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Banks; Single Borrower’s Limit; not release any part of the collateral by
Collateral Security (2008) the amount of reduction.

No.XIX. Industry Bank, which has a net

The collateral is a single commercial lot
worth of P1 Billion, extended a loan to
in the Fort, covered by a single title and
Celestial Properties Inc. amounting to P270
beings essentially indivisible in
Million. The loan was secured by a
character, the mortgage cannot be
mortgage over a vast commercial lot in the
“partially released.” Besides, since a real
Fort Bonifacio Global City, appraised at
estate mortgage cannot be “partially
P350 Million. After audit, the Banko Sentral
released.” Besides, since a real estate
ng Pilipinas gave notice that the loan to
mortgage is merely a collateral contract,
Celestial Properties exceeded the single
it can be enforced only to the amount of
borrower’s limit of 25% of the bank’s net
the loan; and the moment the loan
worth under a recent BSP Circular. In light
exposure is reduced, then automatically,
of other previous similar violations of the
reduction of the collateral coverage of
credit limit requirement, the BSP advised
the real estate mortgage follows.
Industry Bank to reduce the amount of the
loan to Celestial Properties under pain of
severe sanctions. When Industry Bank
informed Celestial Properties that it
intended to reduce the loan by P50 Million, Banks; Types of Banks (2010)
Celestial Properties countered that the
No.I. Briefly describe the ff. types of banks;
bank should first release a part of the
(2% each)
collateral worth P50 Million. Industry Bank
rejected the counter-proposal, and referred
(A) Universal bank
the matter to you as counsel. How would
SUGGESTED ANSWER:
you advise Industry Bank to proceed, with
A universal bank is a commercial bank
its best interests in mind? (5%)
with 2 additional powers, namely: (1) the
SUGGESTED ANSWER:
power of an investment house and (2)
With a net worth of P1.0 Billion, the the power to invest in non-allied
maximum loan exposure of the bank to enterprises (Section 23, Rep. Act No.
Celestial Properties can reach up to 8791, “The General Banking Law of
P250.0 Million. The bank should proceed 2000”).
with to reduce the loan of Celestial
properties by P20.0 Million, but should (B) Commercial bank

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SUGGESTED ANSWER: enterprises and individuals (Section 3

A commercial bank is a bank that can: (a), Rep. Act No. 7906 “Thrift Banks Act
(1) accept drafts; (2) issue letters of of 1995”).
credit; (3) discount and negotiate
promissory notes, drafts, bills of (D) Rural bank
exchange, and other evidence of debt; (4) SUGGESTED ANSWER:
accept or create demand deposits; (5) A rural bank is one established to
receive other types of deposits, as well provide credit facilities to farmers and
as deposit substitutes; (6) buy and sell merchants or their cooperatives and, in
foreign exchange, as well as gold or general to the people of the rural
silver bullion; (7) acquire marketable communities (Section 3, Rep. Act No.
bonds and other debts securities; and (8) 7353, “The Rural Banks Act of 1992”).
extend credit, subject to such rules
promulgated by the Monetary Board (E) Cooperative bank
(Section 29, Rep. Act No. 8791, “The SUGGESTED ANSWER:
General Banking Law of 2000”). A cooperative bank is organized under
the Cooperative Code to provide
(C) Thrift bank financial and credit services to
SUGGESTED ANSWER: cooperatives. It may perform any or all
A thrift bank is one established as a the services offered by a rural bank,
savings and mortgage bank, a stock including the operation of a Foreign
savings and loan association, or a private Currency Deposit Unit subject to certain
development bank, for the purpose of: (1) conditions (Section 100, Rep. Act
accumulating the savings of depositors No.6938, “The Cooperative Code of the
and investing them in outlets Philippines”).
determined by the Monetary Board as
necessary in the furtherance of national
economic objectives; (2) providing short- Truth in Lending Act (2009)
term working capital, medium and long-
No.XI. (A) A loan agreement which provides
term financing, to business engaged in
that the debtor shall pay interest at the rate
agriculture, services, industry and
determined by the bank’s branch manager
housing; and (3) providing diversified
violates the disclosure requirement of the
financial and allied services for its
Truth in Lending Act.
chosen market and constituencies
SUGGESTED ANSWER:
specially for small and medium

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True. This contrary to the duty of the Manila outlet constitutes only one-third
creditor to disclose in detail the of its total business and, therefore, it
interests, charges and other figures would not conducted by Venezia.
indicating in detail the cost of the credit Moreover, the requirements of the Bulk
granted to the debtor (United Coconut Sales Law reflected in Sections 3,4,5,
Planters Bank v. Beluso, 530 SCRA 567 and 9, by the express language of said
(2007)). provisions, apply only to the first type of
bulk sales, i.e., to any sale, transfer,
mortgage or assignment of a stock of
goods, wares, merchandise, provisions or
Bulk Sales Law
materials otherwise than in the ordinary
Bulk Sales Law; Covered Transactions course of trade and the regular
(2010) prosecution of business of the vendor,
mortgagor, transferor, or assignor, and
No.V. Venezia is a famous international
not to the second type (as in the sale
fashion chain with outlets in Makati,
described in the problem) or the third
Ortigas, and Manila. It has complied with
type (i.e., sale, etc. of all or substantially
the minimum capitalization required under
all of the fixtures and equipment used in
the Retail Trade Nationalization Act and
and about the business). As the Bulk
carries on retail business worth more than
Sales Law is penal in nature, it should be
S3 million for each of its outlets. As its
interpreted strictly against the State
Manila outlet is not doing very well, it
(People v. Wong Szu Tung, CA G.R. No.
decides to sell all of its business there
9776-R, March 26, 1954;50 O.G. 4867;
consisting of remaining inventory, furniture
Section 2 of the Bulk Sales Law).
and fixtures and other assets to its
competitor.
(B) If instead of selling its Manila outlet,
Venezia merely mortgages its assets there,
(A) Venezia’s Manila outlet constitutes one-
would it need to comply with the
third of its total business. Should it comply
requirements of the Bulk Sales Law? (2%)
with the requirements of the Bulk Sales
Law? Why or why not? (2%)
SUGGESTED ANSWERS:
For the same reasons stated in the
SUGGESTED ANSWER:
answer to A above, Venezia need not
Venezia need not comply with the
comply with the requirements of the
requirements of the Bulk Sales Law as its
Bulk Sales Law. The second type of bulk

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sales also includes the mortgage of all or The receiver seeks your advice on whether
substantially all of the business of the the Bulk Sales law will apply to either, or
mortgagor (Section 2, Bulk Sales Law). both, options. What will your advice be?
Explain (4%)
(C) What are the legal consequences of a SUGGESTED ANSWER:
failure to comply with the requirements of I will advice the receiver that the Bulk
the Bulk Sales law? (2%) Sales law does not apply to both options.
Sect. 8 of the Bulk Sales Law expressly
SUGGESTED ANSWER: provides that it will not apply executors,
Failure to comply with the requirements administrators, receivers, and assignees
of the Bulk Sales Law renders the Sale, in insolvency, or public officers, acting
transfer, mortgage, or assignment under judicial process. In this case, the
fraudulent and void (Section 4, Bulk receiver is acting under judicial process.
Sales Law), and makes any person found
guilty of violating any provision of the
Bulk Sales Law punishable by 5 years, or
a fine in an amount not exceeding P5,
Bulk Sales Law; Covered Transactions
000, or both such imprisonment and fine
(2007)
in the discretion of the court (Section
11, Bulk Sales Law). No.XII. Seeking to Streamline its operations
and to ball out its losing ventures, the
stockholders of X corporation unanimously
Bulk Sales Law; Covered Transactions adopted a proposal to sell substantially all
(2009) of the machineries and equipment used in
and about its manufacturing business and
No.XIV. XXX Corporation (XXX) and its
to sink the proceeds of the sale for the
sister company, YYY Corporation (YYY), are
expansion of its cargo transport
both under judicial receivership. The
services.(5%)
receiver has the option to sell or
substantially all of the properties of YYY to (A) Would the transaction be covered by the
XX, or simply merges the two Corporations. provisions of eh Bulk Sales Law?
Under either option, the requirements
SUGGESTED ANSWER:
under the Corporation Code have to be
complied with. No. the transaction is not covered by the
provisions of the Bulk sales law, Bulk

