. A purchase or sale of a security of the member of the exchange for period of 2
issuer made by an insider or such insider’s spouse years prior to his appointment.
or relatives by affinity or consanguinity within the (c) Other securities trading markets – the
second degree, legitimate or common-law, shall be SEC is authorized to determine the number,
presumed to have been effected while in possession size and location of stock exchanges, other
of material nonpublic information if transacted after trading markets and commodity exchanges,
such information came into existence but prior to and other similar organizations in the light of
dissemination of such information to the public and national or regional requirements for such
the lapse of a reasonable time fort he market to activities with the view to promote, enhance,
absorb such information; provided, however, that protect, conserve or rationalize investment
this presumption shall be rebutted upon a showing (Sec. 36.3). The Sec is also authorized to
by the purchaser or seller that he was no aware of register and license innovative and other
the material nonpublic information at the time of the trading markets or exchanges covering the
purchase or sale. issuance of innovative securities, securities
of small, medium, growth and venture
MATERIAL NONPUBLIC INFORMATION (Sec. 27. enterprises, and technology-based ventures.
2) (d) Self-regulatory organizations (Sec. 39) –
Material nonpublic information is information that a self-regulatory organization is any
1. has not being generally disclosed to the public securities exchange, clearing or depository
and would likely affect the market price of the agency or other securities-related
security after being disseminated to the public organization or association which is
and the lapse of a reasonable time for the organized and has the capacity to be able to
market to absorb the information, or carry out the purposes of the SRC and to
2. would be considered by a reasonable person comply with, and to enforce compliance by
important under the circumstances in its members, with the provisions of the SRC,
determining his course of action whether to buy, the rules and regulations thereunder, and
sell or hold a security. the rules of the association (Sec. 39.3[a]).
Those entities which the SEC may register
as self=regulatory organizations include
REGISTRATION OF MARKET PROFESSIONALS associations of brokers and dealers, transfer
AND ENTITIES agents, custodians, fiscal and paying
agents, computer services, news
Who are the market professionals and entities disseminating services, proxy solicitors,
required to register with SEC? statistical agencies, security rating agencies,
(a) Brokers, dealers, salesman and and securities information processors.
associated person (Sec. 28.1) – no person (e) Clearing agencies (Secs. 3.6 and 42)
shall engage in the business of buying or
selling securities in the Philippines as a  In Nicolas vs. CA, G.R. 122857, March 27, 1998
broker or dealer, or act as a salesman, or an The Supreme Court ruled that the suit of
associated person of any broker or dealer Nicolas must fail because the traded securities for
unless registered as such with the SEC. the account of others without securing the necessary
(b) Exchanges (Secs. 3.7 and 33.2) – the license therefore from the SEC. the failure to obtain
applicant for the registration must be such a license is a violation of Section 19 of the
organized as a stock corporation and Revised Securities Act which provides that no
engaged solely in the business of operating brokers shall sell any securities unless he is
an exchange. No person may beneficially registered with the SEC. stock market trading, a
own or control, directly or indirectly, more technical and highly specialized institution in the
than 5% of the voting rights of the exchange. Philippines, must be entrusted to individuals with
Industry and business group are similarly proven integrity, competence and knowledge and
limited to not more than 29% of the voting who has due regard for the requirements of the law.
rights of the exchange. Brokers shall
constitute no more than 49% of the Board of INDEPENDENT DIRECTOR
Directors of the exchange, while the ‐ An independent director is a person other than
remaining 51% shall be composed of three an officer or employee of the corporation, its
independent directors and person who parent or subsidiaries, or any other individual
 Saint Louis University COMMERCIAL LAW 210
2012 BAR OPERATIONS

having a relationship with the corporation, which ‐ No broker or dealer shall deal in or otherwise
would interfere in the exercise of independent buy or sell, for its own account or for the account
judgment in carrying out the responsibilities of a of customers, securities listed on an exchange
director (Sec. 38). issued by any corporation where any
‐ More expansively, SRC rule 38.1 defines an stockholder, director, associated person or
independent director as a person who, apart salesman, or authorized clerk of said broker or
from his fees and shareholdings, is independent dealer and all the relatives of the foregoing
of management and free from any business or within the fourth civil degree of consanguinity or
other relationship which could, or could affinity, is at the time holding office in said issuer
reasonably be perceived to, materially interfere corporation as a director, president, vice
with his exercise of independent judgment in president, manager, treasurer, comptroller,
carrying out his responsibilities as a director in secretary or any office of trust and responsibility,
the corporation. For example, a person may not or is controlling person oft eh issuer.
qualify as an independent director under SRC
rule 38.1 if – SUITABILITY RULE (SRC Rule 30.2-4)
(a) he is a substantial shareholder (i.e. a ‐ The suitability rule states that, in recommending
beneficial owner, directly or indirectly, of to a customer the purchase, sale or exchange of
more than 10% of any class of equity any security, a broker, dealer or an associated
security) of the corporation or of its related person or salesman of a broker or dealer shall
companies (i.e., its holding company, its have reasonable grounds for believing that the
subsidiary, or subsidiary of its holding recommendation is suitable for such customer
company) or any of its substantial upon the basis of the facts disclosed by such
shareholders; or customer as to his security holdings and as to
(b) he is a relative (i.e., the spouse, parent, his financial situation and needs.
child, brother and sister of such person,
and the spouse of such child, brother or SUSPENSION OF TRADINGS
sister) of any director, officer or substantial Can the SEC suspend trading in a security or all
shareholder of the corporation, any of its trading on any securities exchange? (Sec. 36.1)
related companies or any of its substantial Yes. The SEC is authorize, if in its opinion
shareholders; or such action is necessary or appropriate for the
(c) he has been employed in any executive protection of investors and the public interest so
capacity by the public company, any of its requires, summarily to suspend trading in any listed
related companies or by any of its security on any exchange or other trading market for
substantial shareholders within the last 5 a period not exceeding 30 days or, with the approval
years; or of the President of the Philippines, summarily to
(d) he is retained as professional adviser by suspend all trading on any securities exchange or
the public company, any of its related other trading market for a period of more than 30 but
companies or by any of its substantial not exceeding 90 days; provided, however, that the
shareholders, either personally or through SEC, promptly following the issuance of the order of
his firm. suspension, shall notify the affected issuer of the
reasons for such suspension and provides such
Who are required to have independent directors? issuer with an opportunity for hearing to determine
(Sec. 38) whether the suspension should be lifted.
Apart from exchange, any corporation with a
class of equity securities listed for trading in an MARGIN TRADING (Secs. 48, et seq.)
exchange, or with assets in excess of P50 million Margin trading refers to the purchase of
and having 200 or more holders, at least 200 of securities by an investor using the credit of the
which are holding at least 100 shares of a class of broker to pay for part of the said securities. It is
its equity securities or which has sold a class of regulated for the purpose of the excessive use of
equity securities to the public pursuant to an credit or carrying of securities. The “margin” is the
effective registration statement in compliance with amount of money or securities that an investor must
Section 12 of the SRC, shall have at least 2 deposit with a broker to secure a loan with from the
independent directors or such independent directors broker. When a broker makes a demand on the
shall constitute at least 20% of the members of such investor to deposit money or securities with a broker
board, whichever is the lesser. when the purchase is made or when the investor’s
equity in a margin account declines below a
PROHIBITED TRANSACTIONS OF BROKERS minimum standard set by the exchange or broker,
AND DEALERS (Sec. 30.1) the broker is said to have made a margin call.
 Saint Louis University COMMERCIAL LAW 211
2012 BAR OPERATIONS

Any person (i) acquiring a security, the

VIOLATONS OF THE SRC, PENALTIES AND registration statement of which or any part thereof
SANCTIONS contains on its effectivity an untrue statement of a
What administrative sanctions may the SEC material fact or omits to state a material fact required
impose? (Sec. 4) to be stated therein or necessary to make such
If there is violation of the SRC, the SCR statement not misleading, (ii) who suffers damage,
rules or the orders of the SEC, the SEC shall, in its and (iii) who did not know of such untrue statement
discretion and after due notice and hearing, impose or omission at the time of such acquisition, may sue
any or all the following sanctions as may be and recover damages.
appropriate in light of the facts and circumstances:
(a) suspension, or revocation of any registration Who may be sued on account of a false
for the offering of securities; registration statement? ( Sec. 56.1)
(b) a fine of no less than P10,000 nor more than (a) the issuer and every person who signed the
P1,000,000 plus not more than registration statement;
P2,000 for each day of continuing violation; (b) every person who was a director of, or any
(c) in the case of violations of Sections 19.2(the other person performing similar functions, or
making of untrue statement, etc. in a partner in, the issuer at the time of the
connection with a tender offer), 20 (proxy filing of the registration statement or any
solicitations), 24 (manipulation of security part, supplement or amendment thereof with
prices, etc.), 26 (fraudulent transactions) respect to which his liability is asserted;
and 27 (insider trading), disqualification from (c) every person who is named in the
being an officer, member of the board of registration statement as being or about to
directors, or person performing similar become a director of, or person performing
functions, of an issuer required to file reports similar functions, or a partner in, the issuer
under Section 17 of the SRC or any other and whose written consent thereto is filed
act, rule or regulation administered by the with the registration statement.
SEC; (d) Every auditor or auditing firm named as
(d) in the case of f\violation of Section 34 (re having certified any financial statements
segregation and limitation of functions of used in connection with the registration
members, brokers, dealers), a fine of no statement or prospectus;
more than 3 times the profit gained or loss (e) Every person who, with his written consent,
avoided as a result of the purchase, sale or which shall be filed with the registration
communication proscribed by such section; statement, or as having prepared or certified
and any report or valuation which is used in
(e) other penalties within the power of the SEC connection with the registration statement,
to impose. with respect to the statement, report or
evaluation, which purports to have been
SETTLEMENT OFFER (Sec. 55) prepared or certified, by him;
A settlement offer is a written proposal (f) Every selling shareholder who contributed to
made to the SEC by a party being investigated or and certified as to the accuracy of the
charged, during an investigation or proceeding portion of the registration statement, with
under the SRC, in order that such investigation or respect to that portion of the registration
proceeding against the said party could be statement which purports to have been
terminated or dismissed. Upon receipt of such offer contributed by him; and
of settlement, the SEC may consider the offer based (g) Every underwriter with respect to such
on timing, the nature of the investigation or security.
proceeding, and the public interest. The SEC may
only agree to settlement offer based on its findings What is the prescriptive period for the
that such settlement is in the public interest. Any enforcement of actions under Sections 56 (re
agreement to settle shall have no legal effect until civil liabilities on account of false registration
publicly disclosed. Such decision may be made with statement) and 57 (Re civil liabilities arising in
out a determination of guilt on the part of the person connection with prospectus, communications
making the offer. and reports)? Sec. 62)
No action shall be maintained to enforce any
FALSE REGISTRATION STATEMENT liability created under Sections 56 or 57 of the SRC
Who may sue on account of a false registration unless brought within 2 years after the discovery of
statement? (Sec. 56.1) the untrue statement or the omission, or, if the action
is to enforce a liability created under Section 57.1(a)
 Saint Louis University COMMERCIAL LAW 212
2012 BAR OPERATIONS

(re offering to sell or selling an unregistered 5. to do and perform any and all things that may be
security), unless brought within 2 years after the necessary or proper to carry out the purposes of
violation upon which it is based. In no event shall this Act
any such action be brought to enforce liability crated 6. may acquire and hold assets and incur liabilities
under Section 56 or 57.1(a) more than 5 years after in connection with its operations
the security was bona fide offered to the public, or 7. may compromise, condone or release in whole
under Section 57.1 (b) ( re offering to sell or selling a or in part, any claim of or settled liability to the
security by means of a prospectus, etc. containing Bangko Sentral
an untrue statement, etc.) more than 5 years after
the sale.  It has a capital of its own; P50B to be fully
subscribed by the Government, P10B of which
What are the damages that may be awarded in shall be fully paid by the Government upon the
suits to recover damages under Sections 56-60? effectivity of the Act and the balance to be paid
(Sec. 63) within a period of 2 years from the effectivity of
(a) actual damages; the Act.
(b) treble damages, i.e., damages in an amount  It has a capital of its own and operates under a
not exceeding triple the amount of the budget prepared by its own Monetary Board and
transaction; appropriates money for its own operations and
(c) exemplary damages in cases of bad faith, other expenditures independently of the national
fraud, malevolence or wantonness in the budget. It does not depend on the national
violation of the SRC or the SRC rules; government for the financing of its operations; it
(d) Attorney’s fees not exceeding 30% of the is the national government that occasionally
award. resorts to it for needed budgetary
accommodations.
May compliance with any provision of the SRC
be waived and would such waiver be valid? (Sec. RESPONSIBILITIES AND PRIMARY OBJECTIVES
71.1) (Sec 3; Chapter I)
Any condition, stipulation, or provision
binding any person to waive compliance with any Responsibilities:
provision of the SRC or of any rule or regulation 1. Provide policy directions in the areas of money,
thereunder, or of any rule of an Exchange required banking and credit
thereby, as well as the waiver itself, shall be void. 2. Shall have supervision over the operations of
banks; and
 
3. Exercise such regulatory powers as provided in
IX. A. THE NEW CENTRAL BANK ACT this Act and other pertinent laws over the
RA 7653  operation of banks and pertinent laws over the
operations of finance companies and non-bank
financial institution performing quasi-banking
Establishment and organization of Bangko functions.
Sentral ng Pilipinas
‐ The central Bank shall be the central monetary Primary objectives:
authority that shall function and operate as an 1. Maintain price stability conducive to a balanced
independent and accountable body corporate in and sustainable growth of the economy
the discharge of its mandated responsibilities 2. Promote and maintain monetary stability and the
concerning money, banking and credit. convertibility of the peso (it includes power to
‐ It is a government-owned-and-controlled regulate no-dollar imports; owing to the influence
corporation but it was created as an and effect that the same may and do have upon
autonomous body corporate governed by the the stability of our peso and its international
provisions of its charter (RA 265). It enjoys fiscal value)
and administrative autonomy.( Sec1; Chapter I )
THE MONETARY BOARD
Corporate powers (Sec 5; Chapter I) ‐ shall exercise all the powers and functions of the
1. authorized to adopt, alter and use a corporate Central Bank
seal
2. lease or own real and personal property The exercise of authority (sec15; Chapter II)
3. sell or dispose of the corporate properties The monetary board shall:
4. to sue or be sued 1. issue rules and regulations it considers
necessary for the effective discharge of the
 Saint Louis University COMMERCIAL LAW 213
2012 BAR OPERATIONS

responsibilities and exercise of the powers c) direct and supervise the operations and
vested upon the Monetary Board and Bangko internal administration of the Bangko
Sentral; Sentral;
2. direct the management, operations and d) appoint and fix the remuneration and other
administrations of Bangko Sentral, reorganize its emoluments of personnel below the rank of
personnel, and issue such rules and regulations a department head in accordance with the
as it may deem necessary or convenient; position and compensation plans approved
3. Establish a human resource management by the board, as well as to impose
system which shall govern the selection, hiring. disciplinary measures upon personnel of
Appointment, transfer, promotion or dismissal of Bangko Sentral
all personnel. AIM OF SYSTEM: establish e) render opinions, decisions or rulings, which
professionalism and excellence at all levels of shall be final and executory until reversed or
Bangko Sentral in accordance with sound modified by the board, on matters regarding
principles of management. application or enforcement of laws
4. Adopt an annual budget for and authorize pertaining to institutions supervised by the
expenditures by the Bangko Sentral as are in Bangko Sentral and laws pertaining to
the interest of effective administration and quasi-banks; and
operations of the bank in accordance with f) exercise such other powers as may be
applicable laws and regulations; and vested in him by the Monetary Board.
5. Indemnify its members and other officials of
Bangko Sentral, including personnel of 2. As a principal representative of the Monetary
departments performing supervision and Board and the Bangko Sentral; he is empowered
examination functions against all costs and to:
expenses reasonably incurred by such persons. a) represent the Monetary Board and Bangko
( civil or criminal action, suit or proceeding which Sentral in all dealings with other offices,
he may be a party by reason of performance of agencies and instrumentalities of the
his functions or duties ) Government and all other persons or
entities, public or private, whether domestic,
Composition of the monetary board foreign or international;
‐ 7 members appointed by the President of the b) sign contracts entered into by the Bangko
Philippines for a term of 6 years Sentral, notes and securities issued by the
‐ The seven members are: Bangko Sentral, all reports, balance sheets,
a. Governor of Bangko Sentral – shall be the profit and loss statements, correspondence
Chairman of the Monetary Board; his and other documents of the Bangko Sentral
appointment is subject to the confirmation by
Commission of Appointments 3. the signature of the Governor may be in
b. Members of the Cabinet – designated by the facsimile whenever appropriate
President of the Philippines a) represent the Bangko Sentral, either
c. 5 members who shall come from the private personally or through counsel as may be
sector, all shall serve full-term authorized by the Monetary Board in any
- 3 shall have a term of 6 years legal proceedings, action or specialized
- 2 shall have a term of 3 years legal studies; and
***No member of the Monetary Board may be b) delegate his power to represent the Bangko
reappointed more than once. Sentral to other officers upon his own
responsibility

THE GOVERNOR OF BANGKO SENTRAL 4. The Governor also has emergency powers
The powers and duties of the Governor: where time is insufficient to call a meeting of the
1. As a chief executive officer of Bangko Sentral; Monetary Board. There are 2 requirements for
his powers and duties are: the exercise of this power, they are:
a) prepare the agenda for the meetings of the a) There must be the concurrence of 2 other
Monetary Board and submit for the members of the monetary Board
consideration of the board the policies and b) He must submit a report to the President
measures necessary to carry out the and Congress within 72 hours after the
purpose of the Act; action has been taken.
b) execute and administer the policies and g) At the soonest possible time, the
measures approved by the Monetary Board; Governor shall call a meeting of the
 Saint Louis University COMMERCIAL LAW 214
2012 BAR OPERATIONS

Monetary Board to submit his action for which are manifestly opposed to the aims
ratification. and interest of Bangko Sentral; or
4. if the member no longer possesses the
qualification specified in this Act.
THE DEPUTY GOVERNORS
‐ the Governor, with the approval of the Monetary Vacancy
Board, shall appoint not more than 3 deputy ‐ created by death, resignation or removal of any
governors who shall perform duties as may be member shall be filled by the appointment of a
assigned to them by the Governor and the new member to complete the unexpired period
Board. of the term of the member concerned.
‐ In the absence of the Governor, the Deputy
designated shall act as chief executive of the Meetings
Bangko Sentral and shall exercise the powers ‐ meet at least once a week
and perform the duties of the Governor.
Quorum
QUALIFICATIONS OF THE MEMBERS OF THE ‐ presence of 4 members shall constitute a
BOARD quorum
1. must be a natural born citizen of the ‐ PROVIDED, that in all cases the Governor or his
Philippines duly designated alternate shall be among the 4.
2. at least 40 yrs old for the Governor and at
least 35 yrs old for the other members Vote
3. of good moral character ‐ concurrence of at least 4 members for decisions
4. of unquestionable integrity of monetary Board
5. of known probity and patriotism
6. with recognized competence in social and Salary
economic discipline ‐ shall be fixed by the President of the Philippines
at a sum commensurate to the importance
DISQUALIFICATIONS OF THE MEMBERS OF and responsibility attached to the position
THE BOARD ‐ any member of the Monetary Board with
1. Disqualified from being a director, officer, personal or pecuniary interest in any matter in
employee, consultant, and lawyer, agent ore the agenda of Board shall disclose his interest to
stockholder of any bank, quasi-bank or any the Board and shall retire from the meeting
other institution subject to supervision or when matter is taken up.
examination by the Bangko Sentral;
2. Members coming from private sector shall OPERATIONS OF THE BANGKO SENTRAL
not hold any other public office/public 1. Shall prepare data and conduct economic
employment during their tenure; research for the guidance of the monetary board
3. Connected directly with any multilateral in the formulation and implementation of its
banking or financial institution or has policies.
substantial interest in any private bank in the ‐ Data includes:
Philippines within 1 year prior to his a) forecast of the balance of payments of
appointment; Philippines
4. Employed in any such institution within 2 b) statistics on the monthly movement of
years after expiration of his term except the monetary aggregates, of prices and
when he serves as an official representative other statistical series
of the Philippines to such institution. c) economic studies useful for the
formulation and analysis of monetary,
REMOVAL banking, credit and exchange policies
‐ the President may remove any member for the 2. Shall have authority to request from government
following reasons: offices and instrumentalities, or GOCC’s, any
1. if the member is subsequently disqualified data which it may require for the proper
under the provision of this Act; discharge of its functions and responsibilities.
2. if he is physically or mentally incapacitated 3. Shall promote and sponsor the training of
that he cannot properly discharge his duties technical personnel in the field of money and
and responsibilities and such incapacity banking – authorized to defray the costs of
lasted for more than 6 months; study, at home or abroad, of qualified
3. if the member is guilty of acts or operations employees of the Bangko Sentral, of promising
which are of fraudulent or illegal character or university graduates or any other qualified
 Saint Louis University COMMERCIAL LAW 215
2012 BAR OPERATIONS

person who shall be determined by proper

competitive examinations. When is supervision and examination
4. Shall have supervision over, and conduct conducted?
periodic or special examinations of, banking ‐ the supervising and examining department
institutions and quasi-banks, including head, personally or by his deputy, shall examine
subsidiaries and affiliates engaged in allied the books of every banking institution once in
activities. every 12 months and in such other times as the
Monetary Board by an affirmative vote of 5
Subsidiary members may deem expedient.
‐ a corporation more than 50% of voting stock of ‐ PROVIDED; that there shall be an interval of at
which is owned by a bank or quasi-bank least 12 months between annual examinations.
‐ examination of its books, cash and available
Affiliate assets and general condition may be made at
‐ a corporation the voting stock of which, to the any time during banking hours when requested
extent of 50% or less, is owned by a bank or to do so by the Bangko Sentral.
quasi-bank or which is related or linked to such
institution or intermediary through common Fees
stockholders or such other factors as ‐ banking and quasi-banking institutions which are
determined by the Board. subject to examination shall pay to Bangko
Sentral an annual fee in an amount equivalent to
SUPERVISION AND EXAMINATION a percentage as may be prescribed by the
‐ the department heads and examinees of the Monetary Board of its average total assets
supervising or examining departments are during the preceding year
hereby authorized to: ‐ paid within the first 30 days of each year, shown
a. administer oaths of any director, officer or in its end-of-the-month balance sheet
employee of any institution under their
respective supervision or subject to their THE CONSERVATOR
examination; Whenever on the basis of a report submitted by the
b. compel the presentation of all books, appropriate supervising or examining department,
documents, papers or records necessary in the Monetary Board finds that a bank or a quasi-
their judgment to ascertain the facts relative bank is in a state of continuing inability or
to the true condition of any institution; unwillingness to maintain a condition of liquidity
c. compel the presentation of books and deemed adequate to protect the interest of
records of persons and entities relative to or depositors and creditors; shall appoint a
in connection with the operations, activities conservator.
or transactions of the institutions under
examination. Powers of the Conservator
 b & c is subject to the provisions of existing 1. take charge of assets, liabilities and the
laws protecting or safeguarding the secrecy management thereof;
as confidentiality of bank deposits as well as 2. reorganize the management
investments of private persons, natural or 3. collect all monies and debts due said institution
juridical, in debt institutions issued by the 4. exercise all powers necessary to restore viability
Government of its banking institution
5. report and be responsible to the Monetary
General rule Board; and
‐ no restraining order or injunction shall be issued 6. shall have the power to overrule or revoke the
by the court enjoining the Bangko Sentral from actions of the previous management and Board
examining any institution subject to the of directors of the bank or quasi-bank
supervision or examination by the Bangko
Sentral. Term of office
‐ the conservatorship shall not exceed 1 year
Exceptions
1. action of Bangko Sentral is plainly arbitrary and Remuneration of the Conservator
made in bad faith; and ‐ To be fixed by the Monetary Board in an amount
2. petitioner files with the clerk or judge of court in not to exceed 2/3 of the salary of the President
which the action is pending a bond executed in of the Institution in 1 year, payable in 12 equal
favor of Bangko Sentral, in an amount fixed by monthly payments.
the court. ‐ Rules on Remuneration:
 Saint Louis University COMMERCIAL LAW 216
2012 BAR OPERATIONS

1. if at any time within the 1 year period, the Deposit Insurance Corporation as
conservatorship is terminated on the ground receiver.
that the institution can operate on its own, ‐ Quasi-banking Institution
the conservator shall receive the balance of  any person of recognized competence
the remuneration which he would have in banking or finance may be designated
received up to the end of the year. as receiver by the Monetary Board.
2. if the conservatorship is terminated on other
grounds, the conservator shall not be ‐ A receiver shall be appointed when the
entitled to such remaining balance. Monetary Board finds that a bank or quasi-bank:
3. if the Monetary Board appoints a a. is unable to pay its liabilities as they become
conservator connected with the Bangko due in the ordinary course of business, BUT
Sentral, he shall not be entitled to receive it shall not include inability to pay caused by
any remuneration or emolument from the extraordinary demands induced by financial
Bangko Sentral during the conservatorship. panic in banking community;
b. has insufficient realizable assets, as
Termination of the Conservatorship determined by Bangko Sentral, to meet its
1. When the Monetary Board is satisfied that liabilities;
the institution can continue to operate on its c. cannot continue in business without
own and the conservatorship is no longer involving probable losses to its
necessary. depositors/creditors;
2. When on the basis of the report of the d. has willfully violated a cease and desist
conservator or of the Monetary Board’s own order that had become final and involves
findings, determine that the continuance in acts/transactions which amount to fraud or a
business of the institution would involve dissipation of the assets of the institution.
probable loss to its depositors or creditors,
provisions on receivership and liquidation ‐ during rehabilitation receivership, the assets are
will apply. held in trust for the equal benefit of all creditors
to preclude one from obtaining an advantage or
preference over another by the expediency of an
THE AUDITOR attachment, execution or otherwise.
Chairman of the Commission on Audit shall act as
the ex-officio auditor of the Bangko Sentral and is ‐ Equality is equity means when a corporation
empowered and authorized to: threatened by bankruptcy is taken over by a
a. appoint a representative who shall be receiver, all the creditors should stand on an
the auditor of Bangko Sentral equal footing. Not anyone of them should be
b. fix salary of such representative given any preference by paying one or some of
c. appoint and fix the salaries and number them ahead of the others.
or personnel to assist said
representative in his work. Requirements before a bank may be found
insolvent and declared dissolved
The representative must be: 1. an examination shall be conducted by the head
a. a certified public accountant of the appropriate supervising or examining
b. with at least 10 years experience department or his examiners or agents into the
condition of the bank;
No relative of any member of the Monetary Board or 2. it shall be disclosed in the examination that the
the Chairman of the Commission within the 6th condition of the bank is one of insolvency or that
degree of consanguinity or affinity shall be appointed its continuance in business would involve
such representative. probable loss to its depositors and creditors;
3. the department head concerned shall inform the
RECEIVERSHIP AND LIQUIDATION Monetary Board in writing, of the facts; and
4. the Monetary Board shall find the statements of
Receivership the department head to be true.
‐ Banking institution
 Monetary Board may summarily and  The bank shall be considered as insolvent
without need for prior hearing forbid the when the realizable assets of a bank or a
institution from doing business in the non-bank financial intermediary performing
Philippines and designate the Philippine quasi-banking functions as determined by
 Saint Louis University COMMERCIAL LAW 217
2012 BAR OPERATIONS

the Central Bank are insufficient to meet its 3. may institute such actions as may be necessary
liabilities. to collect and recover accounts and assets of, or
defend any action against the institution.
Powers of the Receiver
1. Immediately gather and take charge of all the Important points to remember:
assets and liabilities of the institution;  ** the assets of an institution under receivership
2. Administer the assets and liabilities for the or liquidation shall be deemed in custodia legis
benefit of its creditors; and in the hands of the receiver and shall from the
3. Exercise the general powers of receiver under moment of institution was placed under
the Revised Rules of Court BUT shall not pay or receivership or liquidation be exempt from any
commit any act that will involve the transfer or order of garnishment, levy, attachment or
disposition of any assets of the institution; execution.
4. May deposit or place the funds of the institution  ** the actions of the Monetary Board taken
in nonspeculative investments. under appointment of conservator, receivership
or liquidation shall be final and executory, and
 The receiver shall determine as soon as may not be restrained or set aside by the court
possible, but not later than 90 days from except on petition for certiorari on the ground of
take-over, whether the institution may be excess of jurisdiction or with such abuse of
rehabilitated or otherwise placed in such a discretion as to amount to lack or excess of
condition so that it may be permitted to jurisdiction.
resume business with safety to its
depositors and creditors and the general REPORTS AND PUBLICATIONS
public. The reports to be submitted and published by the
 If the receiver determines that the institution Banko Sentral are the following:
cannot be rehabilitated or permitted to 1. General balance sheet- shows the volume and
resume business, the Monetary Board shall composition of its assets and liabilities as of the
notify in writing the Board of Directors of its last working day of the month.
findings and direct the receiver to proceed WHEN TO PUBLISH: Within 60 days after the
with the liquidation of the institution. end of each month except for the month of
December which shall be submitted within ninety
Liquidation days after the end thereof.
2. Analysis of economic and financial development.
‐ Banking Institution WHEN TO PUBLISH: Not later than 90 days
 receiver shall file ex parte with the after the end of each quarter.
proper RTC a petition for assistance in 3. Profit and loss statement- reasonable detail of
the liquidation of the institution pursuant Banko Sentral’s operation.
to a liquidation plan adopted by the WHEN TO PUBLISH: Within 90 days after the
Philippine Deposit Insurance end of the year.
Corporation 4. A review of the state of the financial system.
‐ Quasi-banking Institution WHEN TO PUBLISH: 120 days after the end of
 receiver shall also file an ex parte each semester.
petition for assistance in liquidation, the 5. Abnormal movements in monetary aggregates
plan to be adopted by the monetary and the general price level
Board. WHEN TO PUBLISH: as soon as practicable
6. Remedial measures in response to such
Procedure of Liquidation: abnormal movements.
1. the court shall, upon acquiring jurisdiction, upon WHEN TO PUBLISH: not later than 72 hrs after
motion of the receiver, assist the enforcement of they are taken
individual liabilities of the stockholders, directors 7. Annual report on the condition of the Bangko
and officers, and decide on other issues as may Sentral.
be material to implement the liquidation plan WHEN TO PUBLISH: before the end of March of
adopted; each year
2. convert the assets of the institution to money,
dispose of the same to the creditors and other The annual report shall also include:
parties, for the purpose of paying the debts in 1. a financial condition of the Bangko Sentral; and
accordance with the rules on concurrence and 2. a statistical appendix which shall present the
preference of credit; following:
 Saint Louis University COMMERCIAL LAW 218
2012 BAR OPERATIONS

a. monthly movement of monetary aggregate Sentral, depending on whether the revaluations

and their components have produced net profits or net losses
b. monthly movement of purchases and sales
of foreign exchange and of int’l reserves of Fiscal Year
the Bangko Sentral ‐ begins on January 1st and end on December 31st
c. balance of payments of the Philippines of each year
d. monthly indices of consumer prices and of
import and export prices
e. monthly movement, in summary form, of THE BANGKO SENTRAL AND
exports and imports by volume and value THE MEANS OF PAYMENT
f. monthly movements of the accounts of the
Bangko Sentral and of other banks The unit of monetary value in the Philippines is the
g. principal data on gov’t receipts and peso.
expenditures and on the status of the public
debt, both domestic and foreign; and
Currency
h. texts of the major legal and administrative
measures adopted by the gov’t and the ‐ means all Philippine notes and coins issued or
monetary Board during the year which relate circulating in accordance with the provisions of
to the functions or operations of the Bangko the Act.
Sentral or of the financial system.  the Bangko Sentral shall have the sole
power and authority to issue currency,
PROFITS AND LOSSES within the territory of the Philippines
‐ Net Profits  the Bangko Sentral shall also have the
 in the calculation of profits, the Bangko authority to investigate, make arrests,
Sentral shall make adequate allowance or conduct searches and seizures in
establish adequate reserves for bad and accordance with law, for the purpose of
doubtful accounts. maintaining the integrity of the currency.
‐ the net profits and losses shall be determined by  the Monetary Board may issue
the Bangko Sentral within the first 30 days regulations as it may deem advisable in
following the end of each year order to prevent the circulation of foreign
‐ the determination and carrying out the currency or of currency substitutes as
distribution of the net profits shall be made well as prevent the reproduction of
within the first 650 days following the end of facsimiles of Bangko Sentral notes
each fiscal year and the rules on such
distribution are:
Liability for notes and coins
a. 50% of the net profits shall be carried to
surplus; and ‐ notes and coins issued by the Bangko Sentral
b. the remaining 50% shall revert back to the shall be liabilities of the Banko Sentral and may
national treasury be issued only against, and in amounts not
exceeding, the assets of the Bangko Sentral.
Revaluation of profits and losses ‐ all notes and coins issued by the Bangko Sentral
‐ Profits or losses arising from any revaluation of shall be fully guaranteed by the Gov’t of the
the Bangko Sentral’s net assets or liabilities in Philippines and shall be legal tender in the
gold or foreign currencies shall not be included Philippines for all debts, both public and private.
in the computation of the annual profits and ‐ Coins shall be legal tender:
losses – it shall be offset by any amounts which a. in the amounts not exceeding P50 for
are: denominations of 25cents and above; and
a. owed by the Philippines to any international b. in amounts not exceeding P20 for
or regional inter-gov’t financial institution of denominations of 10cents or less
which the Philippines is a member; or
b. owed by these institutions to the Philippines.
Characteristics of the currency
Revaluation of International Reserves The Monetary Board shall, with approval of the
‐ this is a special frozen account where the President:
remaining profit or loss shall be carried and the
net balance of which shall appear either among 1. Prescribe the denominations, dimensions,
the liabilities or among the assets of Bangko designs, inscriptions and other characteristics of
notes issued by Bangko Sentral;
 Saint Louis University COMMERCIAL LAW 219
2012 BAR OPERATIONS

2. Prescribe the weight, fineness, designs, Demand deposits – all those liabilities of the
denominations and other characteristics of the Bangko Sentral and of other Banks which are
coins issued by the Bangko Sentral; denominated in Philippine currency and are subject
3. Prescribe the amounts of the notes and coins to to payment in legal tender upon demand by the
be printed and minted. presentation of checks.
Notes shall bear the signatures, in facsimiles, of the
President and of the Governor of the Bangko
Sentral.  checks representing demand deposits do
not have legal tender power and their
acceptance in the payment of debts, both
INTERCONVERTIBILITY OF CURRENCY public and private, is at the option of the
creditor
Bangko Sentral shall exchange, on demand and
without charge, Philippine currency of any
denomination for Philippine notes and coins of any GUIDING PRINCIPLES OF MONETARY
other denomination requests. If Bangko Sentral is ADMINISTRATION BY THE BANGKO SENTRAL
temporarily unable to provide notes or coins of the
denominations requested, it shall meet its
obligations by delivering notes and coins of the A. Domestic Monetary stabilization
denominations which most nearly approximate those
requested. Monetary Board shall endeavor to control
any expansion or contraction in monetary
aggregates which is prejudicial to the attainment or
maintenance of price stability.
Replacement of currency unfit for circulation
Monetary Board shall have due regard for
General rule:
their effects on the availability and cost of money
Bangko Sentral shall withdraw from and credit to particular sectors of the economy as
circulation and shall demonetize all notes well as to the economy as a whole, and their effects
and coins which for any reason whatsoever on the relationship of domestic prices and costs to
are unfit for circulation and shall replace world prices and costs.
them by adequate notes and coins.
Exception:
Actions when abnormal movements in monetary
coins which show signs of filing, clipping or aggregates occur
perforation, and notes which have lost more
– whenever abnormal movements in the
than 2/5 of their surface or all of the
monetary aggregates, in credit or in prices
signatures inscribed thereon shall not be
endanger the stability of the Philippine
replaced by the Bangko Sentral and shall be
economy or important sectors thereof, the
withdrawn from circulation and demonetized
Monetary Board shall:
without compensation to the bearer.
a. take such remedial measures as
are appropriate and within the
Replacement of old notes and coins powers granted to the Monetary
Board and the Bangko Sentral; and
Replacement happens when Bangko Sentral
call in for replacement of notes of any series b. submits to the President of the
or denominations which are more than % Philippines and Congress and make
years old and coins which are more than 10 public, a detailed report which shall
years old. include:
1. causes of the rise or fall of the
monetary aggregates of credit or of
Notes and coins called in for replacement in
prices;
accordance with this provision shall remain legal
2. the extent to which the changes in
tender for a period of 1 year from the date of call –
the monetary aggregates, in credit,
after this period, they shall cease to be legal tender
or in prices have been reflected in
but during the following year or for such longer
changes in the level of domestic
period, it maybe exchanged at par and without
output, employment, wages and
charge in the Bangko Sentral.
economic activity in general and the
 Saint Louis University COMMERCIAL LAW 220
2012 BAR OPERATIONS

nature and significance of any such 1. endeavor to hold the foreign exchange
changes; and resources of the Bangko Sentral in freely
3. the measures which the Monetary convertible currencies;
Board has taken and the other 2. give particular consideration to the prospects of
monetary, fiscal or administrative continued strengths and convertibility of the
measures which it recommends to currencies in which the reserve is maintained,
be adopted. including anticipated demands to such
currencies;
3. issue regulations determining the other
B. International Monetary Stabilization
qualifications which foreign exchange assets
The Bangko Sentral shall exercise its must meet in order to be included in the
powers to preserve the International value of the international reserves of the Bangko Sentral.
peso and to maintain its convertibility into other
freely convertible currencies primarily for, although
not necessarily limited to, current payments, for Actions when international stability of peso is
foreign trade and industry. threatened:
The Monetary Board shall:
a. take such remedial measures as are
How to maintain such stability and convertibility: appropriate and within the powers granted to the
Monetary Board and the Bangko Sentral; and
The Bangko Sentral shall maintain b. submits to the President and to congress a
International reserves adequate to meet any detailed report which shall include a description
foreseeable net demands on the Bangko Sentral for and analysis of:
foreign currencies. 1. nature and causes of existing or
imminent decline;
2. remedial measures already taken or to
Guide to monetary board in judging adequacy of be taken by the Monetary Board
international reserves: 3. monetary, fiscal or administrative
1. the prospective receipts and payment of foreign measures; and
exchange by the Philippines; 4. character and extent of the cooperation
2. give special attention to the volume and maturity required from other gov’t agencies for the
of the Bangko Sentral’s own liabilities in foreign successful execution of the policies of the
currencies; Monetary Board.
3. give special attention also to the volume and
maturity of the foreign exchange assets and When threatened:
liabilities of other banks operating in the 1. whenever the international reserve of the
Philippines; and Bangko Sentral falls to a level which the
4. give special attention to the volume and maturity Monetary Board considers inadequate to met
of the foreign exchange assets and liabilities of the prospective net demands on the Bangko
all other persons and entities in the Philippines. Sentral for foreign currencies;
2. whenever the international reserves appears to
Composition of International reserves be in imminent danger of falling to such a level;
It includes, but not limited to: 3. whenever the international reserve is falling as a
a. gold; and result of payments or remittances abroad which
b. assets in foreign currencies which is contrary to the national welfare.
includes:
- documents and instruments customarily
employed for the international transfer of INSTRUMENTS OF BANGKO SENTRAL ACTION
funds
- demand and time deposits in Central In order to achieve the primary objective of price
Banks, treasuries and commercial banks stability, the Monetary Board shall rely on its moral
abroad influence and the powers granted to it for the
- foreign gov’t securities; and management of monetary aggregates.
- foreign notes and coins
Purchases and sales
The Monetary Board shall: 1. Gold
‐ the Bangko Sentral may buy and sell gold in
any form; such purchases and sales shall be
 Saint Louis University COMMERCIAL LAW 221
2012 BAR OPERATIONS

made in the national currency at the  The Bangko Sentral shall endeavor to
prevailing international market price as maintain at all times a net positive foreign
determined by the Monetary Board. asset position so that its gross foreign
exchange assets will always exceed its
2. Foreign Exchange gross foreign liabilities – in case the amount
‐ The Bangko Sentral may buy and sell in peso of the liabilities exceed twice the
foreign notes and coins, and documents and amount in peso of the assets; Bangko
instruments of types customarily employed Sentral shall submit a report to Congress
for the int’l transfer of funds. stating the origin of these liabilities and the
‐ Foreign exchange may be had with the manner they will be paid within 60 days from
following entities or persons: the date the limit is exceeded.
a. Banking institutions operating in the
Philippines; EMERGENCY RESTRICTIONS ON EXCHANGE
b. The government, its political OPERATIONS
subdivisions and instrumentalities During an exchange crisis or in time of national
c. Foreign or int’l financial institutions emergency or crisis, the Monetary Board:
d. Foreign gob’s and their 1. May temporarily suspend or restrict sales of
instrumentalities; and exchange by the Bangko Sentral, with the
e. Other entities and persons which the concurrence of at least 5 of its members; and
Monetary Board is hereby empowered 2. May subject all transactions in gold and foreign
to authorize as foreign exchange exchange to license by the Bangko Sentral and
dealers. any foreign exchange thereafter obtained by any
person or entity in the Philippines be delivered to
Bangko Sentral or to any bank or agent
How to maintain convertibility of peso designated by the Bangko Sentral for the
1. buy any quantity of foreign exchange offered purpose.
2. sell any quantity of foreign exchange demanded
by such institution REGULATIONS OF FOREIGN EXCHANGE
PROVIDED, that the foreign currencies so OPERATION OF BANKS
offered or demanded are freely convertible 1. May require the banks to sell to Bangko Sentral
into gold or Us dollars; but their requirement or to other banks all or part of their surplus
shall not apply to demands for foreign notes holdings of foreign exchange;
and coins. 2. Determine the net assets and net liabilities of
banks and shall take into account the bank’s net
 Bangko Sentral shall avoid the acquisition worth, outstanding liabilities or such other
and holdings of currencies which are not financial or performance ratios;
freely convertible and may acquire such 3. Require banks to have a Balanced Currency
currencies to an amount exceeding the Position – maintain a balanced position between
minimum balance necessary to cover their assets and liabilities in Philippine peso or in
current demands only when such is any other currency in which they operate;
considered by Monetary Board to be in the 4. Issue regulations governing bank’s purchases
national interest. and sales of non-spot exchanges;
5. Banks shall bear the risks of noncompliance with
EXCHANGE RATES the terms of foreign exchange documents and
– the Monetary Board shall determine: instruments which they buy and sell and other
1. The exchange rate policy of the country; typically commercial or banking risks;
2. The rates of which the Bangko Sentral shall buy 6. Banks shall report to Bangko Sentral the volume
and sell spot exchange; and composition of their purchases and sales of
3. Establish deviation limits from the effective gold and foreign exchange each day and furnish
exchange rate(s) as it may deem proper; and additional information with regard to the
4. The rates for other types of foreign exchange movements in their accounts in foreign
transactions by the Bangko Sentral including currencies;
purchases and sales of foreign notes and coins. 7. Monetary Board may also require other persons
and entities to report to it currently all
 The Bangko Sentral shall not collect any transactions or operations in gold and in foreign
additional commissions/charges of any sort exchange.
other than the actual telegraphic/ cable
costs incurred by it.
 Saint Louis University COMMERCIAL LAW 222
2012 BAR OPERATIONS

LOANS TO BANKS AND OTHER OFFICIAL c. credit instruments for commercial

INSTITUTIONS credits;
d. credit instruments for production credits;
Credit Policy e. utilized portions of advances in current
‐ the rediscounts, discounts, loans and account covered by regular overdraft
advances which the Bangko Sentral is agreements;
authorized to extend to banking institutions f. negotiable treasury bills, certificate of
shall be used to influence the volume of indebtedness, notes and other
credit consistent with the objective of price negotiable obligations of the gov’t
stability. maturing within 3 years from date of
advance; and
A. NORMAL CREDIT OPERATIONS g. negotiable bonds issued by the gov’t
1. Commercial credits having maturities of not more than 10
– the Bangko Sentral may rediscount, discount, years from date of advance
buy and sell bills, acceptances, promissory
notes and other credit instruments with B. SPECIAL CREDIT OPERATIONS
maturities of not more than 180 days from date Loans for liquidity purposes – the Bangko
of rediscount, discount or acquisition and Sentral may extend loans and advances to
resulting from transactions related to: banking institutions for a period of not more
a. importation, exportation, purchase than 7 days without any collateral for the
or sale of readily saleable goods purpose of providing liquidity to the banking
and products, or their transportation system in times of need.
within the Philippines; or
b. storing of non-perishable goods and C. EMERGENCY CREDIT OPERATIONS
products which are duly insured and 1. In periods of national or local emergency or
deposited, under conditions during imminent financial panic which directly
assuring their preservation in threaten monetary banking stability, the
authorized bonded warehouses or in Monetary Board may, by a vote of at least 5 of
other places approved by the its members, authorize Bangko Sentral to grant
monetary board extraordinary loans or advances secured by
2. Production credits assets.
– the Bangko Sentral may rediscount, discount,  Amount of loan or advance: shall not exceed
buy and sell bills, acceptances, promissory the sum of 50% of total deposits and deposit
notes and other credit instruments having substitutes of the banking institution.
maturities of not more than 360 days from the  Manner of Paying: shall be disbursed in 2 or
date of their rediscount, discount or acquisition more tranches; 1st tranch shall be limited to
and resulting from transactions related to 25% of the total deposits and deposit
production or processing of agricultural, animal, substitute of the institution and shall be
mineral and industrial products. secured by gov’t securities to the extent of
 this shall be secured by a pledge of the their applicable loan valued and other
respective crops or products but if the unencumbered first class collaterals which
original loan granted by the Bangko monetary Board may approve.
Sentral is secured by a lien or mortgage 2. the Monetary Board may, at its discretion, even
on real estate property 70% of the during normal periods, authorize Bangko Sentral
appraised value equals or exceeds the to grant emergency loans or advances for the
amount of loans granted, then products purpose of assisting a bank in precarious
need not be pledged. financial condition or under serious financial
3. Other credits pressures brought by unforeseen events or
– special credit instruments not otherwise events which through foreseeable could not be
rediscountable under (a) and (b) may be prevented by the bank.
rediscountable in accordance with rules and REQUISITES:
regulation which Bangko Sentral shall prescribe. a. monetary board shall ascertain that the
4. Advances may be granted by Bangko Sentral bank is not insolvent;
against `the following kinds of collateral: b. that the bank has the assets defined to
a. gold coins or bullion; secure the advances;
b. securities representing obligations of the c. there should be a concurrent vote of at
Bangko Sentral or other domestic credit least 5 members of the Monetary Board
institutions of recognized solvency;
 Saint Louis University COMMERCIAL LAW 223
2012 BAR OPERATIONS

Credit term or requirements

1. the Bangko Sentral shall collect interest and BANK RESERVES
other appropriate charges on all loans and ‐ in order to control the volume of money created
advances it extends by the credit operations of the banking systems,
2. the document rediscounted, discounted or all banks operating in the Philippines shall be
accepted as collateral by the Bangko Sentral required to maintain reserves against their
should bear the endorsement of the institution deposit liabilities
from which they are received; ‐ this required reserves of each bank shall be
3. documents rediscounted, discounted, or proportional to the volume of its deposit liabilities
accepted as collateral by Bangko Sentral must and shall ordinarily take the form of a deposit in
be withdrawn by the borrowing institution in the the Bangko Sentral
dates of their maturities or upon liquidation of ‐ the Monetary Board may exempt from reserve
obligation requirement deposits and deposit substitutes
‐ banks shall have the right at any time to with remaining maturities of 2 years or more as
withdraw any document presented as well as interbank borrowings.
collateral upon payment in full of the
corresponding debt to Bangko Sentral DEPOSIT SUBSTITUTES
including interest charges. ‐ an alternative form of obtaining funds from the
4. monetary board prescribe additional conditions public (other than deposits) through the
which borrowing institutions must satisfy in order issuance, endorsement or acceptance of debt
to have access to the credit of Bangko Sentral instruments for the borrower’s own account, for
the purpose of relending or purchasing of
OPEN MARKET OPERATIONS receivables and other obligations; examples of
The open market purchases and sales of securities these instruments are:
by Bangko Sentral shall be made exclusively in 1. banker’s acceptances
accordance with its primary objective of achieving 2. promissory notes
price stability. 3. participations
4. certificates of assignment and similar
What to buy and sell in open market instruments with recourse; and
1. evidences of indebtedness issued directly by the 5. purchase agreements
Government
2. evidences of indebtedness issued by  the Monetary Board may fix and alter the
Government instrumentalities and fully minimum reserve ratios applicable to
guaranteed by the Government deposits denominated in both peso and
 these evidences of indebtedness must be foreign currencies, as well as to deposit
freely negotiable and regularly serviced and substitutes, which each bank maintains.
must be available to the general public
through banking institutions and local Computation of reserves
government treasuries in denominations of a ‐ It shall be calculated daily at the end of the day
thousand pesos or more on the basis of the amount of the institution’s
3. Bangko Sentral may also issue, place, buy and reserves and the amount of its liability accounts
sell freely negotiable evidences of indebtedness against which reserves are required to be
of the Bangko Sentral in order to provide the maintained.
latter with effective instruments for open market ‐ Whenever it becomes necessary to increase
operations reserve requirements against existing liabilities,
 these issuances shall only be made in cases the increase shall be made in a gradual manner
of extraordinary movement in price levels. and shall not exceed 4% points in any 30 day
period.
Bangko Sentral’s Portfolio
‐ at least once a month, the Monetary Board shall Reserve deficiencies
review the portfolio of Bangko Sentral especially
considering whether a sufficiently large part of ‐ occurs whenever the reserve position of any
the portfolio consists of assets with early bank or quasi-bank is below the required
maturities, in order that contraction in Bangko minimum; EFFECT: shall pay the Bangko
Sentral credit may be effected promptly Sentral 1/10 of 1% per day on the amount of the
whenever the national monetary policy so deficiency or the prevailing 91 day treasury bill
requires. rate plus 3% points, whichever is higher
 Saint Louis University COMMERCIAL LAW 224
2012 BAR OPERATIONS

 The banks and quasi-banks shall ordinarily government owned banks and such other banks
be permitted to affect any reserve deficiency as the Monetary Board may designate.
occurring on one or more days of the week 4. The Bangko Sentral shall open a general cash
with any excess reserves which they may account for the treasurer of the Philippines, in
hold on other days of the same week and which the liquid funds of the government shall
shall be required to pay the penalty only on be deposited
the average daily deficiency during the 5. In the performance of its functions as fiscal
week. agent, the Bangko Sentral may engage the
 The Monetary Board may modify or set services of other government owned and
aside the reserve deficiency penalties for controlled banks and of other domestic banks for
part or the entire period of a) a strike or operations in localities at home or abroad in
lockout affecting a bank or quasi-bank, b) or which the Bangko Sentral does not have offices
of a national emergency affecting operations or agencies adequately equipped to perform
of banks or quasi-banks. said operations

Interbank settlement THE MARKETING AND STABILIZATION OF

Bangko Sentral shall establish facilities for interbank SECURITIES FOR THE ACCOUNT OF THE
clearing under such rules and regulations as the GOVERNMENT
Monetary Bank may prescribe; the deposit reserves
maintained by the banks in the Bangko Sentral The issue of government securities
serve as basis for the clearing of checks and the ‐ the issue of securities representing obligations
settlement of interbank balances. of the government and its instrumentalities may
be made through the Bangko Sentral which may
Exemption from attachment and other purposes act as agent of, and for the account of, the
Deposits maintained by banks with the Bangko government or its respective subdivisions or
Sentral as part of their reserve requirement shall be instrumentality.
exempt from attachment, garnishment, or any other ‐ HOWEVER, Bangko Sentral shall not guarantee
order or process of any court, government agency or the placement of said securities, and shall not
any other administrative body issued to satisfy the subscribe to their issue except to replace its
claim of a party other than the government. maturing holdings of securities.
 The Monetary Board shall use the powers
granted to it to ensure that the supply, The placing of government securities
availability and cost of money are in accord ‐ the Bangko Sentral may place the securities
with the needs of the Philippine economy through direct sale to financial institutions and
and that bank credit is not granted for the public
speculative purposes prejudicial to the ‐ the Bangko Sentral shall not be a member of
national interest. any stock exchange or syndicate, but may
intervene therein for the sole purpose of
FUNCTIONS AS BANKER AND FINANCIAL regulating their operations in the placing of
ADVISOR OF THE GOVERNEMENT government securities.

Functions as Banker of the Government FUNCTIONS AS FINANCIAL ADVISOR OF THE

1. The Bangko Sentral shall act as a banker of the GOVERNMENT
Government, its political subdivisions and
instrumentalities. Financial advices on official credit operations:
2. The Bangko Sentral shall represent the a. the government (through the secretary
Government in all dealings, negotiations and of Finance)
transactions with the International Monetary b. political subdivisions and
Fund, International Bank for Reconstruction and instrumentalities of the government;
Development and with other foreign or BEFORE undertaking any credit
international financial institutions or agencies. operations abroad shall request the
3. The Bangko Sentral shall be the official opinion, in writing, of the Monetary
depository of the Government, its political Board on the monetary implications of
subdivision and instrumentalities as well as the contemplated actions.
GOCC’s, their cash balances should be
deposited with the Bangko Sentral, with only Basis of opinion:
minimum working balances to be held by 1. based on the gold and foreign exchange
resources and obligations of the nation;
 Saint Louis University COMMERCIAL LAW 225
2012 BAR OPERATIONS

2. based on the effects of the proposed 2. shall not participate in the ownership or
operation on the balance of payments; management of any enterprise, either directly or
and indirectly
3. based on money aggregates 3. shall not engage in development banking or
financing

SECURITIES STABILIZATION FUND

‐ shall be administered by the Bangko Sentral for  
 

the account of the Government. IX. B. SECRECY OF BANK DEPOSITS LAW

‐ Operation: consists of purchases and sales, in RA 1405
the open market, of bonds and other evidence of
indebtedness issued or fully guaranteed by the
Governmen All deposits of whatever nature with banks or
‐ Purpose: to increase the liquidity and stabilize banking institutions in the Philippines, including
the value of said securities in order to promote investments in bonds issued by the Government of
private investment in government obligations the Philippines, its political subdivisions and its
‐ Resources: shall come from the balance of the instrumentalities is covered by this law.
fund held by the Central Bank
‐ Profits and Losses: shall retain any net profits Money-market placement is NOT covered, because
which it may make on its operations, regardless it is NOT deposited in the bank.
of whether said profits arise from capital gains or
from interest earnings; shall correspondingly Purposes of the law
bear any net losses which it may incur. 1. Encourage people to deposit in banking
institutions; and
PRIVILEGES AND PROHIBITIONS 2. Discourage private hoarding so that banks may
lend such funds and assist in the economic
PRIVILEGES development of the country

1. Tax Exemptions Prohibited Acts

‐ the Bangko Sentral shall be exempt for a 1. Examination and inquiry or looking into all
period of 5 years from the approval of the deposits, of whatever nature, with the banks in
Act from all national, provincial, municipal the Philippines including investment in bonds
and city taxes, fees, charges and issued by the government.
assessments. 2. Any disclosure by any official or employee of
‐ this exemption shall apply to any banking institution to any unauthorized
a. all property of Bangko Sentral, person of any information concerning the said
b. resources, receipts, expenditures, deposits.
profits and income of Bangko Sentral,
c. as well as to all contracts, deeds, GENERAL RULE
documents and transactions relate to All deposits of whatever nature with banks or
banking institutions in the Philippines including
the conduct of the business of Bangko
Sentral investments in bonds issued by the Government, its
political subdivisions and instrumentalities, are
2. Exemption from custom duties hereby considered as of an absolutely confidential
nature and may not be examined, inquired or looked
‐ the importation and exportation by the
into by any person, government official, bureau or
Bangko Sentral of
office.
a. notes and coins;
b. of gold and other metals to be used for
EXCEPTIONS:
the conduct of business of Bangko
Sentral and
c. importation of all equipment needed for A. RA 1405
1. when the examination is made in the course of a
bank note production, minting of coins,
special or general examination of a bank and is
metal refining and other security printing
specifically authorized by the Monetary Board
operations.
after being satisfied that there is reasonable
ground to believe that a bank fraud or serious
PROHIBITIONS
irregularity has been or is being committed and
1. the Bangko shall not acquire shares of any kind
that it is necessary to look into the deposit;
or accept them as collateral
 Saint Louis University COMMERCIAL LAW 226
2012 BAR OPERATIONS

2. when the examination is made by an 4. Destructive arson and murder under RPC,
independent auditor hired by the bank to including those perpetrated by terrorists
conduct its regular audit provided that the against non-combatant persons and similar
examination is for audit purposes only and the targets
results thereof shall be for the exclusive use of
the bank; E. Unclaimed Balances Act
4. upon written permission of the depositor, or in ‐ Disclosure to the Treasurer of the Philippines of
cases of impeachment; dormant deposits for at least 10 years
5. upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or IMPORTANT POINTS TO REMEMBER:
in cases of unexplained wealth under the Anti-
graft Law;  Court cannot order production of bank deposit
6. in cases where the money invested or deposited records of depositor unless exempted.
is the subject matter of the litigation.  Stockholders cannot inquire as to the existence
 It shall be unlawful for any official or employee of of bank deposits and how much, of his debtor
a bank to disclose to any person other than  Writ of garnishment may be issued against
those under the exceptions, or for an debtor’s bank deposits because the inquiry
independent auditor hired by a bank to conduct refers only as to WON the debtor had a deposit
its regular audit to disclose to any person other in the bank concerned. There was really no
than a bank director, official or employee inquiry as to the outstanding balance.
authorized by the bank, any information
concerning said deposits.
Requisites for In-Camera Inspection of Bank
B. Anti-Graft and Corrupt Practices Act Deposits
‐ Upon the order of a competent court or tribunal 1. Pending case before a court of competent
in cases involving unexplained wealth jurisdiction
‐ This law is intended to amend RA 1405 by 2. Account must be clearly identified
providing an additional exception to the rule 3. The inspection is limited to the subject of the
against the disclosure of bank deposits (PNB v pending litigation
Gancayco, September 30, 1965) 4. The bank personnel and account holder must be
notified to be present during the inspection
C. National Internal Revenue Code 5. The inspection must cover only the account
‐ Upon inquiry by the Commissioner of Internal identified in the pending case
Revenue into the bank deposits of
1. A decedent to determine his gross estate;  Investigation by the Office of the
2. Any taxpayer who has filed an application Ombudsman is NOT considered pending
for compromise of his tax liability under Sec. litigation before any court of competent
204(A)(2) by reason of financial incapacity to authority. Such investigation would not
pay his tax liability warrant the opening of the bank account for
 He must file a written waiver of his inspection.
privilege under RA 1405 or other
general or special laws and such waiver PENALTIES
shall constitute the authority of the 1. Imprisonment of not more than 5 years; or
Commissioner to inquire into the bank 2. A fine of not more than P20,000; or
deposits of the taxpayer Both, in the discretion of the court

D. Anti-Money Laundering Act  

 

‐ Inquiry or examination by the AMLC upon order UNCLAIMED BALANCES LAW

of any competent court in cases of violation of
the AMLA, if there is probable cause that the
deposits or investments are related to an ELEMENTS OF UNCLAIMED BALANCES
unlawful activity or a money laundering offense 1. Include credits or deposits of
‐ Except that no court order shall be required in a. Money
the following unlawful activities: b. Bullion
1. Kidnapping for ransom under Art. 267, RPC c. Security, or
2. Violations of the Comprehensive Dangerous d. Other evidence of indebtedness
Act of 2002
3. Hijacking and other violations under RA
6235
 Saint Louis University COMMERCIAL LAW 227
2012 BAR OPERATIONS

2. The credit or deposit must be with a bank, Quasi-banks shall refer to entities engaged in
building and loan association, or trust the borrowing of funds through the issuance,
corporation; and endorsement or assignment with recourse or
3. The credit or deposit is in favor of a person acceptance of deposit substitutes for purposes
a. Who is known to be dead, or of re-lending or purchasing of receivables and
b. Who has not made further deposits or other obligations
withdrawals during the preceding 10 years
or more Deposit substitutes is defined as an alternative
form of obtaining funds from the public, other
LEGAL CONSEQUENCE than deposits, through the issuance,
The unclaimed balances may be subject to escheat endorsement, or acceptance of debt instruments
proceedings, for the borrower's own account, for the purpose
a. after proper publication and of relending or purchasing of receivables and
b. the depositors still do not lay claim to them other obligations. These instruments may
include, but need not be limited to, bankers
 Demand drafts CANNOT be escheated, but acceptances, promissory notes, participations,
telegraphic notes can be escheated (Republic certificates of assignment and similar
v FNCB, December 30, 1961)
instruments with recourse, and repurchase
agreements.
IX. C. THE GENERAL BANKING LAW OF 2000
REPUBLIC ACT NO. 8791 Supervision shall include the following:

a. The issuance of rules of, conduct or the

Banks
establishment standards of operation for
‐ entities engaged in the lending of funds obtained
uniform application to all institutions or
in the form of deposits
functions covered, taking into consideration
‐ an investment company that performs such
the distinctive character of the operations of
functions is NOT a bank; but one which loans
institutions and the substantive similarities of
out the money of its customers, collects the
specific functions to which such rules, modes
interests and charges a commission to both
or standards are to be applied
lender and borrower is engaged in banking
(Banas v. Asia Pacific Finance Corp., Oct. 18, 2000; b. The conduct of examination to determine
Republic vs. SCAC, G.R. No. L-20583) compliance with laws and regulations if the
circumstances so warrant as determined by
Classification of Banks the Monetary Board
a. Commercial banks; c. Overseeing to ascertain that laws and
b. Universal banks regulations are complied with
c. Thrift banks, composed of: d. Regular investigation which shall not be
(i) Savings and mortgage banks; oftener than once a year from the last date of
(ii) Stock savings and loan associations; and examination to determine whether an
(iii) Private development banks institution is conducting its business on a safe
b) Rural banks or sound basis: Provided, That the
c) Islamic banks deficiencies/irregularities found by or
d) Cooperative banks discovered by an audit shall be immediately
e) Other classifications of banks as determined by addressed
the Monetary Board of the Bangko Sentral ng e. Inquiring into the solvency and liquidity of the
Pilipinas. institution; or
f. Enforcing prompt corrective action.
POWERS OF THE BANGKO SENTRAL
2. The Monetary Board may prescribe ratios,
1. Supervisory Powers. The operations and ceilings, limitations, or other forms of
activities of banks shall be subject to supervision regulation on the different types of accounts
of the Bangko Sentral. It shall also have and practices of banks and quasi-banks which
supervision over the operations of and exercise shall, to the extent feasible, conform to
regulatory powers over quasi-banks, trust internationally accepted standards, including of
entities and other financial institutions which the Bank for International Settlements (BIS).
under special laws are subject to Bangko
Sentral supervision.
 Saint Louis University COMMERCIAL LAW 228
2012 BAR OPERATIONS

The Monetary Board may exempt documents, papers or records within a

particular categories of transactions from reasonable time shall subject the persons
the abovementioned regulations, but not responsible therefore to the penal sanctions
limited to: provided under the New Central Bank Act.
1. Exceptional cases or
2. To enable a bank or quasi-bank under 5. The Bangko Sentral shall, when examining a
rehabilitation or during a merger or bank, have the authority to examine an
consolidation to continue in business, enterprise which is wholly or majority-owned
with safety to its creditors, depositors or controlled by the bank.
and the general public. 6. Phase Out of Bangko Sentral Powers Over
Building and Loan Associations.
3. Authorize person or entity to engage in banking
operations or quasi-banking functions Within a period of three (3) years from
the effectivity of this Act, the Bangko
No person or entity shall engage in Sentral shall phase out and transfer its
banking operations or quasi-banking supervising and regulatory powers over
functions without authority from the building and loan associations to the
Bangko Sentral: Home Insurance and Guaranty
Provided, however, That an entity Corporation which shall assume the
authorized by the Bangko Sentral to same.
perform universal or commercial banking
functions shall likewise have the authority Conditions in the organization of bank or quasi-
to engage in quasi-banking functions. bank
1. That the entity is a stock corporation;
Upon issuance of this authority, such 2. That its funds are obtained from the
person or entity may commence to public, which shall mean twenty (20) or
engage in banking operations or quasi- more persons; and
banking function and shall continue to do 3. That the minimum capital requirements
so prescribed by the Monetary Board for
unless such authority is sooner each category of banks are satisfied
1. Surrendered,
2. Annulled by the Bangko Sentral in Other Considerations
accordance with this Act or other 1. Capability in terms of their financial resources
special laws. and technical expertise and integrity.
3. Revoked, 2. The bank licensing process shall incorporate
4. Suspended a. an assessment of the bank’s
ownership structure, directors and
Persons or entities found to be performing senior management,
banking or quasi-banking functions b. its operating plan
without authority from the Bangko Sentral c. internal controls
shall be subject to appropriate sanctions d. its projected financial condition and
under the New Central Bank Act and other capital base.
applicable laws.
Issuance of Stocks
4. The department head and the examiners of the Par value stocks only
appropriate supervising and examining
department are authorized to administer Treasury Stocks - No bank shall purchase or
oaths to any such person, employee, officer, or acquire shares of its own capital stock or
director of any such entity and to compel the accept its own shares as a security for a
presentation or production of such books, loan,
documents, papers or records that are
reasonably necessary to ascertain the facts except when authorized by the Monetary
relative to the true functions and operations of Board:
such person or entity.
Provided, That in every case the stock so
Failure or refusal to comply with the required purchased or acquired shall, within six (6)
presentation or production of such books, months from the time of its purchase or
 Saint Louis University COMMERCIAL LAW 229
2012 BAR OPERATIONS

acquisition, be sold or disposed of at a reasonably assure the safety of deposits

public or private sale. and the public interest.

Foreign Stockholdings  The Securities and Exchange Commission

Foreign individuals and non-bank corporations shall not register the by-laws of any bank, or
may own or control up to forty percent (40%) of any amendment thereto, unless accompanied
the voting stock of a domestic bank. This rule by a certificate of authority from the Bangko
shall apply to Filipinos and domestic non-bank Sentral.
corporations.
Board of Directors
The percentage of foreign-owned voting
stocks in a bank shall be determined by the At least five (5), and a maximum of fifteen (15)
citizenship of the individual stockholders in members of the board or directors of a bank, two
that bank. (2) of whom shall be independent directors.

The citizenship of the corporation which is An "independent director" shall mean a

a stockholder in a bank shall follow the person other than an officer or employee of
citizenship of the controlling stockholders of the bank, its subsidiaries or affiliates or
the corporation, irrespective of the place of related interests.
incorporation. {Control Test applies}
In the case of a bank merger or consolidation,
 Matters which must be fully disclosed in all the number of directors shall not exceed twenty-
transactions by corporations or related groups of one (21)
persons with the bank {Scope of RELATED
INTEREST} Non-Filipino citizens may become members of
1. Stockholdings of Family Groups of Related the board of directors of a bank to the extent of
Interests the foreign participation in the equity of said
Stockholdings of individuals related to bank.
each other within the fourth degree of
consanguinity or affinity, legitimate or The meetings of the board of directors may be
common-law, shall be considered family conducted through modern technologies such
groups or related interests. as, but not limited to,
2. Corporate Stockholdings. 1. teleconferencing and
Two or more corporations owned or 2. video-conferencing.
controlled by the same family group or
same group of persons shall be Fit and Proper Rule.
considered related interests The Monetary Board shall prescribe, pass upon and
review the qualifications and disqualifications of
 The Securities and Exchange Commission individuals elected or appointed bank directors or
shall not register the articles of incorporation officers and disqualify those found unfit.
of any bank, or any amendment thereto, unless Ratio: To maintain the quality of bank management
accompanied by a certificate of authority and afford better protection to depositors and the
issued by the Monetary Board, under its seal. public in general

Evidence to be submitted for the issuance of After due notice to the board of directors of the bank,
the certificate of authority the Monetary Board may disqualify, suspend or
b) That all requirements of existing laws and remove any bank director or officer who commits or
regulations to engage in the business for omits an act which render him unfit for the position.
which the applicant is proposed to be
incorporated have been complied with; In determining whether an individual is fit and proper
c) That the public interest and economic to hold the position of a director or officer of a bank,
conditions, both general and local, justify regard shall be given to his
the authorization; and 1. Experience.
d) That the amount of capital, the financing, 2. Competence
organization, direction and administration, 3. Integrity
as well as the integrity and responsibility 4. Training
of the organizers and administrators 5. Education
 Saint Louis University COMMERCIAL LAW 230
2012 BAR OPERATIONS

Prohibition on Public Officials 1. General powers incident to corporations

Except as otherwise provided in the Rural Banks 2. Powers necessary to carry on the
Act, no appointive or elective public official business banking such as
whether full-time or part-time shall at the same a. accepting drafts and issuing letters
time serve as officer of any private bank, of credit;
save in cases where b. discounting and negotiating
1. Such service is incident to financial promissory notes, drafts, bills of
assistance provided by the government or exchange, and other evidences of
a government owned or controlled debt;
corporation to the bank or c. accepting or creating demand
2. Unless otherwise provided under existing deposits;
laws. Note: A bank other than a
universal or commercial bank
Bank Branches cannot accept or create demand
Universal or commercial banks may open deposits except upon prior
branches or other offices within or outside the approval of, and subject to such
Philippines upon prior approval of the Bangko conditions and rules as may be
Sentral. {all other banks shall be governed by prescribed by the Monetary
pertinent laws.} Board. (sec 22)
d. receiving other types of deposits
A bank may, subject to prior approval of the and deposit substitutes;
Monetary Board, use any or all of its e. buying and selling foreign
branches as outlets for the presentation exchange and gold or silver bullion;
and/or sale of the financial products of its f. acquiring marketable bonds and
allied undertaking or of its investment house other debt securities; and
units. g. extending credit,.
3. powers of an investment house as
A bank authorized to establish branches or provided in existing laws and the power to
other offices shall be responsible for all invest in non-allied enterprises as
business conducted in such branches and provided in this Act.
offices to the same extent and in the same
manner as though such business had all Operations Of Commercial Banks
been conducted in the head office. Powers of a Commercial Bank.
A bank and its branches and offices shall same as (1) and (2) of Universal banks
be treated as one unit.
Commercial
Universal Banks
Strikes and Lockouts Banks
- Any strike or lockout involving banks, A universal bank A commercial
- if unsettled after seven (7) calendar days may invest in the bank may invest
- shall be reported by the Bangko Sentral to the Equity
equities of only in the
Secretary of Labor who: Investments
allied** and non- equities of allied**
1. May assume jurisdiction over the allied enterprises enterprises
dispute or **Allied enterprises may either be
2. Decide it or financial or non-financial.
3. Certify the same to the National Labor a. The total a. The total
Relations Commission for compulsory investment in investment in
arbitration. equities of equities of
However, the President of the Philippines allied and allied
may at any time intervene and assume non-allied enterprises
jurisdiction over such labor dispute in enterprises shall not
order to settle or terminate the same. Conditions
shall not exceed thirty-
to equity
exceed fifty five percent
Ratio: The banking industry is declared as investment
percent (50%) (35%) of the
indispensable to the national interest of the net net worth of
worth of the the bank; and
Operations Of Universal Banks and Commercial bank; and
Banks b. The equity
Powers of a Universal Bank b. The equity investment in
 Saint Louis University COMMERCIAL LAW 231
2012 BAR OPERATIONS

investment in any one the voting

any one enterprise stock of only
enterprise, shall not one other
whether allied exceed twenty- universal or
or non-allied, five percent commercial
shall not (25%) of tile bank (sec
exceed net worth of 25)}
twenty-five the bank. Equity May own up to May own up to
percent (25%) Investments one hundred one hundred
of the net c. Subject to prior in Non- percent (100%) percent (100%) of
worth** of the approval of the Financial of the equity in a the equity in a
bank. Monetary Allied non-financial non-financial
Board Enterprises. allied enterprise. allied enterprise
c. Subject to To promote
prior approval competitive
of the conditions in
Monetary financial
Board markets, the
**“net worth” shall mean the total of the unimpaired Monetary Board
paid-in capital including paid-in surplus, retained Equity may further limit
earnings and undivided profit, net of valuation Investments to forty percent
reserves and other adjustments as may be required in Quasi- (40%) equity
by the Bangko Sentral Banks. investments of
a. May own up to universal banks -do-
one hundred in quasi-banks.
percent This rule shall
(100%) of the also apply in the
equity of case of
o a thrift commercial
a. May own up to
bank or banks.
one hundred
o a rural - The equity
percent
bank investment of
(100%) of the
b. Where the a universal
equity in
equity bank, or
o a thrift
investment of - of its wholly or
bank,
a commercial majority-
o a rural
bank is in owned
bank or
other financial subsidiaries,
o a financial
Equity allied - in a single
allied
Investments enterprises, non-allied
enterprise Equity
in Financial including enterprise
b. A publicly- Investments
Allied another - shall not
listed in Non-
Enterprises commercial exceed thirty-
universal may Allied
bank, such five percent
own up to one Enterprises
investment (35%) of the
hundred -None-
shall remain a total equity in
percent
minority that enterprise
(100%) of the
holding in that - nor shall it
voting stock of
enterprise exceed thirty-
only one other
{??? A five percent
universal or
publicly- (35%) of the
commercial
listed voting stock in
bank
commercial that
bank may enterprise.
own up to
one hundred
percent
(100%) of
 Saint Louis University COMMERCIAL LAW 232
2012 BAR OPERATIONS

PROVISIONS APPLICABLE TO ALL BANKS, - the ratio be determined on the basis of the
QUASI-BANKS, AND TRUST ENTITIES net worth and risk assets of a bank and its
subsidiaries, financial or otherwise,
Other Banking Services - MB may prescribe the composition and the
In addition to the operations specifically manner of determining the net worth and
authorized in this Act, a bank may perform the total risk assets of banks and their
following services: subsidiaries:
- Provided, That in the exercise of this
1. Receive in custody funds, documents authority, the Monetary Board shall, to the
and valuable objects; extent feasible conform to internationally
2. Act as financial agent and buy and sell, accepted standards, including those of the
by order of and for the account of their Bank for International Settlements (BIS),
customers, shares, evidences of relating to risk-based capital requirements:
indebtedness and all types of securities; - Provided further, That it may alter or
3. Make collections and payments for the suspend compliance with such ratio
account of others and perform such whenever necessary for a maximum
other services for their customers as are period of one (1) year:
not incompatible with banking business; - Provided, finally, That such ratio shall be
4. Upon prior approval of the Monetary applied uniformly to banks of the same
Board, act as managing agent, adviser, category.
consultant or administrator of
investment
management/advisory/consultancy In case a bank does not comply with the
accounts; and prescribed minimum ratio:
5. Rent out safety deposit boxes. 1. The Monetary Board may limit or
prohibit the distribution of net profits
The bank shall perform the services permitted by such bank and may require that
under Subsections 1.,.2, 3. and.4. as depositary part or all of the net profits be used
OR as an agent. Accordingly, it shall keep the to increase the capital accounts of
funds, securities and other effects which it receives the bank until the minimum
duly separate from the bank's own assets and requirement has been met
liabilities. 2. The Monetary Board may,
furthermore, restrict or prohibit the
In case a bank or quasi-bank notifies the Bangko acquisition of major assets and the
Sentral or publicly announces a making of new investments by the
1. bank holiday, OR bank, with the exception of
2. In any manner suspends the payment of purchases of readily marketable
its deposit liabilities continuously for more evidences of indebtedness of the
than thirty (30) days, Republic of the Philippines and of
the Monetary Board may summarily and without the Bangko Sentral and any other
need for prior hearing close such banking institution evidences of indebtedness or
and place it under receivership of the Philippine obligations the servicing and
Deposit Insurance Corporation. repayment of which are fully
guaranteed by the Republic of the
Acceptance of Demand Deposits. Philippines, until the minimum
A bank other than a universal or commercial required capital ratio has been
bank cannot accept or create demand deposits restored.
except upon prior approval of, and subject to
such conditions and rules as may be prescribed In case of a bank merger or consolidation, or
by the Monetary Board. when a bank is under rehabilitation under a
program approved by the Bangko Sentral,
Risk-Based Capital Monetary Board may temporarily relieve the
The Monetary Board shall prescribe the surviving bank, consolidated bank, or
minimum ratio which the net worth of a bank constituent bank or corporations under
must bear to its total risk assets which may rehabilitation from full compliance with the
include contingent accounts. required capital ratio under such conditions as
it may prescribe.
 Saint Louis University COMMERCIAL LAW 233
2012 BAR OPERATIONS

Before the effectivity of rules which the

Monetary Board is authorized to prescribe NOTE:
under this provision, Section 22 of the Even if a parent corporation, partnership,
General Banking Act, as amended, Section 9 association, entity or an individual who owns
of the Thrift Banks Act, and all pertinent rules or controls a majority interest in such entities
issued pursuant thereto, shall continue to be has no liability to the bank, the Monetary
in force. Board may prescribe the combination of the
liabilities of subsidiary corporations or
Limit on Loans, Credit Accommodations and members of the partnership, association,
Guarantees entity or such individual under certain
circumstances, including but not limited to,
any of the following situations:
Except as the Monetary Board may otherwise
prescribe for reasons of national interest, the (a) the parent corporation, partnership,
association, entity or individual
total amount of loans, credit accommodations
and guarantees that may be extended by a bank guarantees the repayment of the
to any person, partnership, association, liabilities;
(b) the liabilities were incurred for the
corporation or other entity shall at no time
exceed twenty percent (20%) of the net worth accommodation of the parent
of such bank. corporation or another subsidiary or of
the partnership or association or
The basis for determining compliance with
single borrower limit is the total credit entity or such individual; or
commitment of the bank to the borrower. (c) the subsidiaries though separate
entities operate merely as
Unless the Monetary Board prescribes departments or divisions of a
otherwise, the total amount of loans, credit single entity.
accommodations and guarantees prescribed in Other credit accommodations and
the preceding paragraph may be increased by guarantees shall exclude:
an additional ten percent (10%) of the net
(a) loans and other credit
worth of such bank
Provided the additional liabilities of any accommodations secured by
borrower are adequately secured by trust obligations of the Bangko Sentral or of
the Philippine Government;
receipts, shipping documents, warehouse
receipts or other similar documents (b) loans and other credit
accommodations fully guaranteed by
transferring or securing title covering readily
marketable, non-perishable goods which the government as to the payment of
must be fully covered by insurance. principal and interest;
(c) loans and other credit
The above prescribed ceilings shall include: accommodations covered by
(a) the direct liability of the maker or assignment of deposits maintained in
the lending bank and held in the
acceptor of paper discounted with or sold
to such bank and the liability of a general Philippines;
endorser, drawer or guarantor who (d) loans, credit accommodations and
acceptances under letters of credit to
obtains a loan or other credit
accommodation from or discounts paper the extent covered by margin
with or sells papers to such bank; deposits; and
(e) other loans or credit accommodations
(b) in the case of an individual who owns
which the Monetary Board may from
or controls a majority interest in a
corporation, partnership, association time to time, specify as non-risk items.
or any other entity, the liabilities of said
entities to such bank; NOTE:
(c) in the case of a corporation, all Loans and other credit accommodations,
deposits maintained with, and usual
liabilities to such bank of all
guarantees by a bank to any other bank
subsidiaries in which such corporation
or non-bank entity, whether locally or
owns or controls a majority interest;
and abroad, shall be subject to the limits as
(d) in the case of a partnership, association herein prescribed.
or other entity, the liabilities of the
members thereof to such bank.
 Saint Louis University COMMERCIAL LAW 234
2012 BAR OPERATIONS

Certain types of contingent accounts of unencumbered deposits and book value of their
borrowers may be included among those paid-in capital contribution in the bank:
subject to these prescribed limits as may Provided, however, That loans, credit
be determined by the Monetary Board. accommodations and guarantees secured by assets
considered as non-risk by the Monetary Board shall
Restriction on Bank Exposure to Directors, be excluded from such limit:
Officers, Stockholders and Their Related Provided, further, That loans, credit
Interests (DOSRI) accommodations and advances to officers in the
- No director or officer of any bank form of fringe benefits granted in accordance with
- shall, directly or indirectly, for himself or as the rules as may be prescribed by the Monetary Board
representative or agent of others, shall not be subject to the individual limit.
a. borrow from such bank
b. nor shall he become a guarantor, NOTE:
endorser or surety for loans from The limit on loans, credit accommodations and
such bank to others, guarantees prescribed herein shall not apply to
c. or in any manner be an obligor or loans, credit accommodations and guarantees
incur any contractual liability to the extended by a cooperative bank to its cooperative
bank shareholders.
except with the written approval of
the majority of all the directors of Loans and Other Credit Accommodations
the bank, excluding the director Against Real Estate
concerned:
Provided, That such written
Except as the Monetary Board may otherwise
approval shall not be required prescribe, loans and other credit
for loans, other credit
accommodations against real estate shall not
accommodations and advances
exceed seventy-five percent (75%) of the
granted to officers under a fringe
appraised value of the respective real estate
benefit plan approved by the
security, plus sixty percent (60%) of the
Bangko Sentral. The required appraised value of the insured improvements,
approval shall be entered upon and such loans may be made to the owner of the
the records of the bank and a real estate or to his assignees.
copy of such entry shall be
transmitted forthwith to the
appropriate supervising and Loans And Other Credit Accommodations on
examining department of the Security of Chattels and Intangible Properties
Bangko Sentral.
Except as the Monetary Board may otherwise
NOTE: prescribe, loans and other credit accommodations
Dealings of a bank with any of its directors, officers on security of chattels and intangible properties such
or stockholders and their related interests shall be as, but not limited to, patents, trademarks, trade
upon terms not less favorable to the bank than those names, and copyrights shall not exceed seventy-five
offered to others. percent (75%) of the appraised value of the security,
an such loans and other credit accommodation may
Effect of violation to the provision be made to the title-holder of the chattels and
1. Office may be declared vacant and intangible properties or his assignees.
2. The director or officer shall be subject to the penal
provisions of the New Central Bank Act. Grant and Purpose of Loans and Other Credit
Accommodations
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees that A bank shall grant loans and other credit
may be extended, directly or indirectly, by a bank to accommodations only in amounts and for the
its DOSRI, as well as investments of such bank in periods of time essential for the effective completion
enterprises owned or controlled by said DOSRI of the operations to be financed. Such grant of loans
and other credit accommodations shall be consistent
However, the outstanding loans, credit with safe and sound banking practices.
accommodations and guarantees which a bank may
extend to each of its DOSRI, shall be limited to an
The purpose of all loans and other credit
amount equivalent to their respective
accommodations shall be stated in the application
 Saint Louis University COMMERCIAL LAW 235
2012 BAR OPERATIONS

and in the contract between the bank and the accommodations. Any change by the Board in the
borrower. maximum maturities shall apply only to loans and
other credit accommodations made after the date of
If the bank finds that the proceeds of the loan or such action.
other credit accommodation have been employed,
without its approval, for purposes other than those Amortization on Loans and Other Credit
agreed upon with the bank, it shall have the right to Accommodations
(1) terminate the loan or other credit accommodation The amortization schedule of bank loans and other
and (2) demand immediate repayment of the credit accommodations shall be adapted to the
obligation. nature of the operations to be financed.
1. In case of loans and other credit
Requirement for Grant of Loans or 0ther Credit accommodations with maturities of more than
Accommodations five (5) years,
- provisions must be made for periodic
Debtor should be capable of fulfilling his amortization payments, but such payments
must be made at least annually:
commitments to the bank
- Provided, however, That when the borrowed
funds are to be used for purposes which do
Toward this end, a bank may demand not initially produce revenues adequate for
regular amortization payments therefrom,
a. A statement of their assets and liabilities and the bank may permit the initial amortization
b. of their income and expenditures and payment to be deferred until such time as
c. other information as may be prescribed by said revenues are sufficient for such
law or by rules and regulations of the purpose, but in no case shall the initial
Monetary Board to enable the bank to amortization date be later than five (5) years
properly evaluate the credit application from the date on which the loan or other
which includes the corresponding financial credit accommodation is granted.
statements submitted for taxation purposes 2. In case of loans and other credit
to the Bureau of Internal Revenue. accommodations to micro finance sectors, the
schedule of loan amortization shall take into
Effect of false or incorrect detail, consideration the projected cash flow of the
borrower and adopt this into the terms and
a. The bank may terminate any loan or other conditions formulated by banks.
credit accommodation granted on the basis
of said statements and Prepayment of Loans and Other Credit
b. Shall have the right to demand immediate Accommodations
repayment or liquidation of the obligation.
A borrower may at any time prior to the agreed
Unsecured Loans or Other Credit maturity date prepay, in whole or in part, the unpaid
Accommodations. balance of any bank loan and other credit
accommodation, subject to such reasonable terms
The Monetary Board is hereby authorized to issue and conditions as may be agreed upon between the
such regulations as it may deem necessary with bank and its borrower.
respect to unsecured loans or other credit
accommodations that may be granted by banks. Foreclosure of Real Estate Mortgage

Authority to Prescribe Terms and Conditions of In the event of foreclosure, whether judicially or
Loans and Other Credit Accommodations extra-judicially,

The Monetary Board, may prescribe the maturities, - of any mortgage on real estate which is
as well as related terms and conditions for various security for any loan or other credit
types of bank loans and other credit accommodation granted,
accommodations. - the mortgagor or debtor whose real property
has been sold for the full or partial payment
Any change by the Board in the maximum of his obligation shall have the right within
maturities, as well as related terms and conditions one year after the sale of the real estate, to
for various types of bank loans and other credit redeem the property by paying
 Saint Louis University COMMERCIAL LAW 236
2012 BAR OPERATIONS

1. the amount due under the accommodations, advances and other assets shall
mortgage deed, with interest be subject to regulations issued by the Monetary
thereon at rate specified in the Board.
mortgage, and
2. all the costs and expenses Ceiling on Investments in Certain Assets.
incurred by the bank or institution
from the sale and custody of said - Any bank may acquire real estate as shall be
property less the income derived necessary for its own use in the conduct of its
therefrom.
business:
- Provided, however, That the total investment in
- However, the purchaser at the auction sale such real estate and improvements thereof
concerned whether in a judicial or extra- including bank equipment, shall not exceed fifty
judicial foreclosure shall have the right to percent (50%) of combined capital accounts:
enter upon and take possession of such - Provided, further, That the equity investment of
property immediately after the date of the a bank in another corporation engaged primarily
confirmation of the auction sale and in real estate shall be considered as part of the
administer the same in accordance with bank’s total investment in real estate, unless
law. otherwise provided by the Monetary Board. (sec
51)
NOTE: Any petition in court to enjoin or restrain the
conduct of foreclosure proceedings instituted NOTE: Notwithstanding the limitations above-
pursuant to this provision shall be given due course mentioned (sec 51), a bank may acquire, hold or
only upon the filing by the petitioner of a bond in an convey real property under the following
amount fixed by the court conditioned that he will pay circumstances:
all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure 1. Such as shall be mortgaged to it in good faith
proceeding.
by way of security for debts;
2. Such as shall be conveyed to it in satisfaction
Notwithstanding Act 3135, juridical persons whose of debts previously contracted in the course of
property is being sold pursuant to an extrajudicial its dealings; or
foreclosure, shall have the right to redeem the 3. Such as it shall purchase at sales under
property in accordance with this provision until, but judgments, decrees, mortgages, or trust deeds
not after, the registration of the certificate of held by it and such as it shall purchase to
foreclosure sale with the applicable Register of Deeds secure debts due it. (sec 52)
which in no case shall be more than three (3) months
after foreclosure, whichever is earlier. Any real property acquired or held under the
circumstances enumerated in the above paragraph
Renewal or Extension of Loans and Other Credit (sec 52) shall be disposed of by the bank within a
Accommodations period of five (5) years or as may be prescribed by
the Monetary Board: Provided, however, That the
The Monetary Board may, by regulation, prescribe bank may, after said period, continue to hold the
the conditions and limitations under which a bank property for its own use, subject to the limitations of
may grant extensions or renewals of its loans and the preceding section (sec 51)
other credit accommodations.

Provisions for Losses and Write-Offs Prohibited Transactions

Bad Debts - All debts due to any bank on which 1. A bank shall not directly engage in insurance
interest is past due and unpaid for such period as business as the insurer
2. No director, officer, employee, or agent of any
may be determined by the Monetary Board, unless
the same are welt-secured and in the process of bank shall
collection
a. Make false entries in any bank report or
The Monetary Board may fix, by regulation or by statement or participate in any fraudulent
transaction, thereby affecting the financial
order in a specific case, the amount of reserves for
bad debts or doubtful accounts or other interest of, or causing damage to, the bank or
contingencies. Writing off of loans, other credit any person;
 Saint Louis University COMMERCIAL LAW 237
2012 BAR OPERATIONS

b. Without order of a court of competent 6. Prohibition on Dividend Declaration. – No bank

jurisdiction, disclose to any unauthorized or quasi-bank shall declare dividends, if at the
person any information relative to the funds or time of declaration:
properties in the custody of the bank
belonging to private individuals, corporations, a. Its clearing account with the Bangko Sentral
or any other entity: Provided, That with respect is overdrawn; or
to bank deposits, the provisions of existing b. It is deficient in the required liquidity floor for
laws shall prevail; government deposits for five (5) or more
c. Accept gifts, fees, or commissions or any consecutive days, or
other form of remuneration in connection with c. It does not comply with the liquidity
the approval of a loan or other credit standards/ratios prescribed by the Bangko
accommodation from said bank; Sentral for purposes of determining funds
d. Overvalue or aid in overvaluing any security available for dividend declaration; or
for the purpose of influencing in any way the d. It has committed a major violation as may be
actions of the bank or any bank; or determined by the Bangko Sentral.
e. Outsource inherent banking functions.

