Commercial Law Review

ATENEO
CENTRAL
I EAR OPERATIONS 2019
JORGE ALFONSO C. MELO

Bar Review Coordinator
LEILA S. LIM
Bar Review Secretariat
ATENEO CENTRAL BAR OPERATIONS
PATRICK EDWARD BALISONG

Chairman
KATRINA Y. COSCOLLUELA JONATHAN VICTOR NOEL CZARINA CHER CUERPO

GENICA THERESE ENDALUZ JOHN STEPHEN PANGILINAN BENIGNO ENCISO
Administration Committee Heads Academics Committee Heads Hotel Operations Committee Heads
DEAN JOSE MARIA HOFILENA

ATTY. ROEL REFRAN
ATTY. IVY PATDU
ATTY. FELICISIMO AGAS III
COMMERCIAL LAW Faculty Advisers
ISABELLA NAGUIAT
CHRISTINE LEONG
CLAUDINE BERNAS
PAOLO GABRIEL BAUTISTA
COMMERCIAL LAW Subject Heads
EUNICE A. MALAY()
FRANCES CHRISTINE F. SAYSON
Central Bar Operations
Academics Understudies
GIA MORDENO
MOIRA SARMIENTO NICKI VINE CAPUCHINO
JEBEL CLAUDIO
MAE SAMPANG ELDEN ROCAMORA
RE! LUIS DOMINGO
REMEDIAL LAW Volunteers
ATENEO CENTRAL
BAR OPERATIONS 2019 MERCANTILE LAW
I. LETTERS OF CREDIT AND TRUST RECEIPTS
A. Basic Concepts 1
1. Doctrine of Independence 4
2. Fraud Exception Principle 4
3. Doctrine of Strict Compliance 5
4. Warehouseman's lien 5
B. Rights and Obligations of Parties 10
1. Entruster/entrustee 10
2. Applicant/banks/beneficiaries 4
C. Remedies Available 12
II. NEGOTIABLE INSTRUMENTS LAW
A. Requisites of Negotiability 13
B. Forgery and Material Alteration 19
C. Negotiation 23
D. Rights of the Holder 26
1. Holder in Due Course 26
2. Defense Against the Holder 26
E. Checks 37
III. INSURANCE CODE
A. Basic Concepts 39
1. What may be insured 39
2. Insurable interest 41
3. Double insurance and Over insurance 44
4. Reinsurance 44
5. No fault, suicide, and incontestability clauses 45
B. Perfection of the Insurance Contract 48
C. Rights and Obligation of the Parties 53
1. Insurer 53
2. Insured 54
3. Beneficiary 54
D. Rescission of Insurance Contracts 54
1. Concealment 54
2. Misrepresentation or omissions 56
3. Breach of warranties 57
E. Loss 59
IV. TRANSPORTATION
A. Common Carriers 72
1. Concept 72
2. Common Carrier v. Private Carrier 72
3. Diligence Required 73
B. Obligations and Liabilities 73
1. Vigilance over goods 74
2. Safety of passengers 77
C. Defenses available to a common carrier .80
1. Proof of negligence 80
2. Due diligence in the selection and supervision of employees .80
3. Fortuitous event 80
4. Contributory negligence .80
5. Doctrine of last clear chance 80
D. Extent of liability 81
1. Recoverable damages 81
2. Stipulations limiting liability 82
3. Limitations under the Warsaw Convention 96
V. CORPORATION LAW (Provisions of BP 68, not affected by RA 11232)
A. General Principles 98
1. Nationality of corporations 102
a. Place of incorporation test 102
b. Control test 102
c. Grandfather rule 103
2. Doctrine of separate juridical personality 104
3. Doctrine of piercing the corporate veil 106
B. De facto corporations and corporations by estoppel
C. Powers of corporations 114
1. How powers are exercised 117
2. Ultra vires doctrine 117
3. Trust fund doctrine 120
D. Board of Directors and Trustees 121
1. Basic principles 121
a. Doctrine of centralized management 121
b. Business judgment rule 121
2. Duties, liabilities, and responsibility for unlawful acts 124
E. Stockholders and Members 127
1. Doctrine of equality of shares 127
2. Property rights 129
a. Right to dividends 129
b. Right to inspect 130
c. Pre-emptive right 131
d. Right of first refusal 131
3. Intra-corporate disputes
a. Concept
b. Individual vs. representative vs. derivative suit 133
F. Stock vs. non-stock corporations 147
G. Foreign Corporations 148
1. What constitutes "doing business" 148
2. Personality to sue and suability 150
H. Mergers and Consolidation 151
1. Concept 151
2. Effects and limitations 152
VI. SECURITIES REGULATION CODE R.A. No. 8799
A. Registration requirement; exemptions 157

B. Prohibition on fraud, manipulation, and insider trading 161
C. Protection of investors 163
1. Tender offer rule 163
2. Rules on proxy solicitation 163
3. Disclosure rule 164
VII. BANKING LAWS
A. The New Central Bank Act (RA 7653, as amended by RA 11211) 166
1. Handling of banks in distress 166
a. Conservatorship 166
b. Closure 167
c. Receivership 169
d. Liquidation 169
B. Secrecy of bank deposit (RA 1405, as amended, and RA 6426, as amended) 173
1. Prohibited acts 173
2. Exceptions from coverage 174
3. Garnishment of deposits, including foreign deposits 176
C. General Banking Law of 2000 (RA 8791) 176
1. Nature of bank funds and bank deposits 178
2. Diligence required of banks 179
3. Prohibited transactions by bank directors and officers 179
D. Philippine Deposit Insurance Corporation Act (RA 3591, as amended) 180
1. Maximum deposit insurance coverage 180
2. Meaning of insured deposit 180
3. Splitting of deposits .180
VIII. INTELLECTUAL PROPERTY LAW
A. Patents 182
1. Patentable vs. non-patentable 182
2. Ownership of a patent 184
3. Grounds for cancellation of a patent 186
4. Remedy of the true and actual inventor 186
5. Rights conferred by a patent 186
6. Limitations on patent rights 187
7. Patent infringement 187
B. Trademarks 195
1. Marks vs. collective marks vs. trade names 196
2. Acquisition of ownership 197
a. Concept of actual use 197
b. Effect of registration 198
3. Non-registerable marks 197
4. Well-known marks 199
5. Priority right 200
6. Rights conferred by registration 200
7. Trademark infringement 201
8. Cancellation of registration 204
9. Unfair competition 203
C. Copyrights 205
1. Copyrightable works 205
2. Non-copyrightable works 206
3. Rights conferred by copyright 207
4. Ownership of a copyright 207
5. Limitations on copyright 210
6. Doctrine of fair use 211
7. Copyright infringement 211
IX. ANTI-MONEY LAUNDERING ACT (R.A. 9160, as amended by R.A. 9194)
A. Covered institutions and their obligations 212

B. Covered and suspicious transactions 214
C. When is money laundering committed (including predicate crimes) 214
D. Safe harbor provision 216
E. Authority to inquire into bank deposits 217
F. Freezing and forfeiture 217
X. ELECTRONIC COMMERCE ACT OF 2000 (R.A. 8792) and A.M. No. 01-7-01-SC or the
Rules on Electronic Evidence
A. Legal recognition of electronic data messages, documents, and signature 219

B. Presumption relating to electronic signatures 220
C. Admissibility and evidential weight of electronic data message or electronic
document 220
D. Obligation of confidentiality 221
Xl. DATA PRIVACY ACT (R.A. No. 10173
A. Personal vs. Sensitive personal information 226

B. Scope 227
C. Processing of Personal Information 228
D. Rights of Data Subject 229
XII. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 R.A. No. 10142
A. Basic Concepts 231

1. Rehabilitation 231
2. Insolvency 231
3. Liquidation 242
4. Suspension of Payment
B. Modes of rehabilitation 232
1. Court-supervised rehabilitation 232
a. Voluntary vs. involuntary 232
b. Commencement order (including stay order) 235
c. Rehabilitation receiver and management committee 236
d. Determination of claims
e. Rehabilitation plan 238
i. i. Concept of feasibility
ii. Material financial commitments
iii. Liquidation analysis
f. Creditor approval and confirmation 238
g. Failure of rehabilitatior 239
2. Pre-negotiated rehabilitation 240
a. How initiated 240
b. Period and effect of approval 241
3. Out-of-Court or Informal Restructuring Agreement of Rehabilitation Plan .241
a. Minimum requirements 241
b. Standstill period 241
c. Cram down effect 241
C. Liquidation 243
1. Voluntary liquidation vs. involuntary liquidation vs. conversion 243
2. Procedure 246
a. Liquidation order; effects 246
3. Determination of claims 249
D. Suspension of Payments; Suspension of Payment Order ..244
E. Remedies 250
1. Motion for reconsideration
2. Petition for certiorari
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW
I. LETTERS OF CREDIT AND TRUST Kinds of Letters of Credit

RECEIPTS
Commercial Letter of Credit
TOPIC OUTLINE UNDER THE SYLLABUS An instrument by which a bank, for the account of the
buyer, gives formal evidence to a seller, of its willingness
I. LETTERS OF CREDIT AND TRUST RECEIPTS to permit him, the seller, to draw bills against it, on certain
A. Basic Concepts
terms, and stipulates in legal form that all such bills will be
1. Doctrine of Independence
honored.
2. Fraud Exception Principle
3. Doctrine of Strict Compliance
4. Warehouseman's lien 1. According to Methods of Transmission
B. Rights and Obligations of Parties a) Circular Letter of Credit
1. Entruster/entrustee It is addressed to persons in general in which the
2. Applicant/banks/beneficiary opening bank undertakes to honor the
C. Remedies available beneficiary's drafts under certain stipulated
conditions. This may either be mailed or by the
Letter of Credit issuing bank to the beneficiary or delivered by the
A letter from a merchant or a bank or banker in one place, issuing bank to the accredited buyer, to be mailed
addressed to another, in another place or country, by him to the beneficiary.
requesting the other bank to pay money or deliver goods
to a third party named therein, the opening bank under b) Specially Advised Letter of Credit
taking to provide him the money for the goods or to repay It is transmitted to the beneficiary by the opening
him. bank through the medium of its correspondent in
the vicinity of the beneficiary.
It is a letter requesting one person to make advances to a
third person on the credit of the writer who assumes 2. According to Duration
responsibility for payment of the debt therefor to the a) Revocable Letter of Credit
addressee The opening bank leaves the duration of the credit
open for subsequent consideration and thus
Nature of Letter of Credit reserves the right to withdraw from the transaction
a. A financial device developed by merchants as a by stating that it is "good as cancelied" or good
convenient and relatively safe mode of payment to until a stipulated date "unless sooner revoked".
satisfy the seemingly irreconcilable interest of the
seller, who refuses to part with his goods before he is b) Irrevocable Letter of Credit
paid, and a buyer, who wants to have control of the The issuing bank does not reserve its right to
goods before paying (Transfield Philippines v. Luzon revoke the credit. The consent of the party who
Hydro Corp., G.R. No. 146717, 2004). sought the opening of the letter of credit and the
b. It is a commitment by the bank that the seller will be beneficiary must be obtained before it may be
paid. revoked. This gives the seller certainty of payment.
Purpose of Letters of Credit Issuing bank may not, without the consent of the
a. As to the SELLER beneficiary (seller) and the applicant (buyer),
• Insures to a seller payment of a definite amount revoke his undertaking under the letter
upon presentation of documents
Enables the seller to release his inventory or stock in 3. According to Obligation
trade without seeking credit facilities from his own bank a) Unconfirmed Letter of Credit
for the buye The notifying bank is requested merely to act as
b. As to the BUYER the medium through which the opening bank's
• Gives the buyer the opportunity to levy goods even obligation is transmitted to the beneficiary. Its letter
without money but on his credit standing with the of advice shall guarantee the authenticity of the
opening bank message it is transmitting on behalf of the opening
bank.
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ATENEO CENTRAL
b) Confirmed Letter of Credit a) Simple

The notifying bank gives an absolute assurance A letter of credit where an opening bank instructing
that the opening bank's obligation will be a correspondent to act as the paying bank carries
performed. an account in the currency to be paid with the
paying bank. The amount of payment made to the
rrevocable v. Confirmed Letters of Credit beneficiary and the paying bank's commission for
IRREVOCABLE CONFIRMED LETTERS the service performed is debited to his account.
LETTERS OF CREDIT OF CREDIT
Refers to the duration of Refers to the kind of b) Reimbursement
the letter of credit obligation assumed by the Occasionally, the opening bank doesn't have an
correspondent bank account with the correspondent it chooses as a
paying bank or, having an account, may prefer not
The issuing bank made The correspondent bank
no reservation of his right gives an absolute to have it debited. In the latter case, the paying
to revoke. Hence, it assurance that it will bank will draw a draft for the amount of its
cannot do so without the undertake the issuing payment, with commission and interest for the
consent of the bank's obligation as its own period elapsing until reimbursement, either on the
beneficiary. according to the terms and opening bank or the correspondent with which the
conditions of the credit opening bank carries an account.
4. According to Method of Payment 6. According to Provision for Renewal

a) Negotiation a) Revolving Credits
The beneficiary is to draw his drafts in a foreign The opening bank who may be willing to finance
currency either in the opening foreign bank or in aggregate shipments which will exceed the
another opening foreign bank, which drafts so amount of credit is willing to have outstanding at
drawn the beneficiary may sell to the notifying one time for the accredited buyer.
bank or any other bank in his locality. The
beneficiary negotiates his foreign currency drafts A single commercial letter of credit may be given a
drawn under the credit to the bank in his locality life sufficient to cover the period of time necessary
offering him the best rate. to complete the transaction, with the restriction
that the amount shall not exceed the limit set. '
b) Straight
The beneficiary is paid by a bank local to him and There should be a proviso that, upon notice from
designated by the opening bank. The drafts are the opening •bank that any draft which the
usually drawn in the currency of the beneficiary. beneficiary has drawn within that, limit has been
paid and retired by the accredited buyer, the like
Sight and Acceptance Letter of Credit sum becomes available to the beneficiary.
Under a sight credit, the beneficiary's drafts are drawn
payable at sight. Once paid, the drafts serve simply as b) Cumulative
receipts for payment and are without value for any other Amounts not used in one month are available in
purpose. succeeding months.
In an acceptance credit, it is stipulated that the drafts be c) Non-Cumulative

drawn at time, for acceptance, upon some well-reputed Amounts unused during the month lapses.
bank in a center of international finance. This is used if the
accredited buyer and the opening bank want to use the 7. According to Source of Payment
drafts as a means by which to obtain funds for financing a) Local Currency
the transaction in a discount market. The draft is A credit that stipulates that drafts are to be drawn
discounted after acceptance and the beneficiary is placed in the currency of the domicile of the beneficiary.
in funds. The accredited buyer need not furnish funds to
pay the draft until its maturity.
5. According to Method of Reimbursement

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b) Foreign Currency c. The approximate value of the goods to be shipped

A credit which stipulates that drafts are to be and the general nature of the goods
drawn in a foreign currency, whether that of the d. The issuance of the drafts which the seller must
accredited buyer or not. draw and the name of the bank on which the drafts
are to be drawn
Commercial v. Standby Letters of Credit e. The terms of sale
COMMERCIAL LETTERS STANDBY LETTERS OF f. A statement as to whether the drafts are to be drawn
OF CREDIT CREDIT for 100% of the cost of the merchandise or for a
NATURE lesser percentage
A payment mechanism A security mechanism 9- The shipping route
Payable upon It is payable to seller h. The exact shipping and other documents which
presentation by seller- upon certification of a must be attached to the drafts of the seller
beneficiary of documents party's non-performance I. The outside date of the shipment and the outside
showing that he has of an agreement. date by which the seller is to negotiate his drafts to
complied with sales which the specified documents are attached
agreement. j. Clear indication upon the part of the issuing bank
DOCUMENTATION
that the seller's drafts will be duly honored
Seller-beneficiary must Seller-beneficiary must
show documents that he show that applicant has
has performed his NOT performed his Buyer (Applicant)
contract contract. Procures the letter of credit and obliges himself to
CERTIFICATION reimburse the issuing bank upon receipt of the document
Seller-beneficiary need Seller-beneficiary must of title.
not make any certification, certify obligor has not
performed his contract. Issuing Bank
Undertakes to pay the seller upon receipt of the draft and
Traveler's Letter of Credit proper documents of titles and to surrender the documents
A letter from a bank addressed to one or more of its to the buyer upon reimbursement. Issuing bank's
correspondents stating that drafts up to a certain sum obligation is solidary with that of the buyer (Insular Bank v.
drawn by the beneficiary will be honored by the bank. IAC, G.R. No. 74834, 1988).
Note: Note: Usually the issuing bank merely substitutes its own
• The purpose of a traveler's letter of credit is to provide promise to pay for that of its customer, who in turn
the traveler with funds en route promises to pay the bank the amount of the credit and the
• OR just bring a credit card. fees mutually agreed upon. "Once the issuing bank shall
have paid the beneficiary after the latter's compliance with
Specially Advised Letter of Credit the terms of the letters of credit, the issuing bank is entitled
It is addressed to only one bank. to reimbursement for the amount it paid under the letter of
credit." (Galvez and Guy v. CA and Asia United Bank, G.R.
Circular Letter of Credit No. 187919, 2012).
It is addressed to a number of correspondents.
Seller (Beneficiary)
Essential Conditions (Art. 568) Who in compliance with the contract of sale ships the
a. To be issued in favor of a definite person goods to the buyer and delivers the documents of title and
b. To be limited to a fixed and specified amount, or to draft to the issuing bank to recover payment.
one or more undetermined amounts, but within a
maximum of limits of which has to be stated exactly The Number of Parties May Include:
1. Advising (Notifying) Bank
Contents of Letters of Credit (SAINTS-SCOE) May be utilized to convey to the seller the existence of
a. Signature of the writer the credit, but does not assure that the issuing bank
b. Name of the individual or concern for whose account will pay and may refuse to accept the drafts without
it is issued being liable (Bank of America v. CA, G.R. No. 105395,
1993)
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ATENEO CENTRAL
2. Confirming Bank In a letter of credit, transaction means that a bank, in

Which will lend credence to the letter of credit issued determining compliance with the terms of a letter of credit,
by a lesser known issuing bank; the confirming bank is is required to examine only the shipping documents
directly liable to pay the seller-beneficiary presented by the seller and is precluded from determining
3. Paying Bank whether or not the main contract is actually accomplished
Which undertakes to encash the drafts drawn by the or not.
exporter/seller
4. Negotiating Bank It assures the seller or the beneficiary of prompt payment
Instead of going to the place of the issuing bank to independent of any breach of the main contract and
claim payment, the buyer may approach the precludes the issuing bank from determining whether the
negotiating bank to have the draft discounted; Its main contract is actually accomplished or not (Transfield
liability is dependent upon the stage of the negotiation Philippines v. Luzon Hydro Corp., G.R. No. 146717, 2004).
— if before negotiation, no liability (Charles Lee v. CA,
G.R. No. 117913, 2002). Three Distinct and Independent Contracts in a Letter
of Credit
Obligations of the Parties: (See above for Buyer, a. Sale between the seller and the buyer;
Beneficiary, and Issuing Bank) b. Contract of buyer with issuing bank; and
1. DRAWER of the letter of credit c. The letter of credit itself, wherein the bank promises to
• Liable to the person on whom it was issued for pay pursuant to the terms and conditions of the letters
the amount paid (Code of Commerce, Art. 569, of credit. This assures seller of prompt payment,
par. 1) independent of any breach of the main sales contract.
• In case of revocation, he must inform the
bearer and the person to whom it is addressed In a state of perpetual separation — they are treated
(Code of Commerce, Art. 570) independently. Any discrepancy between the amount of
BEARER of letter of credit goods stipulated in the sale and that of the LOC will not
• Pay the amount received without delay (Code affect the validity and enforceability of the carriage
of Commerce, Art. 571, par. 1) contract. As the bank is not expected to go beyond the
3. ADVISING/NOTIFYING BANK — the bank which documents in the LOC, so is the shipper not expected to
conveys to the seller the existence of the credit look beyond the representations of the seller.
• To notify and/or transmit the documentary of
credit to the seller-beneficiary The carrier is not even charged w/ knowledge of the cargo.
• Assumes no liability That being the case, the remedy of the buyer K would be
4. NEGOTIATING BANK — the bank which discounts the against the seller— and not against the carrier. (Keng Hua
draft presented by the seller. Paper Products Co., Inc. v. Court of Appeals, G.R. No.
• Buys/discounts a draft under the letter of 116863, 1998)
credit
Independent Nature of a Letter of Credit May Be:
• Liability depends upon the negotiation
a. In foto where the credit is independent from the
o Before negotiation, it has no liability
justification aspect and is a separate obligation from
with respect to the seller
the unaerlying agreement like for instance a typical
o After negotiation, there is a contractual
standby; or
relationship prevailing between the
b. Only as to the justification aspect like in commercial
negotiating and the seller
letter of credit or repayment standby, which is identical
5. CONFIRMING BANK — the bank which lends
with the obligations under the underlying agreement
credence to the letter of credit issued .by a lesser
(Transfield Philippines v. Luzon Hydro Corp., GR No.
known issuing bank
146717, 2004).
• Assumes a direct obligation to the seller and
its liability is a primary (Feat! Bank and Trust Co.
2. Fraud Exception Principle
v. CA, G.R. No. 94209, 1991)
Fraud is an exception to the independence principle. That
is, the untruthfulness of a certificate accompanying a
A. BASIC PRINCIPLES
demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment
1. Doctrine of Independence
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(Transfield Philippines v. Luzon Hydro Corp.. G.R. No. (Be/man Compania v. CB of the Philippines, G.R. No. L-
146717, 2004). 10195, 1958).
In letters of credit transactions, fraud is an exception to the

independent Principle. Fraud can also justify the issuance
of an injunction against payment.
The requirements for such injunction to the issue are

the following: (PAI)
a. there is clear Proof of fraud;
b. the fraud constitutes fraudulent Abuse of the
independent purpose of the letter of credit and not only
fraud under the main agreement; and
c. irreparable Injury might follow if injunction is not
granted or the recovery of damages would be seriously
damaged (Transfield Philippines v. Luzon Hydro
Corp., G.R. No. 146717, 2004).
Nature or Legal Relations Arising From Letters of

Credit:
It may be made conditional, but for purposes of protecting
the banking and mercantile community, all conditions must
be complied with, however onerous. It is unaffected by any
breach of contract on the part of the seller or the buyer or
by any controversy which may arise between the buyer
and seller or by any other transactions between the buyer
and the seller (NAMARCO v. Atlas Trading, G.R. No.
21911, 1957).
3. Doctrine of Strict Compliance

In a letter of credit transaction, it means that the documents
tendered by the seller or beneficiary must strictly conform
to the terms of the letters of credit, i.e., they must include
all documents required by the letter of credit. Thus, a
correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risk and may not thereafter
be able to recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the beneficiary
(Feati Bank vs. CA, G.R. No. 94209, 1991).
When Letter of Credit Considered Consummated

Contract:
It is the date of payment if the amount of the foreign
currency to the creditor in his country by the agent or
correspondent bank in the country of the debtor that turns
from executory lo executed or consummated contract. It is
not the date of payment by the debtor to the bank in his
country of the amount of foreign exchange sold that makes
the contract executed or consummated, because the bank
may grant the debtor extension of time to pay such debt
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ATENEO CENTRAL
4. WAREHOUSEMAN'S LIEN
Enforcement of Warehouseman's Lien
Warehouseman's Lien, In General The lien may be enforced against all goods belonging to:
A warehouseman's lien over the goods deposited with him a. The depositor, or
is his security for the payment of the charges, money b. His principal. (WRL, Sec. 28)3
advanced, and other expenses owed to the
warehouseman. Clearly, the lien exists for the benefit of
the warehouseman. Loss of Warehouseman's Lien
Section 27 of the Warehouse Receipts Law (Act. No. The lien may be lost either by:
2137) 1 provides the claims included in the a. Surrendering the possession thereof; or
warehouseman's lien. b. Refusing to deliver the goods when a lawful dernand4
upon him is made. (WRL, Sec. 29)
General rule: a warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands, for: Note:
a. All lawful charges for storage and preservation of the A warehouseman's lien is possessory in nature. Where the
goods; warehouseman surrenders possession of the goods
b. All lawful claims for money advanced, interest, without requiring the payment of his lien, the lien Is lost.
insurance, transportation, labor, weighing, coopering (PNB v. Noah's Ark Sugar Refinery, G.R. No. 119231,
and other charges and expenses in relation to such 1996)
goods;
c. All reasonable charges and expenses for notice, and Where a valid demand by the lawful holder of
advertisements of sale, and for sale of the goods the warehouse receipts for the delivery of the goods is
where default had been made in satisfying the refused by the warehouseman, despite the absence of a
warehouseman's lien. (WRL, Sec. 27) lawful excuse provided by the statute itself, the
warehouseman's lien Is deemed lost. (PNB v. Hon. Sayo,
• Exception: if a negotiable receipt is issued for goods, Jr., G.R. No. 129918, 1998)
the warehouseman shall have no lien thereon except
for charges for storage of goods subsequent to the As to what the law deems a valid demand, Sec. 8
date of the receipt. (WRL, Sec. 30) enumerates what must accompany a demand. (PNB v.
Hon. Sayo, Jr., G.R. No. 129918, 1998)
• Exception to the exception: a warehouseman shall
have a lien insofar as the negotiable receipt expressly The Following Reasons May Be Invoked By A
enumerated other charges for which said lien is Warehouseman To Legally Refuse To Effect Delivery
claimed. In such case, there shall be a lien for the Of The Goods Covered By The Warehouse Receipts:
charges enumerated so far as they are within the terms
of Sec. 27, 2 even if amount of the charges so
enumerated is not stated in the receipt.
For the purposes of this Addendum, the referenced Sections deposit to one who took the goods in good faith for value
refer to the Warehouse Receipts Law (WRL), unless otherwise would have been valid.
indicated. 4 Sec 8. Obligation of warehousemen • to deliver. — A
2 See general rule. warehouseman, in the absence of some lawful excuse provided
3 Sec. 28. Against what property the lien may be enforced. — by [the Warehouse Receipts Law], is bound to deliver the goods
Subject to the provisions of section thirty, a warehouseman's lien upon a demand made either by the holder of a receipt for the
may be enforced: goods or by the depositor, if such demand is accompanied with:
a) Against all goods, whenever deposited, belonging to the a) An offer to satisfy warehouseman's lien;
person who is liable as debtor for the claims in regard to b) An offer to surrender the receipt, if negotiable, with such
which the lien is asserted, and indorsements as would be necessary for the negotiation of
b) Against all goods belonging to others which have been the receipt; and
deposited at any time by the person who is liable as debtor c) A readiness and willingness to sign, when the goods are
for the claims in regard to which the lien is asserted if such delivered, an acknowledgment that they have been
person had been so entrusted with the possession of delivered, if such signature is requested by the
goods that a pledge of the same by him at the time of the warehouseman.
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a. The Holder Of The Receipt Does Not Satisfy The

Conditions Prescribed In Section 8 Of The Act. (Sec. Warehouseman's Remedies
8)
The following are the remedies available to a
b. The Warehouseman Has Legal Title In Himself On The warehouseman having a valid lien against the -person
goods, such title or right being derived directly or demanding the goods:
indirectly from a transfer made by the depositor at the a. To refuse to deliver the goods until the lien is satisfied
time of or subsequent to the deposit for storage, or (Sec. 31);
from the warehouseman's lien. (Sec. 16)
b. To cause the extrajudicial sale of the goods and apply
c. The warehouseman has legally set up the title or right the proceeds to the value of the lien (Secs. 33 & 34);
of third persons as lawful defense for non-delivery of and
the goods as follows:
i. Where the warehouseman has been requested, by c. By other means allowed by law to a creditor against his
or on behalf of the person lawfully entitled to a right debtor, for the collection from the depositor of all the
of property of or possession in the goods, not to charges which the depositor has bound himself to pay.
make such delivery (Sec. 10), in which case, the (Sec. 32); or other remedies allowed by law for the
warehouseman may, either as a defense to an enforcement of lien against personal property (Sec.
action brought against him for non-delivery of the 35) [for instance, by way of counterclaim in an action
goods, or as an original suit, whichever is to recover the property from the warehouseman]. The
appropriate, require all known claimants to third remedy is sought judicially by filing a civil action
interplead (Sec. 17); for unpaid charges.
ii. Where the warehouseman had information that
the delivery about to be made was to one not Note: Warehouse receipts are also known as quedans.
lawfully entitled to the possession of the
goods (Sec. 10), in which case, the Where a warehouse receipt or quedan is transferred or
warehouseman shall be excused from liability for endorsed to a creditor only to secure the payment of a loan
refusing to deliver the goods, either to the or debt, the transferee or endorsee does not automatically
depositor or person claiming under him or to the become the owner of the goods covered by the warehouse
adverse claimant, until the warehouseman has receipt or quedan but he merely retains the right to keep
had a reasonable time to ascertain the validity of and with the consent of the owner to sell them so as to
the adverse claims or to bring legal proceedings to satisfy the obligation from the proceeds of the sale, this for
compel all claimants to interplead (Sec. 18); and the simple reason that the transaction involved is not a sale
iii. Where the goods have already been lawfully sold but only a mortgage or pledge, and that if the property
to third persons to satisfy a warehouseman's lien, covered by the quedans or warehouse receipts is lost
or have been lawfully sold or disposed of because without the fault or negligence of the mortgagee or pledgee
of their perishable or hazardous nature. (Sec. 36). or the transferee or endorsee of the warehouse receipt or
quedan, then said goods are to be regarded as lost on
d. The warehouseman having a lien valid against the account of the real owner, mortgagor or pledgor. (Martinez
person demanding the goods refuses to deliver the v. PNB, G.R. No. L-4080, 1953)
goods to him until the lien is satisfied. (Sec. 31)
B.. Rights and Obligations of the Parties
e. The failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand Rights of the Parties
for delivery and refusal, the goods were stolen or • The person paying shall have the right to demand
destroyed by fire, flood, etc., without any negligence proof of identity of the person in whose favor the
on his part, unless he has contracted so as to be liable letter of credit was issued (Code of Commerce,
in such case, or that the goods have been taken by the Art. 569(3))
mistake of a third person without the knowledge or • In case of non-payment, person to whom the letter
implied assent of the warehouseman, or some other of credit is addressed may institute an action
justifiable ground for non-delivery. (PNB v. Hon. Sayo, involving execution (Code of Commerce, Art.
Jr., G.R. No. 129918, 1998) 571(2)).
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Page 8 of 250
1
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TRUST RECEIPTS LAW 1 b. The total invoice value of the goods and the amount of
the draft to be paid by the entrustee
A. DEFINITION/ CONCEPT OF A TRUST RECEIPT c. An undertaking or a commitment of the entrustee:
TRANSACTION i. To hold in trust for the entruster the goods,
documents or instruments therein described
Trust Receipt ii. To dispose of them in the manner provided for in
A written/printed document signed and delivered by the the trust receipt
entrustee in favor of the entruster, whereby the latter Turn over the proceeds of the sale of goods,
releases the goods, documents or instruments over which documents or instruments to the entruster or as
he holds absolute title or a security interest to the appears on the trust receipt or to return the
possession of the former, upon the entrustee's promise to goods, documents or instruments in the event of
hold said goods in trust of the entruster, and to sell or their non-sale within the period specified therein
otherwise dispose of the goods, etc. with the obligation to
turn over the proceeds thereof to the extent of what is 1. Loan/Security Feature
owing to the entruster, or to return the goods if UNSOLD,
or for other purposes. • A trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as a
Trust Receipt Transaction security
any transaction by and between the entruster and the • In relation to a letter of credit, the trust receipt is a
entrustee, where the entruster, who owns and holds separate document. While the trust receipt may
absolute title to or security interest over certain specified have been executed as a security to the letter of
goods, documents or instruments, releases the same to credit, still the two documents involve different
the possession of the entrustee upon the latter's execution undertakings and obligations.
and delivery to the entruster and the trust receipt (Trust
Receipts Law, P.D. No. 115, [hereinafter TRI] Sec. 4) Obligations in the Trust Receipt
FOR GOODS OR FOR INSTRUMENTS
Note: DOCUMENTS
• Currency in which trust receipt may be 1. To sell them 1. To sell them
denominated: 2. To manufacture for the 2. To deliver them to a
o Philippine currency purposes of sale principal
o Any foreign currency acceptable and eligible as 3. To unload/ship or deal 3. To effect the
part of the national reserves of the Philippines. with them in a manner consummation of a
- Payment shall be made in its equivalent in preliminary to their sale transaction involving
Philippine currency, computed at the delivery to a depositary or
prevailing exchange rate on the date of the a register
proceeds of sale of goods, documents or 4. To effect their
instruments held in trust by the entrustee are presentation, collection or
turned over or on such date as stipulated renewal
(TRL, Sec. 6)
In a trust receipt transaction, it is fundamental "that the Distinguish Between Trust Receipt and Letter of Credit
person who advanced the payment for the (Bank of Commerce v. Serrano, G.R. No. 151895, 2005)
merchandise becomes the absolute owner of said TRUST RECEIPT LETTER OF CREDIT
merchandise and continues as owner until he or she is The trustee executes a It is an engagement by the
paid in full, or if the goods had already been sold, the trust receipt binding bank or other person
proceeds should be turned over to him or her." (Land himself to hold the goods, made at the request of a
Bank of the Philippines v. Perez, et. al., G.R. No. documents or instruments customer that the issuer
166884, 2012). in trust for the entruster will honor drafts or other
and to dispose them with demands of payment after
the obligation to turn over the conditions specified in
Contents of a Trust Receipt the proceeds to the extent the credit have been
a. A description of goods, documents or instruments of of the debtor the unsold complied with.
the trust receipt goods, documents or
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instruments in accordance
with the terms of the trust
receipt. 2. Ownership of the Goods, Documents, and
Instruments Under the Trust Receipt
Note: When the debtor receives goods subject of the trust
receipt before the trust receipt was entered into, the
transaction is a simple loan (Colinares and Veloso v. CA, Entruster holds absolute title to the goods, documents, and
G.R. No. 90828, 2000). instruments (TRL, Sec. 4)
Purpose of the Law • Accordingly, in order to secure that the banker shall be
a. To encourage and promote the use of trust receipts as repaid at the critical point - that is, when the imported
an additional and convenient aid to commerce and goods finally reach the hands of the intended vendee
trade; - the banker takes the full title to the goods at the very
b. To provide for the regulation of trust receipts beginning; he takes it as soon as the goods are
transactions in order to assure the protection of the brought and settled for by his payments or
rights and enforcement of the obligation of the parties acceptances in the foreign country, and he continues
involved therein; and, to hold that title as his indispensable security until the
c. To declare the misuse 'and/or misappropriation of goods are sold and the vendee is called upon to pay
goods or proceeds realized from the sale of goods, for themn (People vs Yu Chai Ho, G.R. No. L-29278,
documents or instruments released under trust receipt 1928).
as acriminal offense punishable as estafa. (TRL,Sec.
2) Entrustee only holds the goods, documents and
instruments in trust or as security in favor of the entruster
Note: (TRL, Sec. 4)
A Trust receipt transaction imposes two obligations on the
entrustee: • This security is not an ordinary pledge by the importer
(1) to deliver the price of the sale OR to the banker, for the importer has never owned the
(2) return the same to the entruster. goods, and moreover he is not able to deliver the
The Trust Receipts law, as supported by Article 315 of the possession; but the security is the complete title vested
RPC, provides that failure to comply constitutes ESTAFA. originally in the bankers, and this characteristics of the
transaction has again and again been recognized and
In Gonzales v HSBC, Petitioner Gonzalez, as Chairman protected by the courts. Of course, the title is at bottom
and and CEO of MLRC acknowledged receipt on behalf of a security title, as it has sometimes been called, and
MLRC various golfing equipments and assorted Walt the banker is always under the obligation to reconvey;
Disney items and signed the two Trust Receipt but only after his advances have been fully repaid and
Agreements. Upon due dates of the Trust Receipts, after the importer has fulfilled the other terms of the
respondent HSBC demanded from MLRC the turnover of contract (People vs. Yu Chai Ho, G.R. No. L-29278,
the proceeds of the sale of the assorted goods OR its 1928).
return. MLRC failed to comply with either option, hence
HSBC filed estafa for violation of the Trust Receipts Law
against Gonzalez.
Evidence shows that Gonzalez executed an affidavit

acknowledging receipt of the trust receipt on behalf of
MLRC. No payment or returns have been made. Further,
the crime is male prohibitum, where mere failure makes
him LIABLE. Though he signed the Trust Receipts as a
corporate officer and had no physical possession over
them, he cannot avoid responsibility. The rationale is that
they are vested with authority to devise means to ensure
compliance with the Trust Receipts Law. (Gonzales v
HSBC, G. R. No. 164904, 2007)
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B. Rights and Obligations of Parties Any purchaser of goods from an entrustee with right to sell,
or of documents or instruments through their customary
form of transfer, who buys the goods, documents, or
1. RIGHTS OF THE ENTRUSTER instruments for value and in good faith from the entrustee,
acquires said goods, documents or instruments free from
Entruster v. Entrustee the entruster's security interest. (TRL, Sec. 11)
ENTRUSTER ENTRUSTEE
1. Entitled to the proceeds 1. To receive surplus Note:
from the sale of goods, from the public sale General Rule: The law warrants the validity of petitioner's
documents or instruments security interest in the goods pursuant to the written terms
of the trust receipt as against all creditors of the trust
2. Entitled to the return of 2. To have possession receipt agreement.
the goods, etc. In case of of the goods as a
non-sale condition for his liability Exception: When the properties are in the hands of an
under TRL. (Ramos V. innocent purchaser for value and in good faith (Prudential
CA, G.R. No. L-39922- Bank v. NLRC, G.R. No. 112592, 1995). The entruster
25, 1987). wins against any of the entrustee's creditors except one is
3. To enforce all other rights an innocent purchaser for value and in good faith.
conferred to him under TRL.
4. To cancel the trust, take 2. OBLIGATIONS AND LIABILITIES OF THE
possession of the goods or ENTRUSTEE
instruments or of proceeds
realized therefrom upon the 1. Payment/Delivery of the Proceeds of Sale or
default of the entrustee. Disposition of Goods, Documents, or Instruments
5. To sell the goods in a
public or private sale upon The entruster shall be entitled to the proceeds from the
notice to the entrustee in sale of the goods, documents or instruments released to
case of default. the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt. (TRL, Sec. 7)
6. May purchase at the
intended public sale (TRL, 2. Return Of Goods, Documents, Or Instruments In
Sec. 7) Case Of Non-Sale (TRL, Sec. 7)
7. Extent of security
interest: The entruster shall be entitled to the return of the goods,
a. As against innocent documents or instruments in case of non-sale
purchaser for value: not
preferred (TRL, Sec. 11) Entruster v. Entrustee
b. As against creditors of ENTRUSTER ENTRUSTEE
the entrustee: preferred 1. To give possession of 1. To hold the goods or the
(TRL, Sec. 12) the goods to the proceeds of the sale in trust
entrustee for the entruster
1. Validity of the Security Interest as Against the 2. To give at least 5 days 2. To comply with his
Creditors Of The Entrustee/Innocent Purchasers notice to the entrustee of alternative obligation
For Value the intention to sell the
goods at the intended
As Against Creditors of the Entrustee public sale
The entruster's security interest in goods, documents, or 3. To ensure against loss
instruments pursuant to the written terms of a trust receipt the goods for their total
shall be valid as against all creditors of the entrustee for value
the duration of the trust receipt agreement. (TRL, Sec. 12)
As Against Innocent Purchasers for Value

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4. To keep the goods or Liability of the Entruster in Any Sale or Contract Made
sale proceeds separate by the Entrustee
and identifiable The entruster is not responsible as principal or as vendor
5. To return the goods in under any sale or contract to sell made by the entrustee by
the event of non-sale or virtue of such interest or having given the entrustee the
upon demand of the liberty to sell or otherwise dispose of the goods, documents
entruster or instruments under the terms of the trust receipt
6. To observe the transaction.
conditions of the trust
receipt not contrary to the Note: The repossession of the goods under the trust
provisions of the TRL receipt does not suffice to satisfy the principal loan
obligation. The entrustee remains liable for the deficiency
Entruster's option to cancel the Trust Receipt: after the proceeds of the sale have been applied to the
• The entruster may cancel the trust and take payment of expenses and debt (Land! & Company, et. al
possession of the goods, documents or instruments or v. MBTC, G.R. No. 159622, 2004).
of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of Failure of the Entrustee to Turn Over the Proceeds of
the terms and conditions of the trust receipt. the Sale
o The entruster in possession of the goods, It shall constitute the crime of estafa and may also be a
documents or instruments may sell the goods at cause for damages under Art. 33 of the Civil Code
a public or private sale, provided he/she gave (Prudential Bank v. IAC, G.R. No. 74886, 1992).
due notice to the entrustee at least 5 days before
such sale. Novation of the Trust Agreement
o The entruster may, at a public sale, become a A Memorandum of Agreement entered into between the
purchaser. bank-entruster and entrustee extinguished the obligation
• The proceeds, in case of any public or private sale, under the existing trust receipt because the agreement did
shall be applied in the following manner not only reschedule the debts of the entrustee but it
a. To the payment of the expenses thereof provided principal conditions which are incompatible with
b. To the payment of the expenses of re-taking, the trust agreement. Hence, the liability for breach of the
keeping and storing the goods, documents or Memorandum of Agreement would be purely civil in nature
instruments and no criminal liability under the TRL can be imposed
c. To the satisfaction of the entrustee's (Philippines Bank v. Alfredo T. Ong, G.R. No. 133176,
indebtedness to the entruster. 2002).
Note: Note: The criminal liability arising from the loan agreement
• The entrustee shall receive any surplus but shall be secured by a trust receipt is not extinguished absent the
liable to the entruster for any deficiency. incompatibility of the obligations under the first and second
• Notice of sale shall be deemed sufficiently given if in agreements (PNB v. Lilian Soriano, G.R. No. 164051,
writing, and either personally served on the entrustee 2012).
or sent by post-paid ordinary mail to the entrustee's
last known business address. 4. Penal Sanction if Offender is a Corporation
If the violation or offense is committed by a corporation,
3. Liability for Loss of Goods, Documents or partnership, association or other juridical entities, the
Instruments penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible
• The risk of loss shall be borne by the entrustee. <
for the offense, without prejudice to the civil liabilities
• Loss of goods, documents or instruments, pending
arising from the criminal case (TRL, Sec. 13)
their disposition, shall not extinguish the obligation of
the entrustee to the entruster for the value thereof,
Note: (BERNABE) As for civil liability, directors, officers
whether or not the said loss was due to the fault or
and employees acting as corporate agents will not be
negligence of the entrustee.
directly liable for the debts incurred. Liability shall fall upon
the hands of the corporation UNLESS they stipulate or
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assume to be personally liable for the debts. (Ildefonso under fraud (Prudential Bank v. IAC, G.R. No. 74886,
Crisologo v. People of the Philippines and China Banking December 8, 1992; See also Sarmiento and Limpin v. CA,
Corporation, G.R. No. 199481, 2012). G.R. No. 122502, 2002).
C.REMEDIES AVAILABLE
end of topic
Criminal
The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing of the
entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa (TRL, Sec. 13)
In order to be validly prosecuted for estafa in relation to

Sec. 13, they:
a. Have the obligation to sell and remit the proceeds
thereof to the entruster, or return the goods if not sold;
b. Misappropriated the goods and/or the proceeds of the
sale;
c. Performed such acts with abuse of confidence to the
prejudice of the entruster; and,
d. Demand was made on the entrustee (Metropolitan
Bank and Trust Company v. Jimmy Go and Benjamin
Go, G.R. No. 155647, 2007).
Note:
Even if the accused did not receive the merchandise for
deposit, he is nevertheless, covered by article 315(I)(b)
because after receiving the price of the sale, he did not
)
deliver the money to the bank or, if he did not sell the
merchandise, he did not return It to the bank. (People v.
Cuervo, G.R. No. 27607, 1981).
When both parties enter into an agreement knowing fully

well that the return of the goods subject of the trust receipt
is not possible, even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the
RPC (Hur Tin Yang v. People of the Philippines, G.R. No.
195117, 2013).
Civil
After commencing criminal action for violation of the Trust
Receipts Law, the entruster may enforce civil liability
arising out of the trust receipt in a separate civil
action. Under Article 33 of the Civil Code, a civil action for
damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of
defamation, fraud and physical injuries. Estafa falls
Page 13 of 250
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H. NEGOTIABLE INSTRUMENTS LAW cashed. (Roman Catholic Bishop of Malolos vs. IAC, 191
SCRA 411)
TOPIC OUTLINE UNDER THE SYLLABUS
Postdated checks does not operate as payment until after
III. NEGOTIABLE INSTRUMENTS LAW the same has been cashed. (BPI Express Card
A. Requisites of negotiability Corporation vs. CA, 296 SCRA 260)
B. Forgery and material alteration
C. Negotiation While a non-negotiable instrument may not be negotiated,
D. Rights of the holder it may be assigned or transferred in the absence of an
1. Holder in due course express prohibition in the face of the instrument. The
promissory note, while marked "non-negotiable" was not
2. Defenses against the holder
stamped as "non-transferrable" or "non-assignable."
E. Checks
Assuming that there was such a prohibition, it still cannot
be invoked against an assignee or transferee of the
FORMS AND INTERPRETATION promissory note in good faith & w/o -notice of such
prohibition. The rights of an assignee are not any greater
Negotiable Instrument
than the rights of the assignor, since the assignee is merely
It is a written contract for the payment of money; by its
substituted in the place of the assignor and that the
form, intended as a substitute for money and intended to
assignee acquires his rights subject to the equities — i.e.
pass from hand to hand, to give the holder in due course
the defenses — w/c the debtor could have set up against
the right to hold the same free from defenses available to
the original assignor before notice of the assignment was
prior parties and collect the sum due.
given to the debtor. (Sesbreno v CA, .GR 89252, 1993)
A. Requisites of Negotiability
Sum
The sum payable is a sum certain within the meaning of
An instrument to be negotiable, must conform to the
this Act, although it is to be paid: (ISDC)
following-requirements: (SUDOC)
a. With interest; or
a. It must be in writing and Signed by the maker or
b. By stated installments; or
drawer;
c. By stated installments, with a ,provision that, upon
b. Must contain an Unconditional promise or order to pay
default in payment of any installment or of interest,
a sum certain in money;
the whole shall become due; or
c. Must be payable on Demand, or at a fixed or
d. With costs of collection or an attorney's fee, in
determinable future time;
case payment shall not be made at maturity. (NIL,
d. Must be payable to Order or to 'bearer; and
Sec. 2)
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
Unconditional Order/Promise to Pay
reasonable Certainty. (Negotiable Instruments Law
("NIL"), Sec. 1)
Effect of a Conditional Promise or Order
Note: A promise or order should not depend on a contingent
event. If it is conditional, it is non-negotiable.
Tender of payment cannot be presumed based on the
circumstances; it must be proven by credible evidence.
There must be a positive and unconditional act of offering There is no "promise" if there is a mere acknowledgment
of debt. However, an acknowledgment may become a
the legal currency as payment for the debt, demanding its
promise by the addition of words by which a promise of
acceptance. Just because one is capable of paying doesn't
mean that he, in fact, actually paid. payment is naturally implied, such as "payable," "payable
on a given day", "payable on demand," and "paid when
called for (Jimenez v. Bucoy, G.R. No. L-10221, 1958)
Even assuming the check was indeed offered, checks —
whether ordinary or manager's checks — are not legal
When Promise Is Unconditional
tender. They are only substitutes for money and mere
An unqualified order or promise to pay is unconditional
delivery thereof does not operate as payment until they are
within the meaning of the NIL, though coupled with —
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a. An indication of a particular fund out of which purchaser or assignee thereof merely steps into the shoes
reimbursement is to be made, or a particular of Industrial and is open to all defenses available against
account to be debited with the amount; or the latter. The note being non-negotiable, it only follows
b. A statement of the transaction which gives rise to that IFC Leasing was not a holder in due course.
the instrument. Further, IFC Leasing knew well enough that the right of
Industrial was not unconditional — the same being subject
But an order or promise to pay out of a particular fund is to warranty. It was not a holder in good faith and knew the
not unconditional. (NIL, Sec. 3) infirmity of Industrial's title thereto.
Note: The treasury warrant is not a negotiable instrument DD: If the instrument is negotiable, the indorsee or
if in its face, the words "payable from the appropriation for transferee can actually acquire a better right than the
food administration" appear. It is an order for payment out indorser. Provided he is a holder in due course, he is
of a particular fund; thus the payment is not unconditional, immune from whatever defenses there are as between the
which is one of the essential elements of a negotiable original parties — such as breach of warranty in this case.
instrument. (Abubakar vs. Auditor General 81 Phil. 359) (Consolidated Plywood vs. IFC Leasing, Gr 72593, 1987)
Demand/Fixed Determinable Future Time At the onset, it is obvious that the check issued by Nell
An instrument is payable at a determinable future time, was equivocal and very ambiguous. The payee was
within the meaning of this Act, which is expressed to be not indicated therein to any reasonable certainty. And
payable — as a rule, the ambiguity is construed against the party
a. At a fixed period after date or sight; or who caused it — in this case, Nell. It couldn't be
b. On or before a fixed or determinable future time ascertained whether the payee was Equitable or Casville.
specified therein; or The Bank teller construed it as payable to the account of
c. On or at a fixed period after the occurrence of a Casville Enterprises and thus allowed the same to be
specified event, which is certain to happen, though deposited. (Equitable Banking vs. IAC, 161 SCRA 518)
the time of happening be uncertain.
Instruments Payable to Bearer
An instrument payable upon a contingency is not The instrument is payable to bearer:
negotiable, and the happening of the Event does not cure a. When it is expressed to be so payable; or
the defect. (NIL, Sec.4) b. When it is payable to a person named therein or
bearer; or
Order/ Bearer, Payable To: Instruments Payable to c. When it is payable to the order of a fictitious or
Order non-existing person, and such fact was known to
The instrument is payable to order where it is drawn the person making it so payable; or
payable to the order of a specified person or to him or his d. When the name of the payee does not purport to
order. It may be drawn payable to the order of: be the name of any person; or
a. A payee who is not maker, drawer, or drawee; or e. When the only or last indorsement is an
b. The drawer or maker; or indorsement in blank. (NIL, Sec. 9
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or Note: A check drawn payable to the order of "cash" is a
f. The holder of an office for the time being. (NIL, check payable to bearer; the Bank may pay it to the person
Sec. 8) presenting it for payment even w/o the drawer's
indorsement. The word "cash" does not purport to be the
Note: The promissory note contained the words "promise name of any person — thus the instrument is payable to
to pay to the Industrial Products Marketing the sum of.." It bearer. Although there are some times when the Banks
did not contain "words of negotiability." It was not payable would require indorsement, this altogether is not a
to order (or to bearer) and was thus non-negotiable. requirement. The Bank would not be negligent in not
The consent of the payer that the note be payable to holding the bearer to be identified. (Ang Tek Lian vs. CA
order is indispensable. The words "or order" or "to the 87 Phil. 383)
order of" must be present. In this case, the note was
payable to Industrial only. Thus, any subsequent
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Payable to Order v. Payable to Bearer money to a specified person or entity for a period of
Payable to Order Payable to Bearer time. (Traders Royal Bank v. CA, G.R. No. 93397, 1997)
Payee must be named or Payee need not be
indicated with reasonable indicated; it is enough that When the documents provide that the amounts deposited
certainty (NIL, Sec. 8) it is expressed to be shall be repayable to the depositor, such instrument is
payable to bearer (NIL, negotiable because it is payable to the "bearer" (Caltex
Sec. 9[a]) Philippines v. CA, G.R. No. 97753, 1992)
Negotiated by Negotiated by mere
indorsement coupled by delivery (NIL, Sec. 30) Kinds of Negotiable Instruments
delivery (NIL, Sec. 30)
Instrument originally Instrument originally
Promissory Note
payable to order can be payable to bearer cannot
converted into a bearer be converted into an order An unconditional promise in writing made by one person to
instrument through blank instrument. A bearer another, signed by thernaker, engaging to pay on demand,
indorsement (NIL, Sec. instrument always remains or at a fixed or determinable future time, a sum certain in
We]) as such and can be money to order or to bearer. Where the note is drawn to
negotiated by mere the maker's own order, it is not complete until indorsed by
delivery, even if specially him. (NIL, Sec. 184)
indorsed. (NIL, Sec 40)
Bill of Exchange
Certainty An unconditional order in writing addressed by one person
Where the instrument is payable to order the payee must to another, signed by the person giving it, requiring the
be named or otherwise indicated therein with reasonable person to whom it is addressed to pay on demand or at a
certainty. (NIL, Sec. 1[e]) fixed or determinable future time a sum certain in money
to order or to bearer. (NIL, Sec. 126)
How Negotiability Is Determined
a. By the provisions of the Negotiable Instrument Law, Check
particularly Section 1 thereof; It is a bill of exchange drawn on a bank and payable on
b. By considering the whole instrument; demand. (NIL, Sec. 185)
c. By what appears on the face of the instrument and not
elsewhere. (Caltex v. CA, G.R. No. 97753, 1992) Characteristics of Negotiable Instruments
a. Negotiability
In determining whether the instrument is negotiable, only • Allows the transfer from one person to another
the instrument itself and no other, must be examined and so as to constitute the transferee as a holder
compared with the requirements stated in Sec. 1. in due course that is free from personal
defenses.
If it appears on the instrument that it lacks one of the b. Accumulation of secondary contracts
requirements, it is not negotiable and the provisions of the • Instrument is negotiated from person to
NIL do not govern the instrument. The requirement lacking person resulting to secondary liability, making
cannot be supplied by using a separate instrument in which more and more persons liable to the holder
that requirement appears.
Negotiable v. Non-Negotiable Instrument
Note: The language of negotiability which characterizes a
Negotiable Non-Negotiable
negotiable paper as a credit instrument is its freedom to
Contains all requisites of Does not have all
circulate as a substitute for money. Hence, freedom of
Section 1 requisites from Section 1
negotiability is the touchstone relating to the protection of
Governed by NIL NIL does not apply except
holders in due course, and the freedom of negotiability is
the foundation for the protection which the law throws by analogy.
around a holder in due course. Transferred by Transferred only by
negotiation or assignment assignment
This freedom in negotiability is totally absent in a Transferee can be a Transferee can never be a
certificate of indebtedness as it merely to pay a sum of holder in due course holder in due course
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Transferee who is a Transferee is subject to all COMPLETION AND DELIVERY

holder in due course is not defenses to prior parties
subject to all defenses 1. Insertion of Date
Promissory Note v. Bill of Exchange Presumption as to Date

Promissory Note Bill of Exchange If the instrument bears a date, it is presumed that the said
Unconditional promise Unconditional order date is the date when it was made or drawn. (NIL, Sec. 11)
Involves 2 parties (maker, Involves 3 parties (drawer,
payee) payee, drawee) Effect of Ante-Dating and Post-Dating
Maker primarily liable Drawer only secondarily It does not render invalid or non-negotiable by that fact
liable alone, provided it is not done for an illegal or fraudulent
Only 1 presentment - for Generally two purpose. The person to whom the instrument so dated is
payment presentments - for delivered the title as of the date of delivery. (NIL Sec. 12)
acceptance and for
payment Instances When a Date May Be Inserted In an
Instrument
Check V. Bill of Exchange Where an instrument expressed to be payable at a fixed
period after date is issued undated, or where the
Check Bill of Exchange
acceptance of an instrument payable at a fixed period after
Always drawn upon a May or may not be drawn
sight is undated, any holder may insert therein the true
bank or banker against a bank date of issue or acceptance, and the instrument shall be
Always payable on May be payable on payable accordingly. The insertion of a wrong date does
demand demand or at a fixed or not avoid the instrument in the hands of a subsequent
determinable future time holder in due course; but as to him, the date so inserted is
Not necessary that it be Necessary that it be to be regarded as the true date. (NIL, Sec. 13)
presented for acceptance presented for acceptance
Drawn on a Deposit Not drawn on a deposit 2. Completion of Blanks
The death of a drawer of The death of the drawer of
a check, with knowledge the ordinary bill of Where an Instrument Is Wanting In Any Material
by the banks, revokes the exchange does not revoke Particular
authority of the banker to the authority of the banker a. The holder has prima facie authority to fill up the blanks
pay to pay therein.
Must be presented for May be presented for b. It must be filled up strictly in accordance with the
payment within a payment within a authority given and within a reasonable time.
reasonable time after its reasonable time after its c. If negotiated to a holder in due course, it is valid and
issue (6 months) last negotiation. effectual for all purposes as though it was filled up
strictly in accordance with the authority given and
Promissory Note v. Check within reasonable time. (NIL, Sec. 14)
Promissory Note Check
2 parties: the maker and 3 parties: the drawer, the Where Only a Signature on a Blank Paper Was
the payee drawee bank and the Delivered
payee If a signature on blank paper is delivered by the person
May be drawn against any Always drawn against a making it in order that it may be converted into a negotiable
person, not necessarily a bank instrument, the holder has prima facie authority to fill it up
bank as such for any amount. (NIL, Sec. 14)
May be payable on Always payable on
demand or at a fixed or demand 3. Incomplete and Undelivered Instruments
determinable future time
A promise to pay An order to pay When an Instrument Is Incomplete and Undelivered
Where an incomplete instrument has not been delivered, it
will not, if completed and negotiated without authority, be
a valid contract in the hands of any holder, as against any
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person whose signature was placed thereon before And where the instrument is no longer in the possession of
delivery. (NIL, Sec. 15) a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is
Note: proved. (NIL, Sec. 16)
• An incomplete and undelivered instrument is a real
defense. Thus, it can be interposed against a holder Rules on Delivery of Negotiable Instruments
in due course. • Delivery is essential to the validity of any negotiable
• Delivery is not conclusively presumed where the instrument
instrument is incomplete. The defense of the maker is • As between immediate parties or those in like cases,
to prove non-delivery of the incomplete instrument. delivery must be with the intention of passing title
• An instrument signed but not completed by the drawer
4. Complete but Undelivered Instruments or maker and retained by him is invalid as to him for
want of delivery even in the hands of a holder in due
When an Instrument Is Complete but Undelivered course
Every contract on a negotiable instrument is incomplete • But there is prima facie presumption of delivery of an
and revocable until delivery of the instrument for the instrument signed but not completed by the drawer or
purpose of giving effect thereto. maker and retained by him if it is in the hands of a
holder in due course. This may be rebutted by proof
As between immediate parties, and as regards a remote of non-delivery.
party other than a holder in due course, the delivery, in • An instrument entrusted to another who wrongfully
order to be effectual, must be made either by or under the completes it and negotiates it to a holder in due course,
authority of the party making, drawing, accepting, or delivery to the agent or custodian is sufficient delivery
indorsing, as the case may be; and in such case the to bind the maker or drawer.
delivery may be shown to have been conditional, or for a • If an instrument is completed and is found in the
special purpose only, and not for the purpose of possession of another, there is prima facie evidence of
transferring the property in the instrument. delivery and if it be a holder in due course, there is
conclusive presumption of delivery.
But where the instrument is in the hands of a holder in due • Delivery may be conditional or for a special purpose
course, a valid delivery thereof by all parties prior to him so but such do not affect the rights of a holder in due
as to make them liable to him is conclusively presumed. course.
Delivery of Instruments
Section 14 Section 15 Section 16
• Delivery
Delivered Undelivered Undelivered
Completeness
(1) Wanting in any material
particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature
Authority of Person in Possession
(1) Prima facie authority to
May negotiate if delivered to him by or
complete it by filling up the blanks;
No authority to complete and/or under the authority of the party
(2) Signature operates as a prima
negotiate making, indorsing, drawing, or
facie authority to fill it up for any
accepting
amount
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When Enforceable
Delivery is made by or under authority
Filled up strictly in accordance with
of the party making, indorsing,
authority given and within a Not Enforceable
drawing, or accepting, as the case
reasonable time
may be
Kind of Defense
Personal Real Personal
Rights of Holder
Can enforce instrument. Here, the
(1) If HDC, he can enforce the
instrument is in the hands of a HDC, a
instrument as completed as against
valid delivery thereof by all parties
parties prior or subsequent to the
prior to him so as to make them liable
completion;
to him is conclusively presumed.
None in the hands of any holder. Where the instrument is no longer in
(2) If not a HDC, he can enforce the
the possession of a party whose
instrument as completed only
signature appears thereon, a valid and
against parties subsequent to the
intentional delivery to him is presumed
completion but not against those
until the contrary is proved.
prior thereto.
SIGNATURE provided that the party intends to bound by the same. (NIL,
Sec. 1812])
General Rule: Only persons whose signatures appear
on an instrument are liable thereon. A person whose 2. Liability of Infants and Corporations for Their
signature does not appear on the instrument is not liable. Indorsement or Assignment
The indorsement or assignment of the instrument by a
Exception: When an agent is liable on the instrument corporation or by an infant passes the property therein,
Where the instrument contains or a person adds to his notwithstanding that from want of capacity the corporation
signature words indicating that he signs for or on behalf of or infant may incur no liability thereon. (NIL, Sec. 22)
a principal, or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere Generally, contracts entered into by a minor are voidable.
addition of words describing him as an agent, or as filling (Civil Code, Art. 1327) A minor shall not be bound by his
a representative character, without disclosing his principal, indorsement for lack of legal capacity, but he may be
does not exempt him from personal liability. (NIL, Sec. 20) allowed to transfer rights.
Signature by Procuration As regards corporations, incapacity to indorse shall apply