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sales law applies only to retail Bulk Sales Law; Validity (2009)
merchants, traders and dealers. It does
No.I. (C) Even if the seller and the buyer in
not apply to manufacturers. X
a sale in bulk violate the Bulk Sales Law,
Corporation is engaged in the
the sale would still be valid.
manufacturing business (Development
SUGGESTED ANSWER:
bank of the Phil. V. Judge of the
False. When the Bulk Sales Law is
Regional Trial Court of manial86 O.G.
violated, the sale is null and void. When
1137 (1987)).
the provisions of the said law have not
ALTERNATIVE ANSWER: been complied with, the sale is
considered as being “fraudulent and
YES, the transaction is covered by the
void” and even when coupled with
Bulk Sales Law because it involves the
delivery, the title over the goods does
sale of substantially all the equipment
not transfer to the buyer. However, the
used in the business of X corporation
civil liabilities arising from the
(Sec. 2 Bulk sales law)
transaction remain enforceable between
the parties thereto.

(B) How would X Corporation effect a valid

sale?
Corporation Law
SUGGESTED ANSWER:
BOD; Conflict of Interest; Ratification
To effect a valid sale. X corporation (2008)
must prepare an affidavit stating the
names of all its creditors, their No.XII. Pedro was 70% of the subscribed

addresses, the amount of their credits capital stock of a company which owns an

and their maturities. X Corporation office building. Paolo and Juan own the

should give the affidavit to the buyer remaining stock equally between them.

who , in turn, should furnish a copy to Paolo also owns a security agency, a

each creditor and notify the creditors of janitorial company and a catering business.

the proposed bulk sale to enable them to In behalf of the office building company,

protect their interest. Paolo engaged his companies to render

their services to the office building. Are the
service contracts valid? Explain. (4%)
SUGGESTED ANSWER:

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The contracts of Paolo, who owns 15% of full disclosure of the adverse interest of
the Outstanding Capital Stock of the Paolo to Pedro.
office building company is concerned if
they were not approved by the Board of
Directors and Paolo was not designated BOD; Qualifications (2012)
to execute them on behalf of said
company. No.VI. X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino
On the other hand, if the contracts were
residing in Quezon City, Philippines. Z is a
duly approved by the Board of Directors
resident alien residing in Makati City. GGG
of the office building company with
Corporation is a domestic corporation -
Paolo duly designated as company
40% owned by foreigners and 60% owned
representative, they would nevertheless
by Filipinos, with T as authorized
be voided at the option of the company.
representative. CCC Corporation is a
Under Sec. 32 of the Corporation Code.
foreign corporation registered with the
“A contract of the corporation with one
Philippine Securities and Exchange
or more of its directors or trustees or
Commission. KKK Corporation is a
officers is voidable at the option of such
domestic corporation (100%) Filipino
corporation, unless all the following
owned. S is a Filipino, 16 years of age, arid
conditions are present,” (a) if Paolo as a
the daughter of Y.
director in the board meeting in which
the contracts were approved was not (A) Who can be incorporators? Who can be
necessary to constitute a quorum for subscribers? (2%)
such meeting; (b) Paolo’s vote at such
meeting was not necessary for the SUGGESTED ANSWER:
approval of the contracts; (c) Each of the
contract are fair and reasonable under X,Y,Z and T could all be incorporators

the circumstances. and subscribers. Note, however, that

Sec.10 of the Corporation Code requires

If condition (a) or (b) is absent, Sec, 32 that there must be at least five but not

requires that the contracts must be more than fifteen incorporators (who

ratified by the shareholders representing must all be natural persons) and that a

at least two-thirds (2/3) of outstanding majority of the incorporators must be

capital stock, provided that there was residents of the Philippines. S, being a
minor, could neither be an incorporator
nor a subscriber. GGG Corporation, CCC

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Corporation, and KKK Corporation, CCC requirement under the law governing the
Corporation, and KKK Corporation could business of the corporation) but not GGG
not be incorporators as they are not Corporation, CCC Corporation, and KKK
natural persons. However, they could be Corporation as they are not natural
subscribers. persons. However, the aforementioned
corporations could have their respective
(B) What are the differences between an representatives nominated and possibly
incorporator and a subscriber, if there are elected as directors by the stockholders.
any? (2%) Each director must own at least one
share of the capital stock of the
SUGGESTED ANSWER:
corporation (Sec.23, Corporation Code).

Some of the differences are as follows:

(D) Who are qualified to act as Treasurer of
first, all the incorporators are required
the company? (2%)
to sign and acknowledge the Articles of
Incorporation while the subscribers, as SUGGESTED ANSWER:
such, are not subject to the same
requirement; second, the incorporators The Corporation Code does not impose
could be either natural or juridical any nationality or residency requirement
persons; and third, the number of in respect of the Treasurer. Any such
incorporators cannot exceed fifteen requirement or any other reasonable
while the number of subscribers could be requirement may be adopted by the
more than fifteen (subject to corporation and reflected in its by-laws,
compliance, in the appropriate cases, or required by the law(s) governing the
with the requirements of the Securities business of the corporation or a law of
Regulation Code). general application (e.g., the Anti-
Dummy Law which applies to all
(C) Who are qualified to become members of nationalized businesses). Accordingly,
the board of directors of the corporation? anybody with the qualifications required
(2%) under the by-laws of the corporation or
under the law(s) governing the business
SUGGESTED ANSWER:
of the corporation, could be elected
Treasurer by the Board of Directors.
X,Y,Z and T could be directors (subject
Note, however, that the Treasurer could
to the residency requirement mentioned
not be the President at the same time
in (a) above and any nationality
(Sec. 25, Corporation Code).

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(E) Who can be appointed Corporate Corporation automatically dissolve or

Secretary? (2%) terminate the corporate existence of AAA
Corporation? Explain your answer. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWERS:
The Secretary is required to be both a
resident and a citizen of the Philippines No, the sale of all the assets and
(Sec. 10, Corporation Code). liabilities of AAA Corporation to BBB
Banking Corporation will not result in
[Note: The problem does not state what kind the automatic dissolution of termination
of business the corporation would engaged of the existence of the former. A
in. Neither does it state whether X,Y,Z and T decision to dissolve AAA Corporation or
are all of legal age and otherwise have the to terminate its corporate existence
capacity to enter into contracts. Accordingly, would require a separate approval by a
the suggested answer set out below assume majority of the Board of Directors of AAA
that the corporation would not be engaging Corporation and its stockholders holding
in a nationalized activity and that X,Y,Z and at least two thirds of the total
T are all of legal age and otherwise have the outstanding capital stock, as well as the
capacity to enter into contracts.] separate approval by the Monetary
Board.