3. No borrower of a bank shall Conducting Business in an Unsafe or Unsound

Manner
a. Fraudulently overvalue property offered as
security for a loan or other credit In determining whether a particular act or omission,
accommodation from the bank; which is not otherwise prohibited by any law, rule or
b. Furnish false or make misrepresentation or regulation affecting banks, quasi-banks or trust
suppression of material facts for the entities, may be deemed as conducting business in
purpose of obtaining, renewing, or increasing an unsafe or unsound manner for purposes of this
a loan or other credit accommodation or Section, the Monetary Board shall consider any of
extending the period thereof; the following circumstances:
c. Attempt to defraud the said bank in the event
of a court action to recover a loan or other 1. The act or omission has resulted or may result in
credit accommodation; or
material loss or damage, or abnormal risk or
d. Offer any director, officer, employee or agent danger to the safety, stability, liquidity or
of a bank any gift, fee, commission, or any solvency of the institution;
other form of compensation in order to
2. The act or omission has resulted or may result in
influence such persons into approving a material loss or damage or abnormal risk to the
loan or other credit accommodation
institution's depositors, creditors, investors,
application. stockholders or to the Bangko Sentral or to the
public in general;
4. No examiner, officer or employee of the Bangko 3. The act or omission has caused any undue
Sentral or of any department, bureau, office, injury, or has given any unwarranted benefits,
branch or agency of the Government that is advantage or preference to the bank or any
assigned to supervise, examine, assist or render party in the discharge by the director or officer of
technical assistance to any bank shall commit his duties and responsibilities through manifest
any of the acts enumerated in this Section or aid partiality, evident bad faith or gross inexcusable
in the commission of the same. negligence; or
4. The act or omission involves entering into any
The making of false reports or misrepresentation contract or transaction manifestly and grossly
or suppression of material facts by personnel of disadvantageous to the bank, quasi-bank or
the Bangko Sentral ng Pilipinas shall be subject trust entity, whether or not the director or officer
to the administrative and criminal sanctions profited or will profit thereby.
provided under the New Central Bank Act.
Whenever a bank, quasi-bank or trust entity persists
5. Consistent with the provisions of Republic Act in conducting its business in an unsafe or unsound
No. 1405, otherwise known as the Banks manner, the Monetary Board may, without prejudice
Secrecy Law, no bank shall employ casual or to the administrative sanctions provided in Section
non regular personnel or too lengthy 37 of the New Central Bank Act, take action under
probationary personnel in the conduct of its Section 30 of the same Act and/or immediately
business involving bank deposit
 Saint Louis University COMMERCIAL LAW 238
2012 BAR OPERATIONS

exclude the erring bank from clearing, the provisions bank, is located, but if no newspaper is
of law to the contrary notwithstanding. published in the same province, then in a
newspaper published in Metro Manila or in the
Independent Auditor nearest city or province.
The Monetary Board may require a bank, quasi-
bank or trust entity to engage the services of an The Bangko Sentral may by regulation prescribe the
independent auditor to be chosen by the bank, newspaper where the statements prescribed herein
quasi-bank or trust entity concerned from a list of shall be published.
certified public accountants acceptable to the
Monetary Board. The Monetary Board may allow the posting of the
financial statements of a bank, quasi-bank or trust
The term of the engagement shall be as prescribed entity in public places it may determine, lieu of the
by the Monetary Board which may either be publication required in the preceding paragraph,
a. on a continuing basis where the auditor when warranted by the circumstances.
shall act as resident examiner, or
b. on the basis of special engagements; Additionally, banks shall make available to the public
but in any case, the independent auditor in such form and manner as the Bangko Sentral may
shall be responsible to the bank’s, prescribe the complete set of its audited financial
quasi-bank’s or trust entity’s board of statements as well as such other relevant
directors. A copy of the report shall be information including those on enterprises majority-
furnished to the Monetary Board. owned or controlled by the bank, that will inform the
public of the true financial condition of a bank as of
The Monetary Board may also direct the board of any given time.
directors of a bank, quasi-bank, trusty entity and/or
the individual members thereof; to conduct, either In periods of national and/or local emergency or of
personally or by a committee created by the board, imminent panic which directly threaten monetary and
an annual balance sheet audit of the bank, quasi- banking stability, the Monetary Board, by a vote of at
bank or trust entity to review the internal audit and least five (5) of its members, in special cases and
control system of the bank, quasi-bank or trust entity upon application of the bank, quasi-bank or trust
and to submit a report of such audit. entity, may allow such bank, quasi-bank or trust
entity to defer for a stated period of time the
Financial Statements publication of the statement of financial condition
required herein.
Every bank, quasi-bank or trust entity shall submit to
the appropriate supervising and examining
department of the Bangko Sentral financial Publication of Capital Stock
statements in such form and frequency as may be
prescribed by the Bangko Sentral. A bank, quasi-bank or trust entity incorporated under
the laws of the Philippines shall not publish the
Such statements, which shall be as of a specific amount of its authorized or subscribed capital stock
date designated by the Bangko Sentral, shall show without indicating at the same time and with equal
the actual financial condition of the institution prominence, the amount of its capital actually paid
submitting the statement, and of its branches, up.
offices, subsidiaries and affiliates, including the
results of its operations, and shall contain such No branch of any foreign bank doing business in the
information as may be required in Bangko Sentral Philippines shall in any way announce the amount of
regulations. the capital and surplus of its head office, or of the
bank in its entirety without indicating at the same
Publication of Financial Statements time and with equal prominence the amount of the
- in such terms understandable to the layman and capital, if any, definitely assigned to such branch,
in such frequency as may be prescribed Bangko such fact shall be stated in, and shall form part of
Sentral, the publication.
- in English or Filipino,
- at least once every quarter in a newspaper of Settlement of Disputes
general circulation in the city or province where
the principal office,
The provisions of any law to the contrary
in the case of a domestic institution or the
notwithstanding, the Bangko Sentral shall be
principal branch or office in the case of a foreign
consulted by other government agencies or
 Saint Louis University COMMERCIAL LAW 239
2012 BAR OPERATIONS

instrumentalities in actions or proceedings initiated a. a bank or a quasi-bank is in a (1) state of

by or brought before them involving controversies in continuing inability or (2) unwillingness to
banks, quasi-banks or trust entities arising out of maintain a condition of liquidity deemed
and involving adequate to protect the interest of depositors
and creditors,
a. relations between and among their directors,
officers or stockholders, Responsibility of the conservator:
b. as well as disputes between any or all of them
and the bank, quasi-bank or trust entity of which a. to take charge of the assets, liabilities, and the
they are directors, officers or stockholders. management thereof, reorganize the
management, collect all monies and debts due
Unauthorized Advertisement or Business said institution, and exercise all powers
Representation necessary to restore its viability.
b. shall report and be responsible to the
No person, association, or corporation unless duly Monetary Board and
authorized to engage in the business of a bank, c. shall have the power to overrule or revoke the
quasi-bank, trust entity, or savings and loan actions of the previous management and
association as defined in this Act, or other banking board of directors of the bank or quasi-bank.
laws,
The Monetary Board shall terminate the
a. shall advertise or hold itself out as being conservatorship
engaged in the business of such bank, quasi-
bank, trust entity, or association, or a. After the expiration of one (1) year {The
b. use in connection with its business title, the word conservatorship shall not exceed one (1) year}
or words “bank,” “banking,” “banker,” “quasi- b. When it is satisfied that the institution can
bank,” “quasi-banking,” “quasi-banker,” “savings continue to operate on its own and the
and loan association,” “trust corporation,” “trust conservatorship is no longer necessary or
company” or words of similar import or transact c. On the basis of the report of the conservator or
in any manner the business of any such bank, of its own findings, determine that the
corporation or association. continuance in business of the institution would
involve probable loss to its depositors or
Penalty for Violation of this Act creditors
Unless otherwise herein provided, the violation of
any of the provisions of this Act shall be subject to CESSATION OF BANKING BUSINESS
Sections 34, 35, 36 and 37 of the New Central Bank
Act.
Voluntary Liquidation
If the offender is a director or officer of a bank,
quasi-bank or trust entity, the Monetary Board may In case of voluntary liquidation of any bank
also suspend or remove such director or officer. organized under the laws of the Philippines, or of
any branch or office in the Philippines of a foreign
If the violation is committed by a corporation, such bank, written notice of such liquidation shall be sent
corporation may be dissolved by quo warranto to the Monetary Board before such liquidation is
proceedings instituted by the Solicitor General. 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.
PLACEMENT UNDER CONSERVATORSHIP
Receivership and Involuntary Liquidation
Provided, That this Section shall also apply to
conservatorship proceedings of quasi-banks. The grounds and procedures for placing a bank
under receivership or liquidation, as well as the
Appointment of Conservator {The conservator powers and duties of the receiver or liquidator
should be competent and knowledgeable in bank appointed for the bank shall be governed by the
operations and management} provisions of Sections 30, 31, 32, and 33 of the New
Central Bank Act:
Grounds:
 Saint Louis University COMMERCIAL LAW 240
2012 BAR OPERATIONS

Provided, That the petitioner or plaintiff files with the (2) Upon acquiring jurisdiction, the court
clerk or judge of the court in which the action is shall, upon motion by the receiver
pending a bond, executed in favor of the Bangko after due notice, adjudicate disputed
Sentral, in an amount to be fixed by the court. claims against the institution, assist
the enforcement of individual
This Section shall also apply to the extent possible liabilities of the stockholders,
to the receivership and liquidation proceedings of directors and officers, and decide on
quasi-banks. other issues as may be material to
implement the liquidation plan
adopted.
Grounds for receivership
(3) convert the assets of the
‐ is unable to pay its liabilities as they become
institutions to money, dispose of
due in the ordinary course of business:
the same to creditors and other
Provided, That this shall not include inability to
parties, for the purpose of paying
pay caused by extraordinary demands induced
the debts of such institution in
by financial panic in the banking community;
accordance with the rules on
concurrence and preference of
(a) has insufficient realizable assets, as credit under the Civil Code
determined by the Bangko Sentral, to (4) institute such actions as may be
meet its liabilities; or necessary to collect and recover
(b) cannot continue in business without accounts and assets of, or defend
involving probable losses to its any action against, the institution.
depositors or creditors; or
(c) has willfully violated a cease and desist
The assets of an institution under
order that has become final, involving
receivership or liquidation shall be
acts or transactions which amount to
deemed in custodia legis in the hands
fraud or a dissipation of the assets of the
of the receiver and shall, from the
institution;
moment the institution was placed
under such receivership or liquidation,
in which cases, the Monetary Board may be exempt from any order of
summarily and without need for prior hearing forbid garnishment, levy, attachment, or
the institution from doing business in the execution.
Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
The actions of the Monetary Board taken shall be
institution.
final and executory, and may not be restrained or set
aside by the court except on petition for certiorari on
For a quasi-bank, any person of recognized the ground that the action taken was in excess of
competence in banking or finance may be designed jurisdiction or with such grave abuse of discretion as
as receiver. to amount to lack or excess of jurisdiction.

Liquidation The petition for certiorari may only be filed by the

stockholders of record representing the majority of
If the receiver determines that the institution cannot the capital stock within ten (10) days from receipt by
be rehabilitated or permitted to resume business the board of directors of the institution of the order
the Monetary Board shall notify in writing the board directing receivership, liquidation or conservatorship.
of directors of its findings and direct the receiver to
proceed with the liquidation of the institution. The Distribution of Assets
receiver shall:
In case of liquidation of a bank or quasi-bank, (1)
(1) file ex parte with the proper regional after payment of the cost of proceedings, including
trial court, and without requirement reasonable expenses and fees of the receiver to
of prior notice or any other action, a be allowed by the court, the receiver shall (2) pay
petition for assistance in the the debts of such institution, under order of the
liquidation of the institution pursuant court, in accordance with the rules on concurrence
to a liquidation plan adopted by the and preference of credit as provided in the Civil
Philippine Deposit Insurance Code.
Corporation
 Saint Louis University COMMERCIAL LAW 241
2012 BAR OPERATIONS

Disposition of Revenues and Earnings. governed by the provisions of the Foreign Banks
Liberalization Act.
All revenues and earnings realized by the receiver The conduct of offshore banking business in the
in winding up the affairs and administering the Philippines shall be governed by the provisions
assets of any bank or quasi-bank within the purview of the Presidential Decree No. 1034, otherwise
of this Act shall be used to pay the costs, fees and known as the “Offshore Banking System
expenses mentioned in the preceding section, Decree.”
salaries of such personnel whose employment is
rendered necessary in the discharge of the Acquisition of Voting Stock in a Domestic Bank
liquidation together with other additional expenses Within seven (7) years from the effectivity of this
caused thereby. act and subject to guidelines issued pursuant to
the Foreign Banks Liberalization Act, the
The balance of revenues and earnings, after the Monetary Board may authorize a foreign bank to
acquire up to one hundred percent (100%) of the
payment of all said expenses, shall form part of the
assets available for payment to creditors. voting stock of only one (1) bank organized
under the laws of the Republic of the
Philippines.
Penalty for Transactions After a Bank Becomes
Insolvent Within the same period, the Monetary Board
may authorize any foreign bank, which prior to
Any director or officer of any bank declared insolvent the effectivity of this Act availed itself of the
or placed under receivership by the Monetary Board privilege to acquire up to sixty percent (60%) of
who the voting stock of a bank under the Foreign
Banks Liberalization Act and the Thrift Banks
1. refuses to turn over the bank’s records Act, to further acquire voting shares such bank
and assets to the designated receivers, to the extent necessary for it to own one
or hundred percent (100%) of the voting stock
2. who tampers with banks records, or thereof.
3. who appropriates for himself for another
party or destroys or causes the HOWEVER: In the exercise of the authority, the
misappropriation and destruction of the Monetary Board shall adopt measures as may
bank’s assets, or be necessary to ensure that at all times the
4. who receives or permits or causes to be control of seventy percent (70%) of the
received in said bank any deposit, resources or assets of the entire banking system
collection of loans and/or receivables, or is held by banks which are at least majority-
5. who pays out or permits or causes to be owned by Filipinos.
transferred any securities or property of
said bank NOTE: Any right, privilege or incentive granted
to a foreign bank under this Section shall be
shall be subject to the penal provisions of the New equally enjoyed by and extended under the
Central Bank Act. same conditions to banks organized under the
laws of the Republic of the Philippines.
LAWS GOVERNING OTHER TYPES OF BANKS
Local Branches of Foreign Banks
The provisions of this Act, however, insofar as they
In the case of a foreign bank which has more
are not in conflict with the provisions of the Thrift
than one (1) branch in the Philippines, all such
Banks Act, the Rural Banks Act, and the
branches shall be treated as one (1) unit for the
Cooperative Code shall likewise apply to thrift
purpose of this Act, and all references to the
banks, rural banks, and cooperative banks,
Philippine branches of foreign banks shall be
respectively. However, for purposes of prescribing
held to refer to such units.
the minimum ratio which the net worth of a thrift
bank must bear to its total risk assets, the provisions
Head Office Guarantee
of Section 33 of this Act shall govern.
In order to provide effective protection of the
interests of the depositors and other creditors of
FOREIGN BANKS
Philippine branches of a foreign bank, the head
office of such branches shall fully guarantee the
Transacting Business in the Philippines
prompt payment of all liabilities of its Philippine
The entry of foreign banks in the Philippines
branch.
through the establishment of branches shall be
 Saint Louis University COMMERCIAL LAW 242
2012 BAR OPERATIONS

Residents and citizens of the Philippines who

are creditors of a branch in the Philippines of a Laws Applicable
foreign bank shall have preferential rights to the In all matters not specifically covered by special
assets of such branch in accordance with the provisions applicable only to a foreign bank or its
existing laws. branches and other offices in the Philippines any
foreign bank licensed to do business in the
Summons and Legal Process Philippines shall be bound by the provisions of
Summons and legal process served upon the this Act, all other laws, rules and regulations
1. Philippine agent or applicable to banks organized under the laws of
designated to accept the Philippines of the same class,
2. Head of any foreign bank service except those that provide for the (1) creation,
thereof (2) formation, (3) organization or (4) dissolution
shall give jurisdiction to the courts over such of corporations or (5)for the fixing of the
bank, and service of notices on such agent or relations, liabilities, responsibilities, or duties of
head shall be as binding upon the bank which stockholders, members, directors or officers of
he represents as if made upon the bank itself. corporations to each other or to the corporation.

Should the authority Revocation of License of a Foreign Bank

1. be revoked, or The Monetary Board may revoke the license to
2. should such agent or head become transact business in the Philippines of, any
mentally incompetent or foreign bank,
3. otherwise unable to accept service while 1. If it finds that the foreign bank is
exercising such authority, insolvent, or
it shall be the duty of the bank (1) to name and 2. In imminent danger thereof or that its
designate promptly another agent or head upon continuance in business will involve
whom service of summons and processes in probable loss to those transacting business
legal proceedings against the bank and of with it.
notices affecting the bank may be made, and (2) After the revocation of its license, it shall be
to file with the SEC a duly authenticated unlawful for any such foreign banks to transact
nomination of such agent. business in the Philippines unless its license is
renewed or reissued.
In the absence of the agent or head or should
there be no person authorized by the bank upon After the revocation of such license, the Bangko
whom service of summons, processes and all Sentral shall take the necessary action to protect
legal notices may be made, service of the creditors of such foreign bank and the
summons, processes and legal notices may be public. The provisions of the New Central Bank
made upon the Bangko Sentral Deputy Act on sanctions and penalties shall likewise be
Governor In-Charge of the supervising and applicable.
examining departments and such service shall
be as effective as if made upon the bank or its TRUST OPERATIONS
duly authorized agent or head. Authority to Engage in Trust Business
- Only a stock corporation or a person duly
The said deputy Governor shall register and authorized by the Monetary Board to engage
transmit by mail to the president or the secretary in trust business
of the bank at its head or principal office a copy, - shall act as a trustee or administer any trust
duly certified by him, of the summons, process, or hold property in trust or on deposit for the
or notice. The sending of such copy of the use, benefit, or behalf of others.
summons, process, or notice shall be a
necessary part of the services and shall For purposes of this Act, such a corporation
complete the service. shall be referred to as a trust entity.
The registry receipt of mailing shall be prima
facie evidence of the transmission of the The SEC shall not register the articles of
summons, process or notice. incorporation and by-laws or any amendment
All costs necessarily incurred by the said Deputy thereto, of any trust entity, unless accompanied
Governor for the making and mailing and by a certificate of authority issued by the Bangko
sending of a copy of the summons, process, or Sentral.
notice shall be paid in advance by the party at
whose instance the service is made.
 Saint Louis University COMMERCIAL LAW 243
2012 BAR OPERATIONS

Minimum Capitalization. – A trust entity, before it estate, real or personal, and the rents,
can engage in trust or other fiduciary business, issues and profits thereof; and
shall comply with the minimum paid-in capital 7. Establish and manage common trust funds,
requirement which will be determined by the subject to such rules and regulations as may
Monetary Board. be prescribed by the Monetary Board.

Conduct of Trust Business For the Faithful Performance of Trust Duties

A trust entity shall administer the funds or 1. Before transacting trust business, every trust
property under its custody with the diligence that entity shall deposit with the Bangko Sentral,
a prudent man would exercise in the conduct of as security for the faithful performance of its
an enterprise of a like character and with similar trust duties, cash or securities approved by
aims. the Monetary Board in an amount equal to
or not less than Five hundred thousand
Prohibited transactions pesos (P500,000.00) or such higher amount
No trust entity shall, for the account of the trustor as may fixed by the Monetary Board:
or the beneficiary of the trust, purchase or Provided, however, That the Monetary
acquire property from, or sell, transfer, assign, or Board shall require every trust entity to
lend money or property to, or purchase debt increase the amount of its cash or securities
instruments of, on deposit with the Bangko Sentral Should
1. any of the departments, directors, the capital and surplus fall below said
officers, stockholders, or employees amount,
of the trust entity, - A trust entity so long as it shall continue
2. relatives within the first degree of to be solvent and comply with laws or
consanguinity or affinity, or regulations shall have the right to collect
3. the related interests, of such the interest earned on such securities
directors, officers and stockholders, deposited with the Bangko Sentral and,
unless the transaction is specifically authorized - from time to time, with the approval of
by the trustor and the relationship of the trustee the Bangko Sentral, to exchange the
and the other party involved in the transaction is securities for others.
fully disclosed to the trustor of beneficiary of the - If the trust entity fails to comply with any
trust prior to the transaction. law or regulation, the Bangko Sentral
shall retain such interest on the
securities deposited with it for the
Powers of a Trust Entity benefit of rightful claimants.
A trust entity, in addition to the general powers - All claims rising out of the trust business
incident to corporations, shall have the power to: of a trust entity shall have priority over
1. Act as trustee on any mortgage or bond all other claims as regards the cash or
issued by any municipality, corporation, or securities deposited as above provided.
any body politic and to accept and execute 2. Before an executor, administrator, guardian,
any trust consistent with law; trustee, receiver or depositary appointed by
2. Act under the order or appointment of any the court enters upon the execution of his
court as guardian, receiver, trustee, or duties, he shall, upon order of the court, file
depositary of the estate of any minor or a bond in such sum as the court may direct.
other incompetent person, NOTE: No bond or other security shall
3. Act under the appointment of any court as be required by the court from a trust
receiver and depositary of any moneys paid entry for the faithful performance of its
into court by parties to any legal duties as court-appointed trustee,
proceedings and of property of any kind executor, administrator, guardian,
which may be brought under the jurisdiction receiver, or depositary. However, the
of the court; court may, upon proper application with
4. Act as the executor of any will when it is it showing special cause therefore,
named the executor thereof; require the trust entity to post a bond or
5. Act as administrator of the estate of any other security for the protection of funds
deceased person, with the will annexed, or or property confided to such entity.
as administrator of the estate of any
deceased person when there is no will; Separation of Trust Business from General
6. Accept and execute any trust for the holding, Business
management, and administration of any
 Saint Louis University COMMERCIAL LAW 244
2012 BAR OPERATIONS

The trust business shall be kept separate and and equipment, appliances and other movable
distinct from the general business including all property.
other funds, properties, and assets of such trust
entity. The accounts of all such funds, POLICIES:
properties, or securities shall likewise be kept
separate and distinct from the accounts of the 1. To regulates and promote activities of financing
general business of the trust entity. and leasing company to place their operations
on a sound, competitive, stable and efficient
Investment Limitations of a Trust Entity basis
Unless otherwise directed by the instrument 2. To recognize and strengthen their critical role in
creating the trust, the lending and investment of providing medium and long term credit for
funds and other assets acquired by a trust entity investment in capital goods and equipments for
as executor, administrator, guardian, trustee, small and medium enterprises.
receiver or depositary of the estate of any minor 3. To curtail and prevent practices prejudicial to
or other incompetent person shall be limited to public interest / to have a better position and
loans or investments as may be prescribed by efficient service in a fair manner to the general
law, the Monetary Board or any court of public, industry, commerce, agriculture and
competent jurisdiction. thereby more fully contribute to sound
development of the national economy
Exemption of Trust Assets from Claims
No assets held by a trust entity in its capacity as Financing Companies – are Corporations
trustee shall be subject to any claims other than EXCEPT:
those of the parties interested in the specific 1. Banks
trusts. 2. Investment houses
3. Saving and loam associations,
Establishment of Branches of a Trust Entity 4. Insurance companies
The ordinary business of a trust entity shall be 5. Cooperatives
transacted at the place of business specified in 6. Other financial institutions organized under other
its articles of incorporation. special laws

With prior approval of the Monetary Board,

establish branches in the Philippines and the SECURITY OF EXCHANGE COMMISSION (SEC)
said entity shall be responsible for all business Empowered to enforce provisions
conducted in such branches to the same extent implementing regulation EXCEPT as the BSP have
and in the same manner as though such supervisory authority under RA No. 7653
business had all been conducted in the head
office.
THE MONETARY BOARD OF THE BSP
For the purpose of this Act, the trust entity and its Empowered to prescribe the maximum rate
branches shall be treated as one unit. of rental fees, services and other changes of
financing company in consultation with financing
 
 
companies and the SEC.
FINANCING COMPANY ACT 
RA 8556 
REQUIREMENT FOR REGISTRATION
Aside from requiring compliance with the
FINANCING COMPANIES provisions of the corporation code.
Corporations or partnerships, except those
regulated by the Central Bank of the Philippines, the 1. All the requirements of existing laws to engage
Insurance commissioner and the Cooperative in the business should be complied with the
Administration Office. Which are primarily organized applicant
for the purpose of extending credit facilities to 2. The organization, integrity and responsibility of
consumers and to industrial, commercial or the organizers should assure the protection of
agricultural enterprises, either by discounting or the interest of the general public.
factoring commercial pares or accounts receivable, 3. All the requirements of this Act have been
or by buying and selling contracts, leases, chattel complied with. Provided: financing companies
mortgages or other evidence of indebtedness, or by registered prior to the approval of this Act shall
leasing of motor vehicles, heavy equipment and
industrial machinery, business and office machines
 Saint Louis University COMMERCIAL LAW 245
2012 BAR OPERATIONS

fill an information sheet with the SEC with 60 2. Overvalues on aid in

days after notice. overvaluing any securities to
influence action of the company
RIGHTS AND POWER OF FINANCING COMPANY on any loan or discounting line
1. Engage in quasi – banking and money market Any officer, employee or examiner of the SEC who
operations with prior approval of the BSP shall commit, connive, aid or assist in the
2. Engage in trust operations subjects to the commission of acts enumerated in the preceding
General banking Act upon prior approval of the section
BSP
3. Issue bonds and other capital instruments  
 

subject to rules and regulations of the BSP. RURAL BANKS ACT OF 1992
4. Rediscount their paper with government R.A. NO. 7353
financial institutions
5. Participate in special loan or credit programs
6. Provide foreign currency loans and leases to  No rural bank shall be operated without a
ente4rprises who lain foreign currency by certificate of authority from the Monetary Board
exports: of the Central Bank. Rural banks shall be
organized in the form of stock corporations
REGISTRY OF FINANCIAL LEASE  Upon consultation with the rural banks in the
 The Registry of Deeds shall open and maintain area, duly established cooperatives and
a register of financial leases, adjunct to the corporations primarily organized to hold equities
chattel mortgage registry in rural banks may organize a rural bank and/or
subscribe to the shares of stock of any rural
LEASE REGISTER SHALL CONTAIN: bank. Provided, that a cooperative or
1. Name/ Description of property including corporation owning or controlling the whole or
a. Brand name/ name of manufacturer majority of the voting stock of the rural bank
b. Name of model; if any shall be subject to special examination and to
c. Year of model; if available such rules and regulations as the Monetary
d. Serial number; if any Board may prescribe.
 The capital stock of any rural bank shall be fully
2. Acquisition cost owned and held directly or indirectly by citizens
3. Name of owner / finance company lessee of the Philippines or corporations, associations
4. Name of lessee or cooperatives qualified under Philippine laws
5. Date of lease agreement/ schedule to own and hold such capital stock with the
6. Date of expiry of lease exception of shareholdings of corporations
7. Date of entry in lease registry organized primarily to hold equities in rural
banks and of Filipino- controlled domestic
banks.
PENALTY/IES  If the subscription of private share holders to the
1. A fine of not less than P 10,000 and not more capital stock cannot be secured or is not
than P 100,000.00 available, or insufficient to meet the normal
2. Imprisonment for not more than 6 mos. Or both credit needs of the locality -- the Land Bank of
at the discretion of the court, shall be imposed the Philippines, the Development Bank of the
upon: Phil., or any government- owned or controlled
bank or financial institution shall subscribe to the
a. Persons, associations, partnerships or capital stock of such rural bank, which shall be
corporation, managing officer that shall: paid in full at the time of subscription, in an
i. Engage in business without amount equal to the fully paid subscribed and
authority from the SEC unimpaired, capital of the private stockholders.
ii. Hold themselves out to be PROVIDED, such shares may be sold at any
financing companies time at market value to private individuals who
iii. Violate provisions of this Act are citizens of the Philippines, and that the
b. Any officer, employee, or agent of a registered stockholders shall have the right of
financing company who shall: preemption within 1 year from the date of offer
1. Knowingly and willingly make in proportion to their respective holdings, but in
any false statement or the absence of such buyer, preference shall be
misleading with respect to any given to residents of the locality or province
material where the rural bank is located.
 Saint Louis University COMMERCIAL LAW 246
2012 BAR OPERATIONS

respective outstanding deposits and book

 To provide supplemental capital until the bank value of the pad-in capital contributions in
has accumulated enough capital of its own or the bank.
stimulate private investments, the same
institutions shall also subscribe within 30 days to  Loans or advances extended by rural banks
the capital stock of any rural bank in an amount shall be primarily for the purpose of meeting
equal to the equity investment of the private the normal credit needs of farmers, fishermen or
shareholders which shall be paid in full at the farm families owning or cultivating land
time of the subscription – right of preemption is dedicated to agricultural production as well as
also available; If such stock held is sold to the normal credit needs of cooperatives and
private individuals, the same may be converted merchants. In granting loans, preference shall
into common stock. Stocks held shall be made be given to the application of farmers and
preferred only as to assets upon liquidation and merchants whose cash requirements are small
without power to vote and shall share in  Loans may be granted by rural banks on the
dividend distributions from the date of issuance security of lands on the following:
in the amount: a. those without Torrens title where the owner
a. 4%-- on the 1st and 2nd years of private property can show 5 years or
b. 6%-- on the 3rd and 4th years more of peaceful, continuous and
c. 8%-- on the 5th and 6th years uninterrupted possession in concept of
d. 10%-- on the 7th and 8th years owner
e. 12%-- on the 9th to the 15th years b. portions of friar land estates or other lands
without preference administered by the Bureau of Lands that
are covered by sales contracts and the
 The corporate secretary of the bank shall purchasers have paid at least 5 years
submit to the Central Bank and the SEC a installment thereon, without the necessity of
report on every transfer of preferred prior approval and consent by the Director of
stock to private shareholders. When all the Lands
preferred shares of stock have been sold to c. portions of other estates under the
private shareholders, the Articles of administration of the Department of Agrarian
Incorporation of the bank shall be amended Reform or other governmental agency which
to reflect the conversion. are likewise covered by sales contracts
(same conditions as above stated)
 All members of the Board of Directors of the d. homesteads or free patent lands pending
rural bank shall be citizens of the Philippines at the issuance of titles but already approved
the time of their assumption to office
 NO director or officer shall for himself or as  When the corresponding titles are issued,
a representative or agent of another, borrow the same shall be delivered to the Register
any of the deposits or funds of such banks, of Deeds of the province where such lands
nor shall he become a guarantor, indorser, are situated for the annotation of the
or surety for loans from such bank or others, encumbrance
or in any manner be an obligor for money
borrowed from the bank or loaned by it  In case of lands homestead or free patent
except with the written approval of the titles, copies of the notices for the
majority of the directors of the bank, presentation of the final proof shall also be
excluding the director concerned. Any such furnished the creditor rural bank; That the
approval shall be entered upon the records applicant has already made improvements
of the corporation and a copy of such entry on the land and the loan applied for is to be
shall be transmitted to the appropriate used for further development of the same or
supervising department. for other productive economic activities
 The Monetary Board may regulate the
amount of credit accommodations that may  The appraisal and verification of the status
be extended directly to the directors, officers of a land is a full responsibility of the rural
or stockholders of rural banks of banking bank and any loan granted on any land
institutions. However, the outstanding credit which shall be found later to be forest zone
accommodations to each of its stockholders shall be for the sole account of the rural
owning 2% or more of the subscribed capital bank.
stock, its directors, or officers shall be
limited to an amount equivalent to the
 Saint Louis University COMMERCIAL LAW 247
2012 BAR OPERATIONS

 Rural banks may, devote a portion of their b. to require rural banks, their directors,
loanable funds to meeting the normal credit officers and agents to conduct and
needs of small business enterprise; Provided, manage the affairs of the banks in a
the loans shall not exceed 15% of he net worth lawful and orderly manner
of a rural bank or such amount as the Monetary c. upon proof of violation of the provisions
Board may prescribe. above mentioned, or that the affairs of
 All supervised past due and restructured past the bank are conducted in a manner
due loans, including those covered under substantially prejudicial to the interest of
existing rehabilitation programs of the Central the government, depositors or creditors,
Bank, and 50% of non-supervised past due shall to take over the management of such
be converted into preferred stocks of the rural bank when authorized to do so by the
bank and issued in favor of the Land Bank of the Monetary Board after due hearing
Phil., the DBP or any government-owned or process until a new board of directors
controlled bank or financial institution, Provided: and officers are elected and qualified
a. penalties thereon are waived except
accrued interest on arrearages  The management of the rural bank by the
b. equivalent penalties due from Central Bank shall be without expense to the
corresponding farmers are waived rural bank, except such is actually
c. rural banks that prefer to settle their necessary for its operation, pending the
arrearages under a plan of payment or a election and disqualification of a new board
combination of both plan of payment of directors and officers
and conversion may do so
d. rural banks shall match these preferred  The director and the examiners of the
stocks wit private equity in equal annual central bank charged with the supervision of
installments over a period of 15 years to rural banks are authorized to administer
begin 3 years after conversion oaths to any director, officer or employee of
any rural bank or to any voluntary witness
SUPERVISORY POWERS OF THE MONETARY and to compel the presentation of all books,
BOARD documents, papers or records necessary in
a. placing the limits to the maximum credit his or their judgment to ascertain the facts
allowed to any individual borrower relative to the true condition of any rural
b. prescribing the interest rate bank of to any loan.
c. determining the loan period and loan
procedures POWERS OF RURAL BANKS
d. indicating the manner in which technical a. Accept savings and time deposits
assistance shall be extended to rural b. Open current or checking accounts,
banks provided the bank has net assets of at
e. imposing a uniform accounting system least P5,000,000
and manner in keeping the accounts c. Act as correspondent for other financial
and records of rural banks institutions
f. instituting periodic surveys of loan and d. Act as collection agent
lending procedures, audits, test-check of e. Act as official depository of municipal,
cask and other transactions of the rural city or provincial funds in the
banks municipality. City or province where it is
g. conducting training courses for located
personnel of rural banks f. Rediscount paper with the PNB, Land
h. supervising the business operations of Bank of the Phil., Development Bank of
the rural bank, in general the Phil., or any banking institution,
i. prescribe the amount, value and class of including its branches and agencies
stock issued by any rural bank g. Offer other banking services as provided
in sec. 72 RA No. 337
SUPERVISORY POWERS OF THE CENTRAL h. Extend financial assistance to private
BANK and public employees
a. enforce laws, orders, instructions, rules
and regulations promulgated by the Investment in allied undertakings shall include:
Monetary Board applicable to rural 1. Banks, financial institutions and non-bank
banks financial intermediaries
2. Warehousing and other post-harvest facilities
 Saint Louis University COMMERCIAL LAW 248
2012 BAR OPERATIONS

3. Fertilizer and agricultural chemical and or surcharges required in setting up a

pesticides distribution branch but under the coordination with the
4. Farm equipment distribution Central Bank which will have to assess that
5. Trucking and transportation of agricultural there are qualified personnel, control and
products procedures to operate the branch
6. Marketing of agricultural products
7. Leasing  Every individual acting as officer or employee of
8. Other undertakings as may be determined by a rural bank and handling funds or securities
the Monetary Board, provided: amounting to P5, 000 or more in any 1 year,
a. the total investment to equities shall not shall be covered by an adequate bond as
exceed 25% of the net worth of the rural determined by the Monetary Board; the by-laws
bank of the bank may also provide for the bonding of
b. the equity investment in any single other employees or officers of rural banks
enterprise shall be limited to 15% of the net
worth of the rural bank EXEMPTIONS
c. the equity investment in any single a. Stockholdings in a rural bank shall be exempt
enterprise shall remain a minority holding in from any ownership ceiling for a period of 10
that enterprise years from the approval of this Act. The
exemption shall require the approval of the
 The LBP, DBP, or any government owned or Monetary Board
controlled bank or financial institution shall within b. The foreclosure of mortgages covering loans
6 days of certification of the Monetary Board, granted by rural banks and executions of
which shall be final, extend to a rural bank loans judgment thereon involving real properties levied
repayable in 10 years, with concessional rates of upon by the sheriff shall be exempt from the
interest, against security which may be offered publications in newspaper where the total
by any stockholder/s of said bank provided: amount of loan, excluding interest due and
a. That the Monetary Board is convinced that unpaid, does not exceed P100, 000. It shall be
the resources of the bank are inadequate to sufficient if the notices of foreclosure and
meet the legitimate credit requirements of execution of judgment are posted in the most
the locality wherein the bank is established conspicuous area of the municipal building, the
b. That there is dearth of private capital in the municipal public market, rural bank, barangay
said locality hall, barangay public market where the land
c. That it is not possible for the stockholders of mortgaged is situated during the period of 60
the rural bank to increase the paid-up capital days immediately preceding the public auction
thereof. or execution of judgment. Proof of publication
shall be accomplished by an affidavit.
 In an emergency or when a financial crisis is c. All rural banks shall be exempt from the
imminent, the Central Bank may give a loan to payment of all taxes, fees and charges of
any rural bank against assets of the rural bank whatever nature and description, except the
which may be considered acceptable by a corporate income tax and local taxes, fees and
concurrent vote of at least 4 members of the charges, for a period of 5 years from the date of
Monetary Board commencement of operations and from the
 To encourage consolidation and mergers of approval of this Act for rural banks already in
rural banks, there are 5 or more rural banks operation as of approval of this Act.
within the region that merge and consolidate d. Deposits of rural banks with government-owned
within 3 years from the enactment of this Act, or controlled financial institutions like the LBP,
the merged or consolidated entity will be given DBP, and the PNB are exempted from the
the ff incentives for a period of 7 years: Single Borrower’s Limit imposed by the General
a. Its deposit liabilities shall be subjected to Banking Act.
only 1/3 of reserves normally required for e. Any city or municipal trial court judge in his
rural banks capacity as notary public ex officio shall
b. Its reserve requirement can all be administer oath or acknowledge the instruments
maintained under interest-bearing of any rural bank and its borrowers or
government securities but kept mortgagors, free from all charges, fees and
unencumbered with government financial documentary stamp tax relative to any loan or
institutions or the Central Bank transaction not exceeding P50,000
c. It shall have unrestricted branching right f. The registration of any instrument to any register
within the region, free from any assessment of deeds by any rural bank and its borrowers or
 Saint Louis University COMMERCIAL LAW 249
2012 BAR OPERATIONS

mortgagors, shall be free from all charges, fees rural banks who shall connive or aid in the
and documentary stamp tax, relating to loans or commission of the same
transactions in an amount not exceeding P50, a. Any municipal trial judge or register of deeds
000. In instruments related to assignments of who shall demand or accept, directly or
several mortgages consolidated in a single indirectly, any gift, fee, commission or other form
deed, if any, shall be levied only on the amount of compensation in connection with the service,
in excess of P50,000 of the consideration in the or shall arbitrarily or without reasonable cause
assignment of each mortgage delay the acknowledgment or administration of
oath or the registration of documents required to
PROHIBITIONS be performed and by said register of deeds shall
A fine of not more than P10, 000, or imprisonment be punished by a fine of not more than P1, 000
for not less than 6 months but not more than 10 or by imprisonment for not more than 1 year, or
years or both, at the discretion of the court, shall be both
imposed upon:
Any bank not organized under this Act and any
a. Any officer, employee, or agent of a rural bank person, association, or corporation doing the
who shall: business of banking, not authorized under this Act
1. Make false entries in any bank report or which shall use the words “Rural Banks” as part of
statement the name or title of such bank or of such person,
2. Without order of a court, disclose any association, or corporation, shall be punished by a
information relative to the funds or properties in fine of not less than P50 for each day during which
the custody of t he bank belonging to private said words are so used.
individuals, corporations, or any other entity
3. Accept gifts, fees or commission or any other
form of remuneration in connection with the  

approval of a loan from said bank AN ACT TO ORDAIN  

4. Overvalue or aid in overvaluing any security for A COOPERATIVE CODE OF THE PHILIPPINES 
the purpose of influencing in any way the action R.A. NO. 6938 
of the bank in any loan
5. Appear and sign as guarantor, indorser, or
surety for loans granted CHAPTER XIII—SPECIAL PROVISIONS
6. Violate any of the provisions of this Act RELATING TO COOPERARIVE BANKS

b. Any applicant for a loan from, or borrower of a Cooperative bank

rural bank who shall: ‐ is one organized by, the majority shares of
1. Misuse, misapply, or divert the proceeds of the which is owned and controlled by, cooperatives
loan obtained by him from its declared purposes primarily to provide financial and credit services
2. Fraudulently overvalue property offered as to cooperatives. The term cooperative bank shall
security for a loan fro said bank include cooperative rural banks
3. Give out or furnish false or willful
misrepresentation of material facts for the Functions of a cooperative bank
purpose of obtaining, renewing, or increasing a 1. To carry on banking and credit services for the
loan or extending the period thereof cooperatives
4. Attempt to defraud the said bank in the event of 2. To receive financial aid or loans from the
court action to recover a loan government and the Central Bank of the Phil. for
5. Offer any officer, employee or agent of a rural and in behalf of the cooperative banks and
bank as a gift, fee or commission or other form primary cooperatives and their federations
of compensation in order to influence such bank engaged in business and to supervise the
personnel into approving a loan application lending and collection of loans
6. Dispose or encumber the property or the crops 3. To mobilize savings of its members for the
offered as security for the loan benefit of the cooperative and their federations
4. To act as a balancing medium for the surplus
c. Any examiner, or officer or employee of the funds of cooperatives and their federations
Central Bank of the Phil. or of any department , 5. To discount bills and promissory notes issued
bureau, office, branch or agency of the and drawn cy cooperatives
government who is assigned to examine, 6. To issue negotiable instruments to facilitate the
supervise, assist or render technical service to activities of cooperatives
 Saint Louis University COMMERCIAL LAW 250
2012 BAR OPERATIONS

7. To issue debentures subject to the approval of ‐ subject to the approval of the Central Bank and
and under conditions and guarantees to be compliance w/ applicable banking laws, rules
prescribed by the government and regulations
8. To borrow money from banks and other financial 1. Coop. banks registered under this code shall
institutions within the limit to be prescribed by be given the same privilege granted to the
the Central Bank rural banks, private development banks,
9. To carry out all other functions as may be commercial banks, and all other banks to
prescribed by the Authority. Provided, that the rediscount notes with the Central Bank, the
performance of any banking function shall be Land Bank of the Philippines and other
subject to prior approval by the Central Bank banks without affecting in any way the
and it satisfies all requirements for registration provisions if this code
as a cooperative 2. To act as depository of government funds

 No entry shall be registered by the Cooperative Whenever a coop. bank organized under this code is
Development Authority as a cooperative bank distressed or may need assistance in the
unless articles of cooperation and by-laws rehabilitation of its financial condition or to avoid
thereof as well as its establishment and bankruptcy, the Monetary Board of the Central Bank
operation as a cooperative bank have been shall designate an official of the Central Bank or a
approved by the Central Bank. person of recognized competence in banking or
finance as receiver or conservator of the said bank.
 Membership of a cooperative bank shall include
only cooperatives and federations of
cooperatives.  
 

FOREIGN CURRENCY DEPOSIT ACT 
 The number, composition and voting rights of RA 6426 
the board of directors shall be defined in the
articles of cooperation and by-laws of the
cooperative bank. Background
Republic Act no. 6426 established the foreign
 Cooperatives may obtain loans from a currency deposit account system in the country in
cooperative bank. Loans granted by a coop. 1972. essentially, it allowed any person to deposit,
bank shall be reported to the Central Bank. and banks to accept for deposit, any foreign
currency acceptable as part of our international
 The cooperative banks registered under this reserve.
code shall be under the supervision of the
Central Bank. The Central Bank upon  Who may deposit:
consultation with the agency and the - Any person
cooperative movement shall formulate a. Judicial
guidelines regarding the operation and banking b. Natural
transactions of cooperative banks. Cooperative
banks may be exempted from Central Bank  Authority of the Central Bank:
rules and regulations, applicable to other types a. To accept deposits and to accept foreign
of banks, which would impede the cooperative currencies in trust: Provided, that numbered
rural bank from performing legitimate financial accounts for recording and servicing of
and banking to its members. such deposits shall be allowed;
 A national coop. shall have a minimum b. To issue certificates to evidence such
authorized share capital of P200, 000,000. The deposits;
authorized share capital shall be divided into c. To discount such certificates;
such number of shares with a minimum par d. To accept said deposits as collateral as
value of P1, 000 per share loans subject to such rules and regulations
 A local coop. bank shall have a minimum as maybe promulgated by the Central Bank
authorized share capital of P20,000,000 divided from time to time.
into such number of shares with a minimum par e. To pay interest in foreign currency on such
value of P100 per share. deposits.

Privileges  Purpose:
Foreign currencies which are acceptable as
acceptable as part of the international reserved
 Saint Louis University COMMERCIAL LAW 251
2012 BAR OPERATIONS

except those which are required by the Central a. kidnapping for ransom under Article 267
Bank to be surrendered. of Act No. 3815, otherwise known as the
Revised Penal Code, as amended (Sec.
 Foreign Currency cover requirements: 3(i)(1));
- Shall maintain at all times a 100% foreign b. violations of sections
currency cover for their deposit liabilities of 4,5,6,8,9,10,12,13,14,15, and 16 of
which cover at least 15% shall be in the form Republic Act No. 9165, otherwise known
of foreign currency deposit with the Central as the Comprehensive Dangerous
Bank Drugs Act of 2002 (Sec. 3(i)(2)); and
- A balance in the form of foreign currency c. hijacking and other violations under
deposits or foreign currency loans or securities Republic Act No. 6235; destructive
which loans or securities shall be of short arson and murder, as defined under the
term maturities and readily marketable. revised penal code, as amended,
- May include loans to domestic enterprises including those perpetrated by terrorists
which are export evented or registered with the against non-combatant persons and
Board of Investments. similar targets (Sect. 3(i)(12).
- Foreign currency cover shall be in the same 3. Upon order of the court, if the anti-money
currency as that of the corresponding foreign laundering council determines that a
currency deposit liability. particular deposit or investment with any
- The Central Bank may pay interest on the banking institution is related to any one of
foreign currency deposit and if requested shall the unlawful activities under Sec. 3(i), except
exchange the foreign currency notes and coins those referred to in Section 3(i)(1), (2) and
into foreign currency instruments drawn on its (12), of RA 9160 or a money laundering
depository banks. offense under Section 4 (Sec. 11, RA
9160);and,
 Withdrawability and transferability of 4. Inquiry into or examination of any deposit or
deposits: investment with any banking institution when
- There shall be no restriction on the the examination is made by the BSP in the
withdrawal by the depositor of his course of a periodic or special examination
deposit or on the transferability of his in accordance with the rules of examination
deposit. of the BSP (Sec. 11, RA 1960; see also Sec.
4, RA 8791).

 Tax exemption of interests on deposits. (c) Numbered Accounts

- The interest on deposits belonging to non – ‐ authorized banks may adopt a numbered
resident nor engaged in trade or business in account system for recording and servicing
the Phils., shall be exempt from income tax. deposits in non-checking accounts (Sec. 3 in
relation to Sec. 9 (a), RA 9160, as
amended).
Unique features of the Act
Unlike ordinary bank deposits, foreign currency (d) Taxes
deposits have the following features: ‐ the foreign currency deposits, including
interests and all other income or earnings of
(b) Absolute Confidentiality such deposits, are exempt from any and all
‐ a foreign currency deposit cannot be taxes whatsoever irrespective of whether or
examined, inquired or looked into y any not these deposits are made by residents or
person or office, whether public or private, or non-residents and, in the latter case,
judicial, administrative or legislative (Sec. 8, irrespective whether or not the non-residents
as amended by PD 1246(1977) except: are engaged in trade or business in the
Philippines (Sec. 6, as amended by PD
1. Upon the written permission of the 1246). Note, however, that under sections
depositor; 24(B)(1), 27(D)(1) and 28(A)(7)(a) of the
2. Without need of a court order, if the anti- NIRC, the interest receive by the individual
money laundering council determines that a (Except a non-resident individual), domestic
particular deposit or investment with any corporation and resident foreign corporation
banking institution is related to any one of from such deposits shall, effective January
the following unlawful activities: 1, 1998, be subject to a final income tax of
7.5%.
 Saint Louis University COMMERCIAL LAW 252
2012 BAR OPERATIONS

case and ordered CBC to release to Salvacion and

(e) Court order or process her parents the dollar deposit of bartelli in such
‐ they are exempt from attachment, amount as would satisfy judgment.
garnishment or any other order or process of
any court, legislative or administrative body, Comment: this case should not be understood as
or government agency whatsoever (Sec. 8 removing from foreign currency deposits accounts
as amended by PD 1246) except the Court maintained by transient alien depositors the benefit
of Appeals, upon application ex parte by the and protection afforded by that Section 8 of Republic
anti-money laundering council and after Act No. 6426. such benefit and protection may be
determination that probable cause exists removed only under circumstances similar to the
that any monetary instrument or property is facts of this case.
in any way related to an unlawful activity as
defined in Section 3(i) of the anti-money Case
laundering act, may freeze the account into Intengan, et al vs CA, et al,
which the monetary instrument or property is G.R. No. 128996, February 15, 2002
deposited (Sec. 10, RA 9160, as amended).
The court held that the accounts in question, being
(f) New enactment or regulation U.S. Dollar deposits, are not covered by the law on
‐ in the event a new enactmentor regulation is secrecy of bank deposits (RA 1405, as amended)
issued decreasing the rights granted under but by the foreign currency deposit act (RA 6426, as
the law, such new enactment or regulation amended). Thus, a case for violation of the latter law
shall not apply to foreign currency deposits should have been the proper case brought against
already made or existing at the time of private respondents Vic Lim, a vice president of
issuance of such new enactment or Citibank, and Joven Reyes, Vice President/Business
regulation (Sec. 12-A, as inserted by PD Manager of the Global Consumer Banking Group of
1246). Citibank, who admitted that they had disclosed
details of petitioners’ dollar deposits without the
Case latter’s written permission. According to the court,
Salvacion, et al vs. Central Bank, et al. Lim’s act of disclosing details of petitioners’ bank
GR No. 94723, Aug. 21, 1997 records regarding their foreign currency deposits,
with the authority of Reyes, would appear to belong
Petitioner Karen E. Salvacion, a minor, was detained tot hat species of criminal acts punishable by special
and raped by Greg Bartelli, an American tourist. laws called malum prohibitum.
Salvacion was later on rescued by the police, Bartelli
was arrested, and criminal cases for serious illegal The private respondents, however, could no longer
detention and rape were filed against the latter. A be charged under RA 6426, a special law, as the
case for damages was also filed by Salvacion and offense has prescribed. Being a special law, the
her parents against Bartelli. Bartelli was able to provisions of Act No. 3326, entitled “An Act to
escape from jail and the criminal cases against him Establish Periods of Prescription for Violations
were thereafter archived. However, the civil case for Penalized by Special Acts and Municipal Ordinances
damages against Bartelli continued and judgment and to Provide When Prescription Shall Begin to
was rendered in favor of Salvacion and her parents. Run’, as amended by Act No. 3763, are applicable.
At the time of his arrest, Bartelli maintained a U.S A violation of RA 6426 shall subject the offender to
Dollar deposit account with China Banking imprisonment of not less than 1 year or more than 5
Corporation (CBC). When the petitioner to have the years, or to a fine of not less than P5,000.00 nor
bank deposit of Bartelli with CBC garnished to more than P25,000.00, or both. Applying Act 3326,
satisfy the judgment rendered in their favor, the bank the offense prescribes in 8 years. The filing of
refused citing Section 8 of Republic Act No. 6426, as complaint or information for alleged violation of RA
amended, which exempt foreign currency deposit 1405 did not have the effect of tolling the
accounts from attachment, garnishment or any other prescriptive period. It is the filing of the complaint or
order or process of any court, legislative or information corresponding to the correct offense
administrative body, or government agency which produces that effect.
whatsoever.
 

The court ruled that Section 8 of Republic Act No. THRIFT BANKS ACT OF 1995
 

6426 does not protect and would not apply to the R.A No. 7906 
foreign currency deposit of a transient alien
depositor under the peculiar circumstances of this
THRIFT BANKS
 Saint Louis University COMMERCIAL LAW 253
2012 BAR OPERATIONS

‐ include savings and mortgage banks, private reasonably assure the safety of the
development banks, and stock savings and interest which the public may entrust
loans associations organized under existing to them
laws, and any banking corporations that may be
organized for the following purposes:
‐ The monetary board may pass upon and review
a. Accumulating the savings of depositors and
the qualifications of persons who are elected or
investing them, together with capital
appointed bank directors and officers, and
loans secured by bonds, mortgage in real
disqualify those unfit.
estate and insured improvements thereon,
‐ At least majority of the members of the board of
chattel mortgage, bonds and other forms of
directors shall be citizen of the Philippines. NO
security or in loans for personal or
appointive or elected official, whether full time or
household finance, whether secured or not,
part time, shall at the same time serve as officer
or in financing for homebuilding and home
of any thrift bank, except in cases where such
development; in readily marketable and debt
service is incident to financial assistance
securities; in commercial papers and
provided by the government owned or controlled
accounts receivables, draft, bills of
corporation to the bank.
exchange, acceptances or notes arising out
‐ In case of merger or consolidation, the limitation
of commercial transactions;
on the number of directors in a corporation (sec.
b. Providing short-term working capital,
14 of the corporation code of the Philippines)
medium and term financing, to businesses
shall not be applied so that membership in the
engaged in agriculture, services, industry
new board may include up to the total number of
and housing and
directors provided for in the respective articles of
c. Providing diversified financial and allied
incorporation of the merging/consolidating
services for its chosen market and
banks.
constituencies especially for small and
medium enterprises and individuals.
OWNERSHIP AND CAPITAL REQUIREMENTS
ORGANIZATION ‐ At least 40% of the voting stock shall be owned
by citizens of the Philippines, except where a
‐ A thrift bank shall be organized in the form of
new bank may be established as a result of a
Stock Corporation. The Monetary Board (of the
merger/consolidation with foreign holdings in
Central Bank of the Philippines) shall fixed the
which case, the resulting foreign holdings shall
minimum paid-up capital taking into account the
not be increased but may be reduced and, once
development thrusts of this Act and due
reduced, shall not be increased thereafter
protection of the public. No thrift bank shall be
beyond 60% of the voting stock of thrift banks.
organized without a certificate of authority from
monetary board. ‐ The percentage of the foreign-owned voting
stocks shall be determined by the citizenship of
individual holders and in case of corporations
‐ The articles of incorporation, or any amendment owning shares, by the citizenship of each
thereto shall not be registered by the SEC stockholder in the said corporations.
unless accompanied by a certificate of authority ‐ The combined capital accounts shall not be less
issued by the monetary board under its official than an amount equal to 10% of the risk assets.
seal.
 Requirements for the issuance of
certificate: Risk assets
1. All the requirements of the existing  total asset minus the following assets:
laws and regulations to engage in a. cash on hand
business for which the applicant is
proposed to be incorporated have b. amount from Bangko Sentral
been complied with c. evidences of indebtedness of the republic of
2. That public interest and the the Philippines and of the Bangko Sentral.
economic conditions, both general And any other evidences of indebtedness or
and local, justify the authorization obligations the servicing and repayment of
3. The amount of capital, the financing which are fully guaranteed by the Rep. of
organization, direction and the Phil.
administration, as well as the d. loans to extent covered by hold-out on, or
integrity and the responsibility of the assignment of deposits maintained in the
organizers and the administrators lending bank and held in the Philippines
 Saint Louis University COMMERCIAL LAW 254
2012 BAR OPERATIONS

e. other non-risk items as the Monetary Board 11. extend credit facilities to private and government
may authorize to be deducted from the total employees
assets. 12. extend credit against the security of jewelry,
precious stones and articles of similar nature
 Whenever the capital accounts are deficient, the
Monetary Board shall limit or prohibit the Limitations on lending authority
distribution of net profit and shall require that
 the direct indebtedness to thrift banks of any
part or all of net profits be used to increase the
person, company, corporation, or firm, including
capital accounts until the requirement has been
the indebtedness of members of a partnership
met. The Board may restrict or prohibit the
and association, for money borrowed shall in no
making of new investments of any sort by bank,
time exceed 15% of unimpaired capital and
with the exception of purchases of evidences of
surplus of the bank except:
indebtedness above mentioned.
a. loans secured by obligation of the Central
Bank
POWERS OF THRIFT BANKS b. loans fully guaranteed by the government as
to payment of principal and interest
1. accept savings and time deposit
c. loans to the extent covered by the hold-out
2. open current or checking accounts, provided
on, or assignment of, deposits maintained in
that the bank has net assets of at least
the lending bank and held in the Philippines
P20,00,000
d. other loans or credits as the Monetary Board
3. act as correspondent for other financial
may specify a non-risk assets
institutions
4. act as collection agent for government entities,
including but not limited to, the BIR, SSS, & the  The total indebtedness may amount to a
Bureau of customs further 15% of the unimpaired capital and
5. act as official depository national agencies and surplus of such bank provide the additional
municipal, city or provincial funds in the indebtedness is for the purpose of financing
municipality, city or province where the thrift subdivision or housing development,
bank is located medium and low income borrowers and
6. rediscount paper with the PNB, Land Bank of agriculture on a full secured basis.
the Philippines, Development Bank of the
Philippines, and other GOCC’s
Investments in allied undertakings
7. issue mortgage and chattel mortgage
certificates, buy and sell them for its own  include institutions engaged in the following
account or for others, or accept and receive activities:
them in payment or as amortization of its loan 1. banking and financing
 such mortgage and chattel mortgage 2. warehousing and other post harvesting
certificates shall be issued exclusively in activities
national currency and exclusively for the 3. fertilizer & agricultural chemical & pesticides
financing of equipment loans, mortgage distribution
loans for the acquisition of machinery and 4. farm equipment distribution
other fixed installations, conservation, 5. trucking and transportation
enlargement or improvement of productive 6. marketing of agricultural products
properties and real estate mortgage loans 7. leasing
for 8. other undertakings as determined by the
(1) the construction, acquisition, Board
expansion or improvement of rural and  Provided:
urban properties; a. that the total investments in equities shall
not exceed 25% of the net worth of
(2) the financing of similar loans and
the thrift bank
mortgages; and
b. the equity investment in any single
(3) such other purposes as may be enterprise shall be limited to 15% of the
authorized by the Monetary Board. net worth of the thrift bank
c. the equity investment in any single
8. purchase, hold and convey real estate
enterprise shall remain a minority holding in
9. engage in quasi-banking and monetary market
that enterprise
operations
d. the equity investment in other banks shall be
10. open domestic letters of credit
subject to the same provisions governing
 Saint Louis University COMMERCIAL LAW 255
2012 BAR OPERATIONS

similar investments of commercial banks qualified personnel, control and procedures to

and shall be deducted from the investing operate the branch.
bank’s net worth for the purpose of 3. A thrift bank may publish its statement of
computing of the prescribed ratio as condition in a newspaper of general circulation,
provided in sec.9 hereof (re: combined or post it in the most conspicuous area of its
capital accounts) premises, municipal building, municipal public
market, barangay hall and barangay public
SUPERVISORY POWERS OF THE MONETARY market, if any, where the bank concerned is
BOARD OVER THRIFT BANKS located.
a. placing limits to the maximum credit allowed to
any individual borrower EXEMPTIONS
b. indicating the manner in which technical a. all thrift banks, whether created organized under
assistance shall be extended to thrift banks this Act or in operation as of the date of
c. imposing a uniform accounting system and effectivity of this Act, shall be exempt from
manner of keeping the accounts and records of payment of all taxes, fees and charges for a
thrift banks period of 5 years, counted from the date of
d. instituting periodic surveys of loans and lending commencement of operations for banks created
procedures, audits, test-check of cash and other under this Act and from the date of effectivity of
transactions of the thrift banks this Act for existing banks
b. The foreclosure of mortgage covering loans
SUPERVISORY POWERS OF THE CENTRAL granted and executions of judgments thereon
BANK OVER THRIFT BANKS involving real properties and levied upon by a
a. to enforce the laws, orders, instructions, rules sheriff shall be exempt from publication
and regulations promulgated by the Monetary requirements where the total amount of the loan,
Board applicable to thrift banks excluding interest due and unpaid, does not
b. to require thrift banks, their directors, officers exceed P100,000.
and agents to conduct and manage the affairs of ** It shall be sufficient publication if the notice of
the thrift bank in a lawful and orderly manner foreclosure and execution of judgment are
c. to appoint a conservator upon proof that the posted in the conspicuous area of a thrift bank’s
bank or its board of directors or officers are premises, municipal building, mun. public
conducting and managing the affairs of the bank market, barangay hall, and barangay public
in a manner contrary to laws, orders, instructions market where the land mortgaged is situated
promulgated by the Monetary Board or in within a period of 60 days immediately
manner substantially prejudicial to the interest of preceding the public auction of the execution of
the government, depositors, creditors, or the judgment. Proof of publication shall be
general public accomplished by an affidavit of the sheriff of the
officer conducting the foreclosure sale or
 The director and examiners of the execution of judgment.
department of Bangko Sentral charged with c. Any metropolitan, municipal, or municipal circuit
the supervision of thrift banks are authorized trial court judge in his capacity as notary public
to administer oaths to any director, officer, or ex officio shall administer oath or acknowledge
employee of any thrift bank or to any the instrument of any thrift bank and its
voluntary witness and to compel the borrowers or mortgagor free from all charges,
presentation of al books, documents, papers fees and documentary stamp tax, collectible
or records necessary in his or their judgment under existing laws, relative to any loan or
to ascertain the facts relative to the true transaction not exceeding P50.00
conditions of any thrift bank or to any loan. d. The registration of any instrument, whether
voluntary or involuntary to the register of deeds
INCENTIVES by any thrift bank and its borrowers and
1. Reserve requirement imposed in thrift banks by mortgagors shall be free from all charges, fees
the Monetary Board shall enjoy equitable and documentary stamp tax relaying to loans or
preferential terms those imposed on commercial transactions in an amount not exceeding
banks P50,000.
2. Thrift banks shall have unrestricted branching
right within the region, free from any assessment  Charges shall be collected, if any, on the
or surcharges required in setting up a branch, amount in excess of P50, 000. Instrument
but under the coordination with the Bangko related to assignments of several
Sentral which will have to assess that there are mortgages consolidated in a single deed, if
 Saint Louis University COMMERCIAL LAW 256
2012 BAR OPERATIONS

any, shall be levied only on the amount in

excess of P50, 000 of the consideration in D. Any MeTC, MTC, or MCTC judge or register of
the assignment of each mortgage. deeds who shall demand or accept, directly or
indirectly, any gift, fee, commission, or any other
e. Any thrift bank shall be exempt from any from of compensation in connection with the
ownership ceiling for a period of 10 years from service, or shall arbitrarily and without
the effectivity of this act. reasonable cause delay the acknowledgment or
administration of oath or the registration of
PROHIBITIONS documents – shall be punished with a fine of not
A fine of not more than P10, 000 or imprisonment for more than P1, 000 or imprisonment of not more
not less than 6 months but not more that 10 years, that 1 year, or both.
or both shall be imposed upon:
E. Any bank not organized under this Act and
A. Any officer, employee, or agent of a thrift bank any person, association, or corporation doing
who shall: business of banking, not authorized under this
1. Make false entries in any bank report or Act or existing laws which shall use the words
statement “Development Bank,” “Savings Bank,” “Savings
2. Without order of a court of competent and Mortgage Bank,” or Savings and Loan
jurisdiction, disclose any information relative to Association,” as part of the name or title of such
the funds or properties in the custody of the bank or of such person, assoc., or corp. – shall
bank belonging to private individuals, be punished by a fine of not less than P100, but
corporations, or any other entity. in no case to exceed P30,000, for each day
3. Accept gifts, fees or commissions or any other during which the said words are used.
form of remuneration in connection with the
approval of a loan from said bank
4. Overvalue or aid in the overvaluing any security  
 

for the purpose of influencing in any way the IX. D. THE PHILIPPINE DEPOSIT INSURANCE
action of the bank on any loan CORPORATION ACT
5. Appear and sign as guarantor, indorser, or (PD 3591 AS AMENDED BY RA 7400)
surety for loans granted
6. Violate any provision of this Act
Purpose of the law
B. Any applicant for a loan from, or borrower of a
thrift bank who shall: The purpose of the law is to create a
1. Misuse, misapply or divert the proceeds of the government-owned entity, the PDIC, that shall
loan obtained by him from its declared purposes insure the deposit liabilities of all banks entitled
2. Fraudulently overvalue property offered as to the benefits of insurance under the Act. Such
security for a loan from said bank insurance is intended to protect depositors from
3. Give out or furnish false or willful situations that prevent banks from paying out
misinterpretation of material facts for the deposits, as in bank failures or closures, ant to
purpose of obtaining, renewing, or increasing a encourage people to deposit in banks.
loan extending the period thereof
4. Attempt to defraud the said bank in the event of
court action to recover the loan Composition of governing board
5. Offer any officer, employee or agent of a thrift
bank a gift, fee, commission or other forms of
compensation in order to influence such bank a. The Secretary of Finance who shall be the
personnel into approving a loan application ex officio chairman of the board without
6. Dispose or encumber the property offered as compensation.
security for a loan b. The Government of the Central Bank, who
shall be the ex officio member of the board
C. Any examiner, or officer or employee of the without compensation.
Bangko Sentral or of any department, bureau, c. The president of the corporation, who shall
office, branch, or agency of the government who be appointed by the President of the
is assigned to examine, supervise, assist or Philippines from either the Government or
render technical service to thrift banks and who Private sector to serve on a full-time basis
shall connive or aid in the commission of the for a term of 6 years. The President shall
same also serve vice chairman of the board.
Saint Louis University COMMERCIAL LAW 257
2012 BAR OPERATIONS

d. The members from the private sector, to be The deposit liabilities of any bank engaged in
appointed for a term of 6 years without the business receiving deposits are required to
reappointment from the President of the be insured with the PDIC.
Philippines: Provided, that of those first
appointed, the first appointee shall serve a
period of 2 years. When the PDIC becomes liable to pay the
insured deposits (Sec. 10[c])
Deposit
The PDIC becomes liable to pay the insured
deposits in a bank when the is closed by the
The term “deposit” means the unpaid balance of
Monetary Board of the Bangko Sentral ng
money or its equivalent received by a bank in
Pilipinas, that is, prohibited from doing further
the usual course of business and for which it has
business in the Philippines, on account of
given or is obliged to give credit to a
insolvency and other grounds under the law.
commercial, checking, savings, time or thrift
account or which is evidenced by passbook
check, and/or certificate of deposit, printed or
issued in accordance with Central Bank Rules Extent of the PDIC’s liability to a bank
and Regulations and other applicable laws, depositor (Sec. 3[g]
together with such other obligations of a bank,
which, consistent with banking usage and
practices, the Board of Directors shall determine The PDIC’s liability is up to P100,000 per
and prescribe by regulations to be deposit depositor/ per capacity.
liabilities of the bank: Provided, That any
obligation of a bank which is payable at the
office of the bank located outside of the Liability of the PDIC
Philippines shall no be a deposit for any of the On a per bank basis.
purposes of this Act or included as part of the
total deposits or insured deposit: Provided,
Further, That, subject to the approval of the When an insured bank is closed on account of
Board of Directors, any insured bank which is insolvency how will payment of the insured
incorporated the laws of the Philippines which deposits in such bank be made BY the PDIC?
maintains a branch outside the Philippines may (Sec. 10[c])
elect to include for insurance its deposit
obligations payable only at such branch.  The PDIC shall pay either in cash or by
making available to each depositor a
transferred deposit in another insured
Transferred Deposit bank in an amount equal to the insured
deposit of such depositor.

A transferred deposit is a deposit in an insured If a depositor has several accounts with the
bank made available to a depositor by the PDIC bank, how will the liability of the PDIC to him be
as payment of the insured deposit of such calculated? (Sec. 3[g])
depositor in a closed bank and assumed by
another insured bank. By paying its liabilities to  The liability of the PDIC will be
depositors in this manner, the PDIC hopes to calculated by adding together all
persuade these depositors to keep their savings deposits in the bank maintained by the
in banks where such funds could be lent out, depositor in the same capacity and the
rather than hoarded and kept out of the banking same right for his benefit either in his
system. own name in the name of others.

Effect of payment to the depositor of his

Deposit liabilities required to be insured with insured deposit
the PDIC (Sec. 4)

Payment to the depositor of his insured deposit

(1) discharges the PDIC from any further liability
 Saint Louis University COMMERCIAL LAW 258
2012 BAR OPERATIONS

to the depositor, and (2) subrogates the PDIC to not on the negotiability or non-negotiability
all the rights of the depositor against the closed of the certificates evidencing these deposits.
bank to the extent of such payment. ‐ In order that a claim for deposit insurance
with the PDIC may prosper, the law requires
Notice requirement imposed by the Act on
that a corresponding deposit be placed in
banks (Sec. 16[a])
the insured bank. A deposit, as defined in
Every insured bank is required by the Act to section 3(f) of RA 3591, may be constituted
display at each place of business maintained by only if money or the equivalent of money is
the bank a sign or signs stating that its deposits received by a bank.
are insured by the PDIC. A similar statement
shall be included by the bank in its
 Trust funds deposited with an insured bank
advertisements.
and bearer time deposit certificates with no
registered payee are excluded from the
insurance coverage
 PDIC vs. CA, December 22, 1997
‐ The PDIC was created by law and as such,
is governed primarily by the provisions of the  PDIC can stop insurance coverage if
special by the provisions of the special law assessments against the insured bank are
creating it. The liability of the PDIC for not paid in 30 days after notice
insured deposits therefore is statutory and,
under RA 3591, such liability rests upon the
existence of deposits with the insured bank,

 
 

PHILIPPINE DEPOSIT INSURANCE CORP. 
CHARTER AMENDMENTS 

Notes compiled by

ATTY. MARIA LULU G. REYES

College of Law
Saint Louis University

SUMMARY OF CHANGES

 Enhancements and refinements to powers of the corporation

 New safeguards for PDIC personnel
 New sanctions and penalties

ENHANCEMENTS & REFINEMENT TO THE POWERS OF THE CORPORATION

The Basic Policy of PDIC

“The Corporation shall … promote and safeguard the interest of the depositing public by way of providing
permanent and continuing insurance coverage on all insured deposits.” (Sec. 1, second par.)

Mandate of PDIC
 Insure Bank deposits
 Receiver / liquidator of closed banks

As deposit insurer (Sec.4 (g))

 Saint Louis University COMMERCIAL LAW 259
2012 BAR OPERATIONS

 “Insured deposit” means the amount due to any depositor for deposits in an insured bank net of any
obligation of the depositor to the insured bank as of the date of closure, but not to exceed P250, 000.
(Sec.4( g))

 A joint account is insured separately from any individually – owned deposit account, regardless “and,” “or”
or “and / or” is used.

 Additional provisions on joint accounts

 Insured amount of deposit is divided to as many equal shares as there are individuals unless
stipulated otherwise in the deposit document.
 All deposits in joint accounts of a depositor are added together, but the sum of his / her insured
deposit in all joint accounts should not exceed P250,000

Computation of Max. Deposit Insurance Cover (MDIC)

Example 1: Jose, no outstanding loan (amounts in thousand pesos)

Deposit Dep. Max Share in max.

Balance Share Insurance Insurance cover
Cover
Jose Pilar Anita
1. Jose Individual 300 300 250 250 n/a n/a
2. Jose Joint Accounts
2.1 Jose and / or Pilar 250 125 250 125 125 0
2.2 Jose and Pilar 400 200 250 125 125 0
2.3 Jose or Anita 300 150 250 125 0 125

Total 1,250 625 250 125

Total Insured deposit 875 500 250 125
Total Uninsured Deposit 375 275 75 25

Jose’s total share is 625 but his maximum insurance cover is only 500. The 125 in excess of 500 is part of his
uninsured deposit

Summary

Total Share in Insured Uninsured

Deposit Insurance Depositor Deposit
Share Cover
Jose 775 625 500 275
Pilar 325 250 250 75
Anita 150 125 125 25
______ _____ ______
Total 1,250 875 375

Depositors with outstanding loans

 Outstanding loans, whether matured or unmatured, are netted out from total outstanding deposits, not
from the insured portion of the deposit.
 If the depositor is a co-owner of a joint account, his / her insured deposit is determined by deducting the
outstanding loan from his / her share of the joint account. His / he5r loan obligation is not deducted from
the share of co-owner.

Example 2: Jose &/ or Pilar (with outstanding loan)

Deposit – P400, 000
 Saint Louis University COMMERCIAL LAW 260
2012 BAR OPERATIONS

Outstanding Loan: Jose – P50, 000 (unmatured); Pilar – P150, 000 (matured)

Deposit O/S Net Max Insured Uninsured

Share Loan (C=A-B) Insurance Deposit Deposit
(A) (B) Cover (E) (F)
(D)
Jose 200 50 150 125 125 25
Pilar 200 150 50 125 50 -
Total 400 200 200 250 175 25

Depositors with loan secured by hold – out

 If a loan is secured by a hold-out on a joint ‘and / or” account, the loan balance is netted out from the
entire account, regardless of who among the owners of the joint account is the borrower.
 If a loan is secured by a hold-out on a joint “and” account, the loan balance is netted out from the share of
the borrower, unless the other owner (s) consented to the hold-out agreement.

Example 3a: Jose &/ or Pilar. Deposit of P400, 000; Jose and Pilar signed the hold-out agreement for a loan of
P150, 000

Acct. O/S Net Deposit Max Insured Uninsured

Balance Loan (C=A-B) Share Cover Deposit Deposit
(A) (B) (D) (E) (E) (F)
Jose 125 125 125 -
400 150 250
Pilar 125 125 125 -

Total 400 150 250 250 250 250 -

Example 3b: Jose &/ or Pilar. Deposit of P400, 000; Jose w/ outstanding loan of P150, 000 secured by hold-out,
only Jose is signatory to hold out agreement

Acct. Deposit O/S Net Max Insured Uninsured

Balance Share Loan (C=A-B) Cover Deposit Deposit
(A) (B) (E) (E) (F)
Jose 125 50 -
400 200 150 50
Pilar 200 0 200 125 125 75

Total 400 400 250 250 250 175 75

 PDIC cannot terminate the insured status of any bank which continues to operate or received deposits.
 If any insured bank fails or refuses to pay any assessment the remedies are:
 An action for collection before the appropriate court
 Administrative sanctions against responsible bank officials

As Receiver / Liquidator
Of Closed banks

 PDIC is the statutory receiver of all closed banks. (Sec. 8-ninth, PDIC Charter; Sec. 30, R.A. 7653)
 Saint Louis University COMMERCIAL LAW 261
2012 BAR OPERATIONS

 Monetary Board shall give prior notice to PDIC of its appointment as receiver of closed bank. (Sec. 10 (a))
 As receiver, it shall have full control, management and administration of the affairs of the closed bank.
(Sec.10 (b))

The Authority of PDIC

 Examine insured banks
 Investigate frauds, irregularities and anomalies
 Provide financial assistance to distressed banks

Examine insured banks (Sec.8)

 Examinations conducted with prior approval of monetary board

 No examination can be conducted within 12 months from last examination date

Investigate frauds,
Irregularities and anomalies

 The Board shall appoint investigators who shall have the power to conduct investigations on frauds,
irregularities and anomalies committed in banks (Sec. 9 (b-1))
 Bases—
 Reports of examination conducted by PDIC and / or BSP
 Complaints from depositors or from other government agency
(Sec. 9(b-1))

 Power of the investigators

 Administer oaths
 Examine, take and preserve the testimony of any person relating to the subject of investigation
(Sec. 9 (b-1))

Financial Assistance (Sec.17 (c))

Condition: When the grant of the assistance is less expensive than actual payoff and liquidation of the bank

Exception: When the MB has determined that there are systemic consequences of a probable failure or closure
of an insured bank.

Definition of systemic risk:

 The possibility that failure of one bank to settle net transactions with other banks will trigger a chain
reaction leading to a shutdown of banking activity,
 Likelihood of sudden unexpected collapse of confidence in a significant portion of the banking or financial
system with potential real economic effects

Live banks
Modes:
 Make loans
 Purchase of assets
 Assume liabilities
 Make deposits
Criteria:
 Essential to provide adequate banking service in the community; or
 Maintain financial stability

Closed banks
 Saint Louis University COMMERCIAL LAW 262
2012 BAR OPERATIONS

Modes:
 Assume liabilities
 Purchase assets
Criteria:
 Vital to the interest of the community; or
 A severe financial climate exists which threatens the stability of a number of banks possessing significant
resources.
 Approval:
- reopening and resumption of operations approved by MB

Recipient of Financial assistance:

 banks in danger of closing
 a corporation—
 acquiring control of a bank in danger of closing
 consolidating with or acquiring the assets of insured bank in danger of closing

 Assistance to an insured bank may take the form of –

 Loans
 Purchase of assets
 Assumption of liabilities
 Making deposits
 With concurrence of Monetary Board, equity or quasi-equity infusion

SAFEGUARD FOR PDIC PERSONNEL

Legal Assistance

 PDIC shall underwrite or advance litigation costs and expenses in connection with any civil, criminal or
administrative action or proceeding involving PDIC personnel.
 Such PDIC personnel are made a party to the action or proceeding by reason of or in connection with
exercise of authority or performance of functions or duties. (Sec 9 (f))
 Personnel separated from service shall continue to be provided with legal protection in connection with any
act done or omitted by them in good faith during their tenure/employment.
 In the event of compromise/settlement, the personnel to be indemnified are those identified not to have
committed any negligence or misconduct.
 PDIC to advance litigation expenses upon receipt of an undertaking by the PDIC personnel to repay the
amount advanced should it determined by the Board that he is not entitled to be indemnified. (Sec.9(g))
 Assistance includes grant or advance of legal fees to enable concerned PDIC personnel to engage a counsel
of his choice.(Sec.9(h))

SANCTION AND PENALTIES

Punishable acts

 Willful refusal to submit reports (Sec. 21(f)1)

 Unjustified refusal to permit examination and audit of deposit record or affairs of institution (Sec.21(f)2)

 Willful making of false statement or entry in bank report or document required by PDIC (Sec 21 (f)3)

 Submission of false material information in relation to financial assistance extended to the bank (Sec 21 (f)4)

 Splitting deposits or creation of fictitious loans or deposit accounts (Sec 21(f)5)

 Saint Louis University COMMERCIAL LAW 263
2012 BAR OPERATIONS

 Refusal to allow PDIC to take over, or obstructing the takeover of a closed bank placed under its receivership
(Sec 21 (f)6)

 Refusal to turn over or destroying or tampering bank records (sec21(f)7)

 Fraudulent disposal, transfer or concealment of any asset, property or liability of a closed bank (Sec21 (f)8)

 Violation of or causing any person to violate the exemption from garnishment, levy, attachment or execution
(sec21(f))

 Willful failure or refusal to comply with or violation of the provisions of R.A. 3591, commission of any other
irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the
Board (Sec.21(f)10)

Criminal Penalties

 Imprisonment of prision mayor or

 Fine of not less than P50,000 but not more than P2 million
 Or both at the discretion of the court (Sec.21 f)

Injunctions
 No court except the Court of Appeals shall issue a TRO, Preliminary injunction, or preliminary mandatory
injunction against the PDIC.

 Any injunction issued in violation of this provision is void & without force and effect; judge who issued the
same shall be suspended for at least 60 days without pay. (Sec.22)

 Supreme Court may issue a restraining order or injunction on matters of extreme urgency involving a
constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise.

Party applying for the TRO or injunction shall post a bond in an amount to be fixed by the Supreme Court

 
 
The bank or a quasi-bank is in a state of
BANK RECEIVERSHIP AND LIQUIDATION continuing inability or willingness to maintain a
condition of liquidity deemed adequate to protect
the interest of depositors and creditors. (Sec. 29,
Notes compiled by: R.A. 7653)

ATTY. MARIA LULU G. REYES  Who may be appointed as conservator?

College of Law Any person who is competent and
Saint Louis University knowledgeable in bank operations and
management. A person connected with BSP
may be appointed as conservator. (Sec. 29,RA
Options of Monetary Board over Distressed bank 7653)
 Order the placement of bank under
conservatorship (Sec 29, RA 7653)  Period of conservatorship---
 Order the placement of bank under receivership Should not exceed 1 year. (Sec. 29, R.A.7653)
(Sec. 30, RA 7653)

Powers of conservator
CONSERVATORSHIP The Monetary Board shall grant to the conservator;
 Ground: as it may deem necessary, the following powers:
 Saint Louis University COMMERCIAL LAW 264
2012 BAR OPERATIONS

from doing business and designate PDIC as the

 to take charge of the assets, liabilities, and the bank’s receiver. (Sec. 30, R.A.7653)
management of the bank;
 reorganize the management; Is there a violation of due process if a bank is
 collect all monies and debts due said institution; ordered closed without prior hearing?
 Exercise all powers necessary to restore its
viability. (Sec. 29,R.A. 7653) None. Prior hearing is not required before a bank
 The conservator shall have the power to can be ordered closed and placed under
overrule or revoke the actions of the previous receivership. (Rural bank of Buhi, Inc. v. CA, 162
management and board of directors of the bank SCRA 288, 302; CB vs. Triumph Savings Bank,
or quasi-bank. (Sec. 29, R.A.7653) March 30, 1993)

Termination of Conservatorship Rationale of receivership

 When MB is satisfied that the institution can  The mere filing of a case for receivership can
continue to operate on its own and the trigger a bank run.
conservatorship is no longer necessary. (Sec.
29, R.A.7653) “One can just imagine the dire consequences of
a prior hearing; bank runs would be the order of
 When MB determines that the continuance in the day, resulting in panic and hysteria. In the
business of the bank would involve probable process, fortunes may be wiped out and
loss to its depositors or creditors. In which case, disillusionment will run gamut of the entire
bank will be placed under receivership. (Sec. 29, banking community.” (Buhi, ibid)
R.A.7653)
 A hearing may be done subsequent to the
closure. “Close now hear later.” (Ibid.)
The placement of a bank under conservatorship is
not a precondition to its placement under
receivership. (Sec. 30, R.A.7653) Exercise of Police Power

RECEIVERSHIP  Closure of a bank is an exercise of police

power of the State. (CB v. CA, G.R. No. 88353,
 Grounds – May 8, 1992; CB v. CA, G.R. No. L-50031-32,
1. When the bank is unable to pay its liabilities July 27,1981)
as they become due in the ordinary course  The exercise may be the subject of judicial
of business. This shall not include inability to review.(Ibid.)
pay caused by extraordinary demands
induced by financial panic in the banking Remedy of aggrieved bank owners
community.
Petition for certiorari to be filled by the stockholders
2. The bank has insufficient realizable assets of record representing the majority of the capital
to meet its liabilities. stock within (10) days from receipt by the board of
directors of the bank of the order directing
3. The bank continue in business without receivership. (Sec. 30, R.A.7653)
involving probable losses to its depositors or
creditors. Rationale why only stockholders are allowed to
question order of receivership
4. The bank has willfully violated a cease and
desist order under section 37 involving acts  To ensure that the order of MB is not frustrated
or transactions which amount to fraud or a or defeated by the incumbent BOD or officers
dissipation of the assets of the institution. who may immediately resort to court action to
(Sec. 30, R.A.7653) prevent its implementation or enforcement/
 It is presumed that such a resolution is directed
principally against acts of said BOD and officers
Summary nature of bank closure which placed the bank in a state of continuing
If the grounds enumerated under Section 30 0f RA inability to maintain a condition of liquidity
7653 are present, the Monetary board may adequate to protect the interest of depositors
summarily and without prior hearing forbid the bank and creditors.
 Saint Louis University COMMERCIAL LAW 265
2012 BAR OPERATIONS

 Intended to protect and safeguard the rights and writ of garnishment, levy, attachment or
interests of the stockholders. execution shall be criminally and/or
 The authority to decide on whether to contest administratively liable under Sec21, (f) (9) of RA
the resolution should be lodged with the 3591, as amended.
stockholders owning a majority of the shares for  Stay of execution against the assets of bank.
they are expected to be more objective in (Lipana vs. DBR, Sept. 24,1987)
determining whether the resolution is plainly  Central Bank vs. Morfe (March 12, 1975)
arbitrary and issued in bad faith. (Central Bank Trust Fund doctrine—“ The assets are held in
vs. CA, May 8, 1992; Central Bank vs. Triumph trust for the equal benefit of all creditors, and
Savings, March 30,1993) after its insolvency, one cannot obtain an
advantage or a preference of another by an
attachment, execution or otherwise.”
Period of Receivership
Maximum of ninety (90) days from take over . (Sec. Rationale for stay of execution
30, R.A.7653)
 Execution would unduly deplete the assets of
Effect of placing a bank under receivership the bank to the obvious prejudice of another
The bank is prohibited from doing business. . (Sec. depositors and creditors, including depositors.
30, R.A.7653) (Lipana, supra.)

Concept of “doing business”  One of the reasons of placing a bank under

receivership is to prevent creditors from having
“… a continuity of commercial dealings and advantage over the assets of the bank. (Lipana,
arrangements, and contemplates to that, extent, the supra.)
performance of acts or words or the exercise of
some of the functions normally incident to, and in Duties/responsibilities of Receiver
progressive prosecution of, the purpose and object
of its organization.” (Provident Savings Bank vs. CP,  Immediately gather and take charge of all the
may 17, 1993) assets and liabilities of the bank, administer the
same for the benefit of its creditors.(Sec30,RA
“… bank would not be able to do new business,i.e., 7653)
to grant new loans or to accept new deposits.”  Exercise the general the general powers of a
(Provident Savings Bank vs. CP, may 17, 1993) receiver under the Rules of Court (Ibid)
 Determine if the bank could be rehabilitated and
Effects of receivership permitted to resume business.(Ibid)
 Bring suits to enforce liabilities to or recoveries of
 ‘Receivership is equivalent to an injunction to the closed bank. (Sec.10 [c] [1],RA 3591, as
restrain the bank officers from intermeddling with amended)
the property of the bank in any way.” (Villanueva  Appoint and hire persons or entities of recognized
vs. CA, 244 SCRA 396) competence in banking or finance as its deputies
 articles of Incorporation/By-Laws of bank are and assistants. (Sec.10 [c] [2]2, ibid)
suspended. (Sec.10[b], RA 3591, as amended)  Suspend or terminate the employment of officers
 the powers, function and duties, as well as all and employees of the bank (Sec.10 [e] [3], ibid.)
allowances, remunerations and perquisites of  Collect loans and other claims of the closed
the directors, officers and stockholders are bank. For this purpose, receiver may modify,
suspended. (Sec.10[b],Ibid) compromise or restructure the terms and
 Bank retains judicial personality. (Manalo vs. conditions of such loans or claims as may be
PAIC, Oct. 8, 2001) deemed advantageous to the interest of the
 The only limitation is that the bank can sue and creditors and claimants of the closed
be sued only through its receiver. (Supra.) bank.(Sec.10 [c] [5]),supra)
 The assets of the bank are considered under  Hire or retain private counsel as may be
custodia legis. (Sec.30,RA7653; Sec. 10 (b) necessary. (Sec. 10 [c] [6], supra)
R.A. 3591, as amended)  Borrow or obtain a loan, or mortgage, pledge or
 Assets of the bank are exempt from any order of encumber any asset of the closed bank, when
garnishment, levy, attachment, or execution. necessary to preserve or prevent dissipation of
(Ibid.) the assets, or to redeem foreclosed assets of
 A judge, officer of the court or any person who the closed bank, or to minimize losses to the
shall cause the issuance or implementation of depositors and creditors. (Sec.10 [c] [7],supra)
 Saint Louis University COMMERCIAL LAW 266
2012 BAR OPERATIONS

 If the stipulated interest on deposit is unusually When the proper RTC gives due course to the PAL,
high compared with the prevailing applicable it is constituted as the Liquidation Court (LC) of the
interest rate, the Receiver may exercise such closed bank. . (Sec.30,RA 7653)
powers which may include a reduction of interest
rate to a reasonable rate: Provided, that any Jurisdiction of Liquidation Court (LC)
modification or reduction shall apply only to
unpaid interest.(Sec 10 [c] [8]), supra)  The court shall adjudicate disputed claims
 Exercise such other powers as are inherent and against the closed bank.
necessary for the effective discharge of the  The court shall assist in the enforcement of
duties of PDIC as receiver.(Sec.10 [c] [9]) individual liabilities of the stockholders, directors
and officers of the bank.
Prohibitions during receivership period  The court shall decide on issues as may be
‐ Receiver shall not pay or commit any act that material in the implementation of the liquidation
will involve the transfer of any assets of the plan adopted. . (Sec.30,RA 7653)
bank. (Sec.30,RA 7653)  The Liquidation Court has exclusive jurisdiction
‐ Exceptions: over “disputed claims” against the closed bank.
 Payment of administrative expenditures (Star Forwarders, Inc. v. Navarro, 191 SCRA
(Sec.30,ibid) 403;Hernandez vs. RB Lucena, January
 Assets of bank may be placed in non- 10,1978)
speculative investments. (Sec.30,ibid)  The exclusive jurisdiction of the liquidation court
 Payment of accrued utilities, rentals and pertains only to the adjudication of claims
salaries of personnel of the closed bank, for against the bank. It does not cover the reverse
a period not exceeding three (3) months, situation where it is the bank which files a claim
from the available funds of the closed bank. against another person or entity. (Domingo
(Sec.10 [c] [4], RA 3591, as amended) Manalo vs. PAIC Savings and Mortgage Bank,
Oct.8,2001)
Possible Outcome of Receivership
Rationale
 Receiver may determine that the bank could be  The judicial liquidation is intended to prevent
rehabilitated. . (Sec.30,RA 7653) multiplicity of action against the insolvent bank.
 The lawmaking body contemplated that for
 Receiver may determine that the bank could not convenience only one court, if possible, should
be rehabilitated. . (Sec.30,RA 7653) pass upon the claims against the insolvent bank
and that the liquidation court should assist the
What if it is determined that the bank cannot be liquidator and control his operations.
rehabilitated? (Hernandez,ibid.)

 Receiver shall notify the Monetary Board of its Concept of “disputed claim”
findings.
 The Monetary Board shall order the liquidation  “Disputed claims” refer to all claims, whether
of the bank they be against the assets of the insolvent bank,
 The Monetary Board shall appoint PDIC as for specific performance, breach of contract,
liquidator of the bank. . (Sec.30,RA 7653) damages, or whatever. (Ong vs. CA,
Feb.1,1996)

LIQUIDATION  “To limit the jurisdiction of the Liquidation Court

against the assets of the bank is to remove
Filing of Petition for Assistance in the significantly and without basis the cases that
Liquidation (PAL) may be brought against a bank in case of
insolvency.”(Ibid.)
The receiver is mandated to file an ex parte Petition
for Assistance in the Liquidation (PAL) of closed
bank in the proper RTC pursuant to a liquidation Nature of Liquidation Proceedings
plan adopted by PDIC. . (Sec.30,RA 7653)
 The PAL is in the nature of a special proceeding.
Giving due course to PAL  It resembles a proceeding for settlement of
estate of deceased person.
 Saint Louis University COMMERCIAL LAW 267
2012 BAR OPERATIONS

 Multiple Appeal is allowed; period to file notice of charge reasonable fees and expenses. (Sec.31,
appeal is 30 days; record of appeal is required R.A. 7653; Sec. 12, PDIC Charter)
to perfect appeal. (PaBCEO vs. CA, March  Shall include: salaries of such personnel whose
20,1995) employment is rendered necessary in discharge
of the receivership/liquidation; other additional
Filing of claims by creditors expenses caused thereby. (Sec.31, R.A.7653)

All disputed claims must be filed with the LC. Liquidating Dividends

Approval/disapproval of Claims  Distribution of assets to the creditors shall be

under order of the duly constituted liquidation
 The disputed claims may be approved or court and in accordance with the rules on
disapproved by the LC concurrence and preference of credits under the
 All approved claims will be classified as to their Civil Code. (Sec.31, R.A.7653)
legal preference. (PaBCEO vs. CA,ibid.)
 “A liquidation proceeding is a single proceeding  Payment of insured deposit by PDIC partake of
which consists of a number of cases properly the nature of public finds; are considered
classified as claims.” . (PaBCEO vs. CA,ibid.) preferred credit similar to taxes due to the
 Although the claims are litigated in the same National Government in the order of preference
proceeding, the treatment is individual. under Art. 2244 of the Civil Code. (Sec. 15,
 Each claim is heard separately. And, the Order PDIC Charter)
issued relative to a particular claim applies only
to said claim, leaving the other claims Republic vs. Peralta [G.R. No. L- 56568. May
unaffected, as each claim is considered 20,1987.]
separate and distinct from the others.” .
(PaBCEO vs. CA,ibid.)  “ It is thus important to begin by outlining the
scheme constituted by the provisions of the Civil
Preparation of Project of Distribution (POD) Code on this subject.
 Those provisions may be seen to classify credits
 The Liquidator is mandated to prepare a Project against a particular insolvent into three general
of Distribution (POD) of the Assets of the bank categories, namely:
among its creditors. a) Special preferred credits listed in Articles
- The POD specifies in detail the assets 2241 and 2242,
available for distribution to creditors whose b) Ordinary preferred credits listed in Article
claims were earlier allowed. (Pacific Bank v. 2244; and
PaBCEO) c) Common credits under Article 2245.”
 The payment shall be in accordance with the
rules on concurrence and preference of credits Specially Preferred credits (Art.2241 & 2242, CC)
as provided under the Civil Code. (Sec.31, RA
7653)  These credits constituted liens or encumbrances
 Rule on concurrence and preference of credit on the specific movable or immovable property
applicable only if the assets of the bank are not to which they relate.
enough to pay all creditors.  Considered as mortgages or pledges of real or
 Trust funds are excluded from distributable personal property, or liens within the purview of
assets of a closed bank. legal provisions governing insolvency. (Art.
2243,CC)
“Property held by the insolvent debtor as a  Art.2241 and 2242 jointly with Arts. 2246 to
trustee of an express or implied trust, shall be 2249 establish a two-tier order of preference.
excluded from the insolvency proceedings.” (Art.  The first tier includes only taxes, duties and
2240, Civil Code) fees due on specific movable or immovable
property.
Receivership and Liquidation Fees and  All other special preferred credits stand on the
Expenses same second tier to be satisfies, pari passu and
pro rata, out of any residual value of the specific
 Payment shall be made prior to the distribution property to which such other credits relate.
of the assets.
 Aside from the cost of the liquidation Ordinary Preferred Credits, Article 2244 CC
proceedings, liquidator is allowed to periodically
 Saint Louis University COMMERCIAL LAW 268
2012 BAR OPERATIONS

 Art. 2244 creates no liens on determinate From date of closure to

property which follow such property. What date the claims
Article 2244 creates are simply rights in favor f were approved by the LC.
certain creditors to have the cash and other In case of disputed From date of takeover to
assets of the insolvent applied in a certain claims, date of distribution
sequence or order of priority. surplus shall be
 Only in respect of the insolvent’s “free property” computed from the time it
is an order of priority established by Article was allowed by LC.
2244.