A signature by procuration operates as a notice that the in cases where the corporation, through its agents or
agent has a limited authority to sign. Hence: officers, has committed ultra vires acts.
• The principal is bound only if the agent acted within the
limits of the authority given; 3. Effect of a Forged Signature or One Made Without
Authority
• The person who takes the instrument is bound to
When a signature is forged, or made without the authority
inquire into the extent and nature of the authority given.
of the person whose signature it purports to be, it is wholly
(NIL, Sec. 21)
inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against
1. Trade Name
any party thereto, can be acquired through or under such
A person who signs in a trade or assumed name shall be
signature, unless the party against whom it is sought to
liable in the same manner as if he signed his name,
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enforce such right is precluded from setting up the forgery thereto. Since under said provision, a forged signature
or want of authority. (NIL, Sec. 23) is "wholly inoperative," no one can gain title to the
instrument through such forged indorsement. Such
B. Foruery And Material Alteration indorsement prevents any subsequent party from
acquiring any right as against any party whose name
Governing Provisions appears prior to the forgery. (Gempesaw v. CA, G.R.
Sec. 23 applies only to forged signatures or signatures No. 92244, 1993)
made without authority. • Where a depositor (drawer) is using its own
personalized checks, its failure to provide adequate
Alterations, such as to amounts or the like, fall under Sec. security measures to prevent forgeries of checks
124. constitutes gross negligence and bars it from setting
up the defense of forgery (MWSS v. CA, -G.R. No. L-
General Rule: When a signature is forged or made without 62943, 1986)
the authority of the person, only the forged signature (not • However, the mere fact that a cheek was removed and
the instrument itself and the other genuine signatures) is stolen in a checkbook without the knowledge and
wholly inoperative consent of the owner is not negligence (PNB v.
Quimpo, G.R. No. L-53194, 1988)
Only the signature forged or made without authority is • If there was no negligence on the 'part of the drawer,
inoperative. The instrument or other signatures which are the drawee bank bears the risk of loss in case of a
genuine are not affected. (Republic v. Ebrada, G.R. No. L- forged check (Samsung Construction Co. v. Far East
40796, 1975) Bank & Trust Co., G.R. No. 129015, 2004)
• If there is a collecting bank, the collecting bank bears
Effects of Forgery the loss, because it has the duty to ascertain the
1. No right to retain the instrument genuineness of all prior indorsements (BDO Savings
2. No right to give a discharge thereof and Mortgage Bank v. Equitable Banking Corp., G.R.
3. No right to enforce payment thereof against any party No. 74917, 1988)
thereto can be acquired through or under such signature
Last Clear Chance and Contributory Negligence in
Exception: The party against whom it is sought to be Forgery
enforced is precluded from setting up forgery or want of In instances where both parties are at fault, the Doctrine of
authority as a defense (NIL, Sec. 23) Last Clear Chance must be applied in order to assign
a. Those who warrant or admit the genuineness of the liability. Drawee cannot evade responsibility for the loss by
signature; attributing responsibility for the loss by attributing
b. Those who are estopped thru negligence. negligence to the drawer because the former had no last
clear chance to avoid the loss. Drawee's liability is
Persons who are precluded by warranting are mitigated by the drawer's negligence (Bank of America
a. Indorsers; •NT&SA v. Philippine Racing Club, G.R. No. 150228, 2009)
b. Persons negotiating by delivery;
c. Acceptors. 24-Hour Clearing Rule
The drawee bank receiving the check for clearing from the
Forms of forgery Central Bank Clearing House must return the check to the
a. Fraud in Factum; collecting bank within the 24-hour period if the check is
b. Duress amounting to Fraud; defective for any reason. Otherwise, the drawee bank
c. Fraudulent Impersonation. forever loses the right to claim against the presenting /
collecting bank if the check is not returned at the next
Doctrines: Liability in Forgery clearing day or within 24 hours. (Metrobank v. The First
• The instrument can be enforced by holders to whose National City Bank and CA, G.R. No. L-55079, 1982)
title the forged signature is not necessary.
• A drawee bank is conclusively presumed to know the
signature of its drawer.
• If an indorser's signature is forged, the loss will be
borne by the forger and the parties subsequent
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Rules on Forgery: Promissory Notes Indorsers subsequent to Indorsers may be made

Order Instrument I Bearer Instrument forgery (such as collecting liable to those persons
Maker's Signature Forged bank or last endorser) are who obtain title through
Maker is not liable because liable. their indorsements.
Same.
he never became a party to Payee's Signature Forged
the instrument. Drawer, drawee and payee Drawer liable (his
Indorsers subsequent to Indorsers may be made not liable. indorsement not
forgery are liable because
liable to those persons necessary to pass title).
of their warranties, who obtain title through Cut-off rule applies.
their indorsements. Drawee is liable (no
Indorsers subsequent to privity between drawer
Payee's Signature Forged
forgery (such as collecting and payee because
Maker and payee not Maker is liable.
bank) are liable without indorsement of payee is
liable.
prejudice to their right to not necessary).
Indorsers subsequent to Indorsers may be made
proceed against the forger.
forgery are liable because liable to those persons
Payee is not liable.
of their warranties. who obtain title through
their indorsements.
Collecting bank is liable
Indorser's Signature Fcrged
because of warranty.
Maker, payee and indorser Maker is liable.
However, it may recover
whose signature was Indorsement is not
from the person who
forged are not liable, necessary to pass title
forged the indorsement
and the maker engages to
on the check and
pay any bearer of the
deposited or encashed
instrument.
the same.
Indorsers subsequent to Only the indorser whose
Indorser's Signature Forged
forgery are liable because signature was forged can
Drawer, payee and Drawer is liable even if
of their warranties. raise the defense of
indroser whose signatures special indorsement was
forgery against a HDC.
were forged are not liable. forged because
indorsement is not
Rules on Forgery: Bills of Exchange
Cut-off rule N/A necessary to title.
Order Instrument I Bearer Instrument Drawee liable if it paid. Drawee is liable.
Maker's Signature Forged Indorsers subsequent to Indorser whose signature
Drawer is not liable Same. forgery (such as collecting was forged is liable
because he was never a bank) are liable. because indorsement is
party to the instrument. not necessary.
Drawee-acceptor is liable, Drawee-acceptor is liable
without recourse to drawer, if it paid. It cannot recover MATERIAL ALTERATION
if it paid because he from the collecting bank
admitted the genuiness of because it is bound to 1. Concept
the drawer's signature. know the drawer's There is a material alteration if it alters the effect of the
signature since the latter instrument. It means an unauthorized change in an
Drawee also cannot is its depositor. instrument that purports to modify in any respect the
recover from the collecting obligation of a party or an unauthorized addition of words
bank because there is no The drawee may recover or numbers or other change to an incomplete instrument
privity of contract between from the drawer when the relating to the obligation of a party.
the collecting bank and the latter's negligence is the
drawer. The collecting bank proximate cause of the In other words, a material alteration is one which changes
does not give any warranty loss or contributed the items which are required to be stated under Sec. 1 of
regarding the signature of thereto. the NIL. (PNB v. al, G.R. No. 107507, 1996)
the drawer.
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General Rule: When materially altered, without the alteration, assuming that the drawer was itself not guilty of
consent of all parties liable, the instrument is avoided. negligence. (Republic Bank vs. CA 196 SCRA 100)
Except as against: 2. Effect of Material Alteration

1. The party who has made the alteration An instrument shall be AVOIDED except as against a party
2. The party who authorized or assented to the alteration. who has himself made, authorized, or assented to the
alteration and subsequent indorsers. (NIL, Sec. 124)
Exceptions:
a. In the hands of a HDC, it may be enforced 3. What Constitutes Material Alteration: (DSTNPA -
according to its original tenor. Daylight Savings Time Naman Po Ah)
b. With respect to a drawee's liability for a negotiable Any alteration which changes:
instrument that has been altered prior to its a. The Date;
acceptance, the original tenor is liable. (Areza v. b. The Sum payable, either for principal or interest;
Express Savings Bank, G.R. No. 72764, 2014) c. The Time or place of payment;
d. The Number or the relations of the parties;
First View: The drawee should be liable for the altered e. The medium or currency in which Payment is to be
amount. Section 62 of the Negotiable Instruments Law made;
(NIL) should be strictly construed and the drawee should f. Or which adds a place of payment where no place
be liable for the amount indicated at the time of his of payment is specified, or Any other change or
acceptance for he accepts no other instrument than the addition which alters the effect of the instrument in
one presented to him-the altered form- and he alone any respect, is a material alteration. (NIL, Sec.
engages to pay it. This is supported by the practical fact 125; Bank of America NT & SA v. Philippine
that the drawee has authenticated the instrument in a Racing Club, G.R. No. 150228, 2009)
certain form and the commercial policy that favors the
protection of a HDC who changes his position on the faith Innocent Alteration
of that authentication. Changes on items other than those required under Sec. 1
of the NIL, and spoliation, which refers to alterations done_
Second View: The drawee despite the tenor of his by a stranger, will not avoid the instrument but the holder
acceptance is liable only to the extent of the bill prior to may enforce it only according to its original tenor (PNB v.
alteration. This is in consonance with Section 124 of the CA, G.R. No. 107507, 1996)
NIL. Thus, when the drawee pays a materially altered
check, it violates the terms of the check, as well 4its duty Note: An alteration on the serial number of the check , an
to charge its client's account only for bona fide item which is not an essential requisite for negotiability, did
disbursements he -had made. If the drawee did not pay not change the relations between the parties. (The
according to the 'original tenor of the instrument, as International Corporate Bank vs Court of Appeals and
directed by the drawer, then it has no right to claim PNB, G.R. No. 129910, 2006)
reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the drawer's With Respect To the Obligation of a Drawee Bank to
account which it was expected to treat with utmost fidelity. Return a Materially Altered Check
The drawee, however, still has recourse to recover its loss, Generally, a check may only be returned within the 24-hour
such as passing liability back to other responsible parties clearing rule.
(i.e. collecting bank).
As the rule now stands, the 24-hour rule is still in force, that
Note: Generally, the collecting bank bears the loss is, any check which should be refused by the drawee bank
when it guarantees a forged indorsement; however, in accordance with long standing and accepted banking
the drawee bank has lost its right of reimbursement practices shall be returned through the PCHC/local
from the collecting bank by virtue of the 24-hour house clearing office, as the case may be, not later than the next
clearing rule if It failes to return the check wii he said regular clearing (24-hour). The modification, however, is
period. Therefore, the collecting bank, is now .solved that items which have been the subject of material
from liability. The remedy now of the drawee b cwould alteration or bearing forged endorsement may be returned
have to go after the person responsible for the f iery or even beyond 24 hours so long that the same is returned
within the prescriptive period fixed by law. The consensus
age 22 of 250
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among lawyers is that the prescriptive period is ten (10) Where value has at any time been given for the instrument,
years because a check or the endorsement thereon is a the holder is deemed a holder for value in respect to all
written contract. Moreover, the item need not be returned parties who became such prior to that time. (NIL, Sec. 26)
through the clearing house but by direct presentation to the
presenting bank. - (Areza v. Express Savings Bank, G.R. d) When A Lien Constitutes A Holder For Value
No. 72764, 2014) Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a
When a BOE may be treated as PN holder for value to the extent of his lien. (NIL, Sec. 27)
a. The drawer and the drawee are one and the same
b. The drawee is a fictitious person Absence of Consideration v. Failure of Consideration
c. The drawee has no capacity to contract. ABSENCE OF FAILURE OF
CONSIDERATION CONSIDERATION
CONSIDERATION No consideration was Consideration was
intended to pass. intended but that it failed to
Every negotiable instrument is deemed prima facie to have pass.
been issued for a valuable consideration; and every person There is a total lack of There was something
whose signature appears thereon to have become a party consideration for the agreed upon as
thereto for value. (NIL, Sec. 24) contract, as consequence consideration between the
the alleged contract must two parties, but the agreed
fail, upon consideration did not
Presumption of Consideration
materialize.
Since the consideration is presumed, it need not be alleged
and proved, but since there is only a prima facie
Effects of Want of Consideration
presumption it can be rebutted by evidence to the contrary.
Absence or failure of consideration is matter of defense as
(Pineda v. De La Rama, G.R. No. L-31831, 1983)
against any person not a holder in due course; and partial
failure of consideration is a defense pro tanto, whether the
The evidence must be convincing and not a mere denial of
failure is an ascertained and liquidated amount or
the receipt of the consideration. (Bayani v. People, G.R. otherwise. (NIL, Sec. 28)
No. 154847, 2004)
Effects of Failure or Absence of Consideration:
Valuable Consideration
a. The defense of want of consideration is ineffective
Value is any consideration sufficient to support a simple
against a holder in due course.
contract. An antecedent or pre-existing debt constitutes
b. A drawee who accepts the bill cannot allege want
value; and is deemed such whether the instrument is
of consideration against the drawer.
payable on demand or at a future time. (NIL, Sec. 25)
Note:
It is prestation to support any contract in favor of the party
• Every negotiable instrument is presumed to have been
to an instrument, such as the maker or indorser, and it may
acquired for value.
consist of giving, doing or not doing. (Civil Code, Art. 1156)
• He who alleges that there was no consideration has
the burden to prove it with convincing evidence. (Yang
Pre-Existing Debt
v. CA, GR No. 138074, 2003)
An antecedent/pre-existing debt is a valuable
• Since consideration is presumed, the maker is liable to
consideration. In other words, the holder can give up his
pay under a negotiable promissory note. (Samson v.
pre-existing debt, or his right to sue thereon for the
CA, GR No. 139983, 2008)
negotiable instrument.
• When the presumption has not been overcome, the
Love and Affection drawer of the must be ordered to pay its value. (Villaluz
"Love and affection" is not valuable consideration as v. Court of Appeals, G.R. No. 100571, 1992)
contemplated in Section 25.
Holder for Value
c) What Constitutes A Holder For Value

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ACCOMODATION PARTY as an accommodation party. (Bautista v. Auto Plus

Traders, Inc., G.R. No.166405, 2008)
An accommodation party is one who signs the instrument • To be entitled to recover from an Accommodation
as maker, drawer, acceptor, or indorser without receiving Party, the Holder of a negotiable instrument must be a
• value for it and for the purpose of lending his name to some holder in due course except for the notice of want of
other person. (NIL, Sec. 29) consideration. (Prudenclo v. Court of Appeals, G.R.
No. 34539, 1986)
Liability of an Accommodation Party • A party who signed a promissory note as
Such a person is liable on the instrument to a holder for accommodation maker in favor of the payees, cannot
value, notwithstanding such holder at the time of taking the raise the defense that he did not receive any value but
instrument (NIL, Sec. 29) is entitled to reimbursement from the party
accommodated. (Caneda v. CA, GR No. 81322, 1990)
Even if the accommodated party receives an extension of • Where a party indorsed several checks as
the period for payment without the consent of the accommodation endorser, she is liable to the holder for
accommodation party, the latter is still liable for the whole the payment of the checks. (People v. Maniego, G.R.
obligation, and such extension does not release him No 30910, 1987)
because as far as a holder for value is concerned, he is a
solidary co-debtor (Aglibot v. Santia, G.R. No. 185945, Accommodation Party v. Regular Party
2012) ACCOMODATiON
REGULAR PARTY
PARTY
The corporation is not liable for its acts as an Signs an instrument Signs the instrument for
accommodation party, because the issue or indorsement without receiving value value
of negotiable paper by a corporation without consideration thereof
and for the accommodation of another is ultra vires. One Must always show by Cannot disclaim or limit his
who has taken the instrument with knowledge of the• parol evidence that he is personal liability as
accommodation nature thereof cannot recover against a only such appearing on the
corporation where it is only an accommodation party instrument by parol
evidence
(Crisologo-Jose v. CA, G.R. No. 80599, 1989)
Cannot avail of the May avail of said defense
defense of absence or against a holder not in due
Right to Reimbursement failure of consideration course
The Accommodated Party cannot recover from the against a holder not in
Accommodation Party. (PNB v. Maze and Macenas, G.R. due course
No. L-242224, 1925) After paying the holder, After paying the holder,
may seek reimbursement may not sue any
Want of consideration cannot be interposed by the against the subsequent party for
Accommodation Party. accommodated party reimbursement
An Accommodation Maker may seek reimbursement from (HECTOR DE LEON, THE PHILIPPINE NEGOTIABLE
a co-maker even in the absence of any provision in the NIL; INSTRUMENTS LAW, 150 (2013))
the deficiency is supplied by the New Civil Code (Art. 1216)
(Sadaya v. Sevilla, G.R. No. L-17845, 1967) C. Negotiation
He may do this even without first proceeding against the An instrument is negotiated when it is transferred from one
debtor provided: person to another in such manner as to constitute the
a. He paid by virtue of judicial demand, and transferee the holder thereof. If payable to bearer, it is
b. Principal debtor is insolvent. negotiated by delivery; if payable to order, it is negotiated
by the indorsement of the holder completed by delivery.
Note: (NIL, Sec. 30)
• The Accommodation Party is permitted to show by
parol evidence which party he accommodated. In Note: For a valid negotiation, it requires both delivery and
absence of concrete evidence showing when one indorsement. In Caltex v CA, Even though the
issued the subject check and in what capacity, it certificates of deposits were bearer instruments, still,
cannot be assumed that he intended to lend his name they were not delivered in payment for the fuel
Page 24 of 250
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purchases. They were delivered merely as a security latter may acquire a better title than that of the transferor.
or guarantee therefor and not to constitute Caltex as a
holder thereof. Negotiation By Indorsement
were in reality delivered to it as a security for De la Cruz' If the instrument is payable to order, two steps are needed
purchases of its fuel products. Any doubt as to whether the to effect negotiation:
CTDs were delivered as payment for the fuel products or a. Indorsement by the payee of the present holder
as a security has been dissipated and resolved in favor of b. The delivery to the next holder.
the latter by petitioner's own authorized and responsible
representative himself. (Caltex v CA, GR No. 97753, 1992) Indorsement
Negotiation v. Assignment How Indorsement Is Made

NEGOTIATION ASSIGNMENT The indorsement must be an indorsement of the entire
Pertains only to More comprehensive; instrument. An indorsement which purports to transfer to
negotiable instruments, pertains to contracts in the indorsee a part only of the amount payable, or which
general. purports to transfer the instrument to two or more
Transferee takes it free Instrument is subject to indorsees severally, does not operate as a negotiation of
from personal defenses defenses obtaining among the instrument. But where the instrument has been paid in
available among parties. the original parties. part, it may be indorsed as to the residue. (NIL, Sec. 32)
Consideration is It is necessary to allege
presumed and need not and prove consideration to Kinds of Indorsement (NIL, Sec. 33)
be alleged and proved, maintain an action on a
common law instrument. Special
The general indorser is The assignor in good faith It specifies the person to whom, or to whose order, the
secondarily liable for any does not warrant the instrument is to be payable. (NIL, Sec. 34)
cause for which the party solvency of the debtor
primarily liable does not or unless it has been Blank
cannot pay; he warrants expressly stipulated or It specifies no indorsee and can be negotiated by mere
the solvency of the person unless the insolvency was delivery. (NIL, Sec. 34) A blank indorsement can be
primarily liable, prior to the assignment converted to a special indorsement by writing over the
and of common signature of the indorser in blank in any contract which is
knowledge. consistent with the character of the indorsement (NIL, Sec.
35).
A qualified indorser and a
person negotiating by
Conditional
mere delivery have limited
The indorser imposes some other condition to his liability,
secondary liability.
or the indorsee's right to collect the proceeds of the
The indorser is not liable
instrument. However, the party liable to pay can disregard
on his indorsement unless
the condition and can pay or indorse the instrument even
there be presentment for
though the condition has not been fulfilled. (NIL, Sec. 39)
payment at maturity and
prompt notice of dishonor
Restrictive
in case of dishonor.
An indorsement that:
a. Prohibits either the further negotiation of an
Modes of Negotiation
instrument; or
b. Restricts further negotiation to a particular person
Negotiation By Delivery
or for a particular purpose; or
If the instrument is payable to bearer, then the instrument
c. Modifies the rights of the holders or the liabilities
is negotiated by mere delivery. Any person in possession
of the indorser. (NIL, Sec. 36)
of an instrument payable to bearer is always the bearer
thereof, even if he has no legal right to it. Consequently, if
However, the absence of words of negotiability does not
the instrument is negotiated to a holder in due course, the
make an indorsement restrictive.
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Effect of Restrictive Indorsement If there are two or more payees or indorsees who are not
It confers upon the indorsee three rights: partners, all must indorse unless the one indorsing is given
a. To receive payment of the instrument; authority to indorse for the others. (NIL. Sec. 41)
b. To bring any action thereon that the indorser could
bring; Irregular
c. To transfer his rights as such indorsee, where the When a person not otherwise a party to the instrument
form of the indorsement authorizes him to do so. places his signature in blank before delivery, he is liable as
an indorser, subject to the following rules:
Furthermore, all subsequent indorsees cannot have rights a. If the instrument is payable to the order of a third
greater than the restrictive indorsee. (NIL, Sec. 37) person, he is liable to the payee and to all
subsequent parties.
Qualified b. If the instrument is payable to the order of the
Constitutes indorser as mere assignore of title maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or
Made by adding the words "without recourse" "sans drawer.
recourse" indorser not holder" "at the indorser's own risk" c. If he signs for the accommodation of the payee, he
and other terms of similar import. (NIL, Sec. 38) is liable to all parties subsequent to the payee.
(NIL, Sec. 64)
Joint
Summary of Indorsements and Effects

TYPE OF INDORSEMENT EXAMPLE OF NIL PROVISIONS ON INDORSER'S
INDORSMENT LIABILITY
Blank "Juan Dela Cruz" Secondary Liability: Liability of General indorser
(NIL, Sec. 66)
Special "Pay to Pedro Santos Secondary Liability: Liability of General indorser
- Juan Dela Cruz" (NIL, Sec 66)
Qualified "without recourse No secondary liability: but with liability for breach
- Juan Dela Cruz" of warranty under Sec. 65
Qualified "Pay to Pedro Santos, No secondary liability: but with liability for breach
(Special for further negotiation) without recourse of warranty under Sec. 65
- Juan Dela Cruz"
Conditional "Pay to Pedro Santos, on Secondary liability only if condition is met. If
(Special for further negotiation) the condition that he condition is met, liabilities under Sec 66 apply.
completes to repair my
house gate on or before
October 2008.
- Juan Dela Cruz"
Restrictive "Pay to Pedro Santos only Secondary Liability but to Pedro Santos only
(prevents further negotiation) - Juan Dela Cruz"
Restrictive "For deposit The indorser is the principal of the indorsee and
(endorsee is an agent) - Juan Dela Cruz" is not liable to subsequent persons who may
acquire it. If the agent-restrictive indorsee
further indorses it, the subsequent indorsee's
right is limited to that of an agent
Restrictive "Pay to Pedro Santos in The indorser is the principal of the indorsee and
(in trust) trust for John Cruz is generally not liable to subsequent persons
-Juan Dela Cruz" who may acquire it. If the trustee-restrictive
indorsee further negotiates it, the subsequent
indorsee's right is limited to that of a trustee.
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D. Rights Of The Holder d. Ultra Vires acts of a corporation where its charter or by
statue, it is prohibited from issuing commercial paper
The holder of a negotiable instrument may sue thereon in e. Alteration
his own name; and payment to him in due course f. Duress amounting to forgery
discharges the instrument. (NIL, Sec. 51) g. Minority
h. Marriage in case of a wife
1. Rights of a Holder In Due Course Want of Authority of agent
A holder in due course holds the instrument free from any J. Insanity, where the insane person has a guardian
defect of title of prior parties, and free from defenses appointed by the court
available to prior parties among themselves, and may k. Want of delivery of incomplete instrument
enforce payment of the instrument for the full amount Illegality of contract made by statute
thereof against all parties liable thereon. (NIL, Sec. 57)
Requisites for a Holder in Due Course ("HDC")
2. Defenses A holder in due course is a holder who has taken the
instrument under the following conditions: (COGI)
Personal or Equitable Defenses a. That it is Complete and regular upon its face;
b. That he became the holder of it before it was
Those which grow out of the agreement or conduct of a Overdue, and without notice that it had been
particular person in regard to the instrument which renders previously dishonored, if such was the fact;
it inequitable for him through legal title to enforce it. It can c_ That he took it in Good faith and for value;
be set up against holders not HDC. d. That at the time it was negotiated to him he had no
a. Absence or failure of consideration notice of any Infirmity in the instrument or defect in
b. Want of delivery of complete instrument the title of the person negotiating it. (NIL, Sec. 52)
c. Insertion of wrong date where payable at a fixed period
after date and issued undated; or at a fixed period after When Subject To Original Defenses
sight and acceptance is undated In the hands of any holder other than a holder in due
d. Filling up the blanks contrary to authority given or not course, a negotiable instrument is subject to the same
within reasonable time defenses as if it were non-negotiable.
e. Fraud in inducement
f. Acquisition of the instrument by force, duress or fear But a holder who derives his title through a holder in due
g. Acquisition of the instrument by unlawful means course, and who is not himself a party to any fraud or
h. Acquisition of the instrument for an illegal illegality affecting the instrument, has all the rights of such
consideration former holder in respect of all parties prior to the latter.
i. Negotiation in breach of faith (NIL, Sec. 58)
j. Negotiation under circumstances amounting to fraud
k. Mistake Rights of a Holder Not a HDC (SRSR)
I. Intoxication a. May sue in his own name.
m. Ultra Vires acts of corporations b. May receive payment and if it is in due course, the
n. Want of Authority of the agent where he has Apparent instrument is discharged.
Authority c. Holds the instrument subject to the same defenses as
o. Illegality of Contract where form or consideration is if it were non-negotiable.
illegal d. If he derives his title through a HDC and is not a party
p. Insanity where there is no notice of Insanity to any fraud or illegality thereto, has all the rights of
such HDC.
Legal or Real Defenses
Those which attach to the instrument itself and can be set Who Is a Holder In Due Course (HDC)
up against the whole world, including a HDC. (FlEU ADM2 Every holder is deemed prima facie to be a holder in due
WIWI) course; but when it is shown that the title of any person
a. Forgery who has negotiated the instrument was defective, the
b. Fraud in factum or in esse contractus burden is on the holder to prove that he or some person
c. Execution of instrument between public enemies under whom he claims acquired the title as holder in due
course.
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• Acquisition of the transferee or indorsee must be in

But the last-mentioned rule does not apply in favor of a good faith.
party who became bound on the instrument prior to the • Good faith means the lack of knowledge or notice of
acquisition of such defective title. (NIL, Sec. 59) defect or infirmity.
A payee may be a [HDC]. Hence, the presumption that he A holder is not a HDC where an instrument payable on
is a prima facie [HDC] applies. Said presumption may be demand is negotiated at an unreasonable length of time
rebutted. (Cely Yang v. CA, G.R. No. 138074, 2003) after its issue. (NIL, Sec. 53)
Presumption of HDC One who became a holder without any, some, or all of the
• Every holder is presumed to be a HDC. (NIL, Sec. 59) requisites under Sec. 52 is not a holder in due course. He
• The person who questions such has the burden of holds the instrument subject the same defenses as if it
proving the contrary. If one of the requisites are not were non-negotiable (Chan Wan v. Tan, G.R. No. L-15380,
present, the holder is not a HDC. 1960)
• An instrument is considered complete and regular on
its face if: It is presumed that every party to an instrument acquires
a. The omission is immaterial; OR the same for a consideration or for value. It devolved upon
b. The alteration on the instrument was not the party who claims that there is no consideration to
apparent on its face present convincing evidence to overthrow the presumption
• An instrument is overdue after the date of maturity. and prove that the checks were in fact issued without
• On the date of maturity, the instrument is not overdue valuable consideration. (Cayanan v. North Star
and the holder is a HDC. International Travel, G.R. No. 172954, 2011)
Summary: Rules and Requirements for Status of HDC

REQUIREMENT BASIC RULES
Must he a holder (1) A payee or indorsee who is in possession of an instrument payable to order; or
(2) The person in possession of an instrument payable to bearer
Must take the instrument Notice exists if an instrume;nt is so incomplete, bears such visible evidence of forgery or
complete and regular alteration, or is so irregular that a reasonable person would be put on notice from
upon its face examination of from facts surrounding the transaction
Must take for value There is value when the consideration given is sufficient to support a simple contract (NIL.
Sec. 25)
A holder is not obliged to show that there was valuable consideration, since the same is
presumed. (Yang v. CA, G.R. No. 138074, 2003)
Must take in good faith Good faith is presence of honesty in act in the conduct or transaction concerned or if he
has knowledge of circumstances that will show that the taking amounts to bad faith
Must take notice that: 1. Instruments payable on specified dates are overdue the moment due date for payment
a. Instrument is (NIL, Sec. 53)
over due
b. Instrument has 2. Demand instruments are overdue after a reasonable time has lapsed from issue
been dishonored
c. Knowledge of "Reasonable time" is determined by the nature of the instrument, the usage of trade, or
infirmity or business with respect to such instrument, and the facts of the particular case (NIL, Sec.
defect of title of 193)
prior parties
3. Instruments with acceleration clause, the instrument is overdue if any cause for
acceleration of a time instrument has taken place.
Actual knowledge or knowledge of any irregularity in the instrument and must have no
notice that a prior party has obtained the instrument, or any signature thereto, by fraud,
Page 28 of 250
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duress, or force and fear, or other unlawful means, or for an illegal consideration, or when
he negotiates it in breach of faith, or under circumstances amounting to fraud
Holder in Due Course is a holder who has taken the LIABILITIES OF PARTIES
instrument under the if conditions:
a. That it is complete and regular upon its face; 1. Maker
b. That he became the holder of it before it was The maker of a negotiable instrument, by making it,
overdue, and without notice that it had been engages that he will pay it according to its tenor, and
previously dishonored, if such was the fact; admits the existence of the payee and his then capacity to
c. That he took it in good faith and for value; indorse. (NIL, Sec. 60)
d. That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in Note:
the title of the person negotiating it • A maker's liability is primary and unconditional.
• One who has signed as such is presumed to have
Defective Title acted with care and to have signed with full knowledge
Title is defective when: of its contents, unless fraud is proved.
a. Instrument or signature was obtained by fraud, • The payee's interest is only to see to it that the note is
duress, force or fear or other unlawful means OR paid according to its terms.
for an illegal consideration; or • When two or more makers sign jointly, each is
b. Instrument is negotiated in breach of faith, or individually liable for the full amount even if one did not
fraudulent circumstances receive the value given.
• The maker is precluded from setting up the defense
Title is not defective when at the time it was negotiated to that a) the payee is fictional, b) that the payee was
him, he had no notice of: insane, a minor or a corporation acting ultra vires.
a. Any infirmity in the instrument; or
b. Any defect in title of the person negotiating Note: Fictitious Payee Rule
As a rule, when the payee is fictitious or not intended to be
A check with 2 parallel lines in the upper left hand corner the true recipient of the proceeds, the negotiable
means that it could only be deposited and may not be instrument is considered as a bearer instrument.
converted to cash. Consequently, such circumstance
should put the payee on inquity and upon him devolves the It is not necessary that the person referred to in the
duty to ascertain the holders' title to the check or the nature instrument is really non-existent or fictitious to make the
of his possession. Failing in this respect, the payee is instrument payable to bearer. The person to whose order
declared guilty of gross negligence amounting to legal the instrument is made payable may in fact be existing but
absence of good faith and as such the consensus of he is still fictitious or non-existent under Sec. 9(c) of the
authority is to the effect that the holder of the check is not NIL if the person making it so payable does not intend to
a holder in good faith. (State Investment House v. IAC, pay the specified persons. (PNB v. Rodriguez, G.R. No.
G.R. No. 72764, 1989) 170325, 2008)
When a collecting bank allowed the depositor to withdraw In a fictitious-payee situation, the drawee bank is absolved
a check which has not been cleared, it is not a HDC and from liability and the drawer bears the loss. One cannot
cannot recover from the drawer in case the check is expect a fictitious payee to negotiate the check by placing
dishonored. (Banco Atlantico v. Auditor General, G.R. No. his indorsement thereon. And since the drawer knew this
33549, 1978) limitation, he must have intended for the instrument to be
negotiated by mere delivery.
Note:
• Every holder is presumed to be a HDC. However, the drawee bank shall also become liable when
• The payee is presumed to be a holder in due course it acts dishonestly and when it is a party to the fraud.
and the drawer cannot invoke want of consideration
between the drawer and the payee as a defense. (Id.)
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2. Drawer Sec. 124. If an instrument that has been materially altered

A drawer is secondarily liable. By drawing the instrument, and is in the hands of a holder in due course, the holder
the drawer: can enforce payment thereof according to its original tenor.
a. Admits the existence of the payee,
b. Admits the capacity of the payee to indorse, ANSWER: The original tenor. (see Areza v. Express
C. Engages that on due presentment, the instrument Savings Bank, G.R. No. 72764, 2014)
will be accepted or paid or both according to its
tenor. (NIL, Sec. 61) Note: On one hand, Sec. 63 of the NIL provides that a
drawee that accepts an instrument engages that he will
If the instrument is dishonored, and the necessary pay it according to the tendor of his acceptance.
proceedings on dishonor duly taken: On the other hand, Sec. 124 of the NIL provides that a
a. The drawer will pay the amount thereof to the material alteration avoids an instrument except as against
holder; AND an assenting party and subsequent indorsers, but a holder
b. Will pay any subsequent indorser who .may be in due course may enforce payment according to its
compelled to pay it. (NIL, Sec. 61) original tenor.
A drawer may insert an express stipulation to negative or The Court, in Areza, upheld the view that the
limit his liability. acceptor/drawee, despite the tenor of his acceptance, is
liable only to the extent of the bill prior to alteration. (Id.)
3. Acceptor
4. Indorser
By accepting the instrument, an acceptor:
a. Engages that he will pay according to the tenor of When Are Persons Deemed Indorsers
his acceptance Any person who places his signature upon a negotiable
b. Admits the existence of the drawer, the instrument who does not appear to be a
genuineness of his signature and his capacity and maker/drawer/acceptor is deemed to be an indorser
authority to draw the instrument UNLESS he indicates that he is bound in some other
c. Admits the existence•of the payee and his capacity capacity. (NIL, Sec. 63)
indorse
Liability of Indorser of a Bearer Instrument
Note: The liability of the acceptor is based on the tenor of Where a person places his indorsement on an instrument
his acceptance. negotiable by delivery, he incurs all the liability of an
indorser. (NIL, Sec. 67)
QUESTION: When an acceptor has accepted an altered
instrument, which shall govern? Section 62 or Section e) Order In Which Indorsers Are Liable
124? Amongst fellow indorsers they are liable, prima facie, in the
order in which they indorse. However, evidence can be
Sec. 62(a). The acceptor shall be liable based on the shown that they have another agreement amongst
alteration. themselves. Joint payees or joint indorsees who indorse
are deemed to indorse jointly and severally. (NIL, Sec. 68)
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Liabilities of Maker, Drawer, and Acceptor

Sec. 62: Acceptor [Drawee], upon
Sec. 60: Maker, upon making the Sec. 61: Drawer, upon drawing the
accepting
Promissory Note Bill of Exchange
Bill of Exchange
(a) He will pay the bill according to the
tenor of his acceptance;
(a) He admits the existence of the
payee and his capacity to indorse;
(b) He admits the existence of the
drawer;
(b) He engages that, on due
(a) He will pay the promissory note
presentment, the bill will be accepted or
according to its tenor; (c) He admits the signature of the
paid, or both, according to its tenor;
drawer is genuine;
(b) He admits the existence of the
(c) That if it is dishonored by non-
payee; (d) He admits the capacity of the
acceptance or non-payment, he will pay
drawer;
to the holder of the bill or to any
(c) He admits that the payee has the
subsequent holder who was compelled
capacity to indorse (e) He admits the drawer has the
to pay it,
authority to draw the instrument;
Provided: necessary proceedings on
(f) He admits the existence of the
dishonor were taken
payee and his then capacity to
indorse
Liabilities of Indorsers
Sec. 65: Negotiation by Delivery,
Sec. 64: Irregular Indorser Sec. 66: General Indorsers
Qualified Indorsements
Where a person, not otherwise a party
Every person negotiating an instrument Every indorser who indorses without
to an instrument, places thereon his
by delivery or by a qualified qualification, warrants to all
signature in blank before delivery, he is
indorsement warrants: subsequent holders in due course:
liable as indorser, in accordance with
the following rules:
(a) That the instrument is genuine and (a) 1 he matters and things
in all respects what it purports to be; mentioned in Sec. 65(a-c); and
(a) If the instrument is payable to the
order of a third person, he is liable to
(b) That he has a good title to it; • (b) That the instrument is, at
the payee and to all subsequent
the time of his indorsement,
parties.
(c) That all prior parties had capacity to valid and subsisting
contract;
(b) If the instrument is payable to the
order of the maker or drawer, or is
(d) That he has no knowledge of any NOTE: If the Negotiable Instrument is
payable to bearer, he is liable to all
fact which would impair the validity of dishonored, a qualified indorser is not
parties subsequent to the maker or
the instrument or render it valueless, liable if he did not violate his
drawer,
warranties
NOTE: an agent, if he did not disclose
(c) If he signs for the accommodation
his principal and the fact that he is an Cf: a general indorser is liable due to
of the payee, he is liable to all parties
agent, is liable under Sec. 65 Sec. 66(b)
subsequent to the payee.
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5. Warranties • The warranty is to the capacity of prior parties at the

time the instrument was negotiated. Subsequent
Warranties Of An Irregular Indorser incapacity does not breach the warranty.
If the indorser is not otherwise a party to the instrument, • Lack of Knowledge of the Indorser as to any fact that
and he places his signature in blank before delivery, he is would impair the validity or the value of the instrument
liable as indorser, in accordance with the following rules: must be subsisting all throughout.
a. If the instrument is payable to the order of a third • A person Negotiating by Delivery warrants the same
person, he is liable to the payee and to all as those of qualified indorser and extends to
subsequent parties. immediate transferees only
b. If the instrument is payable to the order of the
maker or drawer, or is payable to bearer, he is Warranties Of A General Indorser
liable to all parties subsequent to the maker or Every indorser who indorses without qualification warrants,
drawer. to all subsequent holders in due course:
c. If he signs for the accommodation of the payee, he a. The matters and things mentioned in subdivisions
is liable to all parties subsequent to the payee. (a), (b), and (c) of the next preceding section; and
(NIL, Sec. 64) b. That the instrument is at the time of his
indorsement valid and subsisting.
Warranties When Instrument Is Negotiated By Delivery
Every person negotiating an instrument by delivery or by a In addition, he engages that on due presentment, it shall
qualified indorsement warrants: be accepted or paid, or both, as the case may be,
a. That the instrument is genuine and in all respects according to its tenor, and that if it be dishonored, and the
what it purports to be; necessary proceedings on dishonor be duly taken, he will
b. That he has a good title to it; pay the amount thereof to the holder, or to any subsequent
c. That all prior parties had capacity to contract; indorser who may be compelled to pay it. (NIL, Sec. 66)
d. That he has no knowledge of any fact which would
impair the validity of the instrument or render it Collecting Bank has No Right of Recourse Against
valueless. Payee-Depositor
When the payee-depositor deposits the check to the
But when the negotiation is by delivery only, the warranty collecting bank, the latter becomes the agent of the former
extends in favor of no holder other than the immediate for the collection of the amount of the check. The collecting
transferee. bank cannot invoke the warranty of the payee-depositor
who indorsed the check because said indorsement is only
The provisions of subdivision (c) of this section do not for the collection, which is a restrictive endorsement under
apply, to persons negotiating public or corporation Sec. 36 of the NIL, unless when negligence is attributed to
securities, other than bills and notes. (NIL, Sec. 65) the payee-depositor. (Far East Bank & Trust Co. v. Gold
Pa/lace Jewelry, G.R. No. 168274, 2008)
Note:
• A qualified indorser is one who indorses without Note:
recourse. • The indorser under Sec. 66 warrants the solvency of a
• Recourse - Resort to a person secondarily liable after prior party.
default of person primarily liable. • The indorser warrants that the instrument is valid and
• A qualified indorser cannot raise the defense of: subsisting regardless of whether he is ignorant of that
a. Forgery fact or not.
b. Defect of his title or that it is void • Warranties extend in favor of:
c. The incapacity of the maker, drawer or a. HDC
previous indorsers b. Persons who derive their title from HDC
• A qualified indorsement makes the indorser a mere c. Immediate transferees even if not HDC
assignor of title of instrument, and relieves him of the • The indorser does not warrant the genuineness of the
general obligation to pay if the instrument is drawer's signature.
dishonored, but he is still liable for the warranties • General indorser is only secondarily liable.
arising from the instrument only up to the warranties of
a general indorser.
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PRESENTMENT FOR PAYMENT • Acts needed in order to charge persons secondarily

liable:
Requisites for Proper Presentment a. Presentment for payment/acceptance
Presentment for payment, to be sufficient, must be made b. Dishonor by non-payment/non-acceptance;
d. Notice of dishonor to secondary parties.
a. By the holder, or by some person authorized to receive • Acts needed to charge persons secondarily liable in
payment on his behalf; other cases:
b. At a reasonable hour on a business day; a. Protest for non-payment by the drawee;
c. At a proper place as herein defined; b. Protest for non-payment by the acceptor for
d. To the person primarily liable on the instrument, or if honor.
he is absent or inaccessible, to any person found at
the place where the presentment is made. (NIL, Sec. 2. To Whom Presentment Must Be Made
72)
To A Bank
If The Instrument Is Payable On Demand Presentment must be made during banking hours, unless
a. Presentment must be made within reasonable the person to make payment has no funds there to meet it
time after issue (if a note). at any time during the day, in which case presentment at
b. Presentment must be made within reasonable any hour before the bank is closed on that day is sufficient.
time after last negotiation (if a bill).
The maker of the not shall not be discharged in any way
1. Necessity of Presentment for Payment due to presentment after the date of maturity. He shall
have the duty to pay even if the holder does not demand
Presentment for Payment at that time. (NIL, Sec. 75)
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but if To A Personal Representative
the instrument is, by its terms, payable at a special place, If the principal debtor dies, and no place Of payment is
and he is able and willing to pay it there at maturity, such specified, presentment for payment must be made to his
ability and willingness are equivalent to a tender of personal representative, if he can be found. (NIL, Sec. 76)
payment upon his part.
To Partners
But, except as herein otherwise provided, presentment for Each partner is an agent of the partnership and his co-
payment is necessary in order to charge the drawer and partners. Presumption must be had as regards his
indorsers. (NIL, Sec. 70) authority to act on behalf of the others. Presentment may
be made to any one of them or to the agent of one of them.
Presentment for payment is the production of a BOE to
the drawee for his acceptance, or to a drawee or acceptor However, a dishonor by one partner does not amount to
for payment. Also presentment of a PN to the party liable the dishonor by all. (NIL, Sec. 77)
for payment of the same.
• It consists of: To Joint Debtors
a. A personal demand for payment at a proper If there are several persons, not being partners, primarily
place; and liable on the instrument, presentment must be made to
b. The bill or note must be ready to be exhibited them all. (NIL, Sec. 78)
if required and surrendered upon payment.
• Parties primarily liable — persons whom by the terms 3. Dispensation with Presentment for Payment
of the instrument are absolutely required to pay the • Presentment is not required to charge the drawer
same. E.g. maker and acceptors. They can be sued where: (NIL, Sec. 79)
directly. a. He has no right to expect that the drawee or
• If payable at the special place, and the person liable is acceptor will pay the instrument, or
willing to pay there at maturity, such willingness and b. He has no right to require that the drawee or
ability is equivalent to tender of payment. acceptor will pay the instrument.
• Presentment is necessary to charge persons • Presentment is not required to charge the indorser
secondarily liable; otherwise, they are discharged. where: (NIL, Sec. 80)
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a. The instrument was made or accepted for his When parties to be notified are partners, notice to any one
accommodation, and of them is sufficient, even if there was a dissolution. (NIL,
b. He has no reason to expect that the instrument Sec. 99)
will be paid if presented.
• When excused under Sec. 82 Notice To Persons Jointly Liable
a. If after the exercise of due diligence, However, if joint parties, each party must be given notice,
presentment cannot be made unless one of them has been given authority to receive
b. Presentment is waived such notice. (NIL, Sec. 100)
c. The drawee is a fictitious person Notice To Insolvent Parties
d. When the instrument has been dishonored by If parties are adjudged bankrupt or insolvent, notice may
non-acceptance under Sec. 83 be given to the party or his trustee or his assignee. (NIL,
Sec. 101)
4. Dishonor by Non-Acceptance or Non-Payment
2. Where Notice Can Be Given
How Dishonored By Non-Acceptance: Notice must be given, in this order:
a) The instrument was duly presented but payment is a. Either to the post-office nearest to his place of
refused or cannot be obtained residence or to the post-office where he is
b) Presentment is excused and the instrument is overdue accustomed to receive his letters;
and unpaid (NIL, Sec. 83) b. If he lives in one place and has his place of
business in another, notice may be sent to either
Effect of Dishonor By Non-Payment place;
An immediate right of recourse to all parties secondarily c. If he is sojourning in another place, notice may be
liable accrues to the holder. (NIL, Sec. 84) sent to the place where he is so sojourning. (NIL,
Sec. 108)
NOTICE OF DISHONOR
3. Parties Who May Give Notice of Dishonor
1. Parties to be Notified The notice may be given by or on behalf of the holder, or
by or on behalf of any party to the instrument who might be
Notice of Dishonor - It brings, either verbally or in writing, compelled to pay it to the holder, and who, upon taking it
to the knowledge of the drawer or indorser that the up, would have a right to reimbursement from the party to
instrument was dishonored by non-acceptance or non- whom the notice is given. (NIL, Sec. 90)
payment by the drawee/maker.
When An Agent Can Give Notice For Dishonor:
Who Must Be Given Notice If the instrument has been dishonored in the hands of an
The drawer and each indorser. The party not notified is agent,.he can give notice either to his principal or to parties
discharged from any liability. (NIL, Sec. 89) secondarily liable thereon, even without notifying his
principal.
Who May Be Given Notice
To the party himself or to an agent in that behalf. (NIL, 4. Form of Notice
Sec. 97) Notice of dishonor is a liability, so the agent must Ihe notice may be in writing or merely oral and may be
have been authorized to do so. given in any terms which sufficiently identify the instrument
and indicate that it has been dishonored by non-
Notice When Party Is Dead acceptance or non-payment. It may in all cases be given
Notice must be given to a personal representative, if there by delivering it personally or through the mails. (NIL, Sec.
is one, and if with reasonable diligence he can be found. If 96)
he cannot be found, notice may be sent to the last
residence or last place of 'business of the deceased. (NIL, When Notice Is Sufficient
Sec. 98) A written notice need not be signed and an insufficient
written notice may be supplemented and validated by
Notice To Partners verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby. (NIL, Sec. 95)
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a. Drawee is a fictitious person or a person not

5. Effect of Notice of Dishonor having capacity to contract, AND the indorser was
General rule: Any drawer or indorser to whom such notice aware of the fact at the time he indorsed the
is not given is discharged. instrument;
b. Indorser is the person to whom the instrument is
Exceptions: presented for payment;
a. Waiver (Sec. 109) c. Instrument was made or accepted for his
b. Notice is dispensed with (Sec. 112) accommodation. (NIL, Sec. 115)
c. Not necessary to Drawer (Sec. 114)
d. Not necessary to Indorser (Sec. 115) 7. Effect Of Failure To Give Notice
a. Omission to give notice of dishonor by non-
Waiver acceptance does not prejudice a HDC. (NIL, Sec.
Notice of dishonor may be waived, either before the time 117)
of giving notice has arrived or after the omission to give b. Protest only necessary for a foreign bill of
due notice, and the waiver may be express or implied. exchange. Protest for other negotiable
(NIL, Sec. 109) instruments is optional. (NIL, Sec. 118)
Note: Note:
• Protest may be waived. It is also deemed a waiver of • A drawee bank is liable for damages to a drawer
presentment and notice of dishonor. (NIL, Sec. 111) whose checks were dishonored for lack of funds
• Where notice is waived, presentment is not waived. because it did not give him notice that the check he
• Where presentment is waived, notice is also waived. deposited in his account was dishonored. (Associated
• Where protest is waived, notice and presentment is Bank v. Tan, G.R. No. 156940, 2004)
waived. • Where two checks which were dishonored because
the drawer withdrew the funds from the bank, the
Parties Affected by the Waiver holder can hold the drawer liable even if no notice of
Where the waiver is embodied in the instrument itself, it is dishonor was given to the drawer, since the drawer
binding upon all parties; but, where it is written above the had no right to expect that the drawee bank would
signature of an indorser, it binds him only. (NIL, Sec. 110) honor the checks.
6. Dispensation Of Notice DISCHARGE OF A NEGOTIABLE INSTRUMENT

Notice of dishonor is dispensed with when, after the
exercise of reasonable diligence, it cannot be given to or 1. Causes of Discharge of Instrument
does not reach the parties sought to be charged. (NIL, Sec. A negotiable instrument is discharged:
112) a. By payment in due course by or on behalf of the
principal debtor;
When Notice Need Not Be Given To the Drawer b. By payment in due course by the party
Notice of dishonor is not required to be given to the drawer accommodated, where the instrument is made or
in either of the following cases: accepted for accommodation;
a. Drawer and drawee are the same person; c. By the intentional cancellation thereof by the
b. Drawee is a fictitious person or a person not holder;
having capacity to contract; d. By any other act which will discharge a simple
c. Drawer is the person to whom the instrument is contract for the payment of money;
presented for payment; e. When the principal debtor becomes the holder of
d. Drawer has no right to expect or require that the the instrument at or after maturity in his own right.
drawee or acceptor will honor the instrument; (NIL, Sec. 119)
e. Drawer has countermanded payment. (NIL, Sec.
114) Note:
• Discharge of the instrument discharges all the
When Notice Need Not Be Given To the Indorser parties thereto.
Notice of dishonor is not required to be given to an indorser • Payment must be in due course, and by the principal
in either of the following cases: debtor or on his behalf.
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• If payment is not made by the principal debtor, b. Made in favor of a person primarily liable
payment only cancels the liability of the payor and C. Made at or after maturity of the instrument
those obligated after him, but it does not discharge the d. In writing or the instrument is delivered up to the
instrument. person primarily liable.
• Payment by an accommodation party does not
discharge the instrument. Note:
• If renounced in favor of a party secondarily liable, only
2. Discharge of Parties Secondarily Liable he is exonerated from liability and all parties
A person secondarily liable on the instrument is subsequent to him.
discharged: • Discharge by novation is allowed.
a. By any act which discharges the instrument; • Mere expression of intent to discharge the instrument
b. By the intentional cancellation of his signature by is not enough.
the holder;
c. By the discharge of a prior party;
d. By a valid tender of payment made by a prior party; ACCEPTANCE
e. By a release of the principal debtor, unless the
holder's right of recourse against the party Acceptance
secondarily liable is expressly reserved; The signification by the drawee of his assent to the order
f. By any agreement binding upon the hoider to of the drawer. It is an act by which a person on whom the
extend the time of payment, or to postpone the BOE is drawn assents to the request of the drawer to pay
holder's right to enforce the instrument, unless it.
made with the assent of the party secondarily
liable, or unless the right of recourse against such 1. Requisites of an Actual Acceptance
party is expressly reserved. (NIL, Sec. 120) a. In writing
b. Signed by the drawee
3. Rights of a Party Secondarily Liable Who Already c. Must not express that the drawee will perform his
Performed His Obligation to Pay: promise by any other means than payment of
a. The instrument is not discharged money
b. The party is remitted to his former rights as to all prior d. Communicated or delivered to the holder
parties
c. The party may strike out his own and all subsequent 2. Manner of Acceptance
indorsements a. Actual
d. The party may negotiate the instrument again b. Constructive
c. General
Exceptions: d. Qualified
a. An instrument cannot be renegotiated where it is
payable to order of a 3rd person AND has been 3. Time for Acceptance
paid by the drawer
b. Instrument cannot be renegotiated where it was 24 Hour Rule
made or accepted for accommodation AND it has The drawee has 24 hours after presentment for
been paid by the party accommodated. (Sec. 121) acceptance within which to act upon the bill, the
acceptance shall be dated as of the day of presentation or
4. Renunciation by Holder the date when he first saw the bill.
Renunciation, Defined 4. Rules Governing Acceptance

It is the act of surrendering the right or claim with or
without recompense. Renunciation by a holder shall a) Rights Of A Holder
apply only to renunciation by a unilateral act of the holder, a. Require that acceptance be written on the bill and
and can be released without compensation. if refused, treat it as if dishonoured (NIL, Sec. 133)
Refuse to accept a qualified acceptance and may
When Renunciation by a Holder Discharges an treat it as dishonored (NIL, Sec. 142)
Instrument
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Constructive Acceptance maturity of the instrument; or