Corporation; Dissolution (2012) (B) What are the legal requirements in order
that a corporation may be dissolved? (5%)
No.X. AAA Corporation is a bank. The
operations of AAA Corporation as a bank SUGGESTED ANSWERS:

was not doing well. So, to avert any bank

A corporation may be dissolved
run, AAA Corporation, with the approval of
voluntarily under Section 118 (where no
the Monetary Board, sold all its assets and
creditors are affected) or under Section
liabilities to BBB Banking Corporation
119 (where creditors are affected), or by
which includes all deposit accounts. In
shortening of the corporate term under
effect then, BBB Corporation will service all
Section 120, or involuntarily by the SEC
deposits of all depositors of AAA
under Section 122, all of the Corporation
Corporation.
Code. Dissolution under Section 118,119

(A) Will the sale of all assets and liabilities and 120 require the same corporate

of AAA Corporation to BBB Banking approvals stated in (a) above.

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Note that the SEC also has the authority (B) May the composition of the board of
under Section 6 of PD 902-A to revoke directors of the National Power Corporation
the certificate of registration of a (NPC) be validly reduced to three (3)?
corporation upon any of the grounds Explain your answer fully. (2%)
provided by law, including the SUGGESTED ANSWER:
aforementioned Section 6-A
The NPC Board may be reduced to only
three (3) members, but this would have
to be affected by legislative amendment
of its charter. The National Power

Corporation; Formation; Enactment of a Corporation (NPC is a chartered

Law (2008) government corporation, not governed

by the general provisions of the
No.XI. (A) Since February 8, 1935, the
Corporation Code which requires that
legislature has not passed even a single law
Boards of Directors of private
creating a private corporation. What
corporations shall not have less than 5
provision of the Constitution precludes the
members. The provisions of the
passage of such a law? (3%)
Corporation Code are applicable to
SUGGESTED ANSWER:
government corporations only in a

Under Sec. 16, Art. XII of the 1987 suppletory manner.

Constitution, Congress cannot, except

by general law, provide for the
formation, organization, or regulation of
private corporations. It is only
Corporation; Sole Proprietorship (2010)
government owned or controlled
corporations that may be created or No.IX. Your client Dianne approaches you
established through special charters. for legal advice on putting up a medium-
Consequently, it has been held that a sized restaurant business that will
private corporation created pursuant to specialize in a novel type of cuisine. As
a special law is a nullity, and such Dianne feels that the business is a little
special law is void for being in violation risky, she wonders whether she should use
of the Constitution (NDC v. Phil. a corporation as the business vehicle, or
Veterans Bank, G.R. Nos. 84132-33, 10 just run it as a single proprietorship. She
December 1990). already has an existing corporation that is
producing meat products profitably and is

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also considering the alternative of simply capital than if she were to form a
setting up the restaurant as a branch office separate corporation. However, all the
of the existing corporation. assets of the existing corporation will be
liable for the debts and losses of the
(A) Briefly explain to your client what you restaurant business.
see as the legal advantages and
disadvantages of using a separate (B) If you advise your client to use a
corporation, a single proprietorship, or a corporation, what officer positions must the
branch of an existing corporation for the corporation at least have?(2%)
proposed restaurant business. (3%) SUGGESTED ANSWER:
SUGGESTED ANSWER: The corporation must have at least five
If Dianne will set up a separate directors (Section 14 of the Corporation
corporation, her liability for its Code). It Must also have a president, a
obligations and losses will be limited to treasure, and secretary (Section 25 of
the amount of her subscription in the the Corporation Code).
absence of showing that there is a
ground to disregard its separate juridical (C) What particular qualifications, if any,
personality. If she were to operate a are these officers legally required to possess
single proprietorship, her liability for its under the Corporation Code? (2%)
debts and losses will be unlimited. SUGGESTED ANSWER:
Every director must own at least one
The formation and the operation of a share of the capital stock of the
corporation require a great deal of paper corporation, which must be recorded in
work and record-keeping. This is not the his name on the books of the
situation in the case of a single corporation, and a majority of the
proprietorship. directors must be residents of the
Philippines (Section 25 of the
If Dianne will form a separate Corporation Code).
corporation, it can raise more funds for
the business than if she were to set up a The president must also be a director.
single proprietorship. The secretary must be a resident and
citizen of the Philippines (Section 25 of
If she were to set up the restaurant as a the Corporation Code).
branch office an existing corporation,
the corporation will have more funds as

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Derivative Suit; Expiration of Term SUGGESTED ANSWER:

(2013) The remaining directors cannot elect
new directors to fill in the two
No.VIII. In the November 2010 stockholders
vacancies. The board of directors may
meeting of Greenville Corporation, eight (8)
fill up vacancy only if the ground is not
directors were elected to the board. The
due to expiration of term, removal or
directors assumed their posts in January
increase in the number of board seats. In
2011. Since no stockholders meeting was
this case, the term of the two directors
held in November 2011, the eight directors
expired after one year. They hold-over
served in a holdover capacity and thus
period is not part of their term. The
continued discharging their powers.
vacancies should be filled up by election
by the stockholders (Valle Verde Country
In June 2012, two (2) of Greenville
Club, Inc. v. Africa, 598 SCRA 202,
Corporation’s directors - Director A and
2009).
Director B – resigned from the board.
Relying on Section 29 of the Corporation
The derivative suit was improper. In a
Code, the remaining six (6) directors elected
derivative suit, the corporation, not the
two (2) new directors to fill in the vacancy
individual stockholder, must be the
caused by the resignation of Directors A
aggrieved party and that the stockholder
and B.
is suing on behalf of the corporation.
What stockholder X is asserting is his
Stockholder X questioned the election of the
individual right as a stockholder to elect
new directors, initially, through a letter-
the two directors. The case partakes
complaint addressed to the board, and later
more of an election contest under the
(when his letter-complaint went unheeded),
rules on intra-corporate controversy
through a derivative suit filed with the
(Legaspi Towers 300, Inc. v. Muer, 673
court. He claimed that he vacancy in the
SCRA 453, 2012).
board should be filled up by the vote of the
stockholders of Greenville Corporation.
Greenville Corporation’s directors defended
the legality of their action, claiming as well
that Stockholder X’s derivative suit was Derivative Suit; Jurisdiction (2009)
improper.
No.II. Atlantis Realty Corporation (ARC), a
local firm engaged in real estate
Rule on the issues raised. (8%)
development, plans to sell one of its prime