Central Bank vs. Morfe (March 12,1975)  “The surplus after paying all debts belongs to
the stockholders and should be ratable divided
“Judgment for payment of time deposit rendered among them. In determining whether there is
after the declaration of insolvency, but prior to the surplus it has been held that creditors, although
institution of the liquidation proceedings, are not their principal has been returned in full, are
considered preferred credits within the meaning of entitled to interest thereon at the legal rate from
Art. 2244 of Civil Code. the date the bank closed, or from the date of
filing their claims, before any distribution can be
Rationale of Morfe ruling: made to stockholders.” (9 C.J.S. Banks and
A general depositor of a bank is merely a general Banking & 550)
creditor, and, as such, is not entitled to any
preference or priority over other general creditors.  “After the payment of all liabilities and claims
against the closed bank, the Corporation shall
pay any surplus dividends at the legal rate of
 The effect of a judgment obtained against it interest from date of takeover to date of
by a creditor is only to fix the amount of distribution, to creditors and claimants of the
debt. A creditor can be acquire no lien which closed bank in accordance with legal priority
will give any preference or advantage over before distribution to the shareholders of the
other general creditors. closed bank” (Section 12 par. 2, PDIC Charter)

Surplus dividends Filing of Motion for Approval of POD with the LC

If the assets of the bank are more than enough to  The POD shall be presented to the LC, through
pay its liabilities, the creditors are entitled to surplus a motion for its approval.
dividends.  “The second phase [of the liquidation
proceedings] involves the approval by the
Nature of Surplus Dividends Court of the distribution plan prepared by the
duly appointed liquidator. The distribution plan
Interest in the form of damages or as compensation specifies in detail the total amount available for
for withholding of money. (3 Michie on Banks and distribution to creditors whose claim were
Banking, supra, p.531, citing Cooper vs, Parsons, earlier allowed. The Order finally disposes of the
148 F. 2d 21, aff’g Parsons vs. Barry, 59 F, Supp. issue of how much property is available for
221.) disposal. Moreover, it ushers in the final phase
of the liquidation proceeding--- payment of all
allowed claims in accordance with the order of
Surplus Dividends legal priority and the approved distribution plan.”
(PaBCEO vs. CA, ibid.)
Prior to PDIC Charter After PDIC Charter
 The motion for approval of POD shall be
Amendments Amendments
submitted for approval by the LC.
Legal basis:
Foreign Authorities Section 12, PDIC Charter Payment of Claims in accordance to the POD
Distribution:
According to legal Upon approval of the POD by the LC, the liquidator
Pro Rata shall pay the creditors of the bank.
preference
Rate:
Legal Rate Legal Rate Termination of Liquidation Proceedings
Period of computation:
 Saint Louis University COMMERCIAL LAW 269
2012 BAR OPERATIONS

 The approval by the LC of the Final POD paves 1) is a party to any convention, treaty, or
the way to the termination of the liquidation agreement relating to intellectual property rights
proceedings. or the repression of unfair competition to which
 Upon approval of the Final POD, the Liquidator the Philippines is also a party, or
shall hold as trustee the liquidating and/or 2) extends reciprocal rights to nationals of the
surplus dividends Philippines by law, shall be entitled to benefits to
 Creditors shall have a period of three (3) years the extent necessary to give effect to any
from date of last notice within which to claim provision of such convention, treaty, or
payment therefore. reciprocal law, in addition to the rights to which
 After the lapse of the 3-year period, unclaimed any owner of an intellectual property rights is
payments shall be escheated to the Republic of otherwise provided by law. (Sec. 3)
the Philippines in accordance with Rule 91 of the
Rules of Court. REVERSE RECIPROCITY OF FOREIGN LAWS
In the absence of any controversy, the liquidator will Section 231 – making enforceable on
dispose pertinent bank records in accordance with nationals of a foreign state all conditions,
the applicable laws, rules and regulations after a restrictions, limitations, diminutions, requirements or
period of one (1) year from approval of the motion. penalties that may be imposed by such foreign state
on a Filipino national seeking intellectual property
 
 
protection.
X. INTELLECTUAL PROPERTY CODE
(R.A. No. 8293, effective January 1, 1998)  Reciprocal application is not automatic
Rather, the Phils. may apply to the foreign
national those restrictions that his country
INTELLECTUAL PROPERY imposes on Filipino applicants
-those property rights which results from the TECHNOLOGY TRANSFER ARRANGEMENTS
physical manifestation of an original thought. -contracts or agreements involving the
(Ballantine’s Law Dictionary) transfer of systematic knowledge for the
manufacture of a product, the application of a
COVERAGE – Intellectual property rights consists process, or rendering of a service including
of: management contracts; and the transfer,
a) Copyrights and related rights; assignment or licensing of all forms of intellectual
b) Trademarks and service marks; property rights, including licensing of computer
c) Geographic indications; software except computer software developed for
d) Industrial designs; mass market. (Sec. 4)
e) Patents;
f) Layout-designs (Topographies) of Integrated
Circuits; and PRESCRIPTIVE PERIOD OF ACTIONS FOR
g) Protection of Undisclosed Information. (Sec. 4) DAMAGES UNDER THE IPC
-No damages may be recovered after four
STATE POLICY IN RESPECT OF INTELLECTUAL (4) years from the time the cause of action arose
PROPERTY RIGHTS (IPR) (Sec. 226)
-There is a declaration of State Policy that,
among others, the State recognizes that an effective
intellectual and industrial property system is vital to JURISDICTION OVER DISPUTES UNDER IPC
the development of domestic and creative activity,
facilitates transfer of technology, attracts foreign A. Original Jurisdiction
investments and ensures market access for our 1) Director General (IPO)
products, hence it shall protect and secure exclusive -has original jurisdiction to resolve disputes
rights of scientists, inventors, artists, and other gifted relating to the terms of a license involving
citizens to their intellectual property and creations. the author’s right to public performance or
(Sec. 2) other communication of his work.

INTERNATIONAL CONVENTION AND 2) Bureau of Legal Affairs

RECIPROTICY -has jurisdiction over the ff:
 Any person who is a national or who is domiciled
or has a real and effective industrial i. Opposition to applications for
establishment in a country which registration of marks;
 Saint Louis University COMMERCIAL LAW 270
2012 BAR OPERATIONS

ii. Cancellation of trademarks; c) Condemnation or seizure of products subject of

iii. Cancellation of patents, utility the offense;
models and industrial designs; d) Forfeiture of properties used in the commission
iv. Petition for compulsory licensing of of the offense;
patents; e) Imposition of administrative fines;
v. Administrative Complaints for f) Cancellation of permit, license, authority or
violations of laws involving IPR registration;
where the total damages claimed is g) Withholding of permit, license, authority or
not less than P200,000.00 registration;
h) Assessment of damages;
i) Censure;
3) Documentation, Information and
j) Analogous penalties or sanctions (Sec. 10.2 [b])
Technology Transfer Bureau
-has jurisdiction to settle disputes involving
technology transfer payments
LAW ON PATENTS
B. Appellate Jurisdiction
1) Director General
PATENT – an exclusive right acquired over an
-over all decisions rendered by the ff:
invention, to sell, use, and make the same whether
 Dir. of Legal Affairs for commerce or industry.
 Dir. of Patents
 Dir. of Trademarks
 Dir. of the Documentation, PATENTABLE INVENTIONS
Information and Technology -any technical solution of a problem in any
Transfer field of human activity which is NEW, involves an
INVENTIVE STEP and is INDUSTRIALLY
2) Court of Appeals APPLICABLE shall be patentable. The patentable
-over decisions of the Director General in invention may be, or may relate to, a product, or
the exercise of his appellate jurisdiction over process, or an improvement of any of the foregoing.
the decisions of the: (Sec. 21)

 Dir. of Legal Affairs

 Dir. of Patents Requirements:
 Dir. of Trademarks
1) Technical solution of a problem in any field
of human activity
3) Secretary of Trade and Industry 2) Novelty – that which does not form part of a
-over decisions of the Director General on prior art consists of:
the exercise of his appellate jurisdiction of a) that which has been made available to the
the Director of Documentation, Information public anywhere in the world before the filing
and Technology Transfer; AND date or the priority date of the application
-over decisions of the Director General in b) that which forms part of an application
the exercise of his original jurisdiction whether for patent, utility or industrial
relating to the terms of license involving the design, effective in the Philippines, provided
author’s right. that:
i. the inventors or applicants are not
the same
ADMINISTRATIVE PENALTIES IMPOSED FOR ii. the contents of the application are
VIOLATIONS OF LAWS INVOLVING IPR published in accordance with the
requirements of patent application
-The Director for Legal Affairs may impose rules.
the ff: iii. the filing date of the prior art is
earlier.
a) Issuance of a cease and desist order (CDO);
3) Inventiveness/Inventive Step
b) Acceptance of voluntary assurance compliance
-an invention involves an inventive step if,
(VAC) or voluntary assurance of discontinuance
having regard to prior art, it is not obvious to a
(VAD);
person skilled in the art of the time of the filing date
 Saint Louis University COMMERCIAL LAW 271
2012 BAR OPERATIONS

or priority date of the application claiming the RIGHTS ACQUIRED BY THE PATENTEE
invention. (Sec. 26)
The patentee acquires the following rights
under his patent
4) Industrial Applicability a) Where the subject matter of a patent is a
-an invention that can be produced and used product, to restrain, prohibit and prevent any
in any industry. (Sec. 27) unauthorized person or entity from making,
using, offering for sale, selling or importing that
product;
NON-PATENTABLE INVENTIONS b) Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any
The following shall be excluded from patent
unauthorized person or entity from using the
protection: process, and from manufacturing, dealing in,
a) Discoveries, Scientific Theories and using or offering for sale, or importing any
Mathematical Methods; product obtained directly or indirectly from such
b) Schemes, rules and methods of performing process;
mental acts, playing games or doing business, c) to assign, or transfer by succession the patent,
and programs for computer; and to conclude licensing contracts for the same
c) Methods for treatment of the human or animal (Sec. 71)
body by surgery or therapy and diagnostic
methods practiced on the human or animal
CONTENTS OF PATENT APPLICATION
body;
d) Plant varieties or animal breeds of essentially A patent application shall contain:
biological process for the production of plants
1) a request for the grant of patent;
or animals;
2) a description of the invention;
e) Aesthetic creations;
-the disclosure of the invention must be in a
f) Anything which is contrary to public order or
manner sufficiently clear and complete for it to
morality (Sec. 22)
be carried out by a skilled in the art.
3) Drawings necessary for the understanding of the
RIGHT TO A PATENT
invention;
The right to a patent belongs: 4) One or more claims
5) An abstract (Sec. 32)
a) to the inventor, his heirs, or assigns
b) when 2 or more persons have made the
invention separately and independently – to  must contain relevant information as to the
them jointly identity of the person (no anonymous
c) if two (2) or more persons have made the person)
invention separately and independently of each  if the applicant is not the inventor; he must
other – to the person who filed an application for show proof of authority to seek application
such invention (FIRST TO FILE RULE) for registration
d) where 2 or more applications are filed for the
same invention – to the applicant who has the
UNITY OF INVENTION
earliest filing date or the earliest priority date
(FIRST TO FILE RULE) (Sec. 29) -every application for patent registration
e) in case of inventions created pursuant to a must contain an application over a simple invention
commission – to the person who commissions or several inventions but must form part of a single
the work UNLESS agreed otherwise. general inventive concept
f) in case an employee made the invention in the
course of his employment, the patent shall
belong to: PROCEDURE FOR THE GRANT OF PARENT
 the employee – if invention not part of his
a) According a filing date to the application (Sec.
regular duties even if he uses the time,
41);
facilities and materials of the employer; OR
b) Examination of compliance by applicant with the
 the employer – if the invention is the result
formal requirements specified in Sec. 32, i.e.,
of the performance of his regularly assigned
contents of application (Sec. 42);
duties unless agreed otherwise.
c) Classification of application and search for prior
art (Sec. 43)
 Saint Louis University COMMERCIAL LAW 272
2012 BAR OPERATIONS

d) Publication of patent application in the IPO e) failure to make payments of annual fees or dues
Gazette (Sec. 44);
e) Inspection of the application documents by any
Where to file?
interested party and written observations by any
third party concerning the patentability of the  BLA – if in violation of IPC (administrative)
invention (Secs. 44.2 and 47);  RTC – otherwise
f) Written request by the applicant, within 6 months
from the date of publication of his patent
application, for the substantive examination by INFRINGEMENT
the IPO of his application. (Sec 48); -the making, using, offering for sale, selling
g) Grant of the patent (Sec. 50), or refusal of the or importing a patented product or a product
examiner to grant the patent (Sec. 51); in the obtained directly or indirectly from a patented
latter case, the refusal may be appealed to the process or the use of a patented process without the
Director of the Bureau of Patents; authorization of the patentee. (Sec. 76)
h) Publication of the grant of patent in the IPO
Gazette (Sec. 52)
TEST OF PATENT INFRINGEMENT
TERM OF A PATENT, UTILITY MODEL, 1) Literal Infringement – resort is had to the
INDUSTRIAL DESIGN “words” of the claim.
a) Patent – 20 yrs from the filing date of 2) Doctrine of Equivalents – if two devices do the
application, without renewal same work in substantially the same way, the
b) Utility model – 7 yrs, w/out renewal same result, and produce substantially the same
c) Industrial design – 5 yrs, renewable twice result, they are the same even though they differ
in name, form, or shape.

UTILITY MODELS
REMEDIES IN CASE OF INFRINGEMENT
-models of implement or tools of any
industrial product even if not possessed of the A) File civil case for the following purposes:
quality of invention but which is of “practical utility” 1) To recover from the infringer such damages
as the court may award considering the
circumstances of the case provided it shall
INDUSTRIAL DESIGN not exceed 3 times the amount of the actual
damages sustained plus attorney’s fees and
-any composition of lines or colors or any other expenses of litigation;
three-dimensional form, whether or not associated 2) To secure an injunction for the protection of
with lines or colors provided that such composition his rights;
or form gives a special appearance to and can serve 3) To receive a reasonable royalty, if the
as pattern for an industrial product or handicraft. damages are inadequate or cannot be
readily ascertained with reasonable
certainty;
CANCELLATION OF PATENTS 4) To have the infringing goods, materials and
Who may file? implements predominantly used in the
infringement disposed of outside the
 any person channels of commerce, or destroyed without
 IPO motu proprio compensation;
5) To hold the contributory infringer jointly and
severally liable with the infringer.
Grounds:
a) That the patent is invalid (Sec. 81); B) File criminal case within 3 years from date of
b) That what is claimed as the invention is not new
commission of the crime for repetition of
or patentable; infringement (Sec. 84)
c) 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
LAW ON TRADEMARKS
d) That the patent is contrary to public order or
morality. (Sec. 61)
 Saint Louis University COMMERCIAL LAW 273
2012 BAR OPERATIONS

TRADEMARK – anything which is adopted and -the owner of a registered mark shall have
used to identify the source of origin of goods, and the exclusive right to prevent all third parties not
which is capable of distinguishing them from goods having the owner’s consent from using in the course
emanating from a competitor 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
SERVICE MARK – distinguishes the services of an where such use would result in a likelihood of
enterprise from the service of other enterprises. It confusion. (Sec. 147)
performs for services what a trademark does for
goods.
DURATION
-the certificate of registration of a trademark
COLLECTIVE MARK - any visible sign designated
shall be ten (10) years from the filing date of
as such in the application for registration and
application provided the registrant shall file a
capable of distinguishing the origin or any other
declaration of actual use within a year from the 5th
common characteristic, including the quality of
anniversary of registration date (Sec. 145)
goods and services of different enterprises which
use the sign under the control of the registered -renewable for another 10 yrs. (Sec. 146)
owner of the collective mark (Sec. 121.2)

NON-REGISTRABLE TRADEMARKS, TRADE

TRADE NAMES – the person (whether natural or NAMES AND SERVICE MARK
juridical) who does business and produces the
goods or the services is designated by a trade
name. A mark cannot be registered if it:
-Under the law, there is no need to register a) Consists of immoral, deceptive or
trade names in order to secure protection for them. scandalous matter, or matter which may disparage
or falsely suggest a connection with persons, living
or dead, institutions, beliefs, or national symbols, or
TRADE DRESS – involves the total image of a bring them into contempt or disrepute;
product, including such features as size, shape, b) Consists of the flag or coat of arms or
color or color combinations, texture, and/or graphics. other insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any
simulation thereof;
HOW MARKS ARE ACQUIRED c) Consists of a name, portrait or
signature identifying a particular living individual
-Under RA 8293, the rights in a mark shall except by his written consent, or the name,
be acquired through registration made validly in signature, or portrait of a deceased President of the
accordance with its provisions. (Sec. 122) Philippines, during the life of his widow, if any,
-This proposition of law, however, may not except by written consent of the window;
be converted for it is not true that where there is no d) Is identical with a registered mark
registration, there is no protection. belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
 Acquisition through use (i) The same gods or services, or
-Whether or not a registered trademark is (ii) Closely related goods or services, or
employed, when a person has identified in (iii) If it nearly resembles such a mark
the mind of the public the goods he as to be likely to deceive or cause confusion;
manufactures or deals in his business or e) Is identical with, or confusingly similar
services from those of others, such a person to, or constitutes a translation of a mark which is
has a property right in the goodwill of said considered by the competent authority of the
goods or services which will be protected in Philippines to be well-known internationally and in
the same manner as other property rights the Philippines, whether or not it is registered here,
(Sec. 168.1) 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
RIGHTS CONFERRED 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,
 Saint Louis University COMMERCIAL LAW 274
2012 BAR OPERATIONS

including knowledge in the Philippines which has  NO filing date shall be accorded until the
been obtained as a result of the promotion of the required fee is paid (Sec. 127.2)
mark;
f) Is identical with, or confusingly similar
PROCEDURE FOR REGISTRATION
to, or constitutes a translation of a mark considered
well-known in accordance with the preceding a) Examination to determine whether the
paragraph, which is registered in the Philippines with application satisfies the requirements for the
respect to goods or services which are not similar to grant of a filing date.
those with respect to which registration is applied b) Examination to determine whether the
for: provided, that use of the mark in relation to application meets the requirements of Sec. 124
those goods or services would indicate a connection and the mark is registrable under Sec. 123.
between those goods or services, and the owner of c) Denial of the application or amendment thereof
the registered trademark: Provided further that the or publication of the application;
interests of the owner of the registered mark are d) Opposition to the application; notice; hearing;
likely to be damaged by such use; decision by examiner; appeal to the Director of
g) Is likely to mislead the public, Bureau of Trademarks; appeal to the IPO
particularly as to the nature, quality, characteristics Director General; appeal to the CA;
or geographical origin of the goods or services; e) Issuance of Certificate of registration
h) Consists exclusively of signs that are f) Publication in the IPO Gazette of the fact of
generic for the goods or services that they seek to registration
identify;
i) Consists exclusively of signs or of
indications that have become customary or usual to CANCELLATION OF TRADEMARK OR
designate the goods or services in everyday TRADENAME
language or in a bonafide and established trade Who may file?
practice;
j) Consists exclusively of signs or  any person who believes that he is and
indications that may serve in trade to designate the will be damaged by the registration of a
kind, quality, quantity, intended purpose, value, mark
geographical origin, time or production of the goods
or rendering of the services, or other characteristics Where to file?
of the goods or services;
k) Consists of shapes that may be  BLA
necessitated by technical factors or by the nature of Grounds:
the goods themselves or factors that affect their a) Mark becomes generic for goods for which it is
intrinsic value; registered;
l) Consists of color alone, unless defined b) Abandonment of the mark;
by a given form; or c) Registration obtained fraudulently or contrary to
m) Is contrary to public order or morality provisions of RA 8293;
(Sec. 123) d) Mark used by, or with permission, or, registrant;
e) Failure to use the mark within the Philippines for
FILING DATE OF AN APPLICATION 3 uninterrupted years or longer.

-The filing date of an application shall be the

date on which the office received the following EFFECTS OF NON-USE
indications and elements in English or Filipino:  may be excused if caused by circumstances
a) An express or implicit indication that the arising independently of the will of the trademark
registration of a mark is sought; owner, such as military coup, or political
b) Indications sufficient to contact the applicant or changes that impede commerce
his representative, if any;  Registration is an administrative act declaratory
c) Indications sufficient to contact the applicant or of a pre-existing right that does not, of itself,
his representative, if any; perfect a trademark, for what does is actual use
d) A reproduction of the mark where registration is  Non-use is a ground for removing a mark from
sought; and the register
e) The list of the goods or services for which the
registration is sought. (Sec. 127.1)
DOCTRINE OF SECONDARY MEANING
 Saint Louis University COMMERCIAL LAW 275
2012 BAR OPERATIONS

-While a generic, indicative or descriptive 3) Registration of trademarks: in infringement, it is

mark will, as a general rule, be denied registration, a pre-requisite; in UC, it is not required.
there is a circumstance that will allow it to be 4) Class of goods involved: in infringement, the
registered. Under the doctrine of secondary goods must be of similar class; in UC, the goods
meaning, when a mark has become distinctive of the need not be of the same class.
applicant’s gods in commerce and, in the mind of the
public, indicates a single source of consumers, it
 infringement is a form of unfair
may be registered.
competition

WHAT CONSTITUTES AN INFRINGEMENT

-Under RA 8293, any person shall, without REMEDIES AVAILABLE IN CASE OF
the consent of the owner of the registered mark: INFRINGEMENT OF A REGISTERED MARK
1) Use in commerce any reproduction, a) Sue for damages (Sec. 156.1);
counterfeit, copy, or colorable imitation b) Have the infringing goods impounded (Sec.
of a registered mark or the same 156.2);
container or a dominant feature thereof c) Ask for double damages (Sec. 156.3)
in connection with the sale, offering for d) Ask for injunction (156.4)
sale, distribution, advertising any goods e) Have the infringing goods disposed of outside
or services including other preparatory the channels of commerce (Sec. 157.1)
steps necessary to carry out the sale of f) Have the infringing goods destroyed (Sec.
any goods or services on or in 157.1)
connection with which such use is likely g) File criminal action (Sec. 170);
to cause confusion, or to cause mistake, h) Administrative Sanctions
or to deceive; or
2) Reproduce, counterfeit, copy or
UNFAIR COMPETITION
colorably imitate a registered mark or a
dominant feature thereof and apply such -any person who shall employ deception or
reproduction, counterfeit, copy, or any other means contrary to good faith by which he
colorable imitation to labels, signs, shall pass off the goods manufactured by him or in
prints, packages, wrappers, receptacles, which he deals, or his business, or services for those
or advertisements intended to be used of the one having established such goodwill, or who
in commerce upon or in connection with shall commit any acts calculated to produce said
the sale, offering for sale, distribution, or result, shall be guilty of unfair competition.
advertising of goods or services on, or
in connection with which such use is
likely to cause confusion, or to cause How Committed
mistake, or to deceive, shall be liable for
infringement. (Sec. 155) a) Making one’s goods appear as the goods of
another;
b) Use of artifice or device to induce the false belief
TEST OF TRADEMARK INFRINGEMENT that one’s goods are those of another;
1) Dominancy Test – consists in seeking out the c) False statements in the course of trade; or
d) Any act contrary to good faith calculated to
main, essential or dominant features of a mark.
2) Holistic Test – takes stock of the other features discredit another’s goods
of a mark, taking into consideration the entirety
of the marks. TEST OF UNFAIR COMPETITION
-The test is whether certain goods have
DIFFERENTIATED FROM UNFAIR COMPETITION been clothed with an appearance likely to deceive
the ordinary purchaser exercising ordinary care.
1) Cause of action: in infringement, the cause of
action is the unauthorized use of a registered
trademark; in unfair competition, it is the passing
off of one’s goods as those of another merchant. REMEDIES AGAINST UNFAIR COMPETITION
2) Fraudulent intent is not necessary in a) Damages which may either be:
infringement, but necessary in UC.  reasonable profit which would have realized,
or
 Saint Louis University COMMERCIAL LAW 276
2012 BAR OPERATIONS

 actual profits collected by the defendant, or WORKS PROTECTED BY COPYRIGHT

 a certain percentage over the gross sales of A. Original Work - Literary and artistic works are
defendant in case of the measure of original intellectual creations in the literary and
damages cannot be readily ascertained; artistic domain protected from the moment of
b) Damages may be doubled in cases where actual their creation, irrespective of their mode or form
intent to mislead the public or to defraud the of expression, as well as of their content, quality
complaint is shown; and purpose, and shall include in particular:
c) Impounding of sales invoices and other a) Books, pamphlets, articles and other
documents evidencing sales; writings
d) Injunction b) Periodicals and newspapers
e) Destruction of goods found to be infringing, and c) Lectures, sermons, addresses, dissertations
all paraphernalia. prepared for oral delivery, whether or not
reduced in writing or other material form
d) Letters
e) Dramatic or dramatico-musical
LAW ON COPYRIGHT compositions; choreographic works or
entertainment in dumb shows
f) Musical compositions, with or without words
COPYRIGHT – system of legal protection an author g) Works of drawing, painting, architecture,
enjoys in the form of expression of ideas sculpture, engraving, lithography or other
works of art; models or designs for works of
art
BASIC PRINCIPLES h) Original ornamental designs or models for
 Works are protected by the sole fact of their articles of manufacture, whether or not
creation, irrespective of their mode or form of registrable as an industrial design, and other
expression, as well as their content, quality or works of applied art.
purpose (Sec. 172.2) i) Illustrations, maps, plans, sketches, charts
 Protection extends only to the expression of the and three-dimensional works relative to
idea, not to the idea itself or to any procedure, geography, topography, architecture or
system, method or operation, concept or science
principle, discovery or mere data. j) Drawings or plastic works of a scientific or
technical character
k) Photographic works including works
CREATION OF A WORK produced by a process analogous to
A copyright work is created when the two(2) photography; lantern slides
requirements are met: l) Audiovisual works and cinematographic or
any process for making audio-visual
1) Originality – does not mean novelty or recordings
ingenuity, neither uniqueness nor creativity. It m) Pictorial illustrations and advertisements
simply means that the work “owes its origin to n) Computer programs
the author” o) Other literary, scholarly, scientific and artistic
2) Expression – there must be “fixation” To be works (Sec. 172)
“fixed”, a work must be embodied in a medium
sufficiently:
B. Derivative Works – the following derivative
 permanent; or
works shall also be protected:
 stable
a) Dramatizations, translations, adaptations,
to permit it to be perceived, reproduced, or
abridgments, arrangements, and other
otherwise communicated for a period of more than
alterations of literary works
transitory duration.
b) Collections of literary, scholarly or artistic
-if it is not required that the medium be works, and compilations of data and other
visible as long as there is a possibility of retrieval, materials which are original by reason of the
then there is fixation selection or coordination or arrangement of
their contents. (Sec. 173)
-it is fixation that defines the time from when
copyright subsists. Before fixation, there can be no
infringement. WORKS NOT PROTECTED
-The following works are not protected:
 Saint Louis University COMMERCIAL LAW 277
2012 BAR OPERATIONS

1) Any idea, procedure, system, method or

operation, concept, principle, discovery or mere
OWNERSHIP OF COPYRIGHT
data as such, even if expressed, explained,
illustrated, or embodied in a work; 1. Single creator – copyright belongs to the author
2) News of the day and other facts having the of the work, his heirs or assigns.
character of mere items of press information; 2. Joint creation – copyright belongs to the co-
3) Any official text of a legislative, administrative or authors jointly as co-owners. But if the work
legal nature, as well as any official translation consists of identifiable parts, the author of each
thereof. (Sec. 175) part owns the part that he has created.
4) Any work of the Government of the Philippines. 3. Employee’s creation – copyright belongs to the
(Sec. 176) employee if the creation is not part of his regular
-however, prior approval of the government duties even if he uses the time, facilities and
agency or office wherein the work is created shall be materials of the employer; otherwise it belongs
necessary for exploitation of such work for profit. to the employer
Such agency or office, may, among other things, 4. Commissioned work – the work belongs to the
impose as a condition the payment of royalties person commissioning but the copyright remains
with the creator unless there is a written
5) Pleadings;
stipulation to the contrary.
6) Decisions of courts and tribunals.
5. Cinematographic works – the producer has
-This pertains to the “original decisions” not to
copyright for purposes of exhibition; for all other
the SCRA published in volumes since these are
purposes, the producer, the author of the
protected under derivative works.
scenario, the composer, the film director, the
RIGHTS OF AN AUTHOR author of the work are the creators.
6. Anonymous and pseudonymous works – the
(Author – a natural person who has created
publishers shall be deemed the representative of
the work.)
the author unless:
a. the contrary appears
b. the pseudonyms or adopted name leaves no
A. Economic Rights (Sec. 177) doubt as to the author’s identity or
1) Right to reproduce; c. if the author discloses his identity (Sec.
2) Right to create derivative works; 179).
3) Right to first public distribution or first sale;
7. Collective works – the contributor is deemed to
4) Right to rent out the original or a cop of an have waived his right unless he expressly
audiovisual or cinematographic work; reserves it. (Sec. 196)
5) Right to public performance; Collective work – a work created by two or more
6) Right to other communication of the work to persons at the initiative and under the direction
the public. of another with the understanding that it will be
disclosed by the latter under his own name and
B. Moral Rights (Sec. 193) that the contributions of natural persons will not
1) Right of attribution or paternity right; be identified. (Sec. 171.2)
2) Right of alteration or non-publication; 8. In case of transfers, the transferee shall own
3) Right to preservation of integrity one or more or all the economic rights
4) Right not to be identified with work of others
transferred provided:
or with distorted work. a. the assignment, if inter vivos, be in writing
Term of moral right (Sec. 180.2)
-lifetime of the author and 50 years after his b. the assignment be filed with the National
death Library upon payment of the prescribed fee.
(Sec. 182)
Waiver of moral right
1) by a written instrument (Sec. 195) DURATION OF COPYRIGHT
2) by contribution to a collective work
unless expressly reserved (Sec. 196)  Literary artistic works and derivative works of a
SINGLE CREATOR - lifetime of the creator and
for 50 years after his death
PRINCIPLE OF AUTOMATIC PROTECTION
 Joint creation – lifetime of last surviving co-
Under the Berne Convention, the enjoyment creator and for 50 years after his death.
and exercise of copyright, including moral rights,
shall not be the subject of any formality.
 Saint Louis University COMMERCIAL LAW 278
2012 BAR OPERATIONS

 Anonymous or a work under a pseudonym not copyrighted material in a reasonable manner

identifiable with the true name of the creator – without its consent, notwithstanding the
50 years after the date of their first publication. monopoly granted to the owner by the copyright.
 Except where, before the expiration of said
-the doctrine of fair use is meant to balance
period, the author's identity is revealed or is
the monopolies enjoyed by the copyright owner
no longer in doubt, the rule for single and
with interests of the public and of society.
joint creation shall apply
 Photographic works – 50 years from the
publication of the work, or from making the same
CRITERIA TO DETERMINE WHETHER USE IS
term is given to audiovisual works produced by
FAIR OR NOT:
photography or analogous processes.
 Work of Applied Art – 25 years from the date of a) Purpose and the character of the use
making b) Nature of the copyrighted work
 Newspaper Article – lifetime of the author and c) Amount and substantially of the portions used
50 years after his death d) Effect of the use upon the potential market of the
 A pure news report will no longer find copyrighted work (Sec. 185)
protection under he new law, BUT a column
or published comment will THE “FAIR-USES” OF PROTECTED MATERIAL
ARE:
 The work of performers not incorporated in a) Criticizing, commenting, and news reporting;
RECORDING, PRODUCTS OF SOUND IMAGE b) Using for instructional purposes including
RECORDINGS, and BROADCASTS, are producing multiple copies of classroom use, for
protected for periods of 50 years, 50 years, and scholarship, research and similar purposes
20 years, respectively, counted from the end of (Sec. 185)
the year of performance, recording, or
broadcasts, respectively.
3) WORKING OF ARCHITECTURE (Sec. 186)
-include the right to control the erection of
The term of protection shall be counted from any building which reproduces the whole or a
the first day of January of the year following the substantial part of the work either in its original or in
death or of last publication (Sec. 214) any form recognizably derived from the original;
Provided, that the copyright in any such work shall
not include the right to control the reconstruction, or
LIMITATIONS TO THE RIGHTS ON COPYRIGHT rehabilitation in the same style as the original of a
1) Private performance, private and personal building to which that copyright relates
use – applicable only “when a work has been
lawfully made accessible to the public.”
4) REPRODUCTION OF PUBLISHED WORK
-exclusively for research and private study.
Personal Use
-making a single reproduction, adaptation,
arrangement or other transformation of another’s 5) REPROGRAPHIC REPRODUCTION BY
work exclusively for one’s own individual use in LIBRARIES
such cases as personal research, learning or -any library or archive whose activities are not
amusement for profit may, without the authorization of the
author of copyright owner, make a single copy of
the work by reprographic reproduction.
Private Use
-making a reproduction, adaptation or other 6) REPRODUCTION OF COMPUTER
transformation of it, in a single person as in the PROGRAMS
case of “personal use” but also for a common -allowed on the ff. conditions:
purpose by a specific circle of persons only.
a) only one copy is made;
b) lawful owner made the copy;
2) Fair Use of a Copyrighted Work c) purpose of which the reproduction is made
Fair Use - A privilege in persons other than is legal like:
the owner of the copyright to use the
 Saint Louis University COMMERCIAL LAW 279
2012 BAR OPERATIONS

 use to which the program is made and 2) Where Right Registered:

for which it was purchased demand the Copyright – National Library
reproduction of a copy; or
Patent and Trademark – IPO
 the reproduction of a copy is necessary
to guarantee against loss or destruction
(Sec. 189.1)
3) Duration of Right:
Patent – 20 years from filing or priority date
7) IMPORTATION FOR PERSONAL PURPOSES
Trademark – 10 years
-The importation of a copy of a work by an
individual for his personal purposes shall be Copyright – Generally up to 50 years after the death
permitted without the authorization of the author of the author.
of, or other owner of copyright in, the work under
the following circumstances:
a) Copies of the work are not available in the
Philippines and:  

i. not more than one copy at one time  

XI. A. CHATTEL MORTGAGE LAW

is imported for strict individual use;
(Act No. 1508, in relation to Articles 1484,
ii. importation is by authority and for
1485,
the use of Philippine Government;
2140 and 2141, NCC)
or
iii. Religious, charitable, or educational
society imported not more than 3
Chattel Mortgage, defined
copies per title provided they are not
Chattel mortgage is a contract by virtue of
for sale.
which personal property is recorded in the Chattel
b) Copies form part of libraries and personal
Mortgage Register as a security for the performance
baggage belonging to persons or families
of an obligation. (Art. 2140).
arriving from foreign countries and are not
intended for sale: Provided, that such copies
Characteristics of chattel mortgage
do not exceed three (3). (Sec. 190)
It is:
 an accessory contract because it is for the
REMEDIES IN CASE OF INFRINGEMENT: purpose of securing the performance of a
principal obligation;
1) Injunction to prevent infringement
 a formal contract because of its validity,
2) Damages assessed on the basis of the proof
registration in the Chattel Mortgage Register
alleged by the plaintiff of sales made by the
is indispensable; and
defendant of the infringing work minus whatever
costs the defendant may be able to prove and  a unilateral contract because it produces
appreciated by the court. only obligations on the part of the creditor to
3) Delivery under oath of all implements employed free the thing from the encumbrance on
in the production of the infringing products fulfillment of the obligation.
themselves and the infringing items, for
impounding or destruction as the court may Laws principally governing chattel mortgages
order. They are:
4) Payment of moral and exemplary damages in  the Chattel Mortgage Law, Act No. 1508, as
the discretion of court. amended;
5) Criminal Action  the Civil Code;
 the Revised Administrative Code; and
 the Revised Penal Code
DIFFERENCE BETWEEN COPYRIGHT, PATENT
AND TRADEMARK Essential requisites of chattel mortgage
1) Subject Matter of the Right:  constituted to secure the fulfillment of a
Copyright – literary, scientific or artistic work; principal obligation;
 that the mortgagor be the absolute owner of
Patent – new, useful, and industrially applicable the thing mortgage;
inventions;  the persons constituting the mortgage have
Trademark – goods manufactured or produced the free disposal of their property, and in the
 Saint Louis University COMMERCIAL LAW 280
2012 BAR OPERATIONS

absence thereof, that they be legally  Both are extinguished by the fulfillment of
authorized for the purpose. (Art.2085) the principal obligation and by the
 It is also of the essence that when the destruction of the property pledged or
principal obligation becomes due, the thing mortgaged.
in which mortgage consists may be
alienated for the payment to the creditor Distinctions between Chattel mortgage and
(Art. 2087). Pledge
 Mortgagor may be a third person. It is not  In chattel mortgage, the delivery of the
necessary that the principal debtor should personal property to the mortgagee is not
always be the mortgagor. (Art. 2085, par. 2). necessary, while in pledge, such delivery is
necessary;
Subject matter of chattel mortgage  In chattel mortgage, the registration of the
Only movable or personal properties (certain same in the Chattel Mortgage Register is
deviations, however, have been allowed) such as: necessary for its validity, while in pledge,
a) shares of stock ( the mortgage to be registration in the Registry of Property is not
registered both in the Chattel Mortgage necessary;
Registries of the province where the  The procedure for the sale of the thing given
mortgagor resides, and the province where as security is different. In chattel mortgage,
the corporation has its principal business); the procedure is found in Section 14 of Act
b) interest in business; No. 1508, as amended, while in pledge, it is
c) growing crops; found in Article 2112 of the NCC;
d) large cattles;  In chattel mortgage, the excess over the
e) machinery treated by the parties as personal amount due after foreclosure, goes to the
property subsequently installed on leased debtor, while in pledge, if the property is
land; sold, the debtor is not entitled to the excess
f) motor vehicles (the mortgage to be unless it is otherwise agreed upon or except
registered also with the Land Transportation in the case of legal pledge; and
Office)  In chattel mortgage, the creditor is entitled to
‐ with respect to vehicles used for recover any deficiency except if the chattel
public services, the mortgage must mortgage is a security for the purchase of
also carry the approval of LTFRB. personal property in installments (see Art.
g) house built on rented land but as between 1484), while in pledge, the creditor is not
the parties only under the doctrine of entitled to recover the deficiency
estoppel; and notwithstanding any stipulation to the
h) house to be demolished and portable nipa contrary.(Art. 2115).
huts for what are really mortgaged in this
case are the materials thereof and they are, Chattel mortgage and Real Estate mortgage
therefore, personal property. distinguished
 In chattel mortgage, the thing mortgaged
Growing crops and large cattle are considered must be personal or movable property; in
personal property under the Chattel Mortgage Law. real estate mortgage, the thing mortgaged
They cannot, however, be the object of a contract of must be real or immovable property;
pledge because they are considered immovable  An affidavit of good faith is required to be
under the Civil Code which principally governs executed in a chattel mortgage but not in a
pledge real estate mortgage;
 In chattel mortgage, the mortgagor cannot
Similarities between Pledge and Chattel alienate the thing mortgaged without the
mortgage written consent of the mortgagee annotated
They are: on the back of the mortgage instrument; in
 Both are executed to secure performance of real estate mortgage, the mortgagor can
a principal obligation; alienate the thing mortgaged without the
 Both are constituted only on personal written consent of the mortgagee and any
property; stipulation prohibiting such alienation is void.
 Both are indivisible;  In chattel mortgage, redemption of the thing
 Both constitute lien on the property; mortgaged may be made only before the
 In both cases, when the debtor defaults, the sale thereof; in real estate mortgage, the
property must be sold for the payment of the thing mortgaged may be redeemed after it is
creditor; and judicially sold but before judicial confirmation
 Saint Louis University COMMERCIAL LAW 281
2012 BAR OPERATIONS

of the sale, or if extra judicially sold, within 1

year from and after the date of sale. When to register
The law does not provide any specific time
Extent of chattel mortgage within which a chattel mortgage should be recorded
It covers only property in the contract, and in the Chattel Mortgage Register.
excludes like or substituted property thereafter
acquired by the mortgagor, notwithstanding any Duty of Register of Deeds
thing in the contract to the contrary. The duties of a register of deeds in respect
to the registration of chattel mortgages are of purely
Exception: In the case of stock or merchandise ministerial character.
contained in drugstores, grocery stores, etc., which
are constantly sold and substituted with new stock. Right of redemption
A stipulation in the chattel mortgage When the condition of a chattel mortgage is broken,
extending its scope and effect to after-acquired the following may redeem:
property is valid and binding where the after-  the mortgagor;
acquired property is in renewal or, in substitution for,  a person holding a subsequent mortgage; or
goods on hand when the mortgage was executed, or  a subsequent attaching creditor
is purchased with the proceeds of the sale of such An attaching creditor who so redeems shall be
goods. subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same
Ruling: Acme Shoe, et al. v. CA, et al,. August 22, manner that the mortgagee could foreclose it.
1996. The redemption is made by paying or delivering to
While a pledge, real estate mortgage, or the mortgagee the amount due on such mortgage
antichresis may exceptionally secure after-incurred and the costs and expenses incurred by such
obligations so long as these future debts are breach of condition before the sale thereof. (Sec. 13,
accurately described, a chattel mortgage, however, Act No. 1508).
can only cover obligations existing at the time the
mortgage is constituted. Although a promise Right acquired by second mortgagee and
expressed in a chattel mortgage to include debts subsequent purchaser
that are yet to be contracted can be a binding Before payment of debt – After a chattel mortgage is
commitment that can be compelled upon, the executed, there remains in the mortgagor a mere
security itself, however, does not come into right of redemption and only this right passes to the
existence or arise until after a chattel mortgage second mortgagee in case of a second mortgage.
agreement covering the newly contracted debt is As between the first and second mortgages,
executed either by concluding a fresh chattel therefore, the latter can only recover the property
mortgage or by amending the old contract from the former by paying him the mortgage debt.
conformably with the form prescribed by the Chattel After payment of debt – If the only leviable or
Mortgage Law. attachable interest of a chattel mortgagor in a
mortgaged property is his right of redemption, it
Affidavit of Good Faith, defined follows that the judgment or attaching creditor who
An oath in a contract of chattel mortgage purchased the property at the execution sale could
wherein the parties “severally swear that the not acquire anything except such right of
mortgage is made for the purpose of securing the redemption. He is not entitled to the actual
obligation specified in the conditions thereof and for possession and delivery of the property without first
no other purpose and that the same is just and valid paying the mortgaged debt.
obligation and one not entered into for the purpose
of fraud.
Kinds of Foreclosure of chattel mortgage
The absence of the affidavit vitiates a mortgage only Judicial foreclosure – the mortgagee institutes an
as against third persons without notice, like creditors action in court; and
and subsequent encumbrancers Extrajudicial foreclosure – the sale is made by the
mortgagee himself when authorized by the chattel
Creation of a chattel mortgage mortgage contract or by special law.
The law as it now stands provides for only
one way for executing a valid chattel mortgage, i.e., Period to foreclose
the registration of the personal property in the The mortgagee may, after 30 days from the
Chattel Mortgage Register as security for the time of the condition broken, caused the mortgaged
performance of an obligation.
 Saint Louis University COMMERCIAL LAW 282
2012 BAR OPERATIONS

property to be sold at a public auction by a public is not available in the absence of stipulation
officer. in the contract);
The 30-day period to foreclose a chattel 3. Foreclose the chattel mortgage on the thing
mortgage is the minimum period after violation of the sold, if one has been constituted, should the
mortgage condition for the mortgage creditor to vendee’s failure to pay cover two or more
cause the sale at public auction of the mortgaged installments. In this case, he shall have no
chattel with at least ten (10) days notice to the further action against the purchaser to
mortgagor and posting of public notice of time, recover any unpaid balance of the price. Any
place, and purpose of such sale, and is a period of agreement to the contrary is void.
grace for the mortgagor, to discharge the mortgage
obligation.  
 

XI. B. REAL ESTATE MORTGAGE

Application of proceeds of sale (Articles 2124 – 2131, NCC)
The proceeds of the sale are to be applied in
the following order:
1. Costs and expenses of keeping and sale;
2. Payment of the obligation secured by the
mortgage; Real Estate Mortgage, defined
3. Claims of persons holding subsequent A contract whereby the debtor guarantees
mortgages in their order; and the performance of the principal obligation by
4. Balance, if any, shall be paid to the subjecting real property or real rights as security in
mortgagor, or person holding under him. case of non-performance of such obligation within
(Sec. 14, Act No.1508). the period agreed upon.

Right of mortgagee to recover deficiency Essential Requisites of Real Estate Mortgage

Where mortgaged foreclosed – the creditor may (1) It must be constituted to secure the performance
maintain an action for the deficiency although the of the principal obligation.
Chattel Mortgage Law is silent on this point. The (2) The mortgagor must be the absolute owner of
reason is that a chattel mortgage is only given as a the property mortgaged.
security and not as payment for the debt in case of (3) The mortgagor should have the free disposal of
failure of payment. The action must be brought the property mortgaged, and in the absence
within 10 years from the cause of action accrues. thereof, he should be legally authorized for the
Where mortgage constituted as security for purpose.
purchase of personal property payable in (4) When the principal obligation becomes due, the
installments – no deficiency can be asked and any property mortgaged may be alienated for the
agreement to the contrary shall be void. (Art. 1484). payment of such obligation.
Where mortgaged property subsequently attached (5) The subject matter of the contract must be
and sold – the chattel mortgagee is entitled to immovable property or alienable real rights upon
deficiency judgment in action for specific immovables.
performance (Art. 1484[1]) where the mortgaged
property is subsequently attached and sold. The Subject Matter of Mortgage
execution sale in such a case is not a foreclosure They are:
sale. (1) immovables; and
(2) alienable real rights imposed upon immovables.
Recto Law (Articles 1484-1485, NCC)
It is the law, now reflected in Articles 1484
and 1485 of the NCC, which provides that in a Characteristics of Mortgage
contract of sale of personal property the price of (1) real contract;
which is payable in installments, the vendor may (2) accessory contract;
exercise any of the following remedies: (3) subsidiary contract; and
1. Exact fulfillment of the obligation, should the (4) unilateral contract because it creates only an
vendee fail to pay (specific performance); obligation on the part of the creditor who must
2. Cancel the sale, should the vendee’s failure free the property from the encumbrance once
to pay cover two or more installments (not the obligation is fulfilled.
the same as rescission because here the
vendor gets back the object of the sale and Kinds of Mortgages
retains the installments paid; however, this A mortgage may be:
 Saint Louis University COMMERCIAL LAW 283
2012 BAR OPERATIONS

(1) Voluntary – one which is agreed to be between (3) Once the proceeds have been applied to the
the parties or constituted by the will of the owner payment of obligation, the debtor cannot
of the property on which it is created. anymore be required to pay, unless, of course,
(2) Legal – one required by law to be executed in there is a deficiency between the amount of the
favor of certain persons. loan and the foreclosure sale price, because the
(3) Equitable – one which, although it lacks the obligation has already been extinguished.
proper formalities of mortgage, shows the (4) The rule is that statutory provisions governing
intention of the parties to make the property as a public notice of foreclosure sales must be strictly
security for a debt. complied with, and even slight deviations there
from will invalidate the sale or render it at least
Effects of Mortgage voidable.
(1) Creates real right – A mortgage creates a real
right; a lien inseparable from the property Kinds of Foreclosure
mortgaged, which is enforceable against the (1) Judicial foreclosure – it is an ordinary action;
whole word. Until discharged, it follows the governed by Rule 68 of the rules of Court
property wherever it goes and subsists (2) Extrajudicial foreclosure – foreclosure under
notwithstanding changes of ownership. power of sale contained in the mortgage;
(2) Creates merely on encumbrance – A mortgage governed by Act No. 3135, as amended
does not involve a transfer, cession or
conveyance of property but only constitutes a Judicial Foreclosure under the Rules of Court
lien thereon. It gives the mortgagee no right or (Rule 68)
claim to the possession of the property, and,  Judicial action for the Purpose
therefore, a mere mortgagee has no right to A mortgage may be foreclosed judicially by
eject an occupant of the property mortgaged. bringing an action for that purpose, in the proper
court which has jurisdiction over the area
Extent of Mortgage wherein the real property involved or a portion
A real estate mortgage constituted on thereof, is situated.
immovable property is not limited to the property
itself but also extends to all its accessions,  Order of Mortgagor to pay Mortgage
improvements, growing fruits and rents or income, debt
as well as to the proceeds of insurance should the If the court finds the complaint to be well-
property be destroyed, or the expropriation value of founded, it shall order the mortgagor to pay the
the property should it be expropriated. amount due upon the mortgage debt or
obligation with interest and other charges within
Foreclosure, defined a period of not less than 90 days or more than
Foreclosure is the remedy available to the 120 days from entry of judgment (Sec. 2, Rule
mortgagee by which he subjects the mortgaged 68)
property to the satisfaction of the obligation to  Sale to the highest bidder
secure which the mortgage was given. If the mortgagor fails to pay at the time directed
in the order, the court, upon motion, shall order
Validity and Effects of Foreclosure the property to be sold to the highest bidder at
(1) In a real estate mortgage, when the principal public auction (Sec. 3, Ibid.)
obligation is not paid when due, the mortgage has
the right to foreclose the mortgage and to have the  Confirmation of Sale
property seized and sold with a view of applying the The sale when confirmed by an order of the
proceeds to the payment of the principal obligation. court, also upon motion, shall operate to divest
Foreclosure is valid where the debtor is in the rights of all parties to the action and to vest
default of his obligation. their rights in the purchaser subject to such right
of redemption as may be allowed by law.
(2) The essence of a contract of mortgage  Execution of Judgment
indebtedness is that a property has been identified No judgment rendered in an action for
or set apart from the mass of the property of the foreclosure or mortgage can be executed
debtor-mortgagor as security for the payment of otherwise than in the manner prescribed by law
money or the fulfillment of an obligation to answer on mortgages, because parties to an action are
the amount of indebtedness in case of default of not authorized to change the procedure which it
payment. prescribed.
The power to foreclose a mortgage or not
resides in the mortgagee.  Application of proceeds of sale
 Saint Louis University COMMERCIAL LAW 284
2012 BAR OPERATIONS

The proceeds of the sale shall be applied to the and general information:
payment of the: that is has a bonafide
subscription list of paying
(a) costs of sale;
subscribers; that it is
(b) the amount due the
published at regular
mortgagee;
intervals.”
(c) claims of junior
emcumbrances or persons
How the sale should be made
holding subsequent
The sale must be made:
mortgages in the order of their
priority; and (1) at public auction;
(d) the balance, if any. (2) between 9 o’clock in the morning and 4 o’clock
 Execution of sheriff’s certificate in the afternoon; and
In judicial foreclosure, the foreclosure is not (3) shall be under the direction of then sheriff of the
complete until the sheriff’s certificate is executed province, the justice or auxiliary justice of the
acknowledged and recorded. In the absence of a place of the municipality in which such sale has
certificate of sale, no title passes by the foreclosure to be made, or of a notary public of said
proceedings to the vendee. municipality, who shall be entitled to collect the
fee foe each day of actual work performed, in
  addition to his expenses.

EXTRAJUDICIAL FORECLOSURE OF REAL Persons who may participate in the bidding

ESTATE MORTGAGE At any sale, the creditor, trustee, or other
(Act No. 3135, as amended by Act No. 4118) person, authorized to act for the creditor, may
participate in the bidding, and purchase under the
same conditions as any other bidder, unless the
Purpose of the law (Sec. 1) contrary has been expressly provided in the
To regulate the manner in which the mortgage or trust deed under which the sale is made
extrajudicial foreclosure and redemption of real
estate mortgages may be made. Who may redeem the foreclosed property
(1) the debtor;
Where to conduct the sale of the mortgaged real (2) his successors in interest, or
estate (3) any judicial creditor or judgment creditor of
The sale must be made within the province said debtor, or
in which the property sold is situated. (4) any person having a lien on the property or
In case the place within said province in deed of trust under which the property is
w3hich the sale is to be made is the subject of sold.
stipulation, such the sale in said place in the
municipal building of the municipality in which the Period of Redemption
property or part thereof is situated. At any time within the term of one (10 year
from the date when the certificate of sale issued by
Notice Requirement the Sheriff is registered in the Office of Register of
Notice shall be given by posting notices of Deeds.
the sale for not less than twenty (20) days in at least
three public places of the municipality or city where Right to Recover the deficiency
the property is situated. In extrajudicial foreclosure of mortgage, the
If the property is worth more than four mortgagee has the right to recover the deficiency
hundred pesos, such notice shall also be published from the debtor where the proceeds of the sale are
once a week for at least three consecutive weeks in insufficient to pay the debt.
a newspaper of general circulation in the
municipality or city. Procedure to be followed in Extra judicial
 personal notice to the mortgagee is not Foreclosure of mortgage (Supreme Court
required Administrative Order No.3 dated October 19, 1984)
 to be a newspaper of general (1) Application must be filed before the Executive
circulation] Judge through the clerk of court who is also the
- it is enough that “it is Ex-Office Sheriff;
published for the (2) In case of real estate mortgage, before the
dissemination of local news auction sale is conducted, the clerk of court
 Saint Louis University COMMERCIAL LAW 285
2012 BAR OPERATIONS

must examine whether the requirements of the They are:

law have been complied with, that is, whether
(1) Equity of Redemption – the right of the
the notice of sale has been posted for not less
mortgager to redeem the mortgaged property
than 20 days in at least three (3) public places of
after his default in the performance of the
the municipality or city where the property is
conditions of the mortgage but before the sale of
situated, and if such property is worth more
the mortgaged property. In judicial foreclosure,
than P400.00, that such notice has been
the mortgagor may exercise his equity of
published once a week for at least three (30
redemption before but not after the sale is
consecutive weeks in a newspaper of general
confirmed by the court.
circulation in the municipality or city
(2) Right of Redemption – the right of the mortgagor
(3) The certificate of sale must be approved by the
to redeem the mortgaged property within a
Executive Judge or in his absence, by the Vice
certain period after it was sold for the
Executive Judge;
satisfaction of the mortgage debt. In all cases of
(4) Where the application concerns the extrajudicial
extrajudicial sale, the mortgagor may redeem
foreclosure of mortgages of real estate and/or
the property at any time within the term of one
chattels in different locations covering one
(1) year from and after the date of registration of
indebtedness, only one filing fee corresponding
the sale. In judicial foreclosure, the general rule
to such indebtedness shall be collected
is that the mortgagor cannot exercise his right of
(5) The clerk of court, apart from the official receipt
redemption after the sale is confirmed by the
of the fees, shall issue a certificate of payment
court.
indicating the amount of indebtedness, the filing
fees collected, the mortgages sought to be
Effect of Exercise of the right of redemption
foreclosed, the description of the real estate
The redemption defeats the inchoate right of
and/or chattels mortgaged and their respective
the purchaser and restores the property to the same
locations, which certificate shall serve the
condition as if no sale had been made. It does not
purpose of having the application docketed with
give to the mortgagor a new title, but merely restores
the Clerk of Court of the places where other
to him the title freed of the encumbrance of the lien
properties are located and of allowing the
foreclosed.
extrajudicial foreclosure to proceed thereat.
(6) The notice of sale shall be published in a
newspaper of general circulation pursuant to Effect of failure to exercise the right of
Section 1 of PD 1079 and non-compliance redemption
therewith shall constitute a violation of Section 6 If no redemption is made within the
thereof. prescribed period, the purchaser has the absolute
(7) The application shall be raffled among all right to a writ of possession which is the final
sheriffs, including those assigned to the Office of process to carry out or consummate the extrajudicial
the Clerk of Court and Sheriffs assigned in the foreclosure. Henceforth, the mortgagor loses his
branches. right over the property.
(8) After the redemption period has expired, the
Clerk of Court shall archive the records.  
 

(9) No auction sale shall be held unless there arte XI. C. THE TRUTH IN LENDING ACT
at least two (2) participating bidders, otherwise, R.A. 3765
the sale shall be postponed to another date. If
on the new date set forth for the sale there shall
not be at least two (2) bidders, the sale shall A LAW SUPPLEMENTING OR COMPLIMENTING
then proceed. The names of the bidders shall THE ANTI-USURY LAW CIRCUMVENTED EVEN
be reported to the Sheriff of the Notary Public, BY BANKS
who conducted the sale to the Clerk of Court
before the issuance of the certificate of sale.
PURPOSE
Redemption (of foreclosed property), defined To protect citizens from a lack of awareness
Redemption may be defined as a of the true cost of credit to the user by assuring a full
transaction by which the mortgagor reacquires or disclosure of such cost with a view of preventing the
buys the property which may have passed under the uninformed use of credit to the detriment of the
mortgage or divests the property of the lien which national economy.
the mortgage may have created.
REQUIREMENT OF DISCLOSURE
Kinds of Redemption
 Saint Louis University COMMERCIAL LAW 286
2012 BAR OPERATIONS

The creditor shall furnish the debtor prior The regulations shall apply the ff. types of
to the consummation a loan or sale , a clear credit transactions:
statement in writing containing the ff:
1. Cash price or delivered price of the property or 1. Any loans, mortgages, deeds of trust, advances
service and discounts
2. Amounts to be credited as down payment and 2. Any conditional sale
trade-in 3. Any rental-purchase contract
3. The difference the amounts of cash price and as 4. Any contract for hire, bailment or leasing of
down payment property
4. The charges, individuality itemized 5. Any option, demand, loan, ledge
5. Total amount to be financed 6. Any transaction or series of transactions having
6. The percentage that the finance charges bears a similar purpose
to the total amount to be finance as a simple
annual rate. THE FF. CATEGORIES OF CREDIT
TRANSACTION ARE OUTSIDE THE SCOPE OF
Simple Annual Rate THE SAID REGULATIONS
Is the uniform percentage, which represents the
1. Credit transactions which to not involve the
ratio, on annual basis, between the finance charges
payment of finance which to not involve the
and the amount to be financed?
payment of finance charge by the debtor
2. Credit transactions in which the debtor specifies
In case of Simple Payment upon maturity:
a definite and fixed set of terms such as bank
R = 2 x finance charge x 12 x 100 %
deposits, insurance contracts, etc.
Amount to be financed maturity rate in
months
 Phil. Government
In the case of normal installment type of credit of - No punishment or penalty shall apply
at least 1 yr. In deviation
 Any Person
R = 2x finance charge x no. of payments in a 1. Fined by not less P 1,000 nor more than P 5,
year 000
Amount to be financed total number of 2. Imprisonment for not less than 6 mos. Nor more
payment + 1 than 1 year
3. Both
In cases where the credit matures in less
than a yr, the same formula will apply except that the OFFICES AUTHORIZED TO ENFORCE RULES
number of payments in a year would refer to the AND REGULATIONS
number of installment periods. 1. Department of Commercial and Savings
In cases where credit terms provides for Bank
premium or penalty charges depending on for 2. Department of rural bank and Savings
example, the timeliness of the debtors payment, the and Loan Association
annual rate to be disclosed in writing shall be the 3. Office of Non-bank Financial
rate for regular payments. Intermediaries

 The respective heads of the 3 departments have

EFFECT OF NON-DISCLOSURE the authority to examine all books, documents,
1. The creditor is liable to the debtor for P100 or papers or records of creditors
amount equal to twice the finance charge,
whichever is greater provided liability shall not Creditor
exceed P2,000 on any credit transaction. Action Shall include but shall not be limited
to recover penalty must be brought within 1 year to banks and banking institutions, insurance and
from date of violation. bonding co., savings and loan associations, credit
2. The creditor can be held criminally liable. unions, financing companies, etc.

3. The transaction is still valid.  

 

XI. D. ANTI-MONEY LAUNDERING ACT

R.A. 9160
SCOPE OF REQUIREMENTS
 Saint Louis University COMMERCIAL LAW 287
2012 BAR OPERATIONS

Anti-Money Laundering devices used in having or having any

- A crime whereby the proceeds of an relation to any unlawful activity and all
unlawful activity are translated thereby moneys, expenditures, payments,
making them appear to have originated disbursements, costs, outlays, charges,
from legitimate sources. accounts for the financing operations
and maintenance of any illegal activity.
Purposes:  monetary instrument
1. integrity & confidentiality of bank accounts shall - coins, currency of legal tender in the
be protected and preserved Philippines, or of any other country
2. Ensure that the Philippines shall not be used as - drafts, checks and notes
a money laundering site for the proceeds of any - securities or negotiable instruments,
unlawful activity. bonds, commercial papers, deposit
3. Philippines shall not extend cooperation in certificates, trust certificates, custodial
transnational and prosecutions of persons receipts or deposit substitute
involved in money laundering activities wherever instruments, trading orders, transaction
committed. tickets and confirmation of sale or
investments and money market
Three stages: instruments
1. Placement/infusion  client
- physical and actual delivery of cash - any person or corporate entity that
proceeds that originated from an illegal maintains an account or transacts
activity such as: business with any financial institution on
a. smuggling of bulk currency whose behalf an account is maintained
b. illegal-sourced money with legitimate or a transaction is conducted, as well as
deposits the beneficiary of said transaction.
c. cash deposits in small denominations  suspicious transaction
d. cash deposits with several banks - one that merits closer examination, in
order to verify that it is from a legitimate
2. Layering source such as
- Process of separating the illicit proceeds a. no underlying legal/trade obligation
from their source by creating "layers" of b. client is not properly identified
transactions with the end in view of c. amount involved is not commensurate
disguising the source and make it with the business or financial capacity of
appear as insignificant. the client
d. client's transaction is structured in order
3. Integration to avoid being the subject of reporting
- Layered accounts are then re- requirements
introduced into the economy under the e. circumstance relating to the transaction
stamp of legitimacy; through the re-entry WHICH IS OBSERVED TO deviate from
into the financial system it would appear the profile of the client and/or the client's
that the laundered money is normal or past transactions with the covered
legitimate business funds. institution
f. transaction is in a way related to an
DEFINITIONS unlawful activity under this Act that is
 transaction about to be, is being or has been
- any act establishing any right or committed
obligation or giving rise to any g. Any transaction that is similar OR
contractual or legal relationship between ANALOGOUS to any of the foregoing.
the parties; includes any movement or
activity concerning funds by any means  unlawful activities
with a covered institution a. drug trafficking or violation of RA No. 9165
 proceeds (Comprehensive Dangerous Act of 2002)
- Amount taken from an unlawful activity; b. kidnap for ransom
includes material results, profits, effect c. anti-graft and corrupt practices act
and any amount realized from any illegal d. plunder
activity. e. robbery and extortion
- All monetary, financial or economic f. jueteng and masiao ( illegal gambling)
means, documents, papers, things or g. piracy on the high seas
 Saint Louis University COMMERCIAL LAW 288
2012 BAR OPERATIONS

h. qualified theft reveal in any manner any information by reason of

i. swindling their office
j. smuggling (under RPC and RA Nos. 455 Exception:
&1937) Under any orders of the court, Congress, or any
k. violations of E-commerce Act of 2000 government offices authorized by law
l. hijacking
MEETING:
 covered institutions AMLC shall meet every first Monday of the month or
- banks, non-banks, quasi-banks, trust as often as may be necessary at the call of
entities Chairman
- insurance companies - through modern technologies such as,
- those supervised by SEC but not limited to
 threshold TELECONFERENCING &
- Highest/significant level of deposit or VIDEOCONFERENING
placement an account may reach on a
transactional basis. BUDGET: appropriated by Congress
 covered transaction - Used to defray operational expenses, including
- Transaction in cash or other equivalent indemnification for LEGAL COST & EXPENSES.
monetary instrument involving a total
amount in excess of P500, 000.00 within Functions:
one banking day. 1. To require and receive covered or suspicious
transaction reports from covered institution
ANTI-MONEY LAUNDERING COUNCIL (AMLC) 2. all covered transactions and suspicious
Composition: transactions shall be reported to AMLC within 5
1. Governor of Bangko Sentral ng Pilipinas as working days from occurrence thereof, unless
Chairman the Supervising Authority prescribes a longer
2. Insurance Commissioner period not exceeding 10 working days.
3. Chairman of Security & Exchange 3. To issue orders addressed to the appropriate
Commissioner supervising authority or the covered institution to
determine the true identity of the owner of any
AMLC is a collegial body where Chairman & monetary instrument or property subject of a
members of AMLC are entitled to one vote each covered transaction or suspicious transaction
report or request for assistance from a foreign
General Rule: state, or believed by the council, on the basis of
AMLC acts unanimously in discharge of functions substantial evidence, to be in whole or in part,
Exception: wherever located representing, involving, or
In case of incapacity, absence or disability, any related to, directly or indirectly, in any manner or
member to discharge his functions, the officer by any means, the proceeds of an unlawful
designated shall act in his stead. activity
4. To institute civil forfeiture proceedings and all
SECRETARIAT other remedial proceedings through the Office of
- Headed by Exec. Director,, appointed by the Solicitor General
AMLC for a term of % years - the Revised Penal code shall apply
- qualifications: when the court ordered for the seizure
a. member of Phil. Bar of any monetary instrument or property,
b. at least 35 years of age in whole or in part, directly or indirectly
c. of good moral character
d. with unquestionable integrity & known - payment in lieu of forfeiture
probity a. any particular money cannot, with due
e. Must have served for at least 5 years in diligence, be located
Insurance Commission, SEC or BSP & b. substantially alleged, destroyed,
shall hold full-time permanent position diminished in value
within the BSP. c. concealed, removed to prevent the
same from being found
General Rule: d. located outside the Philippines
Members of AMLC, Executive Director, all members e. place or brought outside the jurisdiction
of Secretariat, on detail, on secondment shall not of the court
 Saint Louis University COMMERCIAL LAW 289
2012 BAR OPERATIONS

f. Commingled with other monetary government-owned and controlled corporations

instruments or property belonging to in undertaking any and all anti-money laundering
either the offender himself or third operations, which may include the use of its
person. personnel, facilities and resources for the more
5. To cause the filing of complaints with the resolute prevention, detection and investigation
Department of Justice or the Ombudsman for of money laundering offense and prosecution of
the prosecution of money laundering offenses offenders
6. To investigate suspicious transactions deemed 12. To impose administrative sanctions for the
suspicious after an investigation by the AMLC, violation of laws, rules, regulations and orders
money laundering activities, and other violations and resolutions
of this Act
7. To apply before the Court of Appeals, ex parte,
for the freezing of any monetary instrument or Scope of authority of the AMLC to inquire into
property alleged to be the proceeds of any bank deposits;
unlawful activity - inquire into or examine any particular
- effective immediately upon deposit or investment with any banking
determination of probable cause institution or non-bank financial
- shall be for a period of 20 days unless institution upon order of any competent
extended by the court court in cases of violation of the law,
8. To implement such measures as may be when it has been established that there
necessary and justified under the law to is probable cause that the deposits or
counteract money laundering investments are related to an unlawful
9. To receive and take action in respect to any activity or a money laundering offense
request from foreign states for assistance in except that no court is needed for cases
their own anti-money laundering operations qualified by the law.
- through conventions, resolutions & other
directives of any organizations of which Effect when freeze orders are ordered by the
Philippines is a member. HOWEVER, AMLC with the passage of RA 9194:
AMLC may refuse to comply with such - Shall remain in force for a period of 30
request, when: days after the affectivity of RA 9194,
a. it contravenes provision of Constitution UNLESS extended by the Court of
b. it prejudices national interest of the Appeals.
Philippines
Offenses and their respective penalties:
- requirements for requests for mutual 1.) Crime of money laundering
assistance from foreign sates: 1. knowledge that any monetary
a. investigation/prosecution instrument or property represents,
b. grounds involved or relates the proceeds of any
c. identity of said person unlawful activity, transact or attempts to
d. covered institution believed to have transact said monetary instrument or
been any information which may be of property
assistance to the investigation - 7-14 years; not less than 3M and not
e. all particulars necessary for the more than twice the value of monetary
issuance of the order/processes instrument or property involved in the
f. other information offense
10. To develop educational programs on the
pernicious effects of money laundering, the 2. knowledge that any monetary
methods and techniques used in money instrument or property involves
laundering, the viable means of preventing proceeds of any unlawful activity,
money laundering and the effective ways of performs or fails to perform any act as a
prosecuting and punishing offender result of which he facilitates the offense
- through nationwide information of money laundering
campaigns - 4-7 years; not less than 1.5M but not
- to heighten awareness of the public of more than 3M
their civic duty
11. To enlist the assistance of any branch, 3. Knowledge that any monetary
department, bureau, office, agency or instrument or instrument is required to
instrumentality of the government including
 Saint Louis University COMMERCIAL LAW 290
2012 BAR OPERATIONS

be disclosed and files with AMLC fails to Sandiganbayan - acts/omissions by public officers
do so. and private persons who are in conspiracy with such
- 6 mos.-4 years; not less than public officers
100,000.00 but not more than
500,000.00, or both. Prosecution of money laundering
1. any person maybe charged with & convicted of
2.) Failure to keep records both the offense of money laundering & unlawful
- 6 mos -1 year; not less than 100,000.00 activity
but not more than 500,000.00, or both 2. any proceeding relating to unlawful activity shall
be given precedence over the prosecution of
3.) Failure to report covered transactions any offense or violation without prejudice to the
- 6 mos-4 years; not less than 100,000.00 freezing order & other remedies
but not more than 500,000.00, or both 3. knowledge of offender that monetary instrument
relates to proceeds of unlawful activity shall be
4.) Malicious reporting established by DIRECT EVIDENCE or inferred
- any person who,, with malice, or in bad from attendant circumstances
faith, reports or files a completely 4. No case of money laundering may be filed to the
unwarranted or false information relative prejudice of a candidate for an electoral office
to money laundering transaction against during an election period. HOWEVER, this
any person prohibition shall not constitute a bar to the
- 6 mos-4 years; not less than100,000.00 prosecution of any money laundering case filed
but not more than 500,000.00 at the in court before the election period.
discretion of the court, Provided, the 5. AMLC may apply for provisional remedies to
offender is not entitled to avail of the prevent monetary instrument or property subject
benefits of the Probation Law thereof from being removed, concealed, and
converted with other organizations where there
 if offender is a corporation (who participated in is conviction for money laundering; the court
the commission or shall have knowingly shall issue judgment of forfeiture in favor of
permitted or failed to prevent its participation) government of Philippines. HOWEVER, no asset
- penalty shall be imposed upon the shall be forfeited to the prejudice of a candidate
responsible officers for an electoral office during an election period.
6. Restitution for any aggrieved party
 if offender is a juridical person
- penalty: revocation of license Prevention of Money Laundering
1. Customer Identification requirement
 if offender is an alien - the ff. minimum documents shall be
- penalty: 6 mos-4 years; not less than obtained for Individual customers:
100,000.00 but not more than a. name
500,000.00, at discretion of the court, b. present address
and Deportation c. date & place of birth
d. nationality
 if offender is a public official/employee e. nature of work and name of employer or
- penalty: 6 mos-4 years; not less than nature of self-employment/business
100,000.00 but not more than f. tax identification number, SSS, GSIS
500,000.00 AND Perpetual/Temporary number
Disqualification g. specimen signature
h. source of funds
5.) Breach of confidentiality i. names of beneficiaries in case of
- in case of breach of confidentiality that insurance contracts and whenever
is published or reported by media, the applicable
responsible reporter, writer, president
publisher, manager and editor-in-chief - for Corporate and Juridical entities:
shall be liable a. articles of incorporation/partnership
- 3-8 years; not less than 500,000.00 but b. by-laws
not more than 1M c. list of directors/partners
d. list of principal stockholders owning at
Jurisdiction of Money Laundering cases: least 2% of the capital stock
RTC - all cases on money laundering e. contact numbers
 Saint Louis University COMMERCIAL LAW 291
2012 BAR OPERATIONS

f. beneficial owners, if any the ordinary course of trade and the regular
g. verification of the authority and prosecution of the business of the vendor,
identification of the person purporting to mortgagor, transferor or assignor or
act on behalf of the client b. all or substantially all of the business or
2. Recordkeeping Requirements trade theretofore conducted by the above
a. existing and new accounts mentioned persons
- shall be maintained and stored for 5 c. all or substantially all of the fixtures and
years from Oct 17, 2001 from the dates equipment theretofore conducted by the
of the accounts or transactions business the vendor, mortgagor, transferor
whichever is later or assignor
b. closed accounts
- shall be preserved and safely stored for Goods contemplated:
at least 5 years from the dates when 1. STOCK
they were closed  that which are kept for sale (common
c. records in case a money laundering case has use of this term when applied to goods
been filed in court in a mercantile house)
- Said file must be retained beyond the 2. MERCHANDISE
period stipulated in the two preceding  those that are usually bought and sold in
subsections, as the case may be until it trade by merchants
is confirmed that case has finally  something sold everyday and is
resolved or terminated by the court. constantly going out of the store and
being replaced by other goods
Key Elements in Fighting Money Laundering 3. FIXTURES
1. The criminalization of money laundering  such articles of merchandise usually
2. Institution of a system of suspicious transactions possessed and annexed to the premises
3. Relaxing of bank secrecy laws occupied by merchants to enable them
4. Creation of an anti-money laundering council or beer to store, handle and display their
task force wares although removable without
Institution of procedures for effective international material injury to the premises at or
cooperation before the end of tenancy

 LANDS and BUILDINGS are NOT goods/

BULK SALES LAW merchandise/ fixtures; these are NOT
(Act No. 3952) covered by the Bulk Sales Law.

Purpose of the law

1. To prevent the defrauding of creditors by the Formal Requirements
secret sale or disposal or mortgage in bulk of all 1. Sworn written statement of the names and
or substantially all of a merchant’s stock of addresses of all creditors of the seller and
goods in bulk until the creditor of the seller shall respective amounts of debts to be furnished
have been paid in full the buyer/mortgagee and submitted to the
2. An exercise of the police power of the State Bureau of Domestic Trade (DTI) before
(Liwanag vs. Mengraj, June 20, 1941) receiving the purchase price
2. Pro-rata application of the proceeds to the
Nature bona fide claim of creditors as shown in the
It is penal in nature and in derogation of the verified statement
right to alienate property without restriction. ***Non-compliance with (1) and (2) is with
Its provisions must be strictly construed criminal consequence.
against the State and liberally in favor of the 3. Detailed inventory of stock to be sold or
accused. mortgaged
4. Notice to the creditors at least 10 days
Sale and transfer in bulk before the sale or transfer
It is any sale, transfer, mortgage or assignment, 5. Registration of the documents in Bureau of
regardless of intent, whether done in good or bad Domestic Trade (DTI)
faith, of: ***Non-compliance with (3,)(4) and (5) is
a. a stock of goods, wares, materials, with criminal consequence.
provisions or merchandise OTHER THAN in
 Saint Louis University COMMERCIAL LAW 292
2012 BAR OPERATIONS

Effect of failure to comply with the general possession thereof of the price,
scheme of the Bulk Sales Law terms condition of the sale, transfer,
The sale shall be NULL and VOID; it can be mortgage, or assignment.
nullified by the creditors of the seller. The buyer vi. The sworn statement containing the
merely becomes a trustee of such goods in behalf of names and addresses of all the
the creditors, without prejudice to the right of the creditors shall be registered in the
buyer to be reimbursed for the amount it paid and to Bureau of Commerce.
any action he may have against the seller. vii. To apply the purchase or mortgage
If the buyer already has disposed of the goods, money to the pro rata payment of
the buyer shall be made liable for the value of those the bona fide of the creditors of the
disposed by him forming part of the bulk. vendor or mortgagor
c. Liabiliy
Exempt from application of the Bulk Sales Law  Criminal liability
1. When there is written waiver of the d. Remedies available to avoid liability
provision of the Bulk Sales Law from his i. Comply with the specified formalities
creditors as shown by verified statements ii. Obtain a written waiver from ALL the
(Sec.2) creditors
 Effect of waiver: The buyer, mortgagee
can be protected from future claims of 2. BUYER / MORTGAGEE
creditors of the seller, transferor, or a. Rights
assignor  Recover the price delivered PLUS
2. Sale or mortgage made in the ordinary damages
course of business  Right in the property as against the
3. Sale made by executors, administrators, seller/mortgagor’s creditors
receivers, assignees in insolvency, or public b. Duty
officers, acting under judicial process (Sec. 8)  To hold the property in trust for the
4. Sale by assignee in insolvency or those seller or mortgagor
beyond the reach of creditors c. Liabilities
5. Sale or properties exempt from attachment i. Personal liability for value of the
or execution (Sec. 13, Rule 39, Rules of Court) property in trust if disposed
ii. Possible criminal liability
Parties:
1. SELLER / MORTGAGOR 3. CREDITORS of seller/mortgagor
a. Right a. Who are creditors?
 To recover the property  All of the seller’s creditors at the
sold/mortgaged time of the sale/mortgage
b. Duties  Creditors whose claims came into
ii. To return to the buyer/mortgagee existence subsequent to the sale
the price delivered are entitled to the benefits of the
iii. To deliver to such vendee, statute; they need NOT be judgment
mortgagee, or agent a written creditors and their claim need NOT
statement, sworn to substantially, be due
 the names and addresses of all b. Rights
creditors to whom said vendor or i. To be justly paid in full
mortgagor may be indebted, ii. To file an action against the
 together with the amount of seller/mortgagor under the Bulk
indebtedness due or owing , or to Sales Law
become due or owing to said iii. To collect on the credit against the
creditors. debtor and to attach on the property
iv. To make a full detailed inventory fraudulently sold/ mortgaged (Pp. vs
thereof and to preserve the same Mapoy, 73 P 678)
showing the quantity at least ten c. Remedies available
days before the sale, transfer of the i. Action against the goods to subject
goods them to payment of a debt
v. To notify every creditor whose name (execution, attachment, garnishment
and addresses is set forth in the or proceeding in equity)
verified statement of the vendor at ii. Ordinary action to obtain money
least ten days before transferring judgment against the purchaser by
 Saint Louis University COMMERCIAL LAW 293
2012 BAR OPERATIONS

the creditors in violation of the Bulk

Sales Law if the purchaser has
ELECTRONIC COMMERCE ACT
disposed of the property held in trust
REPUBLIC ACT NO. 8792
Offenses punishable under the Bulk Sales Law
1. Failure to deliver to the vendee, mortgagee
or to his agent or representative the sworn AN ACT PROVIDING FOR THE RECOGNITION
statement provided for AND USE OF ELECTRONIC COMMERCIAL AND
2. To transfer title to the same without NON-COMMERCIAL TRANSACTIONS AND
consideration or for a nominal consideration DOCUMENTS, PENALTIES FOR UNLAWFUL USE
only THEREOF AND FOR OTHER PURPOSES
3. Failure to apply the purchase or mortgage
money of the said property to the pro rata Otherwise known as
payment of the bona fide claim or claims of
the creditors ELECTRONIC COMMERCE ACT
4. Incomplete, false or untrue sworn written
statement; EFFECTS: PART I
a. Without knowledge of buyer A. INTRODUCTION
 Buyer will be protected if the
statement is fair upon its face  History of the Electronic Commerce Act.
 Remedy of creditor is to criminally
prosecute the seller and NOT The Electronic Commerce Act (Republic
against the goods Act No. 8792; the “Act”) is the merged version of
b. With knowledge or imputed knowledge the House Bill No. 9971 (HB 9971) and Senate
of buyer Bill No,. 1902 (SB 1902), primarily authored and
 Buyer accepts at his own risk sponsored by Senator Ramon Magsaysay, Jr.
 Sale is valid between seller and and Representatives Leandro Verceles, Jr. and
vendor Marcial Punzalan, Jr.
 Void as against the creditors
c. With names of certain creditors without  The Inter-Agency Task Force.
omitting notice
 Sale is void as to such creditors The Electronic Commerce Act (Republic
d. With respect to an innocent purchaser Act No. 8792; the “Act”) was signed into law on
for value from the original purchaser June 14, 2000. On that day, an inter-agency
 Buyer is protected; creditor cannot task force convened for the purpose of drafting
pursue property the Act’s Implementing Rules and Regulations
(“IRR”). The task force was co-chaired by the
Effects of violation(s) Department of Trade and Industry (DTI),
1. Contract is Department of Budget and Management (DBP)
a. Valid between the seller and buyer and the Bangko Sentral ng Pilipinas (BSP).
b. Valid between persons other than the
creditors The IRR was digitally signed on July 14,
c. Void as to affected creditors of the 2000 by Secretaries Mar Roxas II (DTI),
seller/mortgagor Benjamin Diokno (DBM) and Governor Rafael
2. Purchaser acts as a trustee or receiver for Buenaventura (BSP) during the plenary session
the benefit of the creditors of the seller of the Global Information Infrastructure
3. Criminal liability, if expressly provided Commission’s (GIIC) Asia Regional Conference
held in Makati City, Manila.
Penalty
1. imprisonment of not less the six months, nor  Necessity of the Act.
more than five years, or
2. fine in a sum not exceeding five thousand To fill in some gaps in Philippine Law
pesos, or requiring certain contracts be in “writing” (e.g.
both, in the discretion of the court statute of frauds) or that some documents be
“signed” (e.g. negotiable instruments). Since the
law already recognizes verbal or oral
agreements, there should be no reason why
electronic contracts would be denied validity.
 Saint Louis University COMMERCIAL LAW 294
2012 BAR OPERATIONS

Before the advent of the Electronic published in the Alliance for Global Business
Commerce Act, Philippine statutory law did not (AGB).
categorically validate electronic evidence. To make
matters worse, it was universally acknowledged that  Role of the Private Sector.
the resolution of legal issues respecting the validity The development of electronic
of electronic contracts and the admissibility of commerce should be driven by market forces
electronic evidence would take years or even with minimal government intervention.
decades if left in the hands of Philippine judiciary. Government’s role is nonetheless important
The only solution to the conundrum insofar as it must provide and sustain a secure
therefore, was to pass the Electronic Commerce Act legal environment and a competitive business
and expressly recognize, in no uncertain terms, that climate for electronic commerce.
doing business electronically is legal, valid and
enforceable in a court of law.
 Harmonization of Laws.
 Guiding Principles of the Act. Electronic commerce, especially when
conducted over the Internet, is necessarily
1. “Functional Equivalent” Approach global in nature. This means the companies
Under this approach, the functions of a engaged in electronic commerce may be
document or a signature is analyzed, and, if an required to comply with the laws of each country
equivalent exists in electronic form, then the latter where they consummate transactions.
will be adopted.
Hence, countries with less stringent
2. Technology-neutrality rules or weak enforcement measures may find
It does not favor any particular technology. themselves used as “safe harbors” for e-
The Act was written with an overriding concern to businesses performing acts or rendering
embrace the full range of electronic technology services illegal or immoral in their home
without bias or prejudice. countries.
3. Principle of media neutrality
In sum, the Act recognizes electronic
documents and signatures in whatever media they  Jurisdiction.
may be found. Media neutrality ensures no As of NOW, there is NO EXISTING LAW
discrimination in the legal treatment of the electronic TO DETERMINE THE JURISDICTION OF
document from the time of its creation or delivery to ELECTRONIC COMMERCE TRANSACTIONS
the time of its receipt or acceptance. IN THE PHILIPPINES.

 Role of the Act vis-à-vis Philippine Law.  Taxation of Electronic Commerce.

There are to sate, no explicit Philippine
The Act is not intended or designed to tax laws on electronic commerce and it appears
supplant any substantive law, particularly the law on that no law will be passed on this matter in the
contracts. In other words, Philippine substantive law near future. However, it is undeniable that may
will continue to apply to all e-commerce transactions. of the activities involving electronic commerce
are subject to existing tax laws.

B. DECLARATION OF PRINCIPLES  Internet Consumer Trust Issues.

FOR ELECTRONIC COMMERCE POLICIES Lack of faith in Internet Sites is
undeniably a clear threat to electronic
commerce.
 Authority of DTI to Set Forth Policies.
Section 2 of the IRR above was lifted  Alternative Modes of Dispute Resolution.
from the Act itself was placed in the earlier E-commerce players would be better
portion of the IRR to establish the legal authority served by privately-run dispute resolution
of the DTI, DBM and BSP to lay down the centers with the expertise and infrastructure to
policies for the promotion of electronic handle complex disputes in a virtual
commerce set forth in Section 3 of the IRR. environment. Such centers would have arbiters
with the necessary technical and legal expertise
 Source of the Policies. to dispense justice in an even-handles manner.
The policies in Section 3 were based on
the Global Action Plan for Electronic Commerce  E-Commerce Policy Formulation.
 Saint Louis University COMMERCIAL LAW 295
2012 BAR OPERATIONS

The Philippine Government formulates Law and similar legislation in other countries
policies respecting electronic commerce through where the enacted statutes govern only
the Information Technology Electronic commercial transactions.
Commerce Council (ITECC), which was created By expanding the scope of the Act,
through Executive Order No. 264 signed by electronic documents and signatures may now
President Estrada. The ITECC is the merger of be used in all types of transactions and acts.
the National Information Technology Council More importantly, electronic evidence is now
(NITC) and the Electronic Commerce Promotion admissible in all types of civil, criminal and
Council (ECPC). administrative proceedings. Non-commercial
With the merger, the ITECC is the activities include, among others, acts,
highest planning and policy advisory body on transactions and documents relating to national
Information and Communications Technology in security, criminal offenses, marriage, paternity
the Philippines. The membership of the ITECC and filiation, adoption, parental authority
reflects the vision that a strong partnership donations, quasi-delicts, labor and employment
between government and the private sector is labor relations, elections, suffrage, agrarian
needed to achieve sustained growth in the ITC reform, immigration, and protection of the
sector. environment.