Where a drawee to whom a bill is delivered for acceptance b. Where the bill expressly stipulates that it shall
destroys the same, or refuses within twenty-four hours be presented for acceptance; or
after such delivery, or within such other period as the c. Where the bill is drawn payable elsewhere
holder may allow, to return the bili accepted or non- than at the residence or place of business of
accepted to the holder, he will be deemed to have the drawee.
accepted the same. (NIL, Sec. 137)
In no other case is presentment for acceptance necessary
5. Presentment for Acceptance in order to render any party to the bill liable. (NIL, Sec. 143)
a. If necessary to fix the maturity of the bill 1. Time of Presentment

b. If it is expressly stipulated that it shall be presented for
acceptance Days Presentment May Be Made
c. If the bill is drawn payable elsewhere than the A bill may be presented for acceptance on any day on
residence or place of business of the drawee. which negotiable instruments may be presented for
payment under the provisions of Sections 72 and 85 of this
Summary on Presentment for Acceptance of BOE: Act. When Saturday is not otherwise a holiday,
a. To make the drawee primarily liable and for the accrual presentment for acceptance may be made before twelve
of secondary liability. (NIL, Sec. 144) o'clock noon on that day. (NIL, Sec. 146)
b. Necessary to fix maturity date, where bill expressly
stipulates presentment, bill payable other than place of Presentment in Case Time Is Insufficient
drawee. (NIL, Sec. 143) Where the holder of a bill drawn payable elsewhere than
c. When presentment is excused: at the place of business or the residence of the drawee has
i. Drawee is dead, hides, is fictitious, incapacitated no time, with the exercise of reasonable diligence, to
person, present the bill for acceptance before presenting it for
ii. After due diligence presentment cannot be payment on the day that it falls due, the delay caused by
made, presenting the bill for acceptance before presenting it for
iii. Presentment is refused on another ground payment is excused and does not discharge the drawers
although presentment is irregular (NIL, Sec. and indorsers. (NIL, Sec. 147)
148)
2. Place of Presentment
6. Protest, Defined. Presentment for acceptance must be made:
A formal declaration, drawn and signed by a notary, that • Where the bill is payable after sight, or in any
he has presented the instrument for acceptance for other case, where presentment for acceptance is
payment and that acceptance or payment is refused. necessary in order to fix the maturity of the
instrument; or
7. When Protest Is Necessary • Where the bill expressly stipulates that it shall be
a. If a foreign bill has been dishonored by non- presented for acceptance; or
acceptance • Where the bill is drawn payable elsewhere than
b. If a foreign bill has been dishonored by non-payment at the residence or place of business of the
(NIL, Sec. 152) drawee.
PRESENTMENT FOR ACCEPTANCE In no other case is presentment for acceptance necessary

in order to render any party to the bill liable. (NIL, Sec. 143)
Presentment
The production/exhibition of a bill of exchange to the 3. Manner of Presentment
drawee for his acceptance or payment. Presentment for acceptance must be made by or on behalf
of the holder at a reasonable hour, on a business day and
Presentment for acceptance must be made: before the bill is overdue, to the drawee or some person
a. Where the bill is payable after sight, or in any authorized to accept or refuse acceptance on his behalf;
other case, where presentment for and
acceptance is necessary in order to fix the a. Where a bill is addressed to two or more drawees
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who are not partners, presentment must be made Note:

to them all unless one has authority to accept or • A PN payable to the maker's order is not complete until
refuse acceptance for all, in which case it is indorsed by him.
presentment may be made to him only; • However, absence of any such indorsement does not
b. Where the drawee is dead, presentment may be bar recovery on the debt for which the instrument was
made to his personal representative; given by the maker.
c. Where the drawee has been adjudged a bankrupt
or an insolvent or has made an assignment for the E.Checks
benefit of creditors, presentment may be made to
him or to his trustee or assignee. Check
(NIL, Sec. 145) It is a bill of exchange drawn on a bank and payable on
demand. (NIL, Sec. 185)
4. When Presentment May Be Excused
1. Kinds of Checks
General rule: Except as herein otherwise provided, the
holder of a bill which is required [under Sec. 143] to be Manager's Check
presented for acceptance must either present it for One drawn by the bank's manager upon the bank itself;
acceptance or negotiate it within a reasonable time. If he and it is similar to a cashier's check both as to effect and
fails to do so, the drawer and all indorsers are discharged. use. (Int'l Corporate Bank v. Gueco, G.R. No. 141968,
(NIL, Sec. 144) 2001)
Exception: Presentment for acceptance is excused and a Note:

bill may be treated as dishonored by non-acceptance in • A manager's check is regarded to be as good as the
either of the following cases: money it represents.
a. Where the drawee is dead, or has absconded, or • When a bank fails to exercise the diligence required, it
is a fictitious person or a person not having must be held liable for such loss. However, it may
capacity to contract by bill. pursue an action against the person responsible or
b. Where, after the exercise of reasonable diligence, who may have been unjustly benefited. (BPI Family
presentment cannot be made. Savings Bank v. Manikan, G.R. No. 148789, 2003)
c. Where, although presentment has been irregular,
acceptance has been refused on some other • General rule: a manager's check is not legal tender.
ground.
Exception: Payment may be accepted as valid if no
5. Dishonor by Non-Acceptance prompt objection is made. (Pabugias v. Sahijwani,
G.R. No. 156846, 2004)
A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and such Crossed Check
an acceptance as is prescribed by this Act is refused Though the NIL is silent as to crossed checks, courts can
or cannot be obtained; or take judicial cognizance of the practice that a check
b. When presentment for acceptance is excused and crossed with two parallel lines in the upper left hand corner
the bill is not accepted. (NIL, Sec. 149) means that it can only be deposited and not converted to
cash. The effects of a crossed check thus relate to the
PROMISSORY NOTES mode of payment — meaning that the drawer intends it to
be only for deposit by the rightful person, the named
Promissory Note payee.
An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, A check is crossed specially when the name of a particular
or at a fixed or determinable future time, a sum certain in banker or company is written between parallel lines drawn
money to order or to bearer. Where the note is drawn to transversally on the face of the check.
the maker's own order, it is not complete until indorsed by
him. (NIL, Sec. 184)
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A check is crossed generally when the words "and b. It operates as an assignment of the funds of the
company" or nothing is written between the parallel lines. drawer in the hands of the drawee bank;
(Go v. Metrobank, G.R. No. 168842, 2010) c. If obtained by the holder, it discharges the persons
secondarily liable.
Jurisprudence provides the following effects of crossing a
check: 2. Presentment for Payment
a. The check may not be encashed but only A check must be presented for payment within a
deposited in the bank reasonable time after its issue or the drawer will be
b. The check may be negotiated only once — to one discharged from liability thereon to the extent of the loss
who has an account with a bank caused by the delay. (NIL, Sec. 186)
c. The act of crossing the check serves as warning
to the holder that the check has been issued for a Innumerable decisions have already been rendered in the
definite purpose so that he must inquire if he has state courts of the United States to the effect that although
received the check pursuant to that purpose, the drawer of a check is discharged only to the extent of
otherwise, he is not a holder in due course (Bataan loss caused by unreasonable delay in presentment, an
Cigar v. CA, G.R. No. 93048, 1994) indorser is wholly discharged thereby irrespective of any
question of loss or injury. (Philippine National Bank v.
Note: Seeto, G.R. No. L-4388, 1952)
• A holder of crossed-checks is obliged to inquire as to
the purpose for which the checks were issued. (Bataan When a Check Operates as an Assignment of Fund
Cigar v. CA, G.R. No. 93048, 1994) A check of itself does not operate as an assignment of any
• The law does not require the payee to be interested in part of the funds to the credit of the drawer with the bank,
the obligation in consideration for which the check was and the bank is not liable to the holder unless and until it
issued. The cause or reason of issuance is accepts or certifies the check. (NIL, Sec. 189)
inconsequential (in connection with BP 22) in
determining criminal liability. (Ngo v. People, G.R. No. end of topic
155815, 2004)
• When a payee of a crossed check issued with the
notation "for payee's account only" the proceeds of the
said check belong only to the payee. Failure of the
collecting bank to follow said notation will make it liable
in case it allows it to be withdrawn by an unauthorized
individual. (Associated Bank v. CA, G.R. No. 89802,
1992)
Memorandum Check
Check on which the word "memorandum" is written,
signifying that the drawer engages to pay the bona fide
holder absolutely and not upon a condition to pay upon
presentment or non-payment.
Certified Check
A check on which the drawee bank has written an
agreement whereby it undertakes to pay the check at any
future time when presented for payment, such as by
stamping on the check the word "certified" and underneath
it is written the signature of the cashier.
Effects of Certification:
a. Equivalent to acceptance and is the operative act
that makes the drawee bank liable;
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III. INSURANCE CODE I A. Basic CONCEPTS
TOPIC OUTLINE UNDER THE SYLLABUS Governing Laws

1. P.D. No. 612, as amended by R.A. No. 10607
III. INSURANCE CODE (hereinafter Insurance Code);
A. Basic concepts 2. Special Laws, such as R.A. No. 1161 (Social Security
1. What may be insured Act)
2. Insurable interest 3. Civil Code, for matters not expressly provided for in #1
3. Double insurance and Over insurance and #2
4. Reinsurance
5. No fault, suicide, and incontestability Contract of Insurance
clauses 1. An agreement;
B. Perfection of the insurance contract 2. Whereby one undertakes for a consideration;
C. Rights and obligations of parties 3. To indemnify another against loss, damage or liability
1. Insurer 4. Arising from an unknown or contingent event.
2. Insured (Insurance Code, Sec. 2[a]).
3. Beneficiary
D. Rescission of insurance contracts
1. What may be insured?
1. Concealment
Any contingent or unknown event, whether past or future,
2. Misrepresentation or omissions
which may damnify a person having an insurable interest,
3. Breach of warranties
E. Loss or create a liability against him, may be insured against,
subject to the provisions of this chapter.
The consent of the spouse is not necessary for the validity

of an insurance policy taken out by a married person on his
or her iife or
that of his or her children.
All rights, title and interest in the policy of insurance taken

out by an original owner on the life or health of the person
insured shall automatically vest in the latter upon the death
of the original owner, unless otherwise provided for in the
policy. (Insurance Code, Sec. 3)
Note:
A contingent event is one that is not certain to take place.
An unknown past event is one which had already

happened, but one is unaware if it happened or not.
An unknown past event may be a designated event only in

cases where it has happened already but the parties do not
know about it, e.g., prior loss of a ship at sea (applicable
only to marine insurance). (De Leon, The Insurance Code
of the Philippines Annotated [2014])
Contract of Suretyship
A contract of suretyship is also considered an insurance
contract, if made by a surety who is doing insurance
business. (P.D. No. 612, as amended by R.A. No. 10607
[hereinafter Insurance Code], Sec. 2[a]).
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Suretyship is an agreement whereby a party called the SUBJECT MATTER

"surety" guarantees the performance by another party
called the "principal obligor" of an obligation or undertaking Risks or Perils That May be Insured
in favor of a third party called the "obligee." It includes a. Any contingent or unknown event, whether past or
official recognizances, stipulations, bonds or undertakings future, which may damnify (cause damage to) a pei-son
issued by any company by virtue of and under the having an insurable interest; or
provisions of Act No. 536, as amended by Act No. 2206. b. Any contingent or unknown event, whether past or
(Insurance Code, Sec. 177) future, which may create a liability against the person
insured (Insurance Code, Sec. 3)
Doing or Transacting an Insurance Business Past Events — Marine Insurance

1. Making or proposing to make, as insurer any insurance A past event which may be insured against is peculiar to
contract; Making, or proposing to make, as surety, any Marine Insurance. A person insured by a contract of
contract of suretyship as a vocation and not as merely marine insurance is presumed to have knowledge, at the
incidental to any other legitimate business or activity of time of insuring, of a prior loss, if the information might
the surety; possibly have reached him in the usual mode of
2. Doing any kind of business including a reinsurance transmission and at the usual rate of communication.
business, specifically recognized as constituting the (Insurance Code, Sec. 111)
doing of an insurance business within the meaning of
this Code; Contingent Liability
3. Doing or proposing to do any business in substance Example: Reinsurance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code. (Insurance Code, Note: Sec. 3 does not authorize an insurance for or against
Sec. 2[b]) the drawing of any lottery, or for or against any chance or
ticket in a lottery drawing a prize. (Insurance Code, Sec. 4)
Consideration Required in Insurance
General Rule: An insurance business consists in Elements of a Lottery
undertaking, for a consideration, to indemnify another a. Consideration;
against loss, damage or liability arising from an unknown b. Prizes; and
or contingent event. c. Chance
Exception: Those not formally designated as insurance There is no lottery where a company, to promote the sale
businesses but are deemed "doing or transacting an of certain products, resorts to a scheme which envisions
insurance business" the giving away for free of certain prizes for the purchase
of said products, for the participants are not required to pay
The fact that no profit is derived from the making of more than the usual price of the products. Here, prizes can
insurance contracts, agreements or transactions or that no be obtained without any additional consideration (Phil.
separate or direct consideration is received therefor, shall Refining Co v. Palomar, G.R. No. L-29062, 1987)
not be deemed conclusive to show that the making thereof
does not constitute the doing or transacting of an insurance
business. (Insurance Code, Sec. 21b1)
Protection and Indemnity Club — Doing Insurance

Business
A protection and indemnity club is an association
composed of shipowners generally formed for the specific
purpose of providing insurance cover against third-party
liabilities of its members. It is a mutual insurance
association. (Steamship Mutual v. Sulpicio Lines, G.R. No.
196072, 2017)
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Insurance Contract v. Gambling Contract Insurable interest in different classes of insurance:

Insurance Contract Gambling Contract
The parties seek to The parties contemplate 1. In Life Or Health
distribute possible loss by gain through mere a. Himself, of his spouse and of his children;
reason of mischance. chance.
The insurer seeks to avoid The gambler courts If a person will insure the life of another payable to
misfortune. fortune. himself, he must have insurable interest on the life
The contract tends to of the person whose life he is insuring.
The contract tends to
increase the inequality of
equalize fortune.
fortune. b. Any person on whom he depends wholly or in
party for education or support, or in whom he has
Whatever one person
What one insures against pecuniary interest;
wins from a wager is lost
is not at the expense of
by the other wagering
another insured person. Note: Persons obliged to support each other: See
party.
Family Code, Art. 195
The purchase of insurance
does not create a new, and
As soon as a party makes c. Any person under a legal obligation to him for the
therefore, non-existing risk
a wager, he creates a risk payment of money, or respecting property or
of loss to the purchaser.
of loss to himself where services, of which death or illness might delay or
The purchaser faces an
no suck risk existed prevent the performance; and
already existing risk of
previously.
economic loss ("insurable
Note: A creditor may insure his debtor's life for the purpose
interest").
of protecting his debt, but only to the extent of the amount
In both cases, one party promises to pay a given sum to
of the debt and the cost of carrying the insurance on the
the other upon the occurrence of a given future event,
debtor's life
the promise being conditioned upon the payment of, or
agreement to pay, a stipulated amount by the other
d. Any person upon whose life any estate or interest
party to the contract. In either case, one party may
vested in him depends. (Insurance Code, Sec. 10)
receive more, or much more, than he paid or agreed to
pay.
Life Insurance Policy v. Civil Donation
Life Insurance Policy Civil Donation
2. Insurable Interest
This is also founded on An act ot liberality
liberality, as the whereby a person
Interest which the law requires the owner of an insurance
policy to have in the thing or person insured. beneficiary will receive the disposes gratuitously a
proceeds of the said thing or right in favor of
insurance another who accepts it
General Rule: It is pecuniary in nature.
As a consequence, the proscription in Civil Code, Art. 739
A person is deemed to have an insurable interest in the
should equally operate in life insurance contracts (Insular
subject matter ins! wed where he has a relation or Life v. Ebrado, G.R. No. L-44059, 1977)
connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation and Beneficiary
will suffer pecuniary loss or damage from its destruction, Person who is named or designated in a contract of life,
termination or injury by the happening of the event insured health, or accident insurance as the one who is to receive
against. (Lalican v. Insular Life Insurance Co, G.R. No. the benefits which become payable, according to the terms
183526, 2009) of the contract, upon the death of the insured (44 Am. Jur.
2d. 639 cited in de Leon, 2010, p. 96).
Exception: Life Insurance
The expectation of benefit from the continued life of that

person need not necessarily be of pecuniary nature.
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Designation of Beneficiary irrevocable beneficiary. But despite the waiver, he can

General rule: When one insures his own life, he may still change the beneficiary, provided that he obtains the
designate any person as the beneficiary, whether or not beneficiary's consent. (Insurance Code, Sec. 11)
the beneficiary has an insurable interest in the life of the
insured. Forfeiture by Beneficiary of Interest in Insurance
Policy
Exceptions: Persons specified in Article 739 of the Civil The interest of a beneficiary in a life insurance policy shall
Code cannot be designated: be forfeited when the beneficiary is the principal,
a. Those made between persons who were guilty of accomplice, or accessory in willfully bringing about the
adultery or concubinage (conviction is not a condition death of the insured; in which event, the nearest relative of
precedent); the insured shall receive the proceeds of said insurance if
b. Those made between persons found guilty of the same not otherwise disqualified.
criminal offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants The share forfeited shall be paid as follows:
or ascendants by reason of his office. a. To the other beneficiaries if not disqualified;
b. If no other beneficiaries, in accordance with the
In order for Article 739 to apply, it is not required that policy contract; (e.g. to the contingent or substitute
there be a previous conviction for adultery or of beneficiaries)
concubinage, due to the wording of "preponderance of c. If policy contract is silent, to the estate of the
evidence" (Insular Life v. Ebrado, G.R. No. L-44059, 1977) insured. (Insurance Code, Sec. 12)
When is the estate entitled to the proceeds of the 2. In Property

insurance?
a. Where the insured has not designated any Coverage of Insurable Interest in Property
beneficiary; or a. Property itself;
b. When the designated beneficiary is disqualified by b. Any relation thereto; or
law to receive the proceeds (Heirs of Maramag v. c. Liability in respect thereof (Insurance Code, Sec.
13)
Maramag, G.R. No. 181132, 2009)
It may consist of:
Note: a. An existing interest;
• The designation is revocable unless the right to revoke b. An inchoate interest founded on an existing
is expressly waived in the policy. interest; or
• If the insured or beneficiary is a minor, and the amount c. An expectancy, coupled with an existing interest in
involved does not exceed P50,000.00, the father or,in that out of which the expectancy arises
his absence or incapacity, the mother may exercise the
minor's rights under the policy, without the need of a Measure of Insurable Interest in Property
The extent to which the insured might be damnified by loss
court authority or a bond.
or injury thereof.
• If the premiums are paid out of the conjugal funds, the
proceeds are considered conjugal. In general, a person has an insurable interest in the
property, if he derives pecuniary benefit or advantage from
If the beneficiary is other than the insured's estate, the its preservation or would suffer pecuniary loss, damage or
source of premiums would not be relevant (BPI v. prejudice by its destruction whether he has or has no title
Posadas, G.R. No. L-34583, 1931). in, or lien upon, or possession of the property. Hence,
pecuniary interest over the property is always necessary.
Right of Insured to Change Beneficiary in Life
Existence of insurable interest is a matter of public policy.
Insurance
Hence, the principle of estoppel cannot be invoked.
General Rule: The insured shall have the right to change
the beneficiary he designated in the policy. (Insurance
Code, Sec. 11)
Exception: If the insured expressly waived his right to

change the beneficiary, this makes the latter an
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Insurable Interest in Life vs. in Property Change of Interest That Suspends an Insurance
LIFE PROPERTY Contract
The change -of interest contemplated by law is an absolute
I
Basis
May be based on Based on pecuniary transfer of the insured's entire interest in the property
pecuniary interest, affinity, interest insured to one not previously interested or insured. In the
or consanguinity following cases, the policy is not suspended: (ML2R2)
When Interest Must Exist
In life insurance (save that Must exist when the a. Execution of a Mortgage
effected by creditor on life insurance takes effect and b. Lease of the insured property
of debtor), it is enoughs when the loss occurs, but c. Vendor who has a Lien on the property sold until the
that insurable interest need not exist in the purchase price is paid or the conditions of the sale are
exists at the time the policy meantime performed
takes effect and need not
d. Judgment debtor whose property has been sold on
exist at the time of the loss
execution (Eight to redeem)
Amount of Insurable Interest
Limited to the actual value e. Mortgagor whose property has been foreclosed (Hight
General Rule: no limit
Except: if insurable of damage/ injury/ loss of redemption)
interest is based on
creditor-debtor relationship Note: In a chattel mortgage, there is no alienation within
(only to the extent of the the meaning of the insurance law until the mortgagee
credit or debt) acquires a right to take possession of the property by
default of the mortgagor under the terms of the mortgage.
Change in Interest of Thing (Bachrach v. British American Ass'n. Co., G.R. No. L-5715,
General rule: A change in interest in the thing insured 1910)
without a change in insurance does not transfer the policy
but suspends it until the interest in the thing and the interest Extent of Insurable Interest in a Mortgage Situation
in the insurance are vested in the same person. • Interest is separate and distinct from the other. In case
both of them take out separate insurance policies on
Exceptions the same property, or one policy covering their
SEC. EXCEPTION respective interests, there is no double insurance.
20 Life, health, and accident insurance • Mortgagor, as owner, may insure the property
A change of interest in the thing insured after mortgaged to the full value of such property.
21 the occurrence of an injury which results in a • Mortgagee can insure the same only to the extent of
loss the amount of his credit.
A change of interest in one or more of
22 several things, separately insured by one Insurance by Mortgagor for the Benefitof Mortgagee,
policy or Policy Assigned to the Mortgagee:
A change of interest by will or succession on • The insurance is still deemed to be upon the interest
23
the death of the insured of the mortgagor who does not cease to be a party to
A transfer to interest by one of several the original contract.
24 partners, joint owners, or owners in common, • Any act of the mortgagor, prior to the loss, which would
who are jointly insured, to the others otherwise avoid the insurance, will have the same
When a policy is so framed that it will inure effects, although the property is in the hands of the
to the benefit of whomsoever, during the mortgagee.
57
continuance of the risk, may become the
• Any act, which under the contract of insurance is to be
owner of the interest insured
performed by the mortgagor, may be performed by the
mortgagee with the same effect as if it has been
Note: When there is an express prohibition against performed by the mortgagor.
alienation in the policy, in case of alienation, the contract
• Upon the occurrence of the loss, the mortgagee is
of insurance is not merely suspended but is avoided.
entitled to recover to the extent of his credit and the
(Civil Code, Art. 1306)
balance, if any, is payable to the mortgagor since such
policy is for the benefit of both the mortgagor and
mortgagee.
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• Upon recovery of the mortgagee to the extent of his e. The risk or peril insured against is likewise the same.
credit from the insurer, the mortgagor is released from (Malayan Insurance v. Philippine First Insurance, G.R.
his indebtedness. No. 184300, 2012)
Insurance by Mortgagee of His Own Interest Over insurance

• The mortgagee may collect from the insurer upon the • Amount of insurance is beyond the value of the
occurrence of the loss to the extent of his credit. insured's insurable interest.
• Unless otherwise stated in the policy, the mortgagor • In case of over-insurance by double insurance, insurer
has no right to collect the balance of the proceeds of is not liable for total amount of insurance taken, his
the policy after payment of the interest of the liability is limited to the amount of insurable interest on
mortgagee. property insured. Insurer is not entitled to portion of
• The insurer, upon payment to the mortgagee-insured, premium corresponding to the excess of insurance
becomes subrogated to the rights of the mortgagee over the insurable interest of the insured
against the mortgagor and may collect the debt of the • Premiums to be returned where there is over-
mortgagor to the extent of the amount paid to the insurance by several insurers shall be proportioned to
mortgagee. the amount by which aggregate sum insured in all
policies exceeds the insurable value of the thing at risk.
Standard or Union Mortgage Clause
If a fire insurance policy contains this, the acts of the Double Insurance v. Over Insurance
mortgagor do not affect the mortgagee. It makes a DOUBLE INSURANCE OVER INSURANCE
separate and distinct contract of insurance on the interest There may be no over Amount of insurance is
of the mortgagee. insurance as when the beyond the value of the
sum total of the amounts of insured's insurable
Open or Loss-Payable Mortgage Clause the policies issued does interest
not exceed the insurable
It is a contract which provides that the payment of loss to
interest of the insured.
the mortgagee, if any, will be according to his interest as it
Several insurers involved May have only one
may appear in the contract. Under such clause, the acts of insurer involved
the mortgagor will affect the mortgagee.
4. Reinsurance
3. Double Insurance and Over Insurance
One by which an insurer procures a third person to insure
Double Insurance him against loss or liability by reason of such original
• Exists where the same person is insured by several insurance. In every reinsurance contract, the original
insurers separately in respect to same subject and contract of insurance and the contract of reinsurance are
interest. separate and distinct and covered by separate policies.
• Not prohibited by law.
• But it may be prohibited by another insurance clause. Policy of Insurance v. Reinsurance
When there is double insurance and over insurance POLICY OF REINSURANCE
results, the insured can claim in case of loss only up to INSURANCE
the agreed valuation or up to the full insurable value Written document Any contract by which an
from any, some or all insurers, without prejudice to the embodying the terms and insurer procures a 3'
insurers ratably apportioning the payments. Insured stipulations of the person to insure him
can also recover before or after the loss, from both contract of insurance against loss or liability by
insurers the excess premium he has paid. between the insured and reason of an original
insurer insurance
Requisites of Double Insurance: Formal written The original contract of
a. The person injured is the same; instrument evidencing insurance and the contract
b. There are two or more insurers insuring separately; the contract of insurance of reinsurance are covered
by separate policies
c. The subject matter is the same;
d. The interest insured is also the same;
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Double Insurance v. Reinsurance tractors, trailers and traction engines of all kinds used
DOUBLE INSURANCE REINSURANCE exclusively for agricultural purposes.
Involves the same Insurance of different
interest interests Scope of Coverage Required
Insurer remains in such Insurer becomes an insured OWNERS OF OPERATORS OF
capacity in relation to insurer PRIVATE MOTOR LAND
VEHICLES TRANSPORTATION
Insured in the 1st Original insured has no
in reinsurance Comprehensive against 3rd
contract is a party in interest
interest in the 2nd contract party liability for death or -
Comprehensive against
contract bodily injuries 3rd
party liability for death
Subject of insurance is Subject of insurance is the or bodily injuries
property original insurer's risk In case a private motor
Insured has to give his Consent of original insured, vehicle is being used to
The insurer may extend
consent not necessary transport passengers for
additional other risks at its
compensation, such
option
The reinsurance contracts were correctly issued in favor of coverage shall, in addition,
Plaridel. By its nature, reinsurance contracts are issued in include passenger liability
favor of the direct insurer because the subject of such
contracts is the direct insurer's risk, in this case, Plaridel's Rules of Comprehensive Third Party Liability
contingent liability to MSAPL, and not the risk assumed Insurance (CTPL):
under the original policy. With or without reinsurance, the • Registration of any vehicle will not be made or
obligation of the surety to the party against whom writ of renewed without complying with the requirements
attachment is issued remains the same (Communication • The protection may be complied with using any of the
and Information Systems Corporation v. Mark Sensing following:
Australia, G.R. No. 192159, 2016). a. Insurance policy
b. Surety bond
5. No fault clause, suicide, and incontestability clause c. Cash bond
• The purpose of CTPL is to give immediate financial
No fault clause assistance to victims of motor vehicle accidents and/or
their dependents, especially if they are poor regardless
Compulsory Motor Vehicle Liability Insurance (CMVLI) of the financial capability of motor vehicle owners or
A protection coverage that will answer for legal liability for operators responsible for the accident. (First
losses and damages for bodily injuries and/or property Integrated Bonding and Ins. Co., Inc. v. Hernando,
damage that may be sustained by another arising from the G.R. No. 51221, 1991).
use and operation of a motor vehicle by its owner.
"No Fault" Clause
It is unlawful for any land transportation operator or owner The injured third party or passenger or heirs of the
of a motor vehicle to operate the same in public highways deceased is given the option to file a claim for death or
unless there is an insurance or guaranty to indemnify the injury without the necessity of proving fault or negligence
death or bodily injury of a third party or passenger arising of any kind.
from the use thereof. (Insurance Code, Sec. 387)
Conditions for application of no fault clause:
Motor Vehicle a. The claim must be for death or bodily injuries only
Shall mean any vehicle propelled by any power other than (property damage/liability not included).
muscular power using the public highways (R.A. No. 4136, b. The total indemnity in respect of any person shall not
Sec. 3[a]) exceed five thousand pesos — this is the minimum
legal limit. Insurance companies issue policies for
Exceptions: road rollers, trolley cars, street sweepers, more than five thousand pesos The legal limit under
sprinklers, lawn mowers, bulldozers, graders, forklifts, the New Insurance Code is 15,000 pesos.
amphibian trucks, and cranes if not used in public c. The following proofs of loss, when submitted under
highways, vehicles which run only on rails or tracks, and oath, shall be sufficient evidence to substantiate the
claim;
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i. Police report of accident; and Note: In all cases, the right of the party paying the claim to
ii. Death certificate and evidence sufficient to recover against the owner of the vehicle responsible for the
establish the proper payee; or, accident shall be maintained. (Insurance Code, Sec. 391)
iii. Medical report and evidence or medical or
hospital disbursement in respect of which Periods in Claims Settlement
refund is claimed. Notice of Claim: must be presented within six (6) months
d. Claim may be made against one motor vehicle only; from the date of the accident
i. Against the insurer of the vehicle where one is
a passenger Otherwise the claim is deemed waived.
ii. in any other case, the offending vehicle
Bringing an Action or Suit: The action must be filed in
Claimant court of the Insurance Commission within one (1) year from
The claimant or victim may be a "passenger" or a "third denial of the claim.
party" (Insurance Code, Sec. 391)
Prescription starts to run from the denial of the claim by the
a. Passenger Insurance Company (Summit Guaranty and Insurance Co.
Any fare paying person being transported and v. Arnaldo, G.R. No. L-48546, 1988)
conveyed in and by a motor vehicle for transportation
of passengers for compensation, including persons Payment of Claims
expressly authorized by law or by the vehicle's If there is an agreement, the insurance company shall
operator or his agents to ride without fare. (Insurance forthwith ascertain the truth and extent of the claim and
Code, Sec. 386114] make payment within five (5) working days after reaching
an agreement.
b. Third Party If no agreement is reached, the insurance company shall
Any person other than a passenger as defined in this pay only the no-fault indemnity without prejudice to the
section and shall aiso exclude a member of the claimant from pursuing his claim further, in which case, he
household, or a member of the family within the shall not be required or compelled by the insurance
second degree of consanguinity or affinity, of a motor company to execute any quit claim or document releasing
vehicle owner or land transportation operator, as it from liability under the policy of insurance or surety bond
likewise defined herein, or his employee in respect of issued.
death, bodily injury, or damage to property arising out
of and in the course of employment (Insurance Code, Note: If the policy provides for indemnity against liability,
Sec. 3861-c]) the insurer can be sued directly by a third person. But, if
the policy provides for "reimbursement after actual
Proper Insurer to Claim From payment by the insured", or for the indemnity against loss,
• In the case of an occupant of a vehicle, claim shall lie a third person has no cause of action against the insurer
against the insurer of the vehicle in which the occupant (Bonifacio Brothers v. Mora, G.R. No. 20853, 1967).
is riding, mounting or dismounting from.
• If not an occupant, claim shall lie against the insurer of While insurer's liability may be direct, it does not mean that
the directly offending vehicle. the insurer can be held solidarily liable with the insured.
The insurer's liability is based on contract; that of the
The claimant is not free to choose from which insurer he insured is based on torts. Furthermore, the insurer's
will claim the "no-fault indemnity" as the law, by using the liability is limited to the amount of the insurance coverage
word "shall," makes it mandatory that the claim be made (Pan Malayan Insurance Corp. v. CA, G.R. No. 81026,
against the insurer of such vehicle. That said vehicle might 1990).
not be the one that caused the accident is of no moment
since the law itself provides that the party paying the claim Authorized Driver Clause
may recover against the owner of the vehicle responsible A stipulation in a motor vehicle insurance which provides
for the accident. (Perla Compania de Seguros v. Ancheta, that the driver, other than the insured owner, must be duly
G.R. No. L-49699 August 8, 1988) licensed to drive the motor vehicle otherwise the insurer is
excused from liability. The clause means that the insurer
indemnifies the insured owner against loss or damage to
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the car but limits the use of the insured vehicle to the b. Group Life
insured himself or any person who drove on his order or A blanket policy covering a number of individuals
with his permission. c. Industrial Life
A form of life insurance under which the premiums are
Authorized driver refers to: payable either monthly or oftener, if the face amount of
a. The insured; insurance provided in any policy is not more than five
b. Any person driving on the insured's order or with hundred times that of the current statutory minimum
his permission, provided that the person driving is daily wage in the City of Manila and if the words
permitted in accordance with the licensing, or "industrial" policy are printed upon the policy as part of
other laws or regulations to drive the motor vehicle the descriptive matter.
and is not disqualified from driving such motor
vehicle by order of a court of law or by reason of Kinds of Life Insurance
any enactment or regulation in that behalf a. Whole Life or Ordinary Policies
The insured agrees to pay annual, semi-annual or
Note: If the claimant was able to present a driver's license, quarterly premiums while he lives. The insurer agrees
the same is presumed to be genuine. The license will still to pay the face value of the policy upon the death of
be sustained in the absence of proof that it was not validly the insured.
issued (CCC Insurance Corporation v. CA, G.R. No. b. Limited Payment Life Policies
26167, 1970). A whole life or ordinary policy where premiums are
paid only for a specified period of years.
A driver (not the insured himself) who holds an expired c. Term Policy
driver's license is not an authorized driver (Gutierrez v. Insured pays only once and insurer's liability arises
Capital Insurance Co., G.R. No. 30892, 1984). only upon the death of the insured within the agreed
term as period. If the latter survives the period, the
Theft Clause contract terminates and the insurer is not liable.
The risks insured against in the policy may include theft. If d. Endowment Policy
there is such a provision and the vehicle was unlawfully Insurer agrees to pay a certain sum to the insured if
taken, the insurer is liable under the theft clause and the the latter outlives a designated period; if he dies before
authorized driver clause does not apply. The insured can thattime, the proceeds are paid to the beneficiary
recover even if the thief has no driver's license. (Perla e. Life Annuity
Compania de Seguros v. CA. G.R. No. 96452, 1992) Debtor binds (the insurer) himself to pay an annual
pension or income during the life of one or more
Suicide persons in consideration of a capital consisting of
money or other property, whose ownership is
Life Insurance transferred to him with the burden of income.
Scope Variable Contract

a. Insurance on human life Any policy or contract on either a group or individual basis
b. Insurance appertaining thereto or connected therewith issued by an insurance company providing for benefits or
may be payable: other contractual payments or values thereunder to vary so
i. On the death of the insured; as to reflect investment results of any segregated portfolio
ii. On his surviving a specified period of investment.
(endowment/annuities); and
iii. Otherwise, contingently on the continuance or Rules on Transferability of Life Insurance Contracts
cessation of life (endowment/annuities) A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has
Note: Life insurance policies are always VALUED policies. an insurable interest or not, and such person may recover
upon it whatever the insured might have recovered.
Classification of Life Insurance (Insurance Code, Sec. 184)
a. Individual Life
Insurance on human lives and insurance appertaining All life insurance policies are declared by law to be
thereto or connected therewith; assignable regardless of whether the assignee has an
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insurable interest in the life of the insured or not (Sun Life Requisites of Incontestability Clause:
Assur. Co. of Canada v. Ingersoll, G.R. No. 16475, 1921) a. The insurance is a life insurance policy.
b. It is payable on the death of the insured.
Necessity of Beneficiary's Consent to Assignment c. It has been in force during the lifetime of the insured
The consent of the beneficiary depends if there is a waiver for at least 2 years from its date of issue or of its last
of the right to change the beneficiary reinstatement. The period of 2 years may be shortened
but it cannot be extended by stipulation.
See discussion on Parties To An Insurance Contract (c)
When incontestability clause sets in
Liability of Insurer in Case of Death or Suicide Whichever is earlier, between:
1. Suicide • Within 2 years from the date of issuance or its last
The insurer is LIABLE in the following cases: reinstatement; or
a. Suicide was committed after the policy has been in • Upon the insurer's death (Sun Life v. Sibya, G.R. No.
force for a period of two years from the date of its 211212, 2016)
issue or its last reinstatement;
b. Suicide committed in a state of insanity regardless Note: In an earlier ruling, the Supreme Court ruled that the
of the date of the commission of the suicide; or insured dying eleven months after the effectivity of the
c. If committed after the lapse of a shorter period in the insurance policy allows the insurer to contest any
policy (Insurance Code, Sec. 183) misrepresentation made in the policy due to the one year
incontestability clause (Florendo vs. Philam Plans, Inc.,
Note: Any stipulation extending the two-year period is void. G.R. No. 186983, 2012).
The insurer is NOT LIABLE in the following cases: Defenses Not Barred by Incontestability Clause:
a. The suicide is not by reason of insanity and is a. Person taking the insurance lacked insurable interest
committed within the two-year period; as required by law;
b. The suicide is by reason of insanity but is not among b. Cause of the death of the insured is excepted risk;
the risks assumed by the insurer regardless of the c. Premiums have not been paid;
date of commission; and d. Conditions of the policy relating to military or naval
c. The insurer can show that the policy was obtained service have been violated;
with the intention to commit suicide even in the e. The fraud is of a particularly vicious type, wherein:
absence of any suicide exclusion in the policy. i. The policy was taken in furtherance of a scheme
to murder the insured;
2. Killing by the Beneficiary ii. The insured instituted another person for the
General Rule: The interest of a beneficiary in a life medical examination; and,
insurance policy shall be forfeited when the beneficiary is iii. The beneficiary feloniously killed the insured;
the principal, accomplice, or accessory in willfully bringing f. Beneficiary failed to furnish proof of death or to comply
about the death of the insured. In such a case, the share with any condition imposed by the policy after the loss
forfeited shall pass on to the other beneficiaries, unless has happened; or,
otherwise disqualified. In the absence of other
9. Action was not brought within the time specified.
beneficiaries, the proceeds shall be paid in accordance
with the policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured. B. Perfection Of The Insurance Contract
(Insurance Code, Sec. 12)
1. Offer and Acceptance / Consensual
Exceptions:
b. Accidental killing; Consensual Nature of Contract
c. Self-defense; and A contract of insurance must be assented to by both
d. Insanity of the beneficiary at the time he killed the parties, either in person or through their agents and so long
insured as an application for insurance has not been either
accepted or rejected, it is merely a proposal or an offer to
Incontestability Clause make a contract. (Perez v. CA, G.R. No. 112329, 2000)
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Also, according to Enriquez v. Sun Life Assurance (G.R. Note: The policy is the formal written instrument
No. L-15895, 1920): evidencing the contract of insurance entered into between
(1) Submission of application, even with premium the insured and the insurer. No form is required to perfect
payment is a mere offer on the part of the applicant, and a contract of insurance.
does not bind the insurer;
Cover-Note
(2) An insurance contract is also not perfected where the It is a contract for temporary insurance for a reasonable
applicant dies before the approval of his application or it time until the policy or policies can be written or issued by
does not appear that the acceptance of the application the insurer.
ever came to the knowledge of the applicant;
Alsc called: Binding Receipt or Slip, Interim, Temporary
(3) An acceptance made by letter shall not bind the person or Provisional Policy
making the offer except from the time it came to his
knowledge. Rules on Cover Notes:
a. Insurance companies doing business in the
a. Delay in Acceptance — A contract of insurance, like Philippines may issue cover notes to bind insurance
other contracts, must be assented to by the parties temporarily, pending the issuance of the policy.
either in person, or by their agents. Under the law, b. A cover note shall be deemed to be a contract of
assent or consent is manifested by the meeting of the insurance within the meaning of Section 1(1) of the
offer and the acceptance upon the thing and the cause Code.
which are to constitute the contract. If an application c. No cover note shall be issued or renewed unless in the
has not been either accepted or rejected, there is no form previously approved by the Insurance
contract yet as it is merely and offer or proposal Commission.
(Insurance, de Leon, p.176). d. A cover note shall be valid and binding for a period not
exceeding sixty (60) days from the date of its,issuance,
b. Delivery of Policy — The delivery of a policy is not, whether or not the premium therefor has been paid,
however, a prerequisite to a valid contract of but such cover note may be cancelled by either party
insurance. The contract may be completed prior to upon at least seven (7) days notice to the-other party.
delivery of the policy or even without -delivery of the e. If a cover note is not so cancelled, a policy of insurance
policy depending on the intention of the parties shall, within sixty (60) days after the issuance of such
(Insurance, de Leon, p.180). cover note, be issued in lieu thereof. Such policy shall
include within its terms the identical insurance bond
FORM OF THE CONTRACT under the cover note and the premium therefor.
f. A cover note may be extended or renewed beyond the
Form NOT REQUIRED to perfect a contract of aforementioned ,period written approval provided that
insurance with upon the certification of sixty (60) days with the of
The policy is the formal written instrument evidencing the the Insurance Commission, such written approval may
contract of insurance entered into between the insured and be dispensed of the president, vice-president, or
the insurer. No form is required to perfect a contract of general manager of the insurance company concerned
insurance. that the risks involved, the values of such risks and/or
the premiums therefor have not as yet been
Form of Insurance Contracts determined or established and that such extension or
4. No policy, certificate or contract of insurance shall be renewal is not contrary to and is not for the purpose of
issued or delivered within the Philippines unless in the violating any provisions of the Insurance Code, or of
form previously approved by the Commissioner; and any of the rulings, instructions, circulars, orders or
5. No application form shall be used with, and no rider, decisions of the Insurance Commissioner. (Ins. Memo.
clause, warranty or endorsement shall be attached to, Cir. No. 3-75, Sept. 29,1975, effective Oct. 21,1976.)
printed or stamped upon such policy, certificate or g. Insurance companies may impose on cover notes a
contract unless the form of such application, rider, deposit premium equivalent to at least 25% of the
clause, warranty or endorsement has been approved estimated premium of the intended insurance
by the Commissioner. (Insurance Code, Sec. 232) coverane Nit in no case less than P500.00. (Ins. Cir.
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Letter, Jan. 17,1980.) (De Leon, The Insurance Code Note: If there is inconsistency between the policy and the
of the Philippines Annotated [2014]) rider, the rider prevails, it being the later and a more
deliberate expression of the agreement of the parties.
The fact that no separate premium was paid on the cover
note before the loss insured against occurred, does not Formal Requirements of a Policy
militate against its binding effect as an insurance contract. a. In printed form which may contain blank spaces;
By their nature, cover notes do not contain particulars that b. Any word, phrase, clause, mark, sign, symbol,
would serve as basis for the computation of the premiums signature, number or word necessary to complete the
and consequently, no separate premiums are intended or contract of insurance shall be written in the blank
required to be paid therefor (Pacific Timber Export Corp. v. spaces provided therein. (Insurance Code, Sec. 50)
CA, G.R. No. L-38613, 1982)
Contents of an Insurance Policy
Insurance Policy a. The parties between whom the contract is made;
A written document issued by the insurer to the insured, b. The amount to be insured except in the cases of open
embodying the terms and conditions of their contract of or running policies;
insurance. c. The premium, or if the insurance is of a character
where the exact premium is only determinable upon
The policy is not necessary for the perfection of the the termination of the contract, a statement of the basis
contract. The Policy is only the formal written instrument and rates upon which the final premium is to he
evidencing the contract. It is required, however, that all determined,
policies issued or delivered must be in the form previously d. The property or life insured;
approved by the Insurance Commission. e. The interest of the insured in property insured, if he is
not the absolute owner thereof;
The BEST EVIDENCE that a contract has been entered f. The risks insured against; and
into between the insurer and the insured is the DELIVERY g. The period during which the insurance is to continue.
of the policy by the insurer to the insured. (Insurance Code, Sec. 51)
Rider Kinds of Policies

Attachment to an insurance policy that modifies the a. Open or Unvalued Policy
conditions of the policy by expanding or restricting its Value of thing insured is not agreed upon, but left to be
benefits or excluding certain conditions from the coverage. ascertained in case of loss;(ex. Marine and Fire
Insurances) (Insurance Code, Sec. 60)
Formal requirements of riders
Riders, together with other attachments to the policy, like In an open policy, the value of the property insured is
clause, warranty or endorsements, are not binding on the not agreed upon, although the parties may agree on
insured unless: the maximum amount of recovery or limit to the liability
1. The descriptive title or name thereof is mentioned and of the insurer. In case of loss, this amount must be
written on the blank spaces provided in the policy and; considered, by agreement of the insurer and the
2. Countersigned by the insured or owner. insured, the actual value of the property in the absence
of evidence of greater or lesser value. (Dev't Ins. Corp.
Exception: No need to countersign if the rider or other v. IAC, G.R. No. L-71360, 1986).
attachment is applied for by the insured or owner of the
policy b. Valued Policy
Definite valuation is agreed upon by both parties, and
A rider containing an "Automatic Increase Clause" — one written on the face of the policy; (ex. Marine and Fire
that increases the coverage subject to the attainment of a Insurances) (Insurance Code, Sec. 51)
certain age of the insured — is not a separate contract. It is
part of the original policy which is in the nature of a C. Running Policy
conditional obligation (Commissioner of Internal Revenue Also called Floating, Adjustable, Blanket or
v. Lincoln Philippine Life Insurance Company, G.R. No. Declaration Policy; Contemplates successive
119176, March 19, 2001). insurances and which provides that the subject of the
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policy may from time to time be defined. (Insurance even if premium has not been actually paid, as
Code, Sec. 62) expressly provided by Section 78 itself. (Insurance
Code, Sec. 78)
Void Stipulations in an Insurance Contract
a. Stipulations for the payment of loss whether the person c. Where the parties agreed that premium payment shall
insured has or has not any interest in the property be in installments and partial payment has been made
insured; or at the time of loss (Makati Tuscany Condominium v.
b. The policy shall be received as proof of such interest, Court of Appeals, G.R. No. 95546, 1992; Gaisano v.
Or Development Insurance and Surety Corp., G.R. No.
c. Policies executed by way of gaming or wagering. 190702, 2017)
2. Premium Payment Cf. Where the policy provides for payment in premium
Premium is the consideration paid to an insurer for in full before the "policy shall be deemed effective,
undertaking to indemnify the insured against a specified valid, and binding upon the company" — the partial
peril. payment is merely treated as a deposit and does not
make the policy binding. (Sps. Tibay v. CA, G.R. No.
An insurer is entitled to payment of the premium as soon 119655, 1996)
as the thing insured is exposed to the peril insured against.
d. Where the insurer granted the insured a credit term for
Effect of Non-Payment of Premium the payment of the premium, and loss occurs before
the expiration of the term (Makati Tuscany
General Rule: Condominium v. Court of Appeals, G.R. No. 95546,
Non-payment of first premium - prevents the contract 1992; Gaisano v. Development Insurance and Surety
from becoming binding notwithstanding the acceptance of Corp., G.R. No. 190702, 2017)
the application or the issuance of the policy.
e. Where the insurer is in estoppel as when it has
But non-payment of the balance of the premium due does consistently granted a 60 to 90-day credit term for the
not produce the cancellation of the contract. (Phil. Phoenix payment of premiums. (Gaisano v. Development
Surety & Insurance v. Woodworks, G.R. No. L-22684, Aug. Insurance and Surety Corp., G.R. No. 190702, 2017).
31, 1967).
Authority of Agent to Receive Premium
Subsequent premiums - does not affect the validity of the Where an insurer authorizes an insurance agent or broker
contracts unless, by express stipulation, it is provided that to deliver a policy to the insured, it is deemed to have
the policy shall in that event be suspended or shall lapse. authorized said agent to receive the premium in its behalf.
Exceptions to General Rule as to Payment of Premiums: The insurer is also bound by its agent's acknowledgement
a. In case of life and industrial life whenever the grace of receipt of payment of premium (American Home
period provision applies. Assurance Co. v. Chua, G.R. No. 130421,1999).
Individual Life or Endowment Insurance and Given the provisions of the Insurance Code, which is a
Group Life Insurance special law, the applicable rate of interest shall be that
Grace period of either thirty (30) days or one (1) month imposed in a loan or forbearance of money as imposed by
within which the payment of any premium after the first the BSP. The unpaid amount due from insurer is a
may be made forbearance of money. So the proper rate applies
(Stronghold Insurance Co., Inc. V. Pamana Island Resort
Hotel and Marina Club, Inc., G.R. No. 174838, 2016).
Industrial Life Insurance
Grace period is four (4) weeks, and where premiums 3. Non-Default Options In Life Insurance
are payable monthly, either thirty (30) days or one (1) The options available to a policyholder in case of non-
month. payment of premium after three full annual premiums have
been paid are:
b. Where the insurer acknowledged in the policy or
contract of insurance itself the receipt of premium, a. Received the cash surrender value
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b. Apply such value as the premium for an extended Conditions:

insurance 1) In the event of default in premium payment, the
c. Apply such value as the premium for a paid-up Premium Loan provision shall only apply if
insurance requested in writing by thepolicyholder either in the
application or at any time before the expiration of
d. Secure from such value an automatic premium loan
the grace period.
before the expiration of the grace period
2) The moment there is default in premium payment
andno option has been elected either in the
Cash Surrender Value application or within thetime specified in the policy,
An amount to be paid to the insured upon surrender of the one of the paid-up options specified therein shall
policy contract. automatically take effect. (De Leon, The Insurance
Code of the Philippines Annotated 120141)
An amount which the insurance company holds in trust for
the insured to be delivered to him upon demand. It is 4. Reinstatement Of A Lapsed Policy Of Life
therefore a liability of the company to the insured. Insurance
(Manufacturer's Life Insurance v. Meer, G.R. No. L-2910, A provision that the policyholder shall be entitled to have
1951) the policy reinstated at any time within three years from the
date of default of premium payment unless the cash
Alternatives to Cash Surrender Value surrender value has been duly paid, or the extension
period has expired, upon production of evidence of
a) Extended Insurance/Term Insurance insurability satisfactory to the company and upon payment
Where insurance is "extended," the insured is given the of all overdue premiums and any indebtedness to the
right, upon default, after the payment of at least three full company upon said policy, with interest rate not exceeding
annual premiums (see Sec. 227[f].), to have the policy that which would have been applicable to said premiums
continued in force from the date of default for a time either and indebtedness in the policy years prior to reinstatement.
stated or equal to the amount as the net value of the policy
taken as a single premium, will purchase. In case of death Requisites for Reinstatement of Lapsed Life Insurance
of the insured within the extended term, he may recover Policy
the face value of the policy. Extended insurance is a. Application shall be made within three years from the
sometimes called "term insurance," "temporary insurance," date of lapse;
or "paid-up extended insurance." (De Leon, The Insurance b. There should be a production of evidence of the good
Code of the Philippines Annotated [2014]) health of the insured:
c. If the rate of premium depends upon the age of the
b) Paid-up Insurance Beneficiary, there should likewise be a production of
Where insurance is "paid-up," the insured is given the right, evidence of his or her good health;
upon default, after the payment of at least three annual d. There should be presented such other evidence of
premiums (Ibid.) to have the policy continued in force from insurability at the date of application for reinstatement;
the date of default for the whole period of the insurance e. There should be no change which has taken place in
without further payment of premiums. In case of death of such good health and insurability subsequent to the
the insured, he may recover only the "paid-up" value of the date of such application and before the policy is
policy, usually less than the "paid-up" premiums, under the reinstated; and
same conditions as the original policy. Technically, the f. All overdue premiums and other indebtedness in
term "paid-up" insurance is often referred to as "reduced respect of the policy, together with interest at six per
paid- up" insurance. (De Leon, The Insurance Code of the cent, compounded annually, should first be paid.
Philippines Annotated [2014]) (Andres v. Crown Life Insurance Co., G.R. No. L-
10874, 1958)
c) Automatic Premium Loan
This provision protects against the unintentional lapse of Insular Life's argument was that the two-year contestability
the contract by advancing, in the form of policy loan, the period of the reinstated insurance policy had not lapsed
unpaid amount of a premium due. The automatic premium inasmuch as the insurance policy was reinstated only on
loan is advantageous to the policy owner because it helps December 27, 1999. The Court notes that the
to continue the contract and all its features in full force and reinstatement was conditioned upon the payment of
effect. additional premium not only prospectively, that is, to cover
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the remainder of the annual period of coverage, but also the surety bond is effective for only one (1) year. In
retroactively, that is for the period starting June 22, 1999. fact, the effectivity of the bond is not wholly dependent
An insurance contract is a contract of adhesion which must on the payment of premium (Country Bankers
be construed liberally in favor of the insured and strictly Insurance Corporation v. Antonio Legman, G.R. No.
against the insurer in order to safeguard the latter's interest 165487, 2011).
(The Insular Life Assurance Company v. Paz Khu, G.R. • A policy of insurance upon life or health may pass by
No. 195176, 2016). transfer, will or succession to any person, whether he
has an insurable interest or not, and such person may
5. Refund Of Premiums recover upon it whatever the insured might have
The insured is entitled to return of premiums paid if the recovered.
follow requisites are met: • On the other hand, property insurance cannot be
a. The thing insured was never exposed to the risks transferred without the consent of the insurer because
insured against; the insurer approved the policy based on the personal
b. Contract is voidable due to the fraud or qualification and the insurable interest of the insured.
misrepresentation of insurer; If there is transfer of property insurance without such
c. Insurer never incurred liability; consent, the insurance policy is suspended and will not
d. When the insurance is for a definite period and the be avoided until the interest in the thing and the
insured surrenders his policy before the termination interest in the insurance are vested in the same
thereof (pre-termination); person.
e. Contract is voidable because of the existence of facts
of which the insured was ignorant without his fault; C. Rights And Obligations Of The Party
f. When there is over-insurance; and
9. When rescission is granted due to the insurer's breach PARTIES TO AN INSURANCE CONTRACT
of contract.
1. Insurer
Payment of Interest on Refund of Premium: The party who assumes or accepts the risk of loss and
Sections 243 and 244 of the Insurance Code explicitly undertakes for a consideration to indemnify the insured or
provide for payment of interest when there is unjustified to pay him a certain sum on the happening of a specified
refusal or withholding of payment of claim by the insurer. contingency or event;
Article 2209 of the Civil Code likewise provides for
payment of interest when the debtor is in delay. However, An insurer may be:
in cases where the refusal to refund insurance premiums i. A foreign or domestic company or corporation; or
is because the insurer wants to rescind the insurance ii. A partnership or an association
contract on account of concealment, the insurance
company did not unreasonably deny or withhold the Insurance Corporations are corporations formed or
insurance proceeds (Sun Life v. Tan Kit, G.R. No. 183272, organized:
2014). i. To save any person or persons or other
corporations harmless from loss, damage, or
Premium Necessary for Suretyship liability from any unknown or future or contingent
General rule: Premium is also necessan/ in order for the event, or
contract of suretyship or bond to be binding. ii. To indemnify or to compensate any person or
persons or other corporations for any such loss,
Exception: Where the obligee has accepted the bond, it damage, or liability, or
is binding even if the premium has not been paid subject iii. To guarantee the performance of, or compliance
to the right of the insurer to recover the premium from its with, contractual obligations or the payment of
principal (Philippine Pryce Assurance Corporation v. CA, debt of others.
G.R. No. 107062, 1994).
An Insurance Corporation must have:
Note: i. Sufficient Capital and assets required under the
• The official receipts in question serve as proof of Insurance Code and pertinent regulations issued
payment of the premium for one year on each surety by the Commission; and
bond. It does not, however, automatically mean that
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ii. A Certificate of Authority to operate issued by husband (Harding v. Commercial Union Assurance, G.R.
the Insurance Commission which should be No. L-12707, 1918)
renewable every 3 years. (New Insurance Code,
Sec. 193) Note: Family Code, Art. 73: While either spouse may
exercise any legitimate activity without the consent of the
2. Insured other, the latter may object on valid, serious, and moral
The person in whose favor the contract is operative and grounds.
who is indemnified against or is to receive a sum upon the
happening of a specified event. 3. Beneficiary
Person designated to receive proceeds of policy when risk
Requisites in Order that a Person May Be Insured attaches since it is possible that the insured may assign
Under a Contract of Insurance: (CIP) (Insurance Code, the proceeds of the insurance to someone else.
Sec. 3)
i. He must be competent to enter into a contract; Note: There are only two parties to a contract of insurance,
ii. He must possess an insurable, interest in the the insured and the insurer. The beneficiary is NOT a party
subject of the insurance; and to the contract unless he is the party to be insured.
iii. He must not be a public enemy (citizen or subject
of a country with whom the Philippines is at war)
(Insurance Code, Sec. 7) D. Rescission Of Insurance Contracts
Effect of War on Existing Insurance Contracts Primary Concerns of the Insurer

i. Property Insurance a. Correct estimation of risk which enables insurer to
An insurance policy ceases to become valid and determine if he will approve the policy application and
enforceable as soon as the insured becomes a public if so at what premium rate;
enemy. b. Delimitation of the risk;
c. Control of risk to guard against increase in risk;
However, premium paid by the insured (public enemy) d. Determine if loss occurs and if so the amount thereof.
shall be returned by the insurer (Filipinas Compania de
Seguros v. Christem Huenefield & Co., G.R. No. L-2294, Devices of Insurer in Ascertaining and Controlling
1951) Risks
a. Concealment
ii. Life Insurance b. Representations
The contract is abrogated but the insured is entitled to the c. Warranties
case or reserve value of the policy (if any), which is the Statements or promises by the insured, whether
excess of the premiums paid over the actual risk carried expressed, implied, affirmative or promissory, set forth
during the years when the policy had been in force in the policy itself or incorporated in it by proper
(Constantino v. Asia Life Insurance, G.R. No. L-1669, reference, the untruth or non-fulfilment of which in any
1950) respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or non-fulfilment
Note: Where the loss occurs after the end of the war, the renders the policy voidable by the insurer.
contract is not revived. d. Conditions
e. Exceptions
Rule on Married Persons Stipulations excluding certain specified risks that
The consent of the spouse is not necessary for the validity otherwise would be included under the general
of an insurance policy taken out by a married person on his language describing the risks assumed.
or her life or that or his or her children (Insurance Code,
Sec. 3, 112) or that of her husband (Insurance Code, Sec. 1. Concealment
10) A neglect to communicate that which a party knows and
ought to communicate (Insurance Code, Sec. 26)
She may also take out insurance on her paraphernal or
separate property, or on property given to her by her
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Requisites of Concealment communication before the making of the insurance

a. A party knows the fact which he neglects to contract.
communicate or disclose to the other;
b. Such party concealing is duty-bound to disclose such Failure on the part of the insured to disclose such facts
fact to the other; known to his agent, or wholly due to the fault of the agent,
c. Such party concealing makes no warranty of the fact will avoid the policy, despite the good faith of the insured.
concealed; and
d. The other party has not the means of ascertaining the Rules on Disclosure of Information
fact concealed
Items to disclose to the other, in good faith, even
Good faith is no defense in concealment. The Insurance without inquiry
Code dispenses with proof of fraudulent intent in cases of • Party concealing must have knowledge of the facts
rescission due to concealment, but not so in cases of concealed;
rescission due to false representations. (VcIa. De Canilang • Facts concealed must be material to the risk;
v. CA, G.R. Na 92492, 1993; The Insular Life Assurance • Party is duty bound to disclose such fact to the other;
Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 & 210156, • Party concealing makes no warranty as to the facts
2018) concealed;
• Other party has no other means of ascertaining the
Proof of Fraud in Concealment facts concealed.
General Rule: Fraud need not be proven in order to prove
concealment. Good faith is not a defense. (Satumino v. Items to disclose upon inquiry
Phil. American Life Insurance, G.R. No. L-16163, 1963) General Rule: Neither party to the insurance contract is
bound to communicate information on the following
Exception: When the concealment is made by the insured matters
in relation to the falsity of a warranty, the non-disclosure
must be intentional and fraudulent in order that the contract Exception: Except in answer to the inquiries of the other:
may be rescinded. (Insurance Code, Sec. 29) a. Those of which the other knows;
b. That which, in the exercise of ordinary care, the other
Effect of Concealment
ought to know and of which the former has no reason
General Rule: Concealment, whether intentional or not,
to suppose his ignorance, i.e. political situation,
entitles the injured party to rescind a contract of-insurance,
general usages of trade;
even if the death or loss is due to a cause not related to
c. Those of which the other waives communication;
the concealed matter (Insurance Code, Sec. 27)
d. Those which prove or tend to prove the existence of
the risk excluded by a warranty and which are not
Exceptions:
otherwise material;
a. Incontestability Clause (Insurance Code, Secs. 48 and
e. Those which relate to a risk excepted from the policy
233[b])
and which are not otherwise material.
b. Concealment made after the contract has become
effective;
Disclosure of Insurable Interest
c. Waiver or estoppel;
General rule: The insured is not required to communicate
d. In marine insurance, in situations where concealment
the nature (or kind) or the amount of his insurable interest
does not vitiate the entire contract, but merely
in the life or property insured to the insurer.
exonerates the insurer from a loss resulting from the
risk concealed (Insurance Code, Sec. 112)
Exceptions:
a. When the insurer makes inquiry from the insured of the
Instances When Concealment Made by an Agent
nature or amount of the latter's insurable interest,
Procuring Insurance Binds Principal
whether in life or property insurance;
a. Where it was the duty of the agent to acquire and
b. Insurance policy must specify the interest of the
communicate information of the facts in question;
insured in the property insured, if he is not the absolute
b. Where it was possible for the agent, in the exercise of
have made the owner thereof.
reasonable diligence, to
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Waiver of Disclosure of Material Facts The withholding by the applicant, father of one- year-old
a. By the terms of the insurance (express waiver); or insured, of the fact that his daughter was typically a
b. By the neglect to make inquiry as to such facts, where mongoloid child, of which he was fully aware, as such a
they are distinctly implied in other facts which congenital physical defect could never be ensconced nor
information is communicated (implied waiver). (Sec. disguised, in supplying essential data for the insurance
33, Insurance Code) application form which fact is material to the contract,
constitutes fraudulent concealment (Great Pacific v. CA,
No duty to disclose opinions G.R. No. L-31845, 1979)
Neither party is bound to communicate his mere opinion,
speculation, intention or expectation even upon inquiry, Exception: Imprecise description of information is not
because such pinion would add nothing to the appraisal of concealment
the application. (Insurance Code, Sec. 35)
Where the insured lacked sufficient medical knowledge as
Materiality
to enable him to distinguish between "peptic ulcer" and
Materiality is to be determined not by the event, but solely
"tumor" the insured cannot claim that he was deceived into
by the probable and reasonable influence of the facts upon
entering into the contract.
the party to whom the communication is due:
a. In forming his estimate of the disadvantages of the
In the absence of evidence that the insured had sufficient
proposed contract; or
medical knowledge as to enable him to distinguish
b. In making his inquiries. (Insurance Code, Sec. 31)
between "peptic ulcer" and a "tumor," his statement that
said tumor was "associated with peptic ulcer of the
Test of Materiality
stomach" should be construed as an expression made in
Was the insurer misled or deceived into entering a contract
good faith of his belief as to the nature of his ailment and
obligation or in fixing the premium of insurance by a
operation. Such statement must be presumed to have
withholding of material information or facts within the
been made by him without knowledge of its incorrectness
assured's knowledge or presumed knowledge? (Araente v.
and without any deliberate intent on his part to mislead the
West Coast Life, G.R. No. L-24899, 1928)
insurer. (Ng Zee v. Asian Crusader, G.R. No. L-30685,
1983)
It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed
2. Misrepresentation or Omissions
insurance policy or in making inquiries (Sunlife Assurance
Company v. CA, G.R. No. 105135, 1995).
Definition
It is a factual statement made by the insured at the time of,
The materiality of the existence of other insurance
or prior to, the issuance of the policy, to give information to
contracts against fire upon the same property insured,
the insurer and otherwise induce him to enter into the
when its disclosure is one of the conditions specified in the
insurance contract.
fire insurance policy, is not open to doubt (Union Mfg. v.
Phil. Guaranty, G.R. No. L-27932, October 30, 1972)
A representation cannot qualify an express provision in a
contract of insurance but it may qualify an implied
Materiality in Medical Examinations
warranty. (Insurance Code, Sec. 40)
General rule: non-disclosure is concealment
In non-medical insurance (which does away with the usual
Form
medical examination before the policy is issued), the
Oral or written. (Insurance Code, Sec. 36)
waiver by said insurance company makes the previous
health conditions of the insured more material (Satumino
When made
v. Phil. American Life Ins., G.R. No. L-16163, 1963)
It may be made orally or in writing. It may be made at the
time of, or before, the issuance of the policy. (Insurance
Where the applicant concealed the fact that he had
Code, Sec. 37)
pneumonia, diabetes or syphillis, the policy is avoided
although the cause of the death (e.g., plane crash) be
It may be altered or withdrawn before the insurance is
totally unconnected with the material fact concealed or
effected, but not afterwards. (Insurance Code, Sec. 41)
misrepresented.
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Requisites for Misrepresentations b. It is false in a material point (Insurance Code, Sec. 45)
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is untrue Note: The materiality of a representation is determined
and with intent to deceive or which he states positively by the same rules as the materiality of concealment.
as true without knowing it to be true and which has a (Insurance Code, Sec. 46)
tendency to mislead;
3. Such fact in either case is material to the risk. Concealment v. Misrepresentation
CONCEALMENT MISREPRESENTATION
Misrepresentation as Affirmative Defense The insured withholds The insured makes erroneous
Misrepresentation is an affirmative defense. To avoid information of material statements of facts with .the
liability, the insurer has the duty to establish such a facts from the insurer; intent of inducing the insurer to
defense by satisfactory and convincing evidence. (Ng Gan enter into the insurance
Zee v. Asian Crusader, G.R. No. L-30685, 1983) contract;
Passive form of the Active form of the act
The fraudulent intent on the part of the insured must be act
established to entitle the insurer to rescind the contract. Usually occurs prior to Maybe made at the time of the
Misrepresentation as a defense of the insurer to avoid making of the issuance of the contract
liability is an affirmative defense and the duty to establish insurance contract
such defense by satisfactory and convincing evidence
rests upon the insurer. (Manulife Philippines v. Ybanez, 3. Breach of Warranties
G.R. No. 204736, 2016)
Warranty
Kinds of Representation: A statement or promise set forth in the policy or by
a. Affirmative - an affirmation of a fact existing when the reference incorporated therein, the untruth or non-
contracts begins; or fulfillment of which in any respect, and without reference to
b. Promissory - a statement by the insured concerning whether insurer was, in fact prejudiced by such untruth or
what is to happen during the term of the insurance. non-fulfillment, renders the policy VOIDABLE by the
insure' .
Effect of Expressions of Opinion or Expectation on
Insurance Policy Kinds of Warranties
A representation of the expectation, intention, belief, a. Express — An agreement contained in the policy or
opinion or judgment of the insured, although false, WILL clearly incorporated therein as part thereof whereby
NOT AVOID a policy of insurance if there is no actual fraud the insured stipulates that certain facts relating to the
in inducing the acceptance of the risk, or its acceptance at risk are or shall be true or certain acts relating to the
a lower rate of premium (Phi/am Health Systems v. CA, same subjects have been or shall be done.
G.R. No. 125678, 2002); b. Implied — Warranties that are,deemed included in the
contract, although not expressly mentioned. They are
Adoption of Misrepresentation found usually in marine insurance.
An insured who signed the pension plan application, c. Affirmative — Asserts the existence of a fact or
adopted as his own the written representations and condition at the time it is m.de;
declarations embodied in it (Ma. Lourdes S. Florendo vs. d. Promissory — The insured stipulates that certain facts
Phi/am Plans, Inc., Perla Abcede, et al., G.R. No. 186983, or conditions shall exist or thin shall be done or
2012). omitted.
Effect of Misrepresentation
If there is misrepresentation, the injured party is entitled to
rescind from the time when the representation becomes
false. (Insurance Code, Sec. 45)
The injured party can rescind the contract when:

a. The representation fails to correspond with the facts
(Insurance Code, Sec. 44); and
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Warranty v. Representations indicative of a clear intent to waive such right. There must
WARRANTY REPRESENTATION be clear showing that the insurer knew about the violation
Part of the contract Collateral Inducement of the clause (General Insurance and Surety Corp. v. Ng
Written on the policy or in Need not be written Hua, G.R. No 14373, 1960).
a valid rider or attachment
EXERCISE OF THE RIGHT TO RESCIND
Generally conclusively Should be established to
presumed to be material be material Time to Exercise the Right to Rescind
Falsity or non-fulfilment Falsity renders the policy a. Non-Life Policy — Prior to the commencement of an
operates as a breach of voidable or rescissible on action on the contract
contract the ground of fraud b. Life Policy — Before the incontestability clause sets in
Fact warranted must be Requires only to be
strictly complied with substantially true
Cancellation of Non-Life Insurance
Where express warranty must be contained
Grounds for Cancellation of a Non-Life Policy by the
a. The policy itself; or
Insurer
b. In another instrument signed by the insured and
a. Non-payment of premium;
referred to in the policy as making a part of it
b. Conviction of a crime out of acts increasing the hazard
insured against;
Effect of Breach of Warranty
c. Fraud or material misrepresentation;
General Rule: The violation of a material warranty or other
d. Willful or reckless acts or omissions increasing the risk
material provision of the policy gives the insurer the right
to rescind the insurance policy (Insurance Code, Sec. 74) insured against;
e. Physical changes in the property insured making it
Note: A policy may declare that a violation of specified uninsurable; and
f. Determination by the Insurance Commissioner that the
provisions thereof shall avoid it. Otherwise, the breach of
an immaterial provision does not avoid the policy. policy would violate the Insurance Code. (Sec. 64,
(Insurance Code, Sec. 75) Insurance Code)
Requisites for Cancellation by Insurer (Other Than Life