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assets—a three-hectare land valued at why and where would such a suit be filed?
about P100-million. For this purpose, the If not, why not? (2%)
board of directors of ARC unanimously SUGGESTED ANSWER:
passed a resolution approving the sale of Yes, such suit would constitute an entra-
the property for P75-million to Shangrila corporate dispute as it is a suit initiated
Real Estate Ventures (SREV) a rival realty by a stockholder against other
firm. The resolution also called for a special stockholders who are officers and
stockholders meeting at which the proposed directors of the same corporation (P.D.
sale would be up for ratification. No. 902-A, Sec. 5(b)). Such suit should be
filed in the Regional Trial Court
Atty. Edric, a stockholder who owns only designated by the Supreme Court as a
one (1) share in ARC, wants to stop the corporate or commercial court.
sale. He then commences a derivative suit
for and in behalf of the corporation, to (C) Will the suit prosper? Why or why not?
enjoin the board of directors and the (3%)
stockholders from approving the sale. SUGGESTED ANSWER:
No. The suit will not prosper. There is no
(A) Can Atty. Edric, who owns only one requisite demand on the officers and
share in the company, initiate a derivative directors concerned. There is, therefore,
suit? Why or why not? (2%) no exhaustion of administrative
SUGGESTED ANSWER remedies.
Yes, Atty. Edric can initiate a derivative
suit, otherwise known as the minority
stockholders’ suit. It is allowed by law to
enable the minority stockholder/s to
Dividends; Declaration of Dividends
protect the interest of the corporation
(2009)
against illegal or disadvantageous act/s
of its officers or directors, the people No.I. (D) Dividends on shares of stocks can
who are supposed to protect the only be declared out of unrestricted
corporation (Pascual v. Del Zaz Orozco, retained earnings of the corporation.
19 Phil. 82 (1991)). SUGGESTED ANSWER:
True. Dividends on shares of stock of a
(B) If such a suit is commenced, would it corporation, whether cash dividend or
constitute an intra-corporate dispute? If so, stock dividend, can be validly declared
only out of unrestricted retained

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earnings (Sec. 43, Corporation Code). It No. the suit will not prosper. Paterno
cannot be declared out of the capital. cannot compel XYZ Corporation to pay
Otherwise, such declaration of dividend dividends, which have to be declared by
will violate the trust fund doctrine. the Board of Directors and the latter
cannot do so, unless there are sufficient
unrestricted retained earnings.
Otherwise, the corporation will be forced
to use its capital to make said payments
Dividends; Declaration of Dividends
in violation of the trust fund doctrine.
(2009)
Likewise, redemption of shares cannot

No.XVI. On September 15, 2007, XYZ be compelled. While the certificate allws

Corporation issued to Paterno eight such redemption, the option and

hundred preferred shares with the ff. terms: discretion to do so are clearly vested in
the corporation (Republic Planters Bank

―The Preferred Shares shall have the v. Agana, 269 SCRA 1 [1997]).

ff. rights, preferences, qualifications, and

limitations, to wit:

(1) The right to receive a quarterly

dividend of One per Centum cumulative and
participating; Dividends; Declaration of Dividends
(2) These shares may be redeemed, (2008)
by drawing of lots, at any time after two
No.XIV. Ace Cruz subscribed to 100,000
years from date of issue, at the option of the
shares of stock of JP Development
Corporation; xxx
Corporation, which ahs a par value of P1
per share. He paid P25,000 and promised
Today, Paterno sues XYZ Corporation for
to pay the balance before December 31,
specific performance, for the payment of
2008. JP Development Corporation declared
dividends on, and to compel the redemption
a cash dividend on October 15, 2008,
of , the preferred shares, under the terms
payable on December 1, 2008
and conditions provided in the stock
certificates. Will the suit prosper? Explain.
(A) For how many shares is Ace Cruz
(3%)
entitled to be paid cash dividends? Expalin.
SUGGESTED ANSWER:
(2%)

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SUGGESTED ANSWER: (B) On December 1, 2008, can Ace Cruz

compel JP Development Corporation to
Ace Cruz is entitled to be paid each cash
issue to him the stock certificate
dividends to the entire 100,1000 shares
corresponding to the P25,000 paid by him?
subscribed, and not only to the paid-up
(2%)
portion thereof. The legal character of
SUGGESTED ANSWER:
being a “stockholder,” and therefore the
entitlement to all the rights of a No, Ace Cruz cannot compel JP
stockholder, are determined from the Development Corporation to issue him
time of “subscription” and not from the stock certificate for the P 25,000.00.
payment of the subscription. No Certificate of Stock can be issued to a
subscriber until the full amount of his
Under Sec. 43 of the Corporation Code, subscription together with interest and
“a stock corporation may declare expense, if any is due, has been paid. A
dividends out of the unrestricted Subscription is one, entire and
retained earnings which shall be payable indivisible whole contract which cannot
in cash, in property, or in stock to all be divided into portions. The
stock-holders on the basis of outstanding stockholder is not entitled to a
stock held by them” on not on the basis Certificate of Stock until he has
on what stocks have been paid. remitted the full amount of his
subscription (Sec. 64, Corporation Code;
ALTERNATIVE ANSWER: SEC Opinion [January 6, 1989]).
Under Sec. 71, only when a stockholder
has been declared delinquent do his
rights as stockholder become suspended. Liabilities; BOD; Corporate Acts (2012)
It means therefore that a stockholder
who has not paid the full subscription, No.IX. A, B, C, D, E are all duly elected
provided he is not declared delinquent members of the Board of Directors of XYZ
has complete exercise of all of his rights, Corporation. F, the general manager,
including the right to receive dividends. entered into a supply contract with an
But any cash dividends due on American firm. The contract was duly
delinquent stock shall first be applied to approved by the Board of Directors.
the unpaid balance of the subscription However, with the knowledge and consent
(Sec. 43, Corporation Code). of F, no deliveries were made to the
American firm. As a result of the non-

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delivery of the promised supplies, the consented to the non-delivery of the

American firm incurred damages. The promised supplies contrary to the
American firm would like to file a suit for contract that was duly approved by the
damages. Can the American firm sue: Board of Directors. The problem does
indicate any circumstance that would
(A) The members of the Board of Directors excuse or favorably explain the action of
individually, because they approved the F.
transaction? (2%)
(D) Explain the rules on liabilities of a
SUGGESTED ANSWERS: corporation for the act of its corporate
officers and the liabilities of the corporate
No. In approving the transaction, the
officers and Board of Directors of a
directors were not acting their personal
corporation acting in behalf of the
capacities but rather in behalf of XYZ
corporation. (4%)
Corporation exercising the powers of the
corporation and conduction its business SUGGESTED ANSWERS:
(Sec. 23, Corporation Code). The problem
contains no facts that would indicate A corporation would be liable for the acts
that the directors acted otherwise. of its Board of Directors and officers if
the said acts were performed by them in
(B) The corporation? (2%) accordance with powers granted to them
under the Corporation Code, the articles
SUGGESTED ANSWERS:
of incorporation and by-laws of the
corporation, the laws and regulations
Yes. The Board approved the supply
governing the business of, or otherwise
contract and the General Manager
applicable to, the corporation, and, in
entered into the contract, both of them
the case of officers, the resolutions
acting on behalf of the XYZ Corporation.
approved by the Board of Directors.