 ITECC Clusters.  What is the Unique Feature of the Act?

a. Infrastructure It applies to both commercial and non-
b. Business Development commercial transactions because substantial
c. Financial Services portion of Internet, mobile and electronic-
d. Human Resources Development, and commerce traffic in the Philippines is not
e. Legal business related.
If the Act were made to apply only to
 ITECC Legal Cluster. commercial transactions, the provisions thereof
a. Taxation - To address issues concerning the would be static and inflexible to adapt to the
taxation of electronic commerce, by providing rapid pace of technology. Inevitably, electronic
assistance to the taxing authority, the BIR. documents and signatures will find widespread
b. Trade - To review import and export procedures application in both commercial as well as non-
with the end in view of expediting the flow of commercial transactions. It is with this measure
trade documents trough electronic facilities. of foresight that the Philippine Congress decided
c. Government Re-engineering - To provide a to adopt a universal application for the Act.
venue for coordinating ICT projects affecting
multiple government agencies.  Definition of Terms. (Sec 6 Implementing
d. Consumer Protection - To review consumer Rules & Regulations)
related laws such as the Consumer Act of the
Philippines in order to determine if the rights of (a) “Addressee” refers to a person who
on-line consumers would fall within their is intended by the originator to receive the
protective mantle. electronic data message or electronic
e. Intellectual Property Rights - To address the document, but does not include a person acting
multifarious policy issues facing intellectual as an intermediary with respect to that
property protection in the Digital Age. electronic data message or electronic
f. Security document.
(b) “Commercial Activities” shall be
given a wide interpretation so as to cover
PART II matters arising from all relationships of a
commercial nature, whether contractual or not.
A. ELECTRONIC COMMERCE IN GENERAL The term shall likewise refer to acts, events,
transactions, or dealings occurring between or
 Objective. among parties including, but not limited to,
To provide a secure legal framework factoring, investments, leasing, consulting,
and environment for electronic commerce. insurance, and all other services, as well as the
manufacture, processing, purchase, sale,
supply, distribution or transacting in any
 Applications. manner, of tangible and intangible property of
The Act applies equally to commercial all kinds such as commodities, goods,
and non-commercial activities unlike the Model merchandise, financial and banking products,
Saint Louis University COMMERCIAL LAW 296
2012 BAR OPERATIONS

patents, participations, shares of stock, by which a right is established or an obligation

software, books, works of art and other extinguished, or by which a fact may be proved
intellectual property. and affirmed, which is received, recorded,
(c) “Computer” refers to any device or transmitted, stored, processed, retrieved or
apparatus singly or interconnected which, by produced electronically. Throughout these
electronic, electro-mechanical, optical and/or Rules, the term “electronic document” shall be
magnetic impulse, or other means with the equivalent to and be used interchangeably with
same function, can receive, record, transmit, “electronic data message.”
store, process, correlate, analyze, project, (i) “Electronic key” refers to a secret
retrieve and/or produce information, data, text, code, which secures and defends sensitive
graphics, figures, voice, video, symbols or other information that crosses over public channels
modes of expression or perform any one or into a form decipherable only by itself or with a
more of these functions. matching electronic key. This term shall include,
(d) “Convergence” refers to but not be limited to, keys produced by single
technologies moving together towards a key cryptosystems, public key cryptosystems or
common point and elimination of differences any other similar method or process, which may
between the provisioning of video, voice and hereafter, be developed.
data, using digital and other emerging (j) “Intermediary” refers to a person who
technologies; the coming together of two or in behalf of another person and with respect to
more disparate disciplines or technologies; the a particular electronic data message or
ability of different network platforms to carry any electronic document sends, receives and/or
kind of service; and the coming together of stores or provides other services in respect of
consumer devices such as, but not limited to, that electronic data message or electronic
the telephone, television and personal document.
computer. (k) “Non-Commercial Activities” are
(e) “Electronic data message” refers to those not falling under commercial activities.
information generated, sent, received or stored (l) “Originator” refers to a person by
by electronic, optical or similar means, but not whom, or on whose behalf, the electronic data
limited to, electronic data interchange (EDI), message or electronic document purports to
electronic mail, telegram, telex or telecopy. have been created, generated and/or sent. The
Throughout these Rules, the term “electronic term does not include a person acting as an
data message” shall be equivalent to and be intermediary with respect to that electronic data
used interchangeably with “electronic message or electronic document.
document.” (m) “Person” means any natural or
(f) “Information and Communications juridical person including, but not limited to, an
System” refers to a system for generating, individual, corporation, partnership, joint
sending, receiving, storing or otherwise venture, unincorporated association, trust or
processing electronic data messages or other juridical entity, or any governmental
electronic documents and includes the authority.
computer system or other similar device by or in (n) “Service provider” refers to a
which data is recorded or stored and any provider of –
procedures related to the recording or storage
of electronic data message or electronic i. Online services or network access,
document. or the operator of facilities therefor,
(g) “Electronic signature” refers to any including entities offering the
distinctive mark, characteristic and/or sound in transmission, routing, or providing of
electronic form, representing the identity of a connections for online
person and attached to or logically associated communications, digital or
with the electronic data message or electronic otherwise, between or among points
document or any methodology or procedures specified by a user, of electronic
employed or adopted by a person and executed data message or electronic
or adopted by such person with the intention of documents of the user’s choosing;
authenticating or approving an electronic data or
message or electronic document.
(h) “Electronic document” refers to ii. The necessary technical means by
information or the representation of information, which electronic data message or
data, figures, symbols or other modes of written electronic documents of an
expression, described or however represented, originator may be stored and made
Saint Louis University COMMERCIAL LAW 297
2012 BAR OPERATIONS

accessible to a designated or storage. Such electronic files therefore

undesignated third party. enjoy the same protection under the
Act. It also refers to paper documents
 Can a computer be an addressee? that are transformed into paperless
form by digital imaging or scanning –
Under letter (a) of Section 6 of the Act, as a result of which the paper
an “addressee” must always be a natural or document is transformed into an
juridical person, since under the law, they are electronic data message even though
the only entities with the capacity to act with the its final destination is an optical CD-
legal consequences. ROM disk.
Networks and computers are merely
conduits or tools by which transactions are  Understanding the nature of an
facilitated. As such, persons who employ these Electronic document
tools should be responsible for the results One should not think of an electronic
obtained by their use since the tools themselves document merely as a computer file but the
cannot act independently from their users. information contained therein. Even if it is
Hence, a computer is no less a party to contract printed out on paper, it retains its character as
as a fax machine, telex, or other office tools. an electronic data message so long as the
information has not been altered.
 Convergence.
Convergence under the Act refers to  Are the output of devices directly
“partial convergence” because it is limited to the connected to computers such as Print
convergence of hardware or infrastructure only Outs from printers which are already
and does not include content such as software, paper documents excluded from the
movies, music and books. definition of Electronic Data Message?
The output devices directly connected
 Electronic Data Message. to computers such as printouts from laser, inkjet
Generally, the term “electronic data and dot-matrix printers are undeniably paper
messages” is understood to mean any documents and would seem to be excluded
electronic file. The Act provides that such from the definition of electronic data messages.
information must either be “generated, sent, Although the printouts encompass the image
received or stored by electronic, optical or appearing on a computer monitor, the electronic
similar means.” data messages printed thereby are generated
or stored by electronic means. They are
 Electronic Data Messages “generated therefore, electronic documents. Note that
by electronic means” – includes word under the New Rules on Electronic Evidence,
processing and other computer files, printouts are also originals for purposes of the
electronic mail, SMS (short message Best Evidence Rule.
service or text messages), and other
documents which are created through  Electronic Signatures.
electronic devices. a. Anything in electronic form which
 Electronic Data Messages “sent or identifies the user can be said to be
received by electronic means” – Here, his signature if it is logically attached to
only the MODE OF TRANSMISSION an electronic data message. For
is RELEVANT so that the output example, if Juan de la Cruz identifies
generated can be considered an himself in his e-mail messages as
electronic data message. In other follows: “juan dlc”, then the latter should
words, a fax, telegram or telex be considered an electronic signature.
messages would be included because Another example of an electronic
there were transmitted through signature is the name of a person
telecommunication networks – as appearing in the “From” field on the e-
would transaction receipts for credit mail, since the same identifies a
cards, debit card, ATM card and other particular person and is logically affixed
similar point of sale transactions. on an electronic data message.
 Electronic Data Messages “stored by b. A signature can also be used to
electronic means” – It includes indicate the person’s consent to the
computer files which are not intended contents of a document or
for transmission but merely for authenticate the same. For example, if
 Saint Louis University COMMERCIAL LAW 298
2012 BAR OPERATIONS

Juan de la Cruz wanted to approve an The fundamental principle that

e-mail proposal, he might write a reply electronic documents should not be
e-mail with nothing but the word discriminated against but should be given the
“accepted” plus the usual mark “juan same legal status as their paper based
dlc”. The entire reply e-mail would counterparts. THE MEDIUM IN WHICH THE
constitute the electronic signature. INFORMATION IS CONTAINED SHALL NOT
c. Method employed by the signer to EFFECT ITS LEGAL CONSEQUENCE.
authenticate a data message. An
example is person signifying his consent  Incorporation by Reference.
to an online contract by filing up a
registration form and clicking on the “I Even now, many of the electronic
Accept” button. (i.e., the contents of the documents and data messages used in
form plus the fact of clicking) will be electronic commerce no longer contain all
considered as the electronic signature of relevant information but merely make
the person. This is true also in case of references thereto. Additionally, much of
digital signatures where the signature is electronic commerce occurs through coded
not merely the person’s public key or his messages that become intelligible only when
digital certificate but the entire related to information extraneous to the said
authentication method utilized. In other message. Under the law, the coded messages
words, an electronic signature may be may be considered an integral part of the data
proven by multiple documents provided message because the extraneous information is
that take as a whole, they fulfill the deemed incorporated into the same.
functions of a handwritten signature.
 Freedom to Opt Out
Note however, that while
electronic signatures are defined in the The objective of the law is to facilitate
Act, only those which comply with the electronic contracting while leaving the parties
stringent requirements of Section 8 of free to determine whether or not to use
the Act or Section 13 of the IRR, rise to electronic records and signatures. Hence, if a
the level of and are given the same legal person receives an e-mail offer to enter into an
protection as handwritten signatures. electronic contract, such person is free to ignore
the same and request the counter-party to
 Can a computer be a party to a contract conduct the transaction off-line. The reverse of
if it is programmed to accept electronic the rule is likewise true that parties may not
offers automatically? compel others to conduct business in a paper-
The party to the agreement is the based environment.
person in whose behalf the electronic In addition, the mere fact that a person
acceptance was sent. Hence, a computer can transacts his business largely through electronic
never be a party to an electronic contract. means does not deprive him of the right to enter
Note that as with the Model Law, the into other transactions by non-electronic means.
originator and the addressee area always Verily, the Act was not intended to restrict the
“persons”, i.e. natural persons or juridical freedom to designate the manner or mode of
entities, which is consistent with the concept contracting but merely to facilitate electronic
that only “persons” (not the tools they utilize) transactions.
can perform acts or enter into transactions with As an exception to this rule, however,
legal effect. the conduct of a person may be used as
Note finally that an originator also evidence of his consent to enter into an
includes one who creates an electronic electronic contract.
document not for transmission but only for
storage. Electronic Documents under the Model Law
Under the Model Law, there are two (2)
major classes of electronic documents –
B. LEGAL RECOGNITION OF ELECTRONIC “writings” and “originals.”
DATA MESSAGES AND ELECTRONIC
DOCUMENTS a. Writings.
Model Law states that an electronic
 The Principle of Non-Discrimination. data message that qualifies as an electronic
“writing” will suffice. Specifically, all
Saint Louis University COMMERCIAL LAW 299
2012 BAR OPERATIONS

electronic data messages are considered (ix) Stipulations limiting a common

“writings” so long as they are “accessible so carrier’s liability to less than
as to be usable for subsequent reference.” extraordinary diligence. (Article
“Writings” are not required to 1744, Civil Code).
conform to any other requirement such as
that relating to integrity, inalterability or c. Generic Electronic documents
reliability. This is consistent with the idea They are neither “writings” nor
that since not all paper-based documents “originals”, but are mere documentary
are free from unauthorized alteration and evidence of the information contained
forgery, the same should not be imposed therein.
upon electronic documents. In other words,
forges or fraudulent electronic documents
should enjoy the same evidentiary benefits  Best Evidence Rule.
of admissibility and legal effects as their The Best Evidence Rule states that
paper-based counterparts. when a document is the subject of inquiry, no
evidence shall be admissible other than the
b. Originals. original document itself. Section 7 (c) “originals”
Applying the functional equivalent are not the originals referred to in the Best
approach, the Model Law requires electronic Evidence Rule.
“originals” to possess “a reliable assurance Electronic data messages and
as to the integrity of the information and the electronic documents by themselves are
ability to be displayed to the person to whom considered original documents for purposes of
it is to be presented. complying with the Best Evidence Rule. In this
regard, since the electronic document is
“Original” electronic documents are considered the functional equivalent of a written
pertinent especially where the uniqueness of document, the procedure of its presentation as
the documents is particularly relevant (i.e. evidence in court shall follow the same rules
bills of landing, certificates of deposits and governing paper-based documentary evidence,
negotiable instruments). and its integrity and reliability need not be
Evidently, reliability and integrity are proved for this purpose.
essential to “originals” while, in contrast, Consistent with the foregoing, the new
these attributes are dispensable for Rules on Electronic Evidence provide that mere
“writings.” printouts are originals for purposes of the Best
Evidence Rule.
 Documents which are required to be in
writing. Note that while an electronic data
(i) Those falling under the Statute of message is by itself the original for purposes of
Frauds. the Best Evidence Rule, if a party wishes to
(ii) Negotiable Instruments (Section prove that the electronic document is a “writing”
1, NIL); or an “original” as defined under Act, the
(iii) Donations of personal property proponent must still independently present
with value in excess of P5,000.00, evidence of its reliability and integrity.
(Article 748, Civil Code);
(iv) Contract of Antichresis where the  What are Solemn Contracts?
amount of the principal and Solemn contracts are those which are
interest must be in writing (Article valid only if the form prescribed by law is
2134, Civil Code); observed. Note that the Act applies not only to
(v) Stipulation to pay interest on loans contracts or agreement but to other kinds of
(Article 1956, Civil Code); documents as well.
(vi) Power of Attorney to sell land or
any interest therein (Article 1874,  Notarized Documents.
Civil Code); In some instances, Philippine law
(vii) Assignment of copyright in whole requires that documents be acknowledged
or in part during the lifetime of the before a notary public for its validity.
author (Section 180.2, Intellectual Notarized documents enjoy a higher
Property Code); degree of acceptability largely because the
(viii) Marriage Settlements (Article 77, Rules of Court consider them public documents
Family Code); and which are easier to present in evidence.
Saint Louis University COMMERCIAL LAW 300
2012 BAR OPERATIONS

letter, character, number or other

symbol in electronic form
representing the persons named
C. LEGAL RECOGNITION OF ELECTRONIC in and attached to or logically
SIGNATURES (SEC 13 IRR) associated with an electronic data
message, electronic document, or
 An electronic signature relating to an that the appropriate methodology
electronic document or electronic data or security procedures, when
message shall be equivalent to the applicable, were employed or
signature of a person on a written adopted by a person and
document if the signature: executed or adopted by such
(a) is an electronic signature as defined person, with the intention of
in Section 6(g) of these Rules; and authenticating or approving an
(b) is proved by showing that a electronic data message or
prescribed procedure, not alterable by the electronic document;
parties interested in the electronic document or
electronic data message, existed. (b) The electronic data message or
electronic document shall be
 Presumption Relating to Electronic authenticated by proof that an
Signatures. - In any proceeding involving appropriate security procedure,
an electronic signature, the proof of the when applicable was adopted and
electronic signature shall give rise to the employed for the purpose of
rebuttable presumption that: verifying the originator of an
electronic data message or
(a) The electronic signature is the signature electronic document, or detecting
of the person to whom it correlates; and error or alteration in the
communication, content or
storage of an electronic document
(b) The electronic signature was affixed by
or electronic data message from a
that person with the intention of signing
specific point, which, using
or approving the electronic data
algorithm or codes, identifying
message or electronic document unless
words or numbers, encryptions,
the person relying on the electronically
answers back or
signed electronic data message or
acknowledgement procedures, or
electronic document knows or has
similar security devices.
notice of defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
 Authenticating Electronic Documents or
circumstances.
Electronic Data Messages Burden of.
 Method of Authenticating Electronic The person seeking to introduce an
Documents, Electronic Data Messages, electronic document or electronic data
and Electronic Signatures. message in any legal proceeding has the
burden of proving its authenticity by
Electronic documents, electronic evidence capable of supporting a finding
data messages and electronic signatures, that the electronic data message or
shall be authenticated by demonstrating, electronic document is what the person
substantiating and validating a claimed claims it to be.
identity of a user, device, or another entity in
an information or communication system.  Modes for Establishing Integrity
Until the Supreme Court, by appropriate
rules, shall have so provided, electronic In the absence of evidence to the
documents, electronic data messages and contrary, the integrity of the information and
electronic signatures, shall be authenticated, communication system in which an
among other ways, in the following manner: electronic data message or electronic
document is recorded or stored may be
(a) The electronic signature shall be established in any legal proceeding, among
authenticated by proof that a other methods:
Saint Louis University COMMERCIAL LAW 301
2012 BAR OPERATIONS

(a) By evidence that at all material  Philippine Contract Law/ Spiritual

times the information and communication System
system or other similar device was operating The Civil Code adheres to the
in a manner that did not affect the integrity of spiritual system where contracts are
the electronic document or electronic data valid if made in any way that indicates
message, and there are no other reasonable that the party wished to be bound. (See
grounds to doubt the integrity of the Article 1356 of the NCC) On the basis of
information and communication system; the foregoing, the SC as repeatedly
upheld the validity of contracts proven
(b) By showing that the electronic solely by testimonial evidence. Hence,
document or electronic data message was as a general rule, a contract under
recorded or stored by a party to the Philippine Law will be valid in whatever
proceedings who is adverse in interest to the form it may be found whether it be oral,
party using it; or paper based or for that matter,
electronic.
(c) By showing that the electronic
document or electronic data message was  Recognition of Electronic Contracts -
recorded or stored in the usual and ordinary Philippine law recognized electronic
course of business by a person who is not a contracts even before the passage of
party to the proceedings and who did not act this act.
under the control of the party using the Basis: Article 17 of the NCC. By
record. express codal provision therefore, the
Philippines follows the lex loci
contractus rule. In this regard, the
Supreme Court has had occasion to rule
 Admissibility and Evidential Weight that a power of attorney executed in
Germany, must be tested as to its
For evidentiary purposes, an formal validity by the laws of that
electronic document or electronic data country and not the Civil Code.
message shall be the functional equivalent Thus, if the law were the
of a written document under existing laws. electronic contract was entered into
In any legal proceeding, nothing in the recognizes such form of agreements,
application of the rules on evidence shall those electronic agreements are
deny the admissibility of an electronic data extrinsically valid in the Philippines.
message or electronic document in Assuming further that such agreements
evidence: are also intrinsically valid under the law
of the place where it was entered into,
(a) On the sole ground that it is in then those electronic contracts would be
electronic form; or valid in all respects under Philippine law.

(b) On the ground that it is not in the

standard written form.  Validity of Electronic Contracts (Sec
16 E-Commerce Act/ Sec 21
 What is the recommended mode of Implementing Rules & Regulations)
presenting evidence?  The Act does not amend the law
Proof by affidavit and cross on contracts but merely allows
examination the requisite elements of offer
and acceptance or its external
manifestations, to be expressed
in electronic form.
C. COMMUNICATION OF ELECTRIC DATA
MESSAGES  Does the Act cover only the
OR ELECTRONIC EVIDENCE cases in which both the offer
and the acceptance are
communicated electronically?
ELECTRONIC CONTRACTS No. The Act also covers
cases where only the offer or
only the acceptance is
electronically communicated. In
Saint Louis University COMMERCIAL LAW 302
2012 BAR OPERATIONS

other words, an e-mail Data messages personally.

acceptance to a handwritten
offer can be used as the basis to
prove the existence of a ERRORS IN THE ELECTRONIC DATA
contract. MESSAGE
 The Act intends only to amend
the law with respect to the form  Two Types of Errors Referred to in
of documents and transactions, the Provision:
not their intrinsic validity. Errors in the Electronic Data
Message
 Consummation of Electronic Errors in the transmission of
Transactions with Banks the Electronic Data
Realizing that Sec 16(2) of the Message
E-Commerce Act may be used to
facilitate fraud with the unwitting and  Purpose for determining Error
involuntary participation of banks, The To assign fault or liability upon
BSP moved to insert the amendments either the originator or addressee for an
into the IRR which now appears in Sec electronic data message when an error
22. They limited the application of the has occurred. If the addressee knew or
provision only to ATM networks and should have known the error, then he is
stressed the BSP’s authority vis a vis not entitled to rely upon the assumption
banks and other financial institutions – that the electronic document was sent
leaving open the possibility that the BSP by the originator. He is therefore solely
will issue circulars to prevent the liable for his actions taken upon that
potential abuse of Sec 16(2) of the Act. assumption. In the opposite case, of
course, the liability rests with the
ELECTRONIC DATA MESSAGE originator.

 General Rule:
If the originator himself sends an AGREEMENT ON ACKNOWLEDGMENT OF
electronic data message, then its RECEIPT OF ELECTRONIC DATA MESSAGES
authorship will be attributed to him, and OR ELECTRONIC DOCUMENTS
e will be bound by the legal
consequences arising from the sending
of the electronic data message. These  Application of the Provision (Sec 20
include civil and criminal liability for the E-Commerce Act; Sec 30 IRR)
contents of such messages. 1. Previous Agreement or Request –
where the parties either agreed or
 Expanded meaning of the the originator has requested an
word “Sent” acknowledgment of receipt. Such
It is not limited to situations where the electronic form must be followed or the service
data message is transmitted, but should also of the same is invalid
apply to situations where the electronic data 2. No agreement as to form of
message is transmitted, but should also apply to Acknowledgment – in such case,
situations where it is merely generated or stored. the acknowledgment may be given
This is consistent with the definition of through any means of
“originator” as being the person who purports to communication or even by the
have created, generated and/or sent the conduct of the addressee.
electronic data message. Hence, if the originator
personally stored the electronic document TIME OF DISPATCH OF ELECTRONIC DATA
without sending it to a third party, then it will still MESSAGE OR ELECTRONIC DOCUMENT
be attributed to him. (Sec 21 E-Commerce Act; Sec 31 IRR)

 Dispatch
 Exception: When the Data Message is For purposes of the Act, an
not Sent by the Originator electronic data message enters an
The Act recognizes that originators information system at the time when it
do not always sent their electronic
Saint Louis University COMMERCIAL LAW 303
2012 BAR OPERATIONS

becomes available for processing within

that information system.  Government Regulation
This serves as a basis for the
TIME OF RECEIPT OF ELECTRONIC DATA DTI or other government agency to
MESSAGE OR ELECTRONIC DOCUMENT issue rules and regulations over the use
(Sec 22, E-Commerce Act; Sec 32 IRR) of encryption technologies, particularly
public key encryption technologies.
 Designated Information System
The mere indication of an  Limitation
electronic mail or telecopy address on a The freedom given to the parties
letterhead or other document should not under the provision is subject to the
be regarded as express designation of rules and regulations of government
one or more information systems. The agencies.
designation by the addressee must be
specific and unequivocal.

 Non-Designated Information System PART III

The addressee had designated ELECTRONIC COMMERCE IN CARRIAGE OF
an information system but the message GOODS
was not sent to the system. In this case, (Sections 25 & 26, E-Commerce Act; Sections 35
the message is deemed received only & 36, IRR)
upon the addressee’s retrieval thereof.

PLACE OF DISPATCH AND RECEIPT OF  Actions Related to Contracts of

ELECTRONIC DATA MESSAGE OR Carriage of Goods.
ELECTRONIC DOCUMENT (Sec 23, E-
Commerce Act; Sec 33 IRR) The Rules applies to any action in
connection with, or in pursuance of, a
 Presumption as to the Place of Receipt contract of carriage of goods, including but
and Dispatch – Party’s place of not limited to:
business or his habitual residence.
However, the parties may agree upon
(a) (i) furnishing the marks, number,
the place.
quantity or weight of goods;(ii)
stating or declaring the nature or
 Relevance of the Provision value of goods; (iii) issuing a receipt
The provision is important in the for goods; (iv) confirming that goods
context of existing legal requirements have been loaded;
respecting the service or presentation of
documents at a particular location.
(b) (i) notifying a person of terms and
conditions of the contract;(ii) giving
instructions to a carrier;
 Private International Law
Under the IRR, the provision
does not intend to determine which law (c) (i) claiming delivery of goods;(ii)
will apply to a particular electronic data authorizing release of goods;(iii)
message. This arises from the simple giving notices of loss of, or damage
fact that the application of the rule to goods;
usually reveals two (2) locations – the
place of dispatch and the place of (d) giving any other notice or statement
receipt. in connection with the performance
of the contract;
CHOICE OF SECURITY METHODS (Sec 24 E-
Commerce Act; Sec 34 IRR) (e) undertaking to deliver goods to a
named person or a person
 Freedom of Choice authorized to claim delivery;
This provision allows parties to
utilize any security or authentication
method appropriate to suit their needs.
 Saint Louis University COMMERCIAL LAW 304
2012 BAR OPERATIONS

(f) granting, acquiring, renouncing, shall ensure the interoperability of systems

surrendering, transferring or forming part of the government network.
negotiating rights in goods;
(c) Elimination of Red Tape. -
(g) acquiring or transferring rights and Government processes shall be re-
obligations under the contract. examined and if appropriate, simplified or re-
engineered to maximize the functionality of
technology and to eliminate unnecessary
 Transport Documents.
delays in the delivery of governmental
services.
The law requires that any action
referred to be carried out in writing or by
using a paper document, that requirement is (d) Security Measures. -
met if the action is carried out by using one Government shall implement appropriate
or more electronic data messages or security measures to guard against
electronic documents. unauthorized access, unlawful disclosure of
information, and to ensure the integrity of
stored information.

PART IV (e) Auditability. - All systems

ELECTRONIC TRANSACTIONS IN installed shall provide for an audit trail.
GOVERNMENT
 Government Information System Plan
A. Government Use of Data Messages, Electronic (GISP). – The blue print for introducing
Documents and Electronic Signatures information technology to every aspect
(Section 27 E-Commerce Act; Section 37 IRR) of its operations. It is also referred to as
the “Philippine Government On-Line.”
 Philippine Government Vision:
If said provisions are strictly
complied with, the Phil. Government shall be B. RPWEB
able to perform all its functions electronically
within 2 years. (Section 28 E-Commerce Act; Section 40 IRR.)

 Supplemental Regulation  RPWEB

Despite the Two years deadline,
private Citizens cannot force the RPWEB is a strategy requiring all
Government to transact business agencies and offices of the Philippine Government
electronically until such time tat appropriate to connect to the internet to Promote the Use Of
agencies have the opportunity to determine Electronic Documents and Electronic Data
the means, methods and regulations Messages In Government and to the General Public.
respecting the same.
 Implementation
 Principles Governing E- Commerce 1. Implementing Agencies: DOTC,
Regulation -shall be mandatory upon NTC, NCC
all departments, bureaus, offices and 2. Mass Media – medium of
agencies of the government, as well as communication limited to Filipino
all government-owned and-controlled Citizens or Filipino owned
corporations: Corporations or Associations.
3. Lead Agency – DTI- The law vests
(a) Technology Neutrality. - All the DTI with the authority to direct
solutions implemented shall neither favor a the promotion and development of
particular technology over another nor Electronic Commerce in the country
discriminate against or in favor of particular as well as empowered to issue rules
vendors of technology. and regulations necessary to
implement the Act.
(b) Interoperability. - All 4. The Department of Budget and
implementation of technological solutions Management shall identify the fund
Saint Louis University COMMERCIAL LAW 305
2012 BAR OPERATIONS

source for the implementation of consent of the owner of the

Sections 37, 39 and 40 of the Rules. computer or information and
communications system, including
the introduction of computer
viruses and the like, resulting in
PART V the corruption, destruction,
alteration, theft or loss of electronic
FINAL PROVISIONS data messages or electronic
document shall be punished by a
minimum fine of one hundred
 Liability thousand pesos (P100,000.00) and
The liability of the service provider a maximum commensurate to the
herein is limited not only to that arising from damage incurred and a mandatory
copyright infringement but to a whole range imprisonment of six (6) months to
of offenses against third parties. It includes three (3) years.
libel, defamation, threats, pornography, as
well as the illegal conduct of its clients.  Love Bug

The provision specifying the

 Lawful Access crime of hacking gained
Apart from persons authorized by media attention before the
the individual having possession of the Act was signed into law
electronic document or signature, the because of the “I love you
appropriate government agency or entity Virus” incident which
including police officers may have access to caused billions of dollars
the same, provided they comply with the worth of damage to
constitutional protection against information networks of
unreasonable searches and seizures. Law several companies.
enforcement agencies must therefore
procure a search warrant before conducting 2. Piracy. - Piracy or the unauthorized
a search of a computer containing electronic copying, reproduction,
evidence. dissemination, distribution,
importation, use, removal, alteration,
substitution, modification, storage,
 Obligation of Confidentiality. uploading, downloading,
communication, making available to
Except for the purposes authorized the public, or broadcasting of
under the Act, any person who obtained protected material, electronic
access to any electronic key, electronic data signature or copyrighted works
message, or electronic document, book, including legally protected sound
register, correspondence, information, or recordings or phonograms or
other material pursuant to any powers information material on protected
conferred under the Act, shall not convey to works, through the use of
or share the same with any other person. telecommunication networks, such
as, but not limited to, the internet, in
a manner that infringes intellectual
 Penal Provisions property rights shall be punished by
a minimum fine of one hundred
1. Hacking. - Hacking or cracking thousand pesos (P100,000.00) and
which refers to unauthorized a maximum commensurate to the
access into or interference in a damage incurred and a mandatory
computer system/server or imprisonment of six (6) months to
information and communication three (3) years. The foregoing shall
system; or any access in order to be without prejudice to the rights,
corrupt, alter, steal, or destroy liabilities and remedies under
using a computer or other similar Republic Act No. 8293 or Intellectual
information and communication Property Code of the Philippines
devices, without the knowledge and and other applicable laws.
Saint Louis University COMMERCIAL LAW 306
2012 BAR OPERATIONS

3. Other Penal Offenses. - Violations citizens. Inasmuch as the Act

of the Consumer Act or Republic Act merely contemplates the legal
No. 7394 and other relevant or recognition of electronic forms of
pertinent laws through transactions documents and signatures and does
covered by or using electronic data not amend any law governing the
messages or electronic documents, underlying substantive validity of
shall be penalized with the same acts or transactions, this provision
penalties as provided in those laws. shall be subject to existing
Constitutional and statutory
4. Other Violations of the Act.- Other restrictions relative to activities
violations of the provisions of the which are reserved to Philippine
Act, shall be penalized with a citizens or juridical entities partially
maximum penalty of one million or wholly-owned by Philippine
pesos (P1,000,000.00) or six-(6) citizens.
years imprisonment.
4. Oversight Committee. - There shall
 Miscellaneous Provisions be a Congressional Oversight
Committee composed of the
1. Statutory Interpretation. - Unless Committees on Trade and
otherwise expressly provided for, Industry/Commerce, Science and
the interpretation of these Rules and Technology, Finance and
the Act shall give due regard to the Appropriations of both the Senate
Act’s international origin - the and House of Representatives,
UNCITRAL Model Law on Electronic which shall meet at least every
Commerce - and the need to quarter of the first two years and
promote uniformity in its application every semester for the third year
and the observance of good faith in after the approval of this Act to
international trade relations. The oversee its implementation. The
generally accepted principles of DTI, DBM, Bangko Sentral ng
international law and convention on Pilipinas, and other government
electronic commerce shall likewise agencies as may be determined by
be considered. the Congressional Committee shall
provide a quarterly performance
2. Variation by Agreement. - Any report of their actions taken in the
provision of the Act may be varied implementation of this Act for the
by agreement between and among first three (3) years.
parties; Provided that such
agreement involves only the 5. DTI’s Continuing Authority to
generation, sending, receiving, Implement the Act and Issue
storing or otherwise processing of Implementing Rules. - Among
an electronic data message or others, the DTI is empowered to
electronic document. Nothing shall promulgate rules and regulations, as
authorize contracting parties to well as provide quality standards or
agree upon stipulations or issue certifications, as the case may
covenants, which defeat the legal be, and perform such other
recognition, validity and admissibility functions as may be necessary for
of electronic data messages, the implementation of this Act in the
electronic documents, or electronic area of electronic commerce.
signatures.
6. Separability. - If any provision in
3. Reciprocity. - All benefits, privileges, these Rules or application of such
advantages or statutory rules provision to any circumstance is
established under this Act, including held invalid, the remainder of these
those involving practice of Rules shall not be affected thereby.
profession, shall be enjoyed only by
parties whose country of origin Effectivity. - These Rules shall take effect fifteen (15)
grants the same benefits and days from the complete publication thereof in a
privileges or advantages to Filipino newspaper of general circulation.
 Saint Louis University COMMERCIAL LAW 307
2012 BAR OPERATIONS

 
 

COMPILATION OF JURISPRUDENCE IN NEGOTIABLE INSTRUMENTS LAW

COMMERCIAL LAW
NEGOTIABILITY
The weight of authority in the United States
CODE OF COMMERCE is that postal money orders are not negotiable
instruments, the reason behind this rule being that,
LETTERS OF CREDIT in establishing and operating a postal money order
In commercial transactions involving letters system, the government is not engaging in
of credit, the functions assumed by a correspondent commercial transactions but merely exercises a
bank are classified according to the obligations governmental power for the public benefit. It is to be
taken up by it. The correspondent bank may be noted in this connection that some of the restrictions
called a notifying bank, a negotiating bank, or a imposed upon money orders by postal laws and
confirming bank. regulations are inconsistent with the character of
In case of a notifying bank, the negotiable instruments. For instance, such laws and
correspondent bank assumes no liability except to regulations usually provide for not more than one
notify and/or transmit to the beneficiary the endorsement; payment of money orders may be
existence of the letter of credit. The notifying bank withheld under a variety of circumstances. (PHIL.
may suggest to the seller its willingness to negotiate, EDUC. CO. VS. SORIANO, G.R. No. L-22405 June
but this fact alone does not imply that the notifying 30, 1971)
bank promises to accept the draft drawn under the
documentary credit. On this score, the accepted rule is that the
A notifying bank is not a privy to the contract negotiability or non-negotiability of an instrument is
of sale between the buyer and the seller, its determined from the writing, that is, from the face of
relationship is only with that of the issuing bank and the instrument itself. (CALTEX PHIL. VS. CA, G.R.
not with the beneficiary to whom he assumes no No. 97753 August 10, 1992)
liability. It follows therefore that when the petitioner
refused to negotiate with the private respondent, the The indication of Fund 501 as the source of
latter has no cause of action against the petitioner the payment to be made on the treasury warrants
for the enforcement of his rights under the letter. makes the order or promise to pay "not
A negotiating bank, on the other hand, is a unconditional and the warrants themselves non-
correspondent bank which buys or discounts a draft negotiable. There should be no question that the
under the letter of credit. Its liability is dependent exception on Section 3 of the Negotiable
upon the stage of the negotiation. If before Instruments Law is applicable in the case at bar.
negotiation, it has no liability with respect to the (METROBANK VS. CA, )
seller but after negotiation, a contractual relationship
will then prevail between the negotiating bank and A negotiable instrument may, however,
the seller. instead of being negotiated, also be assigned or
In the case of a confirming bank, the transferred. The legal consequences of negotiation
correspondent bank assumes a direct obligation to as distinguished from assignment of a negotiable
the seller and its liability is a primary one as if the instrument are, of course, different. A nonnegotiable
correspondent bank itself had issued the letter of instrument may, obviously, not be negotiated; but it
credit. (FEATI BANK VS. CA, G.R. No. 94209 April may be assigned or transferred, absent an express
30, 1991) prohibition against assignment or transfer written in
the face of the instrument:
What characterizes letters of credit, as The words 'not negotiable,' stamped on the
distinguished from other accessory contracts, is the face of the bill of lading, did not destroy its
engagement of the issuing bank to pay the seller assignability, but the sole effect was to exempt the
once the draft and the required shipping documents bill from the statutory provisions relative thereto, and
are presented to it. In turn, this arrangement assures a bill, though not negotiable, may be transferred by
the seller of prompt payment independent of any assignment; the assignee taking subject to the
breach of the main sales contract. By this so-called equities between the original parties. (SESBREÑO
"independence principle," the bank determines VS. CA)
compliance with the letter of credit only by
examining the shipping documents presented; it is The essence of negotiability which
precluded from determining whether the main characterizes a negotiable paper as a credit
contract is actually accomplished or not. (BANK OF instrument lies in its freedom to circulate freely as a
AMERICA VS. CA, 228 SCRA 357)
 Saint Louis University COMMERCIAL LAW 308
2012 BAR OPERATIONS

substitute for money. (FIRESTONE TIRE & pays the amount of the check to a third person, who
RUBBER VS. CA) has forged the signature of the payee, the loss falls
upon the bank who cashed the check, and its only
PAYABLE TO BEARER remedy is against the person to whom it paid the
Where a check is made payable to the order money. (REPUBLIC BANK VS. EBRADA)
of 'cash', the word cash 'does not purport to be the
name of any person', and hence the instrument is The records show that at the time the
payable to bearer. The drawee bank need not obtain twenty-three (23) checks were prepared, negotiated,
any indorsement of the check, but may pay it to the and encashed, the petitioner was using its own
person presenting it without any indorsement. (ANG personalized checks, instead of the official PNB
TEK LIAN VS. CA) Commercial blank checks. In the exercise of this
special privilege, however, the petitioner failed to
COMPLETE BUT UNDELIVERED INSTRUMENT provide the needed security measures. Hence, the
A negotiable instrument, of which a check is, petitioner is barred from setting up the defense of
is not only a written evidence of a contract right but forgery under Section 23 of the Negotiable
is also a species of property. Just as a deed to a Instruments Law because it was guilty of negligence
piece of land must be delivered in order to convey not only before the questioned checks were
title to the grantee, so must a negotiable instrument negotiated but even after the same had already
be delivered to the payee in order to evidence its been negotiated. (MWSS vs. CA)
existence as a binding contract.
Thus, the payee of a negotiable instrument While the drawer generally owes no duty of
acquires no interest with respect thereto until its diligence to the collecting bank, the law imposes a
delivery to him. Delivery of an instrument means duty of diligence on the collecting bank to scrutinize
transfer of possession, actual or constructive, from checks deposited with it for the purpose of
one person to another. Without the initial delivery of determining their genuineness and regularity. The
the instrument from the drawer to the payee, there collecting bank being primarily engaged in banking
can be no liability on the instrument. Moreover, such holds itself out to the public as the expert and the
delivery must be intended to give effect to the law holds it to a high standard of conduct. (BANCO
instrument. (DEVELOPMENT BANK VS. SIMA WEI) DE ORO VS. EQUITABLE BANK)

FORGERY The negligence of a depositor which will

A forged signature in a negotiable prevent recovery of an unauthorized payment is
instrument is wholly inoperative and no right to based on failure of the depositor to act as a prudent
discharge it or enforce its payment can be acquired businessman would under the circumstances.
through or under the forged signature except against (GEMPESAW VS. CA)
a party who cannot invoke the forgery, it stands to
reason, upon the facts of record, that the The bank on which a check is drawn, known
respondent, as a collecting bank which endorsed the as the drawee bank, is under strict liability to pay the
checks to the drawee-banks for clearing, should be check to the order of the payee. The drawer's
liable to the latter for reimbursement, for, as found instructions are reflected on the face and by the
by the court a quo and by the appellate court, the terms of the check. Payment under a forged
endorsements on the checks had been forged prior indorsement is not to the drawer's order. When the
to their delivery to the petitioner. In legal drawee bank pays a person other than the payee, it
contemplation, therefore, the payments made by the does not comply with the terms of the check and
drawee-banks to the respondent on account of the violates its duty to charge its customer's (the drawer)
said checks were ineffective; and, such being the account only for properly payable items. Since the
case, the relationship of creditor and debtor between drawee bank did not pay a holder or other person
the petitioner and the respondent had not been entitled to receive payment, it has no right to
validly effected, the checks not having been properly reimbursement from the drawer. The general rule
and legitimately converted into cash. (JAI-ALAI VS. then is that the drawee bank may not debit the
BPI) drawer's account and is not entitled to
indemnification from the drawer. The risk of loss
Where a check is drawn payable to the must perforce fall on the drawee bank.
order of one person and is presented to a bank by However, if the drawee bank can prove a
another and purports upon its face to have been failure by the customer/drawer to exercise ordinary
duly indorsed by the payee of the check, it is the care that substantially contributed to the making of
duty of the bank to know that the check was duly the forged signature, the drawer is precluded from
indorsed by the original payee, and where the Bank asserting the forgery.
 Saint Louis University COMMERCIAL LAW 309
2012 BAR OPERATIONS

If at the same time the drawee bank was other in the category of mere joint guarantors of the
also negligent to the point of substantially former. (SADAYA VS. SEVILLA)
contributing to the loss, then such loss from the
forgery can be apportioned between the negligent The aforequoted provision of the Negotiable
drawer and the negligent bank. (ASSOCIATED Instruments Law which holds an accommodation
BANK VS. CA) party liable on the instrument to a holder for value,
although such holder at the time of taking the
The mere fact that the forgery was instrument knew him to be only an accommodation
committed by the drawer-payor’s confidential party, does not include nor apply to corporations
employee or agent, who by virtue of his position had which are accommodation parties. This is because
unusual facilities for perpetrating the fraud and the issue or indorsement of negotiable paper by a
imposing the forged paper upon the bank, does not corporation without consideration and for the
entitle the bank to shift the loss to the drawer-payor accommodation of another is ultra vires. Hence, one
in the absence of some circumstances raising who has taken the instrument with knowledge of the
estoppel against the drawer. (PCIB vs. CA) accommodation nature thereof cannot recover
against a corporation where it is only an
The petitioner is precluded from setting up accommodation party. If the form of the instrument,
the forgery, assuming there is a forgery, due to his or the nature of the transaction, is such as to charge
own negligence in entrusting to his secretary his the indorsee with knowledge that the issue or
credit cards and checkbook including the verification indorsement of the instrument by the corporation is
of his statements of accounts.” (ILUSORIO VS. CA) for the accommodation of another, he cannot
recover against the corporation thereon.
MATERIAL ALTERATION By way of exception, an officer or agent of a
An alteration is said to be material if it alters corporation shall have the power to execute or
the effect of the instrument. It means an indorse a negotiable paper in the name of the
unauthorized change in an instrument that purports corporation for the accommodation of a third person
to modify in any respect the obligation of a party or only if specifically authorized to do so
an unauthorized addition of words or numbers or (CRISOLOGO-JOSE VS. CA)
other change to an incomplete instrument relating to
the obligation of a party. In other words, a material To be sure, as regards an accommodation
alteration is one which changes the items which are party (such as STEELWELD), the fourth condition,
required to be stated under Section 1 of the i.e., lack of notice of any infirmity in the instrument or
Negotiable Instrument Law. defect in title of the persons negotiating it, has no
A serial number is an item which is not an application. This is because Section 29 of the law
essential requisite for negotiability under Section 1 above quoted preserves the right of recourse of a
of the NIL. (PNB vs. CA) "holder for value" against the accommodation party
notwithstanding that "such holder, at the time of
The insertion of the words "Agent, Phil. taking the instrument, knew him to be only an
National Bank," which converts the bank from a accommodation party." (STELCO vs. CA)
mere drawee to a drawer and therefore changes its
liability, constitutes a material alteration of the In accommodation transactions recognized
instrument without the consent of the parties liable by the Negotiable Instruments Law, an
thereon, and so discharges the instrument. accommodating party lends his credit to the
(MONTINOLA VS. PNB) accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a
ACCOMMODATION PARTY holder in due course, who gave full value therefor to
On principle, a solidary accommodation the accommodated party. The latter, in other words,
maker who made payment-has the right to receives or realizes full value which the
contribution, from his co-accommodation maker, in accommodated party then must repay to the
the absence of agreement to the contrary between accommodating party, unless of course the
them, and subject to conditions imposed by law. accommodating party intended to make a donation
This right springs from an implied promise between to the accommodated party. But the accommodating
the accommodation makers to share equally the party is bound on the check to the holder in due
burdens that may ensue from their having consented course who is necessarily a third party and is not the
to stamp their signatures on the promissory note. accommodated party. Having issued or indorsed the
For having lent their signatures to the principal check, the accommodating party has warranted to
debtor, they clearly placed themselves-in so far as the holder in due course that he will pay the same
payment made by one may create liability on the according to its tenor. (TRAVEL-ON VS. CA)
 Saint Louis University COMMERCIAL LAW 310
2012 BAR OPERATIONS

HOLDER IN DUE COURSE Respondents can collect from the

Section 52 of the Negotiable Instruments immediate indorser, in this case Lobitana.
Law defines a holder in due course, thus: ”A holder Significantly, Lobitana did not appeal the trial court’s
in due course is a holder who has taken the decision, finding her solidarily liable to pay, among
instrument under the following conditions: (a) That it others, the face value of the subject check.
is complete and regular upon its face; (b) That he Therefore, the trial court’s judgment has long
became the holder of it before it was overdue, and become final and executory as to Lobitana. Roberto
without notice that it has been previously Dino vs. Maria Luisa Judal-Loot, joined by her
dishonored, if such was the fact; (c) That he took it husband Vicente Loot, G.R. No. 170912, April 19,
in good faith and for value; (d) That at the time it 2010.
was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the As the holder's title was defective or
person negotiating it.” suspicious, it cannot be stated that the payee
In the case of a crossed check, as in this acquired the check without knowledge of said defect
case, the following principles must additionally be in holder's title, and for this reason the presumption
considered: A crossed check (a) may not that it is a holder in due course or that it acquired the
be encashed but only deposited in the bank; (b) may instrument in good faith does not exist. And having
be negotiated only once — to one who has an presented no evidence that it acquired the check in
account with a bank; and (c) warns the holder that it good faith, it (payee) cannot be considered as a
has been issued for a definite purpose so that the holder in due course. In other words, under the
holder thereof must inquire if he has received the circumstances of the case, instead of the
check pursuant to that purpose; otherwise, he is not presumption that payee was a holder in good faith,
a holder in due course. the fact is that it acquired possession of the
Based on the foregoing, respondents had instrument under circumstances that should have
the duty to ascertain the indorser’s, in this put it to inquiry as to the title of the holder who
case Lobitana’s, title to the check or the nature of negotiated the check to it. The burden was,
her possession. This respondents failed to do. therefore, placed upon it to show that
Respondents’ verification from Metrobank on the notwithstanding the suspicious circumstances, it
funding of the check does not amount to acquired the check in actual good faith. (DE
determination of Lobitana’s title to the check. Failing OCAMPO VS. GATCHALIAN)
in this respect, respondents are guilty of gross
negligence amounting to legal absence of good Admittedly, petitioner became the holder of
faith, contrary to Section 52(c) of the Negotiable the cashier's check as endorsed by Alexander Lim
Instruments Law. Hence, respondents are not who stole the check. He refused to say how and why
deemed holders in due course of the subject check. it was passed to him. He had therefore notice of the
Roberto Dino vs. Maria Luisa Judal-Loot, joined by defect of his title over the check from the start. The
her husband Vicente Loot,G.R. No. 170912, April holder of a cashier's check who is not a holder in
19, 2010. due course cannot enforce such check against the
issuing bank which dishonors the same. If a payee
The fact that respondents are not holders in of a cashier's check obtained it from the issuing
due course does not automatically mean that they bank by fraud, or if there is some other reason why
cannot recover on the check. The Negotiable the payee is not entitled to collect the check, the
Instruments Law does not provide that a holder who respondent bank would, of course, have the right to
is not a holder in due course may not in any case refuse payment of the check when presented by the
recover on the instrument. The only disadvantage of payee, since respondent bank was aware of the
a holder who is not in due course is that the facts surrounding the loss of the check in question.
negotiable instrument is subject to defenses as if it (MESINA VS. IAC)
were non-negotiable. Among such defenses is the
absence or failure of consideration, which petitioner LIABILITY OF GENERAL INDORSER
sufficiently established in this case. Petitioner "Recourse" means resort to a person who is
issued the subject check supposedly for a loan in secondarily liable after the default of the person who
favor of Consing’s group, who turned out to be a is primarily liable. Appellant, by indorsing the note
syndicate defrauding gullible individuals. Since "with recourse" does not make itself a qualified
there is in fact no valid loan to speak of, there is no indorser; but a general indorser who is secondarily
consideration for the issuance of the check. liable, because by such indorsement, it agreed that if
Consequently, petitioner cannot be obliged to pay Dr. Villaruel fails to pay the note, plaintiff-appellee
the face value of the check. can go after said appellant. The effect of such
indorsement is that the note was indorsed Without
 Saint Louis University COMMERCIAL LAW 311
2012 BAR OPERATIONS

qualification. A person who indorses without the use of a check points to its immediate use and
qualification engages that on due presentment, the payability. (INT’L CORP. BANK VS. SPOUSES
note shall be accepted or paid, or both as the case GUECO)
may be, and that if it be dishonored, he will pay the
amount thereof to the holder. Appellant Sambok's DISHONOR
intention of indorsing the note without qualification is Petitioner’s claim that respondent’s
made even more apparent by the fact that the notice acceptance of the Solid Bank check which replaced
of demand, dishonor, protest and presentment were the dishonored Prudential bank check resulted to
all waived. The words added by said appellant do novation which discharged the latter check is
not limit his liability, but rather, confirm his obligation unmeritorious.
as a general indorser. (METROPOL VS. SAMBOK) In Nyco Sales Corporation v. BA Finance
Corporation, we found untenable petitioner Nyco’s
The collecting bank or last endorser claim that novation took place when the dishonored
generally suffers the loss because it has the duty to BPI check it endorsed to BA Finance Corporation
ascertain the genuineness of all prior endorsements was subsequently replaced by a Security Bank
considering that the act of presenting the check for check.
payment to the drawee is an assertion that the party In this case, respondent’s acceptance of the
making the presentment has done its duty to Solid Bank check, which replaced the dishonored
ascertain the genuineness of the endorsements." Prudential Bank check, did not result to novation as
The rule finds more meaning in this case where the there was no express agreement to establish that
check involved is drawn on a foreign bank and petitioner was already discharged from his liability to
therefore collection is more difficult than when the pay respondent the amount of P214,000.00 as
drawee bank is a local one even though the check in payment for the 300 bags of rice. As we said,
question is a manager's check. (BPI VS. CA AND novation is never presumed, there must be an
NAPIZA) express intention to novate. In fact, when the Solid
Bank check was delivered to respondent, the same
PRESENTMENT FOR PAYMENT/ACCEPTANCE was also indorsed by petitioner which shows
A letter of credit is defined as an petitioner’s recognition of the existing obligation to
engagement by a bank or other person made at the respondent to pay P214,000.00 subject of the
request of a customer that the issuer will honor replaced Prudential Bank check. Anamer Salazar
drafts or other demands for payment upon vs. J.Y. Brothers Marketing Corporation,G.R. No.
compliance with the conditions specified in the 171998, October 20, 2010.
credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise to Among the different types of checks issued
pay of one of its customers who in return promises by a drawer is the crossed check. The Negotiable
to pay the bank the amount of funds mentioned in Instruments Law is silent with respect to crossed
the letter of credit plus credit or commitment fees checks, although the Code of Commerce makes
mutually agreed upon. reference to such instruments. We have taken
In the instant case then, the drawee was judicial cognizance of the practice that a check with
necessarily the herein petitioner. It was to the latter two parallel lines in the upper left hand corner
that the drafts were presented for payment. In fact, means that it could only be deposited and could not
there was no need for acceptance as the issued be converted into cash. Thus, the effect of crossing
drafts are sight drafts. Presentment for acceptance a check relates to the mode of payment, meaning
is necessary only in the cases expressly provided for that the drawer had intended the check for deposit
in Section 143 of the Negotiable Instruments Law only by the rightful person, i.e., the payee named
(NIL). (PRUDENTIAL BANK VS. IAC) therein. The change in the mode of paying the
obligation was not a change in any of the objects or
Under Section 186 of the NIL, “ a check principal condition of the contract for novation to
must be presented for payment within a reasonable take place.
time after its issue or the drawer will be discharged Considering that when the Solid Bank
from liability thereon to the extent of the loss caused check, which replaced the Prudential Bank check,
by the delay”. By current banking practice, a check was presented for payment, the same was again
becomes stale after more than 6 months or 180 dishonored; thus, the obligation which was secured
days. by the Prudential Bank check was not extinguished
A stale check is one which has not been and the Prudential Bank check was not discharged.
presented for payment within a reasonable time after Thus, we found no reversible error committed by the
its issue. It is valueless and therefore should not be CA in holding petitioner liable as an accommodation
paid. This is because the nature and theory behind indorser for the payment of the dishonored
 Saint Louis University COMMERCIAL LAW 312
2012 BAR OPERATIONS

Prudential Bank check. Anamer Salazar vs. J.Y. deposited to the payee’s account only. Vicente Go
Brothers Marketing Corporation, G.R. No. 171998, vs. Metropolitan Bank and Trust Co., G.R. No.
October 20, 2010. 168842, August 11, 2010.

CHECKS While it is true that the delivery of a check

The drawing and negotiation of a check produces the effect of payment only when it is
have certain effects aside from the transfer of title or cashed, pursuant to Art. 1249 of the Civil Code, the
the incurring of liability in regard to the instrument by rule is otherwise if the debtor is prejudiced by the
the transferor. The holder who takes the negotiated creditor's unreasonable delay in presentment. The
paper makes a contract with the parties on the face acceptance of a cheek implies an undertaking of due
of the instrument. There is an implied representation diligence in presenting it for payment, and if he from
that funds or credit are available for the payment of whom it is received sustains loss by want of such
the instrument in the bank upon which it is drawn. diligence, it will be held to operate as actual
Consequently, the withdrawal of the money from the payment of the debt or obligation for which it was
bank to avoid liability on the checks cannot prejudice given. It has, likewise, been held that if no
the rights of a holder in due course. (STATE presentment is made at all, the drawer cannot be
INVESTMENT HOUSE VS. CA) held liable irrespective of loss or injury unless
presentment is otherwise excused.
In order to preserve the credit worthiness of This is in harmony with Article 1249 of the
checks, jurisprudence has pronounced that crossing Civil Code under which payment by way of check or
of a check should have the following effects: (a) the other negotiable instrument is conditioned on its
check may not be encashed but only deposited in being cashed, except when through the fault of the
the bank; (b) the check may be negotiated only creditor, the instrument is impaired. The payee of a
once-to one who has an account with a bank; (c) check would be a creditor under this provision and if
and the act of crossing the check serves as warning its non-payment is caused by his negligence,
to the holder that the check has been issued for a payment will be deemed effected and the obligation
definite purpose so that he must inquire if he has for which the check was given as conditional
received the check pursuant to that purpose, payment will be discharged. (PAPA VS. A.U.
otherwise, he is not a holder in due course. VALENCIA & CO., INC.)
(BATAAN CIGAR & CIGARETTE FACTORY VS.
CA) Respondent bank was negligent in
permitting the deposit and encashment of the
A check is a bill of exchange drawn on a crossed checks without the proper indorsement. An
bank payable on demand. There are different kinds indorsement is necessary for the proper negotiation
of checks. In this case, crossed checks are the of checks specially if the payee named therein or
subject of the controversy. A crossed check is one holder thereof is not the one depositing or encashing
where two parallel lines are drawn across its face or it. Knowing fully well that the subject checks were
across the corner thereof. It may be crossed crossed, that the payee was not the holder and that
generally or specially. the checks contained no indorsement, respondent
A check is crossed specially when the name bank should have taken reasonable steps in order to
of a particular banker or a company is written determine the validity of the representations made
between the parallel lines drawn. It is crossed by Chua. Respondent bank was amiss in its duty as
generally when only the words “and company” are an agent of the payee. Prudence dictates that
written or nothing is written at all between the respondent bank should not have merely relied on
parallel lines, as in this case. It may be issued so the assurances given by Chua.
that presentment can be made only by a bank. Negligence was committed by respondent
The Court has taken judicial cognizance of bank in accepting for deposit the crossed checks
the practice that a check with two parallel lines in the without indorsement and in not verifying the
upper left hand corner means that it could only be authenticity of the negotiation of the checks. The law
deposited and not converted into cash. The effect imposes a duty of extraordinary diligence on the
of crossing a check, thus, relates to the mode of collecting bank to scrutinize checks deposited with it,
payment, meaning that the drawer had intended the for the purpose of determining their genuineness
check for deposit only by the rightful person, i.e., the and regularity. As a business affected with public
payee named therein. The crossing of a check is a interest and because of the nature of its functions,
warning that the check should be deposited only in the banks are under obligation to treat the accounts
the account of the payee. Thus, it is the duty of the of its depositors with meticulous care, always having
collecting bank to ascertain that the check be in mind the fiduciary nature of the relationship. The
 Saint Louis University COMMERCIAL LAW 313
2012 BAR OPERATIONS

fact that this arrangement had been practiced for (China Bank in this case) would not have paid the
three years without Mr. Go/Hope Pharmacy raising value of the subject check.
any objection does not detract from the duty of the Petitioner, as the collecting bank or
bank to exercise extraordinary diligence. Thus, the last indorser, generally suffers the loss because it
Decision of the RTC, as affirmed by the CA, holding has the duty to ascertain the genuineness of all
respondent bank liable for moral damages is prior indorsements considering that the act of
sufficient to remind it of its responsibility to exercise presenting the check for payment to the drawee is
extraordinary diligence in the course of its business an assertion that the party making the presentment
which is imbued with public interest. Vicente Go vs. has done its duty to ascertain the genuineness of
Metropolitan Bank and Trust Co., G.R. No. 168842, prior indorsements.
August 11, 2010. Accordingly, one who credits the proceeds
of a check to the account of the indorsing payee is
Check; indorsement by a co-payee. liable in conversion to the non-indorsing payee for
Section 41 of the Negotiable Instruments Law the entire amount of the check.
provides: “Where an instrument is payable to the Granting petitioner’s appeal for partial
order of two or more payees or indorsees who are liability would run counter to the existing principles
not partners, all must indorse unless the on the liabilities of parties on negotiable instruments,
one indorsing has authority to indorse for the particularly on Section 68 of the Negotiable
others.” Instruments Law which instructs that joint payees
Bitanga alone endorsed the crossed check, who indorse are deemed to indorse jointly and
and petitioner allowed the deposit and release of the severally. When the maker dishonors the instrument,
proceeds thereof, despite the absence of authority the holder thereof can turn to those secondarily
of Bitanga’s co-payee BA Finance to endorse it on liable — the indorser — for recovery. Since the law
its behalf. explicitly mandates a solidary liability on the part of
Petitioner’s argument that since there was the joint payees who indorse the instrument, the
neither forgery, nor unauthorized indorsement holder thereof (assuming the check was further
because Bitanga was a co-payee in the subject negotiated) can turn to either Bitanga or BA Finance
check, the dictum in Associated Bank v. CA does for full recompense. Metropolitan Bank and Trust
not apply in the present case fails. Company, etc. vs. BA Finance Corporation and
The payment of an instrument over a Malayan Insurance Co, Inc., G.R. No. 179952,
missing indorsement is the equivalent of payment on December 4, 2009.
a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees. Checks; crossed checks. A crossed
Petitioner, through its employee, was check is one where two parallel lines are drawn
negligent when it allowed the deposit of the crossed across its face or across its corner. Based on
check, despite the lone endorsement of Bitanga, jurisprudence, the crossing of a check has the
ostensibly ignoring the fact that the check did not following effects: (a) the check may not be encashed
carry the indorsement of BA Finance. Metropolitan but only deposited in the bank; (b) the check may be
Bank and Trust Company, etc. vs. BA Finance negotiated only once — to the one who has an
Corporation and Malayan Insurance Co, Inc., G.R. account with the bank; and (c) the act of crossing
No. 179952, December 4, 2009. the check serves as a warning to the holder that the
check has been issued for a definite purpose and he
Check; liability of collecting bank. The must inquire if he received the check pursuant to this
provisions of the Negotiable Instruments Law and purpose; otherwise, he is not a holder in due course.
underlying jurisprudential teachings on the black- In other words, the crossing of a check is a warning
letter law provide definitive justification for that the check should be deposited only in the
petitioner’s full liability on the value of the check. account of the payee. When a check is crossed, it is
To be sure, a collecting bank, Asianbank in the duty of the collecting bank to ascertain that the
this case, where a check is deposited and check is only deposited to the payee’s account. In
which indorses the check upon presentment with complete disregard of this duty, PCIB’s systems
the drawee bank, is an indorser. This is because allowed Balmaceda to encash 26 Manager’s checks
in indorsing a check to the drawee bank, a collecting which were all crossed checks, or checks payable to
bank stamps the back of the check with the phrase the “payee’s account only.” Philippine Commercial
“all prior endorsements and/or lack of endorsement Bank vs. Antonio B. Balmaceda and Rolando N.
guaranteed” and, for all intents and purposes, treats Ramos, G.R. No. 158143, September 21, 2011.
the check as a negotiable instrument, hence,
assumes the warranty of an indorser. Check; issuance for consideration.
Without Asianbank’s warranty, the drawee bank Upon issuance of a check, in the absence of
 Saint Louis University COMMERCIAL LAW 314
2012 BAR OPERATIONS

evidence to the contrary, it is presumed that the the mortgage contract, the proceeds from such
same was issued for valuable consideration which insurance will be applied to the payment of the
may consist either in some right, interest, profit or mortgage debt, thereby relieving the heirs of the
benefit accruing to the party who makes the mortgagor from paying the obligation. In a similar
contract, or some forbearance, detriment, loss or vein, ample protection is given to the mortgagor
some responsibility, to act, or labor, or service given, under such a concept so that in the event of death;
suffered or undertaken by the other side. Under the the mortgage obligation will be extinguished by the
Negotiable Instruments Law, it is presumed that application of the insurance proceeds to the
every party to an instrument acquires the same for a mortgage indebtedness. (GREPALIFE VS. CA &
consideration or for value. As petitioner alleged that LEUTERIO)
there was no consideration for the issuance of the
subject checks, it devolved upon him to present Contract; insurance surety. Section 175
convincing evidence to overthrow the presumption of the Insurance Code defines a suretyship as a
and prove that the checks were in fact issued contract or agreement whereby a party, called the
without valuable consideration. Sadly, however, surety, guarantees the performance by another
petitioner has not presented any credible evidence party, called the principal or obligor, of an obligation
to rebut the presumption, as well as North Star’s or undertaking in favor of a third party, called the
assertion, that the checks were issued as payment obligee. It includes official recognizances,
for the US$85,000 petitioner owed. Engr. Jose E. stipulations, bonds or undertakings issued under Act
Cayanan vs. North Star International Travel, Inc. 536, as amended. Suretyship arises upon the
G.R. No. 172954. October 5, 2011 solidary binding of a person – deemed the surety –
with the principal debtor, for the purpose of fulfilling
an obligation. Such undertaking makes a surety
INSURANCE LAW agreement an ancillary contract as it presupposes
the existence of a principal contract. Although the
INSURABLE INTEREST contract of a surety is in essence secondary only to
A person who is interested in the safety and a valid principal obligation, the surety becomes liable
preservation of materials in his possession for the debt or duty of another although it possesses
belonging to third parties because he stands either no direct or personal interest over the obligations nor
to benefit from their continued existence or to be does it receive any benefit therefrom. And
prejudiced by their destruction, has an insurable notwithstanding the fact that the surety contract is
interest thereon which is not necessarily limited to secondary to the principal obligation, the surety
the extent of his liability to the owners thereof. A assumes liability as a regular party to the
person having mere right of possession of property undertaking. First Lepanto-Taisho Insurance
may insure it to its full value and in his own name, Corporation (now known as FLT Prime Insurance
even when he is not responsible for its safekeeping. Corporation) vs. Chevron Philippines, inc. (formerly
(ANG KA YU vs. PHOENIX ASSURANCE CO. LTD known as Caltex Philippines, Inc.), G.R. No. 177839,
1CAR 2) January 18, 2012.

The automatic assignment of the policy to Insurance; effectivity of bonds. Lagman

CKS under the provision of the lease contract anchors his defense on two (2) arguments: 1) the
previously quoted is void for being contrary to law 1989 Bonds have expired and 2) the 1990 Bond
and/or public policy. The proceeds of the fire novates the 1989 Bonds. The Court of Appeals held
insurance policy thus rightfully belong to the that the 1989 bonds were effective only for one (1)
spouses Nilo Cha and Stella Uy-Cha (herein year, as evidenced by the receipts on the payment
copetitioners), The insurer (United) cannot be of premiums. The Supreme Court did not agree.
compelled to pay the proceeds of the fire insurance The official receipts in question serve as
policy to a person (CKS) who has no insurable proof of payment of the premium for one year on
interest in the property insured. (SPOUSES CHA vs. each surety bond. It does not, however,
CA, 277 SCRA 690) automatically mean that the surety bond is effective
for only one (1) year. In fact, the effectivity of the
The rationale of a group insurance policy of bond is not wholly dependent on the payment of
mortgagors, otherwise known as the "mortgage premium. Section 177 of the Insurance Code
redemption insurance," is a device for the protection expresses:
of both the mortgagee and the mortgagor. On the Sec. 177. The surety is entitled to payment
part of the mortgagee, it has to enter into such form of the premium as soon as the contract of suretyship
of contract so that in the event of the unexpected or bond is perfected and delivered to the obligor. No
demise of the mortgagor during the subsistence of contract of suretyship or bonding shall be valid and
 Saint Louis University COMMERCIAL LAW 315
2012 BAR OPERATIONS

binding unless and until the premium therefor has When the insurance company pays for the
been paid, except where the obligee has accepted loss, such payment operates as an equitable
the bond, in which case the bond becomes valid and assignment to the insurer of the property and all
enforceable irrespective of whether or not the remedies which the insured may have for the
premium has been paid by the obligor to the recovery thereof. That right is not dependent upon,
surety:Provided, That if the contract of suretyship or nor does it grow out of, any privity of contract, or
bond is not accepted by, or filed with the obligee, the upon written assignment of claim, and payment to
surety shall collect only reasonable amount, not the insured makes the insurer an assignee in equity.
exceeding fifty per centum of the premium due (MALAYAN INSURANCE VS. CA)
thereon as service fee plus the cost of stamps or
other taxes imposed for the issuance of the contract There are a few recognized exceptions to
or bond: Provided, however, That if the non- this rule on subrogation. For instance, if the assured
acceptance of the bond be due to the fault or by his own act releases the wrongdoer or third party
negligence of the surety, no such service fee, liable for the loss or damage, from liability, the
stamps or taxes shall be collected.Country Bankers insurer's right of subrogation is defeated. Similarly,
Insurance Corporation v. Antonio Lagman, G.R. No. where the insurer pays the assured the value of the
165487, July 13, 2011. lost goods without notifying the carrier who has in
good faith settled the assured's claim for loss, the
SUBROGATION settlement is binding on both the assured and the
Based on the applicable jurisprudence, insurer, and the latter cannot bring an action against
because of the inadequacy of the Marine Cargo Risk the carrier on his right of subrogation. And where the
Note for the reasons already stated, it was insurer pays the assured for a loss which is not a
incumbent on respondent to present in evidence the risk covered by the policy, thereby effecting
Marine Insurance Policy, and having failed in doing "voluntary payment", the former has no right of
so, its claim of subrogation must necessarily fail. subrogation against the third party liable for the loss.
A marine risk note is not an insurance (PAN MALAYAN INSURANCE CORP. VS. CA)
policy. It is only an acknowledgment or declaration
of the insurer confirming the specific shipment INCONTESTABILITY CLAUSE
covered by its marine open policy, the evaluation of Section 48 of the Insurance Code precludes
the cargo and the chargeable premium. The Marine the insurer from raising the defense of false
Risk Note relied upon by respondent as the basis for representations or concealment of material facts
its claim for subrogation is insufficient to prove said insofar as health and previous diseases are
claim. Eastern Shipping Lines, Inc. vs. Prudential concerned if the insurance has been in force for at
Guarantee and Assurance, Inc., G.R. No. 174116, least 2 years during the insured’s lifetime. The
September 11, 2009 phrase “during the lifetime” in section 48 means that
the policy is no longer considered in force after the
The insurer can only be subrogated to only insured has died. The key phrase in section 48 is for
such rights as the insured may have. However if the a period of 2 years. The insurer has 2 years from the
insured, after receiving payment from the insurer, date of the issuance of the contract or its last
releases the wrongdoer who caused the loss, the reinstatement within which to contest the policy
insurer loses his rights against the latter. In such a whether or not the insured still lives within such
case, the insurer will be entitled to recover from the period. (TAN vs. CA 174 SCRA 403)
insured whatever it has paid to the latter, unless the
release was made with the consent of the insurer. MISCONDUCT OF INSURANCE AGENT
(MANILA MAHOGANY MANUFACTURING CORP. Where the applicant signs the application in
vs. CA, 154 SCRA 650) blank and authorizes the agent of the insurance
company to fill up the blank spaces for him, he made
Subrogation is a normal incident of them his own agent for that purpose and he is
indemnity insurance Upon payment of the loss, the responsible for their acts in that connection. If they
insurer is entitled to be subrogated pro tanto to any falsified the answers for him, he could not evade the
right of action which the insured may have against responsibility for the application being falsified.
the third person whose negligence or wrongful act (INSURANCE LIFE ASSURANCE CORP. vs.
caused the loss. FELICIANO, 74PHIL 468)
The right of subrogation is of the highest
equity. The loss in the first instance is that of the MARINE INSURANCE
insured but after reimbursement or compensation, it The fact that the subject matter insured was
becomes the loss of the insurer. loaded on two different barges did not make the
contract several and divisible as to the items
 Saint Louis University COMMERCIAL LAW 316
2012 BAR OPERATIONS

insured, where it was shown that the items insured who drives the car with his person must be duly
were not separately valued or separately insured licensed and not disqualified to drive a car.
and only one premium was paid for the entire Where a car is admittedly unlawfully and
shipment. (ORIENTAL ASSURANCE CORP. vs. CA wrongfully taken without the owner’s consent, such
200 SCRA459) taking constitutes or partakes the nature of theft for
purposes of recovery under the insurance policy.
The fact that the unseaworthiness of the (VILLACORTA vs. INSURANCE COMMISSION, 100
ship was unknown to the insured is immaterial in SCRA 467)
ordinary marine insurance and may not be used as a
defense to recover on the policy. The cargo owner is The requirement in an “authorized driver
required to look for a common carrier that keeps its clause” that the driver be permitted in accordance
vessels seaworthy. In the absence of stipulation that with the licensing or other law or regulations to drive
the insurer answers for perils of the ship, insurance the motor vehicle and is not disqualified from driving
cannot be recovered on losses from perils of the such motor vehicle by order of a court of law or by
ship. (ROQUE vs. IAC, 139SCRA 597) reason of an enactment or regulation in that behalf
applies only when the driver is driving under the
Under an all-risks policy, it is sufficient to insured’s order or with his permission. It does not
show that there was damage occasioned by some apply when the person driving is the insured himself.
accidental cause of any kind, and there is no (PALERMO vs. PYRAMID INSURANCE CO. INC.,
necessity to point to any particular cause. An all- 161 SCRA 677)
risks coverage extends all damages/ losses suffered
by the insured cargo except a.) loss or damage or LIFE INSURANCE
expense proximately caused by delay; b) loss or Where a life insurance policy is made
damage or expense proximately caused by the payable to one of the heirs of the person whose life
inherent vice or nature of the subject matter insured. is insured, the proceeds of the policy on the death of
Also it covers all losses except such as arising from the insured belong exclusively to the beneficiary and
the fraud of the insured. (FILIPINO MERCHANTS not to the estate of the person whose life was
INSURANCE CO. vs. CA, 179 SCRA 638) insured and such proceeds are his individual
property and not the property of the heirs of the
DOUBLE INSURANCE person whose life was insured. (DEL VAL vs. DEL
VAL, 29 PHIL 534)
The insurer may not recover under an
insurance policy if he has violated the conditions of The proceeds of a life insurance policy
the policy to the effect that he did not reveal the payable to the insured person’s estate, on which the
existence of other insurance policies over the same premiums were paid by the conjugal partnership,
properties as required by the warranty appearing on constitute community property and belong one-half
the face of the policy. (UNION MANUFACTURING to the husband exclusively, and the other half to the
CO. INC. vs. PHILIPPINE GURANTY CO. INC., 47 wife. If the premiums were paid partly with
SCRA 271) paraphernal and partly conjugal funds, the proceeds
are in like proportion, paraphernal in part and
REINSURANCE conjugal in part. (BPI vs. POSADAS, 56 PHIL 215)
In an action on a contract of reinsurance, as
a general rule, the reinsurer is entitled to avail itself According to the Article 2012 of the New
of every defense which the reinsured might urge in Civil Code that any person who is forbidden from
an action by the person originally insured. (GIBSON receiving any donation under Art. 739 cannot be
vs. REVILLA, 92 SCRA 219) named beneficiary of a life insurance policy by the
person who cannot make a donation to him. Both
IMPLIED WARRANTY OF SEAWORTHINESS are founded upon the same consideration which is
In every voyage policy of marine insurance, liberality. (INSULAR LIFE vs. EBRADO 80 SCRA
there is an implied warranty that the vessel is in all 181)
respect seaworthy, and such warranty can be
excluded only by clear provisions of the policy. Insurance; health maintenance
(PHILIPPINE AMERICAN GENERAL INSURANCE organizations. Applying the “principal object and
CO. vs. CA 273 SCRA 262) purpose test,” there is significant American case law
supporting the argument that a corporation (such as
AUTHORIZED DRIVER CLAUSE an HMO, whether or not organized for profit), whose
The main purpose of the authorized driver main object is to provide the members of a group
clause is that a person other than the insured owner with health services, is not engaged in the insurance
 Saint Louis University COMMERCIAL LAW 317
2012 BAR OPERATIONS

business. Philippine Health Providers, Inc. vs. is sufficient to establish the amount paid to settle the
Commissioner of Internal Revenue, G.R. No. insurance claim. The right of subrogation accrues
167330, September 18, 2009. simply upon payment by the insurance company of
the insurance claim. In International Container
DST; HMO. A health From the language of Terminal Services, Inc. v. FGU Insurance
Section 185, it is evident that two requisites must Corporation, the Supreme Court explained:
concur before the DST can apply, namely: (1) the Indeed, jurisprudence has it that the marine
document must be a policy of insurance or an insurance policy needs to be presented in evidence
obligation in the nature of indemnity and (2) the before the trial court or even belatedly before the
maker should be transacting the business of appellate court. In Malayan Insurance Co., Inc. v.
accident, fidelity, employer’s liability, plate, glass, Regis Brokerage Corp., the Court stated that the
steam boiler, burglar, elevator, automatic sprinkler, presentation of the marine insurance policy was
or other branch of insurance (except life, marine, necessary, as the issues raised therein arose from
inland, and fire insurance). the very existence of an insurance contract between
Health care agreements are clearly not Malayan Insurance and its consignee, ABB Koppel,
within the ambit of Section 185 of the NIRC and even prior to the loss of the shipment. In Wallem
there was never any legislative intent to impose the Philippines Shipping, Inc. v. Prudential Guarantee
same on HMOs like petitioner. Philippine Health and Assurance, Inc., the Court ruled that the
Providers, Inc. vs. Commissioner of Internal insurance contract must be presented in evidence in
Revenue, G.R. No. 167330, September 18, 2009 order to determine the extent of the coverage. This
was also the ruling of the Court in Home Insurance
CASUALTY INSURANCE Corporation v. Court of Appeals.
Where the contract provides for indemnity However, as in every general rule, there are
against liability to third persons, then third persons to admitted exceptions. In Delsan Transport Lines, Inc.
whom the insured is liable, can sue directly the v. Court of Appeals, the Court stated that the
insurer upon the occurrence of the injury or event presentation of the insurance policy was not fatal
upon which the liability depends. The purpose is to because the loss of the cargo undoubtedly occurred
protect the injured person against the insolvency of while on board the petitioner’s vessel, unlike in
the insured who causes such injury and to give him Home Insurance in which the cargo passed through
a certain beneficial interest in the proceeds of the several stages with different parties and it could not
policy. It is as if such injured person were especially be determined when the damage to the cargo
named in person. (SHAFER vs. JUDGE, RTC, 167 occurred, such that the insurer should be liable for it.
SCRA 386) As in Delsan, there is no doubt that the loss
of the cargo in the present case occurred while in
COMPULSORY MOTOR VEHICLE LAW petitioner’s custody. Moreover, there is no issue as
INSURANCE regards the provisions of Marine Open Policy No.
Section 378 of the Insurance Code has MOP-12763, such that the presentation of the
established the following rules under the “no fault contract itself is necessary for perusal, not to
indemnity provision” 1.) a claim maybe made against mention that its existence was already admitted by
one motor vehicle only; 2) if the victim is an petitioner in open court. And even though it was not
occupant of a vehicle, the claim shall lie against the offered in evidence, it still can be considered by the
insurer of the motor vehicle in which he is riding, court as long as they have been properly identified
mounting, dismounting from; 3) in any other case by testimony duly recorded and they have
[i.e.] if the victim was not an occupant of the vehicle, themselves been incorporated in the records of the
the claim shall lie against the insurer of the directly case.
offending vehicle; 4) in all cases, the right of the Similarly, in this case, the presentation of
party paying the claim to recover the owner of the the insurance contract or policy was not necessary.
vehicle responsible for the accident shall be Asian Terminals, Inc. v. Malayan Insurance, Co.,
maintained. (PERLA COMPANIA DE SEGURO INC. Inc., G.R. No. 171406, April 4, 2011.
vs. ANCHETA 164 SCRA 144)

Insurance; presentation of policy as a TRANSPORTATION LAWS

condition for recovery by insurance company.
The presentation in evidence of the marine GENERAL CONCEPTS
insurance policy is not indispensable before the There are two aspects of a contract of
insurer may recover from the common carrier the common carriage, namely: a.) the contract to carry,
insured value of the lost cargo in the exercise of its at some future time, which contract is consensual
subrogatory right. The subrogation receipt, by itself, and is necessarily perfected by mere consent and
 Saint Louis University COMMERCIAL LAW 318
2012 BAR OPERATIONS

b.) the contract of carriage itself which should be The true test of a common carrier is the
considered as a real contract for not until the carrier carriage of goods or passengers provided it has
is actually used can the carrier be said to have space for all who opt to avail themselves of its
already assumed the obligation of a carrier. transportation for a fee. (NATIONAL STEEL CORP.
(BRITISH AIRWAYS, INC. VS. CA) VS. CA)

Art. 1732 of the New Civil Code avoids any The law of the country to which the goods
distinction between one whose principal business are to be transported governs the liability of the
activity is the carrying of persons or goods or both common carrier in case of their loss, destruction, or
and one who does such carrying only as an ancillary deterioration and it is immaterial that the collision
activity (sideline). It also avoids a distinction actually occurred in foreign waters. (NDC vs. CA)
between a person or enterprise offering
transportation service on a regular or scheduled The term “freight forwarder” refers to a firm
basis and one offering such service on an holding itself out to the general public (other than as
occasional, episodic or unscheduled basis. a pipeline, rail, motor, or water carrier) to provide
Neither does the law distinguish between a transportation of property for compensation and, in
carrier offering its services to the general public that the ordinary course of its business, (1) to assemble
is the general community or population and one who and consolidate, or to provide for assembling and
offers services or solicits business only from a consolidating, shipments, and to perform or provide
narrow segment of the general population. for break-bulk and distribution operations of the
A person or entity is a common carrier even shipments; (2) to assume responsibility for the
if he did not secure a Certificate of Public transportation of goods from the place of receipt to
Convenience. (DE GUZMAN VS. CA) the place of destination; and (3) to use for any part
of the transportation a carrier subject to the federal
One is a common carrier even if he has no law pertaining to common carriers. Unsworth
fixed and publicly known route, maintains no Transportation International (Phils.), Inc. vs. Court of
terminals, and issues no tickets. (ASIA Appeals and Pioneer Insurance and Surety
LIGHTERAGE SHIPPING, INC. VS. CA) Corporation, G.R. No. 166250, July 26, 2010.

Art. 1732 makes no distinction as to the A freight forwarder’s liability is limited to

means of transporting, as long as it is by land, water damages arising from its own negligence, including
or air. It does not provide that the transportation negligence in choosing the carrier; however, where
should be by motor vehicle. the forwarder contracts to deliver goods to their
The test for determining whether a party is a destination instead of merely arranging for their
common carrier is: transportation, it becomes liable as a common
1. It must be engaged in the carrier for loss or damage to goods. A freight
business of carrying goods for others as a forwarder assumes the responsibility of a carrier,
public employment and must hold itself out which actually executes the transport, even though
as ready to engage in the transportation of the forwarder does not carry the merchandise itself.
goods generally as a business and not as a Unsworth Transportation International (Phils.), Inc.
casual occupation; vs. Court of Appeals and Pioneer Insurance and
2. It must undertake to carry Surety Corporation, G.R. No. 166250, July 26, 2010.
goods of the kind to which its business in
confined;
3. It must undertake to carry REGISTERED OWNER AND KABIT SYSTEM
by the method by which his business is The registered owner of a certificate of
conducted and over its established roads; public convenience is liable to the public for the
and injuries or damages suffered by passengers or third
4. The transportation must be persons caused by the operation of said vehicle,
for hire. (FIRST PHILIPPINE INDUSTRIAL even thought the same had been transferred to a
CORPORATION VS. CA) third person. (EREZO VS. JEPTE)

The kabit system is an arrangement

whereby a person who has been granted a
certificate of public convenience allows other
persons who own motor vehicles to operate term
under his license, sometimes for a fee or percentage
of the earnings. (LIM VS. CA)
 Saint Louis University COMMERCIAL LAW 319
2012 BAR OPERATIONS

control and without its negligence being proved

Although not outrightly penalized as a relieves the carrier of civil liability for such loss or
criminal offense, the kabit system is invariably damage. (SAMAR MINING CO. INC. VS.
recognized as being contrary to public policy and, NORDEUTSHER LLOYD)
therefore, void and inexistent under Art. 1409 of the
Civil Code. It is a fundamental principle that the Owing to the high degree of diligence
court will not aid either party to enforce an illegal required of them, common carriers as a general rule
contract, but will leave them both where it finds are presumed to have been at fault or negligent if
them. (LITA ENTERPRISES, INC. VS. IAC) the goods they transported deteriorated or got lost or
Where a jeepney is registered in the name destroyed. Mere proof of delivery of the goods in
of an authorized public operator but is actually good order to a common carrier and of their arrival in
owned by another and the same bumped somebody bad order at their destination constitutes a prima
thru the negligence of its driver, such a jeepney can facie case of fault or negligence against the carrier.
be sold at a public auction to satisfy the court’s (BELGIAN OVERSEAS CHARTERING AND
award. It cannot be considered a “stranger’s SHIPPING N.V. VS. PHILIPPINE FIRST
property”. (SANTOS VS. SIBUG) INSURANCE CO., INC.)