Exception: The below instances of warranties relating to
the future Insurance Contracts)
a. Loss occurs before the time of performance of the a. Prior notice of cancellation to insured;
warranty; b. Notice must be based on the occurrence after effective
b. The performance becomes unlawful; date of the policy of one or more of the grounds
c. Performance becomes impossible. (Insurance Code, mentioned;
Sec. 73) c. Notice must be in writing, mailed or delivered to the
insured at the address shown in the policy; and
d. Notice must state the grounds relied upon and upon
Note: Waiver or estoppel may also prevent the insurer
from being discharged from liability (Pioneer v. Yap, G.R. request of insured, to furnish facts on which
No. L-36232, 1974) cancellation is based.
Prior Notice is required to prevent the cancellation of the

Other Insurance Clause — This is a clause in the policy
policy, without allowing the insured ample opportunity to
that provides that the policy shall be void if the insured negotiate for other insurance in its stead for his own
procures additional insurance without the consent of the protection (Saura Import & Export v. Phil. International
insurer. The purpose is to prevent over-insurance and thus Surety, G.R. No. L-15184, 1963).
to avert the possibility of a perpetration of fraud. It is a
warranty that entitles the insurer to rescind in case of Renewal of Non-Life Insurance
breach. The insured shall be entitled to renew the policy upon
payment of the premium due on the effective date of the
The "other insurance clause" may be subject to waiver but renewal. Policy written:
the waiver must either be express or if it is to be implied • Term of less than one (1) year - considered as if
written for a term of one (1) year
from conduct mainly, said conduct must be clearly
• Term longer than one (1) year or any policy with
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no fixed expiration date - considered as if written Insurer is Not Liable if:

for successive policy periods or terms of one (1) a. Loss by insured's willful act or gross negligence;
year b. Loss due to connivance of the insured;
c. Loss where the excepted peril is the proximate cause.
Exception: The insurer at least forty-five (45) days_ in
advance of the end of the policy period mails or delivers to Mandatory Requirement of Notice of Loss and Proof of
the named insured at the address shown in the policy
Loss
notice of its intention not to renew the policy or to condition
its renewal upon reduction of limits or elimination of The requirement of the notice of loss and obligation to file
coverages (Insurance Code, Sec. 66) a proof of loss are condttions with which the insured MUST
comply before there is any liability on the part of the
E. Loss insurer.
1. Notice and Proof of Loss When to Give Notice of Loss

Without unnecessary delay or within a reasonable time.
When Insurer is Liable for Loss
• Unless otherwise provided by the policy, an insurer is A requirement of the policy that notice of loss be given
liable for a loss of which a peril insured against was the immediately or fortwith requires the giving of notice within
proximate cause, although a peril not contemplated by a reasonable time (Bachrach v. Britain Am. Assur. Co.,
the contract may have been a remote cause of the loss G.R. No. L-5715, 1910)
• The thing insured is rescued from a peril insured Form of Notice or Proof of Loss
against that would otherwise have caused a loss, if, in In case of loss upon fire insurance, the law requires written
the course of such rescue, the thing is exposed to a notice. (Insurance Code, Sec. 90)
peril not insured against, which permanently deprives
the insured of its possession, in whole or in part; or For other kinds of insurance, absent any stipulation in the
where a loss is caused by efforts to rescue the thing policy, notice or proof may be given orally or in writing.
insured from a peril insured against (Insurance Code,
Sec. 87) When defects in a notice of loss are waived
All defects in a notice of loss, or in preliminary proof
Insurer is Liable if: thereof, which the insured might remedy, and which the
a. Loss, the proximate cause of which is the peril insured insurer omits to specify to him, without unnecessary delay,
against; as grounds of objection, are waived. (Insurance Code,
b. Loss, the immediate cause of which is the peril insured Sec. 92)
against except where proximate cause is an excepted
peril; When Delay in the Presentation of Notice or Proof of
C. Loss through the negligence of insured except where Loss is Deemed Waived
there was gross negligence amount to willful act; and Delay in the presentation to an insurer of notice or proof of
d. Loss caused by efforts to rescue the thing from peril loss is waived if caused by any act of him, or if he omits to
insured against — if during the course of rescue, the take objection promptly and specifically upon that ground.
thing is exposed to a peril not insured against, which (Insurance Code, Sec. 93)
permanently deprives the insured of its possession, in
whole or in part. Payment of Proceeds
Life Insurance
When Insurer is Not Liable for Loss • The proceeds shall be paid immediately upon the
• Loss of which the peril insured against was only a maturity of the policy (survival benefits) if there is such
remote cause. (Insurance Code, Sec. 86) a maturity date.
• Loss caused by the willful act or through the • If the policy matures by the death of the insured, within
connivance of the insured; but he is not exonerated by sixty (60) days after presentation of the claim and filing
the negligence of the insured, or of the insurance of the proof of the death of the insured.
agents or others (Insurance Code, Sec. 89)
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Property Insurance Time to Commence Actions

• Proceeds shall be paid within thirty (30) days after
proof of loss is received by the insurer and If there is a stipulation in the policy: The stipulation in
ascertainment of the loss or damage is made either by the policy, if not contrary to Sec. 63, will prevail. (Teal
agreement or by arbitration. Motor v. Orient Insurance, G.R. No. 39797, 1934)
• If no ascertainment is made within 60 days after receipt
of proof of loss, the loss shall be paid within 90 days. If there is no express stipulation in the policy
As the policy is a written contract, the action prescribes in
2. Guidelines on Claims Settlement 10 years. (Civil Code, Art. 1144)
a. Unfair Claims Settlement And Sanctions Limitation to Period to File Claim

Any of the following acts by an insurance company, if A condition, stipulation, or agreement in any policy of
committed without just cause and performed with such insurance, limiting the time for commencing an action
frequency as to indicate a general business practice, shall thereunder to a period of less than one year from the time
constitute unfair claim settlement practice. It shall be when the cause of action accrues, is void. (Insurance
considered sufficient cause for the suspension or Code, Sec. 63)
revocation of the company's certificate of authority:
Note: In Industrial life insurance, the period cannot be less
• Knowingly misrepresenting to claimants' pertinent than 6 years after the cause of action accrues. (Insurance
facts or policy provisions relating to coverage at issue; Code, Sec. 231[d])
• Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims When does the insured's cause of action begin to run?
arising under its policies; The prescriptive period for an insured's action for
• Failing to adopt and implement reasonable standards indemnity should be reckoned from the "final rejection" of
for the prompt investigation of claims arising under its the claim (H.H. Hollero Construction v. GSIS, G.R. No.
policies; 152334, 2014).
• Not attempting in good faith to effectuate prompt, fair
and equitable settlement of claims submitted in which Rationale: Before such final rejection, there is no real
liability has become reasonable clear; or necessity for bringing suit (Eagle Star v. Chia Yu,G.R. No.
L-5915, 1955).
• Compelling policyholders to institute suits to recover
amounts due under its policies by offering without Action or suit must be brought in proper cases, with
justifiable reason substantially less than the amounts Commission or the courts within one year from the denial
ultimately recovered in suits brought by them.
of the claim, otherwise, the claimant's right of action shall
prescribe (Jacqueline Jimenez Vda. De Gabriel v. CA,
b. Prescription of Action G.R. No. 103883, 1996).
Nature of Condition for Filing Claim c. Subrogation

The condition contained in the insurance policy that claims
must be presented within one year after rejection is not Legal Bass vi Subrogation
merely a procedural requirement. The condition is an
if the plaintiffs property has been insured, and he has
important matter, essential to a prompt settlement of
received indemnity from the insurance company for the
claims against insurance companies, as it demands that injury or loss arising out of the wrong or breach of contract
insurance suits be brought by the insured while the
complained of, the insurance company shall be subrogated
evidence as to the origin and cause of destruction have not
to the rights of the insured against the wrongdoer or the
yet disappeared.
person who has violated the contract. If the amount paid
by the insurance company does not fully cover the injury
It is in the nature of a condition precedent to the liability of
or loss, the aggrieved party shall be entitled to recover the
the insurer, or in other terms, a resolutory cause, the
deficiency from the person causing the loss or injury (Civil
purpose of which is to terminate all liabilities in case the
Code, Art. 2207)
action is not filed by the insured within the period
stipulated. (Sun Insurance v. CA, G.R. No. 8974, 1991)
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Definition and/or tort (Loadmasters Customs Services, Inc. v. Glodel

Subrogation: Substitution of one person in place of Brokerage Corporation and R & B Insurance Corporation,
another with reference to a lawful claim or right, so that he G.R. No. 179446, 2011).
who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies and Effect of Subrogation on Prescriptive Period to Sue the
securities (LSC v. Chubb, G.R. No. 147724, 2004) Person Causing the Loss or Injury
The insurer acquires a fresh 10-year period arising from
The right of subrogation has its roots in equity. It is law. (Vector Shipping v. AHAC, G.R. No. 159213, 2013)
designed to promote and to accomplish justice and is the
mode which equity adopts to compel the ultimate payment Right of insurer to recover from 3rd party is limited to
of a debt by one who in justice and good conscience ought the amount recoverable from the latter by the insured
to pay. (Delsan Transport v. CA, G.R. No. 127897, 2001) The insurer cannot recover in full the amount it paid to the
insured if it is greater than that to which the insured could
Subrogation only applies to property insurance lawfully lay claim against the person causing the loss (Rizal
If the plaintiffs property is insured... (Civil Code, Art. 2207) Surety v. Manila Railroad, G.R. No. L-24043, 1968)
Note: Subrogation also applies in reinsurance. A reinsurer, Cases When There is No Right of Subrogation:
on payment of a loss, acquires the same rights by a. The insured by his own act releases the
subrogation as in similar cases where the original insurer wrongdoer/third person liable for the loss;
pays a loss. (Pioneer Insurance Co v. CA, G.R. Nos. 84197 b. Where the insurer pays the insured for a loss or risk
& 84157, 1989) not covered by the policy;
c. In life insurance;
When subrogation occurs d. For recovery of loss in excess of insurance coverage.
1. If the plaintiff's property has been insured, and (Malayan Insurance v. CA, G.R. No. 81026, 1990)
2. He has received indemnity from the insurance
company for the injury or loss arising out of the wrong SPECIAL CLASSES OF INSURANCE
or breach of contract complained of (Civil Code, Art.
2207) 1. Marine Insurance
It is not dependent upon, nor does it grow out of, any privity Scope of Marine Insurance
of contract or upon written assignment of claim. It accrues 1. Insurance Against Loss or Damage
simply upon payment by the insurance company of the a. Vessels, craft, aircraft, vehicles, goods, freights,
insurance claim. (Delsan Transport v. CA, G.R. No. cargoes, merchandise, effects, disbursements, profits,
127897, 2001) moneys, securities, choses in action, instruments of
debts, valuable papers, bottomry, and respondentia
The presentation of the marine insurance policy is not interests and all other kinds of property and interests
necessary for the exercise of the insurer's right to therein, in respect to, appertaining to or in connection
subrogation. It accrues upon payment of insurance claim with any and all risks or perils of navigation, transit or
(Asian Terminals, Inc. v. Malayan Insurance, G.R. No. transportation, or while being assembled, packed,
171406, 2011). crated, baled, compressed or similarly prepared for
shipment or while awaiting shipment, or during any
The subrogation receipt, by itself, is sufficient to establish delays, storage, transhipment, or reshipment incident
not only the relationship of insurer and the assured shipper thereto, including war risks, marine builder's risks, and
of the lost cargo, but also the amount paid to settle the all personal property floater risks;
insurance claim. The right of subrogation accrues simply b. Person or property in connection with or appertaining
upon payment by the insurance company of the insurance to a marine, inland marine, transit or transportation
claim. (Asian Terminals, Inc. v. Malayan Insurance, G.R. insurance, including liability for loss of or damage
No. 171406, 2011). arising out of or in connection with the construction,
repair, operation, maintenance or use of the subject
As subrogee of the rights and interest of the consignee, matter of such insurance (but not including life
R&B Insurance has the right to seek reimbursement from insurance or surety bonds nor insurance against loss
either Loadmasters or Glodel or both for breach of contract by reason of bodily injury to any person arising out of
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ownership, maintenance, or use of automobiles); Accidents peculiar to the Damage or losses

c. Precious stones, jewels, jewelry, precious metals, sea which do not happen resulting from:
whether in course of transportation or otherwise; and by intervention of man nor
d. Bridges, tunnels and other instrumentalities of are to be prevented by 1. Natural and inevitable
transportation and communication (excluding human prudence. action of the sea
Casualties due to the: 2. Ordinary wear and tear
buildings, their furniture and furnishings, fixed contents
1. Unusual violence; or of a ship, or
and supplies held in storage); piers, wharves, docks 2. Extraordinary action of 3. Negligent failure of the
and slips, and other aids to navigation and wind and wave; or ship owner to provide
transportation, including dry docks and marine 3. Other extraordinary the vessel with proper
railways, dams and appurtenant facilities for the causes connected equipment to convey
control of waterways. with navigation the cargo under
ordinary conditions
2. Marine Protection and Indemnity Insurance
Insurance against, or against legal liability of the insured All-Risks Policy
for loss, damage, or expense incident to ownership, It is insurance against all causes of conceivable loss or
operation, chartering, maintenance, use, repair, or damage.
construction of any vessel, craft or instrumentality in use of
ocean or inland waterways, including liability of the insured Except:
for personal injury, illness or death or for loss of or damage 1. As otherwise excluded in the policy; or
to the property of another person. 2. Due to fraud or intentional misconduct on the part of
the insured (Choa Tek Seng v. CA, G.R. No. 84507,
Risk Insured Against 1990)
General Rule: It is only PERILS OF THE SEA which may
be insured against Barratry
Willful misconduct on the part of the master or crew in
The insurer does undertake to insure against perils of the pursuance of some unlawful or fraudulent purpose without
ship. The purpose of a marine insurance is to secure an the consent of owners, and to the prejudice of owner's
indemnity against accidents which may happen and interest. This may be expressly covered by the policy.
against events which must happen. (La Razon Social Go When so covered, proof of wiliful and intentional act is
Taico Hermanos v. Union Insurance Society of Canton, necessary. No honest error or judgment or mere
G.R. No. 13983, 1919) negligence, unless criminally gross, can be barratry.
(Roque v. IAC, G.R. No. L-66935, 1985)
Rusting of steel pipes in the course of the voyage is a peril
of the sea in view of the effects of the wind, water, and salt Insurable Interest in Marine Insurance
conditions. (Cathay Insurance v. CA, G.R. No. 76415,
1987) (i) Shipowner
• Over the VALUE OF THE VESSEL, (even if
Exception: Unless perils of the ship are covered by an chartered and the charterer agreed to pay the
ALL-RISK POLICY. shipowner the value of the vessel in case of loss,
however, the shipowner can recover only the
Note: The perils of the sea must be the proximate cause amount not recoverable from the charterer).
of the loss in order that the insurer may be held liable. (Insurance Code, Sec. 102)
• However, if the ship is hypothecated by a
Perils of the Sea v. Perils of the Ship bottomry loan, the insurable interest is only up to
PERILS OF THE SEA PERILS OF THE SHIP the excess of the value of the vessel over the loan
Covered by marine Not covered by marine (Insurance Code, Sec. 103)
insurance insurance • Over EXPECTED FREIGHTAGE. (Insurance
Code, Sec. 105)
Note: Freightage may be derived from:

• The chartering of the ship;
• Its employment for the carriage of his own goods;
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and To constitute concealment, it is sufficient that the insured

• Its employment for the carriage of the good of is in possession of the material fact concealed although he
others (Insurance Code, Sec. 104) may not be aware of it.
(ii) Shipper/Cargo Owner Each -party in a marine insurance contract is bound to

• Over the CARGO AND EXPECTED PROFITS. communicate the following:
1. All facts within his knowledge which are material
(iii) Charterer to the contract and as to which he makes no
• Over the VESSEL up to the extent of the amount warranty, and which the other has not the means
he is liable to the shipowner, if the ship is lost or of ascertaining.
damaged during the voyage. (Insurance Code, 2. All the information which he possesses, material to
Sec. 108) the risk
• Over his EXPECTED PROFITS OR
FREIGHTAGE if he accepts cargoes from other Exception:
persons for a fee. (Insurance Code, Sec. 105) a) Those which the other knows;
• Over his OWN CARGO OR CLIENT'S CARGO. b) Those which, in the exercise of ordinary
care, the other ought to know, and of
Bottomry, Respondentia, and Charter Party which the former has no reason to
suppose him ignorant;
Loan on Bottomry or Respondentia c) Those of which the other waives
A loan in which under any condition whatsoever, the communication;
repayment of the sum loaned, and of the premium d) Those which prove or tend to prove the
stipulated, depends upon the safe arrival in port of the existence of a risk excluded by a warranty,
goods on which it is made or of the price they may receive and which are not otherwise material; and
in case of accident. -It is a loan on bottomry when the e) Those which reiate to a risk excepted from
security is a vessel, and respondentia when the security is the policy and which are not otherwise
cargo. material
Charter Party Contract 3. State the exact and whole truth in relation to all
A contract by virtue of which the owner or the agent of a matters that he represents, or upon inquiry
vessel binds himself to transport merchandise or persons discloses or assumes to disclose (Insurance
for a fixed price. It has also been defined as a contract by Code, Sec. 109)
virtue of which the owner or the agent of the vessel lets the
vessel or some principal part thereof for the transportation In marine insurance, there are instances when matters,
of goods or persons from one port to another. although concealed, will not vitiate the contract but merely
exonerates the insurer from the loss resulting from the risk
Different Types of Charter Parties: concealed:
1. Contracts of Affreightment — use of shipping space a. National character of the insured;
on vessels leased by the shipowner in part or as a b. Liability of insured thing to capture (or) and
whole, to carry goods for others detention;
a. Time Charter — vessel is leased for a fixed period c. Liability to seizure from breach of foreign laws of
of time trade;
b. Voyage Charter — vessel is leased for a single d. Want of necessary documents; and
voyage e. Use of false or simulated papers. (Insurance
2. Charter by Demise or Bareboat Charter — the whole Code, Secs. 109-112)
vessel is leased to the charterer with a transfer to him
of its entire command and possession and consequent
control over its navigation including the master and
crew
Concealment in Marine Insurance

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Concealment in Marine Insurance vs. Other Property unexplained sinking or establishes seaworthiness. (Delsan
nsurance Transport Lines v. CA, G.R. No. 127897, 2001)
Marine Insurance Other Property
Insurance Test of Seaworthiness
Information Of Third Persons Whether or not the ship is reasonably fit to perform the
The information of the The information or belief of service and to encounter the ordinary perils of the voyage
belief or expectation of a third party is not material (Insurance Code, Sec. 117)
third persons in reference and need not be
to a material fact is communicated unless it Note: The implied warranty of seaworthiness also applies
material and must be proceeds from an agent of to a cargo owner.
communicated (Insurance the insured whose duty is
Code, Sec. 110) to give information. Since the law provides for an implied warranty of
(Insurance Code, Sec. 43) seaworthiness in every contract of ordinary marine
Effect of Concealment insurance, it becomes the obligation of a cargo owner to
The concealment of any Concealment of an look for a reliable common carrier which keeps its vessels
fact in relation to any of the material fact will vitiate the in seaworthy condition. The shipper of cargo may have no
matters states in Sec. 112 entire contract, whether or control over the vessel but he has full control in the choice
does not vitiate the entire not the loss results from of the common carrier that will transport his goods. Or the
contract but merely the risk concealed. cargo ownei may enter into a contract of insurance which
exonerates the insurer specifically provides that the insurer answers not only for
from a risk resulting from the perils of the sea but also provides for coverage of perils
the fact concealed. of the ship. (Roque v. IAC, G.R. No. L-66935, 1985)
Representation in Marine Insurance When A Ship Should Be Seaworthy:

If a representation by a person insured by a contract of General Rule: Implied warranty of seaworthiness is
marine insurance, is intentionally false in any material complied with if the ship be seaworthy at the time of the
respect, or in respect of any fact on which the character commencement of the risk
and nature of the risk depends, the insurer may rescind the
entire contract. The eventual falsity of a representation as Exceptions:
to expectation does not, in the absence of fraud, avoid a 1. Time Policy — When the insurance is made for a
contract of marine insurance. (Insurance Code, Secs. 113 specified length of time, the implied warranty is not
and 114) complied with unless the vessel is seaworthy at the
commencement of every voyage it undertakes during
Implied Warranties in Marine Insurance that time; (Insurance Code, Sec. 117[4)
a. That the ship is seaworthy at the inception of the 2. Cargo Policy — When the insurance is upon the cargo
insurance (Sec. 115); which, by the terms of the policy, description of the
b. That the ship will not deviate from agreed voyage voyage, or established custom of trade, is to be
unless deviation is proper (Secs. 125-127); transshipped at an intermediate port, at the
c. That the ship will not engage in an illegal venture; commencement of each particular voyage; (Insurance
d. Warranty of possession of documents of neutrality; Code, Sec. 117[4])
that the ship will carry the requisite documents of 3. Voyage Policy — Where different portions of the
nationality or neutrality of the ship or cargo where such voyage are contemplated, at the commencement of
nationality or neutrality is expressly warranted (Sec. each portion; (Insurance Code, Sec. 119)
122); 4. When the ship was seaworthy at the commencement
e. Presence of insurable interest. of the voyage but becomes unseaworthy during the
voyage to which an insurance related, unreasonable
Seaworthiness delay in repairing the defect exonerates the insurer on
Seaworthiness relates to the vessel's ACTUAL ship or shipowner's interest from liability from any loss
CONDITION at the time of the commencement of the arising therefrom. (Insurance Code, Sec. 120)
voyage. The issuance of the certificate neither negates the
presumption of unseaworthiness triggered by an
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Coverage of the Warranty of Seaworthiness Effect in case of loss or injury: Insurer is not liable
1. Condition of the structure of the ship itself, but requires (Insurance Code, Sec. 128)
that it be properly laden, and provided with a
competent master Kinds of Losses in Marine Insurance
2. Sufficient number of competent officers and seamen
3. Requisite appurtenances and equipment, such as (i) Actual Total Loss
ballasts, cables and anchors, cordage and sails, food, • Total Destruction;
water, fuel and lights, and other necessary or proper • Irretrievable loss by sinking or by being broken up;
stores and implements for the voyage. (Insurance • Damage rendering the thing valueless for the
Code, Sec. 118) purpose held; or
• Total Effective deprivation of owner of possession
Deviation of thing insured at the port of destination.
Departure of vessel from course of voyage, or an (Insurance Code, Sec. 132)
unreasonable delay in pursuing voyage, or the
commencement of an entirely different voyage. (Insurance Note: Complete physical destruction of the subject matter
Code, Sec. 125) is not essential to constitute an actual total loss. Such a
loss may exist where the form and specie of the thing is
Instances of Deviation destroyed, although the materials of which it consisted still
SEC. DEVIATION exist as where the cargo by the process of decomposition
- Departure from the agreed voyage or other chemicai agency no longer remains the same kind
Departure from the course of sailing fixed by of thing as before (Pan Malayan Insurance Corp v. CA,
123 mercantile usage between the places of G.R. No. 95070, 1991)
beginning and ending specified in the policy
Departure from the most natural, direct, and (ii) Constructive Total Loss
advantageous route between the places • Actual loss or more than three-fourths (3/4) of the
124
specified if the course of sailing is not fixed by value of the object;
mercantile usage • Damage reducing value by more than three-
125 Unreasonable delay in pursuing the voyage fourths (3/4) of the value of the vessel and of
The commencement of an entirely different cargo; and
125
voyage • Expenses of shipment exceed three-fourths (3/4)
of value of cargo. (Insurance Code, Sec. 141)
Kinds of Deviations
In case of constructive total loss, insured may:
1. Proper Deviations 1. Abandon the goods or vessel to the insurer and claim
a. If due to circumstances outside the control of the for whole insured value (Insurance Code, Sec. 141); or
master or ship owner; 2. He may, without abandoning vessel, claim for partial
b. If done to comply with a warranty or to avoid a peril, actual loss (Insurance Code, Sec. 157).
whether or not the peril is insured against;
c. If made in good faith, and upon reasonable ground of The word "may" in Section1 141 is intended to grant the
belief in its necessity to avoid a peril; insured the option or direction to make the choice. This option
d. If made in good faith, for the purpose of saving human or discretion is expressed as a right in Section 133. (Keppel
life or relieving another distressed vessel. (Insurance Cebu Shipyard v. Pioneer Ins. & Surety, G.R. Nos.
180880-81, 2009)
Code, Sec. 125)
Effect of Total Loss
Effect in case of loss or injury: Insurer is still liable,
Underwriter is liable for the whole amount insured.
as if there was no deviation.
(iii) Partial Loss (Insurance Code, Sec. 130)
2. Improper Deviations
Every deviation not specified in the last section is improper.
Abandonment
The act of the insured by which, after a constructive total
loss, he may declares the relinquishment to the insurer of
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)
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his interest in the thing insured. (Insurance Code. Sec. Acceptance of Abandonment
140) It is not necessary if abandonment is properly made.
Requisites for Valid Abandonment Effects of Acceptance

SEC. REQUISITE 1. Insurer admits the existence of the loss;
There must be an actual relinquishment by the 2. Insurer admits the sufficiency of the abandonment;
140 person insured of his interest in the thing 3. Abandonment becomes irrevocable, unless the upon
insured which it was made prove to be unfounded;
141 There must be a constructive total loss 4. Freightage earned previous to the loss belongs to the
The abandonment be neither partial nor insurer of said freightage; and
142 5. Freightage subsequently earned belongs to the insurer
conditional
It must be made within a reasonable time after of the ship (Insurance Code, Secs. 153-155)
143
receipt of reliable information of the loss
144 It must be factual Rights of Insurer Who Pays Partial Loss as Actual
It must be made by giving notice thereof to the Total Loss
145 If a marine insurer pays for a loss as if it were an actual
insurer which may be done orally or in writing
The notice of abandonment must be explicit total loss, he is entitled to whatever may remain of the thing
146 and must specify the particular cause of the insured, or its proceeds or salvage, as if there had been a
abandonment formal abandonment (Insurance Code, Sec. 149)
Abandonment where the insurance is divisible or Insurer's Liability for Refusal of Abandonment
indivisible If an insurer refuses to accept a valid abandonment, he is
In a case, the policy in question showed that the subject liable as upon an actual total loss, deducting from the
matter insured was the entire shipment of 2,000 cubic amount any proceeds of the thing insured which may have
meters of logs. come to the hands of the insured. (Insurance Code, Sec.
156)
SC held that the fact that the logs were loaded in two
different barges did not make the contract of insurance Measure of Indemnity
several and divisible as to the items insured because the
logs on the two barges were not separately valued or 1. Valued Policy
separately insured, for only one premium was paid for the The parties are bond by the valuation if the insured had
entire shipment making only one cause or consideration. some interest at risk and there is no fraud (Insurance
The logs having been insured as one inseparable unit, the Code, Sec. /58)
totality of the shipment of logs should be the basis for the
existence of constructive total loss (Oriental Assurance Exception: When a thing has been hypothecated by
Corp v. CA, G.R. No. 94052, 1991) bottomry or respondentia , before its insurance, and
without the knowledge of the person actually procuring the
Effects of Abandonment insurance, he may show the real value (Insurance Code,
1. Transfer of Interest Sec. 158)
An abandonment is equivalent to a transfer by the
insured of his interest to the insurer, with all the 2. Open Policy
chances of recovery and indemnity. (Insurance Code,
Sec. 148) The following rules shall apply in estimating a loss:
1. Value of the ship — value at the beginning of the risk;
2. Transfer of Agency b. Value of the cargo — actual cost when laden on board,
Upon an abandonment, acts done in good faith by or market value at the time and place of lading;
those who were agents of the insured in respect to the c. Value of freightage — gross freightage exclusive of
thing insured, subsequent to the loss, are at the risk of primage; and
the insurer, and for his benefit. (Insurance Code, Sec. d. Cost of insurance— in each case, to be added to the
150) estimated value (Insurance Code, Sec. 163)
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Loss of Profits Separately Insured 3. From the expenses or damages caused follows the
(Value of property lost / Value of whole property insured) * successful saving of the vessel and cargo.
amount of insurance = Amount of recovery 4. Expenses or damages should have been incurred or
inflicted after taking proper legal steps and authority
Presumption of Loss of Profits (A/lagsaysay v. Agan, G.R. No. L-6393, 1955)
When profits are valued and insured by a contract of
marine insurance, a loss of them is conclusively presumed Right of the Insured in General Average
from a loss of the property out of which they are expected Where it has been agreed that an insurance upon a
to arise, and the valuation fixes their amount. (Insurance particular thing, or class of things, shall be free from
Code, Sec. 162) particular average, a marine insurer is not liable for any
particular average loss not depriving the insured of the
Average possession, at the port of destination, of the whole of such
Any extraordinary or accidental expense incurred during thing, or class of things, even though it becomes entirely
the voyage for the preservation of the vessel, cargo, or worthless; but such insurer is liable for his proportion of all
both; and all damages to the vessel and cargo from the general average loss assessed upon the thing insured.
time it is loaded and the voyage commenced, until it ends (Insurance Code, Sec. 138)
and the cargo is unloaded.
When a person insured by a contract of marine insurance
Kinds of Averages: has a demand against others for contribution, he may claim
GROSS / GENERAL SIMPLE/PARTICULAR the whole loss from the insurer, subrogating him to his own
AVERAGE AVERAGE right to contribution. But no such claim can be made upon
Includes all damages and the insurer after the separation of the interests liable to
expenses caused to the contribution, nor when the insured, having the right and
These damages and opportunity to enforce contribution from others, has
vessel or to her cargo
expenses are deliberately neglected or waived the exercise of that right. (Insurance
which have not inured to
caused by the master of Code, Sec. 167)
the common benefit and
the vessel or upon his
profit of all the persons
authority, in order to save Freightage Benefit
interested in the vessel
the vessel, her cargo, or Which is to accrue to the owner of the vessel from its use
and her cargo The owners
both at the same time in the voyage contemplated or the benefit derived from the
are not entitled to receive
from a real and known employment of the ship.
contribution from other
risk.
owners concerned in the
venture. Right to Freightage:
Must be borne equally by These are suffered by and • Freightage earned before loss - Belongs to the insurer
all of the interests borne alone by the owner of freightage
concerned in the venture of the cargo or of the • Freightage earned after loss Belongs to insurer of
in proportion to the value vessel, as the case may ship
of the property saved. be.
Co-Insurance
Requisites to Claim General Average A form of insurance in which a person who insures his
1. There must be a common danger. This means, that property for less than the entire value is understood to be
both the ship and the cargo, after has been loaded, are his own insurer for the difference which exists between the
subject to the same danger, whether during the true value of the property and the amount of insurance.
voyage, or in the port of loading or unloading; that the Also applicable to Fire Insurance if stipulated.
danger arises from the accidents of the sea,
dispositions of the authority, or faults of men, provided When Co-Insurance Applies
that the circumstances producing the peril should be a. Insurance taken is less than the actual value of the
ascertained and imminent or may rationally be said to thing insured; and
be certain and imminent. This last requirement exclude b. Loss is partial (Insurance Code, Sec. 159)
measures undertaken against a distant peril.
2. For the common safety part of the vessel or of the
cargo or both is sacrificed deliberately.
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"New for Old" Rule Ocean Marine Policy vs. Fire Policy
In the case of a partial loss of ship or its equipment, the old A policy of insurance on a vessel engaged in navigation is
materials are to be applied towards payment for the new. a contract of ocean marine insurance although it insures
against fire risks only.
Unless otherwise stipulated in the policy, a marine insurer
is liable for only 2/3 of the remaining cost of repairs after However, where the hazard is fire alone and the subject is
such deduction, except that anchors must be paid in full. an unfinished vessel, never afloat for a voyage, the
(Insurance Code, Sec. 168) contract to insure is a fire risk, especially in the absence of
an express agreement that it shall have the incidents of
2. Fire Insurance marine policy, or where it insures materials in a shipyard
for use in constructing vessels.
It is a contract of indemnity by which the insurer for a
consideration agrees to indemnify the insured against loss Importance of Distinction
of, or damage to, property by fire. (Insurance Code, Sec. 1. The rules on constructive total loss and abandonment
169) only apply in marine insurance; and
2. In case of partial loss of a thing insured for less than
May include loss by lightning, windstorm, tornado or its actual value, the insured in a marine policy is a co-
earthquake and other allied risks, when such risks are insurer of the uninsured portion (Sec. 159), while the
covered by extension to fire insurance policies or under insured may only become a co-insurer in fire insurance
separate policies. if expressly agreed upon by the parties. (Sec. 174)
Nature of Fire Alteration

Fire may not be considered a natural disaster or calamity The use of condition of a thing insured from that to which it
since it almost always arises from some act of man or by is limited by the policy made without the consent of the
human means. It cannot be an act of God unless caused insurer, by means within the control of the insured, and
by lightning or a natural disaster or casualty not attributable increasing the risks, entitles the insurer to rescind a
to human agency (Phil. Home Assurance Corp v. CA, G.R. contract of fire insurance.
No. 106999. June 20, 1996)
Effect of an Alteration in the Use or Condition of a
Friendly Fire vs. Hostile Fire Thing Insured from that Limited by the Policy
FRIENDLY FIRE HOSTILE FIRE The insurer may rescind a contract of fire insurance,
When the fire occurs provided the following are present:
So long as a fire burns in a 1. The use or condition of the thing insured is specially
outside of the usual
place where it was limited or stipulated in the policy;
confines or begins as a
intended to burn, and 2. Such use or condition is altered;
friendly fire and becomes
ought to be, it is merely an 3. The alteration is made without the consent of the
hostile by escaping from
agency for the insurer;
the place where it ought to
accomplishment of some 4. The alteration is made by means within the control of
be to some place where it
purpose; not a hostile peril, the insured;
ought not to be.
Insurer is liable. Insurer is not liable. 5. The alteration increases the risk; and
6. There must be a violation of a material policy provision.
Fire Insurance Policy
Instead of paying for actual loss or the valuation stated on Alterations with DO NOT AVOID the policy
the face of the policy, the policy may stipulate a: 1. Where risk of loss is not increased; or
a. Co-insurance clause; or 2. Where the insured property would be useless if
b. Option to rebuild clause - the insurer is given the questioned acts were prohibited
option to reinstate or replace the building damaged
or destroyed or any part thereof, in the same Even though the policy contains certain provisions
condition as it was at the time of the loss. prohibiting specified articles from being kept in the insured
premises, the policy will not be avoided by a violation of
these provisions if the articles are necessary or ordinarily
used in the business conducted in the insured premises,
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like benzine kept in a furniture factory for purposes of interest may be garnished like any other credit. (Perla
operating or for cleaning machinery (Bachrach v. British Compania de Seguros v. Ramolete, G.R. No. L-60887,
American Assur. Co., G.R. No. L-5715, 1910). 1991)
- Comparative Table: Alteration in Insurance Code — Right of the Injured Person to Sue Insurer of the Party
Sec. 171 vs. Sec. 77 at Fault
SEC. 171 SEC. 77 SCENARIO EFFECT
Alteration in the risk or The contract provides for 3rd persons, to whom the
condition of the thing The insurer is given the indemnity against liability to insured is liable, CAN
insured which does not right to insert Ts and Cs in 3rd persons sue the insurer
increase the risk will not the policy which, if The contract is for 3rd persons CANNOT
affect a contract of fire violated, would avoid it. indemnity against actual proceed against the
insurance /oss or payment insured
Sec. 171 applies if the policy is silent as to breach of (Guingon v. Del Monte, G.R. No. L-22042, 1967)
immaterial provisions.
Note: The injured person may sue the insurer and the
Sec. 77 applies if the policy stipulates that breach of an person at fault, notwithstanding the stipulation against
immaterial policy will void the insurance. suing the insurer ("no-action" clause) in the policy.
(Guingon v. Del Monte, G.R. No. L-22042, 1967)
3. Casualty Insurance
It is an insurance covering loss or liability arising from Rules as to Death or Injury Resulting from Accidental
accident or mishap, Means
Excluding those falling under those types of insurance "Intentional"

such as fire, suretyship, life or marine. Implies the exercise of the reasoning faculties,
consciousness and volition
Accident or Health Insurance
Insurance against specified perils which may affect the Where the provision of the policy excludes intentional
person and/or property of the insured. (ex. Personal injury, the intention of the person inflicting is the controlling
Accident, Robbery/Theft Insurance) factory.
Third Party Liability Insurance However, if the injuries suffered by the insured clearly
Insurance against specified perils which may give rise to resulted from the intentional act of a third person, the
liability on the party of the insured for claims for injuries to insurer is relieved from liability as stipulated (Biagtan V.
or damage to property of others. (ex. Motor Vehicle The Insular Life Assurance Co. Ltd., G.R. No. 26194,
Liability, Professional Liability, Product Liability) 1972).
Where the contract is one of indemnity against liability, it "Accidental"

becomes operative as soon as the liability of the person That which happens by chance or fortuitously, without
indemnified arises irrespective of whether or not he has intention or design, which is unexpected, unusual and
suffered actual loss (Republic Glass Corp v. Qua, G.R. No.
unforeseen (Sun Insurance v. CA, G.R. No. 92383, 1992)
144413, 2004)
The terms "accident" and "accidental" do not, without
In a third-party liability insurance contract, the insurer
qualification, exclude events resulting in damage or loss
assumes the obligation of paying the injured third party to
due to fault, recklessness or negligence of third parties.
whom the insured is liable. 20 The insurer becomes liable
(Pan Malayan Insurance v. CA, G.R. No. 81026, 1990)
as soon as the liability of the insured to the injured third
person attaches. Prior payment by the insured to the
"No Fault"
injured third person is not necessary in order that the
The concept of accident is not necessarily synonymous
obligation of the insurer may arise. From the moment that
with "NO FAULT". It may be utilized simply to distinguish
the insured became liable to the third person, the insured
intentional or malicious acts from negligent or careless acts
acquired an interest in the insurance contract, which
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of man (Pan Malayan Insurance Corp. v. CA, G.R. No. Surety agreement as ancillary contract
81026, 1990). Such undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a principal
4. Suretyship contract.
An agreement whereby one undertakes to answer, under
specified terms and conditions, for the debt, default or Although the contract of a surety is in essence secondary
miscarriage of another in favor of a third party. (Insurance only to a valid principal obligation, the surety becomes
Code, Sec. 177) liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does
Under Sec. 177, a suretyship is: it receive any benefit therefrom.
a. As a contract or agreement
b. Whereby a party, called the surety, guarantees And notwithstanding the fact that the surety contract is
c. The performance by another party, called the principal secondary to the principal obligation, the surety assumes
or obligor, liability as a regular party to the undertaking.
d. Of an obligation or undertaking in favor of a third party,
called the obligee. Liability of Surety
The extent of a surety's liability is determined by the
Suretyship v. Property Insurance language of the suretyship contract or bond itself. It cannot
SURETYSHIP PROPERTY be extended by implication, beyond the terms of the
INSURANCE contract. Thus, to determine whether petitioner is liable to
Accessory contract Principal contract respondent under the surety bond, it becomes necessary
Parties: Parties: to examine the terms of the contract itself (First Lepanto-
[1] Surety, [1] Insurer, and Taisho Insurance Corporation (now known as FLT Prime
[2] Principal Debtor / [2] Insured Insurance Corporation) vs. Chevron Philippines, inc.
Obligor, and (formerly known as Caltex Philippines, Inc.), G.R. No.
[3] Creditor / Obligee 177839, 2012).
Credit transaction, where Contract of indemnity
the surety assumes
Nature of Liability of Surety
primary liability
a. The liability of the sureties under a bond is joint and
Surety is entitled to In subrogation, the 3rd
reimbursement from the party against whom the severalIsolidary (Arts. 1207-1208, NCC)
principal and his insurer may proceed is not b. The liability is limited to the amount of the bond
guarantors for the loss it a party to the contract (Republic v. CA, G.R. No. 103073, 2001).
may suffer under the c. The liability is contractual as it is determined strictly
contract by the terms of the contract of suretyship in relation to
Generally, can only be May be cancelled the principal contract between the obligor and the
cancelled with the consent unilaterally either by the obligee (Zenith Insurance Corp v. CA, G.R. No. L-
of the oblige or by the insured or by the insurer 57957, Dec. 29, 1982.).
Comm'r or by a court of on grounds provided by
competent jurisdiction law (Sec. 64)
Note: In Suretyship, the obligee accepts the surety's
The obligee murt accept The insurance contract
solidary undertaking to pay if the obligor does not
before the suretyship does not need the
becomes valid and acceptance of any 3rd pay. Such acceptance, however, does not change in any
enforceable party material way the obligee's relationship with the principal
obligor. Neither does it make the surety an active party to
Nature of Suretyship the principal obligee-obligor relationship.
It includes official recognizances, stipulations, bonds or
undertakings issued under Act 536, as amended. Thus, the acceptance does not give the surety the right to
intervene in the principal contract. (Asset Builders
When does Suretyship arise? Corporation vs. Stronghold Insurance Co., Inc., G.R. No.
Suretyship arises upon the solidary binding of a person — 187116, 2010).
deemed the surety — with the principal debtor, for the
purpose of fulfilling an obligation.
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Continuing Suretyship Suretyship v. Guaranty

By executing such an agreement, the principal places itself GUARANTY I SURETY
in a position to enter into the projected series of Promise to answer for the debt, default, or miscarriage
transactions with its creditor; with such suretyship of another
agreement, there would be no need to execute a separate Insurer of the debtor's Insurer of the debt —
surety contract or bond for each financing or credit solvency — bound to pay obligates himself to pay
accommodation extended to the principal debtor. A when the principal is when the principal does
continuing suretyship covers current and future loans, unable to pay not pay
provided that, with respect to future loan transactions, they
Undertaking that the Undertaking that the debt
are within the description or contemplation of the contract
debtor shall pay shall be paid
of guaranty (Aniceto G. Saludo, Jr. v. Security Bank
Liable based on an
Corporation, G.R. No. 184041, 2010). independent agreement Liable as a regular party to
to pay if the primary the undertaking
Rules on Payment of Premium debtor fails to do so
The premium is the consideration for furnishing the bond Surety is charged as an
or the guaranty and the obligation to pay the same subsists Guaranty is a collateral
original promisor and
for as long as the liability of the surety shall exist. undertaking
debtor from the beginning
(Reparations Commission v. Universal Deep-Sea Fishing Secondarily or subsidiarily Primary, although a surety
Corporation, A.M. No. 219091-96, 1978) liable is secondary to a valid
1. The premium becomes a debt as soon as the principal obligation
contract of suretyship or bond is perfected and Guarantor contracts to
delivered to the obligor (Insurance Code, Sec. 78) pay if, by use of due Surety undertakes -directly
2. The contract of suretyship or bonding shall not be diligence, the principal the payment w/o reference
valid and binding unless and until the premium cannot pay the debt to principal's solvency
therefor has been paid; Not bound to take notice Ordinarily held to know
3. Where the obligee has accepted the bond, it shall of the non-performance of every default of his
the principal principal
be valid and enforceable notwithstanding that the
Discharged by the mere
premium has not been paid (Philippine -Pryce -
indulgence of the creditor
Assurance v. CA, G.R. No. 107062, 1994); Usually not discharged by
or principal
4. If the contract of suretyship or bond is not the mere indulgence of the
accepted by, or filed with the obligee, the surety creditor or principal
Usually not liable unless
shall collect only a reasonable amount; notified of the principal's
5. If the non-acceptance of the bond be due to the default
fault or negligence of the surety, no service fee, Art. 2080 is applicable to Surety cannot claim
stamps, or taxes imposed shall be collected by the Guarantors release from his obligation
surety; and Statute of Frauds does not
Statute of Frauds applies
6. In the case of a continuing bond (for a term longer apply — suretyship is an
— special promise
original promise
than one year or with no fixed expiration date), the
obligor shall pay the subsequent annual premium
as falls due until the contract is cancelled
end of topic
Note: Where a contract of surety is terminated under its

terms, the liability of the principal for premiums after such
termination ceases notwithstanding the pendency of a
lawsuit to enforce a liability that accrued during its
stipulated lifetime (Capital Insurance & Surety Co v.
Ronquillo Trading, G.R. No. L-36488, 1983).
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IV. TRANSPORTATION
b) Passenger: One who travels in a public conveyance by
TOPIC OUTLINE UNDER THE SYLLABUS virtue of an express or implied contract with the
common carrier, paying fare or what is the equivalent
IV. TRANSPORTATION thereof (Jesusa Vda. de Nueca v. Manila Railroad
A. Common Carriers Company, G.R. No. 31731-R, 1968)
1. Concept
2. Common Carrier v. Private Carrier Carriage of Goods
3. Diligence Required
a) Shipper: The person who delivers the goods to the
B. Obligations and Liabilities
1. Vigilance over goods carrier for transportation and pays the consideration,
2. Safety of passengers or on whose behalf payment is made (AouiNo &
C. Defenses available to a common carrier HERNANDO AT 4).
a. Proof of negligence b) Carrier: (see earlier discussion)
b. Due diligence in the selection and C) Consignee: The party who receives the goods or
supervision of employees
cargo. The consignee and the shipper may be the
c. Fortuitous event
d. Contributory negligence same.
e. Doctrine of last clear chance
D. Extent of liability 2. Common Carrier vs. Private Carrier
a. Recoverable damages COMMON CARRIER PRIVATE CARRIER
b. Stipulations limiting liability
Required to exercise Required to exercise only
c. Limitations under the Warsaw Convention
extraordinary diligence ordinary diligence
Holds out service to the Holds out service to a
public single person or entity
A. Common Carriers There is presumption of There is no presumption of
fault or negligent in case of fault or negligence
1. Concept loss destruction or
Contract of Transportation deterioration of goods or
It is a contract where natural or juridical persons bind death or injury of
themselves to transport persons, goods or both for passengers
compensation offering their services to the public. Stipulations limiting Stipulations limiting
liability are governed by liability are governed by
Governing Laws: law principle of "autonomy of
a. New Civil Code contracts"
b. Code of Commerce
c. Special Laws A private carrier is one which, without being engaged in the
business of carrying as a public employment, undertakes
to deliver goods or passengers for compensation (Home
In all matters not regulated by the Civil Code, the rights and
Insurance v. American Steamship, G.R. No. L-25599,
obligations of common carriers shall be governed by the
Code of Commerce and by special laws. (Civil Code, Art. 1968)
1766)
The distinction between a common carrier and private
Parties to the Contract of Transportation character lies in the character of the business, such that if
the undertaking is a single transaction, not a part of the
general business or occupation, although involving the
Carriage of Passenger
a) Carrier: The party who binds himself to transport carriage of goods for a fee, the person or corporation
persons, goods or both. The carrier may be a common offering such service is a private carrier. (Schmitz
carrier or a private carrier. Transport v. Transport Venture, G.R. No. 150255, 2005)
o Corporations, firms or associations engaged in the
business of carrying or transporting passengers or Does it mean that if a carrier does not transport
passengers, goods, or both as its principal business it
goods or both, by land, water, or air, for
compensation, offering their services to the public is not a common carrier but a private carrier?
(Civil Code, Art. 1732) No. Art. 1732 of the Civil Code makes no distinction
between one, whose principal business activity is the
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carrying of persons or goods or both, and one who does deliver goods to their destination instead of merely
such carrying only as an ancillary activity ("sideline"). (De arranging for their transportation, it becomes liable as a
Guzman vs. Court of Appeals, G.R. No. L-47822, 1988) common carrier for loss or damage to goods. (Unsworth
Transport v. CA, G.R. No. 166250, 2010)
Instance When There is Conversion of a Common
Carrier into a Private Carrier Instance Where the Supreme Court Held a Person,
A charter party may transform a common carrier into a Partnership, Firm or Corporation NOT as a Common
private carrier. However, it must be a bareboat or demise Carrier
charter where the charterer mans the vessel with his own A travel agency is NOT a common carrier. Its covenant
people and becomes, in effect, the owner for the voyage with its customers is simply to make travel arrangements
or service stipulated (Caltex v. Sulpicio Lines, G.R. No. in their behalf. The relationship between the travel agency
131166, 1999) and the passenger is, at most, one of agency (Crisostomo
v. CA, G.R. No. 138334, 2003)
Requisites to be a Common Carrier (PECC)
a. Engaged in business of carrying or transporting goods An exclusive contractor and hauler, rendering or offering
or passengers whether as principal or ancillary its services to an individual or entity (FGU Insurance v.
business and whether on regular/scheduled or G.P. Sarmiento Trucking, G.R. No. 141910. 2002)
occasional/unscheduled basis.
b. Offers its services to the Public whether to the general 3. Diligence Required of Common Carriers
population or narrow segment of general population
c. For Compensation or fixed price or rate Extraordinary Diligence or Responsibility of Common
d. Control of operation or cargo (De Guzman v. CA, G.R. Carrier Regarding Passengers
No. L-47822, 1988) a. To carry passengers safely as far as human care and
foresight can provide,
Instances Where the Supreme Court Held a Person, b. Using utmost diligence of a very cautious person,
Partnership, Firm or Corporation as a Common Carrier c. With due regard for all the circumstances (Sulpicio v.
A customs broker is a COMMON CARRIER due to First Lepanto, G.R. No. 140349, 2005).
transportation of goods being integral to the nature of th'e
business (Celt/0 v. UCPB, G.R. No. 148496, 2002) The Common Carrier Is Not an Insurer of Absolute
Safety
Under the Petroleum Act of the Philippines (R.A. No. 387), The common carrier is not required to exercise all the care,
oil pipeline operators are considered common carriers skill or diligence the human mind can conceive nor does it
(First Philippine Industrial Corp v. CA, G.R. No. 125948, free the passenger from all possible risks. (Japan Airlines
1998) v. CA, G.R. No. 118664, 1998)
The operator of a beach resort that accepts clients by B. Obligations Arid Liabilities
virtue of a tour package — contracts that included
transportation to and from the resort and the point of Liabilities of Common Carriers
departure is considered as a common carrier. Its services
are so intertwined with its main business as to be properly See below discussion in V.B. (Vigilance over Goods) and
considered ancillary thereto. (Cruz v. Sun Holidays, G.R. V.C. (Safety of Passengers).
No. 186312, 2010)
Apportioning Of Liability
The bus principally used as a bus service for school While the Court ruled in previous cases that the registered
children, and which was hired by a grout) of persons owner or operator of a passenger vehicle is jointly and
although the owners were not engaged in the business of severally liable with the driver of the said vehicle for
public transportation is a common carrier (Fabre, Jr. v. CA, damages incurred by passengers or third persons as a
G.R. No. 11127, 1996) consequence of injuries or death sustained in the operation
of the said vehicle, in no case is the actual owner of the
A freight forwarder's liability is limited to damages arising passenger vehicle exempted from liability. In fact, the
from its own negligence, including negligence in choosing registered owner or operator has the right to be
the carrier; however, where the forwarder contracts to indemnified by the real or actual owner of the amount that
Page 74 of 250
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he may be required to pay as damage for the injury caused.