(C) F, the general manager, personally,

As the directors have a personality
because the non-delivery was with his
separate from that of the corporation,
knowledge and consent? (2%)
they would be personally liable only if

SUGGESTED ANSWERS: they acted wilfully and knowingly vote

for or assent to a patently unlawful act
Yes, F could be sued in his personal of the corporation, or when they are
capacity because he knowingly guilty of gross negligence or bad faith in

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directing the affairs of the corporation, SUGGESTED ANSWER:

or when they acquire any personal or
I would sue Nelson, as the person who
pecuniary interest in conflict with their
owned and controlled Sonnel
duty as directors, which acts result in
Contruction Company, under the
damages to the corporation, its
doctrine of “piercing the veil of
stockholders or other persons, when
corporate fiction.” Although a
they agree to hold themselves personally
corporation has a juridical personality
and solidarily liable with the
separate and distinct from that of its
corporation, or when they are made, by a
stockholders, when the corporation is
specific provision of law, to personally
used merely as an alter ego or controlled
answer for the corporate action. (Sec.
for the benefit of a stockholder, or when
31, Corporation Code).
it is necessary to render justice, then
the courts have the right to pierce the
veil of corporate fiction to hold the
controlling stockholder-officer

Piercing the Corporate Veil (2008) personally liable for the corporate tort or
wrong committed.
No.X. Nelson owned and controlled Sonnel
Construction Company. Acting for the
The contractor should also be held liable,
company, Nelson contracted the
since being an independent contractor it
construction of a building. Without first
is liable for the fault or negligence of its
installing a protective net atop the
people.
sidewalks adjoining the construction site,
the company proceeded with the
(B) If you were the counsel for Sonnel
construction work. One day a heavy piece
Construction, how would you defend your
of lumber fell from the building. It smashed
client? What would be your theory? (2%)
a taxicab which at that time had gone
SUGGESTED ANSWER:
offroad and onto the sidewalk in order to
I would use the theory that the company
avoid traffic. The taxicab passenger died as
cannot be held liable for damages
a result.
because there was no fraud or negligence
(A) Assume that the company had no more
by its officers in undertaking the project
account and property in its name. As
for the construction of the building or
counsel for the heirs of the victim, whom
the selection of a construction company.
will you sue for damages, and what theory
Since a contractor is not an agent of
will you adopt? (3%)

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Sonnel Construction, the latter cannot Stock and Transfer Book (2009)
be held liable for the contractor’s
No.XVIII. (C) What is a stock and transfer
negligence. I would also argue that
book? (1%)
piercing the veil of corporate fiction is a
SUGGESTED ANSWER:
remedy of last resort and cannot be
A Stock and transfer book is a book
availed of without clear evidence
which records all stocks in the name of
showing fraud or disrespect of the
the stockholders alphabetically
separate juridical personality of the
arranged; the installments paid or
corporation. Mere control of equity has
unpaid on all stocks for which
not been considered as sufficient basis
subscription has been made and the date
for piercing the veil.
of payment of any installment, a
statement of every alienation, sale or
(C) Could the heirs hold the taxicab owner transfer of stock made, the date thereof,
and driver liable? Explain. (2%) and by and to whom made; and such
SUGGESTED ANSWER: other entries as the by-laws may
prescribe (Section 74, Corporation Code).
Yes, the taxicab company can be liable
for damages because it failed to comply
with its obligation as a common carrier
to use extraordinary diligence in
transporting the passenger, and because Stockholders; Appraisal Right (2007)
at the time of death of the passenger,
No.VII. In a stockholders meeting, S
the cab driver was violating a traffic
dissented from the corporate act converting
regulation. Under Art. 2185 of Civil
preferred voting shares to non-voting
Code, it is presumed that a person
shares. Thereafter, S submitted his
driving a motor vehicle has been
certificates of stock for notation that his
negligent if at time of mishap he was
shares are dissenting. The next day, S
violating a traffic regulation, such as
transferred his shares are dissenting. The
when he was driving on the wrong side of
next day, S transferred his shares to T to
the road (Mallari, Sr. v. CA, G.R. No.
whom new certificates were issued. Now, T
128607, 31 January 2000).
demands from the corporation the payment
of the value of his shares. (10%)

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(A) What is the meaning of a stockholder’s

appraisal right?
Stockholders; Contractual Relationship;
Quorum (2009)
SUGGESTED ANSWER:
Appraisal right is the right of No.XVIII. Triple a Corporation (Triple A) was
stockholder, who dissents from a incorporated in 1960, with 500 founders’
fundamental or extraordinary corporate shares and 78 common shares as its initial
action, to demand payment of the fair capital stock subscription. However, Triple
value of his shares. It is the right of a A registered its stock and transfer book
stockholder to withdraw from the only in 1978, and recorded merely 33
corporation and demand payment of the common shares as the corporation’s issued
fair value of his shares after dissenting and outstanding shares.
form certain corporate acts involving
fundamental changes in the corporate (A) In 1982, Juancho, the sole heir of one of
structure (Section 81, Corporation the original incorporators filed a petition
Code). with the Securities and Exchange
Commission (SEC) for the registration of his
(B) Can T exercise the right of appraisal? property rights over 120 founder’s shares
Reason briefly? and 12 common shares. The petition was
SUGGESTED ANSWER: supported by a copy of the Articles of
No, T cannot exercise the right of Incorporation indicating the incorporator’s
appraisal in this case. When S initial capital stock subscription. Will the
transferred his shares to T and T was petition be granted? Why or why not? (3%)
issued new stock certificates, the SUGGESTED ANSWER:
appraisal right of S ceased, and T Yes. The articles of Incorporation define
acquired all the rights of a regular the charter of the corporation and the
stockholder. The transfer of shares from contractual relationship between the
S to T constitutes an abandonment of State and the Corporation, the State and
the appraisal right of S. All the T the stockholders, and between the
acquired from the issuance of new stock corporation and the stockholders. Its
certificated was the rights of a regular contents are thus binding upon both the
stockholders (Section 86, Corporation corporation and the stockholders,
Code). conferring on Juancho a clear right to
have his stockholding recorded (Lanuza

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v. Court of Appeals, 454 SCRA 54 with equal par values of P100.00/share.

(2005)). Currently, the issued and outstanding
capital stock of BelPhil consists only of
(B) On May 6, 1992, a special stockholders’ common shares shared between Bayani
meeting was held. At this meeting, what Cruz, a Filipino with 60% of the issued
would have constituted a quorum? Explain. common shares, and Bernard Fleet, a
(3%) Canadian, with 40%.
SUGGESTED ANSWER:
A quorum consists of the majority of the To secure additional working fund, BelPhil
totality of the shares which gave been issued preferred shares to Bernard Fleet
subscribed and issued. Thus the quorum equivalent to the currently outstanding
for such meeting would be 289 shares or common shares. A suit was filed
a majority of the 576 shares issued and questioning the corporate action on the
outstanding as indicated in the article of ground that the foreign equity holdings in
incorporation. This includes the 33 the company would now exceed the 40%
common shares reflected in the stock foreign equity limit allowed under the
and transfer book, there being no Constitution the for public utilities.
mention or showing of any transaction
effected from the time of Triple A’s Rule on the legality of Bernard Fleet’s
incorporation in 1960up to the said current holdings. (8%)
meeting (Section 52 in Relation to SUGGESTED ANSWER:
Section 137 of corporation Code; Lanuza The holding of Bernard Fleet equivalent
v. court of Appeals, 454 SCRA 54 to the outstanding common shares is
(2005)). illegal. His holdings of preferred shares
should not exceed 40%. Since the
constitutional requirement of 60%
Filipino ownership of the capital of
public utilities applies not only to voting
Stockholders; Preferred Shares (2013)
control but also to beneficial ownership

No.X. Bell Philippines, Inc. (BelPhil) is a of the corporation, it should also apply

public utility company, duly incorporated to the preferred shares. Preferred shares

and registered with the Securities and are also entitled to vote in certain

Exchange Commission. Its authorized corporated matters. (Gamboa v. Teves,

capital stock consists of voting common 682 SCRA 397, 2012) The state shall

shares and non-voting preferred shares, develop a self-reliant and independent

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national economy effectively controlled directors; and (c) the corporate officers?
by Filipinos. (Articles II, Sec. 19, 1987 (3%)
Constitution) The effective control here
should be mirrored across the board on (A) the corporation;
all kinds of shares. SUGGESTED ANSWER:
Under Section 45 of the Corporation
Code, no corporation shall possess or
exercise any corporate power except
those conferred by the Code or by its
Trust Fund Doctrine (2007)
articles of incorporation and except such

No.VI. Discuss the trust fund doctrine. (5%) as are necessary or incidental to the

SUGGESTED ANSWER: exercise of the powers so conferred.