CARRIAGE OF GOODS Mere proof of delivery of goods to a carrier

Duty to Accept goods in good order and the subsequent arrival of the
Common carriers cannot lawfully decline to same goods at the place of destination in bad order
accept a particular class of goods for carriage to the makes for a prima facie case against the carrier.
prejudice of the traffic in those goods unless it (COASTWISE LIGHTERAGE CORP. V. CA)
appears that for some sufficient reason the
discrimination against the traffic in such goods is Delivery of goods to the custom authorities
reasonable and necessary. Mere prejudice or whim is not delivery to the consignee. (LU DO V.
will not suffice. (FISHER VS. YANGCO STEAMSHIP BINAMIRA)
CO.)
DEFENSES
Duty to exercise extraordinary diligence Where fortuitous event or force majeure is
Common carriers, from the nature of their the immediate and proximate cause of the loss, the
business and for reasons of public policy, are bound obligor is exempt from liability for non-performance.
to observe extraordinary diligence in the vigilance No extraordinary diligence by the carrier
over the goods transported by them, and this liability could have prevented the loss of the goods after
lasts from the time the goods are unconditionally they had been deposited in the warehouse of the
placed in the possession of, and received by the Bureau of Customs. (SERVANDO VS. PHILIPPINE
carrier for transportation until the same are delivered STEAM NAVIGATION CO.)
actually or constructively, by the carrier to the person
who has a right to receive them. (SARKIES TOURS Where loss of cargo results from the failure
PHILIPPINES, INV. VS. CA) of the officers of a vessel to inspect their ship
frequently, that loss cannot be attributed to force
When goods placed in its care are lost or majeure, but to the negligence of the officials.
damaged, the carrier is presumed to have been at (EDGAR COKALIONG SHIPPING LINES, INC. VS.
fault or to have acted negligently. The carrier UCPB GENERAL INSURANCE COMPANY INC.)
therefore has the burden of proving that it observed
extraordinary diligence in order to avoid Fire may not be considered as a natural
responsibility for the lost cargo. (TABACALERA disaster or calamity as it arises almost invariably
INSURANCE CO. VS. NORTH FRONT SHIPPING from some act of man or by human means.
SERVICES, INC.) (EASTERN SHIPPING LINES INC. VS. IAC)

The extraordinary responsibility of the To exculpate the carrier from liability arising
common carrier lasts until the actual or constructive from hijacking, he must prove that the robbers or the
delivery of the cargoes to the consignee or to the hijackers acted with grave or irresistible threat,
person who has a right to receive them. (MACAM violence, or force in accordance with Art.1745 of the
VS. CA) Civil Code. (BASCOS VS. CA)

After a common carrier’s status has passed In order that a common carrier may be
from that of carrier to that of agent of consignee, absolved from liability where the loss, destruction or
loss of goods in its hands for cause beyond its deterioration of the goods is due to a natural disaster
 Saint Louis University COMMERCIAL LAW 320
2012 BAR OPERATIONS

or calamity, it must further be shown that such becomes the duty of the driver and the conductor,
natural disaster or calamity was the proximate and every time the bus stops, to do no act that would
only cause of the loss and that the common carrier have the effect of increasing the peril to a passenger
exercised due diligence to prevent or minimize the while he is attempting to board the same. The victim
loss before, during, and after the occurrence of the herein, by stepping and standing on the platform of
natural disaster. (PHILIPPINE AMERICAN the bus, is already considered a passenger and is
GENERAL INSURANCE CO., INC. VS. MGG entitled to all the rights and protection pertaining to
MARINE SERVICES, INC.) such a contractual relation. (DANGWA
TRANSPORTATION CO. INC. VS. CA)
To absolve the common carrier from liability
the public authority must be shown to have the The duty of a common carrier to provide
power to issue the order or that it was lawful, or that safety to its passengers so obligates it not only
it was issued under legal process of authority. during the course of the trip but for as long as the
(GANZON VS. CA) passengers are within its premises and where they
ought to be in pursuance of the contract of carriage.
If the improper packing or the defects in the (LIGHT RAIL TRANSIT AUTHORITY VS.
container are known to the carrier or his employees NAVIDAD)
or apparent upon ordinary observation, but he
nevertheless accepts the same without protest or The relation of carrier and passenger does
exception notwithstanding such condition, he is not not cease at the moment the passenger alights from
relieved of liability for damage resulting therefrom. the carrier’s vehicle at a place selected by the carrier
(CALVO VS. UCPB GENERAL INSURANCE CO., at the point of destination, but continues until the
INC.) passenger has had a reasonable time or a
reasonable opportunity to leave the carrier’s
CARRIAGE OF PASSENGERS premises. (LA MALLORCA VS. CA)
A passenger is defined as one who travels
in a public conveyance by virtue of a contract, A contract to transport passengers is a
express or implied, with the carrier as to the relationship imbued with public interest. Failure on
payment of fare, or that which is accepted as an the part of the common carrier to live up to the
equivalent thereof. The relation of carrier and exacting standards of care and diligence renders it
passenger commences when one puts himself in the liable for any damages that may be sustained by its
care of carrier, or directly under its control, with the passengers. However, this is not to say that
bona fide intention of becoming a passenger and is common carriers are absolutely responsible for all
accepted by the carrier, as where he makes a injuries even if the same were caused by a fortuitous
contract for transportation and presents himself at event. To rule otherwise would render the defense of
the proper place and in a proper manner to be force majeure, as an exception from any liability,
transported. (JESUSA VDA DE NUECA, ET AL. VS. illusory and ineffective. (JAPAN AIRLINES VS. CA)
MANILA RAILROAD COMPANY)
A common carrier does not give its consent
The relation of carrier and passenger to become an insurer of any and all risks to
continues until the passenger has been landed at passengers and goods. It merely undertakes to
the port of destination and has left the vessel perform certain duties to the public as the law
owner’s dock or premises. Once created, the imposes, and holds itself liable for any breach
relationship will not ordinarily terminate until the thereof. (PILAPIL VS. CA)
passenger has, after reaching his destination, safely
alighted from the carrier’s conveyance or had a While a passenger is entitled to protection
reasonable opportunity to leave the carrier’s from personal violence by the carrier or its agents or
premises. All persons who remain on the premises a employees, since the contract of transportation
reasonable time after leaving the conveyance are to obligates the carrier to transport a passenger safely
be deemed passengers, and what is a reasonable to his destination, the responsibility of the carrier
time or a reasonable delay within this rule is to be extends only to those acts that the carrier could
determined from all the circumstances, and includes foresee or avoid through the exercise of the degree
a reasonable time to see after his baggage and of care and diligence required of it. (GILLACO, ET
prepare for his departure. (ABOITIZ SHIPPING AL. VS. MRR CO.)
CORPORATION VS. CA)
OBLIGATIONS OF THE SHIPPER, CONSIGNEE
A public utility bus, once it stops, is in effect AND PASSENGER
making a continuous offer to bus riders. Hence, it
 Saint Louis University COMMERCIAL LAW 321
2012 BAR OPERATIONS

The act of the shipper in furnishing the

carrier with an inaccurate weight of the payloader The common carrier’s liability for the death
constitutes a contributory circumstance to the or injuries to its passengers is based on its
damage caused on the payloader, which mitigates contractual obligation to carry its passengers safely
the liability for damages of petitioner in accordance to their destination. They are presumed to have
with Art. 1741 of the Civil Code.( COMPANIA been at fault or to have acted negligently unless they
MARITIMA VS. CA) prove that they observed extraordinary diligence.
(BATANGAS LAGUNA TAYABAS BUS CO. VS.
A passenger is guilty of contributory IAC)
negligence where he chose to ride on the open
platform of the train and failed to hold tightly on the In an action based on a contract of carriage,
vertical grab bar. (PNR vs. CA) the court need not make an express finding of fault
or negligence on the part of the carrier in order to
It is to be noted that the Civil Code does not hold it responsible to pay the damages sought for by
limit the liability of the common carrier to a fixed the passenger. By the contract of carriage, the
amount per package. In all matters not regulated by carrier assumes the express obligation to transport
the Civil Code, the rights and obligations of common the passenger to his destination safely and to
carriers are governed by the Code of Commerce observe extraordinary diligence with due regard for
and special laws. Thus, the COGSA supplements all the circumstances, and any injury that might be
the Civil Code by establishing a provision limiting the suffered by the passenger is right away attributable
carrier’s liability in the absence of a shipper’s to the fault or negligence of the carrier. (BATANGAS
declaration of a higher value in the bill of lading. TRANSPORTATION COMPANY VS. CAGUIMBAL)
In the present case, the shipper did not
declare a higher valuation of the goods to be The rule is settled that a driver abandoning
shipped. his proper lane for the purpose of overtaking another
In light of the foregoing, petitioner’s liability vehicle in an ordinary situation has the duty to see to
should be limited to $500 per steel drum. In this it that the road is clear and not to proceed if he
case, as there was only one drum lost, private cannot do so in safety. (MALLARI, SR. VS. CA)
respondent is entitled to receive only $500 as
damages for the loss. In addition to said amount, as Fairness demands that in measuring a
aptly held by the trial court, an interest rate of common carrier’s duty towards its passengers,
6% per annum should also be imposed, plus 25% of allowance must be given to the reliance that should
the total sum as attorney’s fees. Unsworth be reposed on the sense of responsibility of all the
Transportation International (Phils.), Inc. vs. Court of passengers in regard to their common safety. It is to
Appeals and Pioneer Insurance and Surety be presumed that a passenger will not take with him
Corporation, G.R. No. 166250, July 26, 2010. anything dangerous to the lives and limbs of his co-
passengers, not to speak of his own. Not to be
EXTRAORDINARY DILIGENCE considered lightly is the right to privacy of each
While the breaking of the idler may be due passenger. He cannot be subjected to any unusual
to an accident, or to something unexpected, the search, when he protests the innocuousness of his
cause of the disaster which resulted in the loss of baggage and nothing appears to indicate the
the gasoline can only be attributed to the negligence contrary. (NOCUM VS. LAGUNA TAYABAS BUS
and lack of precaution to avert it on the part of CO.)
defendant. The ship was not seaworthy and
defendant did not have a competent tug to A common carrier is presumed at fault in
effectuate the rescue. (STANDARD VACUUM OIL the absence of a satisfactory explanation on how the
COMPANY VS. LUZON STEVEDORING CO., INC.) airplane crash occurred. (VDA. DE ABETO VS.
PHIL. AIR LINES, INC.)
The behavior of the captain of the “Don
Juan”- playing mahjong before and up to the time of BILL OF LADING AND OTHER FORMALITIES
the collision- constitutes behavior that is simply
unacceptable on the part of the master of the vessel A bill of lading is a written acknowledgement
upon whom the law imposes the duty of of the receipt of goods and an agreement to
extraordinary diligence- “the duty to carry the transport and to deliver them at a specified place to
passengers safely as far as human care and a person named or on his or her order. It operates
foresight can provide, using the utmost diligence of both as a receipt and as a contract. It is a receipt for
very cautious persons, with due regard for all the the goods shipped and a contract to transport and
circumstances.” (MECENAS VS. CA) deliver the same as therein stipulated. As a receipt,
 Saint Louis University COMMERCIAL LAW 322
2012 BAR OPERATIONS

it recites the date and place of shipment, describes A stipulation in the bill of lading limiting the
the goods as to quantity, weight, dimensions, common carrier’s liability for loss or destruction of a
identification marks, condition, quality, and value. As cargo to a certain sum, unless the shipper or owner
a contract, it names the contracting parties, which declares a greater value, is sanctioned by Articles
include the consignee; fixes the route, destination, 1749 and 1750 of the Civil Code. The just and
and freight rate or charges; and stipulates the rights reasonable character of a stipulation is implicit in it
and obligations assumed by the parties. Unsworth giving the shipper or owner the option of avoiding
Transportation International (Phils.), Inc. vs. Court of accrual of liability limitation by the simple expedient
Appeals and Pioneer Insurance and Surety and far from onerous expedient of declaring the
Corporation, G.R. No. 166250, July 26, 2010 nature and value of the shipment in the bill of lading.
(EVERETT STEAMSHIP CORPORATION VS. CA)
Three kinds of stipulation have often been
made in a bill of lading. The first is one exempting The issuance of a bill of lading carries the
the carrier from any and all liability for loss or presumption that the goods were delivered to the
damage occasioned by its own negligence. The carrier issuing the bill and it is prima facie evidence
second is one providing for an unqualified limitation of the receipt of the goods by the carrier. However
of such liability to an agreed valuation. And the third as between the shipper and the carrier, when no
is one limiting the liability of the carrier to an agreed goods have been delivered for shipment no recitals
valuation unless the shipper declares a higher value in the bill of lading can estop the carrier from
and pays a higher rate of freight. The first and showing the true facts. (SALUDO, JR. VS. CA)
second kinds of stipulations are invalid as being
contrary to public policy, but the third is valid and ACTIONS IN CASE OF BREACH OF CONTRACT
enforceable. (H.E. HEACOCK CO. VS. OF CARRIAGE
MACONDRAY & CO.) The owners and driver of the bus may be
made jointly and severally liable to the victims where
While it may be true that petitioner had not their separate and distinct acts concurred to produce
singed the plane ticket, he is nevertheless bound by the same injury. (FABRE, JR. VS CA)
the provisions thereof. Such provisions have been
held to be part of the contract of carriage, and valid Where the contract of shipment contains a
and binding upon the passenger regardless of the reasonable requirement of giving notice of loss or
latter’s lack of knowledge or assent to the regulation. injury to the goods, the giving of such notice is a
It is what is known as a contract of adhesion, in condition precedent to the action for loss or injury or
regards which it has been said that contracts of the right to enforce the carrier’s liability. The
adhesion wherein one party imposes a ready made fundamental purpose is not to relieve the carrier
form of contract on the other are contracts not from just liability, but reasonably to inform it that the
entirely prohibited. The one who adheres to the shipment has been damaged and that it is charged
contract is in reality free to reject it entirely; if he with liability therefore, and to give it an opportunity to
adheres, he gives his consent. (ONG YIU VS. CA ) examine the nature and extent of the injury.
(PHILIPPINE AMERICAN GENERAL INSURANCE
The consignee by making claim for loss on CO., INC. VS. SWEET LINES, INC.)
the basis of the bill of lading, to all intents and
purposes accepted said bill. Having done so, he For suits not predicated upon loss or
becomes bound by all stipulations contained therein damage but on alleged misdelivery or conversion of
whether on the front or at the back thereof. (SEA- the goods, the applicable rule on prescription is that
LAND SERVICE, INC. VS. IAC) found in the New Civil Code; either ten years for
breach of a written contract or four years for quasi-
Basic is the rule that a stipulation limiting delict, and not the rule on prescription in the
the liability of the carrier to the value of the goods COGSA. (ANG VS. AMERICAN STEAMSHIP
appearing in the bill of lading, unless the shipper or AGENCIES INC.)
owner declares a greater value, is binding. Further,
a contract fixing the sum that may be recovered by “Loss” refers to the deterioration or
the owner or shipper for the loss, destruction or disappearance of goods. Damages arising from
deterioration of the goods is valid, if it is reasonable delay or late delivery are not the damage or loss
and just under the circumstances, and has been contemplated under the COGSA. (MITSUI O.S.K.
fairly and freely agreed upon. (CITADEL LINES, LINES LTD. VS. CA)
INC. VS. CA)
The coverage of the one-year prescriptive
period under the COGSA includes the insurer of the
 Saint Louis University COMMERCIAL LAW 323
2012 BAR OPERATIONS

goods. Otherwise, what the Act intends to prohibit results in its extinction. The total destruction of the
after the lapse of the one-year prescriptive period vessel extinguishes maritime liens because there is
can be done indirectly by the shipper or owner of the no longer any res to which it can attach. (MONARCH
goods by simply filing a claim against the insurer INSURANCE CO., INC. VS. CA)
even after the lapse of one year. (FILIPINO
MERCHANTS INSURANCE CO., INC. VS. Art. 587 of the Code of Commerce speaks
ALEJANDRO) only of situations where the fault or negligence is
committed solely by the captain. Where the
Under Sec. 3 (6) of the COGSA, only the shipowner is likewise to be blamed, Art. 587 will not
carrier’s liability is extinguished if no suit is brought apply, and such situation will be covered by the
within one year. But the liability of the insurer is not provision of the Civil Code on common carriers.
extinguished because the insurer’s liability is based (PHILIPPINE AMERICAN GENERAL INSURANCE
not on the contract of carriage but on the contract of CO., INC. VS. CA)
insurance. (MAYER STEEL PIPE CORP. VS. CA)
The liability of a shipowner is limited to the
A written extrajudicial demand by the value of the vessel or to the insurance thereon.
creditor does not toll the running of the one-year Despite the total loss of the vessel therefore, its
prescriptive period under the Act. (DOLE insurance answers for the damages that a
PHILIPPINES, INC. VS MARITIME CO. OF THE shipowner or agent may be held liable for by reason
PHILS.) of the death of its passenger. (VASQUEZ VS. CA)

Under Section 3 (6) of the Carriage of The provisions of the Code of Commerce
Goods by Sea Act, notice of loss or damages must regarding maritime commerce have no room in the
be filed within three days of delivery. Admittedly, application of the Workmen’s Compensation Act.
respondent did not comply with this provision. Said Act creates a liability to compensate employees
Under the same provision, however, a or laborers in cases of injury received by or inflicted
failure to file a notice of claim within three days will upon them, while engaged in the performance of
not bar recovery if a suit is nonetheless filed within their work or employment, or the heirs and
one year from delivery of the goods or from the date dependents of such laborers and employees in the
when the goods should have been delivered. event of death caused by their employment.
In Loadstar Shipping Co., Inc. v. Court of (ABUEG VS. SAN DIEGO)
Appeals, the Court ruled that a claim is not barred by
prescription as long as the one-year period has not While the total destruction of the vessel
lapsed. Thus, in the words of the ponente,Chief extinguishes a maritime lien, as there is no longer
Justice Hilario G. Davide Jr.: “Inasmuch as neither any risk to which it can attach, but the total
the Civil Code nor the Code of Commerce states a destruction of the vessel does not affect the liability
specific prescriptive period on the matter, the of the owner for repairs of the vessel completed
Carriage of Goods by Sea Act (COGSA) — which before its loss. (GOVERNMENT OF THE
provides for a one-year period of limitation on claims PHILIPPINES VS. MARITIME)
for loss of, or damage to, cargoes sustained during
transit — may be applied suppletorily to the case at The owners and agents of a vessel causing
bar.” Wallem Philippines Shipping, Inc. vs. S.R. the loss of another vessel by collision are not liable
Farms, Inc., G.R. No. 161849, July 9, 2010. beyond the vessel itself causing the collision and
other things appertaining thereto.(PHILIPPINE
MARITIME LAW SHIPPING CO. VS. GARCIA)
The real and hypothecary nature of
maritime law simply means that the liability of the In case of collision, abandonment of the
carrier in connection with losses related to maritime vessel is necessary in order to limit the liability of the
contracts is confined to the vessel, which is shipowner or the agent to the value of the vessel, its
hypothecated for such obligations or which stands appurtenances and freightage earned in the voyage
as the guaranty for their settlement. (ABOITIZ in accordance with Art.837 of the Code of
SHIPPING CORP. VS. GENERAL ACCIDENT FIRE Commerce. The only instance where such
AND LIFE ASSURANCE CORP., LTD.) abandonment is dispensed with is when the vessel
was entirely lost. LUZON STEVEDORING CORP.
“No vessel, no liability”, expresses in a VS. CA
nutshell the limited liability rule. The shipowner’s or
agent’s liability is merely co-extensive with his If the shipowner or agent may in any way
interest in the vessel such that a total loss thereof be held civilly liable at all for injury to or death of
 Saint Louis University COMMERCIAL LAW 324
2012 BAR OPERATIONS

passengers arising form the negligence of the

captain in cases of collisions or shipwrecks, his Common carriers cannot limit their liability
liability is merely co-extensive with his interest in the for injury or loss of goods where such injury or loss
vessel such that a total loss thereof results in its was caused by its own negligence. Otherwise
extinction. (YANGCO VS. LASERNA) stated, the law on averages under the Code of
Commerce cannot be applied in determining liability
The requisite of registration on the registry, where there is negligence. (AMERICAN HOME
of the purchase of a vessel, is necessary and ASSURANCE, COMPANY VS. CA)
indispensable in order that the purchaser’s rights
may be maintained against a claim filed by a third A derelict is defined as a ship or her cargo
person. (RUBISO AND GELITO VS. RIVERA) which is abandoned and deserted at sea by those
who are in charge of it, without any hope of
A ship’s captain must be accorded a recovering it, or without any intention of returning to
reasonable measure of discretionary authority to it. If those in charge left with the intention of
decide what the safety of the ship and of its crew returning, or of procuring assistance, the property is
and cargo specifically requires on a stipulated ocean not derelict, but if they quitted the property with the
voyage. (INTER-ORIENT MARITIME intention of finally leaving it, it is derelict and a
ENTERPRISES INC. VS. CA) change of their intention and an attempt to return will
not change its nature. (ERLANGER & GALINGER
While in exercising his functions a pilot is in VS. SWEDISH EAST ASIATIC CO. LTD)
sole command of the ship and supersedes the
master for the time being in the command and Limited liability rule; availability. With
navigation of the ship, the master does not respect to petitioners’ position that the Limited
surrender his vessel to the pilot and the pilot is not Liability Rule under the Code of Commerce should
the master. There are occasions when the master be applied to them, the argument is misplaced. The
may and should interfere and even displace the said rule has been explained to be that of the real
pilot, as when the pilot is obviously incompetent or and hypothecary doctrine in maritime law where the
intoxicated. (FAR EASTERN SHIPPING COMPANY shipowner or ship agent’s liability is held as merely
VS. CA) co-extensive with his interest in the vessel such that
a total loss thereof results in its extinction. In this
It is imperative that a public carrier shall jurisdiction, this rule is provided in three articles of
remain as such, notwithstanding the charter of the the Code of Commerce. These are:
whole or portion of a vessel by one or more persons, Art. 587. The ship agent shall also be civilly
provided the charter is limited to the ship only, as in liable for the indemnities in favor of third persons
the case of a time-charter or voyage-charter. It is which may arise from the conduct of the captain in
only when the charter includes both the vessel and the care of the goods which he loaded on the vessel;
crew, as in demise or bareboat that a common but he may exempt himself therefrom by abandoning
carrier becomes private, at least insofar as the the vessel with all her equipment and the freight it
particular voyage covering the charter-party is may have earned during the voyage.
concerned. (PLANTERS PRODUCTS, INC. VS. Art. 590. The co-owners of the vessel shall
CA) be civilly liable in the proportion of their interests in
the common fund for the results of the acts of the
If the charter is a contract of affreightment captain referred to in Art. 587.
which leaves the general owner in possession of the Each co-owner may exempt himself from
ship as owner for the voyage, the rights and the this liability by the abandonment, before a notary, of
responsibilities of ownership rest on the owner. The the part of the vessel belonging to him.
charterer is free from liability to third persons in Art. 837. The civil liability incurred by
respect of the ship. (CALTEX (PHILIPPINES), INC. shipowners in the case prescribed in this section,
VS. SULPICIO LINES, INC.) shall be understood as limited to the value of the
vessel with all its appurtenances and freightage
Expenses incurred to refloat a vessel, which served during the voyage.
accidentally ran aground, in order to continue its Article 837 specifically applies to cases
voyage, do not constitute general average. Not only involving collision which is a necessary
is there absence of a marine peril, common safety consequence of the right to abandon the vessel
factor, and deliberateness. It is the safety of the given to the shipowner or ship agent under the first
property, and not the voyage, which constitutes the provision – Article 587. Similarly, Article 590 is a
true foundation of general average. (A. reiteration of Article 587, only this time the situation
MAGSAYSAY, INC. VS. AGAN) is that the vessel is co-owned by several persons.
 Saint Louis University COMMERCIAL LAW 325
2012 BAR OPERATIONS

Obviously, the forerunner of the Limited Liability could be returned, it was lost due to the negligence
Rule under the Code of Commerce is Article 587. of Agustin to whom Roland chose to sub-charter or
Now, the latter is quite clear on which indemnities sublet the vessel.
may be confined or restricted to the value of the PTSC is liable to Concepcion under Articles
vessel pursuant to the said Rule, and these are the 1665 and 1667 of the New Civil Code. As the
– “indemnities in favor of third persons which may charterer or lessee under the Contract of Agreement
arise from the conduct of the captain in the care of dated June 20, 1984, PTSC was contract-bound to
the goods which he loaded on the vessel.” Thus, return the thing leased and it was liable for the
what is contemplated is the liability to third persons deterioration or loss of the same.
who may have dealt with the shipowner, the agent or Agustin, on the other hand, who was the
even the charterer in case of demise or bareboat sub-charterer or sub-lessee of LCT-Josephine, is
charter. liable under Article 1651 of the New Civil Code.
The only person who could avail of this is Although he was never privy to the contract between
the shipowner, Concepcion. He is the very person PTSC and Concepcion, he remained bound to
whom the Limited Liability Rule has been conceived preserve the chartered vessel for the latter. Despite
to protect. The petitioners cannot invoke this as a his non-inclusion in the complaint of Concepcion, it
defense. Agustin P. Dela Torre v. The Hon. Court of was deemed amended so as to include him
Appeals, et al./Philippine Trigon Shipyard because, despite or in the absence of that formality
Corporation, et al. v. Crisostomo G. Concepcion, et of amending the complaint to include him, he still
al., G.R. No. 160088/G.R. No. 160565, July 13, had his day in court as he was in fact impleaded as
2011 a third-party defendant by his own son, Roland – the
very same person who represented him in the
Charterer and sub-charterer; liability. In Contract of Agreement with Larrazabal.
the present case, the charterer and the sub- In any case, all three petitioners are liable
charterer through their respective contracts of under Article 1170 of the New Civil Code. Agustin P.
agreement/charter parties, obtained the use and Dela Torre v. The Hon. Court of Appeals, et
service of the entire LCT-Josephine. The vessel was al./Philippine Trigon Shipyard Corporation, et al. v.
likewise manned by the charterer and later by the Crisostomo G. Concepcion, et al., G.R. No.
sub-charterer’s people. With the complete and 160088/G.R. No. 160565, July 13, 2011
exclusive relinquishment of possession, command
and navigation of the vessel, the charterer and later WARSAW CONVENTION
the sub-charterer became the vessel’s owner pro The Warsaw convention does not operate
hac vice. Now, and in the absence of any showing as an exclusive enumeration of the instances for
that the vessel or any part thereof was commercially declaring a carrier liable for breach of contract of
offered for use to the public, the above carriage or as an absolute limit of the extent of that
agreements/charter parties are that of a private liability. It must not be construed to preclude the
carriage where the rights of the contracting parties operation of the Civil Code and other pertinent laws.
are primarily defined and governed by the (CATHAY PACIFIC AIRWAYS, LTD. VS. CA)
stipulations in their contract.
Although certain statutory rights and The articles in the Warsaw Convention
obligations of charter parties are found in the Code merely declare the carrier liable for damages in the
of Commerce, these provisions as correctly pointed enumerated cases, if the conditions specified therein
out by the RTC, are not applicable in the present are present. Neither said provisions nor others
case. Indeed, none of the provisions found in the regulate or exclude liability for other breaches of
Code of Commerce deals with the specific rights and contract by the carrier. (NOTHWEST AIRLINES,
obligations between the real shipowner and the INC. VS CUENCA)
charterer obtaining in this case. Necessarily, the
Court looks to the New Civil Code to supply the The Warsaw Convention does not operate
deficiency. as an absolute limit of the extent of an airline’s
Thus, Roland, who, in his personal capacity, liability, it does not regulate or exclude liability for
entered into the Preliminary Agreement with other breaches of contract by the carrier, or
Concepcion for the dry-docking and repair of LCT- misconduct of its employees, or of some particular or
Josephine, is liable under Article 1189 of the New exceptional type of damage. (ALITALIA VS IAC)
Civil Code. There is no denying that the vessel was
not returned to Concepcion after the repairs There is international transportation: 1.)
because of the provision in the Preliminary where the place of departure and the place of
Agreement that the same “should” be used by destination are situated within the territories of two
Roland for the first two years. Before the vessel high contracting parties regardless of whether or not
 Saint Louis University COMMERCIAL LAW 326
2012 BAR OPERATIONS

there be a break of transportation or a Service Commission. (COGEO-CUBAO

transshipment; and 2.) where the place of departure OPERATORS & DRIVERS ASSOC. VS. CA)
and the place of destination are within the territory of
a single high contracting party if there is an agreed Nobody has the exclusive right to secure a
stopping place within a territory subject to the franchise or a Certificate of Public Convenience. The
sovereignty, mandate or authority of another power, paramount consideration should always be the
even though the power is not a party to the public interest and public convenience. (VDA. DE
convention. (MAPA VS. CA) LAT VS. PSC)

Under a general pool partnership Considering the environmental

agreement, the ticket-issuing airline is the principal circumstances of the case, the conveyance of
in a contract of carriage while the endorsee-airline is passengers, trucks and cargo from Matnog to Allen
the agent. The obligation of the former remained and is certainly not a ferry boat service but a coastwise
did not cease even when the breach occurred not on or interisland shipping service. Under no
its own flight but on that of another airline which had circumstance can the sea between Matnog and
undertaken to carry the passengers to one of their Allen be considered a continuation of the highway.
destinations. (CHINA AIRLINES VS. CHIOK0 ) While a ferry boat service has been considered as a
continuation of the highway when crossing rivers or
The forum of action provided in Art. 28(1) is even lakes, which are small body of waters -
a matter of jurisdiction rather than of venue. separating the land, however, when as in this case
It is the passenger’s “ultimate destination” the two terminals, Matnog and Allen are separated
not “an agreed stopping place” that determines the by an open sea it can not be considered as a
country where suit is to be filed. (SANTOS III V. continuation of the highway. Respondent
NORTHWEST) PANTRANCO should secure a separate CPC for the
operation of an interisland or coastwise shipping
A cause of action arising from the slashing service in accordance with the provisions of law. Its
and loss of personal effects by an airline passenger CPC as a bus transportation cannot be merely
is well within the bounds of the Warsaw Convention amended to include this water service under the
while a cause of action arising from the shabby and guise that it is a mere private ferry service. (SAN
humiliating treatment received from the airline PABLO VS. PANTRANCO SOUTH EXPRESS,
employees is not. (UNITED AIRLINES VS. UY) INC.)

PUBLIC UTILITIES Section 19 (a) of the Public Service Act

A certification of public convenience is contemplates of failure to provide a service that is
included in the term "property" in the broad sense of safe, proper or adequate and refusal to render any
the term. Under the Public Service Law, a certificate service which can reasonably be demanded and
of public convenience can be sold by the holder furnished. It refers specifically to the operator's
thereof because it has considerable material value inability to provide reliable vehicles to transport the
and is considered as valuable asset. Although there riding public to their places of destination and to the
is no doubt that it is private property, it is affected failure to provide an adequate number of units
with a public interest and must be submitted to the authorized under his franchise at all times to secure
control of the government for the common good. the public of sustained service. While the words
Hence, insofar as the interest of the State is "unsafe, inadequate and improper" may be broad
involved, a certificate of public convenience does not enough to cover a lot of things, they must be
confer upon the holder any proprietary right or interpreted in consonance with the purpose of the
interest or franchise in the route covered thereby Public Service Law, which was specifically enacted,
and in the public highways. However, with respect to among other things, to protect the public against
other persons and other public utilities, a certificate unreasonable charges and poor inefficient service
of public convenience as property, which represents and to secure adequate sustained service for the
the right and authority to operate its facilities for public at the least possible costs. (MANZANAL VS.
public service, cannot be taken or interfered with AUSEJO)
without due process of law. Appropriate actions may
be maintained in courts by the holder of the CORPORATION LAW
certificate against those who have not been
authorized to operate in competition with the former ATTRIBUTES OF A CORPORATION
and those who invade the rights which the former A corporation as known to Philippine
has pursuant to the authority granted by the Public jurisprudence is a creature without any existence
until it has received the imprimatur of the state
 Saint Louis University COMMERCIAL LAW 327
2012 BAR OPERATIONS

acting according to law. It is logically inconceivable While an individual may lawfully refuse to
therefore that it will have rights and privileges of a answer incriminating questions unless protected by
higher priority than that of its creator. More than that, an immunity statute, it does not follow that a
it cannot legitimately refuse to yield obedience to corporation, vested with special privileges and
acts of its state organs, Certainly not excluding the franchises, may refuse to show its hand when
judiciary, whenever called upon to do so. (TAYAG charged with an abuse of such privileges. (BASECO
VS. BENGUET CONSOLIDATED, INC.) vs. PCGG)

For practical purposes, franchises, so far as It is a doctrine well-established and obtains

relating to corporations, are divisible into (1) both at law and in equity that a corporation is a
corporate or general franchises; and (2) special or distinct legal entity to be considered as separate and
secondary franchises. The former is the franchise to apart from the individual stockholders or members
exist as a corporation, while the latter are certain who compose it, and is not affected by the personal
rights and privileges conferred upon existing rights, obligations and transactions of its
corporations such as the right to use the streets of a stockholders or members. The property of the
municipality to lay pipes of tracks, erect poles or corporation is its property and not that of the
string wires. stockholders, as owners, although they have
The primary franchise of a corporation, that equities in it. Properties registered in the name of
is, the right to exist as such, is vested 'in the the corporation are owned by it as an entity separate
individuals who compose the corporation and not in and distinct from its members. Conversely, a
the corporation itself and cannot be conveyed in the corporation ordinarily has no interest in the individual
absence of legislative authority so to do but the property of its stockholders unless transferred to the
special or secondary franchises of a corporation are corporation, "even in the case of a one-man
vested in the corporation and may ordinarily be corporation". (SULO NG BAYAN, INC. VS.
conveyed or mortgaged under a general power GREGORIO ARANETA, INC.)
granted to a corporation to dispose of its property
except such special or secondary franchises as are The tenor of the NLRC judgment and the
charged with a public use. (JRS BUSINESS CORP. implementing writ is clear enough. It directed
VS. IMPERIAL INSURANCE, INC.) Qualitrans Limousine Service, Inc. to reinstate the
discharged employees and pay them full
The guaranties of the Fourteenth backwages. Respondent, however, chose to "pierce
Amendment and so of the first paragraph of the the veil of corporate entity" usurping a power
Philippine Bill of Rights, are universal in their belonging to the court and assumed improvidently
application to all persons within the territorial that since the complainant is the owner/president of
jurisdiction, without regard to any differences of Qualitrans Limousine Service, Inc., they are one and
race, color, or nationality. The word "person" the same. It is a well-settled doctrine both in law and
includes aliens. Private corporations, likewise, are in equity that as a legal entity, a corporation has a
"persons" within the scope of the guaranties in so far personality distinct and separate from its individual
as their property is concerned. (SMITH, BELL & CO. stockholders or members. The mere fact that one is
VS. NATIVIDAD) president of a corporation does not render the
property he owns or possesses the property of the
A corporation is, after all, but an association corporation, since the president, as individual, and
of individuals under an assumed name and with a the corporation are separate entities. (CRUZ VS.
distinct legal entity. In organizing itself as a collective DALISAY)
body it waives no constitutional immunities
appropriate to such body. Its property cannot be Inasmuch as the real properties included in
taken without compensation. It can only be the inventory of the estate of the late Pastor Y. Lim
proceeded against by due process of law, and is are in the possession of and are registered in the
protected, under the 14th Amendment, against name of private respondent corporations, which
unlawful discrimination. under the law possess a personality separate and
In Stonehill, et al. vs. Diokno, et al., supra, distinct from their stockholders, and in the absence
this Court impliedly recognized the right of a of any cogency to shred the veil of corporate fiction,
corporation to object against unreasonable searches the presumption of conclusiveness of said titles in
and seizures. (BACHE & CO. VS. RUIZ) favor of private respondents should stand
undisturbed. (LIM VS. CA)
It is elementary that the right against self-
incrimination has no application to juridical persons.
 Saint Louis University COMMERCIAL LAW 328
2012 BAR OPERATIONS

The test in determining the applicability of juridical person. Therefore, a juridical person such
the doctrine of piercing the veil of corporate fiction is as a corporation can validly complain for libel or any
as follows: other form of defamation and claim for moral
1. Control, not mere majority or complete damages.
stock control, but complete domination, not only of Moreover, where the broadcast is libelous
finances but of policy and business practice in per se, the law implies damages.In such a case,
respect to the transaction attacked so that the evidence of an honest mistake or the want of
corporate entity as to this transaction had at the time character or reputation of the party libeled goes only
no separate mind, will or existence of its own; in mitigation of damages. Neither in such a case is
2. Such control must have been used by the the plaintiff required to introduce evidence of actual
defendant to commit fraud or wrong, to perpetuate damages as a condition precedent to the recovery of
the violation of a statutory or other positive legal some damages. In this case, the broadcasts are
duty, or dishonest and unjust act in contravention of libelous per se. Thus, AMEC is entitled to moral
plaintiff's legal rights; and damages. (FILIPINAS BROADCASTING
3.The aforesaid control and breach of duty NETWORK, INC. VS. AMEC-BCCM, JANUARY 21,
must proximately cause the injury or unjust loss 2005)
complained of.
The absence of any one of these elements An employee of a company or corporation
prevents 'piercing the corporate veil.' In applying the engaged in illegal recruitment may be held liable as
'instrumentality' or 'alter ego' doctrine, the courts are principal, together with his employer, if it is shown
concerned with reality and not form, with how the that he actively and consciously participated in
corporation operated and the individual defendant's illegal recruitment. It has been held that the
relationship to that operation." (CONCEPT existence of the corporate entity does not shield
BUILDERS, INC. VS. NLRC) from prosecution the corporate agent who knowingly
and intentionally causes the corporation to commit a
Furthermore, considering the nature of the crime. The corporation obviously acts, and can act,
legal services involved, whatever obligation said only by and through its human agents, and it is their
incorporators, directors and officers of the conduct which the law must deter. The employee or
corporation had incurred, it was incurred in their agent of a corporation engaged in unlawful business
personal capacity. When directors and officers of a naturally aids and abets in the carrying on of such
corporation are unable to compensate a party for a business and will be prosecuted as principal if, with
personal obligation, it is far-fetched to allege that the knowledge of the business, its purpose and effect,
corporation is perpetuating fraud or promoting he consciously contributes his efforts to its conduct
injustice, and be thereby held liable therefor by and promotion, however slight his contribution may
piercing its corporate veil. (FRANCISCO MOTORS be. (PEOPLE VS. CHOWDURY)
CORP. VS. CA)
In the absence of an express provision of
The award of moral damages cannot be law making the petitioner liable for the criminal
granted in favor of a corporation because, being an offense committed by the corporation of which lit is a
artificial person and having existence only in legal president as in fact them is no such provisions in the
contemplation, it has no feelings, no emotions, no Revised Penal Code under which petitioner is being
senses. It cannot, therefore, experience physical prosecuted, the existence of a criminal liability on his
suffering and mental anguish, which can be part may not be said to be beyond any doubt. In all
experienced only by one having a nervous system. criminal prosecutions, the existence of a criminal
The statement in People v. Maneroand Mambulao liability for which the accused is made answerable
Lumber Co. v. PNB that a corporation may recover must be clear and certain. (SIA VS. PEOPLE)
moral damages if it "has a good reputation that is Note: This case was decided at the time
debased, resulting in social humiliation" is an obiter when P.D. 115 or the Trust Receipts Law was not
dictum. On this score alone the award for damages yet in effect)
must be set aside, since RBS is a corporation. (ABS-
CBN vs. CA) Corporations; piercing the corporate veil.
Piercing the veil of corporate fiction is warranted
Nevertheless, AMEC’s claim for moral only in cases when the separate legal entity is used
damages falls under item 7 of Article 2219 of the to defeat public convenience, justify wrong, protect
Civil Code. This provision expressly authorizes the fraud, or defend crime, such that in the case of two
recovery of moral damages in cases of libel, slander corporations, the law will regard the corporations as
or any other form of defamation. Article 2219(7) merged into one. As succinctly discussed by the
does not qualify whether the plaintiff is a natural or Court in Velarde v. Lopez, Inc.:
 Saint Louis University COMMERCIAL LAW 329
2012 BAR OPERATIONS

Petitioner argues nevertheless that from any other legal entity to which it may be
jurisdiction over the subsidiary is justified by piercing related. This is basic.
the veil of corporate fiction. Piercing the veil of Equally well-settled is the principle that the
corporate fiction is warranted, however, only in corporate mask may be removed or the corporate
cases when the separate legal entity is used to veil pierced when the corporation is just an alter ego
defeat public convenience, justify wrong, protect of a person or of another corporation. For reasons of
fraud, or defend crime, such that in the case of two public policy and in the interest of justice, the
corporations, the law will regard the corporations as corporate veil will justifiably be impaled only when it
merged into one. The rationale behind piercing a becomes a shield for fraud, illegality or inequity
corporation’s identity is to remove the barrier committed against third persons.
between the corporation from the persons Hence, any application of the doctrine of
comprising it to thwart the fraudulent and illegal piercing the corporate veil should be done with
schemes of those who use the corporate personality caution. A court should be mindful of the milieu
as a shield for undertaking certain proscribed where it is to be applied. It must be certain that the
activities. corporate fiction was misused to such an extent that
In applying the doctrine of piercing the veil of injustice, fraud, or crime was committed against
corporate fiction, the following requisites must be another, in disregard of rights. The wrongdoing must
established: (1) control, not merely majority or be clearly and convincingly established; it cannot be
complete stock control; (2) such control must have presumed. Otherwise, an injustice that was never
been used by the defendant to commit fraud or unintended may result from an erroneous
wrong, to perpetuate the violation of a statutory or application.
other positive legal duty, or dishonest acts in Whether the separate personality of the
contravention of plaintiff’s legal rights; and (3) the corporation should be pierced hinges on obtaining
aforesaid control and breach of duty must facts appropriately pleaded or proved. However, any
proximately cause the injury or unjust loss piercing of the corporate veil has to be done with
complained of. (Citations omitted.) caution, albeit the Court will not hesitate to disregard
Nowhere, however, in the pleadings and the corporate veil when it is misused or when
other records of the case can it be gathered that necessary in the interest of justice. After all, the
respondent has complete control over Sky Vision, concept of corporate entity was not meant to
not only of finances but of policy and business promote unfair objectives.
practice in respect to the transaction attacked, so The doctrine of piercing the corporate veil
that Sky Vision had at the time of the transaction no applies only in three (3) basic areas, namely: 1)
separate mind, will or existence of its own. The defeat of public convenience as when the corporate
existence of interlocking directors, corporate officers fiction is used as a vehicle for the evasion of an
and shareholders is not enough justification to pierce existing obligation; 2) fraud cases or when the
the veil of corporate fiction in the absence of fraud or corporate entity is used to justify a wrong, protect
other public policy considerations.HaciendaLuisita fraud, or defend a crime; or 3) alter ego cases,
Incorporated vs. Presidential Agrarian Reform where a corporation is merely a farce since it is a
Council, G.R. No. 171101, November 22, 2011. mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled
Corporations; piercing the corporate veil. and its affairs are so conducted as to make it merely
Absent any allegation or proof of fraud or other an instrumentality, agency, conduit or adjunct of
public policy considerations, the existence of another corporation. Timoteo H. Sarona vs.
interlocking directors, officers and stockholders is National Labor Relations Commission, Royale
not enough justification to pierce the veil of Security Agency, et al., G.R. No. 185280, January
corporate fiction as in the instant case. Hacienda 18, 2012.
Luisita Incorporated vs. Presidential Agrarian
Reform Council, G.R. No. 171101, November 22, Corporation; circumstances justifying
2011. piercing. Evidence abound showing that Royale is
a mere continuation or successor of Sceptre and
Corporation; piercing the corporate veil. fraudulent objectives are behind Royale’s
A corporation is an artificial being created by incorporation and the petitioner’s subsequent
operation of law. It possesses the right of employment therein. These are plainly suggested by
succession and such powers, attributes, and events that the respondents do not dispute and
properties expressly authorized by law or incident to which the CA, the NLRC and LA Gutierrez accept as
its existence. It has a personality separate and fully substantiated but misappreciated as insufficient
distinct from the persons composing it, as well as to warrant the use of the equitable weapon of
piercing.
 Saint Louis University COMMERCIAL LAW 330
2012 BAR OPERATIONS

As correctly pointed out by the petitioner, it for ends subversive of the policy and purpose
was Aida who exercised control and supervision behind its creation or which could not have been
over the affairs of both Sceptre and Royale. intended by law to which it owed its being. Timoteo
Contrary to the submissions of the respondents that H. Sarona vs. National Labor Relations Commission,
Roso had been the only one in sole control of Royale Security Agency, et al., G.R. No. 185280,
Sceptre’s finances and business affairs, Aida took January 18, 2012.
over as early as 1999 when Roso assigned his
license to operate Sceptre on May 3, 1999. As Single proprietorship; applicability of
further proof of Aida’s acquisition of the rights as piercing the corporate veil. For the piercing
Sceptre’s sole proprietor, she caused the doctrine to apply, it is of no consequence if Sceptre
registration of the business name “Sceptre Security is a sole proprietorship. As ruled in Prince Transport,
& Detective Agency” under her name with the DTI a Inc., et al. v. Garcia, et al., it is the act of hiding
few months after Roso abdicated his rights to behind the separate and distinct personalities of
Sceptre in her favor. As far as Royale is concerned, juridical entities to perpetuate fraud, commit illegal
the respondents do not deny that she has a hand in acts, evade one’s obligations that the equitable
its management and operation and possesses piercing doctrine was formulated to address and
control and supervision of its employees, including prevent:
the petitioner. As the petitioner correctly pointed out, A settled formulation of the doctrine of
that Aida was the one who decided to stop giving piercing the corporate veil is that when two business
any assignments to the petitioner and summarily enterprises are owned, conducted and controlled by
dismiss him is an eloquent testament of the power the same parties, both law and equity will, when
she wields insofar as Royale’s affairs are concerned. necessary to protect the rights of third parties,
The presence of actual common control coupled disregard the legal fiction that these two entities are
with the misuse of the corporate form to perpetrate distinct and treat them as identical or as one and the
oppressive or manipulative conduct or evade same. In the present case, it may be true that Lubas
performance of legal obligations is patent; Royale is a single proprietorship and not a corporation.
cannot hide behind its corporate fiction. However, petitioners’ attempt to isolate themselves
Aida’s control over Sceptre and Royale does from and hide behind the supposed separate and
not, by itself, call for a disregard of the corporate distinct personality of Lubas so as to evade their
fiction. There must be a showing that a fraudulent liabilities is precisely what the classical doctrine of
intent or illegal purpose is behind the exercise of piercing the veil of corporate entity seeks to prevent
such control to warrant the piercing of the corporate and remedy.
veil. However, the manner by which the petitioner Also, Sceptre and Royale have the same
was made to resign from Sceptre and how he principal place of business. As early as October 14,
became an employee of Royale suggest the 1994, Aida and Wilfredo became the owners of the
perverted use of the legal fiction of the separate property used by Sceptre as its principal place of
corporate personality. It is undisputed that the business by virtue of a Deed of Absolute Sale they
petitioner tendered his resignation and that he executed with Roso. Royale, shortly after its
applied at Royale at the instance of Karen and incorporation, started to hold office in the same
Cesar and on the impression they created that these property. These, the respondents failed to dispute.
were necessary for his continued employment. They The respondents do not likewise deny that
orchestrated the petitioner’s resignation from Royale and Sceptre share the same officers and
Sceptre and subsequent employment at Royale, employees. Karen assumed the dual role of
taking advantage of their ascendancy over the Sceptre’s Operation Manager and incorporator of
petitioner and the latter’s lack of knowledge of his Royale. With respect to the petitioner, even if he has
rights and the consequences of his actions. already resigned from Sceptre and has been
Furthermore, that the petitioner was made to resign employed by Royale, he was still using the patches
from Sceptre and apply with Royale only to be and agency cloths of Sceptre during his assignment
unceremoniously terminated shortly thereafter leads at Highlight Metal.
to the ineluctable conclusion that there was intent to Royale also claimed a right to the cash bond
violate the petitioner’s rights as an employee, which the petitioner posted when he was still with
particularly his right to security of tenure. The Sceptre. If Sceptre and Royale are indeed separate
respondents’ scheme reeks of bad faith and fraud entities, Sceptre should have released the
and compassionate justice dictates that Royale and petitioner’s cash bond when he resigned and Royale
Sceptre be merged as a single entity, compelling would have required the petitioner to post a new
Royale to credit and recognize the petitioner’s length cash bond in its favor.
of service with Sceptre. The respondents cannot use Taking the foregoing in conjunction with
the legal fiction of a separate corporate personality Aida’s control over Sceptre’s and Royale’s business
 Saint Louis University COMMERCIAL LAW 331
2012 BAR OPERATIONS

affairs, it is patent that Royale was a mere Section 110 of the Corporation Code, of its
subterfuge for Aida. Since a sole proprietorship does membership.
not have a separate and distinct personality from There is no point to dissolving the
that of the owner of the enterprise, the latter is corporation sole of one member to enable the
personally liable. This is what she sought to avoid corporation aggregate to emerge from it. Whether it
but cannot prosper. Timoteo H. Sarona vs. National is a non-stock corporation or a corporation sole, the
Labor Relations Commission, Royale Security corporate being remains distinct from its members,
Agency, et al., G.R. No. 185280, January 18, 2012. whatever be their number. The increase in the
number of its corporate membership does not
change the complexion of its corporate responsibility
Corporation; contracts before to third parties. The one member, with the
incorporation. With respect to petitioners’ concurrence of two-thirds of the membership of the
contention that the Management Contract executed organization for whom he acts as trustee, can self-
between respondent and petitioner Lucila has no will the amendment. He can, with membership
binding effect on petitioner corporation for having concurrence, increase the technical number of the
been executed way before its incorporation, this members of the corporation from “sole” or one to the
Court finds the same meritorious. greater number authorized by its amended articles.
Logically, there is no corporation to speak of Iglesia Evangelica Metodista En Las Islas Filipinas
prior to an entity’s incorporation. And no contract (IEMELIF), Inc., et al. vs. Bishop Nathanael Lazaro,
entered into before incorporation can bind the et al., G.R. No. 184088, July 6, 2010.
corporation. March II Marketing, Inc. and Lucila V.
Joson vs. Alfredo M. Joson, G.R. No. 171993, Corporation; corporation sole. Even if the
December 12, 2011. transformation of IEMELIF from a corporation sole to
a corporation aggregate was legally defective, its
KINDS OF CORPORATIONS head or governing body, i.e., Bishop Lazaro, whose
acts were approved by the Highest Consistory of
A corporation may change its character as a Elders, still did not change. A corporation sole is one
corporation sole into a corporation aggregate by formed by the chief archbishop, bishop, priest,
mere amendment of its articles of incorporation minister, rabbi or other presiding elder of a religious
without first going through the process of dissolution. denomination, sect, or church, for the purpose of
True, the Corporation Code provides no administering or managing, as trustee, the affairs,
specific mechanism for amending the articles of properties and temporalities of such religious
incorporation of a corporation sole. However, denomination, sect or church. As opposed to a
Section 109 of the Corporation Code allows the corporation aggregate, a corporation sole consists of
application to religious corporations of the general a single member, while a corporation aggregate
provisions governing non-stock corporations. consists of two or more persons. If the
For non-stock corporations, the power to transformation did not materialize, the corporation
amend its articles of incorporation lies in its sole would still be Bishop Lazaro, who himself
members. The code requires two-thirds of their performed the questioned acts of removing Juane as
votes for the approval of such an amendment. So Resident Pastor of the Tondo Congregation.
how will this requirement apply to a corporation sole If the transformation did materialize, the
that has technically but one member (the head of the corporation aggregate would be composed of the
religious organization) who holds in his hands its Highest Consistory of Elders, which nevertheless
broad corporate powers over the properties, rights, approved the very same acts. As either Bishop
and interests of his religious organization? Lazaro or the Highest Consistory of Elders had the
Although a non-stock corporation has a authority to appoint Juane as Resident Pastor of the
personality that is distinct from those of its members IEMELIF Tondo Congregation, it also had the power
who established it, its articles of incorporation to remove him as such or transfer him to another
cannot be amended solely through the action of its congregation. Iglesia Evangelisca Metodista En Las
board of trustees. The amendment needs the Islas Filipinas (IEMELIF), Inc. vs. Nataniel B.
concurrence of at least two-thirds of its membership. Juane/Nataniel B. Juane Vs. Iglesia Evangelisca
If such approval mechanism is made to operate in a Metodista En Las Islas Filipinas (IEMELIF),
corporation sole, its one member in whom all the Inc., G.R. No. 172447, September 18, 2009.
powers of the corporation technically belongs, needs
to get the concurrence of two-thirds of its It is conceded that the Club derived profit
membership. The one member, here the General from the operation of its bar and restaurant, but such
Superintendent, is but a trustee, according to fact does not necessarily convert it into a profit-
making enterprise. The bar and restaurant are
 Saint Louis University COMMERCIAL LAW 332
2012 BAR OPERATIONS

necessary adjuncts of the Club to foster its purposes injustice and unfairness. It applies when persons
and the profits derived therefrom are necessarily assume to form a corporation and exercise
incidental to the primary object of developing and corporate functions and enter into business relations
cultivating sports for the healthful recreation and with third persons. Where there is no third person
entertainment of the stockholders and members. involved and the conflict arises only among those
That a Club makes some profit does not make it a assuming the form of a corporation, who therefore
profit making club. As has been remarked, a club know that it has not been registered there is no
should always strive, whenever possible, to have a corporation by estoppel. (LOZANO VS. DE LOS
surplus (CIR VS. CLUB FILIPINO) SANTOS)

The application of the doctrine of estoppel Under our statute it is to be noted that it is
applies to a third party only when he tries to escape the issuance of a certificate of incorporation by the
liability on a contract from which it had benefited on SEC which calls a corporation into being. The
the irrelevant ground of defective incorporation. In immunity of collateral attack is granted to
the case at bar, the petitioner is not trying to escape corporations 'claiming in good faith to be a
liability from the contract but rather is the one corporation under this act.' Such a claim is
claiming from the contract. (INT’L EXPRESS compatible with the existence of errors and
TRAVEL VS. CA) irregularities; but not with a total or substantial
disregard of the law. Unless there has been an
The doctrine of corporation by estoppel may evident attempt to comply with the law the claim to
apply to the alleged corporation and to a third party. be a corporation 'under this act' could not be made
In the first instance, an unincorporated association, in good faith. (HALL VS. PICCIO)
which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a COMPONENTS OF A CORPORATION
suit against it by a third person who relied in good A corporation, until organized, has no life
faith on such representation. It cannot allege lack of and, therefore, no faculties. It is, as it were, a child in
personality to be sued to evade its responsibility for ventre sa mere. This is not saying that under no
a contract it entered into and by virtue of which it circumstances may the acts of promoters of
received advantages and benefits. corporation be ratified by the corporation if and when
On the other hand, a third party who, subsequently organized. (CAGAYAN FISHING VS.
knowing an association to be unincorporated, SANDIKO)
nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its Where similar acts have been approved by
corporate existence in a suit brought against the the directors as a matter of general practice, custom,
alleged corporation. In such case, all those who and policy, the general manager may bind the
benefited from the transaction made by the company without formal authorization of the board of
ostensible corporation, despite knowledge of its directors. In varying language, existence of such
legal defects, may be held liable for contracts they authority is established, by proof of the course of
impliedly assented to or took advantage of. business, the usages and practices of the company
Technically, it is true that petitioner did not and by the knowledge which the board of directors
directly act on behalf of the corporation. However, has, or must be presumed to have, of acts and
having reaped the benefits of the contract entered doings of its subordinates in and about the affairs of
into by persons with whom he previously had an the corporation. (BOARD OF LIQUIDATORS VS.
existing relationship, he is deemed to be part of said HEIRS OF MAXIMO KALAW)
association and is covered by the scope of the
doctrine of corporation by estoppel. (LIM TONG LIM Corporation; board resolution. The
VS. PHILIPPINE FISHING GEAR INDUSTRIES) second letter-agreement modified the first one
entered into by petitioner, through Atty. Jose Soluta,
The doctrine of corporation by estoppel Jr. In previously allowing Atty. Soluta to enter into
advanced by private respondent cannot override the first letter-agreement without a board resolution
jurisdictional requirements. Jurisdiction is fixed by expressly authorizing him, petitioner had clothed him
law and is not subject to the agreement of the with apparent authority to modify the same via the
parties. It cannot be acquired through or waived, second letter-agreement. Associated Bank (now
enlarged or diminished by, any act or omission of United Overseas Bank [Phils.]) vs. Spouses Rafael
the parties, neither can it be conferred by the and Monaliza Pronstroller/Spouses Eduardo and
acquiescence of the court. Ma. Pilar Vaca (Intervenors), G.R. No. 148444,
Corporation by estoppel is founded on September 3, 2009.
principles of equity and is designed to prevent
 Saint Louis University COMMERCIAL LAW 333
2012 BAR OPERATIONS

BY-LAWS there was still no set of criteria by which to embark

Even under the foregoing express grant of on such an endeavor. The rules and procedures for
power and authority, there can be no automatic validation were formulated by the three-man panel
corporate dissolution simply because the only after the execution of the Bangkok Agreement.
incorporators failed to abide by the required filing of In fact, several of the petitioners actively participated
bylaws embodied in Section 46 of the Corporation in the membership validation process which was
Code, There is no outright "demise" of corporate done after the execution of the Bangkok Agreement.
existence. Proper notice and hearing are cardinal The membership validation resulted in the
components of due process in any democratic conferment of active membership status upon 19
institution, agency or society. In other words, the BAP-SBP members, 17 of which participated in the
incorporators must be given the chance to explain June 12, 2008 meeting. Hence, respondents, who
their neglect or omission and remedy the same. were elected by 17 of the 19 active and voting
(LOYOLA GRAND VILLAS HOMEOWNERS members of the BAP-SBP during the meeting held
ASSOC. VS. CA) on June 12, 2008, are the legitimate officers of the
organization, their election in accordance with the
Nor can petitioner claim a vested right to sit applicable rules on the said exercise. Rep. Luis R.
in the board on the basis of "practice." Practice, no Villafuerte, et al. vs. Gov. Oscar S. Moreno, et
matter how long continued, cannot give rise to any al., G.R. No. 186566, October 2, 2009
vested right if it is contrary to law. Even less tenable
is petitioner's claim that its right is "coterminous with POWERS OF THE CORPORATION
the existence of the association." (GRACE While as a rule an ultra vires act is one
CHRISTIAN HIGH SCHOOL VS. CA) committed outside the object for which a corporation
is created as defined by the law of its organization
Admittedly, the right to amend the by-laws and therefore beyond the powers conferred upon it
lies solely in the discretion of the employer, this by law, there are however certain corporate acts that
being in the exercise of management prerogative or may be performed outside of the scope of the
business judgment. However this right, extensive as powers expressly conferred if they are necessary to
it may be, cannot impair the obligation of existing promote the interest or welfare of the corporation.
contracts or rights. Thus, it has been held that "although not expressly
Prescinding from these premises, private authorized to do so a corporation may become a
respondent's insistence that it can legally dismiss surety where the particular transaction is reasonably
petitioner on the ground that his tenure has expired necessary or proper to the conduct of its business,
is untenable. To reiterate, petitioner, being a regular and here it is undisputed that the establishment of
employee, is entitled to security of tenure; hence, his the local post office is a reasonable and proper
services may only be terminated for causes provided adjunct to the conduct of the business of appellant
by law. A contrary interpretation would not find company. Indeed, such post office is a vital
justification in the laws or the Constitution. If we improvement in the living condition of its employees
were to rule otherwise, it would enable an employer and laborers who came to settle in its mining camp
to remove any employee from his employment by which is far removed from the postal facilities or
the simple expediency of amending its by-laws and means of communication accorded to people living
providing that his/her position shall cease to exist in a city or municipality. (REPUBLIC VS. ACOJE
upon the occurrence of a specified event. MINING)
(SALAFRANCA VS. PHILAMLIFE)
Inasmuch as a corporate president is often
By-laws; membership. Under the by-laws, given general supervision and control over corporate
a three-man panel is mandated to review, verify and operations, the strict rule that said officer has no
validate the lists of members submitted by BAP and inherent power to act for the corporation is slowly
PB to FIBA based on an agreed set of criteria for giving way to the realization that such officer has
membership formulated by the three-man panel. certain limited powers in the transaction of the usual
There is no question that the three-man panel had and ordinary business of the corporation. In the
not yet formulated a set of criteria prior to or as of absence of a charter or bylaw provision to the
the time of signing of the Bangkok Agreement. If contrary, the president is presumed to have the
only for this, it stands to reason that the three-man authority to act within the domain of the general
panel could not have, by any stretch of the objectives of its business and within the scope of his
imagination, possibly validated all organizations or her usual duties. (PEOPLE’S AIRCARGO VS.
proposed by the BAP and PB for BAP-SBP CA)
membership as “active” or “voting” members on a
wholesale basis. It could not have done so since
 Saint Louis University COMMERCIAL LAW 334
2012 BAR OPERATIONS

Since a corporation, such as the private circumvent the constitutionally guaranteed security
respondent, can act only through its officers and of tenure of the employee by the expedient inclusion
agents, all acts within the powers of said corporation in the By-Laws of an enabling clause on the creation
may be performed by agents of its selection; and, of just any corporate officer position.
except so far as limitations or restrictions may be It is relevant to state in this connection that
imposed by special charter, by-law or statutory the SEC, the primary agency administering
provisions, the same general principles of law which the Corporation Code, adopted a similar
govern the relation of agency for a natural person interpretation of Section 25 of the Corporation
govern the officer or agent of a corporation, of Code in its Opinion dated November 25, 1993,
whatever status or rank, in respect to his power to Moreover, the Board of Directors of Matling
act for the corporation; and agents when once could not validly delegate the power to create
appointed, or members acting in their stead, are a corporate office to the President, in light of Section
subject to the same rules, liabilities, and incapacities 25 of the Corporation Code requiring the Board of
as are agents of individuals and private persons. (AF Directors itself to elect the corporate officers. Verily,
REALTY VS. DIESELMAN) the power to elect the corporate officers was a
discretionary power that the law exclusively vested
For the principle of apparent authority to in the Board of Directors, and could not be
apply, the petitioner was burdened to prove the delegated to subordinate officers or agents. The
following: (a) the acts of the respondent justifying office of Vice President for Finance and
belief in the agency by the petitioner; (b) knowledge Administration created by Matling’s President
thereof by the respondent which is sought to be pursuant to By Law No. V was an ordinary, not a
held; and (c) reliance thereon by the petitioner corporate, office.
consistent with ordinary care and prudence. In this The petitioners’ reliance on Tabang,
case, there is no evidence on record of specific acts supra, is misplaced. The statement in Tabang, to the
made by the respondent showing or indicating that it effect that offices not expressly mentioned in the By-
had full knowledge of any representations made by Laws but were created pursuant to a By-Law
Roxas to the petitioner that the respondent had enabling provision were also considered corporate
authorized him to grant to the respondent an option offices, was plainly obiter dictum due to the position
to buy a portion of Lot No. 491-A-3-B-1 covered by subject of the controversy being mentioned in the
TCT No. 78085, or to create a lien or burden By-Laws. Thus, the Court held therein that the
thereon, or that the respondent allowed him to do position was a corporate office, and that the
so. (WOODCHILD HOLDINGS VS. ROXAS determination of the rights and liabilities arising from
ELECTRIC) the ouster from the position was an intra-corporate
controversy within the SEC’s jurisdiction.
DIRECTORS AND CORPORATE OFFICERS In Nacpil v. Intercontinental Broadcasting
Conformably with Section 25 of the Corporation, which may be the more appropriate
Corporation Code, a position must be expressly ruling, the position subject of the controversy was
mentioned in the By-Laws in order to be considered not expressly mentioned in the By-Laws, but was
as a corporate office. Thus, the creation of an office created pursuant to a By-Law enabling provision
pursuant to or under a By-Law enabling provision is authorizing the Board of Directors to create other
not enough to make a position a corporate offices that the Board of Directors might see fit to
office. Guerrea v. Lezama, the first ruling on the create. The Court held there that the position was a
matter, held that the only officers of a corporation corporate office, relying on the obiter
were those given that character either by dictum in Tabang.
the Corporation Code or by the By-Laws; the rest of Considering that the observations earlier
the corporate officers could be considered only as made herein show that the soundness of
employees or subordinate officials. their dicta is not
This interpretation is the correct application unassailable, Tabang and Nacpil should no longer
of Section 25 of the Corporation Code, which plainly be controlling. Matling Industrial and Commercial
states that the corporate officers are the President, Corp., et al. vs. Ricardo R. Coros, G.R. No. 157802,
Secretary, Treasurer and such other officers as may October 13, 2010.
be provided for in the By-Laws. Accordingly, the
corporate officers in the context of PD No. 902-A are Corporation; corporate officers. In the
exclusively those who are given that character either context of Presidential Decree No. 902-A, corporate
by the Corporation Code or by the corporation’s By- officers are those officers of a corporation who are
Laws. given that character either by the Corporation Code
A different interpretation can easily leave or by the corporation’s by-laws. Section 25 of the
the way open for the Board of Directors to Corporation Code specifically enumerated who are
 Saint Louis University COMMERCIAL LAW 335
2012 BAR OPERATIONS

these corporate officers, to wit: (1) president; (2) relationship test. Renato Real vs. Sangu
secretary; (3) treasurer; and (4) such other officers Philippines, Inc. et al., G.R. No. 168757, January 19,
as may be provided for in the by-laws. 2011.
With the given circumstances and in
conformity with Matling Industrial and Commercial Intra-corporate controversy.
Corporation v. Coros, this Court rules that Respondents terminated the services of petitioner
respondent was not a corporate officer of petitioner for the following reasons: (1) his continuous
corporation because his position as General absences at his post at Ogino Philippines, Inc; (2)
Manager was not specifically mentioned in the roster respondents’ loss of trust and confidence on
of corporate officers in its corporate by-laws. The petitioner; and, (3) to cut down operational expenses
enabling clause in petitioner corporation’s by-laws to reduce further losses being experienced by the
empowering its Board of Directors to create corporation. Hence, petitioner filed a complaint for
additional officers, i.e., General Manager, and the illegal dismissal and sought reinstatement,
alleged subsequent passage of a board resolution to backwages, moral damages and attorney’s fees.
that effect cannot make such position a corporate From these, it is not difficult to see that the reasons
office. Matling clearly enunciated that the board of given by respondents for dismissing petitioner have
directors has no power to create other corporate something to do with his being a Manager of
offices without first amending the corporate by-laws respondent corporation and nothing with his being a
so as to include therein the newly created corporate director or stockholder. For one, petitioner’s
office. Though the board of directors may create continuous absences in his post in Ogino relates to
appointive positions other than the positions of his performance as Manager. Second, respondents’
corporate officers, the persons occupying such loss of trust and confidence in petitioner stemmed
positions cannot be viewed as corporate officers from his alleged acts of establishing a company
under Section 25 of the Corporation Code. In view engaged in the same line of business as respondent
thereof, this Court holds that unless and until corporation’s and submitting proposals to the latter’s
petitioner corporation’s by-laws is amended for the clients while he was still serving as its Manager.
inclusion of General Manager in the list of its While we note that respondents also claim these
corporate officers, such position cannot be acts as constituting acts of disloyalty of petitioner as
considered as a corporate office within the realm of director and stockholder, we, however, think that
Section 25 of the Corporation Code. March II same is a mere afterthought on their part to make it
Marketing, Inc. and Lucila V. Joson vs. Alfredo M. appear that the present case involves an element of
Joson, G.R. No. 171993, December 12, 2011. intra-corporate controversy. This is because before
the Labor Arbiter, respondents did not see such acts
Corporate officers; definition. “‘Corporate to be disloyal acts of a director and stockholder but
officers’ in the context of Presidential Decree No. rather, as constituting willful breach of the trust
902-A are those officers of the corporation who are reposed upon petitioner as Manager. It was only
given that character by the Corporation Code or by after respondents invoked the Labor Arbiter’s lack of
the corporation’s by-laws. There are three specific jurisdiction over petitioner’s complaint in the
officers whom a corporation must have under Supplemental Memorandum of Appeal filed before
Section 25 of the Corporation Code. These are the the NLRC that respondents started considering said
president, secretary and the treasurer. The number acts as such. Third, in saying that they were
of officers is not limited to these three. A corporation dismissing petitioner to cut operational expenses,
may have such other officers as may be provided for respondents actually want to save on the salaries
by its by-laws like, but not limited to, the vice- and other remunerations being given to petitioner as
president, cashier, auditor or general manager. The its Manager. Thus, when petitioner sought for
number of corporate officers is thus limited by law reinstatement, he wanted to recover his position as
and by the corporation’s by-laws. Manager, a position which we have, however, earlier
It has been consistently held that “[a]n declared to be not a corporate position. He is not
‘office’ is created by the charter of the corporation trying to recover a seat in the board of directors or to
and the officer is elected (or appointed) by the any appointive or elective corporate position which
directors or stockholders.” Clearly here, has been declared vacant by the board. Certainly,
respondents failed to prove that petitioner was what we have here is a case of termination of
appointed by the board of directors. Thus, we employment which is a labor controversy and not an
cannot subscribe to their claim that petitioner is a intra-corporate dispute. In sum, we hold that
corporate officer. Having said this, we find that there petitioner’s complaint likewise does not satisfy the
is no intra-corporate relationship between the parties nature of controversy test.
insofar as petitioner’s complaint for illegal dismissal With the elements of intra-corporate
is concerned and that same does not satisfy the controversy being absent in this case, we thus hold
 Saint Louis University COMMERCIAL LAW 336
2012 BAR OPERATIONS

that petitioner’s complaint for illegal dismissal said to lawfully attach to a corporate director, trustee
against respondents is not intra-corporate. Rather, it or officer; to wit:
is a termination dispute and, consequently, falls When (1) He assents (a) to a patently
under the jurisdiction of the Labor Arbiter pursuant to unlawful act of the corporation, or (b) for bad faith or
Section 217 of the Labor Code. Renato Real vs. gross negligence in directing its affairs, or (c) for
Sangu Philippines, Inc. et al., G.R. No. 168757, conflict of interest, resulting in damages to the
January 19, 2011. corporation, its stockholders or other persons;
(2) He consents to the issuance of watered
An intra-corporate dispute is understood as stocks or who, having knowledge thereof, does not
a suit arising from intra-corporate relations or forthwith file with the corporate secretary his written
between or among stockholders or between any or objection thereto;
all of them and the corporation. Applying what has (3) He agrees to hold himself personally and
come to be known as the relationship test, it has solidarity liable with the corporation; or
been held that the types of actions embraced by the (4) He is made, by a specific provision of
foregoing definition include the following suits: (a) law, to personally answer for his corporate action.
between the corporation, partnership or association (SANTOS VS. NLRC)
and the public; (b) between the corporation,
partnership or association and its stockholders, Section 23 of the Corporation Code
partners, members, or officers; (c) between the expressly provides that the corporate powers of all
corporation, partnership or association and the State corporations shall be exercised by the board of
insofar as its franchise, permit or license to operate directors. The power and the responsibility to decide
is concerned; and, (d) among the stockholders, whether the corporation should enter into a contract
partners or associates themselves. As the definition that will bind the corporation are lodged in the board,
is broad enough to cover all kinds of controversies subject to the articles of incorporation, bylaws, or
between stockholders and corporations, the relevant provisions of law. In the absence of
traditional interpretation was to the effect that the authority from the board of directors, no person, not
relationship test brooked no distinction, qualification even its officers, can validly bind a corporation.
or any exemption whatsoever. However, just as a natural person may
However, the unqualified application of the authorize another to do certain acts for and on his
relationship test has been modified on the ground behalf, the board of directors may validly delegate
that the same effectively divests regular courts of some of its functions and powers to its officers,
jurisdiction over cases for the sole reason that the committees or agents. The authority of these
suit is between the corporation and/or its individuals to bind the corporation is generally
corporators. It was held that the better policy in derived from law, corporate bylaws or authorization
determining which body has jurisdiction over a case from the board, either expressly or impliedly by
would be to consider not only the status or habit, custom or acquiescence in the general course
relationship of the parties but also the nature of the of business.
question that is the subject of their controversy. The authority of a corporate officer or agent
Under the nature of the controversy test, the dispute in dealing with third persons may be actual or
must not only be rooted in the existence of an intra- apparent. Actual authority is either express or
corporate relationship, but must also refer to the implied. The extent of an agent’s express authority is
enforcement of the parties’ correlative rights and to be measured by the power delegated to him by
obligations under the Corporation Code as well as the corporation, while the extent of his implied
the internal and intra-corporate regulatory rules of authority is measured by his prior acts which have
the corporation. The combined application of the been ratified or approved, or their benefits accepted
relationship test and the nature of the controversy by his principal. The doctrine of “apparent authority,”
test has, consequently, become the norm in on the other hand, with special reference to banks,
determining whether a case is an intra-corporate had long been recognized in this jurisdiction. The
controversy or is purely civil in character. Strategic existence of apparent authority may be ascertained
Alliance Development Corporation vs. Star through:
Infrastructure Development Corporation Corporation, (1) the general manner in which the
BEDE S. Tabalingcos, et al., G.R. No. 187872, corporation holds out an officer or agent as having
November 17, 2010. the power to act, or in other words, the apparent
authority to act in general, with which it clothes him;
In Tramat Mercantile, Inc., vs. Court of or
Appeals, the Court has collated the settled instances (2) the acquiescence in his acts of a
when, without necessarily piercing the veil of particular nature, with actual or constructive
corporate fiction, personal civil liability can also be knowledge thereof, within or beyond the scope of his
 Saint Louis University COMMERCIAL LAW 337
2012 BAR OPERATIONS

ordinary powers. Violeta Tudtud Banate, et al. vs. Specialists. The trial court merely stated that
Philippine Countryside Rural Bank (Liloan, Cebu), Eugene Lim signed on behalf of the Shrimp
Inc. and Teofilo Soon, Jr., G.R. No. 163825, July 13, Specialists as President without explaining the need
2010. to disregard the separate corporate personality. The
CA correctly ruled that the evidence to hold
Elementary is the rule that a corporation is Eugene Lim solidarily liable should be more than just
invested by law with a personality separate and signing on behalf of the corporation because artificial
distinct from those of the persons composing it and entities can only act through natural persons. Thus,
from that of any other legal entity to which it may be the CA was correct in dismissing the case against
related. “Mere ownership by a single stockholder or Eugene Lim. Shrimp Specialist, Inc., vs. Fuji-
by another corporation of all or nearly all of the Triumph Agri-Industrial Corporation/Fuji-Trimph Agri-
capital stock of a corporation is not of itself sufficient Industrial Corporation vs. Shrimp Specialist,
ground for disregarding the separate corporate Inc. et al., G.R. No. 168756/G.R. No. 171476,
personality.” December 7, 2009.
In labor cases, corporate directors and
officers may be held solidarily liable with the Doctrine dictates that a corporation is
corporation for the termination of employment only if invested by law with a personality separate and
done with malice or in bad faith. Bad faith does not distinct from those of the persons composing it, such
connote bad judgment or negligence; it imports a that, save for certain exceptions, corporate officers
dishonest purpose or some moral obliquity and who entered into contracts in behalf of the
conscious doing of wrong; it means breach of a corporation cannot be held personally liable for the
known duty through some motive or interest or ill liabilities of the latter. Personal liability of a
will; it partakes of the nature of fraud. Wensha Spa corporate director, trustee, or officer, along (although
Center, inc. and/or Xu Zhi Jie vs. Loreta T. not necessarily) with the corporation, may validly
Yung, G.R. No. 185122, August 16, 2010. attach, as a rule, only when – (1) he assents to a
patently unlawful act of the corporation, or when he
Corporation; officer. The issue revolves is guilty of bad faith or gross negligence in directing
mainly on whether petitioner was an employee or a its affairs, or when there is a conflict of interest
corporate officer of Slimmers World. Section 25 of resulting in damages to the corporation, its
the Corporation Code enumerates corporate officers stockholders, or other persons; (2) he consents to
as the president, secretary, treasurer and such other the issuance of watered down stocks or who, having
officers as may be provided for in the by-laws. knowledge thereof, does not forthwith file with the
In Tabang v. NLRC, the Supreme Court held that an corporate secretary his written objection thereto; (3)
“office” is created by the charter of the corporation he agrees to hold himself personally and solidarily
and the officer is elected by the directors or liable with the corporation; or (4) he is made by a
stockholders. On the other hand, an “employee” specific provision of law personally answerable for
usually occupies no office and generally is employed his corporate action. Queensland-Tokyo
not by action of the directors or stockholders but by Commodities, Inc., et al. vs. Thomas George, G.R.
the managing officer of the corporation who also No. 172727, September 8, 2010.
determines the compensation to be paid to such
employee. Leslie Okol vs. Slimmers World With respect to the personal liability of
International, et al., G.R. No. 160146, December 11, Hartmannshenn and Schumacher, this Court has
2009. held that corporate directors and officers are only
solidarily liable with the corporation for termination of
Corporation; liability of officers. A employment of corporate employees if effected with
corporation is vested by law with a personality malice or in bad faith. Bad faith does not connote
separate and distinct from the people comprising it. bad judgment or negligence; it imports dishonest
Ownership by a single or small group of purpose or some moral obliquity and conscious
stockholders of nearly all of the capital stock of the doing of wrong; it means breach of unknown duty
corporation is not by itself a sufficient ground to through some motive or interest or ill will; it partakes
disregard the separate corporate personality. Thus, of the nature of fraud. To sustain such a finding,
obligations incurred by corporate officers, acting as there should be evidence on record that an officer or
corporate agents, are direct accountabilities of the director acted maliciously or in bad faith in
corporation they represent. terminating the employee.
In this case, none of these exceptional Petitioners withheld respondent’s salary in
circumstances is present. In its decision, the trial the sincere belief that respondent did not work for
court failed to provide a clear ground why the period in question and was, therefore, not
Eugene Lim was held solidarily liable with Shrimp entitled to it. There was no dishonest purpose or ill
 Saint Louis University COMMERCIAL LAW 338
2012 BAR OPERATIONS

will involved as they believed there was a justifiable as amended, clearly provides and enumerates who
reason to withhold his salary. Thus, although they are criminally liable, which do not include members
unlawfully withheld respondent’s salary, it cannot be of the board of directors of a corporation, petitioners,
concluded that such was made in bad faith. as mere members of the board of directors who are
Accordingly, corporate officers, Hartmannshenn and not in charge of Omni’s business affairs, maintain
Schumacher, cannot be held personally liable for the that they cannot be held liable for any perceived
corporate obligations of SHS. SHS Perforated violations of BP 33, as amended. To bolster their
Materials, Inc., et al. vs. Manuel F. Diaz, G.R. No. position, they attest to being full-time employees of
185814, October 13, 2010. various firms as shown by the Certificates of
Employment[71] they submitted tending to show that
Sec. 4 of BP 33, as amended, provides for they are neither involved in the day-to-day business
the penalties and persons who are criminally liable, of Omni nor managing it. Consequently, they posit
thus: that even if BP 33, as amended, had been violated
Sec. 4. Penalties. — Any person who by Omni they cannot be held criminally liable thereof
commits any act herein prohibited shall, upon not being in any way connected with the commission
conviction, be punished with a fine of not less than of the alleged violations, and, consequently, the
twenty thousand pesos (P20,000) but not more than criminal complaints filed against them based solely
fifty thousand pesos (P50,000), or imprisonment of on their being members of the board of directors as
at least two (2) years but not more than five (5) per the GIS submitted by Omni to SEC are grossly
years, or both, in the discretion of the court. In discriminatory.
cases of second and subsequent conviction under On this point, we agree with petitioners
this Act, the penalty shall be both fine and except as to petitioner Arnel U. Ty who is
imprisonment as provided herein. Furthermore, the indisputably the President of Omni.
petroleum and/or petroleum products, subject matter It may be noted that Sec. 4 above
of the illegal trading, adulteration, shortselling, enumerates the persons who may be held liable for
hoarding, overpricing or misuse, shall be forfeited in violations of the law, viz: (1) the president, (2)
favor of the Government: Provided, That if the general manager, (3) managing partner, (4) such
petroleum and/or petroleum products have already other officer charged with the management of the
been delivered and paid for, the offended party shall business affairs of the corporation or juridical entity,
be indemnified twice the amount paid, and if the or (5) the employee responsible for such violation. A
seller who has not yet delivered has been fully paid, common thread of the first four enumerated officers
the price received shall be returned to the buyer with is the fact that they manage the business affairs of
an additional amount equivalent to such price; and in the corporation or juridical entity. In short, they are
addition, if the offender is an oil company, marketer, operating officers of a business concern, while the
distributor, refiller, dealer, sub-dealer and other retail last in the list is self-explanatory.
outlets, or hauler, the cancellation of his license. It is undisputed that petitioners are members
Trials of cases arising from this Act shall be of the board of directors of Omni at the time
terminated within thirty (30) days after arraignment. pertinent. There can be no quibble that the
When the offender is a corporation, enumeration of persons who may be held liable for
partnership, or other juridical person, the president, corporate violators of BP 33, as amended, excludes
the general manager, managing partner, or such the members of the board of directors. This stands
other officer charged with the management of the to reason for the board of directors of a corporation
business affairs thereof, or employee responsible for is generally a policy making body. Even if the
the violation shall be criminally liable; in case the corporate powers of a corporation are reposed in the
offender is an alien, he shall be subject to board of directors under the first paragraph of Sec.
deportation after serving the sentence. 23 of the Corporation Code, it is of common
If the offender is a government official or knowledge and practice that the board of directors is
employee, he shall be perpetually disqualified from not directly engaged or charged with the running of
office. (Emphasis supplied.) the recurring business affairs of the corporation.
Relying on the third paragraph of the above Depending on the powers granted to them by the
statutory proviso, petitioners argue that they cannot Articles of Incorporation, the members of the board
be held liable for any perceived violations of BP 33, generally do not concern themselves with the day-
as amended, since they are mere directors of Omni to-day affairs of the corporation, except those
who are not in charge of the management of its corporate officers who are charged with running the
business affairs. Reasoning that criminal liability is business of the corporation and are concomitantly
personal, liability attaches to a person from his members of the board, like the President. Section
personal act or omission but not from the criminal 25 of the Corporation Code requires the president of
act or negligence of another. Since Sec. 4 of BP 33,
 Saint Louis University COMMERCIAL LAW 339
2012 BAR OPERATIONS

a corporation to be also a member of the board of vs. Republic of the Philippines, Represented by the
directors. Department of Education, Culture and Sports, G.R.
Thus, the application of the legal maxim No. 172885, October 9, 2009.
expressio unius est exclusio alterius, which means
the mention of one thing implies the exclusion of Directors; per diem. Under section 30 of
another thing not mentioned. If a statute the Corporation Code, the directors of a corporation
enumerates the thing upon which it is to operate, shall not receive any compensation for being
everything else must necessarily and by implication members of the board of directors, except for
be excluded from its operation and effect. The fourth reasonable per diems. The two instances where the
officer in the enumerated list is the catch-all “such directors are to be entitled to compensation shall be
other officer charged with the management of the when it is fixed by the corporation’s by-laws or when
business affairs” of the corporation or juridical entity the stockholders, representing at least a majority of
which is a factual issue which must be alleged and the outstanding capital stock, vote to grant the same
supported by evidence. Arnel U. Ty, et al. vs. at a regular or special stockholder’s meeting, subject
National Bureau of Investigation Supervising Agent to the qualification that, in any of the two situations,
Marvin E. De Jemil,et al., G.R. No. 182147, the total yearly compensation of directors, as such
December 15, 2010. directors, shall in no case exceed ten (10%) percent
of the net income before income tax of the
Directors; liability. Section 31 of the corporation during the preceding year. Gabriel C.
Corporation Code makes directors-officers of Singson, et al. vs. Commission on Audit, G.R. No.
corporations jointly and severally liable even to third 159355, August 9, 2010.
parties for their gross negligence or bad faith in
directing the affairs of their corporations. Corporation; board vacancy. After the
Bad faith implies breach of faith and willful lapse of one year from his election as member of
failure to respond to plain and well understood the VVCC Board in 1996, Makalintal’s term of office
obligation. It does not simply connote bad judgment is deemed to have already expired. That he
or negligence; it imports a dishonest purpose or continued to serve in the VVCC Board in a holdover
some moral obliquity and conscious doing of wrong; capacity cannot be considered as extending his
it means breach of a known duty through some term. To be precise, Makalintal’s term of office
motive or interest or ill will. It partakes of the nature began in 1996 and expired in 1997, but, by virtue of
of fraud. the holdover doctrine in Section 23 of the
Gross negligence, on the other hand, is the Corporation Code, he continued to hold office until
want of even slight care, acting or omitting to act in a his resignation on November 10, 1998. This
situation where there is duty to act, not inadvertently holdover period, however, is not to be considered as
but willfully and intentionally, with a conscious part of his term, which, as declared, had already
indifference to consequences insofar as other expired.
persons may be affected. It evinces a thoughtless With the expiration of Makalintal’s term of
disregard of consequences without exerting any office, a vacancy resulted which, by the terms of
effort to avoid them; the want or absence of or Section 29 of the Corporation Code, must be filled
failure to exercise slight care or diligence, or the by the stockholders of VVCC in a regular or special
entire absence of care. meeting called for the purpose. Valle Verde Country
Petitioner Sanchez of course claims that the Club, Inc., et al. Vs. Victor Africa,G.R. No. 151969,
funds they had collected proved inadequate even to September 4, 2009.
meet expenses. But, as the appellate court held, he
had been unable to substantiate such claims. As the Board of trustees; qualification of
officer charged with approving and implementing Chairman. The Court of Appeals correctly held that
corporate disbursements, Sanchez had the duty to petitioner Villafuerte’s nomination must of necessity
present documents showing how the incomes of the be understood as being subject to or in accordance
foundation were spent. But he failed to do so even with the qualifications set forth in the By-Laws of the
after the DECS, which took custody of the records, BAP-SBP. Since the said by-laws require the
asked Kahn to submit a list of the documents they Chairman of the Board of Trustees to be a trustee
needed for establishing their defenses so these may himself, petitioner Villafuerte was not qualified since
be made available to them. Under the he had neither been elected nor appointed as one of
circumstances, the indubitable conclusion is that the trustees of BAP-SBP. In other words, petitioner
petitioner Sanchez and Kahn acted with bad faith, if Villafuerte never validly assumed the position of
not with gross negligence, in failing to perform their Chairman because he failed in the first place to
duty to remit to DECS or keep in safe hands ULFI’s qualify therefor. Rep. Luis R. Villafuerte, et al. vs.
incomes from the leases. Manuel Luis S. Sanchez
 Saint Louis University COMMERCIAL LAW 340
2012 BAR OPERATIONS

Gov. Oscar S. Moreno, et al., G.R. No. 186566, of the manner of effecting respondent’s termination
October 2, 2009 from service due to absence of just or valid cause
and non-observance of procedural due process but
Corporations; liability of officers in do not point to any malice or bad faith on his part.
general. Obligations incurred by corporate officers, Besides, good faith is still presumed. In addition,
acting as such corporate agents, are not theirs but liability only attaches if the officer has assented to
the direct accountabilities of the corporation they patently unlawful acts of the corporation.
represent. As such, they should not be generally Thus, it was error for the Court of Appeals to
held jointly and solidarily liable with the corporation, hold petitioner Rosit solidarily liable with petitioner
except: Harpoon for illegally dismissing respondent.
1. When directors and trustees or, in Harpoon Marine Services, Inc., et al. v. Fernan H.
appropriate cases, the officers of a corporation – Francisco, G.R. No. 167751, March 2, 2011.
(a) vote for or assent to [patently] unlawful
acts of the corporation; Corporations; liability of officers for labor
(b) act in bad faith or with gross negligence claims. There is solidary liability when the
in directing the corporate affairs; obligation expressly so states, when the law so
(c) are guilty of conflict of interest to the provides, or when the nature of the obligation so
prejudice of the corporation, its stockholders or requires. In MAM Realty Development Corporation
members, and other persons; v. NLRC, the solidary liability of corporate officers in
2. When the director or officer has labor disputes was discussed in this wise:
consented to the issuance of watered stock or who, A corporation, being a juridical entity, may
having knowledge thereof, did not forthwith file with act only through its directors, officers and
the corporate secretary his written objection thereto; employees. Obligations incurred by them, acting as
3. When a director, trustee or officer has such corporate agents, are not theirs but the direct
contractually agreed or stipulated to hold himself accountabilities of the corporation they represent.
personally and solidarily liable with the corporation; True, solidary liabilities may at times be incurred but
4. When a director, trustee or officer is only when exceptional circumstances warrant such
made, by specific provision of law, personally liable as, generally, in the following cases:
for his corporate action. 1. When directors and trustees or, in
The general rule is grounded on the theory appropriate cases, the officers of a corporation−
that a corporation has a legal personality separate (a) vote for or assent to patently unlawful
and distinct from the persons comprising it. To acts of the corporation;
warrant the piercing of the veil of corporate fiction, (b) act in bad faith or with gross negligence
the officer’s bad faith or wrongdoing must be in directing the corporate affairs;
established clearly and convincingly as bad faith is x xxx
never presumed. Harpoon Marine Services, Inc., et In labor cases, for instance, the Court has
al. v. Fernan H. Francisco, G.R. No. 167751, March held corporate directors and officerssolidarily liable
2, 2011. with the corporation for the termination of
employment of employees done with malice or in
Corporations; liability of officers for labor bad faith.
claims. The Court of Appeals’ basis for petitioner From the decisions of the LA, the NLRC,
Rosit’s liability was that he acted in bad faith when and the CA, there is no indication that Estrella’s
he approached respondent and told him that the dismissal was effected with malice or bad faith on
company could no longer afford his salary and that the part of Grandteq’s officers. Their liability for
he will be paid instead his separation pay and Estrella’s illegal dismissal, the consequential
accrued commissions. This finding, however, could monetary award arising from such dismissal and the
not substantially justify the holding of any personal other money claims awarded in the LA’s decision, as
liability against petitioner Rosit. The records are correctly affirmed by the CA, could thus only be
bereft of any other satisfactory evidence that joint, not solidary. This pronouncement does not
petitioner Rosit acted in bad faith with gross or extend to Estrella’s claims for commissions,
inexcusable negligence, or that he acted outside the allowances, and incentives, as the same are still
scope of his authority as company president. subject to the LA’s scrutiny. Grandteq Industrial
Indeed, petitioner Rosit informed respondent that the Steel Products, Inc., et al. vs. Annaliza M.
company wishes to terminate his services since it Estrella, G.R. No. 192416. March 23, 2011
could no longer afford his salary. Moreover, the
promise of separation pay, according to petitioners, Power of board to elect replacement for
was out of goodwill and magnanimity. At the most, resigned holdover director
petitioner Rosit’s actuations only show the illegality
 Saint Louis University COMMERCIAL LAW 341
2012 BAR OPERATIONS

Under section 29 of the Corporation Code, director to fill in a vacancy caused by the resignation
the board of directors, if there remains a quorum, of a hold-over director. The resolution of this legal
can fill up a vacancy in the board of directors, except issue is significantly hinged on the determination of
when: (1) the vacancy was caused by the removal of what constitutes a director’s term of office. . .
a director by the stockholders; or (2) the vacancy The word “term” has acquired a definite
was caused by the expiration of the term of the meaning in jurisprudence. In several cases, we have
director. defined “term” as the time during which the officer
If the vacancy was caused by the may claim to hold the office as of right, and fixes the
resignation of a director who was occupying the interval after which the several incumbents shall
position in a hold-over capacity, can the remaining succeed one another. The term of office is not
directors fill up the vacancy or would that power vest affected by the holdover. The term is fixed by statute
with the stockholders? and it does not change simply because the office
In Valle Verde Country Club, Inc., et al. vs. may have become vacant, nor because the
Victor Africa, G.R. No. 151969, September 4, 2009, incumbent holds over in office beyond the end of the
the stockholders of Valle Verde Country Club term due to the fact that a successor has not been
(VVCC) elected the following as members of the elected and has failed to qualify.
board during its 1996 annual stockholders’ meeting: Term is distinguished from tenure in that an
Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), officer’s “tenure” represents the term during which
Eduardo Makalintal (Makalintal), Francisco Ortigas the incumbent actually holds office. The tenure may
III, Victor Salta, Amado M. Santiago, Jr., Fortunato be shorter (or, in case of holdover, longer) than the
Dee, Augusto Sunico, and Ray Gamboa. term for reasons within or beyond the power of the
Because of lack of quorum, no stockholders’ incumbent.
meetings were held in the years 1997, 1998, 1999, Based on the above discussion, when
2000, and 2001. Thus, the directors continued to Section 23 of the Corporation Code declares that
serve in the VVCC Board in a hold-over capacity. “the board of directors…shall hold office for one (1)
Dinglasan resigned from his position as year until their successors are elected and qualified,”
member of the VVCC Board on September 1998. we construe the provision to mean that the term of
The following month, the remaining directors elected the members of the board of directors shall be only
Eric Roxas (Roxas) to fill in the vacancy created by for one year; their term expires one year after
the resignation of Dinglasan. Subsequently, election to the office. The holdover period – that time
Makalintal also resigned as member of the VVCC from the lapse of one year from a member’s election
Board. The remaining members of the VVCC board to the Board and until his successor’s election and
elected Jose Ramirez (Ramirez) to replace qualification – is not part of the director’s original
Makalintal on March 6, 2001. term of office, nor is it a new term; the holdover
Victor Africa (Africa), a member of VVCC, period, however, constitutes part of his tenure.
questioned the election of Roxas and Ramirez as Corollary, when an incumbent member of the board
members of the VVCC Board with the Securities and of directors continues to serve in a holdover
Exchange Commission (SEC) and the Regional Trial capacity, it implies that the office has a fixed term,
Court (RTC), respectively. In his nullification which has expired, and the incumbent is holding the
complaint before the RTC, Africa alleged that the succeeding term.
election of Roxas was contrary to Section 29, in After the lapse of one year from his election
relation to Section 23, of the Corporation Code. as member of the VVCC Board in 1996, Makalintal’s
According to Africa, the resulting vacancies should term of office is deemed to have already expired.
have been filled by the stockholders in a regular or That he continued to serve in the VVCC Board in a
special meeting called for that purpose, and not by holdover capacity cannot be considered as
the remaining members of the VVCC Board, as was extending his term. To be precise, Makalintal’s term
done in this case. The SEC and the RTC agreed of office began in 1996 and expired in 1997, but, by
with Africa. virtue of the holdover doctrine in Section 23 of the
The Supreme Court also ruled that the Corporation Code, he continued to hold office until
authority to fill in the vacancy caused by the his resignation on November 10, 1998. This
resignation of a holdover director lies with VVCC’s holdover period, however, is not to be considered as
stockholders, not the remaining members of its part of his term, which, as declared, had already
board of directors. According to the Supreme Court: expired.
We are not persuaded by VVCC’s With the expiration of Makalintal’s term of
arguments and, thus, find its petition unmeritorious. office, a vacancy resulted which, by the terms of
To repeat, the issue for the Court to resolve Section 29 of the Corporation Code, must be filled
is whether the remaining directors of a corporation’s by the stockholders of VVCC in a regular or special
Board, still constituting a quorum, can elect another meeting called for the purpose. To assume – as
 Saint Louis University COMMERCIAL LAW 342
2012 BAR OPERATIONS

VVCC does – that the vacancy is caused by caused for reasons other than by removal by the
Makalintal’s resignation in 1998, not by the stockholders or by expiration of the term.
expiration of his term in 1997, is both illogical and It also bears noting that the vacancy referred
unreasonable. His resignation as a holdover director to in Section 29 contemplates a vacancy occurring
did not change the nature of the vacancy; the within the director’s term of office. When a vacancy
vacancy due to the expiration of Makalintal’s term is created by the expiration of a term, logically, there
had been created long before his resignation. . . is no more unexpired term to speak of. Hence,
VVCC’s construction of Section 29 of the Section 29 declares that it shall be the corporation’s
Corporation Code on the authority to fill up stockholders who shall possess the authority to fill in
vacancies in the board of directors, in relation to a vacancy caused by the expiration of a member’s
Section 23 thereof, effectively weakens the term.
stockholders’ power to participate in the corporate As correctly pointed out by the RTC, when
governance by electing their representatives to the remaining members of the VVCC Board elected
board of directors. The board of directors is the Ramirez to replace Makalintal, there was no more
directing and controlling body of the corporation. It is unexpired term to speak of, as Makalintal’s one-year
a creation of the stockholders and derives its power term had already expired. Pursuant to law, the
to control and direct the affairs of the corporation authority to fill in the vacancy caused by Makalintal’s
from them. The board of directors, in drawing to leaving lies with the VVCC’s stockholders, not the
themselves the powers of the corporation, occupies remaining members of its board of directors.
a position of trusteeship in relation to the
stockholders, in the sense that the board should Corporate employees; appointment.
exercise not only care and diligence, but utmost Ordinary company employees are generally
good faith in the management of corporate affairs. employed not by action of the directors and
The underlying policy of the Corporation stockholders but by that of the managing officer of
Code is that the business and affairs of a the corporation who also determines the
corporation must be governed by a board of compensation to be paid such employees.
directors whose members have stood for election, Corporate officers, on the other hand, are elected or
and who have actually been elected by the appointed by the directors or stockholders, and are
stockholders, on an annual basis. Only in that way those who are given that character either by the
can the directors’ continued accountability to Corporation Code or by the corporation’s by-laws.
shareholders, and the legitimacy of their decisions Here, it was the PDMC president who
that bind the corporation’s stockholders, be assured. appointed petitioner Gomez administrator, not its
The shareholder vote is critical to the theory that board of directors or the stockholders. The president
legitimizes the exercise of power by the directors or alone also determined her compensation package.
officers over properties that they do not own. Moreover, the administrator was not among the
This theory of delegated power of the board corporate officers mentioned in the PDMC by-laws.
of directors similarly explains why, under Section 29 The corporate officers proper were the chairman,
of the Corporation Code, in cases where the president, executive vice-president, vice-president,
vacancy in the corporation’s board of directors is general manager, treasurer, and secretary. Gloria
caused not by the expiration of a member’s term, the V. Gomez vs.PNOC Development and Management
successor “so elected to fill in a vacancy shall be Corporation (PDMC), G.R. No. 174044, November
elected only for the unexpired term of the his 27, 2009.
predecessor in office.” The law has authorized the
remaining members of the board to fill in a vacancy RIGHTS OF SHAREHOLDERS
only in specified instances, so as not to retard or One of the rights of a stockholder is the
impair the corporation’s operations; yet, in right to participate in the control and management of
recognition of the stockholders’ right to elect the the corporation that is exercised through his vote.
members of the board, it limited the period during The right to vote inherent in and incidental to the
which the successor shall serve only to the ownership of corporate stock, and as such is a
“unexpired term of his predecessor in office.” property right. The stockholder cannot be deprived
While the Court in El Hogar approved of the of the to vote his stock nor may the right be
practice of the directors to fill vacancies in the essentially impaired, either by the legislature or by
directorate, we point out that this ruling was made the corporation without his consent, through
before the present Corporation Code was enacted amending the charter, or the by-laws. (CASTILLO
and before its Section 29 limited the instances when VS. BALINGHASAY)
the remaining directors can fill in vacancies in the
board, i.e., when the remaining directors still While it may be true that the right of
constitute a quorum and when the vacancy is inspection granted by Sec. 74 of the Corporation
 Saint Louis University COMMERCIAL LAW 343
2012 BAR OPERATIONS

Code is not absolute, as when the stockholder is not the deceased as shareholder of the corporation. The
acting in good faith and for a legitimate purpose; or stocks must be distributed first to the heirs in estate
when the demand is purely speculative or merely to proceedings, and the transfer of the stocks must be
satisfy curiosity, the same may not be said in the recorded in the books of the corporation. Section 63
case of private respondent. This is because the of the Corporation Code provides that no transfer
impropriety of purpose such as will defeat shall be valid, except as between the parties, until
enforcement must be set up (by) the corporation the transfer is recorded in the books of the
defensively if the Court is to take cognizance of it as corporation. During such interim period, the heirs
a qualification. In other words, the specific provisions stand as the equitable owners of the stocks, the
take from the stockholder the burden of showing executor or administrator duly appointed by the court
impropriety of purpose or motive. being vested with the legal title to the stock. Until a
In the case at bar, petitioner failed to settlement and division of the estate is effected, the
discharge the burden of proof to show that private stocks of the decedent are held by the administrator
respondent's action in seeking examination of the or executor. Consequently, during such time, it is the
corporate records was moved by unlawful or ill administrator or executor who is entitled to exercise
motivated designs which could appropriately call for the rights of the deceased as stockholder.
a judicial protection against the exercise of such Thus, even if petitioner presents sufficient
right. Save for its unsubstantiated allegations, evidence in this case to establish that he is the son
petitioner could offer no proof, nay, not even a of Carlos L. Puno, he would still not be allowed to
scintilla of evidence that respondent Cojuangco, Jr., inspect respondent’s books and be entitled to
was motivated by bad faith; that the demand was for receive dividends from respondent, absent any
an illegitimate purpose or that the demand was showing in its transfer book that some of the shares
impelled by speculation or idle curiosity. Surely, owned by Carlos L. Puno were transferred to him.
respondent's substantial shareholdings in the SMC This would only be possible if petitioner has been
and UCPB cannot be an object of mere curiosity. recognized as an heir and has participated in the
(REPUBLIC VS. SANDIGANBAYAN) settlement of the estate of the deceased.
Joselito Musni Puno (as heir of the late
The power to issue shares of stocks in a Carlos Puno) vs.Puno Enterprises, Inc., represented
corporation is lodged in the board of directors and by Jesusa Puno, G.R. No. 177066, September 11,
no stockholders' meeting is necessary to consider it 2009.
because additional issuance of shares of stocks
does not need approval of the stockholders. The by- Stockholders; liability. The “owners” of a
laws of the corporation itself states that 'the Board of corporate organization are its stockholders and they
Trustees shall, in accordance with law, provide for are to be distinguished from its directors and
the issue and transfer of shares of stock of the officers. The petitioners here, with the exception of
Institute and shall prescribe the form of the Audie Llona, are being charged in their capacities as
certificate of stock of the Institute'. stockholders of Bicol Gas. But the Court of Appeals
Petitioner bewails the fact that in view of the forgets that in a corporation, the management of its
lack of notice to him of such subsequent issuance, business is generally vested in its board of directors,
he was not able to exercise his right of pre-emption not its stockholders. Stockholders are basically
over the unissued shares. However, the general rule investors in a corporation. They do not have a hand
is that pre-emptive right is recognized only with in running the day-to-day business operations of the
respect to new issue of shares, and not with respect corporation unless they are at the same time
to additional issues of originally authorized shares. directors or officers of the corporation. Before a
This is on the theory that when a corporation at its stockholder may be held criminally liable for acts
inception offers its first shares, it is presumed to committed by the corporation, therefore, it must be
have offered all of those which it is authorized to shown that he had knowledge of the criminal act
issue. An original subscriber is deemed to have committed in the name of the corporation and that
taken his shares knowing that they form a definite he took part in the same or gave his consent to its
proportionate part of the whole number of authorized commission, whether by action or inaction. Manuel
shares. When the shares left unsubscribed are later C. Espiritu, Jr., et al. vs. Petron Corporation, et
reoffered, he cannot therefore claim a dilution of al., G.R. No. 170891, November 24, 2009.
interest. (BENITO VS. SEC)
SHARES AND SUBSCRIPTIONS
Corporation; stockholders. Upon the A subscription contract necessarily involves
death of a shareholder, the heirs do not the corporation as one of the contracting parties
automatically become stockholders of the since the subject matter of the transaction is
corporation and acquire the rights and privileges of
 Saint Louis University COMMERCIAL LAW 344
2012 BAR OPERATIONS

property owned by the corporation – its shares of concerned. A corporate secretary may not be
stock. compelled to register transfers of shares on the
The real contracting parties to a subscription basis merely of an indorsement of stock certificates.
agreement are the corporation and the subscriber With more reason, a corporate secretary may not be
alone. Thus, a civil case for rescission on the ground compelled to issue stock certificates without such
of breach of contract filed by a third party in their registration. (PONCE VS. ALSONS CEMENT
personal capacities will not prosper. Only the CORP)
corporation has the legal personality to file suit
rescinding the subscription agreement with the Are attachments of shares of stock included
subscriber inasmuch as it was the real party in in the term "transfer" as provided in Sec. 63 of the
interest therein. (ONG YONG VS. TIU) Corporation Code? We rule in the negative. As
succinctly declared in the case of Monserrat v.
The usual practice is for the stockholder to Ceron, chattel mortgage over shares of stock need
sign the form on the back of the stock certificate. not be registered in the corporation's stock and
The certificate may thereafter be transferred from transfer book inasmuch as chattel mortgage over
one person to another. If the holder of the certificate shares of stock does not involve a "transfer of
desires to assume the legal rights of a shareholder shares," and that only absolute transfers of shares of
to enable him to vote at corporate elections and to stock are required to be recorded in the
receive dividends, he fills up the blanks in the form corporation's stock and transfer book in order to
by inserting his own name as transferee. Then he have "force and effect as against third persons."
delivers the certificate to the secretary of the (CHEMPHIL EXPORT VS. CA)
corporation so that the transfer may be entered in
the corporation's books. The certificate is then Sale of shares by stockholder not
surrendered and a new one issued to the transferee. holding stock certificate. On December 27, 1995,
That procedure cannot be followed in the when McFoods offered for sale one Class “A” share
instant case because, as already noted, the twenty of stock to MSCI for the price of P2,800,000.00 for
shares in question we Dot covered by any certificate the latter to exercise its pre-emptive right as required
of stork in Po's name. Moreover, the corporation has by Section 30(e) of MSCI’s Amended By-Laws, it
a claim on the said shares for the unpaid balance of legally had the right to do so since it was already an
Po's subscription. A stock subscription in a owner of a Class “A” share by virtue of its payment
subsisting liability from the time the subscription is on November 28, 1995, and the Deed of Absolute
made. The subscriber is as much bound to pay his Share dated December 15, 1995, notwithstanding
subscription, as he would be to pay any other debt. the fact that the stock certificate was issued only on
The right of the corporation to demand payment is January 5, 1996. A certificate of stock is the paper
no less incontestable. (NAVA VS. PEERS) representative or tangible evidence of the stock itself
and of the various interests therein. The certificate
It may be argued that despite non- is not a stock in the corporation but is merely
compliance with the requisite endorsement and evidence of the holder’s interest and status in the
delivery, the assignment was valid between the corporation, his ownership of the share represented
parties, meaning the private respondents as thereby. It is not in law the equivalent of such
assignors and the petitioners as assignees. While ownership. It expresses the contract between the
the assignment may be valid and binding on the corporation and the stockholder, but is not essential
petitioners and private respondents, it does not to the existence of a share of stock or the nature of
necessarily make the transfer effective. the relation of shareholder to the corporation.
Consequently, the petitioners as mere assignees, Makati Sports Club, Inc. vs. Cecile H. Cheng, et
cannot enjoy the status of a stockholder, cannot vote al., G.R. No. 178523, June 16, 2010.
nor be voted for, and will not be entitled to dividends,
insofar as the assigned shares are concerned. Preemptive rights. McFoods properly
Parenthetically, the private respondents cannot, as complied with the requirement of Section 30(e) of
yet, be deprived of their rights as stockholders, until the Amended By-Laws on MSCI’s pre-emptive
and unless the issue of ownership and transfer of rights. Without doubt, MSCI failed to repurchase
the shares in question is resolved with finality. McFoods’ Class “A” share within the thirty (30) day
(RURAL BANK OF LIPA CITY VS. CA) pre-emptive period as provided by the Amended By-
Laws. It was only on January 29, 1996, or 32 days
Before a transferee may ask for the after December 28, 1995, when MSCI received Mc
issuance of stock certificates, he must first cause the Foods’ letter of offer to sell the share, that Mc Foods
registration of the transfer and thereby enjoy the and Hodreal executed the Deed of Absolute Sale
status of a stockholder insofar as the corporation is over the said share of stock.
 Saint Louis University COMMERCIAL LAW 345
2012 BAR OPERATIONS