(R Transport vs. Luisito Yu, G.R. No 174161, 2015) Mechanical defects are not force majeure if the same
were discoverable by regular and adequate inspections
1. Vigilance over Goods (Necesito v. Paras, G.R. No. L-10605, 1958)
Exempting Causes A tire blow-out is not considered a fortuitous event, as

there are human factors involved in the situation (Yobido
Extraordinary Diligence or Responsibility of Common v. CA, G.R. No. 113003, 1997)
Carrier Regarding Transport of Goods
a. To transport with greatest skill and utmost foresight Highjacking is not an exempting cause under Art. 1734.
b. Utmost vigilance of very cautious person, according to However, common carriers are riot held liable for the acts
all circumstances or events which cannot be foreseen or are inevitable,
provided that they exercised extraordinary diligence (De
General Rule: The common carrier is presumed to have Guzman v. CA, G.R. No. L-47822, 1988)
been at fault or to have acted negligently when the goods
transported are lost, destroyed or deteriorated, or when a b. Act of the public Enemy in war, whether international
passenger dies or is injured. or civil.
This is not a conclusive but disputable presumption, and it
may be overcome by contrary evidence of defenses. Conditions to Avail of Defense:
1. Act was the proximate & only cause
Exceptions (Civil Code, Art. 1734): When the same is 2. Exercise of diligence to prevent or minimize loss
due to any of the following causes only: (FESCO) before, during and after the act
3. No delay (Civil Code, Art. 1740)
a. Flood, Earthquake, Storm, lightning or Other natural
disaster or Calamity c. Act or omission of the Shipper or owner of the goods.
Conditions To Avail Of Defense: Conditions to Avail of Defense:

1. Natural disaster was the proximate & only cause 1. If proximate cause, exempting
2. Exercise of diligence to prevent or minimize loss 2. If contributory negligence, mitigating
before, during and after the occurrence of the 3. Immediate protest by the carrier; otherwise,
natural disaster carrier may be in estoppel
3. No delay (Civil Code, Art. 1740)
When the private respondent did furnish the common
Requisites for Caso Fortuito Which Would Exempt carrier with an inaccurate weight of the payloader, the
the Carrier from Liability (HIFI) common carrier is nonetheless liable, for the damage
a. The event must be independent of Human will caused to the machinery could have been avoided by the
b. The occurrence must render it Impossible for the exercise of reasonable skill and attention on its part in
debtor to fulfill the obligation in a normal manner overseeing the unloading of such a heavy equipment. It
c. The obligor must be Free of participation in, or was the duty of its Chief Officer to determine the weight of
aggravation of, the injury to the creditor, and heavy cargoes before accepting them (Compania Maritime
d. The event must have been Impossible to foresee, v. CA, G.R. No. 31379, 1997)
or if it could be foreseen, must have been
impossible to avoid. d. The Character of the goods or defects in the packing
or in the containers.
Fire may not be considered a natural disaster or
calamity, unless it is caused by lightning or by other Conditions to Avail of Defense:
natural disasters or calamities (Eastern Shipping Lines 1. Exercise of due diligence to forestall or prevent
v. IAC, G.R. No. 69044, 1987) loss
2. Immediate protest by the carrier if the problem
Heavy seas and rains are not case fortuito, but normal with the goods or the packing or containers is
occurrences that an ocean-going vessel would visible; otherwise, carrier may be in estoppel
encounter (Id.)
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Even granting, for the sake of argument, that the Is delivery of the common carrier to the customs
subject cargo was already in a damaged condition at authorities considered as delivery to the consignee so
the time it was accepted for transportation, the carrier as to end the carrier's extraordinarily responsibility
is not relieved from its responsibility to exercise due over the goods?
care in handling the merchandise and in employing the No. Delivery of the cargo to the customs authorities is not
necessary precautions to prevent the cargo from delivery to the consignee or "to the person who has a right
further deteriorating. (Iron Bulk Shipping PhiIs. Co., v. to receive them," The goods are still in the hands of the
Remington Industrial, G.R. No. 136960, 2003) government and the owner cannot exercise dominion over
them. However, the parties may agree to limit the liability
e. Order or act of competent authority. of the carrier. (Lu Do v. Binamira, G.R. No. L-9840, 1957)
Conditions to Avail of Defense: with or without Contributory Negligence

power to issue order (Ganzon v. CA, G.R. No. L- The contributory negligence of the passenger does not bar
48757, 1988) recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
Note: Mere proof of delivery of the goods in good order to carrier, but the amount of damages shall be equitably
a common carrier and of their arrival in bad order at their reduced.
destination constitutes a prima facie case of fault or
negligence against the carrier. (Eastern Shipping Lines vs. Are there exceptions to Article 1741 which provides:
BPI, G.R. No 182864, 2015) "If the shipper or owner contributed to the loss,
destruction, or deterioration of the goods, the
Summary Table: Art. 1734 and Defenses proximate cause thereof being the negligence of the
DEFENSES CONDITIONS TO AVAIL carrier, the latter shall be liable on damages, which
Natural disaster, like flood, Proximate and only however, shall be equitably reduced?"
storm, earthquake, cause; Yes. In collision cases (moving object strikes another
lightning (1734111) moving object) and allision cases (moving object strikes a
Exercise of diligence to stationary object). In such cases, the parties are liable for
Act of public enemy in war, prevent or minimize loss; their own damage.
whether international or and
civil (1734[2])
Duration of Liability
No delay(/ 739, 1740)
If owner or shipper is the In transportation of goods, duration of extraordinary
proximate cause, responsibility:
exempting
Lasts from the time the goods are unconditionally
Act or omission of owner or If there is contributory placed in the possession of, and receivedby the carrier
shipper of goods (1734[3]) negligence, mitigating for transportation until the same are delivered, actually
(1741) or constructively, by the carrier to the consignee or to
the person who has a right to receive them or to his
Immediate protest by duly authorized agent and a reasonable time is given
carrier; else: estoppel
him to remove the goods. (Nedlloyd B. V. Rotterdam v
Exercise of due diligence
to forestall or prevent loss Glow Laks, G.R. No. 156330, 2014)
Character of goods or
(1742)
defect in the packing or • • Even when the goods are temporarily unloaded or
container (173414])
Immediate protest by stored in transit, unless shipper used right of stoppage
carrier; else: estoppel in transitu.
S
Said public authority had
Order or act of competent
the power to issue the Stoppage In Transitu
public authority (173415])
order (1743) Right of an unpaid seller to stop delivery and regain
possession of the goods while they are in transit to the
buyer who has been declared bankrupt/insolvent
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• Even during the time of the storage at warehouse of Prohibited Stipulations in a Contract of Carriage (OLD-
common carrier at place of destination, until consignee FETUs)
is advised of good's arrival and has had opportunity to a) That the goods are transported at the risk of the Owner
remove or dispose of them. or shipper;
b) That the common carrier will not be Liable for any loss,
Surrender of the original Bill of Lading is NOT a destruction, or deterioration of the goods;
condition precedent for a Common Carrier to be c) That the common carrier need not observe any
discharged of its contractual obligation. If surrender of the Diligence in the custody of the goods;
original Bill of Lading is not an option, d) That the common carrier shall exercise a degree of
acknowledgment of the delivery by signing the diligence less than that of a good Father of a family, or
delivery receipt suffices (National Trucking and of a man of ordinary prudence in the vigilance over the
Forwarding v. Lorenzo Shipping, G.R. No. 153563, 2005) movables transported;
e) That the common carrier shall not be responsible for the
Stipulations for Limitations of Liability acts or omission of his or its Employees;
f) That the common carrier's liability for acts committed by
Requisites For A Valid Stipulation In Transportation Of Thieves, or of robbers who do not act with grave or
Goods Contract Between The Common Carrier And irresistible threat, violence or force, is dispensed with or
The Shipper Or Owner Limiting The Liability Of The diminished;
Former To Less Than The Extraordinary Diligence That the common carrier is not responsible for the loss,
(WVR) destruction, or deterioration of goods on account of the
a. In Writing defective condition of the car, vehicle, ship, airplane or
b. Supported by a Valuable consideration other than other equipment Used in the contract of carriage.
the service rendered by the common carrier
c. Reasonable, just, and not contrary to public policy. Liability in the Absence of a Rejection Clause in a
Contract of Carriage of Goods
Valid Stipulations In the absence of a "rejection clause" in a contract of
a) Limited to value of goods appearing in Bill of Lading carriage of goods, Articles 361, 362, 364, 365 of the Code
(Civil Code, Art. 1749); of Commerce become applicable. The aforementioned
b) Fixed sum that is reasonable and just and agreed upon provisions, in summary, state that if the goods are
(Civil Code, Art. 1750) delivered but arrived at the destination in damaged
o Reasonable and just under the circumstances; and condition, the remedies to be pursued by the consignee
o It is fairly and freely agreed upon depend on the extent of damage on the goods. (Loadstar
c) Liability for delay due to strike or riot (Civil Code, Art. Shipping Company, Incorporated v. Malayan Insurance
1748) Company, Incorporated, G.R. No. 185565, 2014)
Factors to be considered when refusing stipulations Liability for Baggage of Passengers

limiting liability The checked-in baggage is considered "goods" and the
a) Refusal to carry goods, UNLESS stipulation limiting passenger is considered the shipper/consignee.
liability is signed by shipper (Civil Code, Art. 1746)
b) Delay or deviation, without just cause (Civil Code, Art. For hand-carried baggage, the responsibility of the carrier
1747) will be governed by the Civil Code provisions on
c) Lack or presence of competition (Civil Code, Art. 1751) hotelkeepers and innkeepers. The carrier is required to
exercise ordinary diligence and is considered a depositary
A Stipulation in Transportation is of Goods Contract (Civil Code, Art. 1754)
Limiting Liability is Void if: (UUC)
a. Unreasonable Inspection Duties
b. Unjust a) General Rule: Carrier may only inquire into the nature
c. Contrary to public policy of the passenger's baggage, but not search nor inspect
its contents
Inquiry may be made as to the nature of passengers'

baggage, but beyond this, constitutional boundaries are
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already in danger of being transgressed (Nocum V. Thus, an arrastre operator should adhere to the same
Laguna Tayabas, G.R. No. L-23733, October 31, degree of diligence as that legally expected of a
1969). warehouseman or a common carrier as set forth in
Warehouse Receipts Act and Article 1733 of the Civil
b) Exception: Airline companies are required to inspect Code. As custodian of the shipment discharged from the
each and every cargo brought into the aircraft (R.A. No. vessel, the arrastre operator must take good care of the
6235, Sec. 8) same and turn it over to the party entitled to its possession.
(Marina Port Service, Inc. v. American Home Assurance
Kinds of Baggage Corporation, G.R. 201822, 2015)
c) Checked-In: Those that are delivered to carrier
d) Hand-Carried: Those in the passenger's custody Multi- Carriers
When there are several carriers who successively
Distinctions between Hand-Carried Baggage and transport goods, or there is a single "through bill of lading"
Checked-In Baggage issued by one carrier and honored by other carriers, the
HAND-CARRIED I CHECK-IN following are the rules:
Applicable Rule 1. Last carrier assumes the obligation of the previous
Civil Code, Arts. 1998, Civil Code, Arts. 1733- carriers.
2000-2003 1753 2. Butlast carrier, if not directly responsible, may proceed
Legal Nature of Baggage against previous carriers.
Necessary deposit "Goods" 3. Shipper/ccnsignee has cause of action against carrier
who executed the contract or other carriers who
Diligence by Common Carrier
received goods without reservation.
Diligence of a depositary
Extraordinary diligence 4. Carriers who made a reservation may still be liable for
(ordinary diligence)
their own acts.
Requisites for Common Carrier's Liability for Hand-
Note: Carriers with reservations are NOT relieved of
Carried Baggage (Necessary Deposit)
responsibilities for their own acts
a) Notice was given to the common carrier, or to their
employees, of the baggage brought by the
2. Safety Of Passengers
passengers; and
b) Passenger took precautions which the common Passenger
carrier advised relative to the care and vigilance of
One who travels in a public conveyance by virtue of an
their baggage (Civil Code, Art. 1998)
express or implied contract with the common carrier paying
fare or what is equivalent thereof. (Jesusa Vda. De Nueca
Instances When Common Carrier is Not Responsible
v. Manila Railroad Company, G.R. No. 31731-R, 1968)
for the Loss and Injury to Passengers' Hand-Carried
Baggage (FAT) The following are NOT passengers
a) Those which may proceed from any Force Majeure
1. One who has not yet boarded any part of a vehicle
(Civil Code, Art. 2000)
regardless of whether or not he has a ticket;
b) Loss due to the Act of passenger or his agents or if the
2. One who remains on a carrier for an unreasonable
loss arises from the character of the things (Civil Code, length of time after he has been afforded every safe
Art. 2000); and
opportunity to alight;
c) Acts of Thief or robbers, done with the use of arms or
3. One who has boarded by fraud, stealth, or deceit;
through irresistible force (Civil Code, Art. 2001)
4. One who attempts to board a moving vehicle,
although he has a ticket, unless he attempt be with
The relationship between the consignee and the arrastre
the knowledge and consent of the carrier;
operator is bailor-bailee or depositor- depositary. An
5. One who has boarded a wrong vehicle, has been
arrastre operator does not render any service of a maritime
properly informed of such fact, and on alighting, is
nature. (Unknown Owner ofMV China vs. Asian Terminals,
injured by the carrier; or
G.R. No 195661, 2015)
6. One who rides any part of the vehicle which is
unsuitable or dz.ngerous or which he knows is not
designed or intended for passengers
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Liberal View v. Strict View

Presumption of Negligence When the passenger places himself in the
If the passenger is injured or killed, there is a presumption LIBERAL care and control of the common carrier
of negligence against a carrier. (Civil Code, Art. 1756) VIEW who accepts him as a passenger
(Philippine law adopts this view)
It is presumed that a person driving a motor vehicle has STRICT When the passenger actually boards or
been negligent if at the time of the mishap, he was violating VIEW places a part of his body inside the carrier
a traffic regulation, unless there is proof to the contrary.
(Sps. Estrada v. Philippine Rabbit, G.R. 203902, 2017) For buses, a bus slowing down means that it is offering
itself to prospective passengers as a common carrier. A
Defenses Available To Common Carrier: (FEPNG) passenger who signals for a ride with his thumb signifies
a. Fortuitous event that he is offering himself as a passenger. (Dangwa v. CA,
b. Extraordinary diligence G.R. No. 95582, 1991)
c. Passenger is proximate cause of death or injury
d. Employees could not have prevented by ordinary Note:
diligence the willful act or negligence of other • Do not confuse perfection of the contract of carriage
passengers or strangers (which caused the death) with the start or commencement of the duty to exercise
e. If the contract of carriage is gratuitous and there is no extraordinary diligence. The contract of carriage may
wiilful act or negligence on the part of the carrier, a be perfected in January while the duty to exercise
stipulation limiting liability is valid extraordinary diligence may only start or commence in
March.
Void Stipulations • The duty to exercise extraordinary diligence
terminates, when the passenger alights from the
General Rule: The responsibility of a common carrier vehicle at the place of destination and has reasonable
cannot be dispensed with or lessened by stipulation, by opportunity to leave the common carrier's premises.
posting of notices, or by statements on tickets. A reduced • For passengers of ships, the Supreme Court has ruled
fare cannot justify limited liability. that a reasonable time to leave and, pick up baggage
is an hour after arrival (Aboitiz Shipping v. CA, G.R.
Exception: If the carriage is gratuitous or for free, a No. 84458, 1989).
stipulation limiting liability is valid.
Liability for Acts of Others
Exception to the Exception: The stipulation does not
cover willful acts or gross negligence of the carrier. (Civil (a) Employees
Code, Arts. 1757-1759) Common carriers are liable even if the employees may
have acted beyond the scope of their authority or in
Reason: Waiver of future fraud or gross negligence is violation of the orders of the common carrier.
invalid (Civil Code, Art. 1172)
Note: The defense of the exercise of all the diligence of a
Note: Moral damages may be recovered in an action for good father in the selection and supervision of their
breach of contract of transportation when death results. employees is appropriate only in quasi-delict or cu/pa
Even if the passenger does not die, the passenger can aquiliana. Such defense is not available in cu/pa
recover moral damages if the carrier is guilty of fraud or contractual and therefore, a common carrier cannot raise
bad faith. However, only the passenger is entitled to moral such defense in action brought by its passengers based on
damages not anyone else. contract.
Duration of Liability The driver and the owner of the vehicle, regardless of
As to the commencement of the duty to exercise relationship, are solidary liable to the injuries caused to a
extraordinary diligence, there are two views: victim of an accident involving the vehicle owner and driven
by 2 different persons. (Dela Cruz v. Octaviano, G.R.
219649, 2017)
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(b) Passengers Registered Owner Rule for Common Carriers

Common Carriers are liable if its employees could have • General rule: The registered owner is liable directly
prevented by ordinary diligence the willful act or negligence and primarily to the general public or to third persons
of other passengers or strangers. and not the actual owner or driver of the vehicle.
• Reason: For easy identification.
Extent of Liability for Damages • Recourse: The registered owner may seek
reimbursement from the actual owner or driver of the
Recovery of Moral Damages vehicle (the real party at fault) by filing a cross-claim or
a) In breach of contract of carriage, there must be fraud, third-party complaint in the same case. (BA Finance v.
bad faith, or death (Sps. Estrada v. Philippine Rabbit CA, G.R. No. 98275, 1992)
Bus Lines, G.R. No. 203902, 2017) • Exception: In case of a stolen vehicle, the registered
b) Only injured passengers are entitled to moral damages owner may not be held liable. The Supreme Court has
due to injuries (Sulpicio Lines v. Curso, G.R. No. ruled that to rule otherwise would be absurd (Duavit v
175100, 2010) CA, G.R. No. 82318, 1989)
0 In case of death, heirs are entitled to moral damages
Registered Owner Rule Still Applies -Even in Sales /
A passenger brought into the bus a box which he Leases
declared to contain clothes and other harmless items. The Registered Owner is not allowed to escape
It turned out that the box contained firecrackers. A responsibility by proving that a 3 rd person is the actual and
passenger was injured when the firecrackers real owner (Villanueva v. Domingo, G.R. No. 144274,
exploded. Is the carrier liable? 2004)
No. The carrier is not liable. It exercised extraordinary
diligence. It is to be presumed that a passenger will not The registered owner rule applies even if the registered
take with him anything dangerous to the life and limbs of owner leased the vehicle to another who is the actual
his co-passengers, not to speak of his own. Not to be operator.
considered lightly is the right to privacy to which each
passenger is entitled. (Nocum v. Laguna Tayabas Bus Co., Defense: The lessor-owner should register the lease
G.R. No. L-23733, 1969) contract with the LTO in order for the lessor-owner to be
free from liability (PCI Leasing and Finance v. UCPB
Note: The Supreme Court ruled in Fortune Express v. CA General Insurance, G.R. No. 162267, 2008)
(G.R. No. 119756, 1999) that: "Under the circumstances,
simple precautionary measures to protect the safety of What is the "kabit system"?
passengers, such as frisking passengers and inspecting Kabit system is an arrangement whereby a person who
their baggages, preferably with non-intrusive gadgets such has been granted a certificate of public convenience allows
as metal detectors, before allowing them on board could other persons who own motor vehicles to operate under
have been employed without violating the passenger's his license sometimes for a fee or percentage of the
constitutional rights. In Gacal v. Philippine Air Lines, Inc., earnings.
a common carrier can be liable for failing to prevent a
hijacking by frisking passengers and inspecting their This is contrary to public policy and therefore void and
baggages." inexistent under Art. 1409 of the Civil Code. This
arrangement is a circumvention of the requirement for
What if the carrier is an airplane? license.
While there is no law that authorizes bus operators to open
the luggage of their passengers, RA 6235 (Acts Inimical to Registered owner and buyer who enter into said
Civil Aviation) gives airline companies authority to open transaction are in pani delicto. Therefore, the courts will not
and investigate packages and cargoes loaded on board. help either of them. (Clean hands doctrine)
Should the personnel of the airline fail to discover
explosives, it could only be due to their failure to exercise
the utmost diligence of very cautious persons for which the
carrier may be held liable.
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)
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C. Defenses Available To A Common Carrier Heavy seas and rains are not caso fortuito, but normal
occurrences that an ocean-going vessel would
1. Proof of negligence encounter (Id.)
There is presumption of fault or negligent in case of loss Mechanical defects are not force majeure if the same
destruction or deterioration of goods or death or injury of were discoverable by regular and adequate inspections
passengers because common carriers are required to (Necesito v. Paras, G.R. No. L-10605, 1958)
exercise extraordinary diligence.
A tire blow-out is not considered a fortuitous event, as
2. Due diligence in the selection and supervision of there are human factors involved in the situation (Yobido
employees v. CA, G.R. No. 113003, 1997)
The defense of the exercise of all the diligence of a good Highjacking is not an exempting cause under Art. 1734.
father in the selection and supervision of their employees However, common carriers are not held liable for the acts
is appropriate only in quasi-delict or culpa aquiliana. Such or events which cannot be foreseen or are inevitable,
defense is not available in culpa contractual and therefore, provided that they exercised extraordinary diligence (De
a common carrier cannot raise such defense in action Guzman v. CA, G.R. No. L-47822, 1988)
brought by its passengers based on contract.
4. Contributory negligence
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused to a Contributory Negligence
victim of an accident involving the vehicle owner and driven The contributory negligence of the passenger does not bar
by 2 different persons. (Dela Cruz v. Octaviano, G.R. recovery of damages for his death or injuries, if the
219649, 2017) proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably
3. Fortuitous event reduced.
Requisites for Caso Fortuito Which Would Exempt the Are there exceptions to Article 1741 which provides:
Carrier from Liability (HIFI) "If the shipper or owner contributed to the loss,
a. The event must be independent of Human will destruction, or deterioration of the goods, the
b. The occurrence must render it Impossible for the proximate cause thereof being the negligence of the
debtor to fulfill the obligation in a normal manner carrier, the latter shall be liable on damages, which
c. The obligor must be Free of participation in, or however, shall be equitably reduced?"
aggravation of, the injury to the creditor, and Yes. In collision cases (moving object strikes another
d. The event must have been Impossible to foresee, moving object) and allision cases (moving object strikes a
or if it could be foreseen, must have been stationary object). In such cases, the parties are liable for
impossible to avoid. their own damage.
Conditions To Avail Of Defense: 5. Doctrine of last clear chance

a. Natural disaster was the proximate & only cause
b. Exercise of diligence to prevent or minimize loss That the person who has the last fair chance to avoid the
before, during and after the occurrence of the impending harm and fails to do so is chargeable with the
natural disaster consequences, without reference to the prior negligence of
c. No delay (Civil Code, Art. 1740) the other party. (Picart v. Smith, G.R. No. L-12219, 1918)
The doctrine of last clear chance states that where both

Fire may not be considered a natural disaster or parties are negligent but the negligent act of one is
calamity, unless it is caused by lightning or by other appreciably later than that of the other, or where it is
natural disasters or calamities (Eastern Shipping Lines impossible to determine whose fault or negligence caused
v. IAC, G.R. No. 69044, 1987) the loss, the one who had the last clear opportunity to avoid
the loss but failed to do so is chargeable with the loss.
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(Lapanday Agricultural and Development Corporation v. What if the carrier is an airplane?

Angala, G.R. No. 153076, 2007) While there is no law that authorizes bus operators to open
the luggage of their passengers, RA 6235 (Acts Inimical to
The rule is that the antecedent negligence of a person Civil Aviation) gives airline companies authority to open
does not preclude recovery of damages caused by the and investigate packages and cargoes loaded on board.
supervening negligence of the !atter, who had the last fair Should the personnel of the airline fail to discover
chance to prevent the impending harm by the exercise of explosives, it could only be due to their failure to exercise
due diligence. (PNR v. Vizcara, G.R. No. 190022, 2012) the utmost diligence of very cautious persons for which the
carrier may be held liable.
Note: Last Clear Chance Doctrine does not apply in
maritime law. Neither does the concept of contributory Registered Owner Rule for Common Carriers
negligence. (Reason: Code of Commerce provides for General rule: The registered owner is liable directly
specific rules on allocation of liabilities — see Art. 827) and primarily to the general public or to third persons
and not the actual owner or driver of the vehicle.
D. Extent Of Liability • Reason: For easy identification.
• Recourse: The registered owner may seek
1. Recoverable Damages reimbursement from the actual owner or driver of the
vehicle (the real party at fault) by filing a cross-claim or
Recovery of Moral Damages third-party complaint in the same case. (BA Finance v.
a) In breach of contract of carriage, there must be fraud, CA, G.R. No. 98275, 1992)
bad faith, or death (Sps. Estrada v. Philippine Rabbit • Exception: In case of a stolen vehicle, the registered
Bus Lines, G.R. No. 203902, 2017) owner may not be held liable. The Supreme Court has
b) Only injured passengers are entitled to moral damages ruled that to rule otherwise would be absurd (Duavit v
due to injuries (Sulpicio Lines v. Curso, G.R. No. CA, G.R. No. 82318, 1989)
175100, 2010)
o In case of death, heirs are entitled to moral damages Registered Owner Rule Still Applies Even in Sales /
Leases
A passonger brought into the bus a box which he The Registered Owner is not allowed to escape
declared to contain clothes and other harmless items. responsibility by proving that a 3rd person is the actual and
It turned out that the box contained firecrackers. A real owner (Villanueva v. Domingo, G.R. No. 144274,
passenger was injured when the firecrackers 2004)
exploded. Is the carrier liable?
No. The carrier is not liable. It exercised extraordinary The registered owner rule applies even if the registered
diligence. It is to be presumed that a passenger will not owner leased the vehicle to another who is the actual
take with him anything dangerous to the life and limbs of operator.
his co-passengers, not to speak of his own. Not to be
considered lightly is the right to privacy to which each Defense: The lessor-owner should register the lease
passenger is entitled. (Nocum v. Laguna Tayabas Bus Co., contract with the LTO in order for the lessor-owner to be
G.R. No. L-23733, 1969) free from liability (PCI Leasing and Finance v. UCPB
General Insurance, G.R. No. 162267, 2008)
Note: The Supreme Court ruled in Fortune Express v. CA
(G.R. No. 119756, 1999) that: "Under the circumstances, What is the "kabit system"?
simple precautionary measures to protect the safety of Kabit system is an arrangement whereby a person who
passengers, such as frisking passengers and inspecting has been granted a certificate of public convenience allows
their baggages, preferably with non-intrusive gadgets such other persons who own motor vehicles to operate under
as metal detectors, before allowing them on board could his license sometimes for a fee or percentage of the
have been employed without violating the passenger's earnings.
constitutional rights. In Gacal v. Philippine Air Lines, Inc.,
a common carrier can be liable for failing to prevent a This is contrary to public policy and therefore void and
hijacking by frisking passengers and inspecting their inexistent under Art. 1409 of the Civil Code. This
baggages." arrangement is a circumvention of the requirement for
license.
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extraordinary diligence may only start or commence in

Registered owner and buyer who enter into said March.
transaction are in pan delicto. Therefore, the courts will not • The duty to exercise extraordinary diligence
help either of them. (Clean hands doctrine) terminates, when the passenger alights from the
vehicle at the place of destination and has reasonable
2. Stipulations limiting liability opportunity to leave the common carrier's premises.
• For passengers of ships, the Supreme Court has ruled
General Rule: The responsibility of a common carrier that a reasonable time to leave and pick up baggage
cannot be dispensed with or lessened by stipulation, by is an hour after arrival (Aboitiz Shipping v. CA, G.R.
posting of notices, or by statements on tickets. A reduced No. 84458, 1989).
fare cannot justify limited liability.
Liability for Acts of Others
Exception: If the carriage is gratuitous or for free, a
stipulation limiting liability is valid. (a) Employees
Common carriers are liable even if the employees may
Exception to the Exception: The stipulation does not have acted beyond the scope of their authority or in
cover willful acts or gross negligence of the carrier. (Civil violation of the orders of the common carrier.
Code, Arts. 1757-1759)
Note: The defense of the exercise of all the diligence of a
Reason: Waiver of future fraud or gross negligence is good father in the selection and supervision of their
invalid (Civil Code, Art. 1172) employees is appropriate only in quasi-delict or cu/pa
aquiliana. Such defense is not available in cu/pa
Note: Moral damages may be recovered in an action for contractual and therefore, a common carrier cannot raise
breach of contract of transportation when death results. such defense in action brought by its passengers based on
Even if the passenger does not die, the passenger can contract.
recover moral damages if the carrier is guilty of fraud or
bad faith. However, only the passenger is entitled to moral The driver and the owner of the vehicle, regardless of
damages not anyone else. relationship, are solidary liable to the injuries caused to a
victim of an accident involving the vehicle owner and driven
Duration of Liability by 2 different persons. (Dela Cruz v. Octavian°, G.R.
As to the commencement of the duty to exercise 219649, 2017)
extraordinary diligence, there are two views:
(b) Passengers
Liberal View v. Strict View Common Carriers are liable if its employees could have
When the passenger places himself in the prevented by ordinary diligence the willful act or negligence
LIBERAL care and control of the common carrier of other passengers or strangers.
VIEW who accepts him as a passenger
(Philippine law adopts this view) Factors to be considered when refusing stipulations
STRICT When the passenger actually boards or limiting liability
VIEW places a part of his body inside the carrier a) Refusal to carry goods, UNLESS stipulation limiting
liability is signed by shipper (Civil Code, Art. 1746)
For buses, a bus slowing down means that it is offering b) Delay or deviation, without just cause (Civil Code, Art.
itself to prospective passengers as a common carrier. A 1747)
passenger who signals for a ride with his thumb signifies C) Lack or presence of competition (Civil Code, Art. 1751)
that he is offering himself as a passenger. (Dangwa v. CA,
G.R. No. 95582, 1991) A Stipulation in Transportation is of Goods Contract
Limiting Liability is Void if: (UUC)
Note: a. Unreasonable
• Do not confuse perfection of the contract of carriage b. Unjust
with the start or commencement of the duty to exercise c. Contrary to public policy
extraordinary diligence. The contract of carriage may
be perfected in January while the duty to exercise
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3. Limitations under the Warsaw Convention • Residence of plaintiff (added by Montreal Convention)
Liability 2. Limitation on Liability

a. For each passenger - limited to 250,000 francs
Causes of action against the carrier b. For goods and checked in baggage - limited to 250
a. Damage sustained in the event of the death or francs per kilogram
wounding of a passenger taking place on board the c. For hand carry - limited to 5,000 francs per
aircraft or in the course of any of the operations of passenger
embarking or disembarking
b. Loss or damage to any checked in baggage or goods When Limitations on Liability are Not Applicable
sustained during the transport by air
c. Delay in the transport by air of passengers, baggage, When can a common carrier not avail of this
or goods limitation? (WDWW)
a. Willful misconduct
Note: b. Default amounting to willful misconduct
• The enumeration of causes of action is not an c. Accepting passengers without ticket
exclusive list. The Warsaw Convention does not d. Accepting goods without airway bill or baggage
preclude operation of the Civil Code and other without baggage check
pertinent taws. (Cathay Pacific Airways, LTD. v. Court
of Appeals, G.R. No. 60501, 1993) Extinguishment of Right to Damages
• in the carriage of passengers and baggage, if the The right to damages shall be extinguished if an action is
carrier proves that the damage was caused by or not brought within 2 years counted from date of arrival
contributed to by the negligence of the persons at the place of destination or from date on which the aircraft
suffering the damage the court may, in accordance ought to have arrived or from date on which the
with the provisions of its own law, exonerate the carrier transportation stopped. (Warsaw, Art. 29)
wholly or partly from his liability. (Warsaw, Art. 21(1))
When 2-Year Period Does Not Apply
• In the carriage of cargo, if the carrier proves that the If the cause of action is based on the Civil Code such as 4
damage was caused by or contributed by the years if the action is based on tort or quasi-delict (United
negligence or other wrongful act or omission of the Airlines v. Uy, G.R. No. 127768, 1999)
person claiming compensation, or the person whom he
derives his rights, the carrier shall be wholly or partly Where the plaintiff was forestalled from filing an action
exonerated from his liability to the claimant to the because of the defendant-airline's delaying tactics (United
extent that such negligence or wrongful act or omission Airlines v. Uy, G.R. No. 127768, 1999)
caused or contributed to the damage. (Warsaw, Art.
21(2)) Notice Requirement
• The Warsaw Convention allows the carrier to use • Damage to baggage: within 3 days from receipt
contributory negligence as a defense. • Damage to goods: within 7 days from receipt
• Delay: within 21 days from receipt
Transport by Air
It is the period during which the baggage or goods are in Source: The Montreal Convention, Article 31(2), to
the charge of the carrier, whether in an airport or on board wit:
an aircraft, or in the case of landing outside an airport, in
any place whatsoever. "In the case of damage, the person entitled to delivery
must complain to the carrier forthwith after the
Plaintiff's Optional Action for Damages discovery of the damage, and, at the latest, within
It must be brought, either at the: (DPCDR) seven days from the date of receipt in the case of
• Domicile of the carrier; checked baggage and fourteen days from the date of
• Principal place of business of carrier; receipt in the case of cargo. In the case of delay, the
• Place where the contract has been made; complaint must be made at the latest within twenty-one
• Place of destination days from the date on which the baggage or cargo
have been placed at his or her disposal."
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The three parties, namely the shipper, the carrier, and

This is an amendment to article 26(2) of the Warsaw the consignee undertake specific responsibilities and
Convention which states that notice should be done assume stipulated obligations. (Keng Hua Paper
within 14 days from the delay. Products v. CA, G.R. No. 116863, 1998)
Note: The notice requirement constitutes a condition c. It is a Symbolic representation of the goods, i.e., it is a
precedent. Failure to comply with a condition precedent document of title.
constitutes failure to state a cause of action as a ground
for a motion to dismiss. (Federal Express Corp. v. In case of charter of the entire vessel, the B/L issued
American Home Insurance Co., GR No. 150094, 2004) by the master to the charterer, as shipper, is in fact and
in legal contemplation merely a receipt and a
Recall: document of title, not a contract, for the contract is the
Code of Commerce — notice of claim is a condition charter party. (Home Insurance Co. v. American
precedent to filing an action Steamship, G.R. No. L-25599, 1968)
COGSA — notice of claim is not a condition precedent to Kinds of Bill Of Lading:

filing an action a. Negotiable — goods to be delivered to the bearer or to
the order of the person named
Warsaw Convention — notice of claim is a condition b. Non-negotiable — goods to be delivered to specified
precedent to filing an action person only
c. Clean — goods received in good condition and/or
correct quantity
B. BILL OF LADING d. Foul — goods received in bad condition and/or short
quantity
Bill Of Lading e. Through — issued by first carrier and honored by the
A written acknowledgment of receipt of goods, their successive carriers
quantity and condition, and an agreement to transport and f. On board— goods received on board the vessel which
deliver them to a specific place to a person named or his will transport the goods
order. It is signed by the captain and shipper, and furnished g. Received shipment — goods received for shipment
to the consignee. with or without specifying the vessel which will
transport the goods
Note: It is not indispensable to the creation of a contract of
carriage. The contract itself arises from the moment goods Contents of a Bill of Lading
are delivered by shipper to carrier and the carrier agrees a. The name, surname, and domicile of the shipper.
to carry them. b. The name, surname, and domicile of the carrier.
c. The name, surname and domicile of the person to
1. Threefold Character (RCS) whom or to whose order the effects are sent, or
a. It is a Receipt for the goods shipped whether such effects are to be delivered to the bearer
of said bill.
The issuance of a B/L carries the presumption that the d. The description of the effects, with statement of their
goods were delivered to the carrier issuing the bill and kind, weight, and the exterior marks or signs of the
is prima facie evidence of the receipt of the goods by packages containing the same.
the carrier (Saludo v. CA, G.R. No. 95536, 1992) e. The cost of transportation
f. The date on which shipment is made
As a receipt, it recites the date and place of shipment, g. The place of delivery to the carrier
describes the goods as to quantity, weight, h. The place and time of delivery to the consignee.
dimensions, identification marks, condition, quality, I. The indemnity to be paid by the carrier in case of delay,
and value. (Unsworth Transport v. CA, G.R. No. should there be any agreement on this point. (Code of
166250, 2010) Commerce, Art. 350)
b. It is a Contract between the parties; and
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Jurisprudence on Bill of Lading by virtue of the exchange of this bill for the object
• A bill of lading, when properly executed and delivered transported, the respective obligations and actions shall be
to a shipper, is evidence that the carrier received the considered as cancelled, unless in the same act the claims
goods for shipment. which the contracting parties desire to reserve are
• Acceptance of a bill of lading without dissent raises the manifested in writing, exception being made of the
presumption that all terms were brought to the provisions of Article 366.
knowledge of the shipper and agreed to by him, and in
the absence of fraud or mistake, the shipper is In case the consignee cannot return, upon receiving the
estopped from denying that he assented to such terms merchandise, the bill of lading subscribed by the carrier,
• A bill of lading is an actionable document, which must due to its loss or for any other cause, he must give the said
be properly pleaded, and the genuineness and due carrier a receipt for the goods delivered, this receipt
execution thereof are deemed admitted unless producing the same effect as the return of the bill of lading.
specifically denied by the adverse party in the answer
to the complaint. Upon the carrier rests the burden of proof to establish
(Magellan Mftg. Marketing Corp v. CA, G.R. No. the actual delivery of the merchandise called for in the bill
95529, 1991) of lading.
Note: Proof in Absence of Bill of Lading

A contract of carriage is a consensual contract. It is not a In the absence of a bill of lading, claims shall be
real contract. Therefore, delivery of the goods is not determined by legal proofs which each of the contracting
needed to perfect the contract. It is also not a formal or parties may present in conformity with the general
solemn contract. Therefore, a written contract (such as a provisions established in this Code for commercial
bill of lading) is not needed for perfection of the contract. contracts. (Code of Commerce, Art. 354)
The Code does not require a bill of lading to be delivered Three Kinds of Stipulations in the Bill Of Lading
to the shipper for the perfection of a contract of Limiting Carrier's Liability:
transportation, however, the law grants both the carrier and a. Exempting the carrier from any and all liability for the
the shipper the right to mutually demand from each other loss or damage occasioned by its own negligence.
a bill of lading. b. Unqualified limitation of such liability to an agreed
valuation
If the bill of lading was issued to the order of shipper, c. Limiting the liability of the carrier to an agreed valuation
the carrier was under a duty NOT to deliver the unless the shipper declare a higher value and pays a
merchandise mentioned in the bill of lading, except upon higher rate of freight. (Provident Insurance v. CA, G.R.
presentation of the bill of lading duly indorsed by the No. 118030, 2004)
shipper.
Note: Only the third is valid and enforceable. The first and
The carrier that issued the through bill of lading is second kinds of stipulations are void for being contrary to
responsible for the carriage of goods by successive public policy.
carriers up to the final destination. The carrier may be held
liable even if the goods were not in its actual possession 2. Delivery of Goods
or custody. The carrier must deliver the goods in the same condition
and quantity in which they were received according to the
Bill of Lading as Evidence bill of lading.
Code of Commerce, Art. 353. The legal evidence of the
contract between the shipper and the carrier shall be the (a) Period of Delivery
bills of lading, by the contents of which all disputes which
may arise with regard to their execution and fulfillment shall When no period fixed: carrier must forward goods in the
be decided, No exceptions being admissible other than first shipment of same or similar goods (Code of
falsity and material error in the drafting thereof. Commerce, Art. 358)
After the contract has been comp'ied with, the bill of lading When period fixed: carrier must deliver goods within time
shall be returned to the carrier who may have issued it, and fixed (Code of Commerce, Art. 370)
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A claim made beyond the 24-hour period was valid, where

(b) Liability of Carrier When There Is Delay In Delivery the consignee made a call to the carrier within 24 hours of
• Indemnity stipulated in the bill of lading (Code of receipt of the goods, then the written notice of claim was
Commerce, Art. 370) received by the carrier two days after (Aboitiz Shipping
• If no stipulation, damages due to delay which may Corporation v. CA, G.R. No. 168402, 2008)
not exceed the current price of the goods on the
day and place of destination (Code of Commerce, 4. Period for Filing Actions / Suit
Art. 371) Claim is a condition precedent to right of action, which
• Special damages, like unrealized profit, if carrier must be filed within 1 year from delivery of goods or denial
foresaw or had notice of circumstances leading to of claim.
the probable occurrence of such damage. (Code
of Commerce, Art. 371) Distinguish Claim from Suit
• Full value of goods, if consignee should exercise File a CLAIM against the carrier, within 24
CLAIM
abandonment of the goods by advising carrier in hours following the receipt of the merchandise
writing prior to arrival at destination. (Code of The CLAIM is a condition precedent to the
Commerce, Art. 371) filing of a SUIT.
(c) Partial/Defective Delivery SUIT The consignee shall file a suit within 1 year
• In case of partial delivery, consignee may refuse from either:
to receive those delivered if they cannot be used - Delivery of the goods; or
independently of those not delivered. - Denial of the claim
• If the goods delivered were rendered useless for
sale or consumption, consignee may refuse to Inspection of the Goods by the Carrier
receive. If by well-founded suspicions of the falsity in the
• If the goods delivered are damaged to such an declaration of the contents of a package, the carrier
extent that their value is diminished, carrier must decides to examine it, he shall make his investigation in the
pay the difference in value as judged by experts. presence of witnesses, with the assistance of the shipper
or consignee:
In the first two cases, consignee may exercise
abandonment and be entitled to the full value of the goods. Should the shipper and consignee who had to be notified
do not appear, the examination shall be made before a
3. Period for Filing Claims notary who shall write the memorandum of the result of the
a. If the damage is apparent from the exterior of examination, for such purposes which may be proper.
the package, the claim must be made upon
receipt of the package. Should the declaration of the shipper appear to be true, the
b. If the damage cannot be known from the expenses occasioned by the examination and by the
exterior, the claim must be made within 24 hours careful repacking of said package shall be paid by the
following the receipt of the merchandise. carrier, and, in a contrary case, by the shipper. (Code of
i. A longer period may be stipulated but not a Commerce, Art. 357)
shorter one.
c. After the periods have elapsed, or after the Period to Deliver Goods When Not Stipulated
transportation charges have been paid, no claim Should there be no period of time previously fixed for the
whatsoever shall be admitted against the carrier delivery of the goods, the carrier shall be under the
with regard to the condition in which the goods obligation to forward them with the first shipment of the
transported were delivered. same or similar merchandise he may make to the point
(Code of Commerce, Art. 366) where he must deliver them, and should he not do so, the
damages occasioned by the delay shall be suffered by him.
A provisional claim NEED NOT state in detail the list of (Code of Commerce, Art. 358)
goods lost or damaged, so long as the carrier can make a
reasonable verification (Esso v. Manila Railroad, G.R. No. Change of Route
L-25488, 1979) General Rule: The carrier cannot change the route to be
taken by the vessel (Code of Commerce, Art. 359)
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file the notice within 24 hours also bars the claim

Exception: When the carrier and shipper agree due to with regard to the condition in which the goods
force majeure. In this situation, the shipper must pay the transported were delivered.(Code of Commerce,
carrier any increase in transportation charges. Art. 366)
Note: If the carrier changes the route without just cause, Note: A claim is condition precedent to a right of action,
the carrier shall be liable for all damages which may be which must be filed within 1 year from delivery of goods or
suffered by the goods. If no route was agreed upon, carrier denial of claim. (Public Act No. 521, Carriage of Goods by
must select the shortest, least expensive and practically Sea Act (COGSA), Sec. 3161)
passable route (Civil Code, Art. 1747)
Disputes With Regard to the Condition of the Goods
Change in the Consignment of Goods Transported at the Time of their Delivery to the
The shipper may change the consignee as long as the Consignee
place of delivery is not changed. The change is The goods shall be examined by an expert appointed by
considered a novation. The shipper will have to return the the parties and, in case of disagreement, by a third one to
bill of lading to the carrier and a new one issued. The be appointed by judicial authority, the result of the
expenses shall be shouldered by the shipper. (Code of examination being reduced to writing; and if the person
Commerce, Art. 360) interested should not agree to the report of the experts and
do not settle their disputes, said judicial authority shall
Instances When the Consignee Can Refuse To Accept order the deposit of the merchandise in a safe warehouse,
the Goods (DEPADAM) and the parties interested shall make use of their rights in
a. When there is DELAY on account of the fault of the the proper manner. (Code of Commerce, Art. 367)
carrier. (Code of Commerce, Art. 371) In this case,
there will be abandonment. The consignee will have to If the consignee cannot be found or if he refuses to pay the
inform in writing the carrier of its desire to abandon the transportation charges and expenses or to receive the
goods before the goods arrive at the point of its goods, the deposit of said goods shall be ordered by the
destination. municipal judge, where there is no judge of the first
b. Only a -PART of the goods transported are delivered instance, to be placed at the disposal of the shipper or
and the consignee is able to prove that he cannot sender, without prejudice to third persons having a better
make use of the part without the others (Code of right, this deposit having all the effects of a delivery. (Code
Commerce, Art. 363) of Commerce. Art. 369)
c. If the goods are DAMAGED and such damage renders
the goods useless for the particular purpose for which If the consignee cannot be found or refuses to accept,
they are to be used. (Code of Commerce, Art. 365) it is the duty of the carrier to exercise due diligence to give
the consignor/shipper notice, within a reasonable time, of
Claims Brought Against The Carrier On Account Of the consignee's failure or refusal to accept the goods. The
Damage Found In The Goods Delivered shipper then will give a directive to the carrier whether to
There are three periods: deposit the goods with the court, to hold the goods or to
a. Until the time of the receipt of the goods if return the goods.
delivered uncovered or in packages with
indications of damage or average — consignee has If the consignor/shipper cannot be found, the carrier
to immediately give notice to the carrier regarding can deposit the goods with the court (consignation).
the damage of the goods or else his claim will be
barred. Legal Effect of Deposit: There is delivery by the carrier
b. Until the payment of its freight charges — Upon to the consignee.
paying freight charges, one forecloses his right to
claim for damages since it would mean that there Note: A claim is not a condition precedent to an
is condonation. This however does not apply if the independent action, which must be filed within 6 years if
freight charges were prepaid. there is no written contract or 10 years if there is a written
c. During the 24 hours following the delivery of the contract.
goods if the average or damage can only be
ascertained by opening the packages — Failure to
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Transportation Charges a. When its object is merchandise or any commercial

The consignee has 24 hours within which to pay the effects
transportation charges following the time of delivery. In b. When, no matter what its object may be, the carrier
case of delay in making payment, the carrier may demand is a merchant or is habitually engaged in
judicial sale of the goods to answer for the transportation transportation for the public.
charges. (Code of Commerce, Art. 374) (Code of Commerce, Art. 349)
Transportation charges (during transportation and until Bay and River Licenses are issued by the Collector of
delivery) are considered a lien on the goods. This preferred Customs to vessels engaged in the business of towing or
lien shall not be affected by insolvency of the consignee. carrying of articles or passengers in bays, harbors, rivers
However, it shall be valid for only 30 days. After 30 days, and inland waters navigable from the sea.
the lien is extinguished but the carrier can still file an action
as an ordinary creditor. (Code of Commerce, Art. 375) To be eligible for such license, a Vessel must be:
a. Built in the Philippines, and
In a combined or successive transportation services b. Owned by Philippine citizens or domestic corporations
agreement, who shall be directly liable against the with capital stock 75% of which is owned by Philippine
consignee and/or the shipper? citizens.
The carrier that delivered the goods or the carrier that (RA 1937, Sec. 911)
executed the contract or the carrier that received the goods
(without reservation) shall be liable. However, the carrier Exemption: The following vessels are not required to
that delivered the goods may proceed against the carrier procure such licenses:
at fault for reimbursement. (Code of Commerce, Art. 373)
a. Vessels of 3 tons net or less;
The goods transported shall be especially obliged to b. Yachts, launches, and other crafts used
answer for transportation charges until delivery. This exclusively for pleasure and recreation;
preferred right shall prescribe eight days from the time of c. Ship's boats and launches bearing the name and
delivery of the goods. Thereafter, the carrier may ,only be home port of the vessel plainly marked thereon;
considered an ordinary creditor. (Code of Commerce, Art. and
375) d. Vessels owned by the Philippine government
Note: The 8-day limitation has been amended by Art. 2242 The exemption shall cease if the vessel engages
(9) of the New Civil Code providing as follows: With in the business of transporting cargo or
reference to specific movable property of the debtor, the passengers, for hire.
following claims or liens shall be preferred: credits for
transportation, upon the goods carried, for the price of the Note: The State can seize Philippine-registered vessels,
contract and incidental expenses until their delivery and for even in the high seas, for violations of the Revised
thirty days thereafter." Administrative Code (or violation of any Philippine law) in
accordance with the State's right to protect itself and its
The carrier shall be liable for non-compliance with laws and revenues and this right is not limited within its own territory.
regulations during the entire course of the trip until arrival (Asaali v. Commissioner of Customs, G.R. No. L-24170,
at the point of destination except when the non-compliance 1968)
is due to false statements of the shipper in the declaration
of the merchandise.
C. MARITIME COMMERCE
If the carrier acted in accordance with a formal order
received from the shipper or consignee, both shall incur Vessels
liability. (Code of Commerce, Art. 377) Those engaged in navigation, whether coastwise or in the
high seas, including floating docks, pontoons, dredges,
Commercial Transactions for Transportation Overland scows and any other floating apparatus destined for
and Waterways maritime commerce. It includes those with motive power
A contract of trpnsportation overland or waterways of any and used as means of water transportation. Vessels are
kind shall be considered commercial: personal properties.
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navigation of the vessel. In this kind of charter, the

The following are not considered vessels: charterer mans and equips the vessel and assumes all
a. Local and foreign military vessels; responsibility for its navigation, management and
b. Bancas and watercraft less than 3 tons gross capacity; operation. He thus acts as the owner of the vessel in all
and important aspects during the duration of the charter.
c. Small watercraft engaged in river and bay traffic.
b. Time Charter — It is a contract to use the vessel for a
Requisites of Maritime or Merchant Vessel (NLS) period of time. Liability for damages: ship owner (acts as a
a. Not an accessory to another vessel common carrier)
b. Must be Licensed to engage in the transportation of
passengers and/or freight c. Voyage Charter— it is a contract to use a vessel for one
or a series of voyages. Liability for damages: ship owner
c. By Sea (not merely in rivers, inlets, lakes coves or
bays) whether in foreign or in coastwise trade (acts as a common carrier)
Special Contracts Of Maritime Commerce 2. Liability of Ship Owners and Ship Agents
a. Charter Parties
b. Bills of lading and contracts of transportation of Persons Participating In Maritime Commerce (SCOS)
passengers on sea voyages a. Ship owner and/or ship agent — the ship agent is the
person entrusted with the provisioning of a vessel or
c. Loans on bottomry and loans on respondentia
d. Marine insurance who represents her in the port in which she may be
found
1. Charter Parties b. Captain or master —the-person in charge of the vessel
and navigates it
A charter party is a contract by which an entire ship or
some principal part thereof is leased by the ship owner to c. Other officers of the vessel (i.e. sailing mate, second
another person for a specified time or voyage. mate, third mate, marine engineer)
d. Supercargo — the person specially employed by the
General Categories or Kinds of Charter Party owner of cargo to take charge of and sell to the best
advantage merchandise which has been shipped, and
a. Bareboat and Contract of Affreightment to purchase returning cargoes and to receive freight
CONTRACT OF
DEMISE / BAREBOAT Ship Captain and Ship Agent
AFFREIGHTMENT
The charterer mans the Roles of the Captain
vessel with its own
a. General agent of the ship owner
people, and is considered The owner of a vessel
b. Technical director of the vessel
the owner pro hac vice (for leases the whole or part of
c. Represents the government of the country under
this occasion only). her to another person to
whose flag he navigates
haul goods for another.
Created by owner
Qualifications of the Captain
completely and Owner retains possession,
a. Filipiro citizen
exclusively relinquishing command, and navigation
b. With skill and capacity to command and direct vessel
possession, command, of the ship.
and navigation to the c. Duly licensed by MARINA
charterer.
Civil Liabilities of the Captain
Charterer is liable for Shipowner •is liable for
damages damages a. Damage to vessel due to lack of skill/negligence
remains as b. Theft, robberies, mutiny by crew
Carrier is converted to Carrier
private carrier — ordinary common carrier — c. Abuse of power
diligence extraordinary diligence d. Unjustified deviation
e. Losses, fines and confiscation imposed due to
Owner Pro Hac Vice — bareboat/demise charterer to violation of law and regulations
whom the owner of the vessel has completely and
Roles of the Ship Agent
exclusively relinquished possession, command and
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a. Maintains and provisions the vessel g. In case of the expenses for Equipping, repairing or
b. Represents vessel in port where she is provisioning the vessel before the loss of the ship.
c. Represents ship owner in judicial/extrajudicial acts
Note: The limited liability rule also applies for claims due
Liabilities of Ship Owners and Ship Agents to death or injuries to passengers, aside from claims for
a. Civil liability for acts of the captain goods. In abandoning the vessel, there is no procedure to
b. Civil liability for contracts entered into by the captain to be followed. There is neither a prescriptive period within
repair, equip and provision the vessel; provided, the which the ship owner can abandon the vessel, provided he
latter were used for the benefit of the vessel is neither estopped from invoking the same nor performs
c. Civil liability for indemnities in favor of 3 rd persons acts inconsistent with abandonment.
arising from the conduct of the captain in the care of
goods and/or safety of passengers Who can exercise the right of abandonment
d. Damages in case of collision by reason of fault, • General rule: Only the ship owner and the ship agent
negligence or lack of skill of the captain or crew. can make an abandonment.
• Exception: in cases of co-ownership of a vessel, a
Note: The ship owner and ship agent are not liable for co-owner may exempt himself from liability by the
obligations contracted by the captain if the latter exceeded abandonment of the part of the vessel belonging to
his powers unless the amount was used to benefit the him.
vessel. • A charterer cannot abandon the vessel since a
charterer does not have rights of ownership over the
Real and Hypothecary Nature of Maritime Law vessel.
To offset against the innumerable hazards and perils in sea
voyages and to encourage ship building in maritime Abandonment may be done to avoid liability in the
commerce, it was deemed necessary to confine the liability following cases:
of the owner or agent arising from the operation of a ship a. For civil liability to third persons arising from the
to the vessel, equipment, and freight or insurance, if any, conduct of the captain in the vigilance over the goods
so that if the ship owner or agent abandon the ship, which the vessel carried;
equipment and freight, his liability would be extinguished. b. For the proportionate contribution of co-owners of the
vessel to a common fund for the results of the acts of
Exceptions: (MESS) the captain referred to in Art. 587 of the Code of
a. Voyage is not Maritime Commerce; and
b. Expenses for equipping, repairing or provisioning of c. For the civil liability incurred by the ship owner in case
the vessel of collision.
C. Vessel is not a common but a Special Charter
d. Vessel would totally Sink or be a total loss due to ship Comparative Table: Abandonment
owner's or ship agent's own fault SHIPOWNER /
CONSIGNEE
SHIP AGENT
Doctrine of Limited Liability What May Be Abandoned?
The liability of the ship owner is limited to the value of the Vessel Goods Shipped
vessel, its equipment and freight. The rule is "no vessel, no Instances When Abandonment
liability." May Be Availed
a) In case of civil liability a) Partial non-delivery,
Exceptions: (AUWDIRE) from indemnities; where the goods are
a. Vessel is not Abandoned (when the ship owner does b) SEC. 138, Insurance useless without the
acts inconsistent with abandonment e.g. salvage) Code; others (363)
b. Ship owner agent/ agent allows his vessel to embark c) In case of leakage of at b) Goods are rendered
least 3/4 of the contents useless for the sale or
in an Unseaworthy condition.
of a cargo containing consumption for the
c. Claims under Workmen's compensation liquids (687) purposes for which
d. Injury/Damage due to ship owner's fault they are properly
e. Vessel is Insured destined (365); and
f. In case the voyage is not maritime but only in River or
gulf
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c) In case of delay • Neither can the captain contract a loan on bottomry for
through the fault of the his own transactions, except on the portion of the
carrier (371) vessel he owns, provided,
Effects o there is no previous loan secured by the entire
a) Transfer of ownership a) Transfer of ownership vessel and
of the vessel from the on the goods on the o no other lien or obligation chargeable against
ship owner to the goods from the
the vessel.
shippers or insurer shipper to the carrier
b) In case of SEC. 138, b) Carrier should pay the • If the captain contracts the loan, the captain must
Insurance Code, the shipper the market disclose his interest in the vessel.(Code of Commerce,
insurer must pay the value of the goods at Art. 617)
insured as if there was the point of destination
actual total loss of the Ordinary Loan v. Loan on Bottomry/Respondentia
vessel ORDINARY LOAN LOAN ON BOTTOMRY
OR RESPONDENTIA
Loans May or may not have a Must have a collateral
A loan on bottomry is an ordinary loan secured by the collateral
vessel while a loan on respondentia is an ordinary loan The collateral of an Must be a vessel or cargo -
secured by the cargo. ordinary loan may be any subject to maritime risks
property, real or personal
Requisites of a Loan on Bottomry/Respondentia: Absolutely repayable Depends upon the safe
(BTPS) arrival at the port of the
a. Ship owner borrows money for use, equipment or collateral of the loan
repair of vessel. subject to usury law not subject to usury law
b. Loan has a term and with extraordinary interest called First lender is the first Last lender is the first
priority priority
premium.
Need not be in writing but Must be in writing
c. Loan is secured by a pledge of the vessel if bottomry
interest shall not be due
loan or pledge of the goods if respondentia loan.
unless expressly
d. Payment depends on the safe arrival of the vessel for stipulated in writing
bottomry loan or safe arrival of the goods for To be binding on third Must be recorded in the
respondentia loan. If the vessel or cargo is lost, persons, need not be registry of vessels of the
obligation to pay is extinguished. registered port of registry of the
vessel
Note: This means the loan is actually subject to a Loss of the collateral if Loss of the collateral
resolutory condition and is not really a secured loan. any, does not extinguish extinguishes the same
•the same
Parties to the Loan
a. Ship owner or ship agent Rules Regarding Loss of Collateral (Code of
b. Owner of the cargo Commerce, Art. 731)
c. Lender
General Rule: If the collateral is lost the loan is
Formal Requirements of Loans on Bottomry or extinguished.
Respondentia
Loans of bottomry or respondentia may be executed: Exceptions:
a. By means of a private instrument; a. Perished due to inherent defects;
b. By means of a policy signed by the contracting parties b. Brought about by malicious conduct of the ship owner;
and the broker taking part therein; c. Barratry of the captain;
c. By means of a public instrument. d. Engaged in unlawful transaction;
e. The vessel in which the cargo was loaded is different
Rules Regarding the Captain from that agreed upon (except if the change was
• The captain is not allowed to contract loans on brought about by force majeure)
respondentia, and if he does, the contract shall be
void.
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Instances When the Contract is Considered a Simple The insurers (859) and
Loan and Not a Loan Bottomry or Respondentia lenders on bottomry and
a. When the amount of the loan is larger than the value respondentia shall
of the vessel due to fraudulent means employed by the likewise contribute (732)
borrower, the amount in excess of the value of the Number of Interests Involved
vessel as appraised by experts is a simple loan. (Code One interest involved Several interests involved
of Commerce, Art. 726) Share in the Damage or Expense
b. If the full amount of loan contracted to lead the vessel In proportion to the value
should not be used for the cargo, the balance, if any, 100% share of the owner's property
shall be a simple loan. (Code of Commerce, Art. 727) saved
c. If the collateral is not subject to risk, the contract shall Right to Recover
be a simple loan, with the obligation on the part of the There may be
No reimbursement
borrower to return the principal and interest at the legal reimbursement
rate if that agreed upon should not be lower. (Code of Kinds of Averages (NOTE: Not Exclusive)
Commerce, Art. 729) Code of Commerce, Art. Code of Commerce, Art.
810 811
3. Accidents and Damages in Maritime Commerce
a. Averages Requisites: (CAP-DISL)
b. Collisions a. Common danger present
That both the ship and the cargo, after it has been
a. General and Particular Averages loaded, are subject to the same danger, whether
during the voyage or in the port of loading or
Averages unloading (Magsaysay v. Agan, G.R. No. L-6393,
(1) All extraordinary or accidental expenses which may be 1955)
incurred during the voyage for the preservation of the b. Arising from Accidents of sea, disposition of authority
vessel or cargo or both; c. Peril imminent and ascertained
Expenses incurred to refloat a vessel, which
(2) All damages or deterioration which the vessel may accidentally ran aground, in order to continue its
suffer from the time it puts to sea at the port of voyage, do not constitute general average. Not
departure until it casts anchor at the port of destination, only is there absence of a marine peril, common
and those suffered by the merchandise from the time safety factor, and deliberateness, it is the safety of
they are loaded in the port of shipment until they are the property, and not the voyage, which
unloaded in the port of consignment constitutes the true foundation of general average
(Magsaysay v. Agan, G.R. No. L-6393, 1955)
Simple v. Gross Averages d. Part of vessel or cargo Deliberately sacrificed
PARTICULAR / SIMPLE I GROSS / GENERAL General Rule: Sacrifice is made through the
Definition jettison of the cargo or part of the ship is thrown
overboard during the voyage
Damages or expenses
Damages or expenses Exceptions:
caused to the vessel or deliberative caused in
cargo that did not inure to - Where the sinking of a vessel is necessary to
order to save the vessel, extinguish a fire in a port, roadsteads, creek or bay
the common benefit, and
i ts cargo, or both from real (Code of Commerce, Art. 818)
borne by respective
and known risk (811) - Where cargo is transferred to lighten the ship on
owners (809)
Liability account of a storm to facilitate entry into a port
All the persons having an (Code of Commerce, Arts. 816-818)
interest in the vessel and e. Intended to save vessel and cargo or both
The owner of the goods f. Successful saving of vessel or cargo
the cargo therein at the
which gave rise to the g. Proper legal steps and authority taken.
time of the occurrence of
expense or suffered the the average shall
damage shall bear this Order by Which Items Should Be Jettisoned
contribute to satisfy this
average (810) • Those which are on deck, beginning with those which
average (812)
embarrass the maneuver or damage the vessel,
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preferring, if possible, the heaviest ones with the least Procedure for Making Arrival under Stress
utility and value. a) The captain believes that the vessel cannot continue
• Those which are below the upper deck, always the trip to the port of destination because of:
beginning with those of the greatest weight and o Lack of provisions;
smallest value, to the amount and number absolutely o Well-founded fear of seizure, privateers, or pirates;
indispensable. (Code of Commerce, Art. 815) or
o By reason of any accident of the sea disabling it to
Formalities to Incur Gross Average navigate
a. There must be an assembly of the sailing mate and b) The captain shall assemble the officers and shall
other officers with the captain including those with summon the persons interested in the cargo who may
interests in the cargo be present, and who may attend the meeting without
b. There must be a resolution of the captain the right to vote
c. The resolution shall be entered in the log book, with c) The officers may agree on the arrival at the nearest and
the reasons and motives and the votes for and against most convenient port after examining the
the resolution circumstances of the case and upon considering the
d. The minutes shall be signed by the parties reason therefor to be well-founded.
e. Within 24 hours upon arrival at the first port the captain o The captain shall have the deciding vote
makes, he shall deliver one copy of these minutes to d) The agreement shall be drafted and entered into the
the maritime judicial authority thereat proper minutes which shall be signed by all in the log
book;
Arrival Under Stress e) The persons interested in the cargo may make the
'Arrival Under Stress' at the nearest and most convenient objections and protests they may deem proper; and
port, when the captain believes the vessel cannot continue f) The protests shall also be entered in the minutes in
the voyage to the point of destination (Code of Commerce, order that the protestants may make use of them in the
Art. 819) manner they may consider advisable.
Once the cause of arrival under stress ceases, the captain Rules on Who Will Bear Expenses Arising From an
must continue with his voyage; otherwise, he is liable for Arrival under Stress:
damage caused by the delay (Code of Commerce, Art. The ship owner/agent will always bear the expenses of an
825, 111) arrival under stress.
An arrival of the vessel at a port not of destination on If the arrival under stress is legal or lawful, the ship
account of: owner/agent will not be liable for damages caused to the
a. Lack of provisions; shippers.
b. Well-founded fear of seizure; or
c. By reason of accident of the sea disabling it to navigate If the arrival under stress is illegal or unlawful, the ship
agent and captain are jointly liable for the damages caused
Unlawful when: to the shippers.
a. Lack of provisions due to negligence to carry according
to usage and customs b. Collisions
b. Risk of enemy not well known or manifest
c. Defect of vessel due to improper repair Collision
d. Malice, negligence, lack of foresight or skill of captain The impact of two vessels both of which are moving
Note: Once cause of arrival under stress ceases, captain Allision