The trust fund doctrine means that the When a corporation does an act or

capital stock, properties and other engages in an activity which is outside

assets of a corporation are regarded as of its express, implied or incidental

equity in trust for the payment of powers set out in its articles of

corporate creditors. Stated simply, the incorporation, the act is deemed to be

trust fund doctrine states that all funds ultra vires.

received by the corporation in payment

of the shares of stock shall be held in (B) the board of directors;

trust for the corporate creditors and SUGGESTED ANSWER:

other stockholders of the corporation. When the Board engages in an activity or

Under such doctrine, no fund shall be enters into a contract without the

used to buy back the issued shares of ratificatory vote of the stockholders in

stock except only in instances those instances where the Corporation

specifically allowed by the Corporation Code so Requires such ratificatory vote,

Code (Boman Environmental such as when the corporation is made to

Development Corporation v. Court of invest in another corporation or engage

Appeals, 167 SCRA 540 [1988]). in a business which is not in pursuit of

its primary purpose, the board resolution
not ratified by stockholders owning or
representing at least two-thirds of the
Ultra Vires Acts (2009)
outstanding capital stock would make
When is there an ultra vires act on the part the transaction void, as being ultra
of (a) the corporation; (b) the board of vires.

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to nullify the foreclosure and the

(C) the corporate officers mortgages, raising the following issues:
SUGGESTED ANSWER:
When a corporate officer enters into a (A) The execution of only one Affidavit of
contract on behalf of the corporation Good Faith for both mortgages invalidated
without having been so expressly or the two mortgages; (2%) and
impliedly authorized by the Board of SUGGESTED ANSWER:
Directors, even when the act or contract The execution of only one Affidavit of
falls within the corporation’s express, Good Faith for both mortgages is not a
implied or incidental power, then the ground to nullify the said mortgages and
unauthorized act of the corporate officer the foreclosure thereof. Said mortgages
is deemed to be ultra vires. are valid as between immediate parties
(Lilius v. Manila Railroad Company, 62
Phil. 56 (1935)), although they cannot
bind third parties (Philippine Refining v.
Credit Transaction
Jarque, 61 Phil. 229 (1935)).
Chattel Mortgage; Foreclosure (2009)
(B) The mortgage on the shares of stocks
No.III. Armando, a resident of Manila,
should have been registered in the office of
borrowed P3-million from Bernardo,
the Register of Deeds of Manila where he
offering as security his 500 shares of stock
resides, as well as in the stock and transfer
worth P1.5-million in Xerxes Corporation,
book of Xerxes Corporation. (3%)
and his 2007BMW sedan, valued at P2-
million. The mortgage on the shares of
Rule on the foregoing issues with reasons.
stock was registered in the Office of the
Register of Deeds of Makati City where
SUGGESTED ANSWER:
Xerxes Corporation has its principal office.
The mortgage on the shares of stock
The mortgage on the car was registered in
should be registered in the chattel
the Office of the Register of Deeds of
mortgage registry in the Register of
Manila. Armando executed a single Affidavit
Deeds of Makati City where the
of Good Faith, covering both mortgages.
corporation has its principal office and
also in the Register of Deeds of Manila
Armando defaulted on the payment of his
where the mortgagor resides (Chua Guan
obligation; thus, Bernardo foreclosed on the
v. Samahang Magsasaka, Inc., 62 Phil.
two chattel mortgages. Armando filed suit
472 (1935)). Registration of chattel

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mortgage in the stock and transfer book February 1, 2008, Al obtained another loan
is not required to make the chattel of P10,000 from Bob to be paid on February
mortgage valid. Registration of dealings 15, 2008. He secured this by executing a
in the stock and transfer book under chattel mortgage on a Honda motorcycle.
Section 63 of the Corporation Code On the due date of the first loan Al failed to
applies only to sale or disposition of pay. Bob foreclosed the chattel mortgage
shares, and has no application to but the car was bidded for P6,000 only. Al
mortgages and other forms of also failed to pay the second loan due on
encumbrances (Monserrat v. Ceron, 58 February 15, 2008. Bob filed an action for
Phil. 469 (1933)). collection of sum of money. Al filed a
motion to dismiss claiming that Bob should
(C) Assume that Bernardo extrajudicially first foreclose the mortgage on The Honda
foreclosed on the mortgages, and both the motorcycle before he can file the action for
car and the shares of stocks were sold at sum of money. Decide with reasons. (4%)
public auction. If the proceeds from such SUGGESTED ANSWER:
public sale should be 1-million short of
Bob has the legal right to file a collection
Armando’s total obligation, can Bernardo
suit for a sum of money in lieu of
recover the deficiency? Why or why not?
foreclosing on the chattel mortgage. It
(2%)
has been ruled that a c chattel mortgage
is a security arrangement to support a
SUGGESTED ANSWER:
primary contract (Serra v. Rodriguez,
Yes. Bernardo can recover the
G.R. no. L-25546, 22 April 1974). Since
deficiency. Chattels are given as mere
the chattel mortgage is only a collateral
security, and not as payment or pledge
contract prerogative to choose which of
(CuH ada v. Drilon, 432 SCRA 618
the remedies available to pursue.
(2004)).
However, the filing of the collection suit
constitutes a waiver of the chattel
mortgage (Land Settlement and Dev.
Corp. v. Carlos, 22 SCRA 202, 1968). And

Chattel Mortgage; Foreclosure (2008) even if the collection suit included the
recovery of the P6,000 deficiency on the
No.XVII. On January 1, 2008, Al obtained a
first loan, the same is valid because
loan of P10,000 from Bob to be paid on
unlike in a pledge the lender has the
January 30, 2008, secured by a chattel
legal right to recover the deficiency
mortgage on a Toyota motor car. On

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incurred on the foreclosure of a chattel Yes. X executed a real estate mortgage

mortgage (PAMECA Wood Treatment v. containing a “blanket mortgage clause.”
CA, G.R. No. 106435, 14 July 1999). Mortgages given to secure future
advancements are valid and legal
contracts, and the amounts named as
consideration in said contracts do not
limit the amount for which the mortgage
Mortgage; Extrajudicial Foreclosure;
may stand as security if from the four
Blanket Mortgage & Damage Clause
corners of the instrument the intent to
(2012)
secure future and other indebtedness
can be gathered. (Prudential Bank v.
No.VIII. X obtained a Php10Million loan
Alviar, G.R. No. 150197, 28 July 2005)
from BBB Banking Corporation. The loan is
secured by Real Estate Mortgage on his
(B) What is the meaning of a "dragnet
vacation house in Tagaytay City. The
clause" in a Deed of Real Estate Mortgage?
original Deed of Real Estate Mortgage for
Under what circumstances will the "dragnet
the Php10Million was duly registered. The
clause" be applicable? ( 5%)
Deed of Real Estate Mortgage also provides
that "The mortgagor also agrees that this SUGGESTED ANSWERS:
mortgage will secure the payment of
additional loans or credit accommodations Generally, a dragnet clause is a clause in
that may be granted by the mortgagee ... " a deed of real estate mortgage stating
Subsequently, because he needed more that the mortgage secures all the loans
funds, he obtained another Php5Million and advances that the mortgagor may at
loan. On due dates of both loans, X failed to any time owe to the mortgagee. The
pay the Php5Million but fully paid the word “dragnet” is a reference to a net
Php10Million. BBB Banking Corporation drawn through a river or across ground
instituted extrajudicial foreclosure to trap fish or game. It is also known in
proceedings. American jurisprudence as a “blanket
mortgage clause” or an “anaconda
(A) Will the extrajudicial foreclosure prosper clause.” A mortgage with a dragnet
considering that the additional Php5Million clause enables the parties to provide
was not covered by the registration? (5%) continuous dealings, the nature or
extent of which may not be known or
SUGGESTED ANSWERS:
anticipated at the time, and they avoid
the expense and inconvenience of