MSCI cannot argue that McFoods was not seniority rights they had accumulated with their prior
yet a registered owner of the share of stock when employers, that is, whether the rosters of the three
the latter offered it for resale, in order to void the corporations, for seniority purposes, should be
transfer from Mc Foods to Hodreal. The “dovetailed” or whether the transferring employees
corporation’s obligation to register is ministerial upon should go to the bottom of the roster of their new
the buyer’s acquisition of ownership of the share of employer. Labor representatives of the various
stock. The corporation, either by its board, its by- systems involved attempted to work out an
laws, or the act of its officers, cannot create agreement which, in effect, preserved the seniority
restrictions in stock transfers. Makati Sports Club, status obtained in the prior employment on other
Inc. vs. Cecile H. Cheng, et al.,G.R. No. 178523, roads, and the action was for specific performance
June 16, 2010. of this agreement against a demurring group of the
original employees of the railroad which was
Issuance. Upon payment by McFoods of operating the consolidated shops. The relief sought
P1,800,000.00 to MSCI and the execution of the was denied, the court saying that, absent some
Deed of Absolute Sale on December 15, 1995, it specific contract provision otherwise, seniority rights
then had the right to demand the delivery of the were ordinarily limited to the employment in which
stock certificate in its name. The right of a they were earned, and concluding that the contract
transferee to have stocks transferred to its name is for which specific performance was sought was not
an inherent right flowing from its ownership of the such a completed and binding agreement as would
stocks.Makati Sports Club, Inc. vs. Cecile H. Cheng, support such equitable relief, since the railroad,
et al., G.R. No. 178523, June 16, 2010. whose concurrence in the arrangements made was
essential to their effectuation, was not a party to the
agreement.
MERGER Where the provisions of a labor contract
provided that in the event that a trucker absorbed
Merger; effect on employment and the business of another private contractor or
seniority rights. Although not binding on this common carrier, or was a party to a mergerof lines,
Court, American jurisprudence on the consequences the seniority of the employees absorbed or affected
of voluntary mergers on the right to employment and thereby should be determined by mutual agreement
seniority rights is persuasive and illuminating. We between the trucker and the unions involved, it was
quote the following pertinent discussion from the held in Moore v International Brotherhood of
American Law Reports: Teamsters, etc. (1962, Ky) 356 SW2d 241, that the
Several cases have involved the situation trucker was not required to absorb the affected
where as a result of mergers, consolidations, or employees as well as the business, the court saying
shutdowns, one group of employees, who had that they could find no such meaning in the above
accumulated seniority at one plant or for one clause, stating that it dealt only with seniority, and
employer, finds that their jobs have been not with initial employment. Unless and until the
discontinued except to the extent that they are absorbing company agreed to take the employees of
offered employment at the place or by the employer the company whose business was being absorbed,
where the work is to be carried on in the future. no seniority problem was created, said the court,
Such cases have involved the question whether hence the provision of the contract could have no
such transferring employees should be entitled to application. Furthermore, said the court, it did not
carry with them their accumulated seniority or require that the absorbing company take these
whether they are to be compelled to start over at the employees, but only that if it did take them the
bottom of the seniority list in the “new” job. It has question of seniority between the old and new
been recognized in some cases that the employees would be worked out by agreement or
accumulated seniority does not survive and cannot else be submitted to the grievance procedure.
be transferred to the “new” job. (Emphasis ours.)
In Carver v Brien (1942) 315 Ill App 643, 43 Indeed, from the tenor of local and foreign
NE2d 597, the shop work of three formerly separate authorities, in voluntary mergers, absorption of the
railroad corporations, which had previously operated dissolved corporation’s employees or the recognition
separate facilities, was consolidated in the shops of of the absorbed employees’ service with their
one of the roads. Displaced employees of the other previous employer may be demanded from the
two roads were given preference for the new jobs surviving corporation if required by provision of law
created in the shops of the railroad which took over or contract. The dissent of Justice Arturo D. Brion
the work. A controversy arose between the tries to make a distinction as to the terms and
employees as to whether the displaced employees conditions of employment of the absorbed
were entitled to carry with them to the new jobs the employees in the case of a corporate merger or
 Saint Louis University COMMERCIAL LAW 346
2012 BAR OPERATIONS

consolidation which will, in effect, take away from business and its obligations to its own employees,
corporate management the prerogative to make and to their certified collective bargaining agent or
purely business decisions on the hiring of labor union.
employees or will give it an excuse not to apply the Even assuming we accept Justice Brion’s
CBA in force to the prejudice of its own employees theory that in a merger situation the surviving
and their recognized collective bargaining agent. In corporation should be compelled to absorb the
this regard, we disagree with Justice Brion. dissolved corporation’s employees as a legal
Justice Brion takes the position that because consequence of the merger and as a social justice
the surviving corporation continues the personality of consideration, it bears to emphasize his dissent also
the dissolved corporation and acquires all the latter’s recognizes that the employee may choose to end his
rights and obligations, it is duty-bound to absorb the employment at any time by voluntarily resigning. For
dissolved corporation’s employees, even in the the employee to be “absorbed” by BPI, it requires
absence of a stipulation in the plan of merger. He the employees’ implied or express consent. It is
proposes that this interpretation would provide the because of this human element in employment
necessary protection to labor as it spares workers contracts and the personal, consensual nature
from being “left in legal limbo.” thereof that we cannot agree that, in a merger
However, there are instances where an situation, employment contracts are automatically
employer can validly discontinue or terminate the transferable from one entity to another in the same
employment of an employee without violating his manner that a contract pertaining to purely
right to security of tenure. Among others, in case of proprietary rights – such as a promissory note or a
redundancy, for example, superfluous employees deed of sale of property – is perfectly and
may be terminated and such termination would be automatically transferable to the surviving
authorized under Article 283 of the Labor Code. corporation. Bank of the Philippine Islands vs. BPI
Moreover, assuming for the sake of Employees Union-Davao Chapter-Federation of
argument that there is an obligation to hire or absorb Unions in BPI Unibank, G.R. No. 164301, August
all employees of the non-surviving corporation, there 18, 2010.
is still no basis to conclude that the terms and
conditions of employment under a valid collective DISSOLUTION AND LIQUIDATION
bargaining agreement in force in the surviving The word "trustee" as used in the
corporation should not be made to apply to the corporation statute must be understood in its general
absorbed employees. Bank of the Philippine Islands concept which could include the counsel to whom
vs. BPI Employees Union-Davao Chapter- was entrusted in the instant case, the prosecution of
Federation of Unions in BPI Unibank,G.R. No. the suit filed by the corporation. The purpose in the
164301, August 18, 2010. transfer of the assets of the corporation to a trustee
upon its dissolution is more for the protection of its
Merger; mandatory absorption of creditor and stockholders. Debtors like the
employees of corporation. The lack of a provision petitioners herein may not take advantage of the
in the plan of merger regarding the transfer of failure of the corporation to transfer its assets to a
employment contracts to the surviving corporation trustee, assuming it has any to transfer which
could have very well been deliberate on the part of petitioner has failed to show, in the first place. To
the parties to the merger, in order to grant the sustain petitioners' contention would be to allow
surviving corporation the freedom to choose who them to enrich themselves at the expense of
among the dissolved corporation’s employees to another, which all enlightened legal systems
retain, in accordance with the surviving corporation’s condemn. (GELANO VS. CA)
business needs. If terminations, for instance due to
redundancy or labor-saving devices or to prevent Under Section 122 of the Corporation Code,
losses, are done in good faith, they would be valid. a dissolved corporation shall nevertheless continue
The surviving corporation too is duty-bound to as a body corporate for three (3) years for the
protect the rights of its own employees who may be purpose of prosecuting and defending suits by or
affected by the merger in terms of seniority and against it and enabling it to settle and close its
other conditions of their employment due to the affairs, to dispose and convey its property and to
merger. Thus, we are not convinced that in the distribute its assets, but not for the purpose of
absence of a stipulation in the merger plan the continuing the business for which it was
surviving corporation was compelled, or may be established. Within those three (3) years, the
judicially compelled, to absorb all employees under corporation may appoint a trustee or receiver who
the same terms and conditions obtaining in the shall carry out the said purposes beyond the three
dissolved corporation as the surviving corporation (3)-year winding-up period. Thus, a trustee of a
should also take into consideration the state of its dissolved corporation may commence a suit which
 Saint Louis University COMMERCIAL LAW 347
2012 BAR OPERATIONS

can proceed to final judgment even beyond the three The prohibition against doing business
(3)-year period of liquidation. without first securing a license is now given penal
In the same manner, during and beyond the sanction which is also applicable to other violations
three (3)-year winding-up period of RMC, the Board of the Corporation Code under the general
of Trustees of RMCPRF may do no more than settle provisions of Section 144 of the Code.
and close the affairs of the Fund. The Board retains It is, therefore, not necessary to declare the
its authority to act on behalf of its members, albeit,in contract null and void even as against the erring
a limited capacity. It may commence suits on behalf foreign corporation. The penal sanction for the
of its members but not continue managing the Fund violation and the denial of access to our courts and
for purposes of maximizing profits. Here, the administrative bodies are sufficient from the
Board’s act of issuing the Resolution authorizing viewpoint of legislative policy.
petitioner to release the Fund to its beneficiaries is Our ruling that the lack of capacity at the
still part of the liquidation process, that is, time of the execution of the contracts was cured by
satisfaction of the liabilities of the Plan, and does not the subsequent registration is also strengthened by
amount to doing business. Hence, it was properly the procedural aspects of these cases. (HOME
within the Board’s power to promulgate. INSURANCE CO. VS. EASTERN SHIPPING)
Metropolitan Bank & trust Company, Inc. vs. The
Board of Trustees of Riverside Mills Corp. Provident The obtainment of a license prescribed by
and Retirement Fund, et al., G.R. No. 176959, Section 125 of the Corporation Code is not a
September 8, 2010. condition precedent to the maintenance of any kind
of action in Philippine courts by a foreign
FOREIGN CORPORATIONS corporation. However, under the aforequoted
As between the parties themselves, R.A. provision, no foreign corporation shall be permitted
No. 5455 does not declare as void or invalid the to transact business in the Philippines, as this
contracts entered into without at securing a license phrase is understood under the Corporation Code,
or certificate to do business in the Philippines. unless it shall have the license required by law, and
Neither does it appear to intend to prevent the courts until it complies with the law in transacting business
from enforcing contracts made in contravention of its here, it shall not be permitted to maintain any suit in
licensing provisions, There is no denying, though, local courts.
that an "illegal situation," as the appellate court has As thus interpreted, any foreign corporation
put it, was created when the parties voluntarily not doing business in the Philippines may maintain
contracted without such license. an action in our courts upon any cause of action,
The parties are charged with knowledge of provided that the subject matter and the defendant
the existing law at the time they enter into the are within the jurisdiction of the court. It is not the
contract and at the time it is to become operative. absence of the prescribed license but "doing
Moreover, a person is presumed to be more business" in the Philippines without such license
knowledgeable about his own state law than his which debars the foreign corporation from access to
alien or foreign contemporary. In this case, the our courts. In other words, although a foreign
record shows that, at least, petitioner had actual corporation is without license to transact business in
knowledge of the applicability of R.A. No. 5455 at the Philippines, it does not follow that it has no
the time the contract was executed and at all times capacity to bring an action. Such license is not
thereafter. This conclusion is compelled by the fact necessary if it is not engaged in business in the
that the same statute is now being propounded by Philippines. (COLUMBIA PICTURES VS. CA)
the petitioner to bolster its claim. We, therefore,
sustain the appellate court's view that "it was More than the sheer number of transactions
incumbent upon TOP-WELD to know whether or not entered into, a clear and unmistakable intention on
IRTI and ECED were properly authorized to engage the part of petitioner to continue the body of its
in business in the Philippines when they entered into business in the Philippines is more than apparent.
the licensing and distributorship agreements." The As alleged in its complaint, it is engaged in the
very purpose of the law was circumvented and manufacture and sale of elements used in sealing
evaded when the petitioner entered into said pumps, valves, and pipes for industrial purposes,
agreements despite the prohibition of R.A. No. 5455. valves and control equipment used for industrial fluid
The parties in this case being equally guilty of control and PVC pipes and fittings for industrial use.
violating R.A. No. 5455, they are in pari delicto, in Thus, the sale by petitioner of the items covered by
which case it follows as a consequence that the receipts, which are part and parcel of its main
petitioner is not entitled to the relief prayed for in this product line, was actually carried out in the
case. (TOP-WELD MFG. VS. ECED) progressive prosecution of commercial gain and the
pursuit of the purpose and object of its business,
 Saint Louis University COMMERCIAL LAW 348
2012 BAR OPERATIONS

pure and simple. Further, its grant and extension of estoppel is deeply rooted in the axiom of
90-day credit terms to private respondent for every commodum ex injuria sua non habere debet – no
purchase made, unarguably shows an intention to person ought to derive any advantage from his own
continue transacting with private respondent, since wrong. (EUROPEAN RESOURCES VS.
in the usual course of commercial transactions, IGNIEBURO)
credit is extended only to customers in good
standing or to those on whom there is an intention to CORPORATE REHABILITATION
maintain long-term relationship. (ERIKS PTE. LTD. Corporate rehabilitation connotes the
VS. CA) restoration of the debtor to a position of successful
operation and solvency, if it is shown that its
We agree with the finding of the respondent continued operation is economically feasible and its
court that petitioner is not suing on an isolated creditors can recover by way of the present value of
transaction as it claims to be, as it is very obvious payments projected in the rehabilitation plan, more if
from the deed of assignment and its relationships the corporation continues as a going concern than if
with Marcopper and Placer Dome, Inc. that its it is immediately liquidated. It contemplates a
unmistakable intention is to continue the operations continuance of corporate life and activities in an
of Marcopper and shield its properties/assets from effort to restore and reinstate the corporation to its
the reach of legitimate creditors, even those holding former position of successful operation and
valid and executory court judgments against it. solvency, the purpose being to enable the company
There is no other way for petitioner to recover its to gain a new lease on life and allow its creditors to
huge financial investments which it poured into be paid their claims out of its earnings.
Marcopper’s rehabilitation and the local situs where An essential function of corporate
the Deeds of Assignment were executed, without rehabilitation is the mechanism of suspension of all
petitioner continuing to do business in the country. actions and claims against the distressed
While petitioner may just be an assignee to corporation, which operates upon the due
the Deeds of Assignment, it may still fall within the appointment of a management committee or
meaning of “doing business” based on the ruling of rehabilitation receiver. The governing law
the Supreme Court that “Where a single act or concerning rehabilitation and suspension of actions
transaction however is not merely incidental or for claims against corporations is P.D. No. 902-A, as
casual but indicates the foreign corporation’s amended. Section 6(c) of the law mandates that,
intention to do other business in the Philippines, said upon appointment of a management committee,
single act or transaction constitutes doing or rehabilitation receiver, board, or body, all actions for
engaging in or transacting business in the claims against corporations, partnerships or
Philippines.” (MR HOLDINGS, INC. VS. BAJAR) associations under management or receivership
pending before any court, tribunal, board, or body
The true test (for doing business), however, shall be suspended. Ricardo V. Castillo
seems to be whether the foreign corporation is vs. Uniwide Warehouse Club, Inc. and/or
continuing the body of the business or enterprise for Jimmy Gow, G.R. No. 169725, April 30, 2010
which it was organized or whether it has
substantially retired from it and turned it over to The issue of whether or not preferred
another. (Substance test) creditors of distressed corporations stand on equal
The second test is the continuity test, footing with all other creditors gains relevance and
expressed thus: materiality only upon the appointment of a
The term (doing business) implies a management committee, rehabilitation receiver,
continuity of commercial dealings and board or body. (RCBC VS. IAC)
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of The reason for suspending actions for
some of the functions normally incident to, and in the claims against the corporation should not be difficult
progressive prosecution of, the purpose and objects to discover. It is not really to enable the
of its organization. (AGILENT TECHNOLOGIES VS. management committee or the rehabilitation receiver
INTEGRATED SILICON) to substitute the defendant in any pending action
against it before any court, tribunal, board or body.
The party is estopped from questioning the Obviously, the real justification is to enable the
capacity of a foreign corporation to institute an management committee or rehabilitation receiver to
action in our courts where it had obtained benefits effectively exercise its/his powers free from any
from its dealings with such foreign corporations and judicial or extra-judicial interference that might duly
thereafter committed a breach of or sought to hinder or prevent the “rescue” of the debtor
renege on its obligations. The rule relating to
 Saint Louis University COMMERCIAL LAW 349
2012 BAR OPERATIONS

company. (B.F. HOMES, INC. VS. CA cited in PAL clear and makes no distinction as to the claims that
VS. SPOUSES SADIC) are suspended once a management committee is
created or a rehabilitation receiver is
The claim of petitioners for payment of appointed. Since the law makes no distinction or
tuition fees from CAP is included in the definition of exemptions, neither should this
“claims” under the Interim Rules. In addiin, the Court. Ubi lex non distinguit nec nos distinguere deb
Interim Rules do not provide that a claim arising from emos. Philippine Airlines, Inc. v. Zamoradeclares
a pre-need contract is an exception to the power of that the automatic suspension of an action for claims
the trial court to stay enforcement of all claims upon against a corporation under a rehabilitation receiver
the finding that the petition for rehabilitation is or management committee embraces all phases of
sufficient in form and substance. Kei Marie and the suit, that is, the entire proceedings of an action
Bianca Angelica both surnamed Abrera, minors, or suit and not just the payment of claims.
represented by their parents Evelyn C. Abrera, et al. The reason behind the imperative nature of
vs. Hon. Romeo F. Barza, in his capacity as a suspension or stay order in relation to the
Presiding Judge of Regional Trial Court, Branch creditors’ claims cannot be downplayed, for indeed
61, Makati City and College Assurance Plan the indiscriminate suspension of actions for claims
Philippines, Inc. G.R. No. 171681, September 11, intends to expedite the rehabilitation of the
2009. distressed corporation by enabling the management
committee or the rehabilitation receiver to effectively
On labor claim. The term “claim” has been exercise its/his powers free from any judicial or
construed to refer to debts or demands of a extrajudicial interference that might unduly hinder or
pecuniary nature, or the assertion to have money prevent the rescue of the debtor company. To allow
paid. It was referred to, in Arranza v. B.F. Homes, such other actions to continue would only add to the
Inc., as an action involving monetary considerations burden of the management committee or
and in Philippine Airlines v. Kurangking, the term rehabilitation receiver, whose time, effort and
was identified as the right to payment, whether or resources would be wasted in defending claims
not it is reduced to judgment, liquidated against the corporation, instead of being directed
or unliquidated, fixed or contingent, matured toward its restructuring and rehabilitation.
or unmatured, disputed or undisputed, legal or At this juncture, it must be conceded that the
equitable, and secured or unsecured. Furthermore, date when the claim arose, or when the action was
the actions that were suspended cover all claims filed, has no bearing at all in deciding whether the
against a distressed corporation whether for given action or claim is covered by the stay or
damages founded on a breach of contract of suspension order. What matters is that as long as
carriage, labor cases, collection suits or any other the corporation is under a management committee
claims of a pecuniary nature. More importantly, the or a rehabilitation receiver, all actions for claims
new rules on corporate rehabilitation, as well as the against it, whether for money or otherwise, must
interim rules, provide an all-encompassing definition yield to the greater imperative of corporate revival,
of the term and, thus, include all claims or demands excepting only, as already mentioned, claims for
of whatever nature or character against a debtor or payment of obligations incurred by the corporation in
its property, whether for money or otherwise. There the ordinary course of business.
is no doubt that petitioner’s claim in this case, arising It is, thus, not difficult to see why the subject
as it does from his alleged illegal dismissal, is a action for illegal dismissal and damages against
claim covered by the suspension order issued by the respondent corporation ought to have been
SEC, as it is one for pecuniary consideration. suspended at the first instance respondents
Ricardo V. Castillo vs.Uniwide Warehouse Club, submitted before the Labor Arbiter their motion to
Inc. and/or Jimmy Gow, G.R. No. 169725, April 30, suspend proceedings in the illegal dismissal case.
2010. This, considering that at the time the labor case was
filed on August 26, 2002, respondent corporation
On suspension of proceedings. was undergoing proceedings for rehabilitation and
Jurisprudence is settled that the suspension of was later on declared to be in a state of suspension
proceedings referred to in the law uniformly applies of payments. Ricardo V. Castillo
to “all actions for claims” filed against a corporation, vs. Uniwide Warehouse Club, Inc. and/or
partnership or association under management or Jimmy Gow, G.R. No. 169725, April 30, 2010.
receivership, without distinction, except only those
expenses incurred in the ordinary course of Rehabilitation; accommodation
business. In the oft-cited case mortgagors. The rehabilitation court committed no
of Rubberworld (Phils.) Inc. v. NLRC, the Court reversible error when it removed TCT No. 133164
noted that aside from the given exception, the law is from the coverage of the stay order. The Interim
 Saint Louis University COMMERCIAL LAW 350
2012 BAR OPERATIONS

Rules of Procedure on Corporate Rehabilitation is corporation. Jose Marcel Panlilio, et al. vs. Regional
silent on the enforcement of claims specifically Trial Court, et al., People of the Philippines and
against the properties of accommodation Social Security System, G.R. No. 173846, February
mortgagors. It only covers the suspension, during 2, 2011
the pendency of the rehabilitation, of the
enforcement of all claims against the debtor, its Corporate rehabilitation; suspension of
guarantors and sureties not solidarily liable with the criminal proceedings. The rehabilitation of SIHI
mortgagor. and the settlement of claims against the corporation
Furthermore, the newly adopted Rules of is not a legal ground for the extinction of petitioners’
Procedure on Corporate Rehabilitation has a criminal liabilities. There is no reason why criminal
specific provision for this special arrangement proceedings should be suspended during corporate
among a debtor, its creditor and its accommodation rehabilitation, more so, since the prime purpose of
mortgagor. Section 7(b), Rule 3 of the said Rules the criminal action is to punish the offender in order
explicitly allows the foreclosure by a creditor of a to deter him and others from committing the same or
property not belonging to a debtor under corporate similar offense, to isolate him from society, reform
rehabilitation. Pacific Wide Realty and Development and rehabilitate him or, in general, to maintain social
Corporation vs. Puerto Azul Land, Inc./Pacific Wide order. As correctly observed in Rosario, it would be
Realty and Development Corporation Vs. Puerto absurd for one who has engaged in criminal conduct
Azul Land, Inc., G.R. No. 178768/G.R. No. 180893, could escape punishment by the mere filing of a
November 25, 2009. petition for rehabilitation by the corporation of which
he is an officer.
Rehabilitation; opposition. Successful The prosecution of the officers of the
rehabilitation of a distressed corporation will benefit corporation has no bearing on the pending
its debtors, creditors, employees, and the economy rehabilitation of the corporation, especially since
in general. The court may approve a rehabilitation they are charged in their individual capacities. Such
plan even over the opposition of creditors holding a being the case, the purpose of the law for the
majority of the total liabilities of the debtor if, in its issuance of the stay order is not compromised, since
judgment, the rehabilitation of the debtor is feasible the appointed rehabilitation receiver can still fully
and the opposition of the creditors is manifestly discharge his functions as mandated by law. It bears
unreasonable. The rehabilitation plan, once to stress that the rehabilitation receiver is not
approved, is binding upon the debtor and all persons charged to defend the officers of the corporation. If
who may be affected by it, including the creditors, there is anything that the rehabilitation receiver
whether or not such persons have participated in the might be remotely interested in is whether the court
proceedings or have opposed the plan or whether or also rules that petitioners are civilly liable. Such a
not their claims have been scheduled. Pacific Wide scenario, however, is not a reason to suspend the
Realty and Development Corporation vs. Puerto criminal proceedings, because as aptly discussed
Azul Land, Inc./Pacific Wide Realty and in Rosario, should the court prosecuting the officers
Development Corporation Vs. Puerto Azul Land, of the corporation find that an award or
Inc., G.R. No. 178768/G.R. No. 180893, November indemnification is warranted, such award would fall
25, 2009. under the category of claims, the execution of which
would be subject to the stay order issued by the
Corporate rehabilitation; feature. rehabilitation court. The penal sanctions as a
Corporate rehabilitation connotes the restoration of consequence of violation of the SSS law, in relation
the debtor to a position of successful operation and to the revised penal code can therefore be
solvency, if it is shown that its continued operation is implemented if petitioners are found guilty after trial.
economically feasible and its creditors can recover However, any civil indemnity awarded as a result of
more, by way of the present value of payments their conviction would be subject to the stay order
projected in the rehabilitation plan, if the corporation issued by the rehabilitation court. Only to this extent
continues as a going concern than if it is can the order of suspension be considered
immediately liquidated.It contemplates a obligatory upon any court, tribunal, branch or body
continuance of corporate life and activities in an where there are pending actions for claims against
effort to restore and reinstate the corporation to its the distressed corporation.
former position of successful operation and Congress has recently enacted Republic Act
solvency, the purpose being to enable the company No. 10142, or the Financial Rehabilitation and
to gain a new lease on life and allow its creditors to Insolvency Act of 2010. Section 18 thereof explicitly
be paid their claims out of its earnings provides that criminal actions against the individual
A principal feature of corporate rehabilitation officer of a corporation are not subject to the Stay or
is the suspension of claims against the distressed Suspension Order in rehabilitation
 Saint Louis University COMMERCIAL LAW 351
2012 BAR OPERATIONS

proceedings. Jose Marcel Panlilio, et al. vs. Therefore, the February 20, 1998
Regional Trial Court, et al., People of the Philippines Suspension Order issued by the SEC did not and
and Social Security System, G.R. No. 173846, could not have included the subject
February 2, 2011. properties. Samuel U. Lee, et al. vs. Bangkok Bank
Public Company, Limited, G.R. No. 173349,
Suspension of payments; properties February 9, 2011.
owned by private individuals. In Chung Ka Bio v.
Intermediate Appellate Court, this Court resolved in Rehabilitation receiver; role. As an officer
the negative the issue of whether private individuals of the court and an expert, the rehabilitation receiver
can file with the SEC petitions for declaration in a plays an important role in corporate rehabilitation
state of suspension of payments. We held that proceedings. In Pryce Corporation v. Court of
Sec. 5(d) of PD 902-A clearly does not allow a mere Appeals, the Court held that, “the purpose of the law
individual to file the petition, which is limited to in directing the appointment of receivers is to protect
“corporations, partnerships or the interests of the corporate investors and
associations.” Besides, We pointed out that the creditors.” Section 14 of the Interim Rules of
SEC, being a mere administrative agency, is a Procedure on Corporate Rehabilitation enumerates
tribunal of limited jurisdiction and, as such, can only the powers and functions of the rehabilitation
exercise those powers, which are specifically receiver: (1) verify the accuracy of the petition,
granted to them by their enabling statutes. We, including its annexes such as the schedule of debts
thus, concluded that where no authority is granted to and liabilities and the inventory of assets submitted
hear petitions of individuals for suspension of in support of the petition; (2) accept and incorporate,
payments, such petitions are beyond the when justified, amendments to the schedule of debts
competence of the SEC. In short, the SEC has no and liabilities; (3) recommend to the court the
jurisdiction over private individuals relative to any disallowance of claims and rejection of amendments
petition for suspension of payments, whether the to the schedule of debts and liabilities that lack
private individual is a petitioner or a co- sufficient proof and justification; (4) submit to the
petitioner. We have said time and again that the court and make available for review by the creditors
SEC’s “jurisdiction is limited only to corporations and a revised schedule of debts and liabilities; (5)
corporate assets;” it has no jurisdiction over the investigate the acts, conduct, properties, liabilities,
properties of private individuals or natural persons, and financial condition of the debtor, the operation of
even if they are the corporation’s officers or its business and the desirability of the continuance
sureties. We have, thus, consistently applied this thereof, and any other matter relevant to the
ruling to the subsequent Ong v. Philippine proceedings or to the formulation of a rehabilitation
Commercial International Bank, Modern Paper plan; (6) examine under oath the directors and
Products, Inc. v. Court of Appeals, and Union Bank officers of the debtor and any other witnesses that
of the Philippines v. Court of Appeals. he may deem appropriate; (7) make available to the
Here, it is undisputed that the petition for creditors documents and notices necessary for them
suspension of payments was collectively filed by the to follow and participate in the proceedings; (8)
five corporations owned by the Lee family. It is report to the court any fact ascertained by him
likewise undisputed that together with the pertaining to the causes of the debtor’s problems,
consolidated petition is a list of properties, which fraud, preferences, dispositions, encumbrances,
included the subject Antipoloproperties owned by misconduct, mismanagement, and irregularities
Samuel and Pauline Lee. The fact, however, that committed by the stockholders, directors,
the subject properties were included in the list management, or any other person; (9) employ such
submitted to the SEC does not confer jurisdiction on person or persons such as lawyers, accountants,
the SEC over such properties. It is apparent that appraisers, and staff as are necessary in performing
even if the members of the Lee family are joined as his functions and duties as rehabilitation receiver;
co-petitioners with the five corporations, (10) monitor the operations of the debtor and to
still, this could not confer jurisdiction on the SEC immediately report to the court any material adverse
over the Lee family members—as private change in the debtor’s business; (11) evaluate the
individuals—nor could this affect their privately existing assets and liabilities, earnings and
owned properties. operations of the debtor; (12) determine and
Further, the fact that the debts of MDEC and recommend to the court the best way to salvage and
MHI to Bangkok Bank are secured by the Lee family protect the interests of the creditors, stockholders,
through the guarantees will not likewise put the Lee and the general public; (13) study the rehabilitation
family and their privately owned properties under the plan proposed by the debtor or any rehabilitation
jurisdiction of the SEC through the consolidated plan submitted during the proceedings, together with
petition for suspension of payments. any comments made thereon; (14) prohibit and
 Saint Louis University COMMERCIAL LAW 352
2012 BAR OPERATIONS

report to the court any encumbrance, transfer, or the debtor’s properties were liquidated; and (f) such
disposition of the debtor’s property outside of the other relevant information to enable a reasonable
ordinary course of business or what is allowed by investor to make an informed decision on the
the court; (15) prohibit and report to the court any feasibility of the rehabilitation plan.
payments outside of the ordinary course of The Court notes that petitioners failed to
business; (16) have unlimited access to the debtor’s include a liquidation analysis in their rehabilitation
employees, premises, books, records, and financial plan. Siochi Fishery Enterprises, Inc., et al. vs.
documents during business hours; (17) inspect, Bank of the Philippine Islands, G.R. No. 193872.
copy, photocopy, or photograph any document, October 19, 2011.
paper, book, account, or letter, whether in the
possession of the debtor or other persons; (18) gain Rehabilitation; property covered by
entry into any property for the purpose of inspecting, rehabilitation. Cash dividends held by Belson and
measuring, surveying, or photographing it or any claimed by both the Alcantaras and Advent Capital
designated relevant object or operation thereon; (19) does not constitute corporate assets of the latter that
take possession, control, and custody of the debtor’s the rehabilitation court may, upon motion, require to
assets; (20) notify the parties and the court as to be conveyed to the rehabilitation receiver for his
contracts that the debtor has decided to continue to disposition.
perform or breach; (21) be notified of, and to attend Advent Capital asserts that the cash
all meetings of the board of directors and dividends in Belson’s possession formed part of its
stockholders of the debtor; (22) recommend any assets based on paragraph 9 of its Trust Agreement
modification of an approved rehabilitation plan as he with the Alcantaras,
may deem appropriate; (23) bring to the attention of According to Advent Capital, it could
the court any material change affecting the debtor’s automatically deduct its management fees from the
ability to meet the obligations under the rehabilitation Alcantaras’ portfolio that they entrusted to
plan; (24) recommend the appointment of a it. Paragraph 9 of the Trust Agreement provides that
management committee in the cases provided for Advent Capital could automatically deduct its trust
under Presidential Decree No. 902-A, as amended; fees from the Alcantaras’ portfolio, “at the end of
(25) recommend the termination of the proceedings each calendar quarter,” with the corresponding duty
and the dissolution of the debtor if he determines to submit to the Alcantaras a quarterly accounting
that the continuance in business of such entity is no report within 20 days after.
longer feasible or profitable or no longer works to the But the problem is that the trust fees that
best interest of the stockholders, parties-litigants, Advent Capital’s receiver was claiming were for past
creditors, or the general public; and (26) apply to the quarters. Based on the stipulation, these should
court for any order or directive that he may deem have been deducted as they became due. As it
necessary or desirable to aid him in the exercise of happened, at the time Advent Capital made its move
his powers. Siochi Fishery Enterprises, Inc., et al. to collect its supposed management fees, it neither
vs. Bank of the Philippine Islands, G.R. No. 193872. had possession nor control of the money it wanted
October 19, 2011. to apply to its claim. Belson, a third party, held the
money in the Alcantaras’ names. Whether it should
Rehabilitation; rehabilitation plan. The deliver the same to Advent Capital or to the
rehabilitation plan is an indispensable requirement in Alcantaras is not clear. What is clear is that the
corporate rehabilitation proceedings. Section 5 of issue as to who should get the same has been
the Rules enumerates the essential requisites of a seriously contested.
rehabilitation plan: The real owner of the trust property is the
The rehabilitation plan shall include (a) the trustor-beneficiary. In this case, the trustors-
desired business targets or goals and the duration beneficiaries are the Alcantaras. Thus, Advent
and coverage of the rehabilitation; (b) the terms and Capital could not dispose of the Alcantaras’ portfolio
conditions of such rehabilitation which shall include on its own. The income and principal of the portfolio
the manner of its implementation, giving due regard could only be withdrawn upon the Alcantaras’ written
to the interests of secured creditors; (c) the material instruction or order to Advent Capital. The latter
financial commitments to support the rehabilitation could not also assign or encumber the portfolio or its
plan; (d) the means for the execution of the income without the written consent of the Alcantara.
rehabilitation plan, which may include conversion of All these are stipulated in the Trust
the debts or any portion thereof to equity, Agreement. Advent Capital and Finance
restructuring of the debts, dacion en pago, or sale of Corporation vs. Nicasio I. Alcantara and Editha I.
assets or of the controlling interest; (e) a liquidation Alcantara, G.R. No. 183050, January 25, 2012.
analysis that estimates the proportion of the claims
that the creditors and shareholders would receive if
 Saint Louis University COMMERCIAL LAW 353
2012 BAR OPERATIONS

Rehabilitation proceedings and the non- In its petition before the Supreme Court, EIB
impairment clause argues that the rehabilitation plan was unreasonable
Can a rehabilitation court compel a lender to and in violation of the non-impairment clause. The
accept a 50% reduction in the borrower’s principal Supreme Court disagreed. The court first explained
obligation? Would that violate the non-impairment of the nature of rehabilitation proceedings:
contracts clause of the Constitution? Rehabilitation contemplates a continuance
In Pacific Wide Realty and Development of corporate life and activities in an effort to restore
Corporation vs. Puerto Azul Land, Inc./Pacific Wide and reinstate the corporation to its former position of
Realty and Development Corporation successful operation and solvency. The purpose of
Vs. Puerto Azul Land, Inc., G.R. No. 178768/G.R. rehabilitation proceedings is to enable the company
No. 180893, November 25, 2009, the borrower, to gain a new lease on life and thereby allow
Puerto Azul Land, Inc. (PALI) is the owner and creditors to be paid their claims from its earnings.
developer of the Puerto Azul Complex situated in The rehabilitation of a financially distressed
Ternate, Cavite. Its business involves the corporation benefits its employees, creditors,
development of Puerto Azul into a satellite city with stockholders and, in a larger sense, the general
residential areas, resort, tourism and retail public.
commercial centers with recreational areas. In order Under the Rules of Procedure on Corporate
to finance its operations, it obtained loans from Rehabilitation, “rehabilitation” is defined as the
various banks, the principal amount of which restoration of the debtor to a position of successful
amounted to aroundPhP640 million. operation and solvency, if it is shown that its
Because of financial difficulties, PALI continuance of operation is economically feasible
subsequently filed a petition for rehabilitation. After and its creditors can recover by way of the present
trial, the rehabilitation court issued a decision which value of payments projected in the plan, more if the
reads, in part: corporation continues as a going concern than if it is
The rehabilitation of the petitioner, therefore, immediately liquidated.
shall proceed as follows. . . An indispensable requirement in the
2. Creditors who will not opt for dacion rehabilitation of a distressed corporation is the
shall be paid in accordance with the restructuring of rehabilitation plan . . .
the obligations as recommended by the Receiver as On EIB’s argument that the rehabilitation
follows: plan violates the non-impairment clause, the court
a) The obligations to secured creditors ruled:
will be subject to a 50% haircut of the principal, and In G.R. No. 180893, the rehabilitation plan is
repayment shall be semi-annually over a period of contested on the ground that the same is
10 years, with 3-year grace period. Accrued interests unreasonable and results in the impairment of the
and penalties shall be condoned. Interest shall be obligations of contract. PWRDC contests the
paid at the rate of 2% p.a. for the first 5 years and following stipulations in PALI’s rehabilitation plan:
5% p.a. thereafter until the obligations are fully paid. fifty percent (50%) reduction of the principal
The petitioner shall allot 50% of its cash flow obligation; condonation of the accrued and
available for debt service for secured creditors. substantial interests and penalty charges;
Upon completion of payments to government and repayment over a period of ten years, with minimal
employee accounts, the petitioner’s cash flow interest of two percent (2%) for the first five years
available for debt service shall be used until the and five percent (5%) for the next five years until
obligations are fully paid. fully paid, and only upon availability of cash flow for
b) One half (1/2) of the principal of the debt service.
petitioner’s unsecured loan obligations to other We find nothing onerous in the terms of
creditors shall be settled through non-cash offsetting PALI’s rehabilitation plan. The Interim Rules on
arrangements, with the balance payable semi- Corporate Rehabilitation provides for means of
annually over a period of 10 years, with 3-year grace execution of the rehabilitation plan, which may
period, with interest at the rate of 2% p.a. for the first include, among others, the conversion of the debts
5 years and 5% p.a. from the 6th year onwards until or any portion thereof to equity, restructuring of the
the obligations are settled in full. Accrued interest debts, dacion en pago, or sale of assets or of the
and penalties shall be condoned. (underscoring controlling interest.
supplied) The restructuring of the debts of PALI is part
One of the lenders, Export and Industry and parcel of its rehabilitation. Moreover, per
Bank (EIB), filed with the Court of Appeals (CA) a findings of fact of the RTC and as affirmed by the
petition for review under Rule 42 of the Rules of CA, the restructuring of the debts of PALI would not
Court. The CA affirmed the decision of the be prejudicial to the interest of PWRDC as a secured
rehabilitation court.
 Saint Louis University COMMERCIAL LAW 354
2012 BAR OPERATIONS

creditor. Enlightening is the observation of the CA in acts intended to preserve such assets. Otherwise, it
this regard,viz.: would be well-nigh impossible for PCGG to perform
There is nothing unreasonable or onerous its duties and exercise its powers under existing
about the 50% reduction of the principal amount laws, for the owner of the sequestered assets will
when, as found by the court a quo, a Special more often than not oppose or resist PCGG’s
Purpose Vehicle (SPV) acquired the credits of PALI actions if their consent is a condition precedent. The
from its creditors at deep discounts of as much as act of PCGG of proposing the conversion of the
85%. Meaning, PALI’s creditors accepted only 15% sequestered SMC shares to Series 1 Preferred
of their credit’s value. Stated otherwise, if PALI’s Shares was clearly an exercise of its mandate under
creditors are in a position to accept 15% of their existing laws, where the consent of the CIIF
credit’s value, with more reason that they should be Companies is rendered unnecessary.
able to accept 50% thereof as full settlement by their Additionally, the above contention has been
debtor. x x x. rendered moot with the filing on October 26, 2009 of
We also find no merit in PWRDC’s the Manifestation dated October 23, 2009. Attached
contention that there is a violation of the impairment to such Manifestation is the Secretary’s Certificate of
clause. Section 10, Article III of the Constitution the 14 CIIF companies approving the conversion of
mandates that no law impairing the obligations of the SMC Common Shares into Series 1 Preferred
contract shall be passed. This case does not involve Shares. Philippine Coconut Producers Federation,
a law or an executive issuance declaring the Inc. (COCOFED), et al. vs. Republic of the
modification of the contract among debtor PALI, its Philippines, G.R. Nos. 177857-58/G.R. No.
creditors and its accommodation mortgagors. Thus, 178193/G.R. No. 180705, February 11, 2010.
the non-impairment clause may not be invoked.
Furthermore, as held in Oposa v. Factoran, Jr. even Corporation; derivative suit. It is well
assuming that the same may be invoked, the non- settled in this jurisdiction that where corporate
impairment clause must yield to the police power of directors are guilty of a breach of trust — not of mere
the State. Property rights and contractual rights are error of judgment or abuse of discretion —
not absolute. The constitutional guaranty of non- and intracorporate remedy is futile or useless, a
impairment of obligations is limited by the exercise of stockholder may institute a suit in behalf of himself
the police power of the State for the common good and other stockholders and for the benefit of the
of the general public. corporation, to bring about a redress of the wrong
Successful rehabilitation of a distressed inflicted directly upon the corporation and indirectly
corporation will benefit its debtors, creditors, upon the stockholders. Santiago Cua, Jr., et al.
employees, and the economy in general. The court vs. Miguel Ocampo Tan, et al./Santiago Cua,
may approve a rehabilitation plan even over the Sr., et al. vs. Court of Appeals, et al, G.R. No.
opposition of creditors holding a majority of the total 181455-56/G.R. No. 182008, December 4, 2009
liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the BANKING LAWS
opposition of the creditors is manifestly
unreasonable. The rehabilitation plan, once NEW CENTRAL BANK ACT
approved, is binding upon the debtor and all persons It must be remembered that the Central
who may be affected by it, including the creditors, Bank of the. Philippines (now Bangko Sentral ng
whether or not such persons have participated in the Pilipinas), through the Monetary Board, is the
proceedings or have opposed the plan or whether or government agency charged with the responsibility
not their claims have been scheduled.” of administering the monetary, banking and credit
system of the country and is granted, the power of
SEQUESTERED CORPORATION supervision and examination over banks and non-
Tañada, et al. posit the view that the bank financial institutions performing quasi-banking
conversion of shares needs the acquiescence of the functions, of which savings and loan associations,
14 CIIF companies. such as PESALA, form part of. (BUSUEGO VS. CA)
The SMC shares allegedly owned by the
CIIF companies are sequestered assets under the While admittedly the Central Bank Act gives
control and supervision of the PCGG pursuant to vast and far-reaching powers to the conservator of a
Executive Order No. 1, Series of 1986. It is the duty bank, it must be pointed out that such powers must
of the PCGG to preserve the sequestered assets be related to the “preservation of the assets of the
and prevent their dissipation. In the exercise of its bank (the reorganization thereof) and the restoration
powers, the PCGG need not seek or obtain the of its viability.” Such powers, enormous and
consent or even the acquiescence of the extensive as they are, cannot extend to ex post facto
sequestered assets owner with respect to any of its repudiation of perfected transactions, otherwise they
 Saint Louis University COMMERCIAL LAW 355
2012 BAR OPERATIONS

would infringe against the non-impairment clause of appointed, the assets of the bank pass beyond its
the Constitution. (FIRST PHIL. INT’L BANK VS. CA) control into the possession and control of the
receiver whose duty it is to administer the assets for
There is no requirement whether express or the benefit of the creditors of the bank. Thus, the
implied, that a hearing be first conducted before a appointment of a receiver operates to suspend the
banking institution may be placed under authority of the bank and of its directors and officers
receivership. On the contrary, the law is explicit as to over its property and effects, such authority being
the conditions prerequisite to the action of the reposed in the receiver, and in this respect, the
Monetary Board to forbid the institution to do receivership is equivalent to an injunction to restrain
business in the Philippines and to appoint a receiver the bank officers from intermeddling with the
to immediately take charge of the bank's assets and property of the bank in any way. (VILLANUEVA VS.
liabilities. They are: (a) an examination made by the CA)
examining department of the Central Bank; (b)
report by said department to the Monetary Board; The fact that the insolvent bank is forbidden
and (c) prima facie showing that the bank is in a to do business, that its assets are turned over to the
condition of insolvency or so situated that its Superintendent of Banks, as a receiver, for
continuance in business would involve probable loss conversion into cash, and that its liquidation is
to its depositors or creditors. undertaken with judicial intervention means that, as
The evident implication of the law, therefore, far as lawful and practicable, all claims against the
is that the appointment of a receiver may be made insolvent bank should be filed in the liquidation
by the Monetary Board without notice and hearing proceeding.
but its action is subject to judicial inquiry to insure We explained therein the rationale behind
the protection of the banking institution. Stated the provision, i.e., the judicial liquidation is intended
otherwise, due process does not necessarily require to prevent multiplicity of actions against the insolvent
a prior hearing; a hearing or an opportunity to be bank. It is a pragmatic arrangement designed to
heard may be subsequent to the closure. One can establish due process and orderliness in the
just imagine the dire consequences of a prior liquidation of the bank, to obviate the proliferation of
hearing: bank runs would be the order of the day, litigations and to avoid injustice and arbitrariness.
resulting in panic and hysteria. In the process, The lawmaking body contemplated that for
fortunes may be wiped out, and disillusionment will convenience only one court, if possible, should pass
ran the gamut of the entire banking community. upon the claims against the insolvent bank and that
(RURAL BANK OF BUHI VS. CA) the liquidation court should assist the
Superintendent of Banks and regulate his
The purpose of the law in requiring that only operations. (ONG VS. CA)
the stockholders of record representing the majority
of the capital stock may bring the action to set aside Payment; foreign currency. A stipulation
a resolution to place a bank under conservatorship of payment in dollars is not prohibited by any
is to ensure that it be not frustrated or defeated by prevailing law or jurisprudence at the time the loans
the incumbent Board of Directors or officers who were taken. In this regard, Article 1249 of the Civil
may immediately resort to court action to prevent its Code provides:
implementation or enforcement. It is presumed that Art. 1249. The payment of debts in money
such a resolution is directed principally against acts shall be made in the currency stipulated, and if it is
of said Directors and officers which place the bank in not possible to deliver such currency, then in the
a state of continuing inability to maintain a condition currency which is legal tender in the Philippines.
of liquidity adequate to protect the interest of Although the Civil Code took effect on
depositors and creditors. Indirectly, it is likewise August 30, 1950, jurisprudence had upheld the
intended to protect and safeguard the rights and continued effectivity of Republic Act No. 529, which
interests of the stockholders. Common sense and took effect earlier on June 16, 1950. Pursuant to
public policy dictate then that the authority to decide Section 1 of Republic Act No. 529, any agreement to
on whether to contest the resolution should he pay an obligation in a currency other than the
lodged with the stockholders owning a majority of Philippine currency is void; the most that could be
the shares for they are expected to be more demanded is to pay said obligation in Philippine
objective in determining whether the resolution is currency to be measured in the prevailing rate of
plainly arbitrary and issued in bad faith. (CENTRAL exchange at the time the obligation was incurred.
BANK VS. CA) On June 19, 1964, Republic Act No. 4100 took
effect, modifying Republic Act No. 529 by providing
It has been said that where upon the for several exceptions to the nullity of agreements to
insolvency of a bank a receiver therefor is pay in foreign currency.
 Saint Louis University COMMERCIAL LAW 356
2012 BAR OPERATIONS

On April 13, 1993, Central Bank Circular No. first be creditors and debtors of each other. While
1389 was issued, lifting foreign exchange PCIB, as the depositary bank, is Ramos’ debtor in
restrictions and liberalizing trade in foreign currency. the amount of his deposits, Ramos is not PCIB’s
In cases of foreign borrowings and foreign currency debtor under the evidence the PCIB adduced. PCIB
loans, however, prior BangkoSentral approval was thus had no basis, in fact or in law, to automatically
required. On July 5, 1996, Republic Act No. 8183 debit from Ramos’ bank account. Philippine
took effect, expressly repealing Republic Act No. Commercial Bank vs. Antonio B. Balmaceda and
529 in Section 2 thereof. The same statute also Rolando N. Ramos, G.R. No. 158143, September
explicitly provided that parties may agree that the 21, 2011.
obligation or transaction shall be settled in a
currency other than Philippine currency at the time SECRECY OF BANK DEPOSITS ACT
of payment. The lower court did not order an
Although the Credit Line Agreement examination of or inquiry into the deposit of B & B
between the spouses Tiu and Union Bank was Forest Development Corporation, as contemplated
entered into on November 21, 1995, when the in the law. It merely required Tan Kim Liong to
agreement to pay in foreign currency was still inform the court whether or not the defendant B & B
considered void under Republic Act No. 529, the Forest Development Corporation had a deposit in
actual loans, as shown in the promissory notes, the China Banking Corporation only for purposes of
were taken out from September 22, 1997 to March the garnishment issued by it, so that the bank would
26, 1998, during which time Republic Act No. 8183 hold the same intact and not allow any withdrawal
was already in effect. Union Bank of the Philippines until further order.
vs. Spouses Rodolfo T. Tiu and Victoria N. Tiu, G.R. It is clear that the prohibition against
Nos. 173090-91. September 7, 2011. examination of or inquiry into a bank deposit under
Republic Act 1405 does not preclude its being
Banks; degree of diligence required. The garnished to insure satisfaction of a judgment.
General Banking Law of 2000 requires of banks the Indeed there is no real inquiry in such a case, and if
highest standards of integrity and performance. The the existence of the deposit is disclosed the
banking business is impressed with public interest. disclosure is purely incidental to the execution
Of paramount importance is the trust and confidence process. It is hard to conceive that it was ever within
of the public in general in the banking industry. the intention of Congress to enable debtors to evade
Consequently, the diligence required of banks is payment of their just debts, even if ordered by the
more than that of a Roman pater familias or a good Court, through the expedient of converting their
father of a family. The highest degree of diligence is assets into cash and depositing the same in a bank.
expected.Philippine Commercial Bank vs. Antonio B. (CHINA BANKING CORP. VS. ORTEGA)
Balmaceda and Rolando N. Ramos, G.R. No.
158143, September 21, 2011. Before an in-camera inspection may be
allowed of bank deposits, there must be a pending
Banks; unilateral freezing of bank cases before a court of competent jurisdiction.
account. We also find that PCIB acted illegally in Further, the account must be clearly identified, the
freezing and debiting Ramos’ bank account. In BPI inspection limited to the subject matter of the
Family Bank v. Franco, we cautioned against the pending case before the court of competent
unilateral freezing of bank accounts by banks, noting jurisdiction. The bank personnel and the account
that: holder must be notified to be present during the
More importantly, [BPI Family Bank] does inspection, and such inspection may cover only the
not have a unilateral right to freeze the accounts of account identified in the pending case.
Franco based on its mere suspicion that the funds An examination by the Office of the
therein were proceeds of the multi-million peso scam Ombudsman is not a pending litigation to allow
Franco was allegedly involved in. To grant [BPI examination of the respondent’s bank account.
Family Bank], or any bank for that matter, the right to (MARQUEZ VS. DESIERTO)
take whatever action it pleases on deposits which it
supposes are derived from shady transactions, Thus, while Republic Act No. 1405 provides
would open the floodgates of public distrust in the that bank deposits are "absolutely confidential . . .
banking industry. and [therefore] may not be examined, inquired or
We see no legal merit in PCIB’s claim that looked into," except in those cases enumerated
legal compensation took place between it and therein, the Anti-Graft Law directs in mandatory
Ramos, thereby warranting the automatic deduction terms that bank deposits "shall be taken into
from Ramos’ bank account. For legal compensation consideration in the enforcement of this section,
to take place, two persons, in their own right, must notwithstanding any provision of law to the contrary."
 Saint Louis University COMMERCIAL LAW 357
2012 BAR OPERATIONS

The only conclusion possible is that section 8 of the discourage private hoarding so that the same may
Anti-Graft Law is intended to amend section 2 of be properly utilized by banks in authorized loans to
Republic Act No. 1405 by providing an additional assist in the economic development of the country.
exception to the rule against the disclosure of bank It covers all bank deposits in the Philippines and no
deposits. distinction was made between domestic and foreign
With regard to the claim that disclosure deposits. Thus, Republic Act No. 1405 is
would be contrary to the policy making bank considered a law of general application. On the
deposits confidential, it is enough to point out that other hand, Republic Act No. 6426 was intended to
while section 2 of Republic Act No. 1405 declares encourage deposits from foreign lenders and
bank deposits to be "absolutely confidential" it investors. It is a special law designed especially for
nevertheless allows such disclosure in the following foreign currency deposits in the Philippines. A
instances: (1) Upon written permission of the general law does not nullify a specific or special
depositor; (2) In cases of impeachment; (2) Upon law. Generaliaspecialibus non derogant. Therefore,
order of a competent court in cases of bribery or it is beyond cavil that Republic Act No. 6426 applies
dereliction of duty of public officials; (4) In cases in this case.
where the money deposited is the subject of the Applying Section 8 of Republic Act No.
litigation. Cases of unexplained wealth are similar to 6426, absent the written permission from Domsat,
cases of bribery or dereliction of duty and no reason Westmont Bank cannot be legally compelled to
is seen why these two classes of cases cannot be disclose the bank deposits of Domsat, otherwise, it
excepted from the rule making bank deposits might expose itself to criminal liability under the
confidential. The policy as to one cannot be different same act. Government Service Insurance System
from the policy as to the other. This policy expresses vs. Court of Appeals, et al., G.R. No. 189206. June
the notion that a public office is a public trust and 8, 2011.
any person who enters upon its discharge does so
with the full knowledge that his life, so far as relevant SPECIAL LAWS
to his duty, is open to public scrutiny. (PNB
VS.GANCAYCO) CHATTEL MORTGAGE
While a pledge, real estate mortgage, or
The inquiry into illegally acquired property- antichresis may exceptionally secure after-incurred
or property NOT "legitimately acquired"-extends to obligations so long as these future debts are
cases where such property is concealed by being accurately described, a chattel mortgage, however,
held by or recorded in the name of other persons. can only cover obligations existing at the time the
This proposition is made clear by R.A. No. 3019 mortgage is constituted. Although a promise
which quite categorically states that the term, expressed in a chattel mortgage to include debts
"legitimately acquired property of a public officer or that are yet to be contracted can be a binding
employee shall not include property unlawfully commitment that can be compelled upon, the
acquired by the respondent, but its ownership is security itself, however, does not come into
concealed by its being recorded in the name of, or existence or arise until after a chattel mortgage
held by, respondent's spouse, ascendants, agreement covering the newly contracted debt is
descendants, relatives or any other persons." executed either by concluding a fresh chattel
To sustain the petitioner's theory, and mortgage or by amending the old contract
restrict the inquiry only to property held by or in the conformably with the form prescribed by the Chattel
name of the government official or employee, or his Mortgage Law. Refusal on the part of the borrower
spouse and unmarried children is unwarranted in the to execute the agreement so as to cover the after-
light of the provisions of the statutes in question, and incurred obligation can constitute an act of default
would make available to persons in government who on the part of the borrower of the financing
illegally acquire property an easy and foolproof agreement whereon the promise is written but, of
means of evading investigation and prosecution; all course, the remedy of foreclosure can only cover the
they would have to do would be to simply place the debts extant at the time of constitution and during
property in the possession or name of persons other the life of the chattel mortgage sought to be
than their spouse and unmarried children. This is an foreclosed. (ACME SHOE, RUBBER & PLASTIC
absurdity that we will not ascribe to the lawmakers. VS. CA)
(BANCO FILIPINO VS. PURISIMA)
A stipulation in the chattel mortgage,
Bank secrecy; foreign currency extending its scope and effect to after-acquired
deposits. Republic Act No. 1405 was enacted for property, is valid and binding where the after-
the purpose of giving encouragement to the people acquired property is in renewal of, or in substitution
to deposit their money in banking institutions and to for, goods on hand when the mortgage was
 Saint Louis University COMMERCIAL LAW 358
2012 BAR OPERATIONS

executed, or is purchased with the proceeds of the very material, much less decisive. Though it is
sale of such goods. A mortgage may, by express desirable that receipts issued by a bonded
stipulations, be drawn to cover goods put in stock in warehouseman should conform to the provisions of
place of others sold out from time to time. A the Warehouseman Receipts Law, said provisions
mortgage may be made to include future are not mandatory, and indispensable in the sense
acquisitions of goods to be added to the original that if they fell short of the requirement of the
stock mortgaged, but the mortgage must expressly Warehouse Receipts Act, then the commodities
provide that future acquisitions shall be held as delivered for storage become ordinary deposits and
included in the mortgage. Where a mortgage will not be governed by the provisions of the Bonded
covering the stock in trade, furniture, and fixtures in Warehouse Act. Under Section 1 of the Warehouse
the mortgagor's store provides that "all goods, stock Receipts Act, the issuance of a warehouse receipt in
in trade, furniture, and fixtures hereafter purchased the form provided by it is merely permissive and
by the mortgagor shall be included in and covered directory and not obligatory. (GONZALES VS. GO
by the mortgage," the mortgage covers all after- TIONG)
acquired property of the classes mentioned, and,
upon foreclosure, such property may be taken and In conclusion, we hold that where a
sold by the mortgagee the same as the property in warehouse receipt or quedan is transferred or
possession of the mortgagor at the time the endorsed to a creditor only to secure the payment of
mortgage was executed. (TORRES VS. LIMJAP) a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods
In the instant case, defendant corporation covered by the warehouse receipt or quedan but he
elected to foreclose its mortgage upon default by the merely retains the right to keep and with the consent
plaintiffs in the payment of the agreed installments, of the owner to sell them so as to satisfy the
Having chosen to foreclose the chattel mortgage, obligation from the proceeds of the sale, this for the
and bought the purchased vehicles at the public simple reason that the transaction involved is not a
auction as the highest bidder, it submitted itself to sale but only a mortgage or pledge, and that if the
the consequences of the law as specifically property covered by the quedans or warehouse
mentioned, by which it is deemed to have renounced receipts is lost without the fault or negligence of the
any and all rights which it might otherwise have mortgagee or pledgee or the transferee or endorsee
under the promissory note and the chattel mortgage of the warehouse receipt or quedan, then said goods
as well as the payment of the unpaid balance. are to be regarded as lost on account of the real
(RIDAD VS. FILIPINAS INVESTMENT) owner, mortgagor or pledgor.
The indorsement and delivery of the
There is also no legal provision nor warehouse receipts (quedans) by Ramos and Zoleta
jurisprudence in our jurisdiction which makes a third to petitioner was not to convey "title" to or ownership
person who secures the fulfillment of another's of the goods but to secure (by way of pledge) the
obligation by mortgaging his own property to be loans granted to Ramos and Zoleta by petitioner.
solidarily bound with the principal obligor. A chattel The indorsement of the warehouse receipts
mortgage may be "an accessory contract" to a (quedans), to perfect the pledge, merely constituted
contract of loan, but that fact alone does not make a a symbolical or constructive delivery of the
third-party mortgagor solidarily bound with the possession of the thing thus encumbered. (PNB VS.
principal debtor in fulfilling the principal obligation SAYO, JR.)
that is, to pay the loan. The signatory to the principal
contract-loan-remains to be primarily bound. It is Regrettably, the factual settings do not
only upon the default of the latter that the creditor sufficiently indicate whether the demand to obtain
may have recourse on the mortgagors by foreclosing possession of the goods complied with Section 8 of
the mortgaged properties in lieu of an action for the the law. The presumption, nevertheless, would be
recovery of the amount of the loan. And the liability that the law was complied with, rather than
of the third-party mortgagors extends only to the breached, by petitioner. Upon the other hand, it
property mortgaged. Should there be any deficiency, would appear that the refusal of private respondents
the creditor has recourse on the principal debtor. to deliver the goods was not anchored on a valid
(CERNA VS. CA) excuse, i.e., non-satisfaction of the warehouseman's
lien over the goods, but on an adverse claim of
WAREHOUSE RECEIPTS LAW ownership. Private respondents justified their refusal
Any deposit made with a bonded to deliver the goods, as stated in their Answer with
warehouseman must necessarily be governed by Counterclaim and Third-Party Complaint in Civil
the provisions of Act No. 3893. The kind or nature of Case No. 90-53023, by claiming that they "are still
the receipts issued by him for the deposits is not the legal owners of the subject quedans and the
 Saint Louis University COMMERCIAL LAW 359
2012 BAR OPERATIONS

quantity of sugar represented therein." Under the In a similar vein, the case of People vs.
circumstances, this hardly qualified as a valid, legal Nitafan (supra) held: "The Trust Receipts Law
excuse. The loss of the warehouseman's lien, punishes the dishonesty and abuse of confidence in
however, does not necessarily mean the the handling of money or goods to the prejudice of
extinguishment of the obligation to pay the another regardless of whether the latter is the owner
warehousing fees and charges which continues to or not. The law does not seek to enforce payment of
be a personal liability of the owners, i.e., the a loan. Thus, there can be no violation of the right
pledgors, not the pledgee, in this case. But even as against imprisonment for non-payment of a debt."
to the owners-pledgors, the warehouseman fees and (TIOMICO VS. CA)
charges have ceased to accrue from the date of the
rejection by Noah's Ark to heed the lawful demand A letter of credit-trust receipt arrangement is
by petitioner for the release of the goods. (PNB VS. endowed with its own distinctive features and
SAYO, JR.) characteristics. Under that set-up, a bank extends a
Imperative is the right of the warehouseman loan covered by the letter of Credit, with the trust
to demand payment of his lien at this juncture, receipt as a security for the loan. In other words, the
because, in accordance with Section 29 of the transaction involves a loan feature represented by
Warehouse Receipts Law, the warehouseman loses the letter of credit, and a security feature which is in
his lien upon goods by surrendering possession the covering trust receipt.
thereof. In other words, the lien may be lost where A trust receipt, therefore, is a security
the warehouseman surrenders the possession of the agreement, pursuant to which a bank acquires a
goods without requiring payment of his lien, because "security interest” in the goods. It secures an
a warehouseman's lien is possessory in nature. indebtedness and there can be no such thing as
(PNB vs. Se, Jr.) security interest that secures no obligation.
Where a warehouse receipt or quedan is Contrary to the allegation of the VINTOLAS,
transferred or endorsed to a creditor only to secure IBAA did not become the real owner of the goods. It
the payment of a loan or debt, the transferee or was merely the holder of a security title for the
endorsee does not automatically become the owner advances it had made to the VINTOLAS. The goods
of the goods covered by the warehouse receipt or the VINTOLAS had purchased through IBAA
quedan but he merely retains the right to keep, and financing remain their own property and they hold it
with the consent of the owner to sell, them so as to at their own risk. The trust receipt arrangement did
satisfy the obligation from the proceeds of the sale, not convert the IBAA into an investor; the latter
this for the simple reason that the transaction remained a lender and creditor."
involved is not a sale but only a mortgage or pledge, For the bank has previously extended a loan
and if the property covered by the quedans or which the L/C represents to the importer, and by that
warehouse receipts is lost later without the fault or loan, the importer should be the real owner of the
negligence of the mortgagee or pledgee or the goods. If under the trust receipt, the bank is made to
transferee or endorsee of the warehouse receipt or appear as the owner, it was but an artificial
quedan, then said goods are to be regarded as lost expedient, more of a legal fiction than fact, for if it
on account of the real owner, mortgagor or pledgor. were go, it could dispose of the goods in any
(MARTINEZ VS. PNB) manner it wants, which it cannot do, just to give
consistency with the purpose of the trust receipt of
TRUST RECEIPTS LAW giving a stronger security for the loan obtained by
As regards the first issue, the Court has the importer. To consider the bank as the true owner
repeatedly upheld the validity of the Trust Receipts from the inception of the transaction would be to
Law and consistently declared that the said law does disregard the loan feature thereof.
not violate the constitutional proscription against Since the IBAA is not the factual owner of
imprisonment for non-payment of debts. the goods, the VINTOLAS cannot justifiably claim
Verily, PD 115 is a declaration by the that because they have surrendered the goods to
legislative authority that, as a matter of public policy, IBAA and subsequently deposited them in the
the failure of a person to turn over the proceeds of custody of the court, they are absolutely relieved of
the sale of goods covered by a trust receipt or to their obligation to pay their loan because of their
return said goods if not sold is a public nuisance to inability to dispose of the goods. The fact that they
be abated by the imposition of penal sanctions. were unable to sell the seashells in question does
In fine, PD 115 is a valid exercise of police not affect IBAA's right to recover the advances it had
power and is not repugnant to the constitutional made under the Letter of Credit. (VINTOLA VS.
provision of non-imprisonment for non-payment of INSULAR BANK)
debt.
 Saint Louis University COMMERCIAL LAW 360
2012 BAR OPERATIONS

The penal provisions of P.D. No. 115 apply debtor. Therefore, there is no conflict between the
even when the trust receipt issued covers goods or two provisions. (RADIOLA-TOSHIBA VS. IAC)
items not destined for sale or for use in manufacture,
and would include items obtained under a trust INTELLECTUAL PROPERTY LAW
receipt used to repair and maintain equipment used
in business. If the beneficiary is not paid under such TRADEMARK
trust receipt, the trustee is liable under the law. A word or a combination of words which is
(ALLIED BANKING CORP. VS. ORDOÑEZ) merely descriptive of an article of trade, or of its
composition, characteristics, or qualities, cannot be
From the legal and jurisprudential appropriated and protected as a trademark to the
standpoint it is clear that the security interest of the exclusion of others. (ONG OI GUI VS. DIRECTOR,
entruster is not merely an empty or idle title. To a PHILIPPINE PATENTS OFFICE, 96 PHIL. 673)
certain extent, such interest becomes a "lien" on the
goods because the entruster's advances will have to Common geometric shapes, such as
be settled first before the entrustee can consolidate diamonds, are ordinarily not regarded as indicia of
his ownership over the goods. A contrary view would the origin of goods, unless they have acquired a
be disastrous. For to refuse to recognize the title of secondary meaning. (VICTORIAS MILLING CO.
the banker under the trust receipt as security for the INC. VS. ONG SU, 79 SCRA 207)
advance of the purchase price would be to strike
down a bonafide and honest transaction of great A trademark is any distinctive word, name,
commercial benefit and advantage founded upon a symbol, emblem, sign, or device, or any combination
well-recognized custom by which banking credit is thereof, adopted and used by a manufacturer or
officially mobilized for manufacturers and importers merchant on his goods to identify and distinguish
of small means. them from those manufactured, sold, or dealt by
Besides, as earlier stated, the law warrants others. Inarguably, it is an intellectual property
the validity of petitioner's security interest in the deserving protection by law. In trademark
goods pursuant to the written terms of the trust controversies, each case must be scrutinized
receipt as against all creditors of the trust receipt according to its peculiar circumstances, such that
agreement. The only exception to the rule is when jurisprudential precedents should only be made to
the properties are in the hands of an innocent apply if they are specifically in point.
purchaser for value and in good faith. The records As Myra correctly posits, as a registered
however do not show that the winning bidder is such trademark owner, it has the right under Section 147
purchaser. Neither can private respondents plead of R.A. No. 8293 to prevent third parties from using
preferential claims to the properties as petitioner has a trademark, or similar signs or containers for goods
the primary right to them until its advances are fully or services, without its consent, identical or similar to
paid. (PRUDENTIAL BANK VS. NLRC) its registered trademark, where such use would
result in a likelihood of confusion. Dermaline, Inc.
INSOLVENCY LAW vs. Myra Phamaceuticals, Inc., G.R. No. 190065,
The provision of the above-quoted Section August 16, 2010.
32, of the Insolvency Law is very clear-that
attachments dissolved are those levied within one One who has adopted and used a
(1) month next preceding the commencement of the trademark on his goods does not prevent the
insolvency proceedings and judgments vacated and adoption and use on the same trademark by others
set aside are judgments entered in any action, for products which and of a different description.
including judgment entered by default or consent of (FABERGE INC. VS. INTERMEDIATE APPELLATE
the debtor, where the action was filed within thirty COURT, 215 SCRA 3160
(30) days immediately prior to the commencement of
the insolvency proceedings. In short, there is cut off The ownership of a trademark is acquired by
period--one (1) month in attachment cases and thirty its registration and its actual use by the
(30) days, in judgments entered in actions manufacturer or distributor of the goods made
commenced prior to the insolvency proceedings. available to the purchasing public. Section 122 of
Section 79, on the other hand, relied upon by private R.A. No. 8293 provides that the rights in a mark
respondents, provides for the right of the plaintiff if shall be acquired by means of its valid registration
the attachment is not dissolved before the with the IPO. A certificate of registration of a mark,
commencement of proceedings in insolvency, or is once issued, constitutes prima facie evidence of the
dissolved by an undertaking given by the defendant, validity of the registration, of the registrant’s
if the claim upon which the attachment suit was ownership of the mark, and of the registrant’s
commenced is proved against the estate of the exclusive right to use the same in connection with
 Saint Louis University COMMERCIAL LAW 361
2012 BAR OPERATIONS

the goods or services and those that are related however, be interpreted to mean that ownership
thereto specified in the certificate. R.A. No. 8293, should be based upon an earlier filing date. While
however, requires the applicant for registration or RA 8293 removed the previous requirement of proof
the registrant to file a declaration of actual use of actual use prior to the filing of an application for
(DAU) of the mark, with evidence to that effect, registration of a mark, proof of prior and continuous
within three (3) years from the filing of the use is necessary to establish ownership of a mark.
application for registration; otherwise, the application Such ownership constitutes sufficient evidence to
shall be refused or the mark shall be removed from oppose the registration of a mark.
the register. In other words, the prima Sec. 134 of the IP Code provides that “any
faciepresumption brought about by the registration person who believes that he would be damaged by
of a mark may be challenged and overcome, in an the registration of a mark x x x” may file an
appropriate action, by proof of the nullity of the opposition to the application. The term “any person”
registration or of non-use of the mark, except when encompasses the true owner of the mark¾the prior
excused. Moreover, the presumption may likewise and continuous user.
be defeated by evidence of prior use by another Notably, the Court has ruled that the prior
person, i.e., it will controvert a claim of legal and continuous use of a mark may even overcome
appropriation or of ownership based on registration the presumptive ownership of the registrant and be
by a subsequent user. This is because a trademark held as the owner of the mark.
is a creation of use and belongs to one who first Here, the incontrovertible truth, as
used it in trade or commerce. established by the evidence submitted by the
The determination of priority of use of a parties, is that EYIS is the prior user of the mark. On
mark is a question of fact. Adoption of the mark the other hand, Shen Dar failed to refute the
alone does not suffice. One may make evidence cited by the BLA in its decision. More
advertisements, issue circulars, distribute price lists importantly, Shen Dar failed to present sufficient
on certain goods, but these alone will not inure to evidence to prove its own prior use of the mark
the claim of ownership of the mark until the goods “VESPA.”
bearing the mark are sold to the public in the As such, EYIS must be considered as the
market. Accordingly, receipts, sales invoices, and prior and continuous user of the mark “VESPA” and
testimonies of witnesses as customers, or orders of its true owner. Hence, EYIS is entitled to the
buyers, best prove the actual use of a mark in trade registration of the mark in its name.E.Y. Industrial
and commerce during a certain period of time. Sales, Inc. and Engracio Yap vs. Shen Dar
Here, Berris was able to establish that it was Electricity Machinery Co., Ltd.,G.R. No. 184850,
using its mark “D-10 80 WP” since June 20, 2002, October 20, 2010.
even before it filed for its registration with the IPO on
November 29, 2002, as shown by its DAU which A word or phrase originally incapable of
was under oath and notarized, bearing the stamp of exclusive appropriation with reference to an article
the Bureau of Trademarks of the IPO on April 25, on the market, because it is geographically or
2003, and which stated that it had an attachment as otherwise descriptive, might nevertheless have been
Annex “B” sales invoices and official receipts of used so long and so exclusively by one producer
goods bearing the mark. Indeed, the DAU, being a with reference to its article that, in that trade and to
notarized document, especially when received in that branch of the purchasing public, the word or
due course by the IPO, is evidence of the facts it phrase has come to mean that the article was his
stated and has the presumption of regularity, entitled product. (LYCEUM OF THE PHILIPPINES INC. VS.
to full faith and credit upon its face. Thus, the COURT OF APPEALS, 219 SCRA 610)
burden of proof to overcome the presumption of
authenticity and due execution lies on the party Among the elements of trademark
contesting it, and the rebutting evidence should be infringement, the element of likelihood of confusion
clear, strong, and convincing as to preclude all is the gravamen of trademark infringement. There
controversy as to the falsity of the certificate. What are two types of confusion in trademark
is more, the DAU is buttressed by the Certification infringement: confusion of goods and confusion of
dated April 21, 2006 issued by the Bureau of business. In Sterling Products International, Inc. v.
Trademarks that Berris’ mark is still valid and Farbenfabriken Bayer Aktiengesellschaft, the Court
existing. Berris Agricultural Co., Inc. vs. Norvy distinguished the two types of confusion:
Abyadang, G.R. No. 183404, October 13, 2010 “Callman notes two types of confusion. The
first is the confusion of goods “in which event the
Under Section 123(d) of RA 8293, the ordinarily prudent purchaser would be induced to
registration of a mark is prevented with the filing of purchase one product in the belief that he was
an earlier application for registration. This must not, purchasing the other.” In which case, “defendant’s
 Saint Louis University COMMERCIAL LAW 362
2012 BAR OPERATIONS

goods are then bought as the plaintiff’s, and the According to Section 123.1(d) of R.A. No.
poorer quality of the former reflects adversely on the 8293, a mark cannot be registered if it is identical
plaintiff’s reputation.” The other is theconfusion of with a registered mark belonging to a different
business: “Here though the goods of the parties are proprietor with an earlier filing or priority date, with
different, the defendant’s product is such as might respect to: (1) the same goods or services; (2)
reasonably be assumed to originate with the plaintiff, closely related goods or services; or (3) near
and the public would then be deceived either into resemblance of such mark as to likely deceive or
that belief or into the belief that there is some cause confusion.
connection between the plaintiff and defendant In determining similarity and likelihood of
which, in fact, does not exist.” confusion, jurisprudence has developed tests—the
There are two tests to determine likelihood Dominancy Test and the Holistic or Totality Test.
of confusion: the dominancy test and holistic test. The Dominancy Test focuses on the similarity of the
The dominancy test focuses on the similarity of the prevalent or dominant features of the competing
main, prevalent or essential features of the trademarks that might cause confusion, mistake,
competing trademarks that might cause confusion. and deception in the mind of the purchasing public.
Infringement takes place when the competing Duplication or imitation is not necessary; neither is it
trademark contains the essential features of another. required that the mark sought to be registered
Imitation or an effort to imitate is unnecessary. The suggests an effort to imitate. Given more
question is whether the use of the marks is likely to consideration are the aural and visual impressions
cause confusion or deceive purchasers. created by the marks on the buyers of goods, giving
The holistic test considers the entirety of the little weight to factors like prices, quality, sales
marks, including labels and packaging, in outlets, and market segments.
determining confusing similarity. The focus is not In contrast, the Holistic or Totality Test
only on the predominant words but also on the other necessitates a consideration of the entirety of the
features appearing on the labels. marks as applied to the products, including the
In cases involving trademark infringement, labels and packaging, in determining confusing
no set of rules can be deduced. Each case must be similarity. The discerning eye of the observer must
decided on its own merits. Jurisprudential focus not only on the predominant words but also on
precedents must be studied in the light of the facts the other features appearing on both labels so that
of each particular case. the observer may draw conclusion on whether one is
In the light of the facts of the present case, confusingly similar to the other. Berris Agricultural
the Court holds that the dominancy test is Co., Inc. vs. Norvy Abyadang, G.R. No. 183404,
applicable. Soceite Des Produits Nestle, S.A. vs. October 13, 2010.
Martin T. Dy, Jr., G.R. No. 172276, August 8, 2010.
The function of a trademark is to point
Although the word “Selecta” may be an distinctively, either by its own meaning or by
ordinary or common word in the sense that it may be association, to the origin or ownership of the wares
used or employed by any one in promoting his to which it is applied. “Ang Tibay” as used by the
business or enterprise, once adopted or coined in respondent to designate his wares, had exactly
connection with one’s business as an emblem, sign performed that function for twenty-two years before
or device to characterize its products, or as a badge the petitioner adopted it as a trademark in her own
of authenticity, it may acquire a secondary meaning business. Even if “Ang Tibay” therefore, were not
as to be exclusively associated with its products and capable of exclusive appropriation as a trademark,
business. In this sense, its use by another may lead the application of the doctrine of secondary meaning
to confusion in trade and cause damage to its could be sustained because, in any event, by
business. (ARCE SONS AND CO. VS. SELECTA respondent’s long and exclusive use of said phrase
BISCUIT CO. INC., ET. AL, 110 PHIL. 858) with reference to his products and his business, it
has acquired a proprietary connotation. (ANG VS.
The trademark “Lionpas” for medicated TEODORO, 74 PHIL. 50)
plaster cannot be registered because it is
confusingly similar to “Salonpas”, a registered Infringement of trademark is a form of unfair
trademark also for medicated plaster. When the two competition. The universal test question for
words are pronounced, the sound effects are infringement is whether the public is likely to be
confusingly similar. (MARVEX COMMERCIAL CO. deceived. Actual probable deception and confusion
INC. VS. PETRA HAWPIA AND CO., 18 SCRA on the part of the customers by reason of
1178) defendant’s practices must always appear. (ASIA
BREWERY INC. VS. COURT OF APPEALS, 224
SCRA 437)
 Saint Louis University COMMERCIAL LAW 363
2012 BAR OPERATIONS

belief that there is some connection between the two

The validity of a cause for infringement is parties, though inexistent.Dermaline, Inc. vs. Myra
predicated upon colorable imitation. The phrase Phamaceuticals, Inc., G.R. No. 190065, August 16,
“colorable imitation” denotes such a close or 2010.
ingenious imitation as to be calculated to deceive
ordinary persons, or such resemblance to the If the competing trademark contains the
original as to deceive an ordinary purchaser giving main or essential or dominant features of another by
such attention as a purchaser usually gives, and to reason of which, confusion and deception are likely
cause him to purchase the one supposing it to be to result, then infringement takes place; the
the other. (ETEPHA VS. DIRECTOR OF PATENTS duplication or imitation is not necessary, a similarity
ET. AL, 16 SCRA 495) in the dominant features of the trademarks would be
sufficient. (PHILIPPINE NUT INDUSTRY INC. VS.
In determining likelihood of confusion, case STANDARD BRANDS INC., 65 SCRA 575)
law has developed two (2) tests, the Dominancy
Test and the Holistic or Totality Test. In infringement or trademark cases in the
The Dominancy Test focuses on the Philippines, particularly in ascertaining whether one
similarity of the prevalent features of the competing trademark is confusingly similar to or is a colorable
trademarks that might cause confusion or deception. imitation of another, no set rules can be deduced –
It is applied when the trademark sought to be each case must be decided on its own merits.
registered contains the main, essential and (SOCIETE DES PRODUITS NESTLE S.A. VS.
dominant features of the earlier registered COURT OF APPEALS, 356 SCRA 207)
trademark, and confusion or deception is likely to
result. Duplication or imitation is not even required; Infringement of trademark depends on
neither is it necessary that the label of the applied whether the goods of the two contending parties
mark for registration should suggest an effort to using the same trademark, such as “ESSO”, are so
imitate. The important issue is whether the use of related as to lead the public to be deceived. The
the marks involved would likely cause confusion or trademark ESSO which the petitioner uses for its
mistake in the mind of or deceive the ordinary various petroleum products can be used by another
purchaser, or one who is accustomed to buy, and as trademark for cigarettes as the two classes of
therefore to some extent familiar with, the goods in products flow through different trade channels.
question. Given greater consideration are the aural (ESSO STANDARD Eastern Inc. vs. Court of
and visual impressions created by the marks in the Appeals, 116 SCRA 336)
public mind, giving little weight to factors like prices,
quality, sales outlets, and market segments. The In determining whether the trademarks are
test of dominancy is now explicitly incorporated into confusingly similar, a comparison of the words is not
law in Section 155.1 of R.A. No. 8293. the only determining factor. The trademark in their
On the other hand, the Holistic Test entails a entirety as they appear in their respective labels or
consideration of the entirety of the marks as applied hang tags must also be considered in relation to the
to the products, including labels and packaging, in goods to which they are attached. (FRUIT OF THE
determining confusing similarity. The scrutinizing LOOM INC. VS. COURT OF APPEALS, 133 SCRA
eye of the observer must focus not only on the 405)
predominant words but also on the other features
appearing in both labels so that a conclusion may be It has been held that if a mark is so
drawn as to whether one is confusingly similar to the commonplace that it cannot be readily distinguished
other. from others, then it is apparent that it cannot identify
Relative to the question on confusion of a particular business; and he who first adopted it
marks and trade names, jurisprudence has noted cannot be injured by any subsequent appropriation
two (2) types of confusion, viz: (1) confusion of or imitation by others, and the public will not be
goods (product confusion), where the ordinarily deceived. (PHILIPPINE REFINING CO. INC. VS.
prudent purchaser would be induced to purchase NG SAM, 115 SCRA 472)
one product in the belief that he was purchasing the
other; and (2) confusion of business (source or The Convention of Paris for the Protection
origin confusion), where, although the goods of the of Industrial Property, otherwise known as the Paris
parties are different, the product, the mark of which Convention, is a multilateral treaty that seeks to
registration is applied for by one party, is such as protect industrial property consisting of patents,
might reasonably be assumed to originate with the utility models, industrial designs, trademarks, service
registrant of an earlier product, and the public would marks, trade names and indications of source or
then be deceived either into that belief or into the appellations of origin and at the same time aims to
 Saint Louis University COMMERCIAL LAW 364
2012 BAR OPERATIONS

repress unfair competition. The convention is respective goods or services of the senior user are
essentially a compact among various countries so related as to likely cause confusion of business or
which as members, have pledged to accord to origin, and thereby render the trademark or trade
citizens of the other member countries, trademark name confusingly similar. Goods are related when
and other rights comparable to those accorded their they belong to the same class or have the same
own citizens by their domestic laws for an effective descriptive properties, when they possess the same
protection against unfair competition. (MIRPURI VS. physical attributes or essential characteristics with
COURT OF APPEALS, 318 SCRA 516) reference to their form, composition, texture or
quality. They may also be related because they
A foreign corporation not doing business in serve the same purpose. (CANON KABUSHIKI
the Philippines needs no license to sue in the KAISHA VS. COURT OF APPEALS, 336 SCRA
Philippines for trademark violations. The Philippine 266)
being a party to the Paris Convention for the
Protection of Industrial Property, the right of a Trademark; Harvard. There is no question
foreign corporation to file suit in the Philippine courts then, and this Court so declares, that “Harvard” is a
to protect its trademark is to be enforced. (LA well-known name and mark not only in the United
CHEMISE LACOSTE VS. FERNANDEZ, 129 SCRA States but also internationally, including the
373) Philippines. The mark “Harvard” is rated as one of
the most famous marks in the world. It has been
A foreign corporation not doing business in registered in at least 50 countries. It has been used
the Philippines may have the right to sue before the and promoted extensively in numerous publications
Philippine courts but it may not necessarily be worldwide. It has established a considerable
entitled to protection due to absence of actual use of goodwill worldwide since the founding of Harvard
the emblem in the Philippine market. (PHILIP University more than 350 years ago. It is easily
MORRIS INC. VS. COURT OF APPEALS, 224 recognizable as the trade name and mark of
SCRA 576) Harvard University of Cambridge, Massachusetts,
U.S.A., internationally known as one of the leading
An unlicensed, unregistered foreign educational institutions in the world. As such, even
corporation which has never done any business in before Harvard University applied for registration of
the Philippines, but is widely and favorably known in the mark “Harvard” in the Philippines, the mark was
the Philippines through the use of its products already protected under Article 6bis and Article 8 of
bearing its corporate and trade name, has a legal the Paris Convention. Again, even without applying
right to maintain an action in the Philippines to the Paris Convention, Harvard University can invoke
restrict the organization of a corporation whose sole Section 4(a) of R.A. No. 166 which prohibits the
purpose is to deal and trade in the same goods as registration of a mark “which may disparage or
those of the foreign corporation. (CONVERSE falsely suggest a connection with persons, living or
RUBBER CORP. VS. UNIVERSAL RUBBER dead, institutions, beliefs x xx.” Fredco
PRODUCTS INC., 147 SCRA 154) Manufacturing Corporation vs. President and
Fellows of Harvard College (Harvard
Agreement giving distributor ownership of University), G.R. No. 185917, June 1, 2011.
packages does not necessarily get her exclusive use
of the trademark. The fact that distributor spent The reckoning point for the filing of a
substantial sums to promote product covered by petition for cancellation of certificate of registration of
trademark is not sufficient to vest ownership of the trademark is not from the alleged date of use but
trademark. (GABRIEL VS. PEREZ, 55 SCRA 406) from the date the certificate of registration was
published in the Official Gazette and issued to the
A certificate of registration of a mark or registrant. (EMERALD GARMENT
trade name is prima facie evidence of the validity of MANUFACTURING CORP. VS. COURT OF
the registration, the registrant’s ownership of the APPEALS, 251 SCRA 600)
mark or trade name, and of the registrant’s exclusive
right to use the same in connection with the goods, The right to the exclusive use of a corporate
business or services specified in the certificate, name with freedom from infringement is determined
subject to any conditions and limitations stated by priority of adoption.
therein. (AMIGO MANUFACTURING INC. VS. In determining the existence of confusing
CLUETT PEABODY CO. INC., 354 SCRA 434) similarity in corporate name, the test is whether the
similarity is such as to mislead a person using
In cases of confusion of business or origin, ordinary care and discretion. (PHILIPS EXPORT
the question that usually arises is whether the B.V. VS. COURT OF APPEALS, 206 SCRA 457)
 Saint Louis University COMMERCIAL LAW 365
2012 BAR OPERATIONS

intent to deceive, actual or probable must be shown

Where an unreasonable period of time had before the right to recover can exist.
elapsed prior to the filing of a petition for revival of In the present case, no evidence exists
the patent application due to the negligence of the showing that KUNNAN ever attempted to pass off
applicant’s counsel, such inaction would result in the the goods it sold (i.e. sportswear, sporting goods
forfeiture of the right to revive the patent application. and equipment) as those of SUPERIOR. In addition,
(SCHWARTZ VS. COURT OF APPEALS, 335 there is no evidence of bad faith or fraud imputable
SCRA 493) to KUNNAN in using the disputed trademarks.
Specifically, SUPERIOR failed to adduce any
Section 22 of RA 166 states that only a evidence to show that KUNNAN by the above-cited
registrant of a mark can file a case for infringement. acts intended to deceive the public as to the identity
Corollary to this, Section 19 of RA 166 provides that of the goods sold or of the manufacturer of the
any right conferred upon the registrant under the goods sold. In McDonald’s Corporation v. L.C.
provisions of RA 166 terminates when the judgment Big Mak Burger, Inc., we held that there can be
or order of cancellation has become final. The trademark infringement without unfair
cancellation of registration of a trademark has the competition such as when the infringer discloses on
effect of depriving the registrant of protection from the labels containing the mark that he manufactures
infringement from the moment judgment or order of the goods, thus preventing the public from being
cancellation has become final. deceived that the goods originate from the
In the present case, by operation of law, trademark owner. In this case, no issue of
specifically Section 19 of RA 166, the trademark confusion arises because the same manufactured
infringement aspect of SUPERIOR’s case has been products are sold; only the ownership of the
rendered moot and academic in view of the finality of trademarks is at issue. Furthermore, KUNNAN’s
the decision in the Registration Cancellation Case. January 29, 1993 notice by its terms prevents the
In short, SUPERIOR is left without any cause of public from being deceived that the goods
action for trademark infringement since the originated fromSUPERIOR since the notice clearly
cancellation of registration of a trademark deprived it indicated that KUNNAN is the manufacturer of the
of protection from infringement from the moment goods bearing the trademarks “KENNEX” and
judgment or order of cancellation became final. To “PRO KENNEX.” Superior Commercial Enterprises,
be sure, in a trademark infringement, title to the Inc. vs. Kunnan Enterprises Ltd. and Sports Concept
trademark is indispensable to a valid cause of action & Distributor, Inc., G.R. No. 169974, April 20, 2010.
and such title is shown by its certificate of
registration. With its certificates of registration over Intellectual property; infringement. The
the disputed trademarks effectively cancelled with essential element of infringement under R.A. No.
finality, SUPERIOR’s case for trademark 8293 is that the infringing mark is likely to cause
infringement lost its legal basis and no longer confusion. In determining similarity and likelihood of
presented a valid cause of action. Superior confusion, jurisprudence has developed tests the
Commercial Enterprises, Inc. Dominancy Test and the Holistic or Totality Test.
vs. Kunnan Enterprises Ltd. and Sports Concept & The Dominancy Test focuses on the similarity of the
Distributor, Inc., G.R. No. 169974, April 20, 2010. prevalent or dominant features of the competing
trademarks that might cause confusion, mistake,
From jurisprudence, unfair competition has and deception in the mind of the purchasing public.
been defined as the passing off (or palming off) or Duplication or imitation is not necessary; neither is it
attempting to pass off upon the public of the goods required that the mark sought to be registered
or business of one person as the goods or business suggests an effort to imitate. Given more
of another with the end and probable effect of consideration are the aural and visual impressions
deceiving the public. The essential elements of created by the marks on the buyers of goods, giving
unfair competition are (1) confusing similarity in the little weight to factors like prices, quality, sales
general appearance of the goods; and (2) intent to outlets, and market segments.
deceive the public and defraud a competitor. In contrast, the Holistic or Totality Test
Jurisprudence also formulated the following necessitates a consideration of the entirety of the
“true test” of unfair competition: whether the acts of marks as applied to the products, including the
the defendant have the intent of deceiving or are labels and packaging, in determining confusing
calculated to deceive the ordinary buyer making his similarity. The discerning eye of the observer must
purchases under the ordinary conditions of the focus not only on the predominant words, but also
particular trade to which the controversy relates. on the other features appearing on both labels so
One of the essential requisites in an action to that the observer may draw conclusion on whether
restrain unfair competition is proof of fraud; the one is confusingly similar to the other.
 Saint Louis University COMMERCIAL LAW 366
2012 BAR OPERATIONS