must continue voyage; otherwise, he is liable for damage The striking of a moving vessel against one that is
caused by delay. stationary.
In case of risk of collision, each vessel must alter course to

starboard (right) to as to pass on the portside (left) of the
other vessel [Rule 18, International Rules of the Road]
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Cases of Collision master nor owner was responsible, and concludes with a
a. Culpable fault - if due to the fault, negligence or lack protest against any liability of the owner for such loss or
of skill of the captain, sailing mate or the complement damage.
of the vessel, ship owner is liable for the losses and
damages (Code of Commerce, Art. 826) It is a condition precedent or prerequisite to recovery of
b. Fortuitous - due to fortuitous event or force majeure, damages arising from collisions and other maritime
each vessel and its cargo shall bear its own damages accidents (Code of Commerce, Art. 835)
(Code of Commerce, Art. 830)
c. Inscrutable fault - if cannot be determined which of Made By Whom: Captain
the 2 vessels caused the collision - each vessel shall
suffer its own damages, and both shall be solidarily When Made: Within 24 hours from the time the collision
responsible for the losses and damages occasioned to took place (Code of Commerce, Art. 835)
their cargoes (Code of Commerce, Art. 828)
Upon arrival at the place of destination, the captain shall
Error in Extremis ratify the protest within 24 hours.
When a collision is imminent through no fault of the vessel
and, due to the confusion and excitement of the situation, Before Whom Made: Competent authority at the point of
something is done which contributed to the collision or collision or at the first port of arrival, if in the Philippines
there is an omission to do something that could have and to the Philippine consul, if the collision took place
avoided the collision, the act or omission is a valid defense abroad (Code of Commerce, Art. 835)
against liability since it was done during an extreme
situation. Maritime Protest Is Required In The Following Cases
(CASH):
Note: Last Clear Chance Doctrine does not apply in a. Collision;
maritime law. Neither does the concept of contributory b. Arrival under stress;
negligence. (Reason: Code of Commerce provides for c. Shipwreck; and
specific rules on allocation of liabilities— see Art. 827) d. In case the vessel has gone through a hurricane
or when the captain believes that the cargo has
Shipwreck suffered damages.
It covers all types of loss/wreck of a vessel at sea either by
being swallowed up by the waves or by running against Maritime Protest shall also be done if the vessel having
another vessel or thing at sea or at the coast and the vessel been wrecked, the captain is saved alone or with part of
is rendered incapable of navigation. the crew, in which case, the captain shall appear before
the nearest authority and make a sworn statement of the
facts.
Liability in Shipwrecks
General rule: each owner, whether of the vessel or cargo,
Salvage — it is the compensation allowed to persons by
shall bear his own loss.
whose voluntary assistance a ship at sea or her cargo or
both have been saved in whole or in part from an
Exception: ship owner or ship agent and/or the shippers
impending peril, or such property recovered from actual
may demand indemnity from the captain if tne shipwreck
peril or loss.
was due to his malice, negligence or lack of skill or the
vessel was insufficiently repaired and equipped by the
In case of shipwreck, derelict or recapture; a service which
captain,
one person renders to the owner of a ship or goods by his
own labor, preserving the goods or ship which the owner
Maritime Protest
or those entrusted with the care of them either abandoned
It is a written statement under oath, made by the master of
in distress at sea or are unable to protect and secure.
a vessel, after the occurrence of an accident or disaster in
which the vessel or cargo is lost or injured, with respect to
Note: A permit is required to engage in the salvage
the circumstances attending such occurrence.
business.
It is intended to show that the loss or damage resulted from
a peril of the sea, or some other cause for which neither
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Derelict (portside). It ceases only when the goods cross the other
It is a ship or cargo which is abandoned and deserted at side (starboard side). This is also known as the "tackle to
sea by those who are in charge of it, without any hope of tackle" rule.
recovering it, or without any intention of returning to it.
Requisites of Contracts Covered By COGSA
Elements of a Valid Salvage (MVS) a. Contracts for the carriage of goods
a. A marine peril b. By sea
b. Service voluntarily rendered when not required as an c. To and from Philippine ports
existing duty or from special contract d. In foreign trade
c. Success, in whole or in part, or that the services
rendered contributed to such success
(Barrios vs. Go Thong, G.R. No. L-17192, 1963) Shipper's Guaranty upon Delivery of the Goods to
Carrier for Shipment
Contract of Towage The shipper guarantees at the time of shipment the
It is a contract to render service whereby a vessel pulls or accuracy of the marks, number, quantity and weight of the
tows another from one place to another for compensation. goods. The shipper shall indemnify the carrier against all
It is not a contract of carriage or transportation. Only the losses, damages and expenses arising from errors or
owner of the towing vessel can ask for compensation. inaccuracies.
Salvage v. Towage The carrier shall be bound before and at the beginning
SALVAGE TOWAGE of the voyage, to exercise due diligence to —
Crew of salvaging ship is Crew of the towing ship 1. Make the ship seaworthy
entitled to salvage, and can does not have any 2. Properly man, equip, and supply the ship
look to the salvaged vessel interest or rights with the 3. Make the holds, refrigerating and cooling
for its share remuneration pursuant to chambers, and all other parts of the ship in which
the contract goods are carried, fit and safe for -reception,
Salvor takes possession Tower has no possessory carriage and, preservation.
and may retain possession lien; only an action for
until he is paid recovery , of sum of Procedure to Recover Loss or Damage to Cargo
money
Court has power to reduce Court has no power to
(b) Notice of Loss or Damage
the amount of remuneration change amount in
towage even if There must be written notice of loss or damage and the
if unconscionable
unconscionable general nature of such loss or damage should be given in
writing to the carrier or his agent at the port of discharge or
at the time of-the removal of the goods.
4. Carriage of Goods by Sea Act (COGSA)
If the loss or damage is not apparent, the notice must be
(a) Application given within 3 days from delivery. The notice of loss or
COGSA only applies to foreign trade. (COGSA, Sec. 1) damage may be endorsed upon the receipt for the goods
However, it may also apply to domestic trade when there given by the person taking delivery thereof.
is a paramount clause in the contract.
The notice or writing need not be given if the state of the
Paramount Clause goods at the time of their receipt has been the subject of
It is a clause which attracts the application of another law Joint Survey Inspection. (COGSA, Sec. 3(6))
to govern the rights and obligations of the parties. Hence,
the parties can stipulate that the COGSA will apply to the Under COGSA, the filing of a notice of claim is NOT a
contract of carriage and not the Civil Code or Code of condition precedent to filing a suit (UCPB v. Aboitiz
Commerce. Shipping G.R. No. 168433, 2009)
Responsibility of the Carrier under the COGSA "Loss" contemplates merely a situation where no delivery
The responsibility of the carrier begins when the goods are at all was made by the shipper of the goods because the
brought to the carrier and crosses one side of the vessel same had perished, gone out of commerce, or
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disappeared in much a way that their existence is unknown

or they cannot be recovered. It does not include a situation (d) Limitation of Liability under the COGSA
where there was indeed delivery — but delivery to the • Maximum of $500 per package or, if not shipped in
wrong person, or a misdelivery (Ang. V. American packages, per customary freight unit (e.g. metric
Steamship, G.R. No. L-22491, 1967) and damage arising ton).
from delay or late delivery (Mitsui O.S.K. Lines v. CA, G.R. • Nature and value of goods may be declared by
No. 119571, 1998). In such instance, the Civil Code rules shipper and inserted in bill of lading; declaration is
on prescription shall apply. prima facie evidence and not conclusive on carrier.
• Shipper and carrier may agree on another maximum
(c) Period of Prescription amount, but not more than amount of damage
The prescriptive period is 1 year counted from delivery or actually sustained.
when goods should have been delivered.
Note: When packages are shipped in a container supplied
In case of misdelivery, prescriptive period is 10 years for by carrier and the number of such units is stated in the bill
breach of written contract or 4 years for quasi-delict. of lading, each "unit" constitutes the "package".
Note: COGSA's coverage include insurer of goods. This The package/container contemplated by the law to limit the
means that the prescriptive period applies to suits by the liability of the carrier should be sensibly related to the unit
shipper against insurer. Otherwise, what is prohibited in which the shipper packed the goods and described
directly can be done indirectly, and the one-year limitation them, not a large metal object, functionally a part of the
would be rendered useless (Filipino Merchants Insurance ship, in which the carrier used them to be contained. Such
Co., Inc. v. Alejandro, G.R. No. 54140, 1986) "container" must be given the same meaning and
classification as a "package" and "customary freight unit."
Instances When the One-Year Period Applies: (Aboitiz Shipping Corporation v. CA, General Accident Fire
a. Amendment of the pleadings (lack of jurisdiction). and Life Assurance Corp., G.R. No. 89757, 1990)
• However, if the dismissal is based on the merits,
the one-year period shall begin from the date of When Carrier Is Exempt From Liability Under COGSA
dismissal of the action a. If nature or value of goods knowingly and fraudulently
b. Filing of a third party complaint misstated by shipper
c. Loss or damage to cargo, excluding delay or b. If damage resulted from dangerous nature of shipment
misdelivery. loaded without consent of carrier
• Counted from the day the carrier had the last c. If unseaworthiness not due to negligence of carrier
opportunity to deliver the goods d. If deviation was to save life or property at sea
d. Subrogation (Civil Code, Art. 2207)
The insurer exercising its right of subrogation is bound by D. THE WARSAW CONVENTION
the one-year prescriptive period. However, it does not
apply to the claim against the insurer for the insurance 1. Applicability
proceeds because the claim against the insurer is based The Convention applies to all international carriage of
on contract — which expires in 10 years (Mayer Steel Pipe persons, baggage or cargo performed by aircraft for
Corp v. CA, G.R. No. 124050, 1997) reward. It applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking. (Warsaw, Art.
The one-year period shall run from delivery to the arrastre 1(1))
operator and not to the consignee (Union Carbide Phil. v.
Manila Railroad Co., G.R. No. L-27798, 1977) "International Transportation By Air" Under The
Warsaw Convention
When The One-Year Period In COGSA Is Interrupted: Under the Warsaw Convention, there are two categories of
a. When an action is filed in court; (Universal Shipping "international transportation by air":
Lines v. IAC, G.R. No. 74125, 1990); and 1. Where place of departure and place of destination are
b. When there is a contrary agreement between the situated within the territories of two High Contracting
parties. (Stevens v. Norddeuscher, G.R. No. L-17730, Parties regardless whether or not there is a break in
1962) transportation or transshipment; and
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2. Where place of departure and place of destination are of departure. He must not exercise this right of disposition
within the territory of a single High Contracting Party if in such a way as to prejudice the carrier or other
there is an agreed stopping place within a territory consignors and he must repay any expenses occasioned
subject to the sovereignty, mandate or authority of by the exercise of this right.
another power, even though the power is not a party to
the Convention (Warsaw, Art. 1(2)) The right conferred on the consignor ceases at the moment
that of the consignee begins in accordance with Art. 13.
Requisites for the Application of the Warsaw Nevertheless, if the consignee declines to accept the
Convention cargo, or if he cannot be communicated with, the consignor
a. It must be an international flight, and resumes his right of disposition. (Warsaw, Art. 12)
b. The two countries must both be signatories,
except if the international flight is that Except when the consignor exercised his right of
contemplated in (2) above. disposition, the consignee is entitled, on arrival of the cargo
at the place of destination, to require the carrier to deliver
Carriage to Be Performed By Several Successive Air the cargo to him, on payment of the charges due and on :
Carriers complying with the conditions of carriage. If the carrier
Carriage to be performed by several successive air carriers admits the loss of the cargo, or it the cargo has not arrived
is deemed to be one undivided carriage if it has been at the expiration of 7 days after the date on which it ought
regarded by the parties as a single operation, whether it to have arrived, the consignee is entitled to enforce against
had been agreed upon under a single contract or a series the carrier the rights which flow from the contract of
of contracts and it-does not lose its international character carriage. (Warsaw, Art. 13)
merely because one contract or a series of contracts is to
be performed entirely within the territory of the same State. Liability
(Warsaw, Art. 1(3))
Causes of action against the carrier
The carrier issuing the passenger's ticket is considered the d. Damage sustained in the event of the death or
principal party and other carriers merely subcontractors wounding of a passenger taking place on board the
or agents. Hence, the principal may be liable for damages aircraft or in the course of any of the operations of
even when the breach of contract had occurred not on its embarking or disembarking
own flight but on that of another airline. (British Airways v. e. Loss or damage to any checked in baggage or goods
CA, GR No. 121824, 1998) sustained during the transport by air
f. Delay in the transport by air of passengers, baggage,
Reason: The principal, in issuing a ticket with several trips or goods
to be performed by various carriers, guarantees the
performance of the successive carriers (i.e. they have a Note:
space for him and will transport him on a particular • The enumeration of causes of action is not an
segment of the trip). (Lufthansa German Airlines v. CA, GR exclusive list. The Warsaw Convention does not
No. 83612, 1994) preclude operation of the Civil Code and other
pertinent laws. (Cathay Pacific Airways, LTD. v. Court
Remedy: The remedy of the principal is to file a third-party of Appeals, G.R. No. 60501, 1993)
complaint or cross-claim against the guilty carrier. (China • In the carriage of passengers and baggage, if the
Airlines v. Chiok, GR No. 152122, 2003) carrier proves that the damage was caused by or
contributed to by the negligence of the persons
Right of Disposition suffering the damage the court may, in accordance
Subject to his liability to carry out all his obligations under with the provisions of its own law, exonerate the carrier
the contract of carriage, the consignor has the right to wholly or partly from his liability. (Warsaw, Art. 21(1))
dispose the cargo by withdrawing it at the airport of • The Warsaw Convention allows the carrier to use
departure of destination, or by stopping it in the course of contributory negligence as a defense.
the journey on any landing, or by calling for it to be
delivered at the place of destination or in the course of the Transport by Air
journey to a person other than the consignee originally It is the period during which the baggage or goods are in
designated, or by requiring it to be returned to the airport the charge of the carrier, whether in an airport or on board
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an aircraft, or in the case of landing outside an airport, in

any place whatsoever. "In the case of damage, the person entitled to delivery
must complain to the carrier forthwith after the
Plaintiffs Optional Action for Damages discovery of the damage, and, at the latest, within
It must be brought, either at the: (DPCDR) seven days from the date of receipt in the case of
• Domicile of the carrier; checked baggage and fourteen days from the date of
• Principal place of business of carrier; receipt in the case of cargo. In the case of delay, the
• Place where the contract has been made; complaint must be made at the latest within twenty-one
• Place of destination days from the date on which the baggage or cargo
• Residence of plaintiff (added by Montreal Convention) have been placed at his or her disposal."
2. Limitation on Liability This is an amendment to article 26(2) of the Warsaw

d. For each passenger - limited to 250,000 francs Convention which states that notice should be done
e. For goods and checked in baggage - limited to 250 within 14 days from the delay.
francs per kilogram
f. For hand carry - limited to 5,000 francs per Note: The notice requirement constitutes a condition
passenger precedent. Failure to comply with a condition precedent
constitutes failure to state a cause of action as a ground
When Limitations on Liability are Not Applicable for a motion to dismiss. (Federal Express Corp. v.
American Home Insurance Co., GR No. 150094, 2004)
When can a common carrier not avail of this
limitation? (WDWW) Recall:
e. Willful misconduct Code of Commerce — notice of claim is a condition
f. Default amounting to willful misconduct precedent to filing an action
9. Accepting passengers without ticket
h. Accepting goods without airway bill or baggage COGSA — notice of claim is not a condition precedent to
without baggage check filing an action
Extinguishment of Right to Damages Warsaw Convention — notice of claim is a condition

The right to damages shall be extinguished if an action is precedent to filing an action
not brought within 2 years counted from date of arrival
at the place of destination or from date on which the aircraft end of topic
ought to have arrived or from date on which the
transportation stopped. (Warsaw, Art. 29)
When 2-Year Period Does Not Apply

If the cause of action is based on the Civil Code such as 4
years if the action is based on tort or quasi-delict (United
Airlines v. Uy, G.R. No 127768, 1999)
Where the plaintiff was forestalled from filing an action

because of the defendant-airline's delaying tactics (United
Airlines v. Uy, G.R. No. 127768, 1999)
Notice Requirement
• Damage to baggage: within 3 days from receipt
• Damage to goods: within 7 days from receipt
• Delay: within 21 days from receipt
Source: The Montreal Convention, Article 31(2), to

wit:
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V. CORPORATION LAW (Provisions of BP 68, A. General Principles

not affected by RA 11232)
Definition of Corporation
TOPIC OUTLINE UNDER THE SYLLABUS An artificial being created by operation of law, having the
right of succession and the powers, attributes and
a. General principles properties expressly authorized by law or incident to its
1. Nationality of corporations existence. (Corporation Code,5 Sec. 2)
a. Place of incorporation test
b. Control test Attributes of a Corporation (Sec. 2)
c. Grandfather rule a. Artificial Being
2. Doctrine of separate juridical personality b. Created by operation of law
3. Doctrine of piercing the corporate veil c. Has right of succession — A corporation has the
b. Stock vs. non-stock corporations capacity for continuous existence despite changes in
c. De facto corporations and corporations by
stockholders/members
estoppel
d. Has only the powers, attributes, and properties
d. Board of Directors and Trustees
1. Basic principles authorized by law or incident to its existence.
a. Doctrine of centralized management
b. Business judgment rule Corporate Fiction
2. Duties, liabilities, and responsibility for
A corporation has a personality separate and distinct from
unlawful acts
e. Powers of corporations the persons composing it. (Civil Code, Arts. 44-47; PNB
t How powers are exercised v. Andrada Electric & Eng'ring Co., G.R. No. 142936,
2. Ultra vires doctrine 2002).
3. Trust fund doctrine
f. Stockholders and Members CLASSES OF CORPORATIONS
1. Doctrine of equality of shares In Relation To The State
2. Proprietary rights
a. Private corporations — Formed by private persons
a. Right to dividends
alone, by or with the State pursuant to a special
b. Right to inspect
c. Pre-emptive right charter or through a general enabling act such as the
d. Right of first refusal Corporation Code.
3. Intra-corporate disputes b. Public corporations - Formed or organized for the
a. Concept government of a portion of the state (e.g., barangay,
b. Individual vs. representative vs. derivative municipality, city and province)
suits Created for political purposes connected with the
g. Foreign Corporations public good in the administration of the civil
1. What constitutes "doing business" government
2. Personality to sue and suability Public Corporation v. Private Corporation
h. Mergers and Consolidations PRIVATE
1. Concept PUBLIC CORPORATION
CORPORATION
2. Effects and limitations
Government holds the Government may hold
controlling interest the controlling interest
Created under the
Corporation Code
Created by its charter
However, GOCC's may
also be created by
special charter
5 For purposes of this part of the reviewer, unless otherwise

specified, all references refer to The Corporation Code, Batasang
Pambansa 68. (hereinafter Corporation Code)
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Created for a public Government (Cervantes v. Auditor General, G.R. No. L-