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executing a new security on each new Mortgage; Foreclosure (2012)

transaction. It operates as a convenience
and accommodation to the borrower as it No.VII. X obtained a loan for Php50Million

makes available additional funds to him from SSS Bank. The collateral is his

without his having to execute additional vacation house in Baguio City under a real

security documents, thereby saving estate mortgage. X needed more funds for

time, travel, cost of extra legal services, his business so he again borrowed another

recording fees, etc. (Prudential Bank v. Php10Million, this time from BBB Bank,

Alviar, id.) another bank, using the same collateral.

The loan secured from SSS Bank fell due
The “dragnet clause” may not apply to and X defaulted.
other loans extended by the mortgagee
to the mortgagor for which other (A) If SSS Bank forecloses the real estate

securities were given. In the case of mortgage, what rights, if any, are left with

Prudential Bank v. Alviar, the Supreme 888 Bank as mo1igagee also? (2%)

Court adopted the “reliance on the

SUGGESTED ANSWER:
security test” to the effect that “when
the mortgagor takes another loan [from BBB Bank, as junior mortgagee, would
the mortgage] for which another security have a right to redeem the foreclosed
was given, it could not be inferred that property, together with X, his successors

such loan was made in reliance solely on in interest, any judicial or judgement
the original security with the “dragnet creditor of X, or any other person or
clause,” but, rather, on the new security entity having a lien on the vacation
given.” This means that the existence of house subsequent to the real estate
the new security must be respected and mortgage in favour of SSS Bank (i.e.,
the foreclosure of the old security should other junior mortgagees, if any)(Sec. 6,
only be for the other loans not Act 3135)

separately collateralized and for any

(B) If the value of the Baguio property is
amount not covered by the new security
less than the amount of loan, what would
for the new loan.
be the recourse of SSS Bank? BBB Bank?
(2%)

SUGGESTED ANSWER:

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In case of a deficiency, SSS bank could If X defaulted in respect of his loan from
file suit to claim for the deficiency. BBB BBB Bank but fully paid his loan from
Bank could file an ordinary action to SSS Bank, BBB Bank could now foreclose
collect its loan from X. if it does so, it the mortgaged property as it would be
would be deemed to have waived its the only remaining mortgagee of the
mortgage lien. If the judgement in the same.
action to collect is favorable to BBB
Bank, and it becomes final and (E) Does X have any legal remedy after the

executory , BBB Bank could enforce the foreclosure in the event that later on he has

said judgement by execution. It could the money to pay for the loan? (1%)

even levy execution execution on the

SUGGESTED ANSWER:
same mortgaged property, but it would
not have priority over the latter. (Caltex
Yes, X could redeem the property within
Philippines v. IAC, et al., G.R. No. 74730,
one (1) year from the date of registration
August 25,1989)
of the sheriff’s certificate of foreclosure
sale.
(C) If the value of the property is more that
the amount of the loan, who will benefit
(F) If SSS Bank and BBB Bank abandon
from the excess value of the property? (2%)
their rights under the real estate mortgage,
is there any legal recourse available to
SUGGESTED ANSWER:
them? (1%)

If the value of the property is more that

SUGGESTED ANSWER:
the amount of the loan, the excess could
benefit and be claimed by BBB Bank, any
SSS Bank and BBB Bank could each file
judicial or judgement creditor of X, any
an ordinary action to collect its loan
other junior mortgagee, and X.
from X.

(D) If X defaulted with its loan in favor of

BBB Bank but fully paid his loan with SSS
Bank, can BBB Bank foreclose the real Mortgage; Foreclosure (2010)

mortgage executed in its favor? (2%)

No.III. Ozamis Paper Corporation secured
loans from ABC Universal Bank in the
SUGGESTED ANSWER:
aggregate principal amount of P100 million,
evidenced by several promissory notes, and

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secured by a continuing guaranty of its and SA v. American Realty Corporation,

principal stockholder Menandro Marquez; a 321 SCRA 659(1999)).
pledge of Marquez’s shares in the
corporation valued at P45 million; and a (C) Can the bank foreclose on the pledged
real estate mortgage over certain parcels of shares of Marquez and recover the
land owned by Marquez. deficiency from the corporation? Explain.
(2%)
The corporation defaulted and the bank SUGGESTED ANSWER:
extra-judicially foreclosed on the real estate If the bank forecloses the pledge, it
mortgage. The bank which was the sole cannot recover the deficiency because
bidder for P75 million, won the award. the foreclosure extinguishes the
principal obligation, whether or not the
(A) Can the bank sue Marquez for the proceeds from the foreclosure are equal
Deficiency of P25 million? Explain. (2%) to the amount of the principal obligation
SUGGESTED ANSWER: (Art. 2115, Civil Code).
Yes, the bank can sue Marquez for the
deficiency of P25million. In extrajudicial
foreclosure of a real estate mortgage, if
Insolvency & Corporate
the proceeds of the sale are insufficient
to pay the debt, the mortgagee has the Recovery
right to sue for the deficiency (Suico
Insolvency; Preferred Claims (2007)
Rattan and Buri Interiors, Inc. v. Court
of Appeals, 490 SCRA 560 (2006)). No.XIII. (A) What are the preferred claims
that shall be satisfied first from the assets
(B) If the bank opts to file an action for of an insolvent corporation? (10%)
collection against the corporation, can it
SUGGESTED ANSWER:
afterwards institute a real action to
foreclose the mortgage? Explain (2%) Under the Insolvency law necessary
SUGGESTED ANSWER: funeral expenses of the debtor is the
No, the bank can no longer file an action most preferred claim. However, this is an
to foreclose the real estate mortgage. insolvent corporation, thus, claims shall
When it filed a collection case, it was be paid in the ff. order:
deemed to have abandoned the real
estate mortgage (Bank of America, NT (1) Debts due for personal services
rendered the insolvent by employees,

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laborers, or domestic servants Philippine Islands (Section 50,

immediately preceding the Insolvency Law).
commencement of proceeding in
insolvency; (B) How shall the remaining non-preferred
creditors share in the estate of the insolvent
(2) Compensation due the laborers or corporation above?
their dependents under the provisions of SUGGESTED ANSWER:
act numbered thirty-four hundred and The remaining non-preferred creditors,
twenty-eight, known as the workmen’s whose debts are duly proved and
Compensation Act, as amended by Act allowed, shall be entitled to share pro-
Numbered Thirty-eight hundred and rata in the assets, without priority or
twelve, and under the provisions of Act preference whatsoever (Section 49,
Numbered Eighteen hundred and Insolvency Law; Article 2251, Civil
seventy-four, known as the Employees’ Code).
Liability Act, and of other laws providing
for payment of indemnity for damages in
cases of labor accidents;