Relative to the question on confusion of make, use and sell a patented product, article or
marks and trade names, jurisprudence has noted process exists only during the term of the patent. In
two (2) types of confusion, viz.: (1) confusion of the instant case, Philippine Letters Patent No.
goods (product confusion), where the ordinarily 21116, which was the basis of respondents in filing
prudent purchaser would be induced to purchase their complaint with the BLA-IPO, was issued on July
one product in the belief that he was purchasing the 16, 1987. This fact was admitted by respondents
other; and (2) confusion of business (source or themselves in their complaint. They also admitted
origin confusion), where, although the goods of the that the validity of the said patent is until July 16,
parties are different, the product, the mark of which 2004, which is in conformity with Section 21 of RA
registration is applied for by one party, is such as 165, providing that the term of a patent shall be
might reasonably be assumed to originate with the seventeen (17) years from the date of issuance
registrant of an earlier product, and the public would thereof. Section 4, Rule 129 of the Rules of Court
then be deceived either into that belief or into the provides that an admission, verbal or written, made
belief that there is some connection between the two by a party in the course of the proceedings in the
parties, though inexistent. same case, does not require proof and that the
Applying the Dominancy Test to the case at admission may be contradicted only by showing that
bar, this Court finds that the use of the stylized “S” it was made through palpable mistake or that no
by respondent in its Strong rubber shoes infringes such admission was made. In the present case,
on the mark already registered by petitioner with the there is no dispute as to respondents’ admission that
IPO. While it is undisputed that petitioner’s stylized the term of their patent expired on July 16, 2004.
“S” is within an oval design, to this Court’s mind, the Neither is there evidence to show that their
dominant feature of the trademark is the stylized “S,” admission was made through palpable mistake.
as it is precisely the stylized “S” which catches the Hence, contrary to the pronouncement of the CA,
eye of the purchaser. Thus, even if respondent did there is no longer any need to present evidence on
not use an oval design, the mere fact that it used the the issue of expiration of respondents’ patent. Phil
same stylized “S”, the same being the dominant Pharmawealth, Inc. vs. Pfizer, Inc and Pfizer (Phil.)
feature of petitioner’s trademark, already constitutes Inc., G.R. No. 167715, November 17, 2010.
infringement under the Dominancy Test. Skechers,
U.S.A., Inc. vs. Inter Pacific Industrial Trading Corp., A person or entity who has not been granted
et al., G.R. No. 164321, March 28, 2011. letters patent over an invention and has not acquired
any right of title thereto either as assignee or as
Mark; infringement. A “mark” is any visible licensee, has no cause of action for infringement
sign capable of distinguishing the goods (trademark) because the right to maintain an infringement suit
or services (service mark) of an enterprise and shall depends on the existence of the patent. (CRESSER
include a stamped or marked container of goods. PRECISSION SYSTENS INC. VS. COURT OF
In McDonald’s Corporation and McGeorge APPEALS, 286 SCRA 13)
Food Industries, Inc. v. L.C. Big Mak Burger, Inc.,
this Court held: The doctrine of equivalents provides that an
To establish trademark infringement, the infringement also takes place when a device
following elements must be shown: (1) the validity of appropriates a prior invention by incorporating its
plaintiff’s mark; (2) the plaintiff’s ownership of the innovative concept and, although with some
mark; and (3) the use of the mark or its colorable modification and change, performs substantially the
imitation by the alleged infringer results in “likelihood same function in substantially the same way to
of confusion.” Of these, it is the element of achieve substantially the same result. The doctrine
likelihood of confusion that is the gravamen of of equivalents thus requires satisfaction of the
trademark infringement. function-means-and-result test, the patentee having
A mark is valid if it is distinctive and not the burden to show that all three components of
barred from registration. Once registered, not only such equivalency test are met. (SMITH KLINE
the mark’s validity, but also the registrant’s BECKMAN CORPORATION vs. COURT OF
ownership of the mark is prima facie presumed. APPEALS ET AL.)
Gemma Ong a.k.a. Ma. Theresa Gemma Catacutan To be able to effectively and legally
vs. People of the Philippines, G.R. No. 169440,. preclude others from copying and profiting from the
November 23, 2011. invention, a patent is a primordial requirement. No
patent, no protection. The ultimate goal of a patent
system is to bring new designs and technologies into
PATENTS the public domain through disclosure. Ideas, once
It is clear from Section 37 of Republic Act disclosed to the public without the protection of a
No. 165 that the exclusive right of a patentee to valid patent, are subject to appropriation without
 Saint Louis University COMMERCIAL LAW 367
2012 BAR OPERATIONS

significant restraint. (PEARL & DEAN (PHIL.), copied. If so much is taken that the value of the
INCORPORATED vs. SHOEMART, original is sensibly diminished, or the labors of the
INCORPORATED, and NORTH EDSA original author are substantially and to an injurious
MARKETING, INCORPORATED) extent appropriated by another, that is sufficient in
point of law to constitute piracy. (HABANA VS.
Under the aforequoted law, only the ROBLES)
patentee or his successors-in-interest may file an
action for infringement. The phrase "anyone SECURITIES REGULATION CODE
possessing any right, title or interest in and to the
patented invention" upon which petitioner maintains SEC; power to fix compensation of
its present suit, refers only to the patentee's liquidators. To countenance petitioner’s posturing
successors-in-interest, assignees or grantees since would be to unduly delimit the broad powers granted
actions for infringement of patent may be brought in to the SEC under Presidential Decree No. 902-A,
the name of the person or persons interested, specifically the all-encompassing provision in
whether as patentee, assignees, or as grantees, of Section 3 that the SEC has “absolute jurisdiction,
the exclusive right. supervision and control” over all corporations who
Moreover, there can be no infringement of a are the grantees of primary franchises and/or license
patent until a patent has been issued, since or permit issued by the government to operate in the
whatever right one has to the invention covered by Philippines. There is no gainsaying, therefore, that
the patent arises alone from the grant of patent. In the SEC is authorized to determine the fees of
short, a person or entity who has not been granted receivers and liquidators not only when there is
letters patent over an invention and has not acquired “failure of agreement” between the parties but also
any right or title thereto either as assignee or as in the absence thereof. A contrary ruling would give
licensee, has no cause of action for infringement license to corporations under liquidation or
because the right to maintain an infringement suit receivership to refuse to participate in negotiations
depends on the existence of the patent. for the fixing of the compensation of their liquidators
Petitioner admits it has no patent over its or receivers so as to evade their obligation to pay
aerial fuze. Therefore, it has no legal basis or cause the same.
of action to institute the petition for injunction and Petitioner may not have been given the
damages arising from the alleged infringement by chance to meet face to face with respondent for the
private respondent. While petitioner claims to be the purpose of determining the latter’s fee. But this fact
first inventor of the aerial fuze, still it has no right of alone should not invalidate the amount fixed by the
property over the same upon which it can maintain a SEC. What matters is the reasonableness of the fee
suit unless it obtains a patent therefor. (CRESER in light of the services rendered by the liquidator. It is
PRECISON SYTEMS VS. CA) the policy of the SEC to provide uniform/fair and
reasonable compensation or fees for the
COPYRIGHT comparable services rendered by the duly
Copyright, in the strict sense of the term, is designated members of the Management Committee
purely a statutory right. Being a mere statutory grant, (MANCOM), rehabilitation receivers and liquidators
the rights are limited to what the statute confers. It in corporations or partnerships placed
may be obtained and enjoyed only with respect to under MANCOM/receivership or liquidation,
the subjects and by the persons, and on terms and pursuant to Section 6(d) of Presidential Decree No.
conditions specified in the statute. Accordingly, it 902-A, the SEC Rules on Corporate Recovery, the
can cover only the works falling within the statutory Corporation Code of the Philippines, the Securities
enumeration or description. (PEARL & DEAN Regulation Code, and other related laws enforced by
(PHIL.), INCORPORATED vs. SHOEMART, the SEC. (Catmon Sales International Corporation
INCORPORATED, and NORTH EDSA vs. Atty. Manuel D. Yngson, Jr. as Liquidator
MARKETING, INCORPORATED) of Catmon Sales International Corporation, G.R. No.
179761, January 15, 2010.)
The copyright does not extend to the
general concept or format of its dating game show. Securities Regulation Code; public
(JOAQUIN VS. DRILON) company. The Philippine Veterans Bank (the
“Bank”) argued that it is not a “public company”
In determining the question of infringement, subject to the reportorial requirements under Section
the amount of matter copied from the copyrighted 17.1 of the SRC because its shares can be owned
work is an important consideration. To constitute only by a specific group of people, namely, World
infringement, it is not necessary that the whole or War II veterans and their widows, orphans and
even a large portion of the work shall have been compulsory heirs, and is not open to the investing
 Saint Louis University COMMERCIAL LAW 368
2012 BAR OPERATIONS

public in general. The Bank also requested the Court in a common enterprise; (4) expectation of profits;
to take into consideration the financial impact to the and (5) profits arising primarily from the efforts of
cause of “veteranism”; compliance with the others. Thus, to sustain the SEC position in this
reportorial requirements under the SRC, if the Bank case, PCI’s scheme or contract with its buyers must
would be considered a “public company,” would have all these elements.
compel the Bank to spend approximately P40 million An example that comes to mind would be
just to reproduce and mail the “Information the long-term commercial papers that large
Statement” to its 400,000 shareholders nationwide. companies, like San Miguel Corporation (SMC), offer
Rule 3(1)(m) of the Amended Implementing to the public for raising funds that it needs for
Rules and Regulations of the SRC defines a “public expansion. When an investor buys these papers or
company” as “any corporation with a class of equity securities, he invests his money, together with
securities listed on an Exchange or with assets in others, in SMC with an expectation of profits arising
excess of Fifty Million Pesos (P50,000,000.00) and from the efforts of those who manage and operate
having two hundred (200) or more holders, at least that company. SMC has to register these
two hundred (200) of which are holding at least one commercial papers with the SEC before offering
hundred (100) shares of a class of its equity them to investors.
securities.” Here, PCI’s clients do not make such
From these provisions, it is clear that a investments. They buy a product of some value to
“public company,” as contemplated by the SRC, is them: an Internet website of a 15-MB capacity. The
not limited to a company whose shares of stock are client can use this website to enable people to have
publicly listed; even companies like the Bank, whose internet access to what he has to offer to them, say,
shares are offered only to a specific group of people, some skin cream. The buyers of the website do not
are considered a public company, provided they invest money in PCI that it could use for running
meet the requirements enumerated above. some business that would generate profits for the
The records establish, and the Bank does investors. The price of US$234.00 is what the buyer
not dispute, that the Bank has assets exceeding pays for the use of the website, a tangible asset that
P50,000,000.00 and has 395,998 shareholders. It is PCI creates, using its computer facilities and
thus considered a public company that must comply technical skills. Securities and Exchange
with the reportorial requirements set forth in Section Commission vs. Prosperity.Com, Inc., G.R. No.
17.1 of the SRC. Philippine Veterans Bank vs. 164197, January 25, 2012.
JustinaCallangan, etc. and/or the Securities and
Exchange Commission G.R. No. 191995, August 3,
2011. TRUTH IN LENDING ACT

Investment contract; definition. The Truth in Lending Act; disclosure of

Securities Regulation Code treats investment financial charges in the promissory note. Both
contracts as “securities” that have to be registered the RTC and CA decisions cited BPI’s alleged
with the SEC before they can be distributed and violation of the Truth in Lending Act and the ruling of
sold. An investment contract is a contract, the Court in New Sampaguita Builders Construction,
transaction, or scheme where a person invests his Inc. v. Philippine National Bank to justify their
money in a common enterprise and is led to expect deletion of the penalty charges.
profits primarily from the efforts of others. In this case, although BPI failed to state the
Apart from the definition, which the penalty charges in the disclosure statement, the
Implementing Rules and Regulations provide, promissory note that the Yus signed, on the same
Philippine jurisprudence has so far not done more to date as the disclosure statement, contained a
add to the same. Of course, the United States penalty clause that said: “I/We jointly and severally,
Supreme Court, grappling with the problem, has on promise to further pay a late payment charge on any
several occasions discussed the nature of overdue amount herein at the rate of 3% per month.”
investment contracts. That court’s rulings, while not The promissory note is an acknowledgment of a
binding in the Philippines, enjoy some degree of debt and commitment to repay it on the date and
persuasiveness insofar as they are logical and under the conditions that the parties agreed on. It is
consistent with the country’s best interests. a valid contract absent proof of acts which might
The United States Supreme Court held in have vitiated consent.
Securities and Exchange Commission v. W.J. The question is whether or not the reference
Howey Co. that, for an investment contract to exist, to the penalty charges in the promissory note
the following elements, referred to as the Howey test constitutes substantial compliance with the
must concur: (1) a contract, transaction, or scheme; disclosure requirement of the Truth in Lending Act.
(2) an investment of money; (3) investment is made
 Saint Louis University COMMERCIAL LAW 369
2012 BAR OPERATIONS

The Court has affirmed that financial In September 2009, the Supreme Court
charges are amply disclosed if stated in the promulgated its decision in Ileana Dr. Macalino vs.
promissory note in the case of Development Bank of Bank of the Philippines Islands, G.R. No. 175490,
the Philippines v. Arcilla, Jr. The Court there said, September 17, 2009, and held that the interest rate
“Under Circular 158 of the Central Bank, the lender of 1.5% per month on credit card payments should
is required to include the information required by be reduced to 1% per month.
R.A. 3765 in the contract covering the credit In Sps. Isagani & Diosdada Castro vs.
transaction or any other document to be Angelina de Leon Tan, G.R. No. 168940. November
acknowledged and signed by the borrower. In 24, 2009, the Supreme Court again faced the issue
addition, the contract or document shall specify of whether the interest rate imposed (this time under
additional charges, if any, which will be collected in a loan agreement) is excessive. Here, the loan
case certain stipulations in the contract are not met agreement (denominated as Kasulatan ng Sanglaan
by the debtor.” In this case, the promissory notes ng Lupa at Bahay) provided for an interest rate of
signed by the Yus contained data, including penalty 5% per month, compounded monthly. The principal
charges, required by the Truth in Lending Act. They amount of the loan was PhP30, 000.
cannot avoid liability based on a rigid interpretation The borrowers (spouses Tan) failed to pay
of the Truth in Lending Act that contravenes its goal. the loan and the lenders (spouses Castro) instituted
(Bank of the Philippines Islands, Inc. vs. Sps. an extra-judicial foreclosure of mortgage. The
Norman and Angelina Yu, et al., G.R. No. 184122, lenders emerged as the only bidder and the
January 20, 2010.) redemption period expired without the property
being redeemed.
Usury Law; interest rate ceiling. The A Complaint for Nullification of Mortgage
Usury Law had been rendered legally ineffective by and Foreclosure and/or Partial Rescission of
Resolution No. 224 dated 3 December 1982 of the Documents and Damages was subsequently filed
Monetary Board of the Central Bank, and later by before the Regional Trial Court of Malolos, Bulacan.
Central Bank Circular No. 905 which took effect on 1 The complainants alleged, inter alia, that the interest
January 1983. These circulars removed the ceiling rate imposed on the principal amount of P30, 000.00
on interest rates for secured and unsecured loans is unconscionable.
regardless of maturity. The effect of these circulars The Regional Trial Court reduced the
is to allow the parties to agree on any interest that interest rate to 12% per annum and the Court of
may be charged on a loan. The virtual repeal of the Appeals affirmed.
Usury Law is within the range of judicial notice which In proceedings before the Supreme Court,
courts are bound to take into account. Although the petitioners contend that with the removal by the
interest rates are no longer subject to a ceiling, the Bangko Sentral of the ceiling on the rate of interest
lender still does not have an unbridled license to that may be stipulated in a contract of loan, the
impose increased interest rates. The lender and the lender and the borrower could validly agree on any
borrower should agree on the imposed rate, and interest rate on loans. Thus, they argue that the
such imposed rate should be in writing. Court of Appeals gravely erred when it declared the
Here, the stipulations on interest rate stipulated interest in the Kasulatan as null as if there
repricing are valid because (1) the parties mutually was no express stipulation on the compounded
agreed on said stipulations; (2) repricing takes effect interest.
only upon Solidbank’s written notice to Permanent of On the other hand, respondents assert that
the new interest rate; and (3) Permanent has the the appellate court correctly struck down the said
option to prepay its loan if Permanent and Solidbank stipulated interest for being excessive and contrary
do not agree on the new interest rate. The phrases to morals, if not against the law. They also point out
“irrevocably authorize,” “at any time” and that a contract has the force of law between the
“adjustment of the interest rate shall be effective parties, but only when the terms, clauses and
from the date indicated in the written notice sent to conditions thereof are not contrary to law, morals,
us by the bank, or if no date is indicated, from the public order or public policy.
time the notice was sent,” emphasize that The Supreme Court agreed with Court of
Permanent should receive a written notice from Appeals and the Regional Trial Court. It ruled:
Solidbank as a condition for the adjustment of the While we agree with petitioners that parties
interest rates. Solidbank Corporation vs. to a loan agreement have wide latitude to stipulate
Permanent Homes, Inc., G.R. No. 171925, July 23, on any interest rate in view of the Central Bank
2010. Circular No. 905 s. 1982 which suspended the Usury
Law ceiling on interest effective January 1, 1983, it
Iniquitous and unconscionable interest is also worth stressing that interest rates whenever
rate unconscionable may still be declared illegal. There is
 Saint Louis University COMMERCIAL LAW 370
2012 BAR OPERATIONS

certainly nothing in said circular which grants they are not contrary to law, morals, good customs,
lenders carte blanche authority to raise interest rates public order or public policy.”
to levels which will either enslave their borrowers or To reiterate, we fully agree with the Court of
lead to a hemorrhaging of their assets. Appeals in holding that the compounded interest
In several cases, we have ruled that rate of 5% per month, is iniquitous and
stipulations authorizing iniquitous or unconscionable unconscionable. Being a void stipulation, it is
interests are contrary to morals, if not against the deemed inexistent from the beginning. The debt is to
law. In Medel v. Court of Appeals, we annulled a be considered without the stipulation of the
stipulated 5.5% per month or 66% per annum iniquitous and unconscionable interest rate.
interest on a P500,000.00 loan and a 6% per month Accordingly, the legal interest of 12% per annum
or 72% per annum interest on a P60,000.00 loan, must be imposed in lieu of the excessive interest
respectively, for being excessive, iniquitous, stipulated in the agreement. . .
unconscionable and exorbitant. In Ruiz v. Court of From the foregoing, it is clear that there is
Appeals, we declared a 3% monthly interest no unilateral alteration of the terms and conditions of
imposed on four separate loans to be excessive. In the Kasulatan entered into by the parties. Surely, it
both cases, the interest rates were reduced to 12% is more consonant with justice that the subject
per annum. interest rate be equitably reduced and the legal
In this case, the 5% monthly interest rate, or interest of 12% per annum is deemed fair and
60% per annum, compounded monthly, stipulated in reasonable
the Kasulatan is even higher than the 3% monthly
interest rate imposed in the Ruiz case. Thus, we Financial institutions; negligence. The
similarly hold the 5% monthly interest to be petitioner, being a banking institution, had the direct
excessive, iniquitous, unconscionable and obligation to supervise very closely the employees
exorbitant, contrary to morals, and the law. It is handling its depositors’ accounts, and should always
therefore void ab initio for being violative of Article be mindful of the fiduciary nature of its relationship
1306 of the Civil Code. With this, and in accord with with the depositors. Such relationship required it and
the Medel and Ruiz cases, we hold that the Court of its employees to record accurately everysingle
Appeals correctly imposed the legal interest of 12% transaction, and as promptly as possible,
per annum in place of the excessive interest considering that the depositors’ accounts should
stipulated in the Kasulatan. always reflect the amounts of money the depositors
The Supreme Court also ruled that the could dispose of as they saw fit, confident that, as a
imposition of a 12% rate per annum does not violate bank, it would deliver the amounts to whomever they
the freedom of contract: directed. If it fell short of that obligation, it should
Petitioners allege that the Kasulatan was bear the responsibility for the consequences to the
entered into by the parties freely and voluntarily. depositors, who, like the respondent, suffered
They maintain that there was already a meeting of particular embarrassment and disturbed peace of
the minds between the parties as regards the mind from the negligence in the handling of the
principal amount of the loan, the interest thereon accounts. Citytrust Banking Corporation vs. Carlos
and the property given as security for the payment of Romulo N. Cruz, G.R. No. 157049, August 11, 2010.
the loan, which must be complied with in good faith.
Hence, they assert that the Court of Appeals should Financial leasing. Republic Act No. 8556
have given due respect to the provisions of the (RA 8556), otherwise known as the Financing
Kasulatan. They also stress that it is a settled Company Act of 1998, Section 3(d) of RA 8556
principle that the law will not relieve a party from the defines financial leasing as:
effects of an unwise, foolish or disastrous contract, a mode of extending credit through a non-
entered into with all the required formalities and with cancelable lease contract under which the lessor
full awareness of what he was doing. purchases or acquires, at the instance of the lessee,
Petitioners’ contentions deserve scant machinery, equipment, motor vehicles, appliances,
consideration. In Abe v. Foster Wheeler Corporation, business and office machines, and other movable or
we held that the freedom of contract is not absolute. immovable property in consideration of the periodic
The same is understood to be subject to reasonable payment by the lessee of a fixed amount of money
legislative regulation aimed at the promotion of sufficient to amortize at least seventy (70%) of the
public health, morals, safety and welfare. One such purchase price or acquisition cost, including any
legislative regulation is found in Article 1306 of the incidental expenses and a margin of profit over an
Civil Code which allows the contracting parties to obligatory period of not less than two (2) years
“establish such stipulations, clauses, terms and during which the lessee has the right to hold and use
conditions as they may deem convenient, provided the leased property with the right to expense the
lease rentals paid to the lessor and bears the cost of
 Saint Louis University COMMERCIAL LAW 371
2012 BAR OPERATIONS

repairs, maintenance, insurance and preservation Newmont in fact furnished the MGB-CAR
thereof, but with no obligation or option on his part to Regional Office with copies of its FTAA applications,
purchase the leased property from the owner-lessor through fax transmission, within 72 hours from filing
at the end of the lease contract. of the FTAA applications. Considering the distance
Thus, in a true financial leasing, whether between Quezon City and Baguio City where the
under RA 5980 or RA 8556, a finance company MGB-CAR Regional Office is located, and the
purchases on behalf of a cash-strapped lessee the requirement to furnish the proper Regional Office
equipment the latter wants to buy but, due to (some of which are located in Visayas and
financial limitations, is incapable of doing so. The Mindanao) a copy of the FTAA application within a
finance company then leases the equipment to the short period of 72 hours, a fax machine copy is a
lessee in exchange for the latter’s periodic payment reasonable and sufficient mode of serving a copy of
of a fixed amount of rental. the FTAA application to the proper Regional Office.
In this case, however, TMI already owned Section 8 of DAO 63 does not specify how a copy of
the subject equipment before it transacted with the FTAA application should be furnished to the
PCILF. Therefore, the transaction between the proper Regional Office.
parties in this case cannot be deemed to be in the Being the first to file its FTAA applications
nature of a financial leasing as defined by law. ahead of Diamond Drilling’s MPSA application, and
In the present case, since the transaction having furnished copies of its FTAA applications to
between PCILF and TMI involved equipment already the MGB-CAR Regional Office within 72 hours from
owned by TMI, it cannot be considered as one of filing, Newmont must be given preferential right to
financial leasing, as defined by law, but simply a utilize the area included in its FTAA applications.
loan secured by the various equipment owned by Diamond Drilling Corporation of the Philippines v.
TMI. PCI Leasing and Finance, inc. vs. Trojan Metal Newmont Philippines, Inc.,G.R. No. 183576, May
Industries Inc., et al., G.R. No. 176381, December 30, 2011.
15, 2010.

Mining Act; meeting 72 hour requirement  

 

via fax. It is clear from Section 8 of DAO 63 that the RANDOM QUESTIONS AND ANSWERS
MGB Central Office processes all FTAA applications in
after payment of the requisite fees. Section 8 MERCANTILE LAW
requires the FTAA applicant to furnish the MGB
Regional Office a copy of the FTAA application By Atty. Maria Lulu G. Reyes
within 72 hours from filing of the FTAA application.
In the present case, the records show that
Newmont filed its FTAA applications with the MGB
Central Office in Quezon City on 20 December CODE OF COMMERCE
1994. After Newmont paid the filing and processing
fees, the MGB Central Office registered Newmont’s Question:
FTAA applications on the same date. On the other Who are merchants?
hand, Diamond Drilling filed its MPSA application
with the MGB-CAR Regional Office in Baguio City on A - Merchants are natural and juridical
20 December 1994. However, since the pertinent persons, who, having legal capacity to
documents needed by the MGB-CAR Regional engage in commerce, habitually devote
Office were lacking, it took two more days for themselves thereto (Art. 1, Code of
Diamond Drilling to complete the requirements. Commerce). Habituality is determined by the
Diamond Drilling paid its filing and processing fees intent, and not by the number of transaction
only on 22 December 1994 or two days after involved.
Newmont’s FTAA applications were registered with
the MGB Central Office. Thus, Diamond Drilling’s
MPSA application was registered by the MGB-CAR NEGOTIABLE INSTRUMENTS LAW
Regional Office only on 22 December 1994.
Since Newmont’s FTAA applications Question:
preceded that of Diamond Drilling’s MPSA What is an order instrument?
application, priority should be given to Newmont.
Section 8 of DAO 63 is clear. It states that in the A- It is an instrument which, on its face,
event there are two or more applicants over the is payable to order of a specified person, or
same area, priority shall be given to the applicant to him or his order.
that first filed its application.
Question:
 Saint Louis University COMMERCIAL LAW 372
2012 BAR OPERATIONS

What is a bearer instrument? check was issued by Z as an

accommodation party, and absence of
A- It is an instrument which, on its face, consideration is in the nature of an
is payable to bearer. accommodation. Despite his knowledge of
such fact, A is still a holder in due course.
Question:
X issued and delivered to Y the following 2.) The instrument is not discharged by
instrument: the payment of the check by Z to A. Being
an accommodation party, Z still needs the
“Pay to Y or bearer” the sum of P 10,000.00, instrument in order to secure payment
thirty (30) days from sight. thereof from the debtor or the party, X. Z is
not the principal debtor or the party
To: Z ultimately liable. Hence, it is the payment by
(Sgd) X X , at or after maturity, which discharges the
instrument.
Y indorsed the instrument by writing on its
back the words: “Pay to A or order”, after Question:
which he signed it, and delivered the X bought goods from Y on a 30-day credit at
instrument to A, who delivered the same to the price of P10, 000.00. In payment of the
B who paid value therefore in good faith. Is price, X drew or issued a check, drawn on
B entitled to payment from Z? Explain Ace Bank, in the sum of P10, 000.00,
briefly. payable to the order of Y. X sent the check
by mail to Y. The check fell into the hands of
A- Yes. B became a holder of the Z who forged the signature of Y, making it
instrument when A negotiated it by delivery appear that Y indorsed the check to Z.
to him. A bearer instrument is always Thereof, Z deposited the check in his
negotiable by mere delivery despite the fact account with Super Bank which stamped
that the only or last indorsement thereon is a thereon the words “ALL INDORSEMENT
special indorsement. Unless it is restrictively AND/OR LACK OF INDORSEMENT
indorsed for deposit only the bearer GUARANTEED”, before sending the check
instrument continues to be negotiable by for clearing. After the expiration of three (3)
mere delivery. days, and without hearing anything from Ace
Bank, Super Bank allowed Z to withdraw the
Question: amount of the check. When Y complained
X needs money to pay an obligation to pay about not having been paid for the price of
Y who is not satisfied with a check issued by the goods, it was then that X discovered that
X as Y does not believe in the credit of X. So something went wrong with the check.
X asks his rich friend, Z, to issue a check When X demanded that Ace Bank pay, the
payable to the order of X in the amount of latter demanded reimbursement from Super
P100,000.00. X gave Z the sum of P500.00 Bank. What are the rights and obligations, if
as gratification for the letter’s act of issuing any, of the parties? Discuss briefly.
such check. X indorsed and delivered the
check to Y who, in turn, negotiated it to A A- 1.) Y has the right to recover
who knows that there was no consideration from X the sum of P10, 000.00 for the price
between X and Z, except the sum of of the goods under the contract of sale. Y
P500.00. A presented the check for payment cannot recover under the check, which is not
to the drawee bank which dishonored the in his possession, and, therefore, he is not a
same for insufficient funds. The requisite holder thereof.
notices of dishonor were given to all parties
concerned. 2.) X has the right to demand that Ace
1.) When A demanded payment from Z, Bank, the drawee bank, credit back the sum
can the latter put up the defense of lack of of P10, 000.00 to his account. The contract
consideration? of deposit between X and Ace Bank
2.) Assuming that Z pays A the amount authorizes the latter to debit X’s account
of the check, is the instrument discharged? only in payment of the checks as ordered by
X.
A- 1.) No. Z cannot put up the
defense of lack of consideration because the
Saint Louis University COMMERCIAL LAW 373
2012 BAR OPERATIONS

The exception to this general rule will be a collecting bank within the 24-hour
case where the negligence of X in sending clearing period, the collecting bank
the check to Y by mail constitutes the is absolved from liability.
proximate cause of the loss. In such a case,
X’s negligence will prevent his recovery of
the amount involved from the drawee bank, Question:
Ace Bank.
Pedro Santos drew or issued the following
3.) Z, being the culprit is liable for the instruments:
amount of the check to Super Bank if the
latter is held liable in favor of Ace Bank, or to
X in case the latter cannot recover from the “Pay to Juan Cruz or whoever is in
Ace Bank, or to X in case the latter cannot possession hereof, the sum of P10,000.00,
recover from the Ace Bank under the or, as he prefers, deliver to him one
exception to the general rule in Answer no.2. thousand piculs of sugars, within sixty (60)
days from sight, with attorney’s fee
4.) Super Bank is liable to Ace Bank equivalent to 10% in case of a collecting
under the indorsement made on the check suit.
before it was sent for clearing, namely, “ALL
PRIOR INDORSEMENT AND/OR LACK OF
INDORSEMENT GUARANTEED”. Under (Sgd.) Pedro
such indorsement/ guarantee, Super Bank, Santos
the collecting bank, warranted the validity of
all indorsements on the back of the check,
including the indorsement made by the To: Jose Bustos
culprit, Z, is the forger. (Philippine National No. 13 Quezon Avenue
Bank vs. Bank of Philippine Island, G.R. No.
27838, August 4, 1986.) Quezon City, Metro Manila”

Note: Answer No.4 is a departure Is the above instrument negotiable? Explain

from the ruling that as between the briefly
drawee bank and the collecting
bank, the former should bear the
loss, which ruling did not give weight A- Yes, it is negotiable. First, it is in
to the collecting bank’s indorsement writing and signed by the drawer.
“ALL INDORSEMENT AND/OR
LACK OF IT GUARANTEED”
(Philippine National Bank vs. Court Second, it contains an unconditional order to
of Appeals and Philippine pay the sum of P10, 000.00. The delivery of
Commercial and Industrial Bank, L- 1,000 piculs of sugar is at the option of the
26001, Banking Corporation vs. payee or holder.
Peoples Bank & Trust Company, L-
28226. September 30, 1970, 34
SCRA 146.) Third, it is payable within sixty (60) days
from sight. This is a determinable future time
namely, sixty (60) days from the date of
Note further: In Republic Bank vs. presentment for acceptance.
Court of Appeals, G.R, No. L-42725,
April 22, 1991, it was ruled that the
unqualified endorsement of the Fourth, it is payable to bearer, namely,
collecting bank of the check should “Juan Cruz, or whoever is in possession of
be read together with the 24-hour the instrument.
regulation for clearing house
operation (Metropolitan Bank &
Trust Company vs. First National Fifth, it is addressed to a drawee, Jose
City Bank, 118 SCRA 537). Thus Bustos, who is named therein.
when the drawee bank fails to return
a forged or altered check to the
 Saint Louis University COMMERCIAL LAW 374
2012 BAR OPERATIONS

All the requirements of Section 1 of the Question:

Negotiable Instruments Law are complained with
What is the language of negotiability which
characterizes a negotiable paper as a credit
instrument?
Question:
Preparing to leave for a family vacation, X A- It is freedom to circulate as a
signed a PNB check and placed the same in substitute for money.
his filing cabinet in his study room. He left
instruction to Y, his housekeeper to fill it up Question:
in case there is a need for payment of water,
Since knowledge involves a state of mind
electric and/or telephone bill/s while he was
difficult to establish, what prima facie
away. After X and his family left for vacation,
presumption has been created by B.P. Blg.
Y filled up the check by making herself the
22?
payee and P50,000.00 as the amount
thereof, antedating the date as the day when
A- That the drawer has knowledge of
X left for vacation. Y indorsed the check by
the insufficiency of his funds in or credit with
signing his name on the back thereof, and
the bank at the time of the issuance and on
delivered the check to Z who paid value
the check’s presentment for payment.
therefore in good faith. In turn, Z delivered
the check to A who, at that time, already
Question:
knew about the surrounding facts and
circumstances. When A deposited the check Is lack of involvement in the negotiation for
with Ace Bank, his depositary bank, said the transaction a defense to a treasurer of
bank credited the amount of P50,000.00 to the corporation who signed the check in his
A’s account. Upon his return, X discovered capacity as an officer of the corporation?
what happened to the check copy through
clearing and had debited Z’s account to his A- No. It is not a defense. What the law
account. What are the rights and obligations, punishes is the issuance of a bouncing
if any, of the parties? Explain briefly. check an not the purpose for which it was
issued nor the terms and conditions relating
to its issuance. The mere act of issuing a
A- 1) X has the right to recover the worthless check is malum prohibitum. The
amount of P50,000.00 from Y his person or persons who actually sign the
housekeeper, who violated his instruction check in behalf of a corporation, company or
and who unduly benefited himself. entity are liable under Batas Pambansa Blg.
22.
2) Z is a holder in due course as he
took the check in good faith and for value. Question:
He was not aware of the breach of trust
committed by Y against X. Does the “Novation Theory” apply to B.P.
22?
3) A was not a holder in due course
because at the time he took the check, he
had already knowledge of the breach at trust A- It does not apply where the offer to
committed by Y. However, since he took the pay by the debtor, which was accepted by
check from Z, a holder in due course, A has the creditor, turned out to be only am empty
all the rights of a holder in due course. promise which effectively delayed the
Therefore, he is entitled to payment under aggrieved party’s filing of a case for violation
the check and the personal defense of of Batas Pambansa Blg. 22
breach of trust by Y cannot be set up
against him by X or5 any other party.
4) X has no right to demand that PNB Question:
credit back the amount of P50,000.00 to his
What are the elements of the offense
account. As between X and PNB, it was the
penalized under Batas Pambansa Blg. 22?
negligence of X which was the culprit, is X’s
employee or agent and X should answer for
A – The elements are: (1) the making,
the loss caused by his own employees.
drawing and issuance of any check to apply
to account or for value; (2) the knowledge of
 Saint Louis University COMMERCIAL LAW 375
2012 BAR OPERATIONS

the maker, drawer or issuer that at the time How do you determine whether a
of issue he does not have sufficient funds in corporation can perform an act or thing
or credit with the drawee bank for the necessary to carry out the purpose on its
payment of such check in full upon business?
presentment; and (3) subsequent dishonor
of the check by the drawee bank for
insufficiency of funds or credit or dishonor A- You have to determine whether or
for the same reason had not the drawer, not a logical and necessary relation exists
without any valid cause, ordered the bank to between the act questioned and the
stop payment. corporate purpose expressed in the charter.
For if the act is one which is lawful in itself
Question: and not otherwise prohibited, and is done for
the purpose of serving corporate ends, and
What is the nature of the violation of the
reasonably contributes to the promotion of
Batas Pambansa Blg. 22?
those ends in a substantial and not in a
remote and fanciful sense, it may be fairly
A – It is in the nature of a continuing crime.
considered the charter power of the
corporate. A corporation is not restricted to
Question: the exercise of powers expressly conferred
upon it by its charter, but has the power to
What is the nature of a cashier’s check?
do what is reasonably necessary or proper
A- A cashier’s check is a primary to promote the interest or welfare of the
obligation of the issuing bank and accepted corporation.
in advance by its mere issuance and by its
peculiar character and general use in the
commercial world is regarded substantially Question:
to be as good as the money which it
When are unpaid subscriptions due and
represents. (Based on Tan v. CA, 239
payable?
SCRA 310)

A- Unpaid subscriptions are not due

and payable until a call is made by the
CORPORATION LAW corporation for payment. Where the
corporation has not presented a resolution
of the board of directors calling for the
Question: payment of the unpaid subscription and no
notice of such call has been sent to the
X entered into a contract with an association stockholder, the corporation has no basis to
which represented itself to be a corporation.
set off the amount due the stockholder, from
When X sued the association under the the amount receivable from him for the
contract, the latter set up the defense that it unpaid subscription. (Apodaca v. NLRC,
has no capacity to be sued. Will the defense
G.R. No. 80039 April, 1989)
prosper?

Question:
A- No. The association is estopped
from denying its corporate capacity in the When is “piercing the veil of corporate
suit. It cannot allege lack of capacity to be fiction” proper?
sued to evade responsibility on a contract it
has entered into and by virtues of which it
received advantage and benefits. (Christian A- Where it appears that two business
Children’s Fund vs. National Labor Relations enterprises are owned, conducted and
Commission. G.R. No. 84502, June 30, controlled by the same parties, both law and
1989) equity will, when necessary to protect the
rights of third persons, disregard the legal
fiction that two corporations are distinct
Question: entities, and treat them as identical.
 Saint Louis University COMMERCIAL LAW 376
2012 BAR OPERATIONS

Question: Question:
Is a general manager of a corporation It is enough to say that foreign corporations
personally liable for the backwages of an not doing business in the Philippines do not
employee of the corporation? need a license in order to sue in the
Philippine Courts?

A- No. A corporation is invested by law

with a personality separate and distinct from A- No. The proposition refers to the
those of the persons composing it as well as right to sue; the question here refers to
from those of the persons composing it as pleading and procedure. Insofar as the
well as from that of ant other entity to which allegations in the complaint have a bearing
it may be related. More ownership by a on the parties’ capacity to sue, all that is
single stockholder or any another averred is that they are both foreign
corporation of all or nearly all of the capital corporations existing under the laws of
stock of a corporation is not of itself another state. This averment conjures two
sufficient ground for disregarding the alternative possibilities: either they are
separate personality. The general manager engaged in business in the Philippines or
of a corporation therefore should not be they are not so engaged. If the first, they
made personally answerable for the must have been duly licensed in order to
payment of the employee’s backwages maintain this suit. If the second, and the
unless he had acted maliciously or in bad action sued upon is singular and isolated, no
faith in terminating the services of the such license is required. In either case, the
employee. (Lim vs. NLRC, G.R. No. 79975, qualifying circumstances are an essential
March 16, 1989) part of the element of plaintiff’s capacity to
sue and must be affirmatively pleaded.
(Commissioner of Customs vs. K.M.K. Gani,
Question: Indrapal & Co., G.R. 73722, February 26,
1990)
Can the vice-president be held jointly and
severally liable with the corporation for the
unpaid wages of the company’s former
Question:
president?
What restrictions may be imposed on the
right of a stockholder to sell or alienate his shares?
A- The responsible officer of an
employer corporation can be held
personally, not say even criminally, liable for A. Restrictions cannot be imposed
non-payment of backwages. (Gudes v. upon stockholders by a by-law without
NLRC, G.R. No. 83023, March 22, 1990) statutory or charter authority. The owner of a
corporate stock has the same uncontrollable
right to sell or alienate, which attaches to the
Question: ownership of any other species of property.
(Go Soc & Sons vs. IAC, G.R. No.
Are questions of policy of the corporate 72342, February 19, 1987)
board subject to judicial review.

Question:
A- No. They are left solely to the
honest decision of the officers and directors Apex Smelting Corporation has an
of the corporation. The court is without authorized capital stock of P1, 000, 000.00,
authority to substitute its judgment for the P5, 000, 000.00 of which has been
judgment of the Board of Directors. The subscribed and paid up. A year after its
Board is the business manager of the corporatio, the company made profits, and
corporation, and so long a sits acts in good P250, 000.00 worth of unsubscribe shares
faith its orders are not reviewable by the of the authorized capital stock were used as
courts. (Sales v. SEC, G.R. No. 54330, stock dividends. Now the company needs
January 13,1988) additional capital of P1, 000, 000.00, which
can be raised from the present stockholders,
 Saint Louis University COMMERCIAL LAW 377
2012 BAR OPERATIONS

what step or steps can be taken to meet this

need? Explain briefly.
A- Jose can exercise his right of
appraisal within thirty (30) days from the
date when the voting took place, approving
A- The Articles of Incorporation should
such extension. Within ten (10) days from
be amended to increase the authorized
the date of his demand for the payment of
capital stock in order to accommodate an
his shares, he should surrender his
infusion of P1,000,000.00 additional capital
certificate of stock for annotation that the
for the operation of the company.
shares covered thereby are dissenting
shares; otherwise his right of appraisal
terminates. After the appraisal of the value
The amendment should be approved by at of his shares, the payment shall be made
least 2/3 of the outstanding capital stock from unrestricted retained earnings of the
entitled to vote and by at least a majority of corporation.
the members of the board of directors
showing such approval of the Securities and
Exchange Commission. Other requirements,
Question:
such as the submission of the long form,
must be complied within certain cases as in Achievers, Inc. made profits last five year,
the case where the amendment involves resulting in a substantial unrestricted
financial matters like the present one. retained earnings very much beyond its
paid-up capital. The company decided to
declare stock dividends out of the unissued
Question: shares of its authorized capital stock. If
consulted by the management as to the
X is one of the five (5) stockholders of a steps taken, what advice will you give?
record of Acme Trading Corporation. Since
Discuss briefly.
he does not belong to the majority of the
stockholders controlling the corporation. He
was not included in the list of stockholders,
A- All the subscription must first be fully
to whom the treasury shares were sold.
paid. When this is done, a letter should be
What right, if any, does X have? Explain
sent to the SEC requesting for exemption
briefly you answer.
from registration of the authorized capital
stock. The letter must be accompanied by
the minutes of the stockholders meeting and
A- He has the right it invoke his also that of the meeting of the board of
preemptive right to subscribe to the directors approving the additional issuance
corresponding portion of the reissuance of of the unissued as stock dividend as
the treasury shares. In relation to the ratio, declared by the stockholders representing at
which his stockholding on record has to the least 2/3 of the outstanding shares of stock
amount of the reissued treasury shares, and by a majority of the members of the
taking into account the shares of the other
board of directors.
stockholders of record

Question:
Question:
A stockholder of Glory Marketing
Jose is a stockholder of a corporation with a Corporation, Pedro sold his shares to
term expiring on August 31, 199. The Santos. The transaction is covered by a duly
majority of the members of the board of
notarized deed of sale/assignment. When
directors of the company approved and the Santos presented the document, duly signed
adopted a resolution extending the term of and executed by Pedro, together with the
the corporation for another twenty five (25)
certificate of stock covering the shares in
years. A similar resolution was previously question, to the corporate secretary for
adopted by the stockholders representing recording and the issuance of a new
two third (2/3) of the outstanding capital
certificate of stock in the same of Santos,
stock. If consulted by Jose who objects to the corporate secretary refused. If consulted
such extension, what advice will you give by Santos as what remedy is available to
him? Explain briefly.
 Saint Louis University COMMERCIAL LAW 378
2012 BAR OPERATIONS

him under the circumstances, what advice corporate act, or a intra-corporate

will you give him? Explain briefly. controversy, and the nature is not altered by
the reason or wisdom with which the Board
of Directors may have in taking such action.
A- Assuming that the certificate of
stock has been duly indorsed by Pedro, The question on remuneration, involving as
Santos can be considered as a stockholder it does, a person who is not a mere
of the corporation. In such a case, actual employee but a stockholder and officer, an
knowledge of the transfer from Pedro to integral part of the corporation, is not a
Santos, on the part of the corporate simple labor problem but a matter that
secretary, is equivalent to registration. The comes within the area of corporate affairs
knowledge of the corporate secretary is and management and is in fact a corporate
binding upon the corporation. Being a controversy in contemplation of the
stockholder of the corporation, Santos can Corporation Code.
institute an action in the RTC vested with
special jurisdiction under RA 8799 in order Question:
to compel the corporation and the corporate
Distinguish between “office” and “employee”.
secretary to record the transfer and to issue
a new certificate of stock of his name. This
A – An “office” is created by the charter of
is example of intracorporate controversy
the corporation and the officer is elected by
since the action is between the stockholder,
the directors or stockholders. An
Santos, and the corporation, and the dispute
“employee” usually occupies no office and
concerns and/or arises out of the
generally is employed not by the action of
relationship between such stockholder and
the directors or stockholders but by
the corporation.
managing officer of the corporation who also
determines the compensation to be paid to
such employee.
If the certificate of stock has not been duly
indorsed by Pedro, Santos should first Question:
secure such indorsement before presenting
the document of transfer, together with the What is needed for the purpose of serving
certificate of stock duly indorsed, to the summons on a foreign corporation?
corporate secretary for recording.
Otherwise, he will not be considered a A – For purposes of having summons
stockholder of the corporation and the action served on a foreign corporation in
will not be considered an intracorporate accordance with Rule 14, Section 14, it is
controversy. (Rivera vs. Florendo, L-57586, sufficient that it be alleged in the complaint
October 8, 1986, 144 SCRA 643.) that the foreign corporation is doing
business in the Philippines.

Question: Question:
How do you characterize the determination Is a foreign corporation without a license
of the rights of the person and the ipso facto incapacitated from bringing an action?
concomitant liability of a corporation arising
from the former’s ouster as a medical A – No. A license is necessary only if it is
director and/or hospital administrator, which “transacting or doing business” in the
are corporate offices. country.

Question:
A – It is an extra controversy subject to the
jurisdiction of the Special Commercial Court What is the test to determine whether a
under RA 8799. foreign corporation is “doing business” in the
country.
Where the medical director and/or hospital
administrator was appointed by the A – The test seems to be whether a foreign
corporation’s Board of Directors/Trustees, corporation is continuing the body or
he is deemed an officer of the corporation. A substance of the business or enterprise for
corporate officer’s dismissal is always a which it was organized or whether it has
 Saint Louis University COMMERCIAL LAW 379
2012 BAR OPERATIONS

substantially retired from it and turned it over

to another. A – A resident agent, as a representative of
the foreign insurance company, is tasked
The purpose of the law is not to prevent the only to receive legal processes on behalf of
foreign corporation from performing single or its principal and not to answer personally for
isolated acts, but to bar it from acquiring a any claim against the foreign corporation.
domicile for the purpose of business without
first taking the steps necessary to render it Question:
amenable to suits in the local courts.
What is the preferred share of stock?
By securing a license, a foreign entity would
A – A preferred share of stock is one which
be giving assurance that it will abide the
entitles the holder thereof to a certain
decisions of our courts, even if adverse to it.
preferences over the holder of common
stock. Preferences granted to preferred
The primary purpose of the license
stockholders do not give them a lien upon
requirement is to compel a foreign
the property of the corporation nor make
corporation desiring to do business within
them creditors of the corporation, the right of
the state to submit itself to the jurisdiction of
the former being always subordinate to the
the courts of the state.
latter.

Question:
What are the redeemable shares?
Question:
What is determinative of “doing business”? A – Redeemable shares are shares usually
preferred, which by their terms are
A – It is not really the number of quantity of redeemable at a fixed date, or at the option
the transactions, but more importantly, the of either the issuing corporation, or the
intension of an entity to continue the body of stockholder, or both at a certain redemption
its business in the country. The grant and price. Redemption may not be made there
extension of 90-day credit terms by a foreign the corporation is insolvent or if such
corporation to a domestic corporation for redemption will cause insolvency or inability
every purchase made unarguably shows an of the corporation to meet its debts as they
intention to continue transacting with the mature.
latter since in the usual course of
commercial transactions, credit is extended
Question:
only to customers in good standing or to
those on whom there is an intention to Are the shareholders risk takers?
maintain long-term relationship.
A – Yes. Shareholders, both common and
Question: preferred, are considered risk takers who
invest capital in the business and who can
What is meant by the phrase “isolated
look only to what is left after corporate debts
transaction”?
and liabilities are fully paid.
A – The phrase “isolated transaction” has a
Question:
definite and fixed meaning, i.e., a
transaction or series of transactions set When is “interest bearing stock” legal?
apart from the common business of a
foreign enterprise in the sense that there is A – “Interest bearing stocks,” on which the
no intention to engage in a progressive corporation agrees absolutely to pay interest
pursuit of the purpose and object of the before dividends are paid to common
business organization. stockholders, is legal only when construed
as requiring payment of interest as
Question: dividends from net earnings or surplus only.
What is the extent of the authority of a
Question:
resident agent, as representative of the
foreign insurance company?
 Saint Louis University COMMERCIAL LAW 380
2012 BAR OPERATIONS

What is required of the court in piercing the Such dismissal or non-appointment of a

veil of corporate entity? corporate officer is clearly an intra-corporate
matter and jurisdiction properly belongs to
A – Piercing the veil of corporate entity the Securities and Exchange Commission.
requires the court to see through the
protective shroud which exempts its Jurisdiction pertains to the Special
stockholders from liabilities that ordinarily Commercial Court (no longer the Securities
they could be subject to, or distinguishes and Exchange Commission) even if the
one corporation from a seemingly separate complaint by a corporate officer includes
one, were it not for the existing corporate money claims since such claims are actually
fiction. part of the perquisites of his position, and
therefore interlinked with his relations with
Question: the corporation.
Is mere ownership by a single stockholder or
by another corporation of all or nearly all of
Question:
the stock of the corporation itself a sufficient
reason for disregarding the fiction of In unauthorized corporate contracts, who
separate corporate personalities? can make ratification in behalf of a corporation?

A – No. A – Ratification cannot be made on the part

of the corporation by the same persons who
Question: wrongfully assume the power to make the
contract, but ratification must be by an
What is a certificate of indebtedness?
officer or governing body having authority to
make such contract.
A – A certificate of indebtedness pertains to
certificate for the creation and maintenance Question:
of a permanent improvement revolving fund, What is the liability of persons who assume
similar to a “bond”. to act as a corporation knowing it to be
without authority to do so?

A – They shall be liable as general partners

Question:
for all the debts, liabilities and damages
What is the concept of “unpaid claims” in
incurred or arising as a result thereof.
Section 63 of the Corporation Code?

A – It refers to “any unpaid claim arising

Question:
from unpaid subscription”, and not to “any
What is the effect of the purchase of shares
indebtedness which a subscriber or
of stock or membership certificate at public
stockholder may owe the corporation arising
auction and the issuance to the purchaser of
from any other transaction, such as monthly
the corresponding Certificate of Sale?
dues.

Question: A – Such purchase transfers ownership of

Is dismissal or non-appointment of a the same to the purchaser and thus entitles
corporate officer an intra-corporate matter? him to have the share registered in his name
as member.
A – Yes. Sec. 5(c ) of P.D. NO. 902-A, in rel.
to Sec. 5 of RA 8799, covers both election
and appointment of corporate directors, Question:
trustees, officers and managers. What is necessary for the validity of the sale
of all or substantially all of the property of
A superintendent/Administrator who is the corporation?
included in the by-laws of an association in
its roster of corporate officers is an officer of A – For the sale of the only property of a
said corporation and not a mere employee. corporation to be valid, the majority vote of
the legitimate board, concurred in by the
vote of at least 2/3 of the bona fide members
 Saint Louis University COMMERCIAL LAW 381
2012 BAR OPERATIONS

of the corporation should be obtained. The A – No. Consolidation becomes effective not
Securities and Exchange Commision has upon mere agreement of the members but
the unquestionable authority to pass upon only upon issuance of the certificate of
the issue as to who among the different consolidation by the Securities and
contending groups is the legitimate Exchange Commission.
governing board of a corporate body.
Question:
Question: What debars the foreign corporation from
What is the general rule concerning access to out courts?
obligations, incurred by the corporation,
acting through its directors, officers and A – it is not the absence of the prescribed
employees? license but “doing business” implies a
A – Such obligations are the sole liabilities of continuity of commercial dealings and
the corporation. arrangements, and contemplates, to that
extent, the performance of acts or works or
Question: the exercise of some of the functions
In labor cases, when are directors and normally incident to or in progressive
officers solidarity liable with the corporation prosecution of the purpose and subject of its
for the termination of employment of organization.
corporate employees?
A foreign corporation will not be regarded as
A – They are solidarily liable with the doing business in the State simply because
corporation for such termination of it enters into contracts with residents of the
employment of corporate employees when State, where such contracts are
done with malice or bad faith. consummated outside the State. Sales
made to customers in the State by an
Question: independent dealer who has purchased and
What is the nature of corporation bv obtained title from the corporation to the
estoppel? products sold are not a doing business by
the corporation.
Corporation by estoppel is founded on
principles of equity and is designed to The ground for barring recourse to our
prevent injustice and unfairness, and where courts by an unlicensed foreign corporation
there is no third party involved and the doing or transacting business in the
conflict arises only among those assuming Philippines should properly be “lack of
the form of a corporation, who know that it capacity to sue” and not “lack of personality
has not been registered, there is no to sue”.
corporation by estoppel.
Question:
Question: What are the instances where personal
What determines the jurisdiction of the liability of a corporate officer, director or
Special Commercial Court in intra-corporate trustee along with the corporation validly
controversies under R.A. 8799? attach?

The jurisdiction of the Special Commercial

Court is determined by the concurrence of A – These instances are when: 1) He
two elements, namely: (1) the status or assents: (a) to a patently unlawful act of the
relationship of the parties; and (2) the nature corporation, or (b) for bad faith or gross
of the question that is the subject of their negligence in directing its affairs, or (c) for
controversy. conflict of interest, resulting in damages to
the corporation, its stockholders or other
Question: persons; 2) He consents to the issuance of
Is there intra-corporate or partnership watered stocks, or who, having knowledge
relation between two jeepney drivers’ and thereof, does not forthwith file with the
operators’ associations whose plan to corporate secretary any written objection
consolidate into a single common thereto; 3) He agrees to hold himself
association is still a proposal? personally and solidarily liable with the
corporation; 4) He is made by specific
 Saint Louis University COMMERCIAL LAW 382
2012 BAR OPERATIONS

provision of law, to personally answer for his used as a device to defeat the labor laws,
corporate action. this separate personality of a corporation
may be disregarded or the veil of corporate
Question: fiction pierced.
What is the status of a “foreign corporation”
within the state in which is foreign? Question:
What are some probative factors of identity
A – Such foreign corporation has no legal that will justify the application of the doctrine
existence within the state in which it is of piercing the corporate veil?
foreign. This proceeds from the principle that
judicial existence of a corporation is A – They are: (1) Stock ownership by one or
confined within the territory of the state common ownership of both corporations, (2)
under whose laws it was incorporated and Identity of directors and officers, (3) The
organized, and it has no legal status beyond manner of keeping corporate books and
such territory. records, (4) Methods of conducting the
business.

Question: Question:
What is the purpose of the law in requiring What is the rest in determining the
that foreign corporations doing business in applicability of the doctrine of piercing the
the Philippines licensed to do so and that veil of corporate fiction?
they appoint an agent for service of
process? A – The test is as follows: (1) Control, not
merely majority or complete stock control,
A – It is to subject the foreign corporation but complete domination, not only of
doing business in the Philippines to the finances but of policy and business practice
jurisdiction of its courts. in respect to the transaction attacked so that
the corporate entity as to this transaction
Question: had at the time no separate mind, will or
Is the party estopped to challenge the existence of its own; (2) Such control must
personality of a corporation after having have been used to defendant to commit
acknowledged the same by entering into a fraud or wrong, to perpetuate the violation of
contract with it? a statutory or other positive legal duty, or
dishonest and unjust act in contravention of
A – Yes. Moreover, where the parties are plaintiff’s legal right; and (3) The aforesaid
equally guilty of violating the law, they are in control and breach of duty must proximately
pari delicto, in which case it follows as a cause the injury or unjust loss complained
consequence that such party is not entitled of. The absence of any one of these
to the relief prayed for. elements prevents “piercing the corporate
veil.”
Question:
Being an artificial being and having Question:
existence only in legal contemplation, has a What is the so-called “Instrumentality Rule”
corporation feelings, emotions or senses? or doctrine?

A – No. It cannot therefore experience A – It is otherwise known as “alter ego”

physical suffering and mental anguish as to doctrine.
entitle it to an award of moral damages.
Question:
Question: What are the powers which may not be
What is the purpose of the fiction of exercised by the EC?
separate distinct personality of a corporation?
A- The Executive Committee cannot
exercise the following:
A – It is merely a fiction created by law for
convenience and to promote justice. When 1. approval of any action for which
the notion of separate judicial personality is shareholders’/ stockholders’ action
used to defeat public convenience, justify is required;
wrong, protect fraud or defend crime, or is 2. filling of vacancies in the board;
 Saint Louis University COMMERCIAL LAW 383
2012 BAR OPERATIONS

3. amendment or repeal of by-laws or

adoption of new by-laws; The formalities are: (1) There must be a
4. amendment or repeal of any resolution of the captain, adopted after
resolution of the board, which by its deliberation with the sailing mate and the
express terms is not so amendable other officers of the vessel, and after hearing
or repealable; the persons interested in the cargo who may
5. distribution of cash dividends to the be present; (2) The resolution adopted to
shareholders. cause the damages which constitute general
average must necessarily be entered in the
log book, stating the reason for the dissent,
TRANSPORTATION if any, and the urgent reasons or causes
which impelled the captain of he acted of his
Question:
own accord; (3) In the minutes and the
What does a contract of air carriage resolution should be slated in detail the
generate? goods jettisoned; and (4) The captain shall
deliver one copy of the first part he may
A – It generates a relation attended with a make, within twenty –four hours after his
public duty and any discourteous conduct on arrival, and to ratify it immediately under
the part of a carrier’s employee toward a oath.
passenger gives the latter an action for
damages and, more so, where there is bad
faith. In attention to and lack of care for the Question:
interests of its passengers who are entitled
What is the assumption of the doctrine of
to its utmost consideration, particularly as to
“last clear chance”?
their convenience, amount to bad faith which
entitles the passengers to an amount of
A – It assumes that the negligence of the
moral damages.
defendant was subsequent to the
negligence of the plaintiff and the same
Question:
must be the proximate cause of the injury.
Does the Warsaw Convention operate as an
exclusive enumeration of the instances or
Question:
declaring a carrier liable for breach of
What is franchise?
contract of carriage or as an absolute limit of
the extent of that liability?
A – Franchise is a legislative grant, whether
made directly by the legislature itself, or by
A – No. It must not be construed to preclude
anyone of its properly constituted
the operation of the Civil Code and pertinent
instrumentalities. The grant, when made,
laws.
binds the public, and is, directly or indirectly,
the act of the state.
Question:
As a rule, what does general or gross
Question:
average include?
What is a “charter-party”?
A – It includes all damages and expenses
A – A “charter-party” is defined as a contract
which are deliberately caused in order to
by which an entire ship, or some principal
save the vessel, its cargo, or both at the
part thereof, is let by the owner to another
same time, from real and known risk.
person for a specified time or use; a contract
of affreightment by which the owner of a
Question:
ship or other vessel lets the whole or a part
What is the necessary to enable the carrier
of her to a merchant or other person for the
to claim contribution from the consignees for
conveyance of goods, on a particular
additional freight and salvage changes?
voyage, in consideration of the payment of
the freight.
A – The carrier must comply with the
Question:
formalities prescribed under Articles 813 and
What makes out a prima facie case against
814 of the Code of Commerce in order to
the common carrier?
incur the expenses and cause the damage
corresponding to gross average.
 Saint Louis University COMMERCIAL LAW 384
2012 BAR OPERATIONS

A – Mere proof of delivery of goods in good A – No, unless expressly stipulated by the
order to a common carrier, and of their parties in their charter party. In a contract of
arrival at the place of destination in bad private carriage, the parties may freely
order, makes out prima facie case against stipulate their duties and obligations which
the common carrier. perforce would be binding on them. Unlike in
a contract involving common carrier, private
Question: carriage does not involve the general public.
What is the nature of the liability of the As a private carrier, a stipulation exempting
registered owner of a public service vehicle the owner from liability for the negligence of
for damages arising from the tortuous act of its agent is not against public policy and is
the driver? deemed valid.
A – Such liability is primary, direct and
solidary with the driver. A charterer, in exchange for convenience
and economy, may opt to set aside the
Question: protection of the law on common carriers.
What presumption arises from carrying a When the charterer decides to exercise this
deck cargo? option, he takes a normal business risk.

A – It is settled that carrying a deck cargo Question:

raises the presumption of unseaworthiness What can be a basis for airline passengers’
unless it can be shown that the deck cargo action for damages
will not interfere with the proper
management of the ship. A – The contract of air carriage generates a
relation attended with a public duty, and
Question: neglect or malfeasance of the carrier’s
When does the right of abandonment of employees naturally could give ground for
vessels not apply? an action for damages.

A – The internal rule is to the effect that the

right of abandonment of vessels, as a legal Question:
limitation of a shipowner’s liability, does not Can the refusal by the airline to accord
apply to cases where the injury or average amenities to stranded passengers in case of
was occasioned by the shipowner’s own cancellation of flight due to force majeure
fault. Where the shipowner is likewise to be make the airline liable for damages?
blamed, Article 587 of the Code of
Commerce will not apply, and such situation A – Assuming arguendo that airline
will be covered by the provision of the Civil passengers have no vested right to
Code on common carriers. amenities in case of flight cancellation due
to force majeure, what makes an airline
Question: liable for damages is its blatant refusal to
Under Section 3(6) of the Carriage of Goods accord the so-called amenities equally to all
by Sea Act, what is extinguished if no suit is its stranded passengers who are similarly
brought within one year? situated.

A – Only the carrier’s liability is extinguished. Question:

The ruling in Filipino Merchants (145 SCRA What are the two categories of international
42) should apply only to suits against the transportation?
carrier filed either by the supplier, the
consignee or the insurer, not to suits by the
A – They are: (1) that where the place of
insured against the insurer.
departure and the place of destination are
situated within the territories of two High
Contracting Parties regardless of whether or
not there is a break in the transportation or a
Question:
transshipment; and (2) that where the place
May Article 1745 and other Civil Code
of departure and the place of destination are
provisions on common carriers apply to
within the territory of a single High
private carrier?
Contracting Party if there is an agreed
stopping place within a territory subject to
 Saint Louis University COMMERCIAL LAW 385
2012 BAR OPERATIONS

the sovereignty, mandate, or authority of into a private one as to negate the civil law
another power, even though the power is not presumption of negligence in the case of
a party to the Convention. loss or damage to its cargo?

A- It depends on the type of charter

Question: party.
Charter parties are 2 types:(a) “contract of
What is the effect or nature of a copy of an affreightment” which involves the use of
official entry in the ship captain’s logbook? shipping space on vessels leased by the
owner in part or as a whole, to carry goods
A – It is legally binding and serves as an
for others ; (b) “charter by demise” or
exception to the hearsay rule. “bareboat charter” where the whole vessel is
leased to the charterer with a transfer to him
Question: of its entire command and possession and
What is an apprentice in maritime law? consequent control over its navigation,
including the master and the crew who are
A – An apprentice is a person bound in the his servants.
form of law to a master, to learn from his art, It is only in the case of charter by demise or
trade or business, and to serve him during bareboat charter where the common carrier
the time of his apprenticeship. An apprentice becomes a private carrier. This is because
officer cannot be considered a superior this type of charter includes both the vessel
officer. and its crew; at least insofar as the particular
voyage covering the charter-party is
concerned. In the case of affreighnment (or
Question: time or voyage charter), the carrier remains
common because the charter is limited to
Anthony is the owner and driver of a Mazda the ship only, the crew remaining under the
minibus which he uses to provide bus control the direction of the shipowner.
service for school children in the Makati (Planters Products v. Court of Appeals, 226
area. One Sunday, the El Zhaddai asked SCRA 476)
Anthony to transport 20 of its members from
Makati to the Luneta, for which service El
Zhaddai offered Anthony 1,000 pesos. Question:
Anthony accepted and undertook the What is a maritime protest? When, where
transport. While enroute to Makati, Anthony and before whom should it be filled? What is
lost control of the steering wheel and caused the effect of non-filing of the protest?
the bus to collide with parked truck, causing
injuries to some of his passengers. Is
Anthony a common carrier? A- A maritime protest is a sworn
statement stating the circumstances of any
of the following incidents: (a) collision;
A- Yes. Anthony does not have to be (b) arrival under stress (c)
engaged in the business of public transport shipwreck; and (d) after the
for the provisions of the Civil Code on vessel has passed a hurricane and the
common carriage to apply. Article 1732 of cargo had been, damaged. The protest must
the Civil Code, in defining common carriers, be presented within 24 hours before the
makes no distinction between the whose competent authority of the port nearest to
principal business activity is the carrying of where the incident took pace, or the first port
persons or goods or both, and one who of arrival; if the incident occurs in a foreign
does such carrying only as an ancillary country, the Philippine consular
activity. Neither does the law distinguish representative.
between a carrier offering its services to the An action to recover losses and damages
general public and one who offers services arising from the incident cannot be admitted
only to a narrow segment of the general if such protest is not made. The lack of
population. protest, however, will not prejudice such
action by owners of cargo who were not in a
Question: condition to make unknown their wishes.
Does a charter party between a ship owner
and a charterer transform a common carrier Question:
Saint Louis University COMMERCIAL LAW 386
2012 BAR OPERATIONS

Distinguish between a Certificate of Public captain is convinced as a reasonably

Convenience and Necessity (CPCN) and a competent and prudent marirer that the
Certification of Public Convenience (CPC) shipowner’s or agent’s instructions will
result, in very specific circumstances facing
him, in imposing unacceptable risks of loss
A- A CPC is an authorization issued for or serious danger to ship or crew he cannot
the operation of a public service for which no seek absolution from his responsibility, if a
franchise, municipal or legislative, is marine casualty occurs in such
required by law. A CPCN, on the other hand instructions.(Inter Crient v. NLRC< 235
is an authorization issued for the operation SCRA 268)
of a-public-service for which a franchise is
required.
Question:
Question: What is an average in maritime law? What
are the kinds of average?
What do you understand by the “prior
operator” rule?
A- An average is either (a) all the
extraordinary or accidental expenses which
A- By the prior operator rule, a first
may be incurred during the voyage for the
license has more or less a vested and
preservation of the vessel or cargo or both;
preferential right over another who seeks to
or (b) all damages or deterioration which the
acquire a license and operate a public
vessel may suffer from the casts anchor in
service over the same route, as long as the
the port of destination, and those suffered by
first license and complies with the issuing
the merchandise form the time it is loaded in
agency’s reasonable rules and regulations.
the port of shipment until it is unloaded in
the port of the consignment.
Question:
Averages are of 2 kinds: (a) Simple or
Contrary to the instructions of his employer, particular, these are the expenses and
the captain or the M/V Morning Star refused damages caused to the vessel or cargo
to leave for South Africa because, in his which have not inured to the benefit and
judgment, the vessel needed repairs common profits of all the persons interested
necessary to ensure the safety of the in the vessel and her cargo; and (b) general
voyage. For insubordination, the captain or gross which are all the damages and
was terminated from his employment. Is the expenses which are deliberately caused in
termination valid? order to save the vessel, her cargo or both
from a real or known risk.
Question:
A- No. A captain commonly performs 3
distinct roles (a) general agent of the Pascual Taxi Company prides itself in
shipowner, (b) commander and technical employing only experienced and courteous
director of the vessel; and (c) representative taxi drivers. In fact, applicants are examined
of the country under whose flag he not only with respect to their technical
navigates. competence but also as to their total
Of these, the most important is the role personality, behavior, family background,
performed by him as commander of the and even their moral fiber.
vessel during its voyage and the protection
of the passengers, crew and cargo. He must
be accorded a reasonable measure of Despite all these, a driver newly-hired by
discretionary authority to decide what the Pascual stabbed his first passenger,
safety of the ship and of its crew and cargo Rogelio. Rogelio survived the assault and
specifically requires on a stipulated voyage. sued the Company for damages. The
He is right there on the vessel, in command Company puts up the defense that the
of it and presumably knowledgeable as to employee’s acts were beyond the scope of
the specific requirements of seaworthiness his employment, contrary to instructions
and the particular risks and perils of the given to him and constituted force majeure
voyage he is to embark upon. Thus, if the because the Company could not have
 Saint Louis University COMMERCIAL LAW 387
2012 BAR OPERATIONS

foreseen that its driver would perpetrate the

assault. Is the Company liable?
A- What can be recovered in such a
case are only damages which are the
natural and probable consequences of said
A- The Company is liable. Under the
breach and which the parties have foreseen
Civil Code, common carriers are liable for
at the time the obligation was constitute.
injuries to passengers through the
These damages consist of the actual
negligence or willful acts of its employees,
damages. (China Air Lines, Ltd. V. IAC, G.R.
although such employees may have acted
No. 73835, January 17, 1989)
beyond the scope of their authority or in
violation of the orders of the common
carriers. This liability does not cease upon
Qustion:
proof that they exercise the diligence of a
good father of a family in selecting and Name at least three grounds for arrival under
supervising employees. stress
A- They are:
Question:
1. lack of provisions
What does pilotage service consist of?
2. well-founded fear of seizure,
A – Pilotage service consists of navigating a privateers or pirates
vessel from a specific point, usually about 3. inability of the vessel to navigate
two (2) miles offshore, to an assigned area due to an accident of the sea
at the pier and vice-versa.

Question:
When may moral damages be recoverable INSURANCE
in case of breach of contract of carriage?
Question:
A- Moral damages are recoverable in a May an insurance contract, by special
damage suit predicated upon a breach of provisio, restrict or limit the operation of the
contract of carriage only in the following general provisions?
cases: 1) where the mishap results in the
death of a passenger; 2) where it is proved A – Yes. The insurance company shall
that the carrier was guilty of fraud or bad express such limitation in clear and
faith, even if death does not result. In cases unmistakable language.
other than those two, moral damages will be
disallowed. Question:
Has marine insurance developed as an all-
Question: risk coverage?

When may an award of exemplary damages A – Yes. Marine insurance developed as an

by proper? all-risk coverage, using the phrase “perils of
the sea” to encompass the wide and varied
range of risks that were covered.
A- It is proper when the carriers, is
committing the breach of contract, acted in
wanton, fraudulent, reckless, oppressive or Question:
malevolent manner. When does the prescriptive period to bring a
suit in court under an insurance policy begin?
Question:
A – It begins to run from the date of the
What kind of damages can be recovered insurer’s rejection of the claim filed by the
where the breach of contract is incurred in insured, the beneficiary or any person
good faith? claiming under an insurance contract.
 Saint Louis University COMMERCIAL LAW 388
2012 BAR OPERATIONS

insurance company does not fully cover the

Question: loss?
In every marine insurance policy, what does
A – Yes.
the assured impliedly warrant to the assurer?
Question:
A – The assured impliedly warrants to the
assurer that the vessel is seaworthy and In insurance, when must the notice of claim
such warranty is as much a term of the be files?
contract as if expressly written on the face of
the policy. Hence, it becomes the obligation A – The notice of claim must be filed within
of the cargo owner to look for a reliable six (6) months from the date of the accident.
common carrier which keeps its vessels in Otherwise, the claim shall be deemed
seaworthy condition. waived. An application form does not prove
that insurance was secured.
Question:
Question:
How may a warranty of seaworthiness be
excluded in a marine insurance policy? What is a valid precondition before the
insurer can be compelled to turn over the
A – In policies where the law will generally whole amount of the insurance to the
imply a warranty of seaworthiness, such insurer?
warranty can only be excluded by terms in
writing in the policy in the clearest language. A – It is the signing of the Loss and
Subrogation Receipt.
Question:
Question:
What may the result of admission by the
assurer of seaworthiness mean? What do you understand by the “no-fault”
A – Such result of admission of claim under a Compulsory Motor Vehicle
seaworthiness may mean one or two things, Liability (CMVLI)?
namely: (a) that the warranty of the
A- An insurance company shall pay
seaworthiness is to be taken as fulfilled; or
any claim for death or bodily injuries
(b) that the risk of unseaworthiness is
sustained by a passenger on third party
assumed by the insurance company.
without proving no fault or negligence of any
kind subject to certain conditions. (Sec.378,
Question:
ICP)
When does the right of subrogation accrue?
Question:
A – The right of subrogation is not Under the “no fault insurance”, against
dependent upon, nor does it from out of any whom should the claim be filed?
privity of contract or upon payment by the
insurance company of the insurance claim. It
accrues simply upon payment by the A- The law is clear. The claim shall lie
insurance company of the insurance claim. against insurer of the vehicle in which the
occupant is riding, mounting or dismounting
Question: from and no other. The claimant is not free
to choose from which insurer he will claim
What is the coverage of an “all risks”
insurance policy? be made against the insurer in which the
occupant is riding, mounting or dismounting
from.
A – An “all risks” insurance policy covers all
kinds of loss other than those due to willful Question:
and fraudulent act of the insured.
Is the rusting pipes in the course of a
Question: voyable “peril of the sea”?

May an aggrieved party still recover the

deficiency from the person causing the loss A- Yes. This is in view of the toll on the
in the event the amount paid by the cargo of wind, water and salt conditions.
 Saint Louis University COMMERCIAL LAW 389
2012 BAR OPERATIONS

(Cathay Insurance Company v. Court of The one-year period should be counted from
Appeals, G.R. 46145, June 30, 1987) the date of rejection by the insurer, as this is
the time when the cause of action accrues.
Before such final rejection (Subbmit
Question: Guaranty and Insurance Company, Inc. v.
Jose C. de Guzman, G.R. 50997, and two
What is an “all risks” policy of insurance? companion cases, June 30, 1987)

A- An “all risks” insurance policy

insures against all causes of conceivable
loss of damage, except as all causes of BANKING AND ALLIED LAWS
conceivable loss or damage, except as
otherwise excluded in the policy or sue to
fraud or intentional misconduct on the part of Question:
the insured. It covers all losses during the
When it appears prima facie that a bank is in
voyage whether arising from a marine peril
“a condition of insolvency” or so situated
or not, including pilferage losses during the
“that its condition in business would involve
war.
probable loss to its depositors or creditors”,
what step/s may be taken by the Monetary
Board?
Question:
What is the measure of the insurer’s liability
under a policy of insurance? A- The Monetary Board may take the
following steps:

A- The terms of the contract or policy

constitute the measure of the insurer’s 1.) To forbid the bank to do business and
liability and compliance therewith is a appoint a receiver for the bank.
condition precedent to the insured’s right of
recovery from the insurer. (Perla Compania
2.) To determinate within ninety (90) days
de Seguros, Inc. vs. Court of Appeals, G.R.
whether or not-
78860, May 28, 1990)
a.) The bank may be
reorganized and
rehabilitated to such an
Question:
extent as to be permitted to
It is provided by law that notice of the claim resume business with safety
must be filed within six months from date of to the depositors, creditors
the accident, otherwise the claim shall be and the general public. A
deemed waived and action or suit for conservator may be
recovery of damage due to loss or injury appointed for this purpose.
must be brought, in proper cases, with the
Commission or the Courts within one year
from the date of accident, otherwise b.) If it is indeed insolvent or
claimant’s right of action shall prescribe cannot resume business
(Section 384). Are those two (2) periods with safety to the
mandatory and must always concur? depositors, creditors and
the general public, and the
public interest requires that
A- No. There is nothing in the law the bank be liquidated, a
which mandates that the two periods must liquidator shall be
concur. On the contrary, the one-year period appointed. Thereafter, the
is only required “in proper cases”. Had the Central Bank shall file in the
lawmakers intended it to be that way, then Regional Trial Court a
the phrase “improper cases” would not have petition for insolvency
been used. praying of the assistance of
the court in liquidation, with
the Bangko Sentral ng
 Saint Louis University COMMERCIAL LAW 390
2012 BAR OPERATIONS

Pilipinas being represented A – The interest due should be that

by the Office of the Solicitor stipulated, and, in the absence thereof, the
General. rate shall be 12% per annum. Where an
obligation arises “from a contract of
purchase and sale and not from a contract
Question: of loan or mutuum,” the applicable rate is
“6% per annum as provided in Article 2209
May the actions of the Monetary Board in of the New Civil Code and not the rate of
appointing a conservator or to liquidate and 12% per annum as provided in Central Bank
petitioning for an insolvency proceeding for Circular NO. 416.”
a bank be challenged by an interested
party? Question:
Is the ceiling prescribed by the Usury Law
A- Generally, it cannot be challenged. for interest rates still in force?
Such actions by the Monetary Board are
final and executory. They cannot be set A – No. Section 1 of Central Bank Circular
aside or even restrained by the court, except No. 905, series of 1982, expressly removed
only upon convincing proof that the action is the interest ceilings prescribed by the Usury
plainly arbitrary and not made in good faith. law.

Question:
Question:
Before a mortgagor can exercise his right of
When and how may these exceptions redemption, is he required to make a
(stated in the answer to the next preceding previous notice or formal tender to the
question) be asserted? vendee or redemptioner?

A- These exceptions may be asserted A- No. Previous notice to the vendee or

as an affirmative defense or a counterclaim a meeting between the mortgagor and the
in the proceeding for assistance in redemptioner, or a previous formal tender
liquidation. It is not necessary to assert the before action is begun to enforce the right of
same as a cause of action in a separate and redemption, is not required. The mortgagor
distinct action. is given a maximum of three (3) months or
up to the registration of the foreclosure sale
or real estate, whichever is earlier, within
Question: which to redeem the property by paying all
When does the rate of 12% interest referred the claims of the bank against them on the
to in Circular NO. 416 apply? date of the sale, including all costs, and
other expenses incurred by reason of the
A – It applies to load or forbearance of foreclosure sale and custody of the property,
money, or to cases where money is as well as charges and accrued interest.
transferred from one person to another and
the obligation to return the same or a portion
thereof is adjudged, and any other monetary Question:
judgment which does not involve or which X secured a loan from Bank M. In the loan
has nothing to do with loads or forbearance contract, it is expressly provided under the
of any money, goods or credit does not fall so-called escalation clause as follows:
within the coverage for such imposition is
not within the ambit of the authority granted
to the Central Bank. “I hereby authorized the bank to
correspondingly increase the interest rate
Question: stipulated in this contract without advance
What is the rate of interest in a loan or notice to me in the event a law increasing
forbearance of money? the lawful rate of interest that may be
charged on this particular kind of loan.”
Subsequently, CB Circular No. 494
 Saint Louis University COMMERCIAL LAW 391
2012 BAR OPERATIONS

increased the interest rate from 12% to 17% Question:

per annum. Correspondingly, the bank
What is the purpose of the special affidavit
increased the rate of interest of the loan of X
of a good faith in connection with a chattel
from 12% to 17% per annum. Is the act of
mortgage?
the bank valid and binding?
A– It is not necessary for the validity of
the chattel mortgage itself but only to give it
A- No. While an escalation clause like
a preferred status.
the one in question can be ordinarily, the
bank cannot rely on it to raise the interest
Question:
rate from 12% to 17% per annum in this
case. Circular No. 494 of the Monetary What is an affidavit of good faith? What is
Board is not the “law” contemplated by the the effect of the absence of an affidavit of
parties. Nor should said circular be held good faith?
applicable to loan secured by registered real
A- It is an oath in a contract of chattel
property in the4 absence of any specific
mortgage wherein the parties “severally
indication and in contravention of the policy
swear that the mortgage is made for the
behind the Usury Law (Banco Filipino
purpose of securing the obligations specified
Savings and Mortgage Bank vs. Navarro,
in the condition thereof and for no other
G.R. No. 46591, July 28, 1987)
purpose and that the same is just and valid
obligation and one not entered into for the
purpose of fraud.”
Question:
Central Bank Circular Nos. 265 and 534
Question:
require prior authority for taking out of the
country of foreign currency. X has a foreign Can a chattel mortgage secure after-
currency deposit with Bank A. X wants to incurred obligations?
withdraw from said account certain sum of A – While a pledge, real estate mortgage or
foreign currency to be sent abroad. Does he antichresis may exceptionally secure after-
need CB authority for this purpose? incurred obligations so long as these future
debts are accurately described, a chatted
mortgage can only secure obligations
A- No. Under Sec.5, of Republic Act existing at the time the mortgage was
No. 6426, as amended, the transferability constituted. This is because of the Affidavit
abroad of foreign currency deposits is of Good Faith in the chattel mortgage.
unrestricted. Only one exception is provided
for therein, which is, any restriction “arising Question:
from the contract between the depositor and
May the contracting parties to a pledge
the bank”. Neither is a CB authority required
agreement stipulate that the said pledge will
for transferability abroad of foreign currency
also stand as security for any future
deposits.
advancements (or renewals thereof) that the
pledgor may procure from the pledgee?
The underlying objective of the Foreign A – Yes. (Note: This in not true in the case
Currency Deposits Act, as amended, is to of a Chattel Mortgage where such stipulation
attract and invited the deposit of foreign cannot be made.)
currencies which are acceptable as part of
the international reserve in duly authorized Question:
banks in order that they may be put into
What is the nature of the trust receipt?
transferability of such funds, would defeat
the very purpose of the law. The
A – A trust receipt is a security agreement to
countervailing effect would be To
which a bank requires a “security interest” in
discourage prospective foreign currency
the goods. By virtue of a trust receipt
depositors to the detriment of the banking
agreement, the bank theoretically acquired
system. (Cancio v. CTA, G.R. No. 73382,
ownership of the imported personal
October 22, 1987)
property.
 Saint Louis University COMMERCIAL LAW 392
2012 BAR OPERATIONS

Question: Flag Law finds no application. (Asbestos

Integrated Manufacturing, Inc. v. Peralta,
While acting as local correspondent bank,
G.R. 45515, October 29,1987)
does local bank have the right to intercept
funds being coursed through it by its foreign
counterpart for transmittal and deposit to the
account of an individual with another local
bank, and thereafter apply the said funds to
certain obligations owed to it by said
individual?
ANTI- DUMPING LAW
A – No.

Question:

FLAG LAW Predicting a shortage of rice supply in the

coming months, the Secretary of Agriculture
decided to import rice from Thailand. Can
the Rice Producers of the Philippine invoke
Question:
the Anti-Dumping Law to prevent such
In response to an invitation to bid for the importation? Discuss briefly.
purchase of office supplies by a government
office, Acme Trading, A Filipino firm,
submitted the lowest bid, covering supplies A- No. The rice to be imported is not
made in Taiwan. Having submitted the meant to dump foreign rice into the country,
second lowest bid covering supplies made in but to solve a rice shortage. Moreover, there
the Philippines, using partly Korean raw is nothing to protect in the local rice industry
materials and partly local products, Super for the moment.
Marketing protested the award of the
contract to supply to Acme Trading. How will
you resolve the controversy? Explain briefly.
RETAIL TRADE LAW
A- Under the Flag Law, Super
Marketing should be preferred. The product
which Acme Trading is offering to sell is not Question:
made in the Philippines. On the other hand, A Chinese national, Chua is a textile
what Super Marketing is offering to sell is merchant with a bodega in Binondo. He
Philippine product, even if it is using partly supplies textile goods on consignment basis
Korean raw materials as long as the to Marta who operates a stall at the Divisoria
substantial portion of the materials is locally Market. Is Chua violating the provision of
produced. Republic Act No. 1180, otherwise known as
the Retail Trade Law?

Question:
When may the Flag Law be invoked? A- No. Chua is engaged in wholesale
business, and not in retail business, and not
in retail business which is reserved by the
A- The Flag Law may be invoked only law for Filipino citizens when the
against a bidder who is not a domestic entity capitalization of the business is not more
who offers imported articles, materials or than US$2.5 million. Chua sells to Marta
supplies of those made or produced in the who does not use or consume the textile
Philippines from imported materials. But goods herself, but who, in turn, sells the
where all the materials, goods or supplies goods to her customers. Under the end-user
offered in the bids submitted are produced, doctrine, the transaction between Chua and
made and manufactured in the Philippines Marta is wholesale, while that between
substantially from articles, materials or Marta and her customer is retail.
supplies of the growth of the Philippines,
and the bidders are domestic entities, the
 Saint Louis University COMMERCIAL LAW 393
2012 BAR OPERATIONS

A – Trademark refers to a word, name,

symbol, emblem, sign or device or any
INTELLECTUAL PROPERTY RIGHTS
combination thereof adopted and used by a
merchant to identify, and distinguish from
others, his goods of commerce. Trademark
Question: is basically an intellectual creation that is
What are the so-called “intellectual property susceptible to ownership by the incorporeal
rights” under the IPC? right is distinct from the property in the
material object subject to it.
A-
1. copyright and related rights Question:
2. trademarks and service marks 1.) Who is entitled to register in the
3. geographical indications principal register?
2.) What is the effect of registration in the
4. industrial designs principal register?
5. patents 3.) In publication of the application
necessary for registration in the principal
6. layout-designs (topographies) of register?
integrated circuits

A- 1.) Registration in the principal

7. protection of undisclosed register is limited to the actual owner of the
information trademark. Proceedings therein on the issue
of ownership may be contested through
Question: opposition or interference proceedings or,
after registration, in a petition for
What are non-patentable inventions? cancellation.
A-
1. discoveries, scientific theories and 2.) Registration in the principal register
mathematical methods is constructive notice of the registrant’s
2. schemes, rules and methods of claim of ownership, while registration in the
performing mental acts, playing games supplemental register is merely proof of
or doing business, and programs for actual use of the trademark and notice that
computers the registrant has used or appropriated it.

3. methods for treatment of the human or

animal body by surgery or therapy and 3.) In application for registration in the
diagnostic methods practiced on the Principal Registrar, publication of the
human and animal body. This provision application is necessary. This is not so in
shall not to apply to products and application for registration in the
composition for use in any of these. Supplemental Register.
4. plant varieties or animal breeds or
essential biological process for the
production of plants or animals. This Question:
provision shall not apply to micro- What are the distinctions between
organisms and non-biological and infringement and unfair competition?
microbiological processes
5. aesthetic creations
A- 1.) Infringement of trademark is the
6. anything which is contrary to public unauthorized use of a trademark, whereas
order to morality unfair competition is the passing off of one’s
goods as those of another.
Question:
What is a trademark?
 Saint Louis University COMMERCIAL LAW 394
2012 BAR OPERATIONS

2.) In infringement of trademark, fraudulent meeting his debts

intent is unnecessary, whereas in unfair as they fall.
competition, fraudulent intent is essential.
2. The purpose is to 2. The purpose is to
suspend or delay discharge the
3.) In infringement of trademark, the prior the payment of debtor from the
registration of the trademark is a debts. payment of certain
prerequisite to the action, whereas in unfair debts.
competition, registration is not necessary.
3. The amount of 3. Some of the
indebtedness is creditors may
Question: not affected. receive less than
their credits.
To constitute infringement, to what extent
must the work be copied? 4. The number of 4. In case of
creditors is involuntary
A – To constitute infringement, it is not
immaterial insolvency, three or
necessary that the whole or even large more creditors are
portion of the work shall have been copied. required.
Question:
Question:
What are the moral rights under the Intellectual
Property Code? Distinguish voluntary solvency from involuntary
insolvency.
A-
(1) to make alterations of his work prior
to or withhold it from publication; VOLUNTARY INVOLUNARY
INSOLVENCY INSOLVENCY
(2) to require that the authorship of the
works be attributed to him;
(3) to object to any alteration, mutilation 1. One creditor is 1. Three or more
or other modification of his work sufficient. creditors are
required
which is prejudicial to his honor or
reputation;
2. Filed by the debtor. 2. Filed by three or
(4) to restrain the use of his name with more qualified
respect to any work not of his own creditors.
creation or in a distorted version of
his work. 3. No need for 3. Debtor must have
commissions of acts committed one or
of insolvency. more acts of
INSOLVENCY LAW insolvency.