purpose 4043, 1952).
Exists primarily for the
government of a portion of Generally created for In order to qualify as a GOCC, one must be organized
the state profit generation either as a stock or non-stock corporation. Section 31
Subject to control and defines a stock corporation as one whose "capital stock is
supervision by the State or divided into shares and ... authorized to distribute to the
its agency holders of such shares dividends." Although BCDA has an
authorized capital of P100 Billion, however, it is not divided
Note: into shares of stock; it has no voting shares; and has no
• Ownership of the government of the majority of the provision which authorizes the distribution of dividends and
shares of a corporation does not by itself constitute allotment of surplus and profits to BCDA's stockholders. It
such entity as a public corporation (National Coal Co., cannot qualify also as a non-stock corporation because its
v. Collector of Internal Revenue, G.R. No. L-22619, primary purpose do not fall within the purposes
1994). enumerated under Section 88. (BCDA v. CIR, G.R. No.
• When the law vests corporate powers in a government 205925, 20 June 2018)
instrumentality, it does not necessarily become a
corporation; a GOCC must be organized as a stock or As to Place of Incorporation
non-stock corporation. (MIAA v. CA, G.R. No. 155650, a. Domestic — one incorporated under laws of the
2006) Philippines
• Test to determine whether a corporation is public b. Foreign— one formed, organized or existing under any
or private: If the corporation is created by the State as laws other than those of the Philippines, and whose
the latter's own agency or instrumentality to help it in laws allow Filipino citizens and corporations to do
carrying out its governmental functions, then that business in its own country. (Sec. 123)
corporation is considered public; otherwise it is private.
(Philippine Society for the Prevention of Cruelty to As To Legal Status
Animals v. COA, G.R. No. 169752, 2007) a. De jure corporation
7 • Corporation organized in accordance with
c. Quasi-public corporation requirements of law;
A species of private corporations created by special • Every corporation is deemed de jure until proven
law and required to render public service or supply otherwise
public wants. (Id.)
b. De facto corporation (Sec. 20)
Usually covers school districts, water districts and the • A corporation claiming in good faith to be a
like. corporation under the Corporation Code but where
there exists a flaw in its incorporation or it falls
d. Government owned and controlled corporations short of the requirements provided by law.
(GOCCs) • It is the result of an attempt to incorporate under
Created under a special law or charter, or an existing law coupled with the exercise of
Any agency organized as a stock or non-stock corporate powers.
corporation, vested with functions relating to public • A de facto corporation will incur the same
needs whether governmental or proprietary in nature, obligations; have the same powers and rights as a
and owned by the Government of the Republic of the de jure corporation.
Philippines directly or through its instrumentalities • The due incorporation of any corporation claiming
either wholly or, where applicable as in the case of in good faith to be a corporation under the
stock corporations, to the extent of at least a majority Corporation Code, and its right to exercise
of its outstanding capital stock (R.A. No. 10149) corporate powers, shall not be inquired into
collaterally in any private suit.
Note: A GOCC when organized under the Corporation
Code is still a private corporation. But being a GOCC Under the Rules of Court Rule 66, inquiry must be done by
makes it subject to laws and provisions applicable to the the Solicitor General in a quo warranto proceeding where
Government or its entities and subject to the control of the the main issue is the right to exist as a corporation
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Elements of a de facto corporation d. Corporation by prescription
a. Valid law under which incorporated; The Roman Catholic Church is a corporation by
b. Attempt in good faith to incorporate or "colorable prescription, with acknowledged juridical personality
compliance;" inasmuch as it is an institution which antedated by almost
c. Assumption of corporate powers; and a thousand years any other personality in Europe (Bar/in v
d. Issuance of certificate of incorporation. Ramirez, G.R. No. L-2832, 1906).
(Arnold Hall v. Piccio, G.R. No. L-2598, 1950)
As To Existence of Stocks
Note: A corporation which has failed to file its by-laws a. Stock corporation
within the prescribed period does not ipso facto lose its • Corporation in which capital stock is divided into
powers as such (Sawadjaan v. CA, G.R. No. 141735, shares and is authorized to distribute to holders of
2005). such shares, dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
c. Corporation by estoppel (Sec. 21)
• Persons, who assume to act as a corporation b. Non-stock corporation (Secs. 87-88)
(exercising corporate functions, entering into • A corporation where no part of its income is
business relations with others) knowing it has no distributable as dividends to members, trustees or
authority to do so shall be liable as general officers
partners. • Any profit obtained as an incident to its operations
• Ostensible corporation cannot use as its defense shall, whenever necessary or proper, be used for
to avoid an obligation or liability its lack of the furtherance of the purpose for which the
corporate personality corporation was organized.
• Third party who assumes an obligation to an
ostensible corporation cannot resist performance As To Control
by alleging the ostensible corporation's lack of a. Holding company — one that controls another as a
personality subsidiary or affiliate by the power to elect its
management; one which holds shares in other
Certain features compared companies for purposes of control rather than for mere
DE JURE DE FACTO investment. (SEC Opinion No. 15-15)
Actually exists for all b. Affiliate company — one that is subject to common
Created in strict or practical purposes as a control of a parent or holding company and operated
substantial conformity with corporation but has no as part of a system. (SEC Opinion No. 15-15)
the statutory requirements legal right to corporate c. Parent and subsidiary companies — when a
for incorporation existence as against the corporation has a controlling financial interest in one or
State more corporations, the one having control is known as
Right to exercise powers the "parent company" and the controlled corporations
are known as the `!subsidiary companies".
Right to exist cannot be cannot be inquired into
successfully attacked even collaterally in any private
in a direct proceeding by suit. But such inquiry may As To Purpose of Incorporation
the State be made by the State in a a. Municipal corporation
proper court proceeding. b. Religious corporation
c. Educational corporation
DE FACTO ESTOPPEL
d. Charitable, Scientific or Vocational corporation
Existence in Law
e. Business corporation
Yes None
Dealings Among Parties on a Corporate Basis As To Number of Members
Not required Required a. Aggregate - a corporation which consists of many
Effect of Lack of Requisites persons united to form a body politic and corporate
Could be a corporation by Not a corporation in any (IEMELIF v. Lazaro, G.R. No. 184088, 2010).
estoppel shape or form b. Corporation sole — Formed by one person who may
be the chief archbishop, bishop, minister, rabbi, or
other presiding elder of any religious denomination,
sect or church.
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Purpose: created to administer and manage the affairs, there is no need to further trace the ownership of the 60%
properties, temporalities of the church to which the holder (or more) Filipino stockholdings of the Investing
of the office belongs and also to transmit the same to his Corporation since a corporation which is at least 60%
successor in office. Filipino-owned is considered as Filipino. (Narra Nickel
Mining and Development Corp. v. Redmont Consoidated
Mines Corp., G.R. No. 195580, 2014).
1. NATIONALITY OF CORPORATIONS
The required percentage of Filipino ownership shall be
Nationality of Corporation applied to both:
Serves as a legal basis for subjecting the enterprise or its a. The total number of outstanding shares of stock
activities to the laws, the economic and fiscal powers, and entitled to vote in the election of directors, and
various social and financial policies of the state to which it b. The total number of outstanding shares of stock,
is supposed to belong. whether or not entitled to vote in the election of
directors. (SEC Memorandum Circular No. 8, s. 2013,
Tests: Sec. 2)
1. Place of Incorporation
2. Control Test Mere legal title is not enough. Full beneficial ownership of
3. Grandfather Rule 60 percent of the outstanding capital stocks, coupled with
4. War-time — in times of war, nationality of corporation is 60 percent of the voting rights, is constitutionally required
determined by the character or citizenship of its for State's grant of authority to operate a public utility.
controlling stockholders Thus, voting rights of stocks which have been assigned or
5. Investment Test transferred to aliens cannot be considered held by
6. Place of Principal Business Philippine citizens or nationals (cannot give proxies to
vote). (Roy Ill v. Herbosa, et al., G.R. No. 207246, 2016)
General rule: Nationality of a corporation is ordinarily
determined by the country under whose laws it is The definition of "beneficial owner or beneficial ownership
incorporated (Place of Incorporation Test). in the SRC-1RR, which is in consonance with the concept
of "full beneficial ownership" in the FIA-IRR, is relevant is
Exception: Test of Controlling Ownership resoling only the question of who is the beneficial owner or
has beneficial ownership of each "specific stock" of the
A. Place of Incorporation Test public utility whose stocks are under review. If the Filipino
A corporation is a national of the country under whose laws has the voting power of the "specific stock", i.e., he can
it has been organized and registered vote the stock or direct another to vote for him, or the
Filipino has the investment power over the "specific stock",
B. Control Test i.e., he can dispose of that "specific stock" or direct another
In cases involving properties, business or industries to vote or dispose it for him, then such Filipino is the
reserved for Filipinos, in addition to the place of "beneficial owner" of that "specific stock." Being considered
incorporation test, the nationality of a corporation is Filipino, that "specific stock" is them to be counted as part
determined by the nationality of the "controlling of the 60% Filipino ownership requirement under the
stockholders". Constitution. The right to the dividents, jus fruendi—a right
Absent any doubt, the Control Test shall be used in emanating from ownership of that "specific stock"
determining the nationality of a corporation specially in necessary accrues to its Filipino "beneficial owner." (Roy
cases where foreign ownership restrictions apply. (SEC III v. Herbosa, G.R. No. 207246 (Resolution), 18 April
OGC Opinion No. 16-19) 2017.)
[T]here are two cases in determining the nationality of the General rule: The Control Test cannot overcome the
Investee Corporation. The first case is the 'liberal rule', Place of Incorporation Test.
later coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said Paragraph Exception: A corporation organized abroad and registered
7 of the 1967 SEC Rules which states, '(s)hares belonging as doing business in the Philippines under the Corporation
to corporations or partnerships at least 60% of the capital Code, whose capital outstanding stock and entitled to vote
of which is owned by Filipino citizens shall be considered is wholly owned by Filipinos is a Philippine National. (SEC
as of Philippine nationality.' Under the liberal Control Test,
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Opinion No. 04-14 in reference to the Foreign Investments have a 30% Filipino interest in XYZ Company (60% of
Act) 50%), while AC Corporation would have a 25% Filipino
interest in XYZ Company (50% of 50%). Hence, the total
Some instances wherein the control test applies: Filipino interest is only 55%.
a. Exploitation of natural resources (> 60%)
• Sec 2, Art XII, 1987 Constitution — policy of the The Control test is still the prevailing mode of determining
State is to ensure that the exploitation of natural whether or not a corporation is a Filipino corporation within
resources or the pursuit of the activities deemed to the ambit of the natural resources provisions of the
be of public or national interest are in the control Constitution. But when in the mind of the court there is
of the Filipinos doubt based on attendant facts and circumstances, in the
• The State may directly undertake such activities, 60-40 Filipino equity ownership in the corporation, then it
or it may enter into co-production, joint venture, or may apply the grandfather rule (Narra Nickel Mining and
production sharing agreements with: Development Corp. v. Redmont Consoidated Mines Corp.,
o Filipino citizens; or G.R. No. 195580, 2014).
o Corporations or associations, at least 60%
owned by such citizens War-Time Test
b. Public Utilities (> 60%) In times of war, nationality of corporation is determined by
• Sec 11, Art XII, 1987 Constitution — requires that the character or citizenship of its controlling stockholders
only domestic corporations with at least 60% of the
capital stock owned by Filipinos may own and Investment Test
operate public utilities in the Philippines
c. Mass Media (100%) "P.hilippine_National"
• Sec 11, Art XVI, 1987 Constitution — ownership of a. A corporation organized under Philippine laws of which
mass media shall be limited to the citizens of the at least 60% of the outstanding capital stock entitled to
Philippines, or to corporations, cooperatives or vote is owned and held by Filipino citizens; and
associations, wholly-owned and managed by such b. A corporation organized abroad and registered as
citizens (100% Filipino management of the entity) "doing business" in the Philippines under the
• Cable Industry - CATV as "a form of mass media Corporation Code of which 100% of the capital stock
which must, therefore, be owned and managed by entitled to vote belong to Filipinos (P.A. No. 7042, Sec.
Filipino citizens, or corporations, cooperatives or 3[a], as amended)
associations, wholly-owned and managed ,by
Filipino citizens pursuant to the mandate of the Double 60% Rule
Constitution." (DOJ Opinion No. 95, series of Where a corporation and its non-Filipino stockholders own
1999). stock in a SEC-registered enterprise, at least 60% of the
d. Advertising Industry (> 70%) outstanding capital stock and entitled to vote of both
corporations and at least 60% of the members of the Board
• Sec 11, Art XVI, 1987 Constitution — only Filipino
citizens or corporations or associations at least of Directors of both corporations must be Filipino citizens
70% of the capital of which is owned by such (R.A. No. 7042, Sec. Nal as amended)
citizens shall be allowed to engage in the
advertising agency Place of Principal Business Test
Residence of a corporation is the place where its principal
C. Grandfather Rule office is located, as stated in its Articles of Incorporation.
Where corporate shareholders are present (and when the
Filipino-foreign equity ownership is in doubt), the The place where the principal office of the corporation is to
percentage of the Filipino equity in corporations is be located is one of the required contents of the articles of
computed by attributing the nationality of the second or incorporation to be filed with the SEC (Hyatt Elevators v.
subsequent tier of ownership to determine the nationality Goldstar, G.R. No. 161026, 2005).
of the corporate shareholder
Applied to determine whether a state has jurisdiction over
Example: MV Corporation and AC Corporation have equal the existence and legal character of a corporation, its
interest in XYZ Company. MV Corporation is 60% owned capacity or powers, internal organization, capital structure,
by Filipinos, while AC Corporation is 50% owned by the rights and liabilities of directors, officers, and
Filipinos. By the grandfather rule, MV Corporation would
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shareholders towards each other and to creditors and third Entering Into Partnerships
persons. The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
Corporation v. Partnership incorporation of the corporation;
CORPORATION I PARTNERSHIP
Manner of Creation The nature of the business venture to be undertaken by the
Commences only from the By mere agreement partnership is in line with the business authorized by the
issuance of a Certificate of charter or articles of incorporation of the corporation
Incorporation by the SEC, involved; and
or, in proper cases,
passage of a special law The agreement on the articles of the partnership must
Number of Organizers provide that all the partners shall manage the partnership,
At least 5 persons to a At least 2 and the articles of partnership must stipulate that all the
maximum of 15 partners shall be jointly and severally liable for all the
obligations of the partnership
Powers
Restricted due to limited Subject to the agreement
Can a defective corporation result into a partnership?
powers of partners
(Two Views)
Authority of Those Who Compose It
Stockholders are not Mutual agency between
No Partnership: When investors intended only to invest in
agents of the corporation in partners
a corporate venture with no intention of participating in its
the absence of express
corporate affairs, and the corporation was not formed, no
authority
partnership relation is established by the failure to
Transfers of Interest
incorporate, such investors cannot even be held liable for
Freely transferable without Cannot be transferred the contracts and transactions sued upon. (Pioneer
the consent of other without the consent of the
Insurance v. CA, G.R. No. 84197, 1989)
stockholders (unless there other partners
is a stipulation to the Partnership Exists: However, when there Was a clear
thntrary)
intention to form a partnership veraire through a corporate
Succession vehicle (there was intention to be active participants in the
Existence continues even Death of a partner ends corporation's business), even those who did not directly
as persons who compose it the partnership participate in the contract or transaction being sued upon,
change but benefitted therefrom may be held liable as general
partners. (Lim Tong Lim v. Philippine Fishing Gear, G.R.
Corporations as partners in a partnership No. 136448, 1999)
Old rule: 2. CORPORATE JURIDICAL PERSONALITY
Although a corporation cannot enter into a partnership
contract, it may engage in a joint venture with others 1. Doctrine of Separate Juridical Personality
(Aurbach v. Sanitary Wares Manufacturing, G.R. No. A corporation is a juridical entity with a legal personality
75875, 1989). separate and distinct from those acting for and on its
behalf, and, in general, from the people comprising it; the
The SEC has maintained this stand on the ground that the obligations incurred by the corporation, acting through its
management of a partnership is vested in the partners directors, officers and employees are its sole liabilities
which is contrary to the idea that any exposure of the (Santos v NLRC, G.R. No. 101699, 1996).
corporation should be within the control of the directors.
While a share of stock represents a proportionate or aliquot
Current rule: SEC Guidelines re: Corporations (SEC interest in the property of the corporation, it does not vest
Opinion 16-22) the owner thereof with any legal right or title to any of the
corporate property, his interest in such property being
equitable or beneficial in nature. Shareholders are in no
legal sense the owners 0' corporate property, which is
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owned by the corporation as a distinct legal person for the crime, precisely because of the nature of the crime
(Magsaysay-Labrador v CA. G.R. No. 58168, 1989). and the penalty therefore. However, the corporation may
be charged and prosecuted for a crime if the imposable
Corporate Liability penalty is fine (Ching v. Secretary of Justice, G.R. No.
164317, 2006).
a. Liability for Torts and Crimes
When a law expressly provides that a corporation may be
On Torts proceeded against criminally, the responsible officer will be
A corporation is civilly liable in the same manner as natural held personally liable for the crimes committed by the
persons for torts, because the rules governing the liability corporation. However, such liability will only attach to the
of a principal for a tort committed by an agent are the same officer when the corporation is directly required by law to
whether the principal be a natural person or a corporation, do an act in a given manner, and the same law makes the
and whether the agent be a natural or artificial person. That person who fails to perform the act in the prescribed
a principal is liable for every tort which he expressly directs manner expressly liable 'criminally (Sia v. Court of Appeals,
or authorizes, is just as true of a corporation as a natural G.R. No. 108222, 1997).
person (PNB v. CA, G.R. No. L-27155, 1978). • For example, under the Anti-Money Laundering Act,
juridical persons are also defined as offenders.
A corporate officer who caused the tort act to be committed
in the name of the corporation is also personally liable as b. Recovery of Moral Damages
a joint-tortfeasor.
General rule: A corporation cannot recover moral
The failure of the corporate employer to comply with a legal damages as it cannot suffer physical suffering and mental
duty, such as under the Labor Code to grant separation anguish (Prime White Cement v IAC, G.R. No. L-68555,
pay to employees constitutes tort and its stockholder who 1993).
was actively engaged in the management of the business
should be held personally liable (Naguiat v. NLRC, G.R. Exception: A corporation with a good reputation, if
No. 116123, 1997). besmirched, is allowed to recover moral damages upon
proof of existence of factual basis of damage (actual injury)
A corporation can be held liable for the tortuous acts of a and its causal relation (Crystal v. BPI, G.R. No. 172428,
corporate officer, in the absence of a prior express 2008).
direction from the BOD, if such was a connected to the
business of the corporation. The following Constitutional rights apply to a
corporation:
The remedy of the corporation is to recover damages
against the acting corporate officer responsible for the a. Due process - The due process clause is universal in
tortuous act. its application to all persons without regard to any
differences of race, color, or nationality. Private
On Crimes corporations, likewise, are "persons" within the scope
General rule: Corporations cannot commit felonies under of the guaranty insofar as their property is concerned."
the RPC for it is incapable of the requisite intent to commit (Smith Bell & Co. v. Natividad, G.R. No. 15574, 1919).
these crimes. b. Equal protection of the law (Smith Bell & Co. v.
Natividad, G.R. No. 15574, 1919)
It also cannot commit crimes that are punishable under c. Unreasonable searches and seizures - (Stonehill v.
special laws because crimes are personal in nature Diokno, G.R. No. L-19550, 1967).
requiring personal performance of overt acts.
In organizing itself as a collective body, the corporation
A corporation cannot be arrested and imprisoned; hence, waives no constitutional immunities applicable to it. Its
cannot be penalized for a crime punishable by property cannot be taken without compensation; can only
imprisonment. be proceeded against by due process of law; and is
protected against unlawful discrimination (Bache & Co.
Exceptions: If the crime is committed by a corporation, the (Phil.), Inc. v. Ruiz, G.R. No. 32409, 1971, citing Hale v.
directors, officers, employees or other officers thereof Henkel, 201 U.S. 43, 50 L.Ed. 652.).
responsible for the offense shall be charged and penalized
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Note: The right against self-incrimination has no corporate legal entity is used as a cloak for fraud or
application to juridical persons. (Bataan Shipyard v. illegality (Kukan v Reyes, G.R. No. 182729, 2010).
PCGG, G.R. No. 75885, 1987)
• The right against self-incrimination refers only to It is an equitable doctrine used as a last resort only when
testimonial compulsion; the objective is to hold the officers and/or stockholders
liable. Thus, in one case, it cannot be applied in order to
• A corporation cannot testify; and
declare a foreclosure proceeding a nullity (Umali v. CA, GR
• The State can freely open the books of the No. 89561, 1990).
corporation to ensure that it does not exceed its
powers a. Grounds for Possible Application of Doctrine
• The parent corporation owns all or most of the capital
On Jurisdiction of RTC in Intra-Corporate Disputes: of the subsidiary.
Section 5 of the Securities Regulation Code transferred the • The parent and subsidiary corporations have common
jurisdiction of the (SEC) over intra-corporate disputes to directors or officers.
RTCs designated by the Supreme Court as commercial • The parent company finances the subsidiary.
courts. The existence of an intra-corporate dispute must be • The parent company subscribed to all the capital stock
clearly alleged in the complaint. of the subsidiary or otherwise causes its incorporation.
• The subsidiary has grossly inadequate capital.
Two tests to determine existence of intra-corporate • The parent corporation pays the salaries and other
dispute expenses or losses of the subsidiary.
• The subsidiary has substantially no business except
Relationship Test with the parent corporation or no assets except those
conveyed to or by the parent corporation.
A dispute is intra-corporate if it is:
• The papers of the parent corporation or in the
1. Between the corporation, partnership or
statements of its officers, the subsidiary is described
association and the public;
as a department or subdivision of the parent
2. Between the corporation, partnership or corporation, or its business or financial responsibility is
association and the state insofar as its franchise, referred to as the parent corporation's own.
permit or license to operate is concerned; • The parent corporation uses the property of the
3. Between the corporation, partnership or subsidiary as its own.
association and its stockholders, partners, • The directors or executives of the subsidiary do no act
members or officers; and independently in the interest of the subsidiary but take
4. Among the stockholders, partners or associates their orders from the parent corporation.
themselves (Philippine Communications Satellite • The formal legal requirements of the subsidiary are not
Corp. v. Sandiganbayan, G.R. No. 203023, 2015) observed (Phil. National Bank v. Ritratto Group, Inc.,
GR No. 142616, 2001).
Nature of the Controversy Test
The dispute itself must be intrinsically connected with the Note: Mere ownership by a single stockholder or by
regulation of the corporation, partnership or association. another corporation of all or substantially all of the capital
stock of the corporation does not justify the application of
the doctrine (Francisco v. Mejia, G.R. No. 141617, 2001).
The controversy "must not only be rooted in the existence
of an intra-corporate relationship, but must also refer to the Classification of piercing cases:
enforcement of the parties' correlative rights and a. Fraud piercing — when corporate entity is used to
obligations under the Corporation Code as well as the commit fraud or justify a wrong or to defend a crime.
internal and intra-corporate regulatory rules of the b. Alter-ego piercing — when corporate entity is used to
corporation." (Dy Teban Trading Inc. V. Dy, G.R. No. defeat public convenience or is merely a farce since
161803, 2008) the corporation is merely the alter ego, business
conduit, or instrumentality of a person or another
3. Doctrine of Piercing the Veil of Corporate Fiction entity.
c. Equity cases — when piercing the corporate fiction is
Under certain circumstances, the courts may disregard the necessary to achieve justice or equity.
separate and distinct personality of the corporation from its
members or stockholders and treat the corporation as a Note: The three cases may appear together in one
mere collection of individuals or an aggregation of persons application (R.F. Sugay & Co. v. Reyes, G.R. No. L-20451,
undertaking business as a group such as when the 1964).
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Implications of the Existence of the Corporate Veil d) Assumption as a corporate officer
Being an officer or stockholder of a corporation does not
a) Controlling interest of and/or dealings in by itself make one's property also of the corporation, and
shareholdings vice-versa, for they are separate entities, and that
Ownership of a majority of capital stock and the fact that shareholders are in no legal sense the owners of corporate
majority of directors of a corporation are the directors of property which is owned by the corporation as a distinct
another corporation creates no employer-employee legal person (Good Earth Emporium, Inc. v. CA, G.R. No.
relationship with the latter's employees (DBP v. NLRC, 82797, 1991).
G.R. No. 86932, 1990; Francisco, et al. v. Mejia, G.R. No.
141617, 2001). The mere fact that one is president of the corporation does
not render the property he owns or possesses the property
The mere fact that a stockholder sells his shares of stock of the corporation, since that president, as an individual,
in the corporation during the pendency of a collection case and the corporation, are separate entities (Cruz v. Dalisay,
against the corporation, does not make such stockholder A.M. No. R-181-D, 1987).
personally liable for the corporate debt, since the disposing
stockholder has no personal obligation to the creditor, and e) Properties, obligations and debts
it is the inherent right of the stockholder to dispose of his A corporation has no legal standing to file a suit for
shares of stock anytime he so desires (Remo, Jr. v. IAC, recovery of certain parcels of land owned by its members
G.R. No. L-67626, 1989). in their individual capacity, even when the corporation is
organized for the benefit of the members (Subo ng Bayan
Mere substantial identity of the incorporators of the two v. Araneta, Inc., G.R. No. L-31061, 1976).
corporations does not necessarily imply fraud, nor warrant
the piercing of the veil of corporate fiction. In the absence The corporate debt or credit is not the debt or credit of the
of clear and convincing evidence to show that the stockholder nor is the stockholder's debt or credit that of
corporate personalities were used to perpetuate fraud, or the corporation (Traders Royal Bank v. CA, G.R. No. L-
circumvent the law, the corporations are to be treated as 78412, 1989).
distinct and separate from each other (Laguio v. NLRC,
G.R. No. 108936, 1996). Stockholders have no personality to intervene in a
collection case covering the loans of the corporation on the
b) Transaction amongst the corporation and ground that the interest of shareholders in corporate
stockholders property is purely inchoate (Saw v. CA, G.R. No. 90580,
1991).
The transfer of the corporate assets to the stockholder is
not in the nature of a partition but is a conveyance from The interests of payees in promissory notes cannot be off-
one party to another (Stockholders of F. Guanzon and set against the obligations between the corporations to
Sons, Inc. v. Register of Deeds of Manila, G.R. No. L- which they are stockholders absent any allegation, much
18216, 1962). less, even a scintilla of substantiation, that the parties
interest in the corporation are so considerable as to merit
Note: A corporation may not be made to answer for acts a declaration of unity of their civil personalities (CKH
or liabilities of its stockholders or those of the legal entities Industrial and Development Corp. v. CA, G.R. No. 111890,
which it may be connected and vice-versa (ARB 1997).
Constructions Co., Inc. v. Court of Appeals, G.R. No.
126554, 2000). Even when the foreclosure on the assets of the corporation
was wrongful and done in bad faith, the stockholders of the
c) Pertaining to privileges enjoyed corporation have no standing to recover for themselves
The tax privileges enjoyed by a corporation do not extend moral damages. Otherwise, it would amount to the
to its stockholders. A corporation has a personality distinct appropriation by, and the distribution to, such stockholders
from that of its stockholders, enabling the taxing power to of part of the corporation's assets before the dissolution of
reach the latter when they receive dividends from the the corporation and the liquidation of its debts and liabilities
corporation. It must be considered as settled in this (APT v. CA, G.R. No. 121171, 1998).
jurisdiction that dividends of a domestic corporation which
are paid and delivered in cash to foreign corporations as Where real properties included in the inventory of the
stockholders are subject to the payment of the income tax, estate of a decedent are in the possession of and are
the exemption clause to the charter [of the domestic registered in the name of the corporations, in the absence
corporation] notwithstanding. (Manila Gas Corporation. v. of any cngency to shred the veil of corporate fiction, the
Collector of Internal Revenue, G.R. No.L-42780, 1936). presumption of conclusiveness of said titles in favor of said
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corporations should stand undisturbed (Lim v. CA, G.R. (c) Piercing is forbidden when the personal obligations
No. 124715, 2000). of an individual are sought to be enforced against
the corporation (Robledo v. NLRC, G.R. No. 110358,
f) Third-parties to corporate acts 1994).
The fact that respondents are not stockholders of the (d) To disregard the separate juridical personality of a
disputed corporations does not make them non-parties to corporation, the wrongdoing must be clearly and
the case. In this case, it is alleged that the aforementioned convincingly established. It cannot be presumed
corporations are mere alter egos of the directors- (DBP vs. CA, G.R. No. 126200, 2001).
petitioners, and that the former acquired the properties (e) Piercing of the veil of corporate fiction is not allowed
sought to be reconveyed to FGSRC in violation of when it is resorted to justify under a theory of co-
directors-petitioners' fiduciary duty to FGSRC. ownership the continued use and possession by
stockholders of corporate properties (Boyer-Roxas
The notion of corporate entity will be pierced or v. Court of Appeals, G.R. No. 100866, 1992).
disregarded and the individuals composing it will be treated (f) The piercing doctrine cannot be availed of in order to
as identical if, as alleged in the present case, the corporate dislodge from the jurisdiction of the SEC the
entity is being used as a cloak or cover for fraud or petition for suspension of payments filed under Section
illegality; as a justification for a wrong; or as an alter ego, 5(e) of Pres. Decree No. 902-A, on the ground that the
an adjunct, or a business conduit for the sole benefit of the petitioning individuals should be treated as the real
stockholders (Gochan v. Young, G.R. No. 131889, 2001). petitioners to the exclusion of the petitioning corporate
debtor (Union Bank v. CA, G.R. No. 131729, 1998).
Elements to justify piercing on the ground that the (9) Changing of the petitioner's subsidiary liabilities by
corporation is a mere alter ego: (CUP) converting them to guarantors of bad debts cannot be
a. Control — not mere stock control but Complete done by piercing the veil of corporate identity (Ramoso
Domination — not only of finances, but of policy and v. CA, G.R. No. 117416, 2000)
business practice in respect to •the transaction (h) Piercing doctrine is meant to prevent fraud, and
attacked and must have been such that the corporate cannot be employed to perpetrate fraud or a wrong
entity as to this transaction had at the time no (Araneta, Inc. v. Tuason, G.R. No. L-2886, 1952).
separate mind, will or existence of its own. (i) Corporate persons are entitled to due process
b. Such control must have been Used by the defendant protection. Thus, failure to implead a corporation in
to commit a fraud or wrong to perpetuate the a suit for recovery of ill-gotten wealth against its
violation of a statutory or other positive legal breach stockholders cannot bind, the corporation itself;
of duty, or a dishonest and an unjust act in otherwise, its fundamental right to due process will be
contravention of the plaintiffs legal right; and, violated. (COCOFED v. Republic, G.R. No. 177857-
c. The said control and breach of duty must have 58, 2016)
Proximately caused the injury or unjust loss (j) Mere ownership of all or nearly all of the capital stocks
complained of (PNB v. Andrada Electric & of a corporation is not in itself a sufficient reason for
Engineering Company, GR No. 142936, 2002). disregarding the fiction of separate corporate
personalities. The probate court applied doctrine of
The veil may not always be pierced, especially in the piercing the corporate veil since Rosario had no other
following circumstances: properties that comprise her estate other than her
(a) Piercing is remedy of last resort and is not available shares. Although the intention to protect the shares
when other remedies are still available (Umali v. CA, from dissipation is laudable, it is still an error to order
G.R. No. 89561, 1990). tenants to remit payments to the estate. Also, court has
(b) Piercing is forbidden unless the remedy sought is to not acquired jurisdiction over Primrose and its
make the stockholder, officer or another properties. Piercing applies to the determination of
corporation pecuniarily liable for corporate debts liability not of jurisdiction. It is not available to
(Umali v. CA, G.R. No. 89561, 1990; Indophil Textile confer jurisdiction over a party not impleaded in a
Mill Workers Union-PTGWO v. Calica, G.R. No. case. (Mayor v. Tiu, G.R. No. 203770, 2016)
96490, 1992).
Parameters to Illuminate the Piercing Process
Note: However, piercing in alter ego cases may prevail
even when no monetary claims are sought to be For Fraud Cases:
enforced against the stockholders or officers of the (a) There must have been fraud or an evil motive in the
corporation. (e.g. piercing for other purposes such as affected transaction, and the mere proof of control of
laborer's rights) the corporation by itself would not authorize piercing;
and
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(b) The main action should seek for the enforcement of m) The doctrine in such cases is based on estoppel: if
pecuniary claims pertaining to the corporation against stockholders do not respect the separate entity, others
corporate officers or stockholders. cannot also be expected to be bound by the separate
juridical entity.
For Alter-ego Cases: n) Piercing in alter ego cases may -prevail even when no
a) Where the stock of a corporation is owned by one monetary claims are sought to be enforced against the
person whereby the corporation functions only for the stockholders or officers of the corporation.
benefit of such individual owner, the corporation and
the individual should be deemed the same (Arnold v. For Equity Cases:
Whets and Patterson, Ltd., G.R. No. L-20214, 1923). a) When used to confuse legitimate issues (Telephone
b) When the corporation is merely an adjunct, business Engineering and Service Co., inc. V. WCC, G.R. No.
conduit or alter ego of another corporation, the fiction L-28694, 1981).
of separate and distinct corporation entities should be b) When used to raise technicalities (Emilio Cano Ent. v.
disregarded (Tan Boon Bee & Co. v. Jarencio, G.R. C1R, G.R. No. L-20502, 1965).
No. L-41337, 1988).
c) Employment of same workers; single place of
business, etc. (La Campana Coffee Factory v. INCORPORATION AND ORGANIZATION
Kaisahan ng Manggagawa, G.R. No. L-5677, 1953).
d) Use of nominees (Marvel Building v. David, G.R. No. 1. Number and Qualifications of Incorporators
L-508, 1951)
e) Avoidance of tax. (Yutivo Sons Hardware v. Court of Promoter
Tax Appeals, G.R. No. L-13203, 1981; Liddell& Co. v. A person who, acting alone or with others, takes initiative
Collector ofInternal Revenue, G.R. No. L-9687, 1961). in founding and organizing the business or enterprise of
f) Mixing of bank deposit accounts. (Ramirez Telephone the issuer and receives consideration therefor. (Securities
Corp. v. Bank of America, G.R. No. L-22614, 1969). Regulation Code, Sec. 3.10. [R.A. 8799])
g) Where it appears that two business enterprises are
owned, conducted, and controlled by the same parties,
Liability of a Promoter
both law and equity will, when necessary to protect the
rights of third persons, disregard the legal fiction that General rule: Promoter is personally liable in the event the
two corporations are distinct entities and treat them as corporation is not_duly incorporated.
identical (Sibagat Timber Corp. v. Garcia, G.R. No.
98185, 1992) Exception: Investors who were not the "moving spirit"
h) Thinly-capitalized corporations (McConnel v. Court of behind the organization of the corporation, but who were
Appeals, G.R. No. L-10510, 1961). merely convinced to invest in the proposed corporate
i) Parent-subsidiary relationship. (Koppel (Phil.), Inc. v. venture on the basis of the feasibility study undertaken, are
Yatco, G.R. No. L-47673,1946; Philippine Veterans not liable personally with the corporation for the cost of
Investment Development Corporation v. CA, G.R. No. such feasibility study.(Caram, Jr. v. CA, G.R. No. L-48627,
85266, 1990) 1987)
l) Affiliated companies (Guatson International Travel and
Tours, Inc. v. NLRC, G.R. No. 100322, 1994)
Liability of Corporation for Promoter's Contracts
k) Summary of Probative Factors (Philippine National
General Rule: Corporation is not bound to a contract
Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616,
2001; Concept Builders, Inc. v. NLRC, G.R. No. made by a promoter before its incorporation (Cagayan
108734, 1996): Whether the separate personality of Fishing v. Sandiko, G.R. No. L-43350, 1937)
the corporation should be pierced depends on
questions of facts, appropriately pleaded. Mere Exceptions:
allegation that -a corporation is the alter ego of the a) Adopts or ratifies the contract; or
individual stockholders is insufficient. The presumption b) Accepts its benefits with knowledge of the terms
is that the stockholders or officers and the corporation thereof (Rizal Light v. Morong, G.R. No. L-20993,
are distinct entities. The burden of proving otherwise is 1968)
on the party seeking to have the court pierce the veil
of corporate entity (Ramoso v. CA, G.R. No. 117416, Ratification is the key element in upholding the validity
2000).
and enforceability of promoter's contracts. Without
I) The doctrine applies in this case even in the absence
ratification by a corporation after its due incorporation, a
of evil intent; it applies because of the direct violation
of a central corporate law principle of separating ccntract entered into in behalf of a corporation yet to be
ownership from management. organized or still in the process of incorporation is void as
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against the corporation (Cagayan Fishing Development may protect its tangible property against trespass or
Co., Inc. V. Teodoro Sandiko, G.R. No. L-43350, 1937). conversion (Philips Export v. CA, G.R. No. 96161, 1992)
Although a franchise may be treated as a contract, Statutory Limitations on Use of Corporate Name
1. The eventual incorporation of the applicant The proposed name must not be:
corporation after the grant of the franchise; and a. Identical;
2. Its acceptance of the franchise as shown by its b. Deceptively or confusingly similar to that of any
action in prosecuting the application filed with the existing corporation, including internationally known
Commission for the approval of said franchise, foreign corporation though not used in the Philippines,
or to any other name already protected by law; or
...not only perfected a contract between the respondent c. Patently deceptive, confusing, or contrary to law (Sec.
municipality and Morong Electric but cured the deficiency 18)
in the application of Morong Electric (Rizal Light & Ice Co., d. Name already protected by law;
v. Municipality of Morong, Rizal, G.R. No. L-20993, 1968). e. Name which is contrary to law, morals or public policy
Persons Relevant to the Corporation and their Other Limitations
Qualifications a. Must contain the word "Incorporated" or "Inc" unless it
1) Incorporators — those mentioned in the articles of includes the word "Corporation" or "Corp"
incorporation as originally forming and composing the b. Those prohibited under special laws
corporation, having signed the articles and c. Use of generic, geographical, and descriptive terms
acknowledged the same before the notary public. They and names;
must be d. Use of trade name of another corporation; and
a. Natural persons (but under RA 720 or Rural e. Other policies provided by the SEC Memorandum No.
Banks Act, cooperatives can be 14, Series of 2000
incorporators);
b. At least five (5) but not more than fifteen (15); A corporation has the power to change its name by
c. Of Legal Age; following the procedure laid down by law. However, such
,
d. :-Majority must be residents of the Philippines; change would not result in its dissolution.
and
e. Each must own or subscribe to at least one Doctrine of Secondary Meaning
share (for stock corporations). (Sec. 10) General Rule: A corporation whose corporate name is a
2) Corporators — All the stockholders and members of a word or phrase which is generally descriptive or
corporation including the incorporators who are still geographical cannot prevent another corporation, which
stockholders. (Sec. 5) uses the same or phrase as its corporate name, from using
3) Stockholders — Corporators in a stock corporation such.
4) Members — Corporators in a non-stock corporation
5) Directors and trustees — The Board of Directors is Exception: A word or phrase originally incapable of
the governing body in a stock corporation while the exclusive appropriation with reference to an article on the
Board of Trustees is the governing body in a non-stock market because geographically or otherwise descriptive,
corporation. might nevertheless have been used so long and so
6) Corporate officers — They are the officers who are exclusively by one producer with reference to his article
identified as such in the Corporation Code, the Articles that, in that trade and to that branch of the purchasing
of Incorporation or the By-laws of the corporation. public, the word or phrase has come to mean that the
7) Promoter — A self-constituted organizer who finds an article was his product. (Lyceum v. CA, G.R. No. 101897,
enterprise or venture and helps to attract investors, 1993)
forms a corporation and launches it in business, all
with a view to promotion profits. Change of Corporate Name
A corporation may change its name by the amendment of
2. Corporate Name its articles of incorporation, but the same is not effective
A corporation's right to use its corporate and trade name is until approved by the SEC (Philippine First Insurance Co.
a property right, it is a right in rem which it may assert or v. Hartigan, G.R. No. L-26370, 1970).
protect against the whole world in the same manner aF it
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A change in the corporate name does not make a new Exception:
corporation, and whether affected by special act or under There are justifiable reasons, as determined by the SEC,
a general law, has no effect on the identity of the for an earlier extension.
corporation, or on its property, rights, or liabilities (Republic
Planters Bank v. CA, G.R. No. 93073, 1992). How to extend — amend articles of incorporation during
the life of the corporation before the expiry of its term
Other Doctrines: Corporate Name
Similarity in corporate names between two corporations Upon expiration of the period fixed in the articles of
would cause confusion to the public especially when the incorporation, in the absence of compliance with the legal
purposes stated in their charter are also the same type of requisites for the extension of the period, the corporation
business (Universal Mills Corp. v. Universal Textile Mills ceases to exist and is dissolved ipso facto (PNB v. CFI
Inc., G.R. No. L-28351, 1977). Rizal, G.R. No. 63201, 1992)
A corporation has no right to intervene in a suit using a Doctrine of Relations or Relating Back Doctrine
name other than its registered name; if a corporation Where the delay in affecting the amendment is due to the
legally and truly wants to intervene, it should have used its neglect of the officer with whom the certificate is required
corporate name as the law requires and not another name to be filed, or to a wrongful refusal on his part to receive it,
which it had not registered (Laureano Investment & the same will be treated as having been filed before the
Development Corp. v. CA, G.R. No. 100468, 1997). expiry date. The doctrine does not apply where the delay
is attributable to the corporation (Alhambra Cigar v. SEC,
There would be no denial of due process when a G.R. No. L-23606, 1968)
corporation is sued and judgment is rendered against it
under its unregistered trade name, holding that a 4. Minimum Capital Stock And Subscription
corporation may be sued under the name by which it Requirements
makes itself known to its workers (Pison-Arceo Agricultural
Development Corp. v. NLRC, G.R. No. 117890, 1997). At the time of incorporation:
• At least 25% of authorized capital stock as stated in
To determine the existence of confusing similarity in the articles of incorporation must be subscribed
corporate names, the test is whether the similarity is • At least 25% of total subscription must be paid upon
such as to mislead a person, using ordinary care and subscription, the balance to be payable on a date or
discrimination. In so doing, the court must examine the dates fixed in the contract of subscription without need
record as well as the names themselves. Proof of actual of call, or in the absence of a fixed date or dates, upon
confusion need not be shown. It suffices that call for payment by the board of directors.
confusion is probably or likely to occur. (Indian
Chamber of Commerce PhiIs, Inc. v. Filipino Indian No minimum authorized capital stock required except if
Chamber of Commerce in the Philippines, Inc., G.R. No. required by special laws (Sec 12 and 13). However, since
184008, 2016) the law requires the minimum paid —up capital to be not
less than P5,000, all corporations must have a minimum
3. Corporate Term authorized capital stock of P5,000.
General Rule: The Corporation shall exist for the term Call
specified in the articles of incorporation Term used when the Board formally asks for payment of
the balance of your subscriptions or a part thereof
Limitations:
a. The corporate term shall not exceed 50 years; unless: 5. Articles of Incorporation
i. Sooner dissolved, or
ii. Extended for periods not exceeding 50 years in a. Nature and Function of Articles
any instance The Articles of Incorporation is a basic contract document
iii. The extension cannot be made earlier than 5 in Corporate Law which defines the charter of the
years prior to the expiration date (Sec. 11) corporation. Section 14 of the Corporation Code provides
that the Articles of Incorporation do not become binding as
the charter of the corporation unless they have been filed
with and registered with the SEC.
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Note: Articles of Incorporation must be accompanied by a
Note: The Articles of Incorporation defines the contractual sworn statement of the Treasurer elected by the
relationships between the State and the corporation, the subscribers showing that at least twenty-five (25%) percent
stockholders and the State, and between the corporation of the authorized capital stock of the corporation has been
and its stockholders (Lanuza v. CA, G.R. No. 131394, subscribed, and at least twenty-five (25%) of the total
2005). subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal to at
b. Contents (Sec. 14) least twenty-five (25%) percent of the said subscription,
All corporations organized under the Corporation Code such paid-up capital being not less than five thousand
shall file with the Securities and Exchange Commission (P5,000.00) pesos.
Articles of Incorporation in any of the official languages
duly signed and acknowledged by all of the incorporators, c. Amendments
containing substantially the following matters, except as
otherwise prescribed by the Corporation Code or by Requirement for Amending Articles of Incorporation
special law: (Sec. 16)
a. The name of the corporation; a. A legitimate purpose for the amendment;
b. The specific purpose or purposes for which the b. Majority vote of directors or trustees and the vote or
corporation is being incorporated. Where a corporation written assent of the stockholders representing at least
has more than one stated purpose, the articles of two-thirds (2/3) of the outstanding capital stock,
incorporation shall state which is the primary purpose without prejudice to the appraisal right of dissenting
and which is/are the secondary purpose or purposes: stockholders if available, or two-thirds (2/3) of the
Provided, That a non-stock corporation may not members if it be a non-stock corporation.
include a purpose which would change or contradict its c. Indication in the articles, by underscoring, the change
nature as such; or changes made.
c. The place where the principal office of the d. A copy of amended articles duly certified under oath
corporation is to be located, which must be within the by the corporate secretary and a majority of the
Philippines; directors or trustees stating the fact that said
d. The term for which the corporation is to exist; amendment or amendments have been duly approved
e. The names, nationalities and residences of the by the required vote of stockholders or members, as
incorporators; the case may be.
f. The number of directors or trustees, which shall not
be less than five (5) nor more than fifteen (15); Grounds for Rejecting Incorporation or Amendment to
g. The names, nationalities and residences of persons Articles of Incorporation (Sec. 17)
who shall act as directors or trustees until the first a. Not in prescribed form;
regular directors or trustees are duly elected and b. Illegal purpose;
qualified in accordance with the Corporation Code; C. False Treasurer's affidavit; and
h. If it be a stock corporation, the amount of its d. Non-compliance with required Filipino stock
authorized capital stock in lawful money of the ownership.
Philippines, the number of shares into which it is
divided, and in case the share are par value shares, The Commission shall give the corporation a reasonable
the par value of each, the names, nationalities and time to correct or modify objectionable portions.
residences of the original subscribers, and the
amount subscribed and paid by each on his Note: A favorable recommendation of the appropriate
subscription, and if some or all of the shares are government agency to the effect that such article or
without par value, such fact must be stated; amendment is in accordance with law is required in the
i. If it be a non-stock corporation, the amount of its following types of corporation:
capital, the names, nationalities and residences of the • Banks, banking and quasi-banking institutions
contributors and the amount contributed by each; • Building and loan associations
and • Insurance companies
Such other matters as are not inconsistent with law • Public utilities
and which the incorporators may deem necessary and • Educational institutions
convenient. • Other corporations governed by special laws
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d. Non-Amendable Items: b. Requisites of Valid By-Laws:
• Names of incorporators a. It must be consistent with the Corporation Code, other
• Names of incorporating directors/trustees pertinent laws and regulations.
• Names of original subscribers to capital stock and b. It must be consistent with the Articles of Incorporation.
subscribed and paid-up capital c. It must be reasonable and not arbitrary or oppressive.
• Treasurer-in-trust elected by original subscribers d. It must not disturb vested rights, impair contract or
property rights of stockholders or members or create
• Members who contributed to the initial capital of non-
obligations unknown to law.
stock corporation
• Witnesses and acknowledgments
c. Binding Effects
The by-laws of the corporation are its own private laws that
6. Registration And Issuance Of Certificate Of
have the same effect as the laws of the corporation. They
Incorporation
are deemed written into the charter. Thus, they become
The articles of incorporation does not become binding as
part of the fundamental laws of the corporation which are
the charter of the corporation unless it has been filed with
binding upon the corporation and its officers, and the
and registered by the SEC.
litigating parties who are not part of the corporation in
accordance with their terms (Pelia v. CA, G.R. No. 91478,
Commencement of Corporate Existence and Juridical
1991; Forest Hills Golf Club v. Gardpro Inc., G.R. No.
Personality
164686, 2014).
A private corporation formed or organized under the
Corporation Code commences to have corporate
existence and juridical personality and is deemed Procedure (Sec. 46)
incorporated from the date the securities and exchange a. Adopt by-laws one (1) month after receipt of official
commission issues a certificate of incorporation under notice of issuance of its certificate of incorporation
its official seal; and thereupon the incorporators, b. Approval by the majority of outstanding
stockholders/members and their successors shall shares/members
constitute a body politic and corporate under the name i. By-laws must be signed by
stated in the Articles of Incorporation for the period of time stockholders/members voting for them
mentioned therein, unless said period is extended or the ii. Kept in the principal office of the corporation
corporation is sooner dissolved in accordance with law. iii. Subject to inspection by stockholders or
(Sec. 19) members
iv. Certified copy signed by majority of directors,
7. Adoption of By-Laws countersigned by the corporate secretary, filed
w/ SEC and attached to original Articles of
a. By-laws Incorporation
Relatively permanent and continuing rules .of action
adopted by the corporation for its own government and of Note:
the individuals composing it and those having direction, By-laws may be adopted prior to or after the incorporation.
management and control of its affairs, in whole or in part,
in the management and control of its affairs and activities. Failure to comply with the one month period for filing by-
laws will not result to an automatic -demise" of the
Regulations, ordinances, rules or laws adopted by an corporation but it will be considered as a ground by which
association or corporation or the like for its internal the SEC may seek the corporation's dissolution (Loyola
governance, including rules for routine matters such as Grand Villas Homeowners (South) Association, Inc. v. CA,
calling meetings and the like (San Miguel Corp. v. G.R. No.117188, 1997).
Mandaue Packing Products Plants Union-FFVV, G.R. No.
152356, 2005). WHEN BY-LAWS VOTING
ADOPTED REQUIREMENT
By-laws are intended merely for the protection of the
Prior to incorporation All of the incorporators
corporation, and prescribe regulation, not restrictions, they
Within one month after Majority of stockholders
are always subject to the charter of the corporation (Rural
receipt of notice of the (representing OCS) or
Bank of Salinas v. CA, GR No. 96674, 1992).
issuance of the certificate of members (if non-stock)
incorporation by SEC and majority of the board
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• By-law provisions cannot discriminate among its
Common Law Limitations on By-Laws stockholders or members
• By-laws cannot be contrary to law and articles of Binding effect of by-laws:
incorporation • As- to the corporation and its components — Binding
not only upon the corporation but also on its
A by-law provision granting to a stockholder a permanent stockholder, members and those having direction,
representation in the Board of Directors is contrary to the management and control of its affairs. They have the
Corporation Code requiring all members of the Board to be force of contract between the members/stockholders.
elected by the stockholders or members. Even when the • As to third persons — Not binding unless there is
members of the association may have formally adopted the actual knowledge. Third persons are not even bound
provision, their action would be of no avail because no to investigate the content because they are not bound
provision of the by-laws can be adopted if it is contrary to to know the by-laws which are merely provisions for
law (Grace Christian High School v. CA, G.R. No. 108905 the government of a corporation and notice to them will
, 1997). not be presumed (China Banking Corp. v. CA, G.R.
No. 118332 1997).
Although the right to amend by-laws lies solely in the
discretion of the employer, this being in the exercise of d. Amendment or Revision
management prerogative or business judgment, such right
cannot impair the obligation of existing contracts or rights • With stockholders or members approval
or undermine the right to security of tenure of a regular Majority vote of the members of the Board;
employee. Otherwise, it would enable an employer to Majority of the outstanding capital stock or
remove any employee from employment by the simple majority of the members in case of non- stock
expediency of amending its by-laws and providing the corporation, in a meeting duly called for the
position shall cease to exist upon occurrence of a specified purpose
event (Salafranca v. Philamlife (Pamplona) Village • Delegation to the Board of Directors/ Trustees
Homeowners Association, Inc., G.R. No. 121791, 1998) - 2/3 of the outstanding capital stock; or
2/3 of the members in a non- stock corporation
-By-laws that prohibit directors who have interests in may delegate to the board the power to amend
competitor corporations are reasonable in order to protect or repeal any by- laws or adopt new by- laws
the interests of the company (Gokongwei v. SEC, G.R. No. o Such power of the Board may be revoked by
L-45911, 1979) majority vote of the outstanding capital stock or
majority of the members in a non- stock
• By-laws cannot be unreasonable or be contrary to corporation
nature of by-laws (GPI v. El Hogar Filipino, G.R. No. o The power to adopt the first original by- laws
L-26649, 1927). cannot be delegated to the board of directors or
trustees; only the power to adopt new by- laws that
Authority granted to a corporation to regulate the transfer will supplant the old by- laws can be validly
of its stock does not empower corporation to restrict the delegated
right of a stockholder to transfer his shares, but merely The amended or new Li -laws shall only be
authorizes the adoption of regulations as to the formalities effective upon the issuance by the SEC of a
and procedure to be followed in effecting transfer certification that the same are not inconsistent with
(Thomson v. CA, G.R. No. 116631, 1998). the Corporation Code.
By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restrictions; they E. CORPORATE POWERS
are always subject to the charter of the corporation (Rural
Bank of Salinas, Inc. v. CA, 1992; quoting from Thompson 1. General Powers; Theory of General Capacity
on Corporation Sec. 4137, cited in Fleischer v. Nolasco, a. Express powers — Those expressly authorized by the
G.R. No. L-23241, 1925). Corporation Code and other laws, and its Articles of
Incorporation or Charter
b. Implied/necessary powers — Those that can be
inferred from or necessary for the exercise of the
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express powers or for the pursuit of its purposes as • In shortening of term — right of appraisal
provided in the Charter. Examples are powers related recognized in Sec 81(1) — amendment of Articles
to the same line of business (e.g. stevedoring services to shorten or extend corporate term
to unload coal to its pier for corporations supplying
electric power) b. Power to Increase or Decrease Capital Stock or
c. Incidental/inherent powers — Those that are deemed Incur, Create, Increase Bonded Indebtedness (Sec.
to be within the capacity of corporate entities. These 38)
"necessarily flow" from the business and attach at the
moment of creation without regard to express powers Power to increase or decrease capital stock - provided
or primary purpose. the 25-25 rule is complied with, as approved by the SEC
General Express Powers under the Corporation Code There shall be no increase or decrease of capital stock
(Sec. 36) unless
a. Sue and be sued in its corporate name; • Approved by majority of the board
b. Succession; • Approved by at least 2/3 of OCS in a meeting
c. Adopt and use a corporate seal; • With notice of the proposal and meeting given to
d. Amend Articles of Incorporation stockholders
e. Adopt, amend or repeal By-laws; • With prior approval of the SEC
f. For stock corporations — Issue stocks to subscribers • Accompanied by a Sworn statement of the
and to sell treasury stocks; for non-stock corporations treasurer showing that the 25-25 rule has been
— admit members; complied with
9. Purchase, receive, take, or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with real No decrease of capital stock shall be approved by the SEC
and personal property, pursuant to its lawful business; if it will prejudice the rights-of corporate creditors
h. Enter into Merger or consolidation;
i. Reasonable Donations for public welfare, hospital, From and after the approval by the SEC and the issuance
charitable, cultural, scientific, civil or similar purposes of its certificate of filing, capital stock shall stand increased
(Prohibited: for partisan political activity); or decreased as the certifi-Cate may declare
j. Establish pension, retirement and other plans for the
benefit of directors, trustees, officers and employees; Incur, create, or increase-bonded indebtedness - There
and should be no incurring, creating or increasing any bonded
k. Other powers essential or necessary to carry out its indebtedness unless:
purposes. • Approved by majority of the board
• Approved by at least 2/3 of OCS/members in a
2. Specific Powers: Theory of Specific Capacity meeting
• With notice of the proposal and meeting given to
a. Power to Extend or Shorten corporate term
stockholders
There should be a written notice of stockholders/members
• With prior approval of the SEC
meeting stating:
• Proposed action and time and place of meeting
c. Power to Deny Pre-Emptive Rights
• Addressed to each stockholder/ member
As a general rule, stockholders have the pre-emptive right
• Deposited to the addressee in post office, with to subscribe to all issues or disposition of shares of any
postage prepaid or served personally class in proportion to their shareholdings unless:
Vote needed:
• Denied by the Articles of Incorporation or
• Board majority (in board meeting) amendment thereto;
• Ratified by 2/3 of OCS or members in a meeting — • Shares are issued in compliance with laws
mere written assent is not enough (Sec. 37) requiring minimum stock ownership by the public
• Shares issued in good faith in exchange for
Appraisal rights available to dissenting stockholders
property for corporate purposes approved by 2/3
• In case of extension of term — right of appraisal of the OCS
exists
• Shares in payment of previously contracted debts
approved by 2/3 of OCS (Sec. 39)
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corporations is reasonably necessary to
d. Power to Sell, Dispose, Lease, Encumber All or accomplish primary purpose
Substantially All of Corporate Assets (Sec. 40) • Written notice of proposed investment and time
and place of meeting sent to stockholders
Needs vote of: • Dissenting stockholders have appraisal rights
• Board majority in meeting
• 2/3 of OCS or members Investment by a sugar central in the equity of a jute-bag
manufacturing company used in packing sugar, falls within
Written notice of stockholder/member meeting proposing the implied powers of the sugar central as part of its
said action needed for "sale of all or substantially all of the primary purpose (De La Rama v. Ma-ao Sugar Central,
corporate property and asset" — one where the corporation G.R. No. L-17504, 1969)
is rendered incapable of accomplishing its corporate
purpose. g. Power to Declare Dividends
Only Board action is needed (except stock dividends
Dissenting stockholders have appraisal right. where stockholder action is needed)
• Cash dividends due on delinquent stock should
After authorization or approval by the first be applied to unpaid balance plus cost and
stockholders/members, the Board may however, abandon expenses
proposed action without prior authorization/approval of • Stock dividends shall be withheld from delinquent
stockholders/members, subject to rights of parties
r stockholders until the unpaid subscription is fuIly
paid
However, stockholders'/members' authorization not • Stock dividends need 2/3 vote of the OCS
needed if • Dividends are payable out of unrestricted retained
• Disposition of property and assets is necessary in earnings
the usual and regular course of business • Stock corporations cannot retain surplus profits
• Or if the proceeds of sale or disposition is more than 100% of paid-in capital stock unless:
appropriated for the conduct of the remaining - Needed for corporate expansion projects
business (See. 40) approved by the board
Or prohibited by loan agreement which
e. Power to Acquire Own Shares prohibits declaration of dividends without
Allowed for a legitimate corporate purpose including but financial institution's consent
not limited to the following: Or needed under special circumstances (Sec.
• To eliminate fractional shares arising out of stock 43)
dividends; • Unless otherwise provided in the articles of
• To collect or compromise an indebtedness to the incorporation, distribution of dividends is done on
corporation, arising out of unpaid subscription, in a a pro rata basis.
delinquency sale, and to purchase delinquent
shares sold during said sale; h. Power to Enter Into Management Contract
• To pay dissenting or withdrawing stockholders Where one corporation undertakes to manage all or
entitled to payment for their shares under the substantially all of the ousiness of another corporation,
provisions of the Corporation Code. whether the contract is called "service contracts" or
"operating agreement" (Sec. 44)
Provided the corporation has unrestricted retained
earnings to cover stocks purchased or acquired (Sec. 41) General Rule: Contract may not exceed 5yr5 per term
f. Power to Invest Corporate Funds in another Exception: Contracts relating to exploration,
Corporation or For Non-PrImary Purpose (Sec. 42) development, exploitation or utilization of natural
resources, where pertinent laws or regulations will govern
Needs vote of:
• Board majority in meeting A management contract is not an agency contract, and
• 2/3 of OCS or members - Stockholders/members' therefore is not revocable at will (Nielson v. Lepanto, G.R.
approval not needed if investment in stock of other No. L-21601, 1968)
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the express powers and reasonably necessary to their
This needs approval of: exercise. If so, the corporation has the power to do it;
1. Board of Directors of both managing and managed otherwise, not. (University of Mindanao, Inc. v. Bangko
corporation Sentral ng Pilipinas, G.R. 194964-65, 2016)
2. Majority of outstanding shares or members of
both managed and managing corporation Doctrine of Ratification
3. But 2/3 vote of outstanding stock/members of The corporation may ratify the unauthorized acts of its
managed corporation necessary in the if: corporate officer. The substance of the doctrine is
• Where stockholders of both confirmation after conduct, amounting to a substitute for a
managing and managed prior authority. Ratification can be made either expressly
corporation (the common or impliedly like silence or acquiescence and acceptance
stockholders) own or control more of benefits (Yasuma v. Heirs of Cecilio De Villa, G.R. No.
than 1/3 or the outstanding stock 150350, 2006). But illegal acts cannot be ratified.
of managing corporation
• Where majority of directors in Doctrine of Individuality of Subscription
both corporations are the same On the creation of a corporation, the individuality of the
corporators or members is merged in the corporate body
i. Ultra Vires Acts and the corporation becomes in law a legal entity or
artificial person entirely distinct from its members and its
i. Applicability of Ultra Vires Doctrine officers, and the property or rights acquired, or the liabilities
An act not within the express or implied, and incidental incurred by it are regarded as its property, rights, and
powers of the corporation. liabilities as such distinct legal entity (Jose C. Campos, Jr.,
et al., Survey of Mercantile Law, 30 Phil. L. J. 255, 264
Types of Ultra Vires Cases [1954]).
a. First type: Acts done beyond the powers of the
corporation as provided for in the law or its articles of Equality of Shares
incorporation (Sec. 45) Under the doctrine of equality of shares — all stocks issued
b. Second type: Acts or contracts entered into in behalf by the corporation are presumed equal with the same
of the corporation by persons without corporate privileges and liabilities, provided that the Articles of
authority, even though the contract is within the powers Incorporation is silent on such differences (CIR vs. CA
of the corporation (Manila Metal Container Corp. v. (G.R. No. 108576, 1999) citing Sec. 5 par 1, last sentence
PNB, G.R. No. 166862, 2006) and of Act 1459 (Old Corporation Law) now Sec. 6 of the
c. Third type: Acts or contracts, which are per se illegal Corporation Code requires that the distinguishing features
as being contrary to law. be stated also in the Certificate of Stock)
ii. Consequences of Ultra Vires Acts Those Who May Exercise the Powers of the
• Executed contract — Courts will not set aside or Corporation
interfere with such contracts; General Rule: The Board of Directors ALONE exercises
• Executory contracts — No enforcement even at the the powers of the corporation.
suit of either party (void and unenforceable);
• Partly executed and partly executory — Principle Exceptions: Other persons or groups within the
against unjust enrichment shall apply. corporation may do so similarly:
a. If (1) there is a management contract and (2) powers
Ultra vires test: It is a question, therefore, in each case, are delegated by majority of the board to an executive
of the logical relation of the act to the corporate purpose committee;
expressed in the charter. If that act is one which is lawful b. Corporate officers (e.g. the President) via authority
in itself, and not otherwise prohibited, is done for the from (1) law, (2) corporate by-laws; and (3)
purpose of serving corporate ends, and is reasonably authorization from the board, either expressly or
tributary to the promotion of those ends, in a substantial, impliedly by habit, custom or acquiescence in the
and not in a remote and fanciful, sense, it may fairly be general course of business;
considered within charter powers. The test to be applied is c. A corporate agent in transactions with third persons
whether the act in question is in direct and immediate to the extent of the authority to do so has been
furtherance of the corporation's business, fairly incident to conferred upon him;
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d. Those with apparent authority (doctrine of has been ratified. If it acquiesces, with knowledge of the
apparent authority). facts, or fails to disaffirm, ratification will be implied or else
it will be estopped to deny ratification (Premiere
Theories on Source of Board Power Development Bank vs. CA, G.R. No. 159352, 2004).
a. Directly-Vested / Original Power Efren was Bonanza's General Property Manager while
Pursuant to Section 23, the source of power of the Board Miguel was the President. Bonanza leased the lot to Efren
of Directors is primarily and directly-vested by law; it is not but eventually notified the latter about the rescission of
a delegated power from the stockholders or members of lease. Using the Doctrine of Apparent Authority, Bonanza
the corporation was estopped from denying the existence and
b. Delegated Powers from Stockholders enforceability of Lease Contract after it effectively ratified
The Board of Directors is a creation of the stockholders the lease by accepting proceeds throughout several years.
and controls and directs the affairs of the corporation by Also, while it is true that the doctrine cannot be invoked by
delegation of the stockholders. By drawing to themselves one who is not a third party, an officer of a corporation
the powers of the corporation, they occupy positions of can actually be a third person in contract with the
trusteeship in relation to the stockholders. corporation. (Quesada, et al. v. Bonanza Restaurants, Inc.,
G.R. No. 207500, 2016)
Doctrine of Apparent Authority
If a corporation knowingly permits one of its officers, or any Who Is an Officer of a Corporation?
other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the Corporations act only through their officers and duly
power to so do those acts; and thus, the corporation will, authorized agents. All acts within the powers of a
as against anyone who has in good faith dealt with it corporation may be performed by agents of its selection;
through such agent, be estopped from denying the agent's except so far as limitations or restrictions imposed by
authority. (Francisco v. GSIS, G.R. No. L-18287, 1963) special charter, by-laws, or statutory provisions (BA
Savings Bank v. Sia, G.R. No. 131214, 2000).
Apparent authority may be ascertained-through:
a. The general manner in which the corporation holds out An "office" is created by the charter of the corporation and
an officer or agent as having the power to act or, in the officer is elected by the directors or stockholders. Note
other words, the apparent authority to act in general, that a corporate officer's removal from his office is a
with which it clothes him; or corporate act. Such removal occasions an intra-corporate
b. The acquiescence in his acts of a particular nature, controversy and its nature is not altered by the reason or
with actual or constructive knowledge thereof, whether wisdom, or lack thereof, with which the BOD might have in
within or beyond the scope of his ordinary powers. taking such action.
If a private corporation intentionally or negligently clothes When petitioner, as Executive VP, allegedly diverted
its officers or agents with apparent power to perform acts company funds for his personal use resulting in heavy
for it, the corporation will be estopped to deny that the financial losses in the company, this matter would amount
apparent authority is real as to innocent third persons to fraud. Such fraud would be detrimental to the interest
dealing in good faith with such officers or agents. not only of the corporation but also of its members. This
type of frau-, encompasses controversies in a relationship
Note: within the corporation covered by the SEC [now with the
It requires presentation of evidence of similar acts regular courts]. Perforce, the matter would come within the
executed either in its favor or in favor of other parties. It is area of corporate affairs and management, and such a
not the quantity of similar acts which establishes apparent corporate controversy would call for the adjudicative
authority, but the vesting of a corporate officer with the expertise of the SEC, not the Labor Arbiter or the NLRC
power to bind the corporation (People's Aircargo and (De Rossi v. NLRC, G.R. No. 108710, 1999)
Warehousing Co., Inc. v. CA., G.R. No. 117847, 1998).
When the officers or agents of a corporation exceed their
powers in entering into contracts or doing other acts, the
corporation, when it has knowledge thereof, must promptly
disaffirm the contract or act and allow the other party or
third persons to act in the belief that it was authorized or
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Corporate Officer vs. Other Positions Comptroller/Administrator, Chiefs of Services and such
CORPORATE OFFICERS OTHER POSITIONS other officers as it may deem necessary and prescribe their
Agents of the corporation Agents of the corporation powers and duties," then such specifically designated
More important employees positions should be considered "corporate officers"
exercising greater authority May also exercise position. The determination of the rights and the
or power in the authority but scope of concomitant liability arising from any ouster from such
management of the authority and duties are positions, would be intra-corporate controversy subject to
business limited by virtue of the the jurisdiction of the SEC (now RTC) rTabang v. NLRC,
Specific duties are imposed delegation G.R. No. 121143, 1997).
by express provision of law
Created by virtue of A corporate officer's dismissal is always a corporate act, or
Created by the Corporation an intra-corporate controversy, and the nature is not
"enabling powers" given
Code or the By-Laws altered by the reason or wisdom with which the Board of
to officers in the By-Laws
Directors may have in taking such action.
The electing/removing
Elected and removed by the
body need not follow the
directors or the The President, Treasurer and Secretary are considered
requirements in the
stockholders corporate officers because all corporations are required by
Corporation Code
law to have such positions.
RTC-Special Commercial
NLRC has jurisdiction
Court has jurisdiction over
over termination disputes The creation of a position under the corporation's charter
termination disputes
or by-laws, and that the election is by the directors or
stockholders must concur in order for an individual to .be
An "office" is created by the charter of the corporation and
considered a corporate officer, as against an ordinary
the officer is elected by the directors or stockholders (2
employee or officer. It is only when officer claiming to have
Fletcher Cyc. Corp. Ch. II, Sec. 266).
been illegally dismissed is classified as corporate officer
that the issue is deemed an intra-corporate dispute which
On the other hand, an "employee" usually occupies no
falls within the jurisdiction of the trial courts. (Wesleyan
office and generally is employed not by action of the
University v. Maglaya, Sr., G.R. No. 212774, 2016)
directors or stockholders bit by the managing officer of the
corporation who also determines the compensation to be
Liability of the Officer
paid to such employee (Tabang v. NLRC, G.R. No.
General rule: Corporate officers are not personally liable
121143, 1997).
for their official -acts unless it is shown that they have
exceeded their authority. ARB Constructions Co., Inc. v.
The president, vice-president, secretary and treasurer are
Court of Appeals, G.R, No. 126554, 2000)
commonly regarded as the principal or executive officers
of a corporation, and modern corporation statutes usually
Exception: Personal liability of a corporate director,
designate them as the officers of the corporation. However,
trustee or officer along (although not necessarily) with the
other offices are sometimes created by the charter or by-
corporation may validly attach, as a rule, only when:
laws of a corporation, or the board of directors may be
a. He assents to a patently unlawful act of the corporation
empowered under the by-laws of a corporation to create
b. Guilty of bad faith or gross negligence in directing its
additional offices as may be necessary (Tabang v. NLRC,
affairs
G.R. No. 121143, 1997).
c. for conflict of interest resulting in damages to the
corporation, its stockholders or other persons
When the by-laws of the condominium corporation
d. He consents to the issuance of watered stocks or who,
specifically includes the position of
having knowledge thereof, does not forthwith file with
"Superintendent/Administrator" in is roster of corporate
the corporate secretary his written objection thereto
officers, then such position is clearly a corporate officer
e. He agrees to hold himself personally and solidarily
position and issues of reinstatement would be within the
liable with the corporation; or
jurisdiction of the SEC [now with the RTC] and not the
f. He is made, by a specific provision of law, to personally
NLRC (Ongkingco v. NLRC, G.R. No. 119877, 1997).
answer for his corporate action (Atrium Management
Corporation vs. Court of Appeals, G.R. No. 109491,
When the by-laws provide that one of the powers of the
2001).
Board of Trustees is "[t]o appoint a Medical Director,
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In Labor Cases: In the absence of malice, bad faith, or or by expiration of term, if the remaining BOD
specific provisions of law, a stockholder or an officer of a constitutes a quorum; otherwise, said vacancies must
corporation cannot be made personally liable for corporate be filled by the stockholders in a regular or special
liabilities (McLeod v. NLRC, G.R. No. 146667, 2007) meeting called for that purpose.
b. Extension or shortening of the corporate term
3. Exercise of Corporate Powers c. Increase or decrease of capital stock or the creation of
bonded indebtedness
a. By the Shareholders d. Sale or other disposition of all or substantially all
assets
2/3 vote of stockholders or members are needed in the e. Acquisition of its own shares
following instances: f. Investment of corporate funds in any corporation or
a. Removal of directors or trustees business or for any purpose other than its primary
b. In cases of vacancies, stockholders/members are purpose
entitled to fill up such vacancies g. Declaration of cash, property, and stock dividends
c. Extension or shortening of corporate term h. Entering into management contracts
d. Increase or decrease of capital stock or the creation of i. Amendment of the articles of incorporation
bonded indebtedness j. Amendment o the by-laws
e. Sale or other dispositions of all or substantially all k. Approval of the plan of merger or consolidation
corporate assets I. Dissolution of the corporation
f. Investing corporate funds in another corporation or
business or for any other purpose other than its c. By Executive Committee
primary purpose The By-laws may create an executive committee,
g. Power to enter into management contracts in the composed of not less than 3 members of the board, to be
following instances: (a) where stockholders appointed by the Board.
representing the same interest of both the managing
and the managed corporations own more than one- General rule: The Executive Committee may act, by
third (1/3) of the total outstanding capital stock entitled majority vote, on specific matters within the competence of
to vote of the managing corporation; or (b) where a -the board as deiegated to it
majority of the members of the Board of Directors of
the managing corporation also constitute a majority of Exception:
the members of the Board of Directors of the managed 1. Acts where stockholders' approval is also needed
corporation 2. Filling vacancies within the Board of Directors
h. Declaration of stock dividend 3. Amending, repealing or adopting by-laws
.7) i. Amendment of the articles of incorporation 4. Amending or repealing resolutions of the Board
j. Approval of the plan of merger or consolidation where the resolution by express terms is not so
k. Dissolution of the corporation amendable or repealable by the Executive
Committee
However, only majority vote is needed in: 5. Distribution of cash dividends
c. Approval of the by-laws of the corporation A. Trust Fund Doctrine
d. Amendment of the by-laws General Rule: The subscribed capital stock of the
e. Power to enter into management contracts, except in corporation is a trust fund for the payment of debts of the
instances mentioned in letter (g) of the preceding corporation which the creditors have the right to look up to
section satisfy their credits. Corporations may not dissipate this,
and the creditors may sue the stockholders directly for their
b. By the Board of Directors unpaid subscriptions.
The Board of Directors is the main agency by which all
corporate powers and authority are exercised Special Rule in Insolvency: The trust fund doctrine is not
limited to reaching the stockholders' unpaid subscriptions.
General rule: Majority vote of the Board is needed in the The scope of the doctrine when the corporation is
following instances: insolvent encompasses not only the capital stock, but
a. Filling of vacancies in the board, except when vacancy also other property and assets generally regarded in
was due to removal by the stockholders or members equity as a trust fund for the payment of corporate
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debts. Thus, the Trust Fund Doctrine extends to all assets
(not just subscribed capital stock) when a corporation Qualifications of Directors (Sec. 23 & 27)
becomes insolvent. (Halley v. Printwell, G.R. No. 157549, a. Must own at least one (1) share of the capital stock of
2011) the corporation in his own name or must be a member
in the case of non-stock corporations
i. Any director who ceases to be the owner of at
A. BOARD OF DIRECTORS AND TRUSTEES least one (1) share of the capital stock of the
corporation of which he is a director shall
1. Doctrine of Centralized Management thereby cease to be a director.
b. A majority of the directors/trustees must be residents
Powers of the Board of Directors of the Philippines
Unless otherwise provided in the Corporation Code, the c. He must not have been convicted by final judgment of
corporate powers of all corporations formed under this an offense punishable by imprisonment for a period
Code shall be exercised, all business conducted and all exceeding six (6) years or a violation of the
property of such corporations controlled and held by the Corporation Code, committed within five (5) years
board of directors or trustees to be elected from among the before the date of his election
holders of stocks, or where there is no stock, from among d. He must be of legal age
the members of the corporation (Sec. 23). e. He must possess other qualifications as may be
prescribed in the by-laws of the corporation.
2. Business Judgment Rule
Questions of policy or management are left solely to the Disqualifications of Directors, Trustees, -or Officers
honest decision of officers and directors of a corporation (Sec. 27)
and the courts are without authority to substitute their a. Convicting by final judgment of an offense punishable
judgment for the -judgment of the board of directors; the by imprisonment for a period exceeding 6 years; or
board is the business manager of the corporation and so b. Violation of the Corporation Code, committed within 5
long as it acts in good faith its orders are not reviewable by years prior to the date of his election or appointment
the courts or the SEC. The directors are also not liable to
the stockholders in performing such acts (Philippine Stock Note: It is the commission (not conviction) that must take
Exchange, Inc. v. CA, GR No. 130644, 1997).,, place within 5 years prior to election or appointment.
Coverage of the Rule: Two Branches Grounds not exclusive
a. Resolutions and transactions -entered into by the The enumeration of grounds is not exclusive.
Board of Directors within the powers of the corporation
cannot be reversed by the courts not even on the By-law provisions that prohibit directors who have interests
behest of the stockholders of the corporation; and in competitor corporations are reasonable in order to
b. Directors and officers acting within such business protect the interests of the company (Gokongwei v. SEC,
judgment cannot be held personally liable for the G.R. No. L-45911, 1979)
consequences of such acts.
Hold-Over Principle
Instances When a Director is Liable: Directors/Trustees may continue to hold office despite the
a. Willfully and knowingly voting for and assenting to lapse of one year until their successors are elected and
patently unlawful acts of the corporation; qualified.
b. Gross negligence or bad faith in directing the affairs of
the corporation; Remaining members of the board of directors cannot elect
c. Acquiring any personal or pecuniary interest in conflict another director to fill in a vacancy caused by the
of duty. resignation of a hold-over director. The hold-over period is
not part of the term of office of a member of the board of
3. Tenure, Qualifications and Disqualifications of directors. (Valle Verde Country Club v. Africa, G.R. No.
Directors 151969, 2009)
Term of Office (Sec. 23) Thus, when during the holdover period, a director resigns
Each duly elected director/trustee shall hold office for one from the board, the vacancy can only be filled-up by the
(1) year until their successors are elected and qualified. stockholders, since there is no term left to fill-up pursuant
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to the provisions of Section 29 which mandates that a
vacancy occurring in the board of directors caused by the Note: Stock corporations follow the cumulative voting
expiration of a member's term shall be filled by the method. In non-stock corporations, unless otherwise
corporation's stockholders. (Valle Verde Country Club v. provided in the articles of incorporation or in the by-laws,
Africa, G.R. No. 151969, 2009) the default rule in the election of trustees is straight
voting. (Sec. 24)
A director continuing to serve after one year from his
election (on a holdover capacity), cannot be considered as b. Required Attendance at Meeting for Election
extending his term. This hold-over period is not part of his (Quorum)
term, which, as declared, had already expired. (Valle • Stock Corporation - majority of outstanding
Verde Country Club v. Africa, G.R. No. 151969, 2009) capital stock
•Non-stock Corporation — majority of members
4. Elections entitled to vote
Election of Directors or Trustees (Sec. 24) Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time
Manner of Election but not sine die or indefinitely if, for any reason, no election
• In any form; or is held, or if there are not present or represented by proxy,
• By ballot when requested by any voting at the meeting, the owners of a majority of the outstanding
stockholder or member capital stock, or if there be no capital stock, a majority of
In stock corporations, voting may be in person or the member entitled to vote. Voting may be made
by proxy personally or by proxy.
Time to Determine Voting Right Who Elects Directors or Trustees
• At the time fixed in by- laws • By the stockholders/members as provided in the
• If by- laws are silent, at time of election by-laws (traditionally during annual SH/M
meetings
a. Methods of Voting in the Election of Directors • By the board, if still constituting quorum for
(Cumulative Voting/Straight Voting) vacancies in the interim (i.e. between annual
meetings) due to causes other than removal or
Outstanding capital stock - means the total shares of expiry of term (Sec. 29)
stock issued under binding subscription agreements to • If the vacancies are due to removal or expiry of
subscribers or stockholders, whether or not fully or partially term, the directors/trustees must be elected by the
paid, except treasury shares (Sec. 137) stockholders/members at a meeting for this
purpose (special meeting)
a. Straight voting — Every stockholder may vote the
number of outstanding capital stock in his own name How Elected
for as many persons as there are directors to be • By owners of majority of outstanding capital stock
elected; or in non-stock corporations, members may or by members in annual stockholders'/members'
cast as many votes as there are trustees to be c,:ected meeting
but may not cast more than one vote for one candidate. • Stockholders/members may be present in person
(In straight voting, the votes are spread out evenly or by written proxy
among all the elective positions) • For stock corporations: Number of votes = (no. of
b. Cumulative voting for one candidate — a shares) x (no. of directors to be elected)
stockholder may cumulate his shares and give one • By cumulative voting all votes may be cast for a
candidate as many votes as the number of directors to candidate or distributed among the candidates —
be elected multiplied by the number of his shares shall But no cumulative voting in non-stock
equal; corporations
c. Cumulative voting by distribution — a stockholder • Unless otherwise provided in the articles of
may also cumulate his shares by multiplying the incorporation or in the by-laws, members of non-
number of his shares by the number of directors to be stock corporations may cast as many votes as
elected and distribute the same among as many
candidates as he shall see fit
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there are trustees to be elected but may not cast Non-Filipino citizens may become members of the board
more than one vote for one candidate. of directors of a bank to the extent of the foreign
• Viva voce (live voice) or must be by ballot if participation in the equity of said bank. (General Banking
requested Law, Sec. 15)
• Delinquent shares and treasury shares cannot
vote Filling Vacancies in Board - Permissive
• Candidates with highest number of votes will be The filling of vacancies in the board by the remaining
declared elected directors or trustees constituting a quorum as provided for
by Section 29 is merely permissive, not mandatory, and the
When Elected (Sec. 29) vacancies may still be filled-up by the stockholders of
• Any vacancy occurring in the board of directors or members in a regular or special meeting called for the
trustees other than by removal by the stockholders purpose. However, when the by-laws of the corporation
or members or by expiration of term, may be filled contain a specific mode of filling- up existing vacancies in
by the vote of at least a majority of the remaining the board, the same is mandatory (Tan v. Sycip, G.R. No.
directors or trustees, if still constituting a quorum; 153468, 2006).
otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called Report On Election of Directors, Trustees and Officers
for that purpose Within 30 days after election of the directors, trustees and
• Any directorship or trusteeship to be filled by officers of the corporation, the secretary or any other officer
reason of an increase in the number of directors or of the corporation shall submit to the SEC, the names
trustees shall be filled only by an election at a nationalities and residences of the directors, trustees and
regular or at a special meeting of stockholders or officers elected. Should a director, trustee or officer die,
members duly called for the purpose, or in the resign or in any manner cease to hold office, his heirs in
same meeting authorizing the increase of directors case of his death, secretary or any other officer of the
or trustees if so stated in the notice of the meeting. corporation, or the director, trustee or officer himself, shall
immediately report such fact to the SEC.
Election Rules on Stock.and Non-Stock Corporations
STOCK CORPORATION NON-STOCK
Only the directors and officers of the corporation whose
CORPORATION
names appears in the report submitted to the SEC are
Owners of a majority of A majority of the
deemed legally constituted to bind the corporation in
outstanding capital stock,members, either in person
bringing a suit in behalf of the corporation (Premium
either in person or by or by representative
Marble Resources v. CA, G.R. No. 96551, 1996).
representative authorized authorized to act by
to act by written proxy, written proxy, must be
5. Removal (Sec. 28)
must be present at the present at the election of
election of the directors the trustees
Requisites of Removal from the Board
Cumulative voting is
Cumulative voting is not
a. It must take place either at a regular meeting or special
mandatory; a matter of available, unless allowed meeting of the stockholders or members called for the
right granted by law to by the articles or by-laws.
purpose;
each stockholder with
b. There must be previous notice to the stockholders or
voting rights. The Board may be elected
members of the intention to remove;
by region.
c. The removal must be by a vote of the stockholders
Directors are elected at representing 2/3 of the outstanding capital stock or 2/3
large. of the members, as the case may be;
d. The director may be removed with or without cause
Alien Membership in Board of Directors unless he was elected by the minority, in which case,
P.D. No. 715: "election of aliens as members of the board it is required that there is cause for removal.
of directors of governing body of corporations or
associations engaging in partially nationalized activity shall
6. Filling of Vacancies (Sec. 29)
be allowed in proportion to their allowable participation or
share in the capital of such entities."
By stockholders or members — if vacancy results
because of:
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a. Removal
b. Expiration of term b. Duty of Loyalty (Basis: Secs. 31 & 34)
c. The ground is other than removal or expiration of term Directors or trustees shall not acquire any personal or
where the remaining directors do not constitute a pecuniary interest in conflict with their duty as such
quorum directors or trustees.
d. Increase in the number of directors.
Disloyalty: Sec. 31(2) vs. Sec. 34
Note: Vacancies must be filled by the stockholders in a SEC. 31(2) SEC. 34
regular or special meeting called for that purpose. Applicable to directors, Applicable to directors
trustees, and officers only
By board if remaining directors constitute a quorum — Allows ratification of a
Except for vacancies occuring due to removal, expiration No ratification allowed transaction by the
of term, or increase in the number of directors director
Covers stock and non-stock Covers stock
7. Compensation (Sec. 30) corporations corporations only
General Rule: The directors shall not receive any c. Duty of Diligence (Basis: Sec. 31)
compensation, as such Directors and/or trustees shall not willfully and knowingly
vote for or assent to patently unlawful acts of the
Exception: They may receive reasonable per diems [i.e. corporation or act in bad faith or with gross negligence in
at meetings] , directing the affairs of the corporation
Qualifiers to General Rule and Exception Doctrine of Corporate Opportunity
Any such compensation other than per diems may be If there is presented to a corporate officer or director a
granted to directors by the vote of the stockholders business opportunity, which the corporation has an interest
representing at least a majority of the outstand,ing capital or a reasonable expectancy, the self-interest of the officer
stock at a regular or special stockholders' meeting. or director will be brought into conflict with that of his
corporation. The law does not permit him to seize the
The By-Laws may specifically provide for fixing of opportunity even if he will use his own funds in the venture.
compensation. If he seizes the opportunity thereby obtaining profits to the
expense of the corporation, he must account all the profits
However: In no case shall the total yearly compensation by refunding the same to the corporation.
of directors, as such directors, exceed 10% percent of the
net income before income tax of the corporation during the Requisites of Doctrine of Corporate Opportunity
preceding year. a. The Corporation is financially able to undertake the
business opportunity.
Note: The implication of the phrase "as such directors" is b. From the nature of the business opportunity, it is in line
that members of the Board may receive compensation, in with the corporation's business and is of practical
addition to reasonable per diems, when they render advantage to the corporation.
services to the corporation in a capac'ty other than as c. The corporation has an interest or a reasonable
directors or trustees [in this case, if serving as corporate expectancy, by embracing the opportunity.
officers] (Western Technology v. Sales, G.R. No. 113032,
1997) Consequence of violation
a. Directors must account for all the profits by refunding
Rules on Fiduciaries' Duties and Liabilities the same to the corporation
b. Directors may be removed from the board.
Three-Fold Duties of Directors (Strategic Alliance
Development Corporation v. Radstock, G.R. No. 178158, Exception: The act of the director/trustee has been ratified
2009) by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock.
a. Duty of Obedience (Basis: Sec. 25)
To direct the affairs of the corporation only in accordance Violations of Secs. 31 and 34 are not penal offenses in
with the purposes for which it was organized relation Sec. 144: Had the Legislature intended to attach
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penal sanctions to said sections, it could have expressly 4. He is made, by a specific provision of law, to personally
stated such intent in the same manner it did for Section 74 answer for his corporate action (Tramat Mercantile,
of the same Code that the violation thereof is likewise Inc. v. CA, G.R. No. 111008, 1994).
considered an offense under Section 144. (lent v. Tullet,
Inc., G.R. No. 189158, 2016) 9. Responsibility For Crimes
(See Subsection on Personal Liabilities of Board of
Solidary liabilities for damages Directors and Trustees)
(See below discussion on Personal Liabilities)
Special Fact Doctrine
Liability for Watered Stocks Under the Special Facts Doctrine, although a director does
not stand in fiduciary relation to the stockholder, he is
Watered Stock (Sec. 65) under legal obligation to make fair and full disclosure of
Stock issued for a consideration less than its par or issued pertinent official information where special circumstances
value or for a consideration in any form other than cash, exist, giving rise to the obligation to disclose. (Soledad M.
valued in excess of its fair value. Cagampang, The Fiduciary Duties of Corporate Directors
Under Philippine Law, 46 Phil. L. J., 513, 562 [1971])
Includes stock:
a. Issued without consideration (bonus share) 10. Inside Information
b. Issued as fully paid when the corporation received less
than its par or issued value (discount share) Unlawful Acts of Insider (RA 8799, Sec. 27)
c. Issued for a consideration other than actual cash (e.g. It shall he unlawful for an insider to sell or to buy a security
property or services) the fair valuation of which is less of an issuer, while in the possession of material information
than its par or stated value with respect to the issuer or the security that is not
d. Issued as stock dividends when the corporation has generally available to the public unless:
insufficient retained earnings or surplus 1. The insider proves that the info was not gained from
such relationship
Effect of Issuance of Watered Stock 2. That the other party selling to or buying from the insider
Directors or officers consenting to such issuance are is identified the insider proves
solidarily liable with the stockholder concerned, to the a. That he disclosed the information
corporation or its creditors for the difference between the b. That he had reason to believe that the other
fair value received (by the corporation at the time of the party otherwise is also in possession of the
issuance) and the par or issued value of the stock issued. information
Personal Liabilities Presumption of a Purchase or Sale of a Security of an
Issuer of Insider
Personal liability of a corporate director, trustee or officer Applies when an insider or an insider's spouse, or relatives
along with the corporation may so validly attach, as a rule, by affinity or consanguinity within the second degree,
only when: legitimate or common-law, while in possession of material
1. He assents: nonpublic information if transacted after such information
a. To a patently unlawfi d act of the corporation, came into existence but prior to dissemination of such
or information to the public and the lapse of a reasonable time
b. For bad faith, or gross negligence in directing for market to absorb such information.
its affairs, or
c. For conflict of interest, resulting in damages to This presumption is rebutted upon a showing by the
the corporation, its stockholders or other purchaser or seller that he was aware of the material
persons; nonpublic information at the time of the purchase or sale.
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with Material Non-Public Information
the corporate secretary his written objection thereto; a. It has not been generally disclosed to the public and
3. He agrees to hold himself personally and solidarily would likely affect the market price of the security after
liable with the corporation; or being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
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b. Would be considered by a reasonable person
important under the circumstances in determining his Powers That Cannot Be Delegated to the Executive
course of action whether to buy, sell or hold a security. Committee
a. Approval of action requiring concurrence of
11. Contracts stockholders;
b. Filling of vacancies in the board;
a. By Self-Dealing Directors with the Corporation - A c. Adoption, amendment or repeal of by-laws;
contract of the corporation with its director/s or trustee/s or d. Amendment or repeal of board resolution which
officer/s is voidable at the option of such corporation unless by its terms cannot be amended or repealed;
the following are present: e. Distribution of cash dividends.
a. The presence of such director/trustee in the Board
meeting in which the contract was approved was not 13. Meetings
necessary to constitute a quorum. The corporation's by-laws can provide otherwise to all the
b. The vote of such director or trustee was not necessary rules hereunder, so long as minimum requirements are
for the contract's approval. satisfied.
c. The contract is fair and reasonable
d. In case of: a. Regular or Special
• An officer, the contract with him has been 1. Regular-held monthly, unless the by- laws provide
previously authorized by the Board. otherwise
• A director or trustee, where any of the first two 2. Special- held anytime upon the call of the
conditions are absent, there must be a ratification President or as provided in the by- laws
by 2/3 of the outstanding capital stock provided
there is full disclosure of the adverse interest of the i. Notice of the meeting - At least 1 day prior to the
director or trustee. (Sec. 32) scheduled meeting. A director may waive the requirement,
expressly or impliedly.
b. Contracts Between Corporations with Interlocking
Directors - These are valid so long as there is no fraud ii. Place of meetings - Anywhere in or outside the
and the contract is fair and reasonable. However, if the
director's interest,- is nominal in one of the contracting
corporations (not exceeding 20% of the outstanding capital b. Who Presides - The president shall preside at all
stock), then the contract must comply with the requisites meetings of the directors or trustees, unless the by-laws
provided supra, Sec. 32, otherwise voidable. provide otherwise.
12. Executive Committee / Delegated Authority c. Quorum of Board - A majority of the number of directors
a. The Board may delegate such powers to either an or trustees as fixed in the articles of incorporation.
executive committee or officials or contracted Directors cannot be represented or vote by proxy.
managers.
b. The delegation, except for the executive committee, d. Rule on Abstention
must be for specific purposes. In case of abstention during a board meeting on a vote
• Accordingly, the ge.,eral rules of agency as to the taken on any issue, the general rule is that an abstention
binding effects of their acts would apply. is counted in favor of the issue that won the majority vote;
• For such officers to be deemed fully clothed by the since by their act of abstention, the abstaining directors are
corporation to exercise a power of the Board, the deem to abide by the rule of the majority. (Lopez v. Ericta,
latter must specially authorize them to do so (ABS- G.R. No. L-32991, 1972)
CBN Broadcasting Corporation v. CA, GR No.
128690, 1999).
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Comparison Between Stockholder's And Director's Meeting
STOCKHOLDER'S MEETING DIRECTOR'S/ TRUSTEES' MEETING
Types of Regular and Special Regular and Special
Meetings
Place of Held in the city or municipality where the Anywhere in or outside of the Philippines, unless the
Meetings principal office is located by- laws provide otherwise
When held REGULAR — held annually on a date fixed by the REGULAR — held monthly
by- laws, or if not so fixed, on any date in April of
every year as determined by the Board of
Directors or Trustees
SPECIAL — held at any time deemed necessary SPECIAL — held at any time upon the call of the
or as provided in the by- laws President
Notice of REGULAR — notice must be sent at least 2 Notice must be sent at least 1 day prior to the
Meeting weeks scheduled meeting. Notice may be waived expressly
SPECIAL — notice must be sent at least 1 week. or impliedly, by any Director or Trustee
Notice may be waived, expressly or impliedly, by
any stockholder or member
Who Person designated in the by- laws. When there is The President shall preside
presides no person authorized to call a meeting, SEC may
issue an order to petitioner, who is also a
stockholder or member, to call a meeting to
choose a presiding officer
Quorum Majority of the outstanding capital stock, or ofthe Majority of the number of directors and trustees as
members. fixed in the articles of incorporation
EXCEPT: in cases where greater vote for an act
or business is required by law. ..;,
Note: For stock corporations, quorum iS'based
on outstanding voting stocks. For non-stock
corporations, only those who are actual, living
members with voting rights shall be counted.(Tan
v. Sycip, G.R. No. 153468, 2006
F. STOCKHOLDERS AND MEMBERS Articles of Incorporation is silent on such differences. (CIR
v. CA, G.R. No. 108576, 1999)
1. Rights of Stockholders and Members
The following are important rights of stockholders, which 2. Participation In Management
continue to exist e)..3n when the shares have been a. Proxy — Section 58 of the Corporation Code provides
sequestered: that stockholders and members may vote in person or
a. Right to attend meetings and to vote by proxy in all meetings of stockholders or members.
b. Right to receive dividends
c. Right to receive distributions upon liquidation of the b. Voting Trust Agreements — A stockholder confers
corporation upon a trustee the right to vote and other rights
d. Right to inspect the books of the corporation pertaining to the shares for a period not exceeding 5
e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, G.R. No. years at any one time.
91925, 1991)
However, if the voting trust was a requirement for a loan
agreement, period may exceed 5 years but shall
a. Doctrine of Equality of Shares automatically expire upon full payment of the loan.
All stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the
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Pooling or voting agreements — two or more right to revoke the trust and recover damages from such
stockholders agree that their shares shall be voted as a trustee.
unit. Usually concerned with the election of directors to
gain control of the management. Voting Trust v. Proxy
VOTING TRUST PROXY
Requisites for Valid Proxy Trustee votes as owner Proxy holder votes as
1. The proxy shall be in writing; agent
2. Signed by the stockholder or member; and Agreement must be Proxy need not be
3. Filed before the scheduled meeting with the corporate notarized notarized
secretary (Sec. 58) Trustee acquires legal Proxy has no legal title to
title to the shares of the the shares of the principal
Duration of Proxy transferring stockholder;
General Rule: It shall be valid only for the meeting for only beneficial title
which it is intended. remains with the
stockholder
Exception: Unless otherwise provided in the proxy Trustee may vote in Proxy must vote in person
person or by proxy unless
Note: No proxy shall be valid and effective for a period the agreement provides
longer than five (5) years at any one time. otherwise
Trustee is not limited to Proxy can only act at a
The by-laws of the corporation may prescribe a particular act at any particular specified stockholder's
form for proxy and fix the deadline for its submission. meeting meeting (if not continuing)
Trustee can vote and Proxy can only vote in the
Generally, proxies, even those with irrevocable terms, exercise all the rights of absence of the owners of
have always been considered as revocable, unless the stockholder even the stock
coupled with an interest, and their revocation may be by when the latter is present
formal notice, orally, or by conduct as by the appearance Agreement must not Proxy cannot exceed 5
of the stockholder or member giving the proxy, or the exceed 5 years at any years at any one time
issuance of a subsequent proxy, or the sale of shares. one time, except when '
the same is made a
Proxy Disputes—Jurisdiction condition of a loan
The regular courts now have the power to hear and decide Right to vote is inherent or
Voting right is divorced
cases involving all matters and conduct of the elections of inseparable from the right
from the ownership of
directors, including validation of proxies. The power of SEC to ownership of the stock
stocks
to regulate proxies remains only in instances when
Agreement is irrevocable Revocable anytime, except
stockholders vote on matters other than the election of
if coupled with interest
directors (SEC v. CA, G.R. No. 187702/189014, 2014).
Limitations on Right to Vote
Requisites for Valid Voting Trust
a. Where the Articles of Incorporation provides for
a. In writing and notarized
classification of shares pursuant to Sec. 6, non-voting
b. Specifying the terms and conditions
shares are not entitled to vote except as other provided
c. A certified copy must be filed with the corporation and
in the said section.
with the SEC. (Sec. 59)
b. Preferred or redeemable shares may be deprived of
the right to vote unless otherwise provided.
Duration
c. Fractional shares of stock cannot be voted unless they
General Rule: Not exceeding 5 years
constitute at least one full share.
d. Treasury shares have no voting rights as long as they
Exception: If the voting trust was a requirement for a loan
remain in treasury.
agreement, period may exceed 5 years but shall
e. Holders of stock declared delinquent by the board for
automatically expire upon full payment of the loan.
unpaid subscription.
No voting trust must be used for the purposes of fraud.
Stockholders who are defrauded by their trustees have a
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f. A transferee of stock if his stock transfer is not 3. Proprietary Rights
registered in the stock and transfer book of the
corporation. a. Right To Dividends
g. A stockholder who mortgages or pledges his shares The right to dividends vests at the time of its declaration
retains the right to vote unless he gives authority for by the Board of Directors.
creditor to vote.
Although stock certificates grant the stockholder the right
c. Cases When Stockholder's Action is Required to receive quarterly dividends of 1%, cumulative and
participating, the stockholders do not become entitled to
i. Concurrence of majority of the outstanding the payment thereof without necessity of a prior declaration
capital stock (by majority vote) of dividends. (Republic Planters Bank v. Hon. Agana, Sr.,
a. To enter into management contract if any G.R. No. 51765, 1997)
of the two instances stated above are
absent; Stock Corporations are prohibited from retaining surplus
b. To adopt, amend or repeal the by-laws. profits in excess of 100% of their paid-in capital stock,
ii. Concurrence of 2/3 of outstanding capital stock except:
(by 2/3 vote) (see similar enumeration in the 1. When justified by definite corporate expansion projects
specific express powers of the corporation) or programs approved by the board of directors
a. Extend or shorten corporate term; 2. Corporation is prohibited under a loan agreement from
b. Increase/Decrease Corporate Stock; declaring dividends without the creditor's consent.
c. Incur, Create Bonded Indebtedness; 3. Under special circumstances such as when there is a
d. Deny pre-emptive right; need for special reserve for probable contingencies
e. Sell, dispose, lease, encumber all or substantially
all of corporate assets; Form of Dividends
f. Investing another corporation, business other than 1. Cash Dividends (revocable before announcement).
the primary purpose; 2. Property Dividends (revocable before announcement).
9. Declare stock dividends 3. Stock Dividends, which requires, aside from the
h. Enter into management contract if (1) a declaration by the Board, the approval of 2/3 of the
stockholder or- stockholders representing the outstanding capital stock (revocable-before issuance). P".
same interest of both the managing and the
managed corporations own or control more than Note: No dividends can be declared out of capital, except
1/3 of the total outstanding capital entitled to vote liquidating dividends distributed at dissolution.
of the managing corporation; or (2) a majority of b. Right Of Appraisal
the members of the board of directors of the The right to withdraw from the corporation and demand
managing corporation also constitute a majority of payment of the fair value of his shares after dissenting from
the members of the board of the managed certain corporate acts involving fundamental changes in
corporation; corporate structure.
i. Amend the Articles of Incorporation
iii. By Cumulative Voting Instances Wherein Appraisal Right May Be Exercised
a. See earlier discussion on election of a. Extension or shortening of corporate term;
directors b. In case any amendment to the articles of incorporation
iv. Without board resolution has the effect of changing or restricting the rights of
a. 2/3 of outstanding capital stock — delegate any stockholders or class of shares, or of authorizing
to the board the power to amend the by- preferences in any respect superior to those of
laws; outstanding shares of any class;
b. Majority of the outstanding capital stock — c. Investing of corporate funds in another business or
revoke the power of the board to amend purpose;
the by-laws which was previously d. Sell or dispose all or substantially all assets of
delegated. corporation;
c. Removal of directors by a vote of the e. Merger or consolidation.
stockholders representing at least 2/3 of
the outstanding capital stock Exercise of Appraisal Right (Sec. 82)
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)
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• A written demand on the corporation within 30 days
after the vote was taken (failure to do so means All transfers of shares not entered in the stock and transfer
waiver); book of the corporation are invalid as to attaching or
• Ten (10) days from demand, the dissenting execution creditors of the assignors, as well as to the
stockholder must submit his certificates of stocks for corporation and to subsequent purchasers in good faith
notation that such certificates represent dissenting and to all persons interested, except the parties to such
shares. transfers: "All transfers not so entered on the books of the
• The price to be paid is the fair value of the shares on corporation are absolutely void; not because they are
the date the vote was taken; without notice or fraudulent in law or fact, but because they
• The fair value shall be agreed upon by the corporation are made so void by statute (Uson vs. Diosomito, G.R. No.
and the dissenting stockholders within 60 days from 42135, 1935).
the date the vote was taken. In case there is no
agreement, the fair value shall be determined by a The entries are considered prima facie evidence only and
majority of the 3 distinguished persons one of whom may be subject to proof to the contrary (Bitong v. CA, G.R.
shall be named by the stockholder another by the No. 123553, 1998).
corporation and the third by the two who were chosen;
• The right of appraisal is extinguished when: The stock and transfer book of the corporation cannot be
a. He withdraws the demand with the used as the sole basis for determining the quorum as it
corporations consent; does not reflect the totality of shares which have been
b. The proposed action is abandoned; subscribed, and more so when the articles of incorporation
c. The SEC disapproves the action. show a significantly larger amount of shares issued and
• If the dissenting stockholder is not paid within 30 days outstanding as compared to that listed in the stock and
from the award, he shall automatically be restored to transfer book (Lanuza v. Court of Appeals, G.R. No.
all his rights as stockholder. 131394, 2005).
c. Right To Inspect
Grounds for Not Allowing Inspection by a Stockholder
What Records Can Be Inspected? a. If the person demanding to examine the records has
1. Bodk of minutes of stockholders meetings; improperly used any information secured fdi- prior
2. Book of minutes of board meetings; examination,
3. Record or Book of all business transactions; b. He is not acting in good faith,
4. Stock and transfer book. c. It is not being exercised for a legitimate purpose
5. Financial statements (Sec. 75) (Gokongwei v. SEC, G.R. No. 45911, 1979).
Stock and transfer book Doctrinal Rulings on Right to Inspect
Record of: 1. The demand for inspection should cover only
1. All stocks in the names of the stockholders reasonable hours on business days;
alphabetically arranged; The stockholder, member, director or trustees demanding
2. The installment paid and unpaid on all stock for which the right is one who has not improperly used any
subscription has been made, and the date of payment information secured through any previous examination of
uf any installment; the records;
3. A statement of every alienation, sale or transfer of The demand must be accompanied with statement of the
stock made; and purpose of the inspection, which must show good faith or
4. Such other entries as the by-laws may prescribe. legitimate purpose. Illegitimate purposes include to obtain
corporate secrets (formula), nuisance suit, or to embarrass
Notes: Stock and Transfer Book the company. (Africa v. PCGG, G.R. No. 83831, 1992)
Section 74, while specific in the kinds of records that must
be maintained, is not limiting, thus, the inspection right is If the corporation or its officers contest such purpose or
applicable to the stock and transfer book (Yujuico v. contend that there is evil motive behind the inspection, the
Quiambao, G.R. No. 180416, 2014) burden of proof is with the corporation or such officer to
show the same.
The corporate secretary is the officer who is duly
authorized to make entries on the stock and transfer book The RTC, and not the Sandiganbayan, has jurisdiction
(Gokongwei v. SEC, GR No. 45911, 1979). over a stockholder's suit to enforce its right to inspect
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under the Corporation Code where the case does not The shareholders' right to subscribe to all issues or
involve a sequestration-related incident, but an intra- dispositions of shares of any class in proportion to his
corporate controversy (Abaci v. PHILCOMSAT, G.R. No. present stockholdings, the purpose being to enable the
200620, 2015) shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus.
A stockholder's right to inspect corporate records subsists
during the period of liquidation (three year period for Instances When Pre-Emptive Right Is Not Available
dissolution per Sec. 145). (Chua v. SEC, G.R. No. 216146, a. Shares to be issued to comply with laws requiring
2016) stock offering or minimum stock ownership by the
Remedies If Right to Inspect is Denied public;
b. Shares issued in good faith with approval of the
Mandamus stockholders representing 2/3 of the outstanding
Refusal to allow stockholders (or members of a non-stock capital stock in exchange for property needed for
corporation) to examine books of the -company is not a corporate purposes;
ground for appointing a receiver (or creating a mgt. c. Shares issued in good faith with approval of the
committee) since there are other adequate remedies, such stockholders representing 2/3 of the outstanding
as mandamus. (Ao-as v. CA, G.R. No. 128464, 2006) capital stock issued in payment of previously
contracted debts;
Damages d. In case the right is denied in the Articles of
Incorporation;
Criminal Sanction (Sec. 144) e. Waiver of the right by the stockholder;
Requisites for Section 144 to Apply (Ang-Abaya v. Ang, f. If the shares of a corporation are offered and not
G.R. no. 178511, 2008) subscribed and purchased by the stockholders, and
the shares are being offered again, there is no pre-
• A director, trustee, stockholder or member has made emptive right with respect to the latter offer of shares
a prior demand in writing for ,a copy of excerpts from (Benito V. SEC, G.R. No. L-56655, 1983)
the corporations records or minutes;
• Any officer or agent of the concerned corporation shall e. Right to Vote
refuse to allow the said director, trustee, stockholder (See Subsection F.2. on Participation in Management)
or member of the corporation to examine and copy
said excerpts; f. Right of First Refusal
• If refusal is made per a resolution or order of the board The right of first refusal provides that a stockholder who
of directors or trustees, the liability under this section may wish to sell or assign his shares must first offer the
for such action shall be imposed upon the directors or shares to the corporation or to the existing stockholders of
trustees who voted for refusal; and, the corporation, under terms and conditions which are
• Where the officer or agent of the corporation sets up reasonable; and that only when the corporation or the other
the defense that the person demanding to examine stockholders do not or fail to exercise their option, is the
and copy excerpts from the corporation's records and offering stockholder at liberty to dispose of his shares to
minutes has improperly used any information secured third parties.
through any prior examination of the records or
minutes of such corporation or of any other Pre-Emptive Right v. Right of First Refusal
corporation, or was not acting in good faith or -for a RIGHT OF FIRST
PRE-EMPTIVE RIGHT
legitimate purpose in making his demand, the contrary REFUSAL
must be shown or proved. Generally may be Arises only by virtue of
• The person demanding to examine has improperly exercised, subject to contractual stipulations or
used any information secured through any prior limitations in Corporation statutory stipulations (Sec.
examination of the records or minutes of such Code 98)
corporation or for any other corporation; and Covers unissued shares Covers shares already
• The one requesting to inspect was not taking in good offered for subscriptions issued
faith or for a legitimate purpose in making his demand May be exercised by mere Can only be exercised by
trustee or conservator the owner and not mere
d. Pre-Emptive Right (Republic v. trustee or conservator,
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Sandiganbayan, G.R. No. since it is an act of 1. Full payment for the corresponding number of
107789, 2003) ownership (Republic v. shares, the par value of which is covered by such
Sandiganbayan, G.R. No. payment; or
107789, 2003) . 2. Payment pro rata to each and all the entire
Right claimed against the number of shares subscribed for
Right exercisable against
Corporation, where the
the seller-stockholder
stockholder must pay Once an alternative is chosen, it must be applied uniformly
to all stockholders similarly situated, and therefore, it
Note: cannot be changed without the consent of all stockholders
A corporation has no power to prevent or restrain transfers who might be affected.
of its shares, unless such power is expressly conferred in
the Articles of Incorporation or the law. (Fleischer v. Botica • Proportionate participation in the distribution of
Nolasco Co., G.R.No. L-23241, 1925) assets in liquidation
Stockholders and stock corporation — Except
A provision in the by-laws granting the right of first refusal by decrease of capital stock, and as otherwise
(and therefore, restrains trade) is void and does not bind allowed by the Corporation Code, no corporation
third parties (Fleischer v. Botica Nolasco Co., G.R. No. L- shall distribute any of its assets or property to its
23241, 1925) stockholders except upon lawful dissolution and
after payment of all its liabilities (Sec. 122)
A corporation cannot by either its board, its by-laws, or the
acts of its officers create restrictions in stock transfers, - Members and foundations — Upon dissolution of
because 'restrictions in the transfer of stock must have a non-stock corporation, all liabilities and
their source in legislative enactment.' obligations must first be paid, and assets received
and held subject to limitations permitting their use
By-laws are intended merely for the protection of the for specified eleemosynary purposes shall be
corporation and prescribe relation, not restriction; they are properly transferred or returned, then the net
always subject to the charter of the corporation. (Rural assets remaining, if any, shall be distributed to the
Bank of Salinas v. CA, G.R_No. 96674, 1992) members, or any class or classes of members, to
the extent that the articles of incorporation or by-
g. Other Rights laws provide for a plan of distribution. Otherwise,
• Right to issuance of stock certificate for fully paid a plan of distribution may be adopted in the
shares - Under Section 64 of the Corporation Code, process of dissolution by:
no certificate of stock shall be issued to a subscriber a. Majority vote of the Board of Trustees
until the full amount of his subscription together with b. Adopted by at least 2/3 of the members
interest and expenses (in case of delinquent shares), having voting rights (Secs. 94-95)
if any is due, has been paid. A subscriber must first
totally pay his subscription before a certificate of stock • Right to transfer of stocks in corporate books;
covering shares subscribed and paid for could be
issued to him. But an unpaid subscription (not declared Requirements for valid transfer of stocks
delinquent) can be voted upon in corporate meetings. 1 There must be delivery of the stock certificate;
Such delinquent shares are also entitled to dividends, 2. The certificate must be endorsed by the owner, or his
subject to the rules set forth in Section 43 of the attorney-in-fact, or other persons legally authorized to
Corporation Code on delinquent shares. make the transfer; and
3. To be valid against third parties, the transfer must be
Nevertheless, Section 64 does not prohibit the corporation recorded in the books of the corporation
from "dividing" the subscription of a subscriber by
considering portion thereof as fully paid and issuing a A transfer of shares not recorded in the stock and transfer
corresponding certificate over the paid- up shares. Thus, book is non- existent as far as the corporation is
in the absence of provisions in the by- laws to the contrary, concerned, and consequently, a petition for mandamus
a corporation may apply payments made by subscribers filed by a transferee, compelling it to issue the
on account of their subscriptions either as: corresponding certificates in th9 name of the transferee
would be without basis. It is only when the transfer has
been recorded in the stock and transfer book that a
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corporation may rightfully regard the transferee as one of (Yu v. Yukayguan, G.R. No. 177549, 2009; Ang v. Sps.
its stockholders. From this time, the consequent Ang, G.R. No. 201675, 2013)
obligations on the part of the corporation to recognize such
right as it is mandated by law to recognize arises (Ponce c. No appraisal rights are available for the act or acts
v. Alsons Cement, G.R. No. 139802, 2002). complained of; and
d. The suit is not a nuisance or harassment suit (Interim
Note: In Andaya v. Rural Bank of Cabadbaran, Inc., G.R. Rules of Procedure for Intra-Corporate Controversies,
No. 188769, 2016, the Court ruled that the registration of a A.M. No. 01-2-04-SC, 2001).
transfer of shares of stock is a ministerial duty on the part
of the corporation. Aggrieved parties may then resort to the 5. Obligations of a Stockholder
remedy of mandamus to compel corporations that a. Liability to the corporation for unpaid subscription;
wrongfully or unjustifiably refuse to record the transfer or b. Liability to the creditors of the corporation for unpaid
to issue new certificates of stock. This remedy is subscription;
available even upon the instance of a bona fide c. Liability to the corporation for interest on unpaid
transferee who is able to establish a clear legal right to subscription if so required by the by-laws;
the registration of the transfer. d. Liability for watered stock;
e. Liability for dividends unlawfully paid;
4. Remedial Rights
6. Meetings
Suits by Stockholders/Members
a. Individual Suit — those brought by the shareholder in a. Regular or Special:
his own name against the corporation when a wrong is 1. Regular - held annually on a date fixed in the by- laws,
directly inflicted against him. or if not so fixed, on any date in April of every year as •
b. Representative Suit — those brought by the determined by the Board of Directors or Trustees.
stockholder in behalf of himself and all other Provided, written notice of regular meeting must be
stockholders similarly situated when a wrong is sent at least 2 weeks, unless a different period is
committed against a group of stockholders. required by the by- laws
c. Derivative Suit — those brought by one or more
stockholders/members in the name and on behalf of Special - held at any time deemed necessary or as
the corporation to redress wrongs committed against provided in the by- laws. Provided that at least 1 week
it, or protect/vindicate corporate rights whenever the written notice shall be sent to all stockholders or
officials of the corporation refuse to sue, or the ones to members, unless otherwise provided in the by- laws.
be sued, or has control of the corporation. (Ching v. Note that notice of any meeting may be waived,
Subic Bay, G.R. No. 174353, 2014) expressly or impliedly by any stockholder or member.
A lawyer engaged as counsel for a corporation
cannot represent members of the Board in a i. When and Where - The meetings of stockholders or
derivative suit against them. To do so would be members must be held in the city or municipality where the
tantamount to conflicting interest between the principal office of the corporation is located, preferably in
Board and the corporation (Homilla V. Salunat, the principal office itself. Any provision in the by- laws
A.C. 5804, 2003). changing such place shall be illegal
Requisites of Derivative Suit ii. Notice
a. He (Plaintiff) was a stockholder or member at the time
the acts or transactions subject of the action was filed; Section 50 of the Corporation Code expressly allows a
b. He exerted all reasonable efforts, and alleges the shorter period of notice of stockholders'
same with particularity in the complaint, to exhaust all meetings that those provided under its default two (2) week
remedies available under the articles of incorporation, period, provided the same is provided for in the By-Laws,
by-laws, laws or rules governing the corporation or (Ricafort v. Dicdican, 787 SCRA 163, 2016); such period
partnership to obtain the relief he desires; set in the by-laws is valid even when the period is reckoned
from the mailing of the notice rather than when it is actually
The exhaustion of intra-corporate remedies cannot be received by the stockholder of record, (Guy v. Guy, 790
dispensed even if the company is a family corporation SCRA 288, 2016)
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b. Who Calls The Meetings on a similar demand, the yeas and nays must
1. Whenever for any cause, there is no person be taken on any motion or proposition, and a
designated by the by-laws to call a meeting, the SEC record thereof carefully made.
upon petition of a stockholder/ member, and on the - the protest of any director, trustee, stockholder
showing of good cause therefore, may issue an order or member on any action or proposed action
to petitioner to call a meeting by giving proper notice, must be recorded in full on his demand. (Sec.
with the petitioner presiding thereat until at least a 74)
majority of stockholders/ members present have
chosen a presiding officer. The signing of the minutes by all the members of the board
2. Same remedy may be used if the authorized person is not required—there is no provision in the Corporation
fails or refuses to call a meeting Code that requires that the minutes of the meeting should
be signed by all the members of the board. The signature
c. Quorum in meetings of the corporate secretary gives the minutes of the meeting
probative value and credibility (People v. Dumlao, G.R. No.
General rule: Majority of the outstanding capital stock, or 168918, 2009).
of the members, shall constitute a quorum
The entries contained in the minutes are prima fade
Outstanding Capital Stock — the total shares of stock evidence of what actually took place during the meeting,
issued under binding subscription agreements to pursuant to Section 44, Rule 130 of the Revised Rule on
subscribers or stockholders, whether or not fully or partially Evidence (People v. Dumlao, G.R. No. 168918, 2009).
paid, except treasury shares
Resolution vs. Minutes Of The Meeting (People v.
Exception: In cases where greater vote for an act or Dumlao, G.R. No. 168918, 2009)
business is required by law as when the required vote is RESOLUTION MINUTES OF THE
2/3 of the outstanding capital stock, or membership as the MEETING
case may be A formal action by a A brief statement not only
corporate board of what transpired at a
of
Note: For stock corporations, the "quorum" referred to in directors or meeting,
other usually of
Section 52 of the Corporation Code is based on the corporate bodystockholders/members or
number of outstanding voting stocks. For non- stock authorizing a particular directors/trustees, but also
corporations, only those who are actual, living members act, transaction, or
at a meeting of an
with voting rights shall be counted in determining the appointment executive committee
existence of a quorum during member's meetings. Dead
members shall not be counted (Tan v. Sycip, G.R. No.
153468, 2006). F. CAPITAL STRUCTURE
d. Minutes of meetings 1. Subscription Agreements
• Records of all business transactions and minutes Any contract for the acquisition of unissued stock shall be
of all meetings shall be kept and carefully deemed a subscription, notwithstanding the fact that the
preserved at a corporation's principal office parties refer to it as a purchase or some other contract.
• It shall set forth in detail: (Sec. 60)
time and place of holding the meeting, Kinds of Subscription Contracts
how authorized, a. Pre-incorporation subscription — entered into before
the notice given, the incorporation and irrevocable for a period of six (6)
whether the meeting was regular or special; if months from the date of subscription unless:
special its object must be stated, i. All other subscribers consent to the revocation, or
- those present and absent, and every act done ii. The corporation failed to materialize after 6
or ordered done at the meeting. months or within the stipulated period.
- upon the demand of any director, trustee,
stockholder or member, the time when any It cannot be revoked after filing the Articles of Incorporation
director, trustee, stockholder or member with the SEC. (Sec. 61)
entered or left the meeting must be noted in
the minutes;
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b. Post-incorporation subscription — entered into after 3. Shares of Stock
incorporation, such as for the unsubscribed portion of
the authorized capital stock and for the purchase of a. Nature of Stock
increased capital stocks after an amendment of the This is the interest or right, which an owner has in the
article of incorporation. management of the ,corporation, and its surplus profits,
and, on dissolution, in all of its assets remaining after the
2. Consideration for Stocks (Sec. 62) payment of its debt. The stockholder may own the share
Stocks shall not be issued for a consideration less than the even if he is not holding a certificate of stock.
par or issued price thereof.
Shares of Stock v. Certificate of Stock
Consideration for issuance of stock may be by any or a SHARES OF CERTIFICATE OF STOCK
combination of any two or more of the following: STOCK
a. Cash actually paid Unit of interest in a Evidence of the holder's
b. Property (tangible or intangible) actually received and corporation ownership of the stock and of his
necessary or convenient for the corporation's use right as a shareholder and up to
c. If other than cash, valuation must first be determined the extend specified therein
by incorporators (if not yet incorporated) or Board
subject to SEC approval
Incorporeal or It is concrete and tangible
d. Labor performed or -service actually rendered to the
intangible property
corporation
e. Debts incurred previously by the corporation (for May be issued by May be issued only if the
subscriptions after incorporation) the corporation even subscription is fully paid
f. Amounts from unrestricted dividends (for declaration if the subscription is .
of stock dividends) not fully paid
g. Outstanding shares exchanged in reclassification or
conversion Note: A stockholder who does not pay his subscription is
h. No issuance of shares on promissory notes or future not entitled to the issue of a stock certificate. The
services subscription price of the stocks subscribed by him should
i. Same rules on consideration for stocks whenever first be paid.
applicable are to be used for bonds issued by the
corporation b. Consideration for Shares of Stock
The issued price of no par value shares is the amount (See earlier discussion)
fixed:
i. In the Articles c. Watered Stock (Diluted Stock)
ii. By the Board if authorized in the Articles or By-
Laws, or i. Definition
iii. By majority vote of the outstanding stock Stock issued for a consideration less than its par or issued
value or for a consideration in any form other than cash,
Where the consideration is other than actual cash, or valued in excess of its fair value. (Sec. 65)
consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be ii. Liability Of Directors For Watered Stock
determined by the incorporators or the board of directors, Directors or officers consenting to issuance of watered
subject to approval by the SEC. (Sec. 62) stock are solidarily liable with the stockholder concerned,
to the corporation or its creditors for the difference between
Note: A special stipulation contained in a subscription to the fair market value received (by the corporation at the
corporate stock which, if valid, would lessen the capital of time of issuance) and the par or issued value of the stock.
the company and relieve the subscriber from liability to be
sued upon the subscription, is illegal (National Exchange If knowing the same, the Directors or Officers did not object
v. Dexter, G.R. No. L-27872, 1928). and express their written objection, filed with the corporate
secretary, they shall be liable for the issuance of watered
stocks. (Sec. 65)
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iii. Trust Fund Doctrine On Watered Stocks • Voting share with complete voting rights
The Trust Fund Doctrine is the basis for the prohibition on • Non - voting shares are usually preferred or
issuing watered stock. redeemable shares and have limited voting rights.
A Corporation has no power to release an original Non- Voting Shares Have Voting Rights In The
subscriber of its capital stock from the obligation of paying Following Matters:
for his shares, without a valuable consideration for such a. Amendment of Articles
release; and as against creditors, a reduction of the capital b. Adoption/ Amendment of By- Laws
stock can take place only in the manner and under the c. Sale, lease, exchange, mortgage, pledge or dispose of
conditions prescribed by the statute or the charter or the all or substantially all of corporate property
articles of incorporation (Philippine Trust Corp. v. Rivera, d. Incur, create, increase bonded indebtedness
G.R. No. L-19761, 1923). e. Increase, decrease capital stock
f. Merger/ consolidation with another corporation
See subsection F.4. for discussion on Trust Fund Doctrine. g. Investment of funds in another corporation
h. Dissolution of corporation
d. Situs of the Shares of Stocks
The situs of shares of stock is the domicile of the Other Classes of Shares: (Secs. 7, 8, 9)
corporation (Tayag v. Benguet Consolidated Inc., G.R. No. a. Founder's shares — Given rights and privileges
L-23145, 1968). not enjoyed by owners of other stocks; exclusive
right to vote/be voted in the election of directors
e. Classes of Shares of Stock (Sec. 6) shall not exceed 5 years
a. Common and Preferred shares b. Redeemable shares — Expressly provided in
Common shares are also called ordinary shares articles; may be purchased/taken up upon
and they share in profits pro- rata expiration of period of said shares purchased
- Preferred shares may be preferred (a) as to whether or not there are unrestricted retained
dividends, or (b) as to distribution of assets during earnings; may be deprived of voting rights.
liquidation, or (c) as to any other manner stated in c. Treasury stocks — stocks previously issued and
the Arti,cies, not violative of the Corp Code. If fully paid for and reacquired by the corporation
authorized by Articles, Board may fix terms. It is through lawful means (purchase, donation, etc.);
ALWAYS with a stated par value. not entitled to vote and no dividends could be
declared thereon as corporations cannot declare
b. Par Value and No-Par Value dividends to itself.
• Par value shares - with a pre-stated amount or
denomination Escrow shares — those held by a third person to be
• Non- par value - no pre-stated value released only upon the performance of a condition or the
happening of a certain event contained in the agreement.
Non-par value shares are deemed fully paid and non-
assessable so holders of such are not liable to the Preferred cumulative participating share of stock -
corporation or its creditors. Share entitling its holder to preference in the payment of
dividends ahead of common stockholders and to be paid
The consideration received is treated as capital and cannot the dividends due for prior years and to participate further
be declared as dividends. with common stockholders in dividend declarations.
Because they are vested with public interest, the Promotion stocks for services rendered prior to
following types of corporations may only issue par incorporation escrow stock — Stock deposited with a 31d
value shares: person to be delivered to stockholder/assignor after
a. Banks complying with certain conditions.
b. Trust Companies
C. Insurance Companies Over-Issued Stock — Stock issued in excess of authorized
d. Public Utilities capital stock; null and void.
e. Building and Loan Associations.
c. Voting and Non- Voting Shares
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4. Payment of Balance of Subscription petitioner by the respondent corporation (Apocada v.
NLRC, G.R. No. 80039, 1989).
May be through any of the following means:
a. As specified in the subscription contract. c. Sale of Delinquent Shares
b. The Board, through a resolution, may call for all or part
of the unpaid subscriptions. Delinquency on subscriptions
c. Failure to pay on a specified date, the entire balance Stocks not paid within 30 days from the date fixed in the
which is due and payable. contract of subscription or from the date stated in the call
d. Failure to pay within thirty (30) days from the date the made by the Board of Directors.
subscription becomes delinquent and is subject to
sale. i. Effect of Delinquency
• They shall be subject to delinquency sale.
The prescriptive period in case of subscription of shares • The stock shall not be voted or be entitled to vote
begins to run only from the time the board of directors or to representation at any stockholder's meeting.
declares that the balance is due and payable (Garcia v. • The holder shall not be entitled to any of the rights
Suarez, G.R. No. 45493, 1939) of a stockholder except the right to dividends
• The corporation has the right to apply cash
Unpaid Subscriptions (Sec. 66) dividends due to the unpaid balance plus cost and
a. There will be interest imposed on unpaid subscriptions expenses and to withhold stock dividends until the
b. Payable to the corporation from date of subscription unpaid subscription is fully paid.
c. If required by and interest fixed in the By-laws
d. If interest is required but not fixed — legal rate Procedure of Delinquency Sale
e. Therefore, no interest on unpaid subscription is a. The Board, by a resolution, declares a call, which is to
required: pay the unpaid subscription or part thereof on a
a. If not required by by-laws specified date.
b. If not required by subscription contract
Note: Notice of said resolution is sent to all shareholders
Methods of Collection of Unpaid Subscription with unpaid subscriptions.
a. Call for payment
b. Declaration of delinquency and sale at public auction There is no need for a call if the subscription contract
of delinquent shares; specifies dates when subscription balance is due.
c. Ordinary civil action;
d. Collection from cash dividends and other amounts due b. If no payment is made within thirty (30) days from the
to stockholders if allowed by by-laws/agreed to by him. date specified, the board shall order the sale of
delinquent shares.
a. Call by-Board of Directors c. Notice of sale and copy of resolution ordering the sale
The Board of Directors may, by a formal resolution, issue, of delinquent shares is given to every delinquent
at any time, subject to the subscription contract, a call for stockholder personally or by registered mail.
all or part of the unpaid subscription with or without d. Publication once a week for two (2) consecutive weeks
interest. in a newspaper of general circulation in the province or
city of the corporation's principal office.
Requisites for a valid call e. Sale at Public Auction is done wherein the winning
a) Must be made in the manner prescribed by law; bidder is the one who offers full payment of balance
b) Must be made by the Board of Directors; and plus accrued interest, advertising costs, sale expenses
c) Must operate uniformly upon all shareholders for smallest number of shares or fraction of a share. If
there are no bidders, the Corporation may bid and the
Note: No need of a call if the subscription contract shares become treasury shares, provided the same
specifies dates when the subscription balance is payable. has unrestricted retained earnings.
b. Notice Requirement Note: There shall be no sale at public auction if:
The unpaid subscriptions are not due and payable until a a. The delinquent stockholder pays on or before the
call is made by the corporation for payment. It does not • sale: (a) balance due, (b) accrued interest, or (c)
even appear that a notice of such has been sent to advertising costs and expenses of sale.
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b. The Board orders otherwise, on any of the Note: Under Sec. 43.1 of the Securities and Regulation
following grounds: (a) Defect in the Notice of Sale; Code, a corporation whose shares of stock are registered
or (b) Defect in sale itself. pursuant to the Corporation Code or listed in a stock
exchange may:
After the sale, the Stocks purchased are transferred to the a. If so resolved by its Board of Directors and agreed by
winning bidder in the corporate books. a shareholder, issue shares to, or record the transfer
of some or all of its shares into the name of said
When Sale May Be Questioned shareholders, investors or, securities intermediary in
a. The action is filed on the ground of irregularity or defect the form of uncertificated securities;
in the notice of sale, or in the sale of the delinquent b. The use of uncertificated securities shall be without
stock; prejudice to the rights of the securities intermediary
b. The party seeking to maintain such action first pays or subsequently to require the corporation to issue a
tenders to the party holding the stock the sum for which certificate in respect of any shares recorded in its
the same was sold with interest from the date of the name; and
sale at the legal rate; and c. If so provided in its articles of incorporation and by-
c. The complaint was filed within 6 months from the date laws, issue all of the shares of a particular class in the
of the sale (Sec. 69) form of uncertificated securities and subject to a
condition that investors may not require the
Cases When Corporation Can Reacquire Stock corporation to issue a certificate in respect of any
shares recorded in their name.
Note: Corporation must have unrestricted retained
earnings c. Negotiability
a. Eliminate fractional shares; Shares of stocks are transferable by endorsement plus
b. Collection of compromise indebtedness to the delivery.
corporation arising from unpaid subscriptions;
c. Purchase delinquent shares; Endorsement plus delivery is good as between parties but
d. Exercise appraisal right. it needs to be recorded in the corporate books to be
effective against ihird parties.
5. Certificate of Stock
A certificate of stock is a quasi-negotiable instrument. It
a. Nature of the Certificate may be transferred by endorsement, coupled with delivery
It is the paper representation or tangible evidence of the but the holder thereof takes it without prejudice to such
stock itself and of the various representations therein. It rights or defenses as the registered owner or creditor may
expresses the contract between the corporation and the have under the law, except insofar as such rights or
stockholder. It is not essential to the ownership and/or defenses are subject to the limitations imposed by the
existence of the share of stock. It is prima facie evidence principles governing estoppel. (De los Santos v. McGrath,
that the holder is a shareholder in a corporation (Makati G.R. No. L-4818, 1955)
Sports Club v. Cheng, G.R. No. 178523, 2010)
i. Requirements for Valid Transfer of Stock:
It is a written acknowledgment by the corporation of the 1. If represented by a certificate, the following must be
stockholder's interest in the corporation. It is the personal strictly complied with:
property and may be mortgaged or pledged. Transfer a. Delivery of the certificate;
binds the corporation when it is recorded in the corporate b. Indorsement by the owner or his agent;
books. c. To be effective against third parties, the transfer
must be recorded in the books of the corporation.
Note: It is the shares that can be mortgaged or pledged, 2. If NOT represented by the certificate (such as when
not the certificate of stock the certificate has not yet been issued or where for
some reason is not in the possession of the
b. Uncertificated Shares/Securities stockholder):
Defined as security evidenced by electronic or similar a. By means of deed of assignment or public
records. (Securities and Regulation Code, Sec. 3.14) document; and
b. Such is duly recorded in the books of the
corporation
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d. Issuance b. Certificates and Serial Numbers of lost
Certificates; and
i. Full Payment c. Other Information and Evidence.
There shall be no issuance of stock certificates unless b. Publication of notice of loss by the Corporation for at
there is full payment of: least three (3) consecutive weeks in a newspaper of
1. Subscription; general circulation in the principal place of business of
2. Interest; and the corporation.
3. Expenses (in case of delinquent shares). c. If a contest is presented to the corporation or if an
action is pending in court, issuance of new certificates
ii. Payment pro rata is suspended until final court decision.
In the absence of special agreement to the contrary, the d. No action is allowed against the corporation for issuing
subscriber's right consists only in an equity entitling him to new shares except for fraud, bad faith, or negligence.
a certificate for the total number of shares subscribed for
by him upon payment of the remaining portion of the 6. Stock And Transfer Book
subscription price (Fua Cur; vs. Summers, G.R. No. 19441,
1923). a. Contents
Record of:
Requisites for Issuance of Certificate of Stock 1. All stocks in the names of the stockholders
1. The certificate must be signed by the president or vice- alphabetically arranged;
president, countersigned by the secretary or assistant 2. The installment paid and unpaid on all stock for which
secretary; subscription has been made, and the date of payment
2. The certificate must -be sealed with the seal of the of any installment;
corporation; 3. A statement of every alienation, sale or transfer of
3. The certificate must be delivered; stock made; and
4. The par value, as to par value shares or full 4. Such other entries as the by-laws may prescribe.
subscription as to no par value shares must first be
fully paid; and Only absolute transfers of shares of stock are required to
5. The original certificate must be surrendered where the be recorded in the corporation's stock and transfer book in
person requesting the issuance of a certificate is a order to have force and effect as against third persons.
transferee from the stockholder (Bitong v. CA. G.R. Attachments of shares are not "transfer" and need not be
No. 123553, 1998) recorded in the corporation's stock and transfer book.
(Ferro Chemicals v. Garcia, etal., G.R. 168134, 2016)
Shares Of Stock v. Certificate Of Stock
SHARES OF STOCK CERTIFICATE OF STOCK b. Who May Make Valid Entries
Evidence of the holder's Entries made on the stock and transfer book by any person
Unit of interest in a ownership of the stock and other than the Corporate Secretary, such as those made
corporation of his right as a by the President and Chairman cannot be given any valid
shareholder effect (Torres Jr. v. CA, G.R. No. 120138, 1997).
Incorporeal or intangible Concrete and tangible
property property Registration of a transfer of shares of stock is a ministerial
May be issued by the duty on the part of the corporation. Aggrieved parties may
corporation even if the May be issued only if the then resort to the remedy of mandamus to compel
subscription is not fully subscription is fully paid corporations that wrongfully or unjustifiably refuse to
paid record the transfer or to issue new certificates of stock.
This remedy is available even upon the instance of a bona
e. Lost or Destroyed Certificate fide transferee who is able to establish a clear legal right to
Procedure for the issuance of new certificates to replace the registration of the transfer. (Andaya v. Rural Bank of
those lost, stolen, or destroyed: Cabadbaran, Inc., G.R. No. 188769, 2016)
a. Affidavit of loss in triplicate copies to be made by the
registered owner or legal representative filed with the
corporation, and stating the following:
a. Circumstances of the Loss;
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7. Disposition And Encumbrances Of Shares restrict the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to the
a. Sale of Shares formalities and procedure to be followed in effecting
transfer (Thomson v. CA, G.R. No. 116631, 1998).
Sale of Partially Paid Shares
Section 63 provides that no share of stock against which c. Requisites of a Valid Transfer
the corporation holds any unpaid claims shall be If represented by a certificate, the following must be strictly
transferable in the books of the corporation. complied with:
a. Delivery of the certificate;
Sale of a Portion of Shares Not Fully Paid b. Indorsement by the owner or his agent;
A stockholder who has not paid the full amount of his c. To be valid against third parties, the transfer must be
subscription cannot transfer part of his subscription in view recorded in the books of the corporation (Rural Bank
of the indivisible nature of a subscription contract. (SEC of Lipa v. CA, G.R. No. 124535, 2001).
Opinion)
If NOT represented by a certificate, the following must be
Sale of All Shares Not Fully Paid complied with:
The entire subscription, although not yet fully paid, may be a. By means of a deed of a Deed of Assignment;
transferred to a single transferee, who as a result of the b. The same must be recorded in the books of the
transfer must assume the unpaid balance. (SEC Opinion) corporation.
Consent of the corporation must first be secured since the
transfer of subscription rights and obligations The failure by a seller to deliver, within a reasonable time,
contemplates a novation of contract. (Civil Code, Art. 1923) the stock certificates representing shares of stock subject
of a sale transaction may be a basis to rescind such sale
The SEC correctly categorized the assignment of the (Fil-Estate Gold and Development v. Vertex, G.R. No.
subscription agreements as a form of novation by 202079, 2013).
substitution of a new debtor and which required the
consent of or notice to the creditor. In this case, the change In case of chattel mortgage, a double registration is
of debtor took place when R.C. Lee assigned the Oceanic-- necessary with the Register of Deeds where:
shares under the subscription agreements to SSI so that a. The debtor resides
the latter became obliged to settle the 75% unpaid balance b. The corporation has its principal place of business.
on the subscription. The SEC was correct in saying that
Interport was duly notified of the assignment when SSI Registration on the stock and transfer book would be of no
tendered its payment for the 75% unpaid balance, and that effect
it could not anymore refuse to recognize the transfer of the
transfer of the subscription agreements to SSI was to In case of attachments and levies, shares may be attached
extinguish the obligation of R.C. Lee to Oceanic, now by leaving with the corporate officer a copy of the writ and
Interport. Interport was no longer obliged to accept any notice. No recording in the stock and transfer book is
payment from R.C. Lee because the latter had ceased to needed. The moment the notice has been duly delivered,
be privy to the subscription agreements, but was now it becomes binding.
legally bound to accept SSi's tender of payment as the new
debtor. (Interport Resources Corporation v. Security d. Involuntary Dealings With Shares
Specialist, Inc., G.R. No. 154069, 2016) As an incident of ownership, a stockholder may pledge,
mortgage or encumber his shares of stocks. Restrictions
Sale of Fully Paid Shares by the corporation are only valid when:
Section 63 provides that shares of stock issued with a a. They appear in the Articles of Incorporation, by-laws,
corresponding certificate of stock are personal property and the certificates.
and may be transferred by delivery of the certificate or b. They are not more onerous than granting existing
certificates indorsed by the owner or his attorney-in-fact or stockholders an option to purchase within a
other person legally authorized to make the transfer. reasonable period and within reasonable terms.
b. Allowable Restrictions on Sale of Shares B. DISSOLUTION AND LIQUIDATION
The authority granted to a corporation to regulate the
transfer of its stock does not empower the corporation to Dissolution
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Extinguishment of the franchise of a corporation and the three (3) consecutive weeks in three (3) public places
termination of its corporate existence. is sufficient;
• Objections must be filed no less than 30 days nor more
However, the corporation shall nevertheless be continued than 60 days after the entry of the Order;
as a body corporate for three (3) years after the time when • After the expiration of the time to file objections, a
it would have been so dissolved, for the purpose of hearing shall be conducted upon prior five (5) day
prosecuting and defending suits by or against it and notice to hear the objections;
enabling it to settle and close its affairs, to dispose of and • Judgment shall be rendered dissolving the corporation
convey its property and to distribute its assets, but not for and directing the disposition of assets; the judgment
the purpose of continuing the business for which it was may include appointment of a receiver.
established. (Sec. 122)
iii. By Shortening Corporate Term- This is done by
1. Modes of Dissolution: amending the Articles of Incorporation.
a. Voluntary b. Involuntary
A corporation may be dissolved by the SEC upon filing of
i. Where No Creditors Are Affected a verified complaint and after proper notice and hearing on
• A meeting must be held on the call of directors or grounds provided by existing laws, rules, or regulations.
trustees; (Sec. 121)
• Notice of the meeting should be given to the
stockholders by personal delivery or registered mail at i. Expiration of Corporate term: A corporation has a term
least 30 days prior to the meeting; of not more than 50 years from date of incorporation
• The notice of meeting should also be published for subject to extension for a period not exceeding 50 years
three (3) consecutive weeks in a newspaper published per extension unless:
in the place; - Sooner dissolved
• The resolution to dissolve must be approved by the - Extended. (Sec. 11)
majority of the directors/trustees and approved by the
stockholders representing at least 2/3 of the ii. Failure to Organize And Commence Business Within
outstanding capital stock or 2/3 of members; 2 Years From Incorporation
• A copy of the resolution shall be certified by the If the corporation does not formally organize and
majority of the directors or trustees and countersigned commence the transaction of its business or the
by the secretary; construction of its works within 2 years from the date of its
• The signed and countersigned copy will be filed with incorporation, its corporate power ceases and the
the SEC and the latter will issue the certificate of corporation shall be deemed dissolved. (Sec. -22)
dissolution.
iii. Legislative Dissolution
ii. Where Creditors Are Affected
• Approval of the stockholders representing at least 2/3 iv. Dissolution by the SEC on Grounds under Existing
of the outstanding capital stock or 2/3 of members in a Laws
meeting called for that purpose; A corporation may be dissolved by the SEC 1- ased on the
• Filing a Petition with the SEC signed by majority of following grounds:
directors or trustees or other officers having the
management of its affairs verified by President or • Failure to organize and commence business within 2
Secretary or Director. Claims and demands must be years from incorporation (Corporation Code, Sec. 22)
stated in the petition; • Continuously inoperative for 5 years (Corporation
• If Petition is sufficient in form and substance, the SEC Code, Sec. 22; (PD 902-A, Sec. 6(i(4)))
shall issue an Order fixing a hearing date for • Fraud in procuring Certificate of Registration (PD 902-
objections; A, Sec. 6(i)(1))
• A copy of the Order shall be published at least once a • Serious misrepresentation as to what the government
week for 3 consecutive weeks in a newspaper of can do or is doing to the prejudice of or damage to the
general circulation or if there is no newspaper in the general public. Fraud in procuring Certificate of
municipality or city of the principal office, posting for Registration (PD 902-A, Sec. 6(i(2))
Page 142 of 250
(
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• Refusal to comply with any lawful order of the SEC Corporate dissolution due to mismanagement of majority
restraining commission of acts which would amount to stockholder is too drastic a remedy, especially when the
a grave violation of its franchise (PD 902-A, Sec. situation can be remedied such as giving minority
6(i)(3)) stockholders a veto power to any decision (Chase v.
• Failure to file by-laws within 30 days from issue of Buencamino, G.R. No. 20395, 1985).
certificate of incorporation (PD 902-A, Sec. 6(i)(5))
• Failure to file required reports (PD 902-A, Sec. 6(i(6) Effects of Dissolution
• Breach of provision of law for its creation or renewal (a) Vesting of legal title to the corporate property in the
(Sec. 2(a), Rule 66, Rules of Court) stockholders, who become co-owners thereof
• Continuance of business not feasible as found by (b) The corporation ceases to be a body corporate to
Management Committee or Rehabilitation Receiver continue the business for which it was established.
(PD 902-A, Sec. 6(d))
• Act or omission which amounts to a surrender of The termination of the life of a juridical entity does not by
corporate rights, privileges, or franchises (Sec. 2(c), itself cause the extinction or diminution of the rights and
Rule 66, Rules of Court) liability of such entity, since it is allowed to continue as a
juridical entity for three (3) years for the purpose of
• Misuse of a right, privilege, or franchise in
contravention of law, such as the commission of ultra prosecuting and defending suits by or against it and
vires or illegal acts (Sec. 2(c), Rule 66, Rules of Court) enabling it to settle and close its affairs, to dispose of and
convey its property, and to distribute its assets (Republic
Non- Use of Charter (Sec. 22) v. Tancinco, G.R. No. 139256, 2002).
"Organization" under SEC Rules A board resolution to dissolve the corporation does not
operate to so dissolve the juridical entity. For dissolution to
• Adoption of the by-laws and the filing and approval of
be effective the requirements mandated by the
the same with and by the SEC if the same were not
Corporation Code should have been strictly complied with"
adopted and filed simultaneously with the articles of
(Vesagas v. Court of Appeals, G.R. No. 142924, 2001)
incorporation;
• Election of the Board of
• Directors or Trustees and of A corporation cannot extend its life by amendment of its
the officers;
articles of incorporation effected during the three-year
• Establishment of the principal office; and
statutory period for liquidation when its original term of
• Providing for the subscription and payment of the existence had already expired, as the same would
capital stock and the taking of such steps as are constitute new business (Alhambra Cigar & Cigarette
necessary to endow the legal entity with capacity to Manufacturing Company, Inc. v. SEC, G.R. No. 23606,
transact the legitimate business for which it was 1968).
created
When the period of corporate life expires, the corporation
"Commenced Business" under SEC Rules
ceases to be a body corporate for the purpose of
When the corporation has performed preparatory acts continuing the business for which it was organized (PNB v.
geared towards the fulfillment of the purposes for which it Court of First Instance of Rizal, Pasig, Br. XXI, G.R. No.
was established such as but not limited to the following:
63201, 1992).
• Entering into contracts or negotiations for lease or sale
of properties to be used as business or factory site; A party's stockholding in a corporation, whether existing or
• Making plans for and the construction of the factory; dissolved, is a property right which he may vindicate
and against another party who has deprived him thereof.
• Taking steps to expedite the construction of the
company's working equipment Stockholders may convey their respective shareholdings
toward the creation of a new corporation to continue the
The failure to file the by-laws does not automatically business of the old or they may reincorporate by filing new
operate to dissolve a corporation but is only a ground for articles of incorporation and by-laws.
such dissolution (Chung Ka Bio v. IAC, G.R. No. 74653,
1988).
Demands of Minority for Dissolution
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2. Methods ofLiquidation until rendition of 'the final judgment, even if such judgment
Liquidation is rendered beyond the three-year period allowed by
Process by which all the assets of the corporation are Section 122. However, an already defunct corporation
converted into liquid assets in order to facilitate the cannot initiate a suit after the lapse of the three-year
payment of obligations to creditors, and the remaining period. (Alabang Dev't v. Alabang Hills Village Ass'n, G.R.
balance if any is to be distributed to the stockholders. No. 196950, 2014)
There is no time limit within which the trustees must Note: When a corporation threatened by bankruptcy is
complete a liquidation placed in their hands (Vigilla taken over by a receiver, all the creditors shall stand on
et.a/. v. Philippine College of Criminology, G.R. No. equal footing. Not one of them should be given preference
200094, 2013). by paying one or some of them ahead of the others.
Modes of Liquidation The Civil Code provisions on concurrence and preference
of credits are applicable to the liquidation proceedings.
a. Through Board of Directors or Trustees — normal
method of procedure A corporation in the process of liquidation has no legal
authority to engage in any new business, even if the same
Even if no trustee is appointed or designated during the is in accordance with the primary purpose stated in its
three-year period of the liquidation of the corporation, the articles of incorporation.
Court has held that the Board of Directors may be
permitted to complete the corporate liquidation by When a Corporation Must Wind Up (Sec. 122)
continuing as trustees by legal implication (Vigilla et al. v If it is dissolved by:
Philippine College of Criminology, G.R. No. 200094, 2013) a. By expiry of term or
b. Is annulled by forfeiture, or otherwise, or
b. Through Trustee — at any time during the three years c. Is terminated In any other manner
of liquidation, a corporation is authorized and
empowered to convey all of its property to trustees for Effects of Winding Up of Affairs: (SEC. 122)
the benefit of stockholders, members, creditors, and a. Continues as a corporate body for 3 years to
other persons in interest. The twee (3)-year limitation prosecute and defend suits against it, close its
will not apply provided the designation of the trustee is affairs, dispose and convey its property and
made within said period. distribute assets
b. Cannot continue business for which it was
c. Through Receiver —created by means of judicial or established
quasi-judicial appointment of the receiver. The c. Can convey property to trustees for the benefit of
receiver is actually an officer of the court and must the stockholders/members, creditors and other
therefore be accountable to the court. persons in interest
i. Legal interest vests in business
Note: If there is no Board of Directors or Trustees, those ii. Beneficial interest remains with
having pecuniary interest in the assets, including not only stockholders/ members, creditors
the shareholders but likewise the creditors of the d. Assets distributable to unknown creditors,
corporation, acting for and in its behalf, may liquidate stockholders/ members, persons in interest or
(Alabang Dev't v. Alabang Hills Village Ass'n, G.R. No. those who cannot be found shall be escheated to
196950, 2014) the city or municipality where the assets are
located.
d. Liquidation after Three Years e. Distribution of assets only upon lawful dissolution
and payment of all debts and liabilities.
If full liquidation can only be effected after the 3-year period
and there is no trustee, the directors may be permitted to Exceptions:
complete the liquidation by continuing as trustees by legal a. Decrease of capital stock
implication (Reburiano v. CA, G.R. No. 102965, 1999). b. As otherwise allowed in the Corporation Code
The trustee may continue to prosecute a case commenced
by the corporation within three years from its dissolution
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C. OTHER CORPORATIONS
Validity Of Restrictions On Transfers Of Shares
Close Corporations Restrictions on the right to transfer shares must appear in:
A close corporation, within the meaning of the Corporation 1. The articles of incorporation;
Code, is one whose articles of incorporation provide that: 2. The by-laws; and
1. All the corporation's issued stock of all classes, 3. In the certificate of stock
exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not Otherwise, the same shall not be binding on any purchaser
exceeding twenty (20) thereof in good faith.
2. All the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted Said restrictions shall not be more onerous than granting
by this Title the existing stockholders or the corporation the option to
3. The corporation shall not list in any stock exchange or purchase the shares of the transferring stockholder with
make any public offering of any of its stock of any such reasonable terms, conditions or period stated therein.
class.
If upon the expiration of• said period, the existing
Notwithstanding the foregoing, a corporation shall not be stockholders or the corporation fails to exercise the option
deemed a close corporation when at least two-thirds (2/3) to purchase, the transferring stockholder may sell his
of its voting stock or voting rights is owned or controlled by shares to any third person.
another corporation which is not a close corporation within
the meaning of the Corporation Code. (Sec. 96) Need for factual determination of close corporation to
apply Sec. 98
Suppietory Effect Before courts can allow the operation of Section 98 to a
The provisions of other Titles of the Corporation Code shall case, there must first be a factual determination that the
apply suppletorily except insofar as Title of Close corporation is indeed a close corporation. There needs to
Corporation otherwise provides. be a presentation of evidence on the relevant restrictions
in the articles of incorporation and by-laws of the
Characteristics corporation. (Rural Bank ofAndayay. Cabadbaran, G.R.
1. The articles of incorporation of a close corporation may No. 188769, 2016)
provide that the business of the corporation shall be
managed by the stockholders of the corporation rather Pre-Emptive Rights Of Stockholders In Close
than by a board of directors. Corporations
a. When they manage, stockholders are liable as General Rule: It shall extend to all stock to be issued,
directors; including reissuance of treasury shares, whether for
b. There is no need to call a meeting to elect money, property or personal services, or in payment of
directors; corporate debts
c. To the extent that the stockholders are actively
engaged in the management, said stockholders Exception: Unless the articles of incorporation provide
shall be liable for corporate torts unless the otherwise.
corporation has obtained reasonably adequate
liability insurance. Power To Buy-Back Shares Of Close Corporations v.
Appraisal Right In Stock Corporations
Companies That Cannot Be Close Corporations CLOSE CORP CLOSE CORP STOCK CORP
(MIPES-B00) Sec. 104 Sec. 105
a. Mining companies; Exercised by Exercised by the Exercised by the
b. Insurance companies; the corporation stockholder stockholder
c. Public utilities; There are
d. Educational institutions; Exercisable certain
e. Stock exchanges; only in a Exercisable for instances where
f. Banks; deadlock any reason appraisal rights
g. Oil companies; situation can be
h. Other corporations declared to be vested with public exercised
interest.
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Can be directed g. Fraternal,
either against Available only Available only h. Literary,
the corporation against the against the i. Scientific,
or any other corporation corporation j. Social,
stockholder k. Civic Service,
Limited only in a I. Similar purposes, like trade, industry, agriculture and
situation when like chambers, or
Available even Unrestricted m. Any combination of thereof (Sec. 88)
the corporation
without retained
has sufficient
unrestricted earnings are In the Articles of Incorporation, a non-stock corporatior
assets in its
retained required for may not include a purpose which would change Of
books to cover its
earnings and buyback to contradict its nature as such. (Sec. 14121)
debts and
not subject to happen,
liabilities,
any formula generally c. Treatment Of Profits
exclusive of
capital stock Non-stock non-profit corporations may actually earn profit:
incidentally from its operations, provided that the
Compelling Dissolution In Close Corporations v. Stock profits are devoted to their purpose.
Corporations
CLOSE CORP CLOSE CORP STOCK CORP The mere fact that a non-stock corporation may earn profit
Sec. 104 Sec. 105 does not make it a profit-making corporation, where such
profit is used to carry out the purposes set forth in the
SEC is given
Articles of Incorporation and is not distributed to its
express power A stockholder
Majority of the incorporators, members, trustees, or officers. (SEC
to dissolve a must make a
Board plus 2/3 Opinion, 13 November 1990, XXIV SEC Quarterly Bulletin
close written petition to
stockholder vote 63)
corporation the SEC to
is required for
when there is a compel
dissolution Note:
deadlock dissolution
Despite its nomenclature, the essence of a non-stock non-
situation
profit corporation is not the non-existence of shares of
stock to cover its capital (it is legally possible for a
1. Non-Stock Corporations
corporation having capital stock to still be considered a
non-stock corporation), but that:
a. Definition
a. Its primary purpose should be any of those under Sec.
A non-stock corporation is one where no part of its income
88 of the Corporation Code, and
is distributable as dividends to its members, trustees, or
b. There is a prohibition in the articles of incorporation
officers, subject to the provisions of the Corporation Code
and by-laws that no part of the income or any form of
on dissolution
dividend is distributable-to the members, trustees, and
officers of the corporation (CIR v. Club Filipino Inc. de
Any profit which a non-stock corporation may obtain as an
Cebu, G.R. No. L-12719, 1962)
incident to its operations shall, whenever necessary or
• Even though the corporation may
proper, be used for the furtherance of the purpose or
incidentally earn profits from its
purposes for which the corporation was organized, subject
operations. (CIR v. University of Visayas,
to the provisions of this Title. (Sec. 87)
G.R. No. L-13554, 1961)
b. Purposes
A non-stock corporation may be formed or organized for
d. Distribution of Assets upon Dissolution
the following purposes:
In case dissolution of