Rehabilitation; Proceeding;
(3) Legal expenses, and expenses Rehabilitation & Insolvency (2012)
incurred in the administration of the
No.XVIII. (A) Can be distressed corporation
insolvent’s estate for the common
file a petition for corporation rehabilitation
interest of the creditors, when properly
after the dismissal of its earlier petition for
authorized and approved by the court;
insolvency? Why? (2%)
SUGGESTED ANSWER:
(4) Debts, taxes, and assessments due
the Insular Government; Yes, when a distressed corporation’s
petition for insolvency has been
(5) Debts, taxes, and assessments due to dismissed, it can only mean that it still
any province or provinces of the possesses more than enough assets to
Philippine Islands; cover all its liabilities, and consequently,
it can still be “rehabilitated” (PAL v.
(6) Debts, taxes, and assessments due to Zamora, G.R. No. 166996, 06 February
any municipality or municipalities of the 2007, and Sec. 5[d], Securities
Regulation Act).

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Although in Ching v. LBP, G.R. No.

Under Sec. 6(d) of P.D. 902-A, a petition 73123, 02 September 1991, it was held
for corporate rehabilitation is allowed that when a petitioning corporate debtor
only “in cases where the has been denied rehabilitation, the SEC
corporation**possesses sufficient may declare a corporation insolvent as
property to cover all its debts but an incident and in continuation of its
foresees the impossibility of meeting already acquired jurisdiction over
them when they respectively fall due or petitioner, such a procedure does not
in cases where the corporation** has no seem warranted under the Interim Rules
sufficient assets to cover liabilities, but of Procedure for Corporate
is under the management of a Rehabilitation.
rehabilitation receiver or management
committee created pursuant to this Sec. 27, Rule 4 of the Interim Rules
Decree.” state that, “the court shall upon motion,
motu porprio or upon the
Under Sec. 1, Rule 4, Interim Rule of recommendation of the Rehabilitation
Procedure for Corporate Rehabilitation. Receiver, terminate the proceedings,
A petitioner corporate debtor must be without proceeding to
one who is “Any debtor who foresees the insolvency/dissolution.” In other words,
impossibility of meeting its debts when a different petition for insolvency
they respectively fall due,” which means proceedings fall with the general
that it is not insolvent, but merely jurisdiction of RTC, whereas petition for
illiquid, which under Section 2 provides corporate rehabilitation fall within the
the minimum that the debtor is original and exclusive jurisdiction of
“rehabilitable” thus: “the manner by RTC special Commercial Courts.
which the debtor may be rehabilitated
and how such rehabilitation may benefit (C) Explain the key phrase ―equality is
the general body of creditors, employees equity‖ in corporate rehabilitation
and stock holders. proceedings. (2%)
SUGGESTED ANSWER:
(B) Can the corporation file a petition for
The principle of “equality in equity”
rehabilitation first, and after it is dismissed
means that when a corporation is placed
file a petition foR insolvency? Why? (2%)
under the control of a court-appointed
SUGGESTED ANSWER:
rehabilitation receiver, then “all the

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creditors should stand on equal footing. (A) Can XYC Company still be able to draw
Not anyone of them should be given any on their irrevocable Standby Letter of Credit
preference by paying one or some of when due? Explain your answer. (5%)
them ahead of the others. This is
SUGGESTED ANSWER:
precisely the reason for the suspension
of all pending claims against the Yes, As an exception to a Stay or

corporation under receivership” Suspension Order included in a

(Sobrejuanite v. ASB Dev. Corp., G.R. No. Commencement Order issued pursuant

165675, 30 September 2005: Ruby to Section 16(q) of the FRIA, Section

Industrial v. Lim, G.R. Nos. 124185-87, 18(c) if the said law provides that a Stay

20 January 1998). or Suspension Order shall not apply “to

the enforcement of claims against
sureties and other persons solidarily
liable with the debtor, and third party or
accommodation mortgagors as well as
Rehabilitation; Stay Order (2012) issuers of letters of credit x xx.”
Similarly, assuming that it has not been
No.I. ABC Company filed a Petition for
superseded by the FRIA, Section 7(b) of
Rehabilitation with the Court. An Order
the Supreme Court Rules of Procedure
was issued by the Court, (1) staying
on Corporate Rehabilitation (2008)
enforcement of all claims, whether money
provides that a stay order shall not cover
or otherwise against ABC Company, its
claims against letters of credit and
guarantors and sureties not solidarily liable
similar security arrangements issued by
with the company; and (2) prohibiting ABC
a third party to secure the payment of
Company from making payments of its
the debtor’s obligations. This was the
liabilities, outstanding as of the date of the
basis of the decision in the case of
filing of the Petition. XYC Company is a
Metropolitan Waterworks and Sewerage
holder of an irrevocable Standby Letter of
System v. Hon. Reynaldo B. Daway, et al.
Credit which was previously procured by
(G.R. No. 160732, June 21,2004).
ABC Company in favor of XYC Company to
secure performance of certain obligations.
In the light of the Order issued by the
Court.

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Insurance Law Concealment; Material Concealment

(2013)
Beneficiary; Death of Insured Due to
No.II. Benny applied for life insurance for
Beneficiary (2008)
Php 1.5 Million. The insurance company
No.VI. On January 1, 2000, Antonio Rivera approved his application and issued an
secured a life insurance from SOS insurance policy effective Nov, 6, 2008.
Insurance Corp. for P1 Million with Gemma Benny named his children as his
Rivera, his adopted daughter, as the beneficiaries. On April 6, 2010, Benny died
beneficiary. Antonio Rivera died on March of hepatoma, a liver ailment.
4, 2005 and in the police investigation, it
was ascertained that Gemma Rivera The insurance company denied the
participated as an accessory in the killing of children’s claim for the proceeds of the
Antonio Rivera. Can SOS Insurance Corp. insurance policy on the ground that Benny
avoid liability by setting up as a defense the failed to disclose in his application two
participation of Gemma Rivera in the killing previous consultations with his doctors for
of Antonio Rivera? Discuss with diabetes and hypertension, and that he had
reasons.(4%) been diagnosed to be suffering from
hepatoma. The insurance company also
SUGGESTED ANSWER:
rescinded the policy and refunded the
Under Sec. 12 of the Insurance Code. premiums paid.
The interest of a beneficiary shall be Was the insurance company correct? (8%)
forfeited when the beneficiary is the SUGGESTED ANSWER
principal, accomplice, or accessory in The insurance company correctly
willfully bringing about the death of the rescinded the policy because of
insured. In which event, the nearest concealment (Section 27 of Insurance
relative of the insured shall receive the Code). Benny did not disclose that he
proceeds of said insurance, if not was suffering from diabetes,
otherwise disqualified. Thus, the hypertension, and hepatoma. The
insurance company must still pay out concealment is material, because these
the proceed of the life insurance policy are serious ailments (Florendo v. Philam
to the nearest qualified relative of the Plans, Inc., 666 SCRA 618, 2012). Benny
insured. died less than two years from the date of
the issuance of the policy (Section 48 of
Insurance Code).

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