4. Amount of 4. Indebtedness must

Question: indebtedness must not less than one
exceed one thousand pesos(P1,
Distinguish suspension of payments from thousand pesos (P1, 000.00)
insolvency 000.00)

5. Bond is not required 5. Bond is required.

SUSPENSION OF
INSOLVENCY
PAYMENTS  
 

FREQUENTLY ASKED QUESTIONS

1. The debtor has 1. The debtor does not In
sufficient property have sufficient COMMERCIAL LAW
but he foresees property to pay his
the impossibility of debts.
 Saint Louis University COMMERCIAL LAW 395
2012 BAR OPERATIONS

NEGOTIABLE INSTRUMENTS LAW  The fact that the instrument is

payable to “cash” does not affect the
1. Subject matter: negotiability of the instrument for
REQUISITES FOR NEGOTIABILITY under Sec. 9, NIL, this makes the
instrument payable to bearer
Concept: because the name of the payee
 The requisites for negotiability are does not purport to be the name of
as follows: any person.
1. It must be in writing and signed  If the bill is addressed to two or
by the maker or drawer; more drawees in the alternative or in
2. It must contain an unconditional succession, it is not negotiable.
promise or order to pay a sum
certain in money; Years Asked:
3. It must be payable to order or to 2002, 2000, 1999,1998,1997,1996, 1993,
bearer; 1992, 1989, and 1988
4. it must be payable on demand
or at determinable future time; Applicable Law:
and Sec. 1, 2, 4, 5, 6, 9, 10, 11, 13, 17
5. Where the instrument is Negotiable Instruments Law
addressed to a drawee, he must
be named or otherwise Illustrative Cases:
indicated therein with Caltex Phils. Inc. v. Court of Appeals
reasonable certainty. (Section 1, 212 SCRA 448
Negotiable Instruments Law) Metropolitan Bank and Trust Company v.
 In determining whether an Court of Appeals 194 SCRA 169
instrument is negotiable or not, the Salas v. Court of Appeals
sole test is whether or not the 181 SCRA 296
requisites of negotiability expressed PNB v. Manila Oil and Refining Company
in Section 1 of the Negotiable 43 Phil. 444
Instruments law are not met on the
face of the instrument itself. The
intrinsic validity of the instrument is
of no moment. Even the acceptance 2. Subject matter:
or non-acceptance by the drawee of EFFECTS OF DELIVERY
the instrument would be irrelevant.
 The fact that the instrument is not Concept:
dated and does not mention the A. Delivery of Incomplete instrument
place of payment does not militate (2006, 2003, 1997, 1993, 1978)
against its being negotiable. The  Where the instrument is wanting in
date and place of payment are not any material particular, the person in
material particulars required to possession thereof is prima facie
make an instrument negotiable. presumed authorized to complete it.
However, when the day and the  A signature on a blank paper
month is so placed but the year of delivered by the person making the
maturity is not given, the instrument signature in order that it may be
ceases to be so negotiable for the converted into a negotiable
time for payment is not determinable instrument operates as a prima facie
in this case as the year is not stated. authority to fill it up as such for any
 The serial number is not material amount.
particular to the negotiability of a In both cases however, the
check. Its alteration does not instrument must be filled up strictly
constitute material alteration of the in accordance with the authority
instrument. given and within reasonable time in
 The fact that the sum payable is to order that it may be enforced
be paid with interest or that the against any person who became a
maturities are in stated installments party thereto prior to its completion.
does not render the amount payable However, persons negotiating after
as uncertain.
 Saint Louis University COMMERCIAL LAW 396
2012 BAR OPERATIONS

its completion are liable because of Applicable Law:

their warranties. Sec. 52, NIL
 A holder in due course may enforce
the instrument as if it had been filled
up strictly in accordance with the 4. Subject matter:
authority given and within a EFFECTS OF CROSSING A CHECK
reasonable time. (Sec. 14,NIL)
Concept:
B. Incomplete and undelivered  The effects of crossing a check
instrument (2006, 2000, 1985, 1982) (Sec.542, Code of Commerce) are
 Non-delivery of an incomplete as follows:
instrument is a real defense (Sec. 1. The check is for deposit only in the
15, NIL) account of the payee and cannot be
 When an incomplete instrument has encashed;
not been delivered, it will not, if 2. The check may be negotiated only
completed and negotiated without once to one who has an account
the authority, be a valid contract in with the bank;
the hands of any holder, as against 3. The check is issued for a specific
any person whose signature was purpose and the person who takes it
placed thereon before delivery. not in accordance with said purpose
does not become a holder in due
Years asked: course and is not entitled to
2006, 2003, 2000, 1997, 1993, 1985, 1982, payment thereunder.
1978  The act of crossing a check serves as a
warning to the holder thereof that the
Applicable Law: check has been issued for a definite
Secs. 14, 15, 16, NIL purpose so that the holder must inquire
if he has received the check pursuant to
Illustrative cases: that purpose; otherwise he is not a
Kauffman v. National Bank 42 holder in due course. (Bataan Cigar and
Phil. 183 Cigarette Factory, Inc. v. Court of
Appeals, et. Al. G.R. No. 93048, March
3, 1994; 230 SCRA 643)
3. Subject Matter:  Crossing a check is done by writing two
HOLDER IN DUE COURSE parallel lines diagonally on the left top
portion of the checks. The crossing is
Concept: special where the name of a bank or a
 A holder in due course is one who has business institution is written between
taken the instrument under the following the two parallel lines, which mean that
conditions: the drawee should pay only with the
1. That it is complete and regular intervention of that company. The
upon its face. crossing is general where the words
2. That he became holder of it written between two parallel lines are
before it was overdue and without “and Co.” or “for payees account only.”
notice that it had been previously (Associated Bank v. Court of Appeals,
dishonored, if such was the fact; 208 SCRA 468)
3. That he took it in good faith and
for value; Years asked:
4. That at the time it was negotiated 2005, 2004, 1996, 1995, 1994, 1991
to him, he had no notice of any
infirmity in the instrument or defect Applicable Law:
in the title of the person negotiating Sec. 542, Code of Commerce
it.
Illustrative Cases:
Years Asked: Bataan Cigar and Cigarette Factory, Inc. v.
2000, 1996, 1995, 1994,1993, 1992, Court of Appeals, et. Al. G.R. No. 93048,
1985,1978,1977 March 3, 1994; 230 SCRA 643
 Saint Louis University COMMERCIAL LAW 397
2012 BAR OPERATIONS

Associated Bank v. Court of Appeals, 208 date, sum payable, time or

SCRA 468 place of payment, number or
relation of parties, or medium or
currency of payment, or adds a
5. Subject matter: place where none is specified or
ACCOMODATION PARTY which alters the effect of the
instrument in any respect.
Concept:  Under Sec. 124 of the
 An accommodation party is one who Negotiable Instruments Law, a
has signed the instrument as maker, material alteration avoids the
drawer, acceptor or indorser, without instrument, except as against
receiving value therefor and for the the party who made, authorized,
purpose of lending his name to some or assented to the alteration and
other person. subsequent indorsers. However,
 The accommodation party is liable as a a holder in due course can
maker to a holder up to the sum of enforce the instrument
which he accommodated even if he did according to its original tenor
not receive any consideration for the and for the value placed therein.
promissory note. This is the nature of  The alteration of a serial number
accommodation. of a check does not alter the
 The accommodation party is liable on effect of the instrument, nor
the instrument to a holder in value. This does it modify in any respect the
is true even if the holder was aware at obligation of a party thereto. It
the time he took the instrument that the does not change the items
party is merely an accommodation which are required to be in
party. Section 1, NIL.
 Absence of consideration is in the
nature of accommodation. Defense of B. Forgery (2006, 2004, 1997, 1995, 1992,
the absence of consideration cannot be 1990, 1989, 1987,
validly interposed by accommodation 1984, 1983, 1982,
party against a holder in due course. 1981, 1977, and
(Sec. 29, Negotiable Instruments Law) 1976)
 The party accommodating can recover  When a signature is forged or made
what he has paid from the without authority of the person
accommodated party since the relation whose signature it purports to be, it
between the two is in effect that of is wholly inoperative, and no right to
principal and surety. (PNB v. Maza & retain the instrument, or to give a
Macenas, 48 Phil, 207) discharge therefor, or to enforce
payment thereof against any party
Years Asked: thereto, can be acquired through or
2005, 1996, 1993, 1991, 1990, 1985, 1977, under such signature, unless the
1975 party against whom it is sought to
enforce such right is precluded from
Applicable Law: setting up forgery or want of
Sec. 29, NIL authority.
 Parties to an instrument who are
Illustrative Case: such prior to the forgery cannot be
PNB v. Maza & Macenas, 48 Phil, 207 held liable by any party who became
such at or subsequent to the
forgery. However, a party who had
6. Subject matter: been a party subsequent to the
forgery and who later on indorses
DEFENSES the same can be held liable to a
holder in due course.
Concept:  Only the forged signature is wholly
A. Alteration (1999, 1996, 1995, 1983) inoperative not the instrument itself,
 Material Alteration is any and not the genuine signatures.
alteration which changes the
Saint Louis University COMMERCIAL LAW 398
2012 BAR OPERATIONS

 Despite the forgery of the signature, o Drawer’s account

there may be parties who shall be cannot be charged and
precluded from setting up forgery or if charged, he can
want of authority, such as: 1. those recover from the
who warrants the genuineness of drawee bank.
the instrument like acceptors, (Associated Bank v. CA,
indorsers; 2. those who ratified the Jan. 31, 1996)
forgery express or implied; 3. those o Drawer has no cause of
who were negligent action against collecting
 The general rule is that in case of bank, since the duty of
forgery of the indorsement of the collecting bank is only
payee of the check the drawee bank to the payee. A
cannot debit the drawer’s account collecting bank is not
and that the loss shall be borne by guilty of negligence over
the drawee bank. The depositary or a forged indorsement
collecting bank is liable to the on checks for it has no
drawee in case of forged way of ascertaining the
indorsement because it guarantees authority of the
all prior indorsement. However, this endorsement and when
is subject to the qualification that the it caused the checks to
drawee himself was not negligent or pass through the
guilty of such conduct as would stop clearing house before
him from asserting the forged allowing withdrawal of
character of the instrument as the proceeds thereof.
against the drawer. (Manila Lighter
 The legal consequences when a Transportation, Inc. V.
bank honors a forged CA, Feb. 15, 1990) On
check are as follows: the other hand, a
1. When Drawer’s Signature collecting bank which
is Forged: Drawee-bank by endorses a check
accepting the check cannot bearing a forged
set up the defense of endorsement and
forgery because by presents it to the
accepting the instrument, drawee bank
the drawee bank admits the guarantees all prior
genuineness, the drawee endorsements including
bank admits the the forged endorsement
genuineness of signature of itself and should be
the drawer (BPI Family liable therefor . (Traders
Bank v. Buenaventura Sept. Bank v. RPN, Oct 10,
30, 2005) 2002)
2. Forged Payee’s signature: o Drawee-bank can
When drawee-bank pays a recover from the
the forged check, it must be collecting bank (Great
considered as paying out of Eastern Life Ins. Co. v.
its funds and cannot charge Hongkong and
the amount so paid to the Shanghai Bank, Aug.
account of the depositor. In 23, 1922) because even
such case, the bank if the indorsement on
becomes liable since its the check deposited by
primary duty is to verify the the bank’s client is
authenticity of the payee’s forged, collecting bank
Signature. (Trader’s Royal is bound by its
Bank v. Radio Philippines warranties as an
Network, Oct 10, 2002; indorser and cannot set
Westmont Bank v. Ong, up the defense of
January 30, 2002) forgery as against
3. Forged Indorsment drawee
 Saint Louis University COMMERCIAL LAW 399
2012 BAR OPERATIONS

bank.(Association Bank  The maker is the party primarily

v. CA, Jan. 31, 1996) liable and (1) engages himself to
pay according to the tenor of the
C. Lack of Consideration (1998, 1996, instrument, and (2) admits the
1994, 1989, 1979) existence of the payee and his
 Failure, absence of, or illicit capacity to indorse.
consideration are only personal
defenses. However, with respect to b. Of Acceptor and Drawee who pays
illegality, the exceptional cases without accepting the instrument
when it is a real defense is if the  The drawee is generally not liable
statute declares the instrument void until he accepts the instrument and
for any purpose. becomes the drawee/acceptor.
 Absence of consideration is in the When he becomes a
nature of an accommodation. drawee/acceptor, he is primarily
Defense of absence of liable and (1) engages to pay
consideration cannot be validly according to the tenor of his
interposed by an accommodation acceptance, (2) admits the
party as against a holder in due existence of the drawer, the
course. genuineness of his signature and
 The defense of absence or lack of his capacity and authority to draw
consideration is a personal defense the instrument,, (3) admits the
that can not be used against a existence of the payee and his
holder in due course. Therefore, the capacity to indorse.
person invoking such defense is still  The payee has no cause of action
liable to a holder in due course. against the drawee-bank. The bank
(State Investment House v. IAC, is not liable to the holder unless and
175 SCRA 310) until it accepts or certifies a check.
The remedy of the holder is against
Years asked: the drawer, provided notice of
2006, 2004, 1999, 1998, 1997, 1996, 1995, dishonor is given to him on the basis
1994, 1992, 1990, 1989, 1987, 1984, 1983, of the transaction that gave rise to
1982, 1979, 1977, and 1976 the issuance of the check. Once the
bank\ certifies the check, the bank
Applicable Law: becomes liable thereon because
Sec. 1, 124, NIL certification is equivalent to
acceptance and if procured by the
Illustrative Cases: holder, the drawer and all indorsers
BPI Family Bank v. Buenaventura are discharged from liability. (Sec.
Sept. 30, 2005 188 and 189, NIL)
Manila Lighter Transportation, Inc. V. CA  A drawee becomes liable the
Feb. 15, 1990 moment he accepts the instrument.
Traders Bank v. RPN Sec. 62 provides that the “acceptor,
Oct 10, 2002 by accepting the instrument,
Great Eastern Life Ins. Co. v. Hongkong and engages that he will pay it according
Shanghai Bank Aug. 23, 1922 to the tenor of his acceptance.”
Association Bank v. CA
Jan. 31, 1996 c. Of Drawer
State Investment House v. IAC  Secondarily liable and (1) admits the
175 SCRA 310 existence of the payee and his
capacity to indorse; (2) engages that
7. Subject Matter: the instrument will be accepted or
paid by the party primarily liable;
LIABILITY OF PARTIES TO A NEGOTIABLE and (3) engages that if the
INSTRUMENT instrument is dishonored and proper
proceedings are brought, he will pay
Concept: to the party entitled to be paid.
a. Of maker
d. Of indorsers
Saint Louis University COMMERCIAL LAW 400
2012 BAR OPERATIONS

1. Qualified Indorsers and any subsequent indorser

persons negotiating who may be compelled to it.
by delivery However, a general
Every person negotiating an indorser of a bearer
instrument by delivery or by instrument warrants the
qualified indorsement foregoing only in favor of
warrants: those persons who make
o that the instrument title through the
is genuine and in all indorsement. (Sec. 66, 67
respects what it and 40, NIL)
purports to be; Years asked:
o that he has a good 2002, 2001, 1999,1998, 1997, 1996, 1995,
title to it. 1993, 1992,1991, 1990, 1989, 1988, 1987,
o That all prior parties 1986,1985, 1984, 1983, 1982, 1981, 1980,
had capacity to 1979, 1977, 1975
contract;
o That he has no Applicable Law:
knowledge of any Sec. 60-69, 188, 189, NIL
fact which would
impair the validity of
the instrument or
render it valueless.
The warranty of persons TRANSPORTATION LAW
negotiating by mere delivery
extends to immediate 1. Subject Matter:
parties. COMMON CARRIER v. PRIVATE CARRIER; TEST
IN DETERMINING A COMMON CARRIER
2. General indorsers (Sec. 66,
NIL) Concept:
Every indorser who  Art. 1732 of the Civil Code provides
endorses without that common carriers are persons,
qualification, warrants to all corporations, firms or associations
subsequent holders in due engaged in the business of carrying
course: or transporting passengers or
o that the insttrfument goods or both, by land, water or air,
is genuine and in all for compensation, offering their
respect what it services to the public.
purports to be;  The tests for determining whether a
o that he has good party is a common carrier of goods
title to its; are the following:
o that all prior parties a. he must be engaged in
had capacity the business of carrying
to contract; goods for others as a
o that the instrument public employment, and
is, at the time of the must hold himself out as
endorsement, valid ready to engage in the
and subsisting. transportation of goods
The general indorser also generally as a business
engages that on due and not as a casual
presentment, it shall be occupation;
accepted or paid or both, as b. he must undertake to
the case may be, according carry goods of the kind to
to its tenor; and if it be which his business is
dishonored and the confined;
necessary proceedings on c. he must undertake to
dishonor will be duly taken, carry by the method by
he will pay the amount which his business is
thereof to the holder, or to
 Saint Louis University COMMERCIAL LAW 401
2012 BAR OPERATIONS

conducted and over his Concept:

established routes; and  In case of loss of effects of
d. The transportation must passengers or death or injuries to
be for hire. passengers, the common carrier is
presumed to be at fault or to have
 Common Carrier v. Private Carrier acted negligently unless it has
Common carrier Private carrier observed extraordinary diligence in
Holds himself out in common, Agrees in some the vigilance thereof. The court
that is, to all persons who special case with need not make an express finding of
choose to employ him, ready to some private fault or negligence of common
carry for hire individual to carry carriers as the law imposes to
for hire common carriers strict liability as
Bound to carry for all those who Not bound to carry long it is shown that there exist a
offer such goods as it is for any reason contract between the passenger (or
accustomed to carry and tender unless it enters into the shipper of the goods to be
reasonable compensation for a special carried) and the common carrier and
carrying them agreement to do so. that the loss, deterioration injury or
Subject to regulation as it is a Not subject to death took place during the
public service regulation existence of the contract.
 The exercise of extraordinary
Bound to exercise extraordinary Owes only diligence
diligence is a defense which could
diligence of a good father of a
exempt a common carrier from
family
liability.
Cannot stipulate that it is May enter into a
exempt from liability for the stipulation
Years asked:
negligence of its agents or exempting itself
2000, 1997, 1996, 1990, 1989, 1988, 1986,
employees. Such stipulation is from liability for
1983, 1982, 1979,
void as it is against public policy negligent acts of its
1978, 1975
agents or
employees.
Applicable Law:
Arts. 1974, 1975, 1976 of the Civil Code of
Year asked:
the Philippines
2002, 2000, 1996, 1991
3. Subject Matter:
Applicable Provisions:
DEFENSES OF COMMON CARRIERS
Art. 1732, Civil Code of the Philippines
Concept:
Illustrative Cases:
 The defenses that a common carrier
De Guzman v. Court of Appeals
may use are the following:
Dec. 22, 1988
a. exercise of extraordinary
First Philippine Industrial Corp. v. CA
diligence (Art. 1735 and
300 SCRA 661
1736, NCC)
National Steel Corporation v. Court of
b. flood, storm, earthquake,
Appeals 283 SCRA 45,61
lightning or other natural
Caltex Philippines v. Sulpicio Lines
disaster or calamity;
315 SCRA 709
c. acts or omission of the
Coastwise Lighterage Corp. v. Court of
shipper or owner of the
Appeals 245 SCRA 797
goods;
Virgines Calvo v. UCPB General Insurance
d. the character of the goods
Co. No. March 19, 2002
or defects in the packing
Phil. American General Insurance Company
or in the containers;
v. PKS Shipping Company April 9, 2003
e. order or act of the
Asia Lighterage and Shipping, Inc. v. Court
competent public authority
of Appeals August 19, 2003
(Art. 1734,NCC)
The above enumeration is exclusive
2. Subject Matter:
or a closed list. If not one of those
EXTRAORDINARY DILIGENCE AND enumerated is present, the carrier is
PRESUMPTION OF NEGLIGENCE
liable.
Saint Louis University COMMERCIAL LAW 402
2012 BAR OPERATIONS

 The requisite diligence would not 2001, 1997, 1996, 1995, 1994,
vary in case the contract is for 1993, 1992, 1991 1989, 1987, 1986,
transport of passengers; the carrier 1985, 1984, 1979, 1978, 1976
is obliged to carry the passenger
safely as far as human care and Applicable Law:
foresight can provide, using the Art. 1734, 1735, 1755, New Civil
utmost diligence of every cautious Code
person with due regard to all the
circumstances. (Art. 1755, NCC) Illustrative Cases:
 Hijacking of a carrier does not fall Delsan Transport Lines v. Court of
among the five categories of Appeals November 15, 2001
exempting causes. It would follow De Guzman v. CA
therefore that the hijacking of the September 15,
carrier’s vehicle must be dealt with 1993
under Art. 1735 of the New Civil Fortune Express, Inc. v. Court of
Code, in other words, the common Appeals March 18, 1999
carrier is presumed to be at fault or Southern Lines, Inc. v. Court of
to have acted negligently unless Appeals 4 SCRA 258
there is proof of extraordinary
diligence on the part of the common 4. Subject Matter:
carrier. STIPULATIONS REDUCING DILIGENCE OR
 The carrier was not held liable LIMITING LIABILITY
where the goods were lost as a
result of robbery attended by grave Concept:
irresistible threat, violence or force.  The parties cannot stipulate so as to
(De Guzman v. CA, September 15, totally exempt the carrier from
1993) exercising any degree of diligence
 The seizure of a passenger bus by whatsoever; and that the parties
armed men is not fortuitous event cannot stipulate that the common
and does not excuse the carrier carrier shall exercise diligence of a
from liability where there is already good father of a family. In other
a report from police agents that a words, in carriage of goods, the
certain group will attack the buses parties may stipulate that the
and the carrier did not take steps to diligence to be exercised by the
safeguard the lives and properties of common carrier shall be less than
its passengers (Fortune Express, extraordinary diligence provided the
Inc. v. Court of Appeals, March 18, following requisites are complied
1999) with;
 Contributory negligence on the part a. that the stipulation be in
of the passenger is not a defense writing signed by both
that will excuse the carrier from parties;
liability. It will only mitigate such b. that the stipulation be
liability. supported by a valuable
 The carrier, knowing the fact of consideration other than
improper packing of the goods upon the service rendered by
ordinary observation, still accepts the common carrier;
the goods notwithstanding such c. that the stipulation be
condition, is not relieved of liability reasonable, just and not
or loss or injury resulting there from. contrary to law (Art. 1744,
(Southern Lines, Inc. v. Court of NCC)
Appeals, 4 SCRA 258)  Article 1750 is different from the
 The common carrier is also liable for above provision because it involves
acts caused by third persons a stipulation fixing the amount that
may be recovered which only
requires that it is reasonable and
Years asked: just under the circumstances; and it
is fairly agreed upon
Saint Louis University COMMERCIAL LAW 403
2012 BAR OPERATIONS

 The following are considered as d. the carrier shall exercise a

valid stipulations relative to liability degree of diligence less than
of common carriers: that of a good father of a family
a. an agreement limiting the over the movable transported;
common carrier’s liability for e. the carrier shall not be
delay on account of strikes and responsible for the acts or
riots; omissions of his or its
b. a stipulation that the common employees;
carrier’s liability is limited to the f. the carrier’s liability for acts
value of the goods appearing in committed by thieves or robbers
the bill of lading unless the who do not act with grave or
shipper or owner declared a irresistible threat, violence or
greater value (Edgar Cokaliong force is dispensed with or
Shipping Lines v. UCPB Gen. diminished;
Insurance, Co., June 25, 2003) g. the carrier is not responsible for
--If the goods are to be the loss, destruction or
shipped from a foreign port deterioration of the goods on
to the Philippines, the account of the defective
COGSA shall apply condition of the car, vehicle,
suppletorily. Under the ship or other equipment used in
COGSA, the liability of the the contract of carriage.
carrier is US$500 per
package in the absence of a Years asked:
shipper’s declaration of a 2002, 2001, 1998, 1989, 1987,
higher value in the bill of 1985, 1984, 1983, 1978
lading. (Sec. 4(5), COGSA)
The condition is Applicable Law:
part of the bill of lading even Arts. 1744, 1757, 1748, 1758, 1745
if not expressly stated. of the New Civil Code
The purpose of Sec. 4(5) Carriage of Goods by Sea
limiting the stipulation in the Act (COGSA)
bill of lading is to protect the
common carrier. Such Illustrative Cases:
stipulation obliges the Edgar Cokaliong Shipping Lines v.
shipper/consignee to notify UCPB Gen. Insurance Co., June 23,
the common carrier of the 2003
amount that the latter may Eastern Shipping v. IAC
be liable for in case of loss 150 SCRA 464
of the goods. Belgian Overseas Chartering v. Phil.
c. When a passenger is carried First Ins. Co. June 5, 2002
gratuitously, a stipulation limiting
the carrier’s liability for 5. Subject Matter:
negligence is valid, but not for REGISTERED OWNER RULE AND KABIT
willful acts or gross negligence. SYTEM
However reduction of fare does
not justify any limitation of Concept:
liability (Art. 1758,NCC)  The Registered Owner Rule states
 The following are considered as that the person who is the registered
invalid stipulations with common owner of a vehicle is liable for any
carriers under Art. 1745, NCC: damages caused by the negligent
a. the goods are transported at the operation of the vehicle although the
risk of the owner or shipper; same was already sold or conveyed
b. the carrier will not be liable for to another person at the time of the
any loss, destruction or accident. The registered owner is
deterioration of the goods; liable to the injured party subject to
c. the carrier need not observe any his right of recourse against the
diligence in the custody of the transferee or the buyer. (Gaudioso
goods; Erezo, et. Al. v. Aluedo Jepte,
Saint Louis University COMMERCIAL LAW 404
2012 BAR OPERATIONS

September 30, 1957; Equitable BA Finance Corporation v. Court of

Leasing Corporation v. Lucita Appeals 215 SCRA 715
Suyon, et. Al. September 5, 2002) Duavit v. Court of Appeals
 The registered owner is also liable 173 SCRA 490
even if the vehicle was leased to Abelardo Lim, et. Al., v. Court of
another person (BA Finance Appeals January 16, 2002;
Corporation v. Court of Appeals, Baliwag Transit, inc. v. Court of
215 SCRA 715) Appeals 147 SCRA 82
 The registered owner is not liable if
the vehicle was taken from the 6. Subject Matter:
garage without his knowledge and DOCTRINE OF LIMITED LIABILITY
consent. To hold the registered
owner liable would be absurd as it Concept:
would then be holding liable the  It is also called the exclusive real
owner of a stolen vehicle for an and hypothecary nature of maritime law
accident caused by the person who which is embodied in Arts. 587, 590 and
stole such vehicle. (Duavit v. Court 837 of the Code of Commerce.
of Appeals, 173 SCRA 490)  By limited liability is meant that the
 The registered owner rule is not liability of the ship owner for damages in
applicable whenever the persons case of loss is limited to the value of the
involved are engaged in what is vessel involved. The ship owner’s other
known as the “kabit system.” The properties cannot be reached by the
“Kabit System” is an arrangement parties entitled to damages.
whereby a person who has been  The total destruction of the vessel
granted a certificate of public extinguishes maritime lien as there is no
convenience allows other persons longer any res to which it can attach.
who own motor vehicles to operate  Under the doctrine of limited liability
them under his license, sometimes in maritime law, the liability of the ship
for a fee or percentage of earnings. owner arising from the operation of the
Although the parties to such an ship is confined to the vessel,
agreement are not outrightly equipment and freight, or insurance if
penalized by law, the kabit sytem is any, so that if the ship owner
invariably recognized as being abandoned the ship, equipment and
contrary to public policy and freight, his liability is extinguished.
therefore void and inexistent under  Exception to the rule: when the
Art. 1409 of the Civil Code. ship owner of the vessel involved is
(Abelardo Lim, et. Al., v. Court of guilty of negligence, the limited liability
Appeals, January 16, 2002; Baliwag rule does not apply. In such case, the
Transit, inc. v. Court of Appeals, 147 ship owner is liable to the full extent of
SCRA 82) the damages sustained by the
 Under the Kabit system, the aggrieved parties.
apparent owner (who has a  The Code of Commerce sanctions
certificate of public convenience) is the application of the doctrine in the
liable to the injured person without following cases:
right of recourse/ reimbursement a. Civil liability for the
against the actual owner. This is indemnities in favor of
based on the principle of “pari third persons which arise
delicto.” from the conduct of the
captain in the care of the
Years asked: goods which the vessel
2005, 1990, 1988, 1976 carried. (Art. 587, Code of
Commerce)
Illustrative Cases: b. Civil liability arising from
Gaudioso Erezo, et. Al. v. Aluedo collisions (Art. 837,CC)
Jepte September 30, 1957 c. Unpaid wages of the
Equitable Leasing Corporation v. captain and the crew if the
Lucita Suyon, et. Al. September 5, 2002 vessel and its cargo are
totally lost by reason of
Saint Louis University COMMERCIAL LAW 405
2012 BAR OPERATIONS

capture or shipwreck (Art. employees in an action against it by

643,CC) the shipper of the other colliding
 The exceptions are: vessel as distinguished from the
a. when the injury to or death of a ordinary rule in liabilities for tort or
passenger is due either to the culpa acquiliana. Under the
fault of the shipowner, or to the “Doctrine of Inscrutable Fault,”
concurring negligence of the where fault is established but it
ship owner and the captain; cannot be determined which of the
b. when the vessel is insured (to two vessels were at fault, both shall
the extent of the insurance be deemed to have been at fault.
proceeds); and  Rules on the collision of Vessels:
c. in Workmen’s Compensation (Arts. 826, 827, 828, 830,
claims (Yangco v. Laserna, 73 831 and 832, CC)
Phil. 330; Chua yek Hong v. o The collision may be due to
IAC, 166 SCRA183) the fault, negligence or lack
d. if the carrier failed to overcome of skill of the captain, sailing
the presumption of negligence mate, or any other member
(Monarch Ins. Co. v. Court of of the complement of the
Appeals; June 8, 2000) vessel. The owner of the
vessel at fault shall be liable
Years asked: for losses or damages. (Art.
2000, 1998, 1997, 1994, 1991, 826,CC)
1989, 1985, 1982, 1979 o The collision may be de to
the fault of both vessels.
Applicable Law: Each vessel shall suffer its
Code of Commerce, Secs. 587, 590, own losses, but as regards
643, 837 the owner of the cargoes,
both vessels shall be jointly
Illustrative Cases: and severally liable (Art.
Yangco v. Laserna, 827,CC)
73 Phil. 330 o If it cannot be determined
Chua Yek Hong v. IAC which vessel is at fault,
166 SCRA183 each vessel shall also suffer
Monarch Ins. Co. v. Court of its own losses and both
Appeals June 8, shall be solidarily liable for
2000 losses or damages on the
Aboitiz Shipping Corp. v. Gen cargoes. (art. 828,CC)
Accident Fire and Life o The vessels may collide
Assurance Corp. 217 with each other through
SCRA 359 fortuitous event or force
majeure. In this case, each
7. Subject Matter: shall bear its own damage.
DOCTRINE OF INSCRUTABLE FAULT (Art. 830,CC)
o Two vessels may collide
Concept: with each other without their
 In a collision, the vessel at fault shall fault by reason of a third
indemnify the damages sustained or vessel. The third vessel will
losses incurred (Art. 826, CC), and if be liable for losses and
both vessels were at fault, each damages (Art. 831,CC)
shall suffer its own damages, and o A vessel which is properly
both shall be solidarily liable to anchored and moored may
others (Art. 827-28,CC). This collide with those nearby by
solidarity expressed in Art. 827 of reason of storm or other
the Code of Commerce has been causes of force majeure.
held to preclude a common carrier The vessel run into shall
operating a vessel from interposing suffer its own damage or
a defense of due diligence in the expense.(Art. 832, CC)
selection and supervision of its
 Saint Louis University COMMERCIAL LAW 406
2012 BAR OPERATIONS

Years asked: PRESCRIPTIVE PERIOD UNDER THE CARRIAGE

1998, 1997, 19995,1991, 1987 OF GOODS BY SEA ACT (COGSA)

Applicable Law: Concept:

Code of Commerce, Arts. 826, 827,  When to file a claim with carrier—
828, 830, 831, 832 not a condition precedent
a. upon discharge of the
8. Subject Matter: goods, if the damage is
LIABILITY OF A CHARTER PARTY apparent, claim should be
filed immediately;
Concept: b. if the damage is not
 A charter party is a contract by apparent, claim should be
which with the entire ship or some filed within 3 days from
principal part thereof is let by the delivery.
owner to another person for a  When to file the court-case
specified period of time or use. prescriptive period
 There are two types of charter --within a period of one year from
parties— discharge
a. a contract of affeightment  The prescriptive period of one year
which involves the use of starts after the delivery of the goods
shipping space leased by or the date the goods should have
the owner in part or as a been delivered.(Sec. 3,COGSA).
whole, to carry goods for The period does not apply to
others, and Time conversions or misdeliveries. It
charter—leased for a starts from the delivery to the
period of time, Voyage— arrastre operator, not consignee. A
for a single voyage. stipulation reducing the one year
b. A charter by demise or period is null and void, but a written
bareboat—by the terms of agreement to suspend it is valid.
which the whole vessel is  The rule applies also in cases of
let to the charterer which collision but when the goods should
transfers to him the entire have been delivered, had the
command and possession cargoes been saved. (Maritime
and consequent control Company of the Philippines v. Court
over its navigation of Appeals 164 SCRA 593)
including the master and  The insurer who is exercising its
crew who are his right of subrogation is also bound by
servants. The charterer is the one year prescriptive period (Fil.
treated as owner pro hac Merchants v. Alejandro, 145 SCRA
vice of the vessel. In such 42)
case, the common carrier  However, the prescriptive period
becomes a private carrier. does not apply to claim against the
(Planters Products, Inc. v. insurer for the insurance proceeds.
Court of Appeals 226 The claim against the insurer which
SCRA 476) is based on a written contract
expires in ten years. (Mayer Steel
Years asked: Pipe Corp. v. Court of Appeals, 274
2004, 1991, 1989, 1987, 1981, 1980 SCRA 432)
 Damages arising from delay or late
Illustrative Cases: delivery is not the damage or loss
Planters Products, Inc. v. Court of contemplated under the COGSA.
Appeals 226 SCRA 476 The goods are not actually lost or
damaged. The applicable period is
ten years. (Mitsui v. Court of
Appeals, 287 SCRA 366)

9. Subject Matter: Years asked:

2004, 2000, 1995, 1992, 1978, 1976
 Saint Louis University COMMERCIAL LAW 407
2012 BAR OPERATIONS

class in proportion to their respective

Applicable Law: share-holdings.
Sec. 3, Carriage of Goods by Sea  Pre-emptive rights must be exercised in
Act accordance with the Articles of
Incorporation or the By-Laws. When the
Illustrative Cases: Articles of Incorporation or the By-Laws
Maritime Company of the are silent, the Board, may fix, by
Philippines v. Court of Appeals 164 SCRA reasonable time within which the
593 stockholders may exercise the right.
Fil. Merchants v. Alejandro Years asked: 2004, 2001, 1999, 1996,
145 SCRA 42 1984, 1983,
Mayer Steel Pipe Corp. v. Court of
Appeals 274 SCRA 432 3. Subject matter:
Mitsui v. Court of Appeals DOCTRINE OF PIERCING THE VEIL OF
287 SCRA 366 CORPORATE ENTITY
Concept:
CORPORATION LAW  The doctrine of “piercing the veil of
corporate entity” is the doctrine that
1. Subject matter: allows the courts to look behind the
DISTINCT PERSONALITY OF A CORPORATION separate juridical personality of a
corporation and treat the corporation as
Concept: an association of persons and thereby
 The corporation has a separate and make the individual actors personally
distinct personality from that of the liable for corporate liabilities. The fiction
stockholders and the manager. The of corporate identity is disregarded and
stockholders or the manager cannot be the individuals comprising it can be
held solidarily liable for the obligations treated identically. The stockholders can
incurred by the corporation as a general be held directly liable for corporate
rule. obligations, even to the extent of their
 The liability of the corporation is that of personal assets.
the corporation and not that of its  The doctrine is applicable when the
officers and stockholders who are not notion of legal entity is used to:
liable for corporate liabilities. 1. defeat public convenience
2. justify wrong
Year asked: 3. protect fraud
2000, 1999, 1997, 1996, 1989, 1988 4. defend crime
5. shield a violation of the
2. Subject matter: proscription against forum
PRE-EMPTIVE RIGHTS OF STOCKHOLDERS shopping
6. work inequities among members
Concept: of the corporation internally
 A pre-emptive right is the shareholder’s involving no rights of the public
right to subscribe to all issues or or third persons
disposition of shares of any class in 7. evade the lawful obligations of
proportion to his present stockholdings, the corporation like a judgment
the purpose being to enable the credit
shareholder to retain his proportionate 8. escape liability arising from a
control in the corporation and to retain debt
his equity in the surplus. 9. avoid inclusion of corporate
 Under the Corporation Code, each assets as part of the estate of
stockholder has the pre-emptive right to the decedent
all issues of shares made by the 10. promote or shield unfair
corporation in proportion to the number objectives
of shares he holds on record in the  Where there are grounds for piercing
corporation. the veil of corporate entity, that is
 All stockholders of a corporation shall disregarding the fiction, the corporation
enjoy pre-emptive right to subscribe to will follow the nationality of the
all issues on disposition of shares of any controlling members or stockholders
 Saint Louis University COMMERCIAL LAW 408
2012 BAR OPERATIONS

since the corporation will then be KINDS OF CORPORATION: DE FACTO AND DE

considered as one and the same. JURE CORPORATION, CORPORATION BY
 The elements that must be present to ESTOPPEL AND CORPORATION BY
justify the piercing of the veil of the PRESCRIPTION
corporate fiction on the ground that the
corporation is a mere alter ego are the Concept:
following:  a De Jure corporation is a
1. control—not mere stock control corporation organized in accordance
but complete domination—not with requirements of law;
only of finances but of policy  a de facto corporation is a
and business practice in respect corporation where there exists a
to the transaction attacked and flaw in its incorporation. The
must have been such that the requisites for its existence are:
corporate entity as to this a. the existence of a valid law
transaction had at the time no under which
separate mind, will, or existence it may be
of its own; incorporate
2. such control must have been d;
used by the defendant to b. an attempt in good faith to
commit a fraud or wrong to incorporate;
perpetuate the violation of a c. use of corporate powers
statutory or other positive legal  De jure v. de facto
breach of duty, or a dishonest
and an unjust act in De jure De facto
contravention of the plaintiff’s
legal right; and One created in One which actually
3. the said control and breach of strict or substantial exists for all
duty must have proximately conformity with the practical purposes
caused the injury or unjust loss statutory as a corporation
complained of. requirements for but which has legal
incorporation right to corporate
Years asked: existence as
2006,2004, 2001, 1998, 1991, 19985, 1978 against the State
Right to exist Right to exercise
Illustrative cases: cannot be powers cannot be
Concept Builders v. NLRC, Marabe, et. Al. successfully inquired into
May 29, 1996 attacked even in collaterally in
PNB v. Andrada Electric direct proceeding private suit. But
April 17, 2002 by the State. such inquiry may
First Philippine International Bank v. Court of be made by the
Appeals January 24, 1996 State in proper
Secosa v. heirs of Erwin Suarez Francisco court proceeding.
June 29, 2004
Sibagat Timber Corp v. Garcia  a corporation by estoppel is a group
December 11, 1992 of persons which holds itself out as
Arcilla v. Court of Appeals a corporation and enters into a
October 23, 1992 contract with a third person on the
Cease v. Court of Appeals strength of such appearance cannot
October 18, 1979 be permitted to deny its existence in
Villanueva v. Adre an action under said contract.
April 27, 1989  A corporation by prescription is a
Commissioner of Internal Revenue v. Norton corporation which is not formally
& Harrison Company 11 SCRA 714 organized as such but has been
Lipat v. Pacific banking Corporation, et. Al duly recognized by immemorial
April 30, 2003 usage as a corporation, with rights
and duties maintainable at law.
4. Subject matter:
Years asked:
 Saint Louis University COMMERCIAL LAW 409
2012 BAR OPERATIONS

2004, 1994, 1986 capital is necessary together with board

approval in the following instances:
5. Subject Matter: 1. to enter into management
INSTANCES WHERE THE CONCURRENCE OF contract if any of the two
THE STOCKHOLDERS ARE NECESSARY FOR instances stated above are
THE EXERCISE OF THE POWERS OF THE absent;
CORPORATION 2. to adopt, amend or repeal by-
laws (Sec. 46 and 48, CCP)
Concept:  without board resolution, the
 Approval of the majority of the board stockholders may by:
and the concurrence of the stockholders 1. 2/3 outstanding capital—
representing 2/3 of the outstanding delegate to the board the power
capital (or 2/3 of the member whenever to amend the by-laws (sec. 48,
applicable) is necessary in the exercise CCP)
of the following powers: 2. majority of outstanding capital—
1. power to extend or shorten revoke the power of the board to
corporate term (Section 37, amend the by-laws which was
Corporation Code of the Phils.) previously delegated.
2. increase/ decrease corporate
stock (Sec. 38, CCP) Years asked:
3. incur, create bonded 2001, 1998, 1996, 1995, 1993, 1987, 1984,
indebtedness (Sec. 38, CCP) 1983, 1982
4. to deny pre-emptive rights (Sec.
39, CCP) Applicable laws:
5. sell, dispose, lease, encumber Corporation Code of the Philippines Secs.
all or substantially all of 37, 38, 39,40, 42, 43, 44,
corporate assets (Sec. 40, CCP) 16, 46, 48
6. to invest in another corporation,
business other than the primary 6. Subject Matter:
purpose (Sec. 42, CCP) INSTANCES WHEN A CORPORATION MAY
7. to declare stock dividends (Sec. ACQUIRE OR TRANSFER ITS OWN SHARES
43, CCP)
8. to enter into management Concept:
contract (Sec. 44, CCP) if:  a corporation may acquire its own
a. a stockholder or shares in the following instances:
stockholders a. the corporation has unrestricted
representing the same retained earnings in its books to
interest of both the cover the shares to be purchased/
managing and the acquired;
manged corporations b. for legitimate corporate purpose/s
own or control more including but not limited to the
than 1/3 of the total following:
outstanding capital 1. to eliminate fractional
entitled to vote of the shares arising out of stock
managing corporation; dividends;
or 2. to collect or compromise
b. a majority of the an indebtedness to the corporation
members of the board arising out of unpaid subscription in
of directors of the a delinquency sale and to purchase
managing corporation delinquent shares sold during the
also constitute a sale;
majority of the members 3. to pay dissenting or
of the board of the withdrawing stockholders entitled to
managed corporation. payment of their shares
9. to amend the articles of  shares of stock may be transferred in
incorporation (Sec. 16, CCP) the following:
 approval of the stockholders a. if represented by a certificate,
representing majority of the outstanding the following must be strictly
 Saint Louis University COMMERCIAL LAW 410
2012 BAR OPERATIONS

complied with: (1) delivery of the in excess of 100% of their paid-in

certificate; (2) indorsement by capital.
the owner or his agent; (3) to be However, even if the retained surplus
valid to third parties, the transfer profits are in excess of 100% of the
must be recorded in the books paid-in capital, the board may still refuse
of the corporation. (Rural Bank to declare dividends if:
of Lipa v. Court of Appeals 1. Justified by definite corporate
September 28, 2001) expansion projects/ programs
b. if not represented by the approved by the Board; or
certificate (such as when the 2. the corporation is prohibited
certificate has not yet been under any loan agreement with
issued or where for some any financial institution or
reason is not in the possession creditor, whether local or
of the stockholder: foreign, from declaring
1. by means of a deed of dividends without its/ his
assignment, and consent, and such consent has
2. such is duly recorded in not yet been secured; or
the books of the 3. It can be clearly shown that such
corporation retention is necessary under
special circumstances obtaining
Years asked: in the corporation.
04, 2001, 1996, 1994, 1992, 1989, 1984,  Other rules concerning dividends:
1982, 1981 1. Stockholders are entitled to
dividends pro-rata based on the
Illustrative case: total number of shares and not on
Rural Bank of Lipa v. Court of Appeals the amount paid for the shares
(SEC Opinion dated July 16, 1996)
7. Subject matter: 2. Stockholders at the time of
DECLARATION OF DIVIDENDS declaration are the ones entitled to
dividends. Dividends declared
Concept: before the transfer of shares belong
 who may declare dividends? (Sec. 43) to the transferor and those declared
1. Board of Directors alone for after the transfer belongs to the
cash and property dividends transferee. (SEC Opinion, July 14,
2. Board of Directors with the 1994)
approval of stockholders 3. the stockholder’s right to be paid
representing not less than 2/3 of dividends accrues as soon as the
outstanding capital for stock declaration is made in accordance
dividends with Sec. 43 of the Corporation
 the conditions that must be present to Code. From that time, the
declare dividends are the following: stockholder can already demand
1. unrestricted retained earnings; payment thereof. (SEC opinion
2. resolution of the board or if dated October 10, 1992)
stock dividends, the board with 4. Stock dividends can be declared
the concurrence of 2/3 of at a premium (at value higher than
outstanding capital par) (SEC Opinion dated October
 Declaration of dividends is discretionary 23, 1992)
upon the board. Dividends are payable 5. Even unpaid subscribers are
only when there are profits earned by entitled to dividends.
the corporation and as a general rule,
even if there are existing profits, the Years asked:
Board of directors has the discretion to 2005, 2001, 1991, 1990, 1989, 1987, 1982
determine whether or not dividends are
declared (Republic Planters Bank v. Applicable law:
Agana, 269 SCRA 1). SEC Opinion dated July 16, 1996
Exception. Stock corporations are SEC Opinion dated July 14, 1994
prohibited from retaining surplus profits SEC Opinion dated October 10, 1992
SEC Opinion dated October 23, 1992
 Saint Louis University COMMERCIAL LAW 411
2012 BAR OPERATIONS

Sec. 43, Corporation Code of the Philippines 9. Subject mater:

DISSOLUTION OF A CORPORATION
Illustrative cases:
Republic Planters Bank v. Agana Concept:
269 SCRA 1  the dissolution of a corporation is the
extinguishment of the franchise of a
corporation and the termination of its
8. Subject matter: corporate existence
RIGHTS OF STOCKHOLDERS  A corporation is dissolved by the
following modes:
Concept: 1. Voluntary dissolution
 The basic rights of stockholders are the a. where no creditors are
following: affected (Sec. 118, CCP)
a. direct and indirect participation b. where creditors are
in management; affected (Sec. 119, CCP)
b. voting rights (Sec. 6, CCP); 2. Involuntary dissolution (Sec. 121,
c. right to remove directors (Sec. CCP)
28, CCP); 3. Shortening term, (Sec. 120, CCP)
d. proprietary rights; and
 right to dividends; 4. Expiration of term
 appraisal right (Sec. 81,  Dissolution has the following effects:
CCP); a. It results in the transfer of legal
 right to issuance of title to properties in the
stock certificate for fully stockholders who become co-
paid shares; (Sec. 64, owners thereof;
CCP) b. The corporation ceases as a
 proportionate body corporate to continue the
participation in the business for which it was
distribution of assets in established;
liquidation (Secs. 118- c. The stockholders are not
119, CCP); prevented from conveying their
 right to transfer stocks respective shareholdings toward
in corporate books (sec. the creation of a new
63, CCP) corporation to continue the
 pre-emptive right (Sec. business of the old;
39, CCP) d. Though a dissolved corporation
e. right to inspect books and cannot be revived, those
records (Sec. 74, CCP); interested may reciprocate by
f. right to be furnished with the re-filing the new Articles of
most recent financial statement/ Incorporation and by-laws;
financial report (Secs. 74 and e. The corporation continues as a
75, CCP); corporate body for three years
g. right to recover stocks for purposes of winding up or
unlawfully sold for delinquent liquidation;
payment of subscription; f. Upon the expiration of the three
h. right to file individual suit, year-winding up period, the
representative suit and corporation ceases to exist for
derivative suits. all purposes.

Years asked: Years asked:

1998, 1996, 1993, 199, 1988, 1985, 1984, 2004, 2002, 2000, 1997, 1998, 1981
1983, 1981, 1976
Applicable law:
Applicable law: Corporation Code of the Philippines,
Corporation Code of the Philippines, sections 118, 119, 120, 121
Sections 6, 28, 81, 64, 118,
119, 63, 39, 74, 75 10. Subject Matter:
RECOVERY OF MORAL DAMAGES
 Saint Louis University COMMERCIAL LAW 412
2012 BAR OPERATIONS

 The fully or partly nationalized

Concept: corporations are the following:
 Moral damages cannot awarded in favor a. Where no foreign
of corporations because they do not stockholder is
have feelings and mental state. Mental allowed as in
suffering can be experienced only by 1. mass media recording
one having a nervous system and it (Art. XVI, Sec. 11,
flows from ills, sorrows and grief’s of Constitution)
life—all of which cannot be suffered by 2. retail trade enterprises
artificial person. (National Power with paid-up capital of
Corporation v. Philipp brothers Oceanic, les than US $2.5 million
Inc. November 20, 2001) (Sec. 5, R.A. No. 8762)
 The Supreme Court clarified in ABS- 3. private security
CBN Broadcasting Corporation v. Court agencies (Sec. 4, R.A.
of Appeals (January 21, 1999) that No. 5487)
moral damages are awarded to enable 4. utilization of natural
the injured party to obtain means, resources (Art. XII, Sec.
diversion, or amusements that will serve 2, Constitution)
to obviate the moral suffering he has 5. small-scale mining
undergone. The statement in People v. (Sec. 3, R. A. No. 7076)
Manero and Mambulao Lumber co. v. 6. cockpits (Sec. 5, P.D.
PNB that a corporation may recover No. 449)
moral damages if it “has a good 7. manufacture, repair,
reputation that is debased, resulting in stockpiling and/ or
social humiliation” is obiter dictum. distribution of nuclear
 However, the Supreme Court ruled in weapons (Art. II, Sec. 8,
Filipinas Broadcasting Network, Inc. v. Constitution)
Ago Medical and Educational Center 8. manufacture of
(January 17, 2005) that a corporation firecrackers and other
can recover moral damages under Art. pyrotechnic devices
2219 (7) if it was the victim of (Sec. 5, R.A. No. 7183)
defamation. b. Up to twenty percent (20%)
foreign equity like private
Years asked: radio communications
1998, 1985, 1978 network (R. A. No. 3846)
c. Up to twenty-five percent
Applicable law: (25%) foreign equity
Art. 2219 (7), Civil Code of the Philippines like the following:
1. private recruitment,
Illustrative cases: whether local or
National Power Corporation v. Philipp overseas,
brothers Oceanic, Inc. November 20, 2001 employment (Art.
ABS-CBN Broadcasting Corporation v. 27, P.D. No. 442)
Court of Appeals January 21, 1999 2. construction and
People v. Manero repair of locally
Mambulao Lumber Co. v. PNB funded works (Sec.
Filipinas Broadcasting Network, Inc. v. Ago 1, C.A. 541)
Medical and Educational Center January 17, 3. construction of
2005 defense-related
structures (Sec. 1,
11. Subject matter: C. A. 541)
FOREIGN STOCKHOLDERS IN A CORPORATION d. Up to forty percent (40%)
and FOREIGN CORPORATION “DOING foreign equity
BUSINESS” IN THE PHILIPPINES 1. exploration,
Concept: development and
 Stockholders in a corporation can utilization of natural
be foreigners except in fully or partly resources (Art. XII,
nationalized corporations.
Saint Louis University COMMERCIAL LAW 413
2012 BAR OPERATIONS

Sec. 2,  In Pacific Vegetable Oil Corp. v.

Constitution) Singson (April 1955), the Supreme
2. realty companies Court held that a foreign corporation
and other is not doing business in the
corporations that Philippines when it entered into a
own private lands contract with a domestic corporation
(Art. XII, Sec. 7, providing for the delivery and
Constitution) payment of copra from the
3. operation and Philippines where the said contract
management of was negotiated, perfected and
public utilities (Art. performed in the United States.
XII, Sec.11, Thus, even if the twin
Constitution) characterization tests (Continuity
4. culture, production, and Substance tests) of
milling, processing, Mentholatum obtained in the case,
trading except retail so long as the perfection and
of rice and corn and consummation of series of
by-products (Secs. transactions are done outside of the
5, P.D. No. 194; Philippine territorial jurisdiction, the
Sec. 15, R. A. No. same would not constitute doing
8762) business in the Philippines, even if
5. adjustment the products themselves should be
companies (Sec. manufactured or processed in the
323, P.D.No. 612) Philippines.
6. sauna and steam  DOING BUSINESS UNDER THE
bath bathhouses, FOREIGN INVESTMENT ACT OF
massage clinics 1991
and similar activities 1. DOING BUSINESS (Sec.
(r. A. No. 7042) 3(d))
e. Up to sixty (60%) foreign a. soliciting orders,
equity service contracts,
1. financing opening offices
companies (Sec. 6, (whether branch or
R.A. No. 5980, as liaison officer);
amended by R.A. b. appointing
No. 8556) representatives,
2. investment houses distributors
(Sec. 5, P.D. No. domiciled in the
129, as amended Philippines or who
by R. A. No. 8366) stay for a period or
periods totaling 180
 A foreign corporation is said to be days or more;
“doing business” in the Philippines c. participating in the
under the Continuity Test implies a management,
continuity of commercial dealings supervision or
and arrangements, and control of nay
contemplates to some extent the domestic business,
performance of acts or works or the firm, entity or
exercise of some functions normally corporation in the
incident to and in progressive Philippines;
prosecution of, and the purpose and d. any act or acts that
object of its organization. Under the imply the continuity
Substance Test, a foreign of commercial
corporation is doing business in the dealings or
country if it is continuing the body or arrangements, and
substance of the enterprise of contemplate to
business for which it was organized. some extent the
performance of acts
 Saint Louis University COMMERCIAL LAW 414
2012 BAR OPERATIONS

or works or the Agilent Technologies v. Integrated Silicon

exercise of some Technology April 2004
functions normally
incident to and in
progressive INSURANCE LAW
prosecution of, the
purpose and object 1. Subject Matter:
of its organization BENEFICIARY
2. NOT DOING
BUSINESS(Sec. 3(d)) Concept:
a. mere investment as  The beneficiary is the person
a shareholder and designated to receive proceeds of policy
exercise of rights as when risk attaches.
investor;  When one insures his own life, he may
b. having a nominee designate any person as the beneficiary,
director or officer to whether or not the beneficiary has an
represent its insurable interest in the life of the
interest in the insured.
corporation; Exceptions: Persons specified in
c. appointing Art. 739 (in re Art. 2012) of the Civil
representative or Code cannot be designated
distributor which a. those made between
transact business in persons who were guilty of
its own name and adultery and concubinage at
for its own account. the time of the donation;
(conviction is not a condition
Years asked: precedent)
2002, 1998, 1995, 1990, 1979 b. those made between
persons found guilty of the
Applicable law: same criminal offense, in
Constitution, Art. XVI, Sec 11, Art. XII, Sec. consideration thereof;
2; Art. II, Sec. 8; Art.XII, Sec. 2 and 7; c. those made to a public
Sec. 5, R. A. No. 8762 officer or his wife,
Sec 4, R.A. No. 5487 descendants or ascendants
Sec. 3. R.A. No. 7076 by reason of his office
Sec. 5, R. A. No. 449  If a person will insure the life of another
Sec. 5, R.A. No. 7183 payable to himself, he must have
R.A. No. 3846 insurable interest on the life of the
Art. 27, P.D. No. 442 person whose life he is insuring
Sec. 1, C.A. 541  The designation is revocable unless the
Sec. 5, P.D. No. 194 right to revoke is expressly waived in the
Sec. 15, R.A. No. 8762 policy.
Sec. 323, P.D. No. 612 o Thus, although Sec. 181 of the
R.A. No. 7042 Insurance Code of the
Sec. 6, R.A. No. 5980, as amended by R.A. Philippines allows assignment of
No. 8556 the life or health insurance
Sec. 5, P.D. No. 129, as amended by R.A. policies to any person whether
No. 8366 he has insurable interest or not,
Foreign Investment Act of 1991, Sec. 3 (d) the insured cannot assign the
policy if the designation of the
Illustrative cases: beneficiary is irrevocable. The
Pacific Vegetable Oil Corp. v. Singson irrevocable beneficiary has
April 1955 vested right.
Aetna Casualty and Surety Co. v. Pacific o If there is no waiver of the right
Star Lines 80 SCRA 835 to revoke under Section 181,
Universal Shipping Lines, Inc. v. IAC assignment of the policy may be
188 SCRA 170 deemed as implied revocation.
 Saint Louis University COMMERCIAL LAW 415
2012 BAR OPERATIONS

o If the insured refuses to pay the shortened but it cannot be

premiums, the designated extended by stipulation.
irrevocable beneficiary may  The following defenses are not barred
continue the policy by paying by the incontestability clause:
premiums that are due. 1. that the person taking the
 If the premiums are paid out of the insurance lacked insurable
conjugal funs, the proceeds are interest as required by law;
considered conjugal. If the beneficiary is 2. that the cause of the death of
other than the insured’s estate, the the insured is an accepted risk;
source of the premiums would not be 3. that the premiums had not been
relevant. (Del Val v. Del Val, 29 Phil. paid; (Sec. 77, 227 (b), 228 (b);
534; BPI v. Posadas, 56 Phil. 215) 230 (b), ICP);
 If the insured or beneficiary is a minor 4. that the conditions of the policy
and the amount involved does not relating to military or naval
exceed P50,000.000, the father in the service has been violated (Secs.
absence of judicial guardian, or in his 227 (b), 228 (b), ICP);
absence or incapacity, the mother may 5. that the fraud is of particularly of
exercise the minor’s rights under the vicious type;
policy, without the need of court 6. that the beneficiary failed to
authority or bond. furnish proof of death or to
comply with any condition
Years Asked: imposed by the policy after the
2005, 2000, 1998, 1991, 1985, 1981, 1978 loss has happened; or
7. that the action was not brought
Applicable law: within the time specified.
Section 11, 181 Insurance Code of the
Philippines (ICP) Years asked:
1998,1997, 1994, 1991, 1989, 1983
Illustrative case:
Del Val v. Del Val 29 Applicable law:
Phil. 534; Section 48, ICP
BPI v. Posadas 56
Phil. 215; 3. Subject Matter:
The Insular Life Assurance Co. v. Ebrado CONCEALMENT AND MISREPRESENTATION
80 SCRA 181
Concept:
2. Subject Matter:  Concealment is the neglect to
INCONTESTABILITY CLAUSE communicate that which a party knows
Concept: and ought to communicate (Sec. 26,
 After a policy of life insurance made ICP)
payable on the death of the injured shall  Concealment vitiates the contract and
have been in force during the lifetime of entitles the insurer to rescind, even if the
the insured for a period of two years death or loss is due to a cause not
from the date of its issue or of its last related to the concealed matter.
reinstatement, the insurer cannot prove (Section 27, ICP)
that the policy is void ab initio or is  The matter concealed need not be the
rescindable by reason of the fraudulent cause of loss.
concealment or misrepresentation of the  Representations are factual statements
insured or his agent. made by the insured at the time of or
 Requisites for application: prior to the insurance policy to give
1. the insurance is a life insurance information to the insurer and otherwise
policy is payable on the death of induce him to enter into the insurance
the insured. contract. The effect of misrepresentation
2. it has been in force during the is that the injured party is entitled to
lifetime of the insured for at rescind from the time when the
least 2 years from the date of its representation becomes false.
issue or of its last reinstatement.  It is well settled that the insured need
The period of 2 years may be not die of disease he failed to disclose
 Saint Louis University COMMERCIAL LAW 416
2012 BAR OPERATIONS

to the insurer. It is sufficient that his non- benefit to be derived need not legal basis
disclosure misled the insurer in forming have any legal basis
the estimate of the risks of the proposed As to the beneficiary’s
insurance policy or in making inquiries. interest The beneficiary
 It is not material that the insured died of The beneficiary need not must have
a different cause than the fact have insurable interest over insurable interest
concealed. the life of the insured if the over the thing
 Where the matters which the insured insured himself secured the insured.
failed to disclose were material and policy. However, if the life
relevant to the approval and issuance of insurance was obtained by
the insurance policy and they would the beneficiary, the latter
have affected the insurer’s action on the must have insurable interest
insured application, the claim can be over the life of the insured.
denied.

Years asked:  Insurable Interest in Life Insurance:

2001, 1998, 1997, 1996, 1993, 1989, 1987, (1997, 1987, 1976)
1984, 1983, 1980, 1979, 1977, 1975 Every person has an insurable
interest in the life and health:
Applicable law: o Of himself, his spouse and
Section 26, 27, 31 ICP of his children,
o Of any person on whom he
Illustrative cases: depends wholly or in part for
Vda. De Canilang v. Court of Appeals education or support, or in
223 SCRA 443 whom he has pecuniary
Sunlife Assurance Company of Canada v. interest;
Court of Appeals 245 SCRA 268 o Of any person under legal
Philamcare health Systems, Inc. v. Court of obligation to him for the
Appeals March 18, 2002 payment of money, or
The Insular Life Ltd. V. Feliciano respecting property or
74 Phil. 468 services, of which death or
illness might delay or
4. Subject matter: prevent the performance;
INSURABLE INTEREST (2002, 2001, 2000) and
 Insurable interest in property v. o Of any person upon whose
insurable interest in life life any estate or interest
vested in him depends.
Insurable interest in Life Insurable Interest In general, the test is whether or not
in Property the person is interested in the
As to extent preservation of the insured life despite
Unlimited (save in life Limited to the the insurance.
insurance effected by a actual value of the In paragraph (a) of Section 10, mere
creditor on the life of the interests thereon relationship is sufficient while the rest
debtor) (paragraphs b, c and d) requires
As to the time when pecuniary interest. Thus the interest of
insurable interest must the creditor over the life of the debtor
exist It is necessary that ceases upon full payment.
It is enough that the the insurable
insurable interest exist at the interest exist when  Insurable Interest in Property
time the policy takes effect the insurance Insurance (1999, 1998, 1997, 1994,
and need not exist at the time takes effect and 1991, 1987, 1982, 1979, 1977, 1975)
of the loss when the loss o Insurable interest in
occurs, but need property insurance is any
not exist in the interest therein, or liability in
meantime. respect thereof and it may
As to expectation of the consist in an existing
benefit to be derived interest, an inchoate interest
The expectation of the There must be founded on an existing
 Saint Louis University COMMERCIAL LAW 417
2012 BAR OPERATIONS

interest, or any expectancy not prohibited by law but it may be

coupled with an existing prohibited by an “other insurance
interest. clause.”
o In general, a person has  Requisites of double insurance:
insurable interest in the 1. the person insured is the same;
property, if he derives 2. there are two or more insurers
pecuniary benefit or insuring separately;
advantage from its 3. the subject matter is the same;
preservation or would suffer 4. the interest insured is also the
pecuniary loss, damage or same;
prejudice by its destruction 5. the risk or peril insured against
whether he has or has no is likewise the same.
title in, or lien upon, or  When there is double insurance, the
possession of the property. insured can claim in case of loss only up
(Filipino Merchants to the agreed valuation or up to the full
Insurance, Co., Inc. v. Court insurable value for any, some or all
of Appeals, 179 SCRA 638) insurers, without prejudice to the
Hence pecuniary interest insurers ratably apportioning the
over the property is always payments. The insured can also recover
necessary. before or after the loss, from both
o The existence of insurable insurers the excess premium he has
interest is a matter of public paid. (Sec. 94, ICP)
policy. Hence, the principle
of estoppel cannot be Years asked:
invoked. 2005, 1999, 1990
o For the beneficiary to
recover on the fire or Applicable provisions:
property insurance policy, it Section 93, 94, ICP
is required that he must
have insurable interest in 6. Subject Matter:
the property insured. LOSS AND CLAIMS SETTLEMENT
o The businessman, as
owner, and the creditor, as Concept:
mortgagee have separate  The insurer is liable if:
insurable interests in the 1. the proximate cause of the loss is
same stocks-in-trade. Each the peril insured against (Sec. 84)
may insure such interest to 2. the immediate cause of the loss is
protect his own interest. the peril insured against except
where proximate cause is an
Years asked: excepted peril;
2002, 2001, 2000, 1999, 1998, 1997, 1994, 3. loss through negligence of insured
1991, 1987, 1982, 1979, 1977, 1976, 1975 except where there was gross
negligence amounting to willful act;
Applicable Law: 4. loss caused by efforts to rescue the
Sections 10-25, Insurance Code of the thing from peril insured against—if
Philippines during the course of rescue, the
thing is exposed to a peril, not
Illustrative case: insured against, which permanently
Filipino Merchants Insurance, Co., Inc. v. deprives the insured of its
Court of Appeals 179 SCRA 638 possession, in whole or in part.
(Sec. 85, ICP)
5. Subject matter:  The insurer is not liable:
DOUBLE INSURANCE 1. loss by insured’s willful act or gross
Concept: negligence;
 Double insurance exists where the 2. loss due to connivance of the
same person is insured by several insured (Sec. 87, ICP), and
insurers separately in respect to same 3. Loss where the excepted peril is the
subject and interest (Sec. 93, ICP). It is proximate cause.
 Saint Louis University COMMERCIAL LAW 418
2012 BAR OPERATIONS

 Claims settlement in life insurance: 8. Subject matter:

(Sec. 242, ICP) NO FAULT CLAUSE
1. the proceeds shall be paid
immediately upon the maturity of the Concept:
policy if there is such a maturity  the injured third party or passenger is
date; given the option to file a claim for death
2. If the policy matures by the death of or injury without the necessity of proving
the insured, within 60 days after fault or negligence of any kind under the
presentation of the claim and filing following conditions:
of the proof of the death of the 1. the total indemnity in respect of any
insured. person shall not exceed five
 Claims settlement in property insurance: thousand pesos;
(Sec. 243, ICP) 2. the following proofs of loss, when
1. Proceeds shall be paid within 30 submitted under oath, shall be
days after proof of loss is received sufficient evidence to substantiate
by the insurer and ascertainment of the claim:
the loss or damage is made either a. police report of accident,
by agreement or by arbitration. and
2. If no ascertainment is made within b. death certificate and
60 days after receipt of proof of loss, evidence sufficient to
the loss shall be paid within 90 days establish the proper payee,
after such receipt. or
c. medical report and evidence
Years asked: of medical or hospital
2000, 1996, 1995, 1993, 1990, 1989, 1978 disbursement in respect of
which refund is claimed.
Applicable law: 3. claim may be made against one
Sec. 84, 85, 87, 242, 243, ICP motor vehicle only.

7. Subject Matter: Years asked:

IMPLIED WARRANTIES IN MARINE INSURANCE 1994, 1989, 1977

Concept: Applicable law:

 the implied warranties in marine Sec. 378, ICP
insurance are the following:
1. that the ship is seaworthy at the 9. Subject matter:
inception of the insurance (Sec. THEFT CLAUSE
113, ICP);
2. that the ship will not deviate from Concept:
agreed voyage unless deviation is  The risk insured against in the policy
proper (Secs. 123, 124, 125, ICP); may include theft. If there is such a
3. that the ship will not engage in an provision and the vehicle was unlawfully
illegal venture; taken, the insurer is liable under the
4. warranty of the possession of theft clause and the authorized driver
documents of neutrality: that the clause does not apply. The insured can
ship will carry the requisite recover even if the thief has no driver’s
documents of nationality or license. (Perla Compania de Seguros,
neutrality of the ship or cargo where Inc. v. Court of Appeals, 208 SCRA 487)
such nationality or neutrality is  Where the motor vehicle is unlawfully
expressly warranted; and wrongfully taken without the
5. presence of insurable interest. owner’s consent or knowledge, such
taking constitutes theft, and therefore, it
Years asked: is the “theft clause” and not the
2000, 1986, 1983 “authorized driver’s clause” that should
apply.
Applicable law:  There is theft if an employee took the
Secs. 113, 123, 124, 125, ICP vehicle of his employer without the
latter’s consent and therefore liable to
 Saint Louis University COMMERCIAL LAW 419
2012 BAR OPERATIONS

the insured for damage to the vehicle e. inclusion of a work in a publication,

even if the employee did not have a broadcast, or other communication to the
driver’s license. The theft clause public, sound recording or film if made by
operates (this is present in a way of illustration for teaching purposes
comprehensive policy unless theft is compatible with fair use and the source and
excepted) and not the “authorized name of the author, appearing on work must
driver’s clause”. be mentioned;
 The above rule is also true if an f. recording made in schools, universities or
employee of a repair shop took the car educational institutions of a work included in
that is being repaired for a “joy ride” a broadcast for the use of such schools,
universities or educational institutions.
Years asked: g. Making of ephemeral recordings: (1) by a
1993, 1988, 1985, 1981 broadcasting organization, (2) by means of
its own facilities, (3) for use of its own
Illustrative cases: broadcast;
Perla Compania de Seguros, Inc. v. Court of h. Use made of a work by or under the
Appeals, 208 SCRA 487 direction or control of the Government for
Villacorta v. Insurance Comm. public interest compatible with fair use;
100 SCRA 469 i. Public performance or the communication to
Ass’n of Baptist for World Evangelism, Inc. the public of a work in a place where no
v. Fielmen’s Ins. Co., Inc. 124 SCRA admission fee is charged by a club or
618 institution for charitable or educational
INTELECTUAL PROPERTY purpose only and the aim is not profit-
making;
1. Subject Matter: j. Public display of the original or a copy of
INFRINGEMENT OF COPRYRIGHT the work not made by means of a film, slide,
television image or otherwise on screen or
Concept: by means of any other device or process ;
 There is infringement when there is piracy or k. Any use made of work for the purpose of
substantial reproduction. If so much is taken that any judicial proceedings; or for giving of
the value of the original work is substantially professional advice by a legal practitioner;
diminished or the labors of the original author l. Single copy of a published work by natural
are substantially and to an injurious extent person exclusively for research and private
appropriated by another. study (even without authorization of the
 The following acts do not constitute infringement owner);
of copyright: m. Reproduction by libraries of (1) fragile
a. recitation or performance of a work: (1) works,(2) isolated articles in composite
made accessible to the public, (2) privately works, (3) brief portions of published
done, (3) free of charge, (4) strictly for works,(4) to preserve or replace copy;
charitable or religious institution; n. One back-up copy of computer program.
b. making of quotations from a published work:  Remedies against Infringement:
(1) compatible with fair use, (2) extent is a. injunction to prevent
justified by the purpose, (3) source and infringement; (Sec. 216,
name of the author, appearing on work, IPL)
must be mentioned; b. action for damages which
c. reproduction or communication to the public should be filed within 4
by mass media of articles on current years
political, social, economic, scientific or c. filing of a criminal case
religious topic, lectures, addresses and (Sec. 218,IPL)
other works, derived in public (1) for
information purposes, (2) not expressly Years Asked:
reserved, and (3) sources already indicated; 1998, 1997, 1994, 1989, 1988, 1987, 1983,
d. reproduction and communication to the 1977
public of literary or artistic works as part of
reports of current events by means of Applicable Law:
photography, cinematography or Secs. 216, 218, Intellectual Property Code
broadcasting to the extent necessary for the
purpose;
 Saint Louis University COMMERCIAL LAW 420
2012 BAR OPERATIONS

2. Subject Matter: deals, or his business, or services for

REGISTRATION OF TRADEMARKS those of the one having established
such goodwill, or shall commit any acts
Concept: calculated to produce said result, shall
 The rights in a mark shall be acquired be guilty of unfair competition
through registration with the Intellectual b. selling goods and giving them the
Property Office or the IPO. (Sec. 122, IPC) appearance of goods of another
 Registration is necessary before one can file manufacturer or dealer, either as to the
an action for infringement. goods themselves or the wrapping of
 The following are marks that cannot be the packages in which they are
registered: contained, or the devices or words
a. immoral, deceptive, or scandalous thereon, or in any other feature of their
matter, or matter which may disparage appearance, which would likely to
or falsely suggest a connection with influence purchasers to believe that the
persons, living or dead, institutions, goods offered are those of a
beliefs, or national symbols, or bring manufacturer or dealer, or who
them into contempt or disrepute; otherwise clothes the goods with such
b. consists of the flag or coat of arms or appearance as shall deceive the public
other insignia of the Philippines or any c. using any artifice of employing other
of its political subdivisions, or of any means calculated to induce the false
foreign nation, or any simulation thereof; belief that such person is offering the
c. consists of the name, portrait or services of another who has identified
signature identifying a particular living such services in the mind of the public,
individual except by his written consent, or
or the name, signature or portrait of a d. making false statement in the course of
deceased President of the Philippines, the trade or who shall commit any other
during the life of his widow, if any, act contrary to good faith of a nature
except by written consent of the widow; calculated to discredit the goods,
d. identical with a registered mark business or services of another.
belonging to a different proprietor or a
mark with an earlier filing or priority  Infringement of trademark v. Unfair
date, in respect of: (1) the same goods Competition
or services, or (2) closely related goods Infringement Unfair competition
or services or (3) if it nearly resembles
such a mark as to be likely to deceive or There is unauthorized use of a Involves passing off
cause confusion; trademark of one’s goods and
e. generic terms for goods or services; giving one’s goods
f. characteristics of goods like quality or the appearance of
quantity; that of another
g. customary sign in everyday language; It is not necessary to establish It is necessary to
h. color by itself. fraudulent intent establish fraudulent
intent
Years Asked: Registration of the trademark Prior registration is
1994, 1985, 1983, 1982, 1979, 1978, 1976 is necessary for the filling of not necessary
an action for infringement
Applicable Law: Limited in scope Broader as it
Sec. 122, Intellectual Property Code includes cases that
are covered not only
3. Subject Matter: by the IPC but also
UNFAIR COMPETITION by Art. 27 of the New
Civil Code
Concept:
 Unfair competition may be committed as Years Asked:
follows: 1996, 1988, 1984, 1982, 1981, 1980
a. any person who shall employ deception
or other means contrary to good faith by Applicable Law:
which he shall pass off the goods Sec. 168, Intellectual Property Code
manufactured by him or in which he
4. Subject matter:
 Saint Louis University COMMERCIAL LAW 421
2012 BAR OPERATIONS

INFRINGEMENT OF PATENT transferor or assignor who

produces and delivers a written
Concept: waiver of the provisions of the
 The making, using, offering for sale, Bulk Sales Law from his
selling importing patented product or a creditors as shown by the
product obtained directly or indirectly verified statement;
from a patented process, or the use of a b. if the sale and transfer is made
patented process without the by the vendor, mortgagor,
authorization of the patentee is transferor or assignor who is an
considered an infringement of patent. executor, administrator,
receiver, assignee in insolvency,
Years asked: or public officer acting in judicial
1993, 1992, 1985, 1977 process.

Applicable Law: Years asked:

Sec. 76, Intellectual Property Code 2006, 2005, 2001, 2000, 1997, 1994, 1993,
1988, 1982

SPECIAL LAWS ON COMMERCIAL LAW Applicable Law:

Republic Act No. 3952
1. Subject matter:
BULK SALES LAW

Concept:
 The sale of all the stock of goods,
fixtures and entire business, not in the
ordinary course of business or trade of
the vendor is covered by the provisions 2. Subject Matter:
of the Bulk Sales Law. Hence, before LAW ON SECRECY OF BANK DEPOSITS (R.A.
receiving from the vendee any part of NO. 1405)
the purchase price, the vendor must
deliver to such vendee a written Concept:
statement, duly sworn, containing the  The law is intended to encourage people to
names and addresses of all creditors to deposit their money in banking institutions
whom said vendor may be indebted, and also to discourage private hoarding so
together with the amount of that the same may be properly utilized by
indebtedness due or owing, on account banks to assist in the economic
of the goods, fixtures or business development of the country.
subject matter of the bulk sale.  All deposits of whatever nature with banks
 The vendee should require from the or banking institutions in the Philippines
vendor submission of a written waiver of including investment bonds issued by the
the Bulk Sales Law by the creditors as Government of the Philippines, its political
shown by the verified statement or to subdivisions and its instrumentalities, are
comply with the requirements of the hereby considered as an absolutely
Bulk Sales Law, that is, the seller, must confidential nature and may not be
notify his creditors of the terms and examined, inquired or looked into by any
conditions of the sale (Sec. 2, Act No. person, government official, bureau or office.
3952, as amended). (Sec. 2, RA. No. 1405)
 The two instances when the sale,  Exceptions:
transfer, mortgage or assignment of o when there is written permission of
stock of goods, wares, merchandise, the depositor or investor;
provision or material otherwise than in o special or general examination of a
the ordinary course of trade and the bank, authorized by the Bangko
regular prosecution of the business of Sentral ng Pilipinas’ Monetary Board
the vendor are not deemed to be a sale in connection with a bank fraud or
or transfer in bulk are the following: serious irregularity;
a. if the sale or transfer is made by
the vendor, mortgagor,
Saint Louis University COMMERCIAL LAW 422
2012 BAR OPERATIONS

o examination by an independent o Upon the order of the court (or even

Auditor, hired by a Bank and for the without court order in proper cases)
Bank’s exclusive use; when there is probable cause of
o DOSRI Loans: Loans with their money laundering as provided for
Banks of banks of Directors, under Section 11 of the Anti-Money
Officers, Stockholders and related Laundering Act.
interests  The Anti-Money Laundering Council may
1. loans in excess of 5% of inquire into the deposits upon order of the
the bank’s capital and court when there is probable cause that the
surplus deposits are related to the crime of unlawful
2. the borrower waived his activities defined in Sec. 3 (1) and Sec. 4 of
rights as regards the R.A. 9160. However, a court order is not
secrecy of bank even necessary when the offense or
deposits unlawful activity involved is any of the
o impeachment cases; following:
o upon the order of a competent court o Kidnapping for ransom under Art.
in cases of bribery or dereliction of 267 of the Revised Penal Code as
duty of public officials; amended,
o upon the order of a competent court o Sections 4, 5, 7, 8,9, 10, 12, 13,14,
in cases where the money 15, and 16 of R.A. No. 9165
deposited or invested is the subject otherwise known as the
of litigation; Comprehensive Dangerous Drugs
o upon order of the competent court Act of 2002, and
or tribunal in cases involving o Hi-jacking and other violations of
unexplained wealth under the Anti- Republic Act No. 6235; destructive
Graft and Corrupt Practices Act, arson and murder as defined under
R.A. No. 3019 (Banco Filipino v. the Revised Penal Code, as
Purisima, 161 SCRA 576); amended, including those
o upon inquiry by the Commissioner perpetrated by terrorists against
of Internal Revenue for the non-combatant persons and similar
purposes of determining the net targets.
estate of a deceased depositor;  Bank accounts may be garnished by the
o upon the order of a competent court creditors of the depositor. There is no
or in proper cases in the Anti-money violation of the Law on Secrecy of Bank
Laundering Council where there is Deposits if the accounts are garnished. The
probable cause of money laundering amount of deposit is not actually disclosed
and in some instances even without and the intent of the legislature does not
court order; cover garnishment. The notice of
o Disclosure to the Treasurer of the garnishment served on a bank at the
Philippines for dormant deposits for instance of the creditor of a depositor is not
at least ten (10) years under the covered by the Law on Secrecy of Bank
Unclaimed balances Act (Sec.2, Deposits. Garnishment is just part of the
R.A. No. 3936) process of execution. The moment notice of
o Coup d’etat law (RA 6968, October garnishment is served on a bank and there
24, 1990) exists a deposit by the judgment debtor, the
o When the state exercises/ invokes bank is directly accountable to the sheriff, for
its Police Power benefit of the judgment creditor, for the
 The above-enumerated exceptions do not whole amount of the deposit. In such event,
apply to foreign currency deposits. There is the amount of the deposit becomes, in
only one exception under the Foreign effect, subject of the litigation.
Currency Deposits Act (Intengan v. Court of  Whether the transaction is considered a sale
Appeals, February 15, 2002) although of money placement does not make the
another is provided for under the Anti-Money money “subject matter of litigation” within the
Laundering Law. These Exceptions are: meaning of Sec. 2(g), RA 1405 which
o When there is written consent of prohibits the disclosure or inquiry into bank
depositor under Sec. 8 of the deposits “in cases where the money
Foreign Currency Deposits Act; and deposited or invested is the subject matter
 Saint Louis University COMMERCIAL LAW 423
2012 BAR OPERATIONS

of litigation” nor will it matter whether the Debtors must have No need for
money is “swindled”. committed one or commission of acts
more acts of of insolvency
Years asked: insolvency
2006, 2005, 2004, 2001, 2000, 1998, 1997, Indebtedness must Amount of
1995, 1994, 1992, 1991, 1990, 1989, not be less than indebtedness must
1988,1985, 1981, 1980, 1977, 1976 one thousand exceed one thousand
pesos pesos.
Applicable laws: Petition must be Bond is not required
Sec. 2, Republic Act 1405 (Law on Secrecy accompanied by a
of Bank Deposits) bond
Sec. 3 (1), 4, 11, Republic Act No. 9160  An insolvent debtor, after a lawful discharge
Sec. 2, Republic Act No. 3936 following an adjudication of insolvency, is
Sec. 8, Foreign Currency Deposits Act released generally from all debts, claims,
Anti-Money Laundering Act liabilities and demands which are or have
been proved against his estate.
Illustrative cases:
Banco Filipino v. Purisima  Suspension of payments v. Insolvency
161 SCRA 576 Suspension of Insolvency
Intengan v. Court of Appeals payments
February 15, 2002 Debtor has The debtor does not
China Bank v. Ortega sufficient property have sufficient
49 SCRA 356 but he foresees property to pay his
Salvacion, et.al. v. Central Bank of the the impossibility of debts
Philippines, et.al. August 21, 1997 meeting his debts
Benedicto and Riviera v. Court of Appeals as they fall due
364 SCRA 334 The purpose is to The purpose is to
suspend or delay discharge the
the payments of debtor from the
3. Subject matter: debts payment of certain
INSOLVENCY LAW debts
The amount of Some of the
Conept: indebtedness is creditors may
 Insolvency is declared when the liabilities of not affected receive less than
the debtor are more than his assets. their credits
 The assets of the debtor are to be converted The number of In case of
to cash for distribution among his creditors. creditors is involuntary
 The insolvency has for its object to obtain immaterial insolvency, three or
discharge from all debts and liability. more creditors are
 The Insolvency Law seeks: required.
o to effect equitable distribution of the
insolvent’s property among his Years asked:
creditors, and
2005, 2004, 1999, 1998, 1997, 1995, 1991,
o To discharge the debtor from his 1988, 1982, 1980,
liabilities so that he can start afresh 1979, 1978, 1976,
with the property set apart to him as
1975
exempt
Applicable Law:
 Involuntary insolvency v. voluntary Insolvency law (Act No. 1956)
insolvency
Involuntary Voluntary 4. Subject matter:
insolvency insolvency ORIGINAL AND EXCLUSIVE JURISDICTION OF
Three or more One creditor is THE SECURITIES AND EXCHANGE
creditors are sufficient COMMISSION (SEC)
required
Filed by three or Filed by the debtor Concept:
more qualified
debtors
 Saint Louis University COMMERCIAL LAW 424
2012 BAR OPERATIONS

 Formerly, the SEC has original and only to recover his credit from
exclusive jurisdiction over cases the proceeds of the sale of the
involving: property at public auction
1. devices or schemes amounting through a public officer in the
to fraud or misrepresentation; manner prescribed in Section 14
2. controversies arising out of of Act No. 1508. (Mahoney vs.
intra-corporate or partnership Tuason, 39 Phil. 951 [1919]);
representations; Esguerra vs. Court of Appeals,
3. controversies in the election or 173 SCRA 1 [1989]).
appointment of directors, 2. Private Sale – if there is an
officers, etc. express stipulation in the
4. petitions to be declared in the contract.
state of suspension of Exception: fraud or duress
payments.  The mortgagee may, after thirty
 At present, the jurisdiction over these (30) days from the time of the
cases has been transferred to the condition broken, cause the
Courts of general jurisdiction or the mortgaged property to be sold
appropriate Regional Trial Court acting at public auction by a public
as a Special Commercial Court. officer (Section 14, Act No.
 Sec. 5, PD 902-A 1508)
The SEC has jurisdiction to declare  The 30-day period to foreclose a
suspension of payments with respect to chattel mortgage is the
corporations, partnerships, or associations, minimum period after violation
but not with respect to individuals. of the mortgage condition for the
mortgage creditor with at least
Years asked: ten (10) days notice to the
2006, 1997, 1996, 1994, 1991, 1990, 1988, mortgagor and posting of public
1987, 1985, 1984, 1981, 1976 notice of time, place and
purpose of such sale, and is a
Applicable law: period of grace for the
Securities Regulations Code, R.A. No. 8799 mortgagor, to discharge the
mortgage obligation. After the
5. Subject matter: sale of the chattel at public
CHATTEL MORTGAGE LAW auction, the right of redemption
is no longer available to the
Concept: mortgagor. (Cabral vs.
 The registration of the chattel Evangelista, 28 SCRA 1000
mortgage is an effective and [1969])
binding notice to other creditors  Right of Mortgagee to
of its existence and creates a Recover Deficiency
real right or a lien which being 1. The creditor may maintain
recorded, it follows the chattel an action for the deficiency
wherever it goes. The although the Chattel Mortgage
registration gives the mortgagee Law is silent on this point
the symbolical possession. (Ablaza vs. Ignacio, (unrep) 103
(Northern Motors, Inc. vs. Phil. 1151 [1958]; Garrido vs.
Coquia, 68 SCRA 374 [1975]). Tuason, 24 SCRA 727 [1968]’
 Foreclosure of Chattel Phil. National Bank vs. Manila
Mortgage Investment & Construction, Inc.,
1. Public Sale – if the supra; Bank of the Philippine
mortgagor defaults in the Isalnd vs. Olutanga Lumber Co.,
payment of the secured debt or 47 Phil. 20 [1924]). The action
otherwise fails to comply with may be sought within ten (10)
the conditions of the mortgage, years from the time the cause of
the creditor has no right to action accrues.
appropriate to himself the 2. If the chattel mortgage is
personal property (Article 2141, constituted, whether by the
2088) because he is permitted debtor-vendee or a third person,
 Saint Louis University COMMERCIAL LAW 425
2012 BAR OPERATIONS

as security for the purchase of  The foreclosure of Real Estate

personal property payable in Mortgages can either
installments, no deficiency be:
judgment can be asked and any 1. Judicial foreclosure
agreement to the contrary shall governed by Rule 68 of the Rules of
be void (Article 1484, Civil Court.
Code). 2. Extrajudicial Foreclosure
3. The chattel mortgagee is governed by Act. No. 3135 as
entitled to deficiency judgment amended, if and when the
in an action for specific mortgagee is given a specific power
performance (Article 1484 [1]) or express authority to do so.
where the mortgaged property is  Debtor has the right to redeem the
subsequently attached and sold. property sold within the term of one year
The execution sale in such case from and after the date of the sale
is not a foreclosure sale. (Section 6). The reckoning date in case
(Industrial Finance Corporation of registered land is from the registration
vs. Ramirez, 77 SCRA 152 of the certificate of sale since it is only
[1977]). from such date that the sale takes effect
 A chattel mortgage constituted over an as a conveyance. (Jose vs. Blue, 42
immovable is binding only between the SCRA 351, [1971]; Gorospe vs. Santos,
parties and is therefore unenforceable 69 SCRA 191 [1976]; General vs.
against third parties. Barrameda, 60 SCRA 162 [1976].
“Every conveyance of lands acquired
Years asked: under the free patent or homestead
2001, 1999, 1997, 1991, 1990, 1987, 1986, provisions, when proper, shall be
1985, 1984, 1983,1982, 1977, 1976 subject to repurchase by the applicant,
his widow or legal heirs, within a period
Applicable law: of five years from the date of the
Sec. 14, Chattel Mortgage Law (Act No. conveyance.” (Section 119, C.A. No.
1508) 141 [Public Land Law], as amended) or
Article 1484, 2141, 2088, Civil Code of the foreclosure sale (Tupas vs. Damasco,
Philippines 132 SCRA 593 [1984]).
 Rules on the Right of Mortgagee to
Illustrative cases: Recover Deficiency
Northern Motors, Inc. vs. Coquia 1. If there be a balance due to the
68 SCRA 374 [1975] mortgagee after applying the proceeds
Mahoney vs. Tuason, of the sale, the mortgagee is entitled to
39 Phil. 951 [1919] recover the deficiency. (Development
Esguerra vs. Court of Appeals Bank of the Philippines vs. Mirang, 66
173 SCRA 1 [1989] SCRA 141 [1975]. In judicial
Cabral vs. Evangelista foreclosure, the Rules of Court
28 SCRA 1000 [1969] specifically gives the mortgagee the
Ablaza vs. Ignacio, (unrep) right to claim for deficiency in case a
103 Phil. 1151 [1958] deficiency exists (Section 6, Rule 70).
Garrido vs. Tuason While Act No. 3135 governing
24 SCRA 727 [1968] extrajudicial foreclosures of mortgage
Bank of the Philippine Isalnd vs. Olutanga does not give a mortgagee the right to
Lumber Co. 47 Phil. 20 [1924] recover deficiency after the public
Industrial Finance Corporation vs. Ramirez auction sale, neither does it expressly or
77 SCRA 152 [1977] impliedly prohibit such recovery.
This right to recover deficiency had
6. Subject Matter: been categorically resolved in State
FORECLOSURE OF REAL ESTATE MORTGAGE Investment vs. Court of Appeals (217
LAW SCRA 32 [1993]). Ergo, the mortgagee
is entitled to recover the deficiency in
Concept: case the sale proceeds are not sufficient
to cover the debt in extrajudicial
foreclosures.
Saint Louis University COMMERCIAL LAW 426
2012 BAR OPERATIONS

2. The action to recover a deficiency mortgage deed, with interest

after foreclosures prescribes after ten thereon at the rate specified in the
(10) years from the time the right of mortgage and all the costs and
action accrues as provided in Article expenses incurred by the banking
1144(2) of the Civil Code (Development institution from the sale and custody
Bank of the Philippines vs. Tomeldan, of said property less the income
101 SCRA 171 [1980]. derived therefrom. However, the
 Rules on the Right of Redemption: purchased at the auction sale
1. In all cases of extrajudicial concerned whether in a judicial or
sale, the mortgagor may redeem the extrajudicial foreclosure shall have
property at any time within the term the right to enter upon and take
of one year from and after the date possession of such property
of registration of the sale (see immediately after the date of the
Section 6, Act No. 3135; Reyes vs. confirmation of the auction sale and
Tolentino 42 SCRA 365 [1971]). administer the same in accordance
2. In judicial foreclosure of real with law. Any petition in court to
estate mortgage, there is an equity enjoin or restrain the conduct of
of redemption which he can foreclosure proceedings instituted
exercise at any time after service of pursuant to this provision shall be
judgment of foreclosure and within given due course only upon the
the 90-day period and even filing by the petitioner of a bond in
thereafter provided he does so an amount fixed by the court
before the foreclosure sale is conditioned that he will pay all the
confirmed by the court. (Anderson damages which the bank may suffer
vs. Reyes, 54 Phil 944). by the enjoining or the restraint of
Confirmation of the sale of the foreclosure proceedings.
mortgaged real property cuts off all Notwithstanding Act 3135,
the rights or interests of the juridical persons whose property is
mortgagor and of the mortgagee being sold pursuant to an
and persons holding under him, and extrajudicial foreclosure, shall have
with them the equity of redemption the right to redeem the property in
in the property and vests them in the accordance with this provision until,
purchaser. Confirmation retroacts but not after, the registration of the
to the date of the sale. It is a final certificate of foreclosure sale with
order, not interlocutory. (Ocampo the applicable Register of Deeds
vs. Domalanta, 20 SRCA 1136 which in no case shall be more than
[1967]; Binalbagan Estate, Inc. vs. three months after foreclosure,
Gatuslao, 76 Phil. 128 [1946]; Villar whichever is earlier. Owners of
vs. Javier, 97 Phil 604 [1955]; property that has been sold in a
Lonzome vs. Amores, 134 SCRA foreclosure sale prior to the
380 [1985]. effectivity of this Act shall retain their
redemption rights until their
Exception: Right of expiration.
Redemption by Reason of
Foreclosure of Mortgages because SUMMARY OF THE RULES:
of the General Banking Laws 1. if the real estate mortgage has been
In the event of foreclosure, foreclosed extrajudicially by a bank, the
whether judicially or extrajudicially, owner, if an individual, has the right of
of any mortgage on real estate redemption of one year from the registration
which is security for any loan or of the certificate of sale;
other credit accommodation 2. if a real estate mortgage had been foreclosed
granted, the mortgagor or debtor extrajudicially by a bank, the owner, if a
whose real property has been sold juridical person, has a right of redemption
for the full or partial payment of his until, but not after the registration of the
obligation shall have the right within certificate of foreclosure sale with the
one year after the sale of the real applicable Register of Deeds which in no
estate, to redeem the property by case shall be more than threee (3) months
paying the amount due under the after foreclosure, whichever is earlier;
 Saint Louis University COMMERCIAL LAW 427
2012 BAR OPERATIONS

3. if a real estate mortgage had been foreclosed

judicially by a bank, the owner, whether an
individual or a corporation, has the right of
redemption of one year from registration of
the certificate of sale.(Sec. 47, GBL)

Years asked:
2006, 2005, 2002, 1999, 1996, 1991, 1987,
1979, 1978

Applicable law:
Article 1144(2) of the Civil Code
Section 119, C.A. No. 141 [Public Land
Law], as amended
Rule 68, 70 (Sec. 6) of the Rules of Court.
Sec. 78, Republic Act No. 337
Common Wealth Act No. 459
Republic Act No. 1300
Republic Act No. 2670
Sec. 6, Foreclosure of Real Estate Mortgage
Law (Act No. 3135 in relation to R.A. No. 8791
Sec. 47, General banking Laws of 2000
Illustrative cases:
Development Bank of the Philippines vs.
Tomeldan 101 SCRA 171
[1980].
Reyes vs. Tolentino
42 SCRA 365
[1971]
Anderson vs. Reyes
54 Phil 944
Ocampo vs. Domalanta
20 SCRA 1136 [1967]
Binalbagan Estate, Inc. vs. Gatuslao
76 Phil. 128 [1946]
Villar vs. Javier
97 Phil 604 [1955]
Lonzome vs. Amores
134 SCRA 380
[1985].
State Investment vs. Court of Appeals
217 SCRA 32 [1993]
Development Bank of the Philippines vs.
Mirang, 66 SCRA 141 [1975]
Tupas vs. Damasco
132 SCRA 593
[1984]
Jose vs. Blue

42
SCRA 351, [1971]
Gorospe vs. Santos
69 SCRA 191
[1976]
General vs. Barrameda
60 SCRA 162 [1976]. Conzales vs. Phil.
National Bank, 48 Phil. 824
[1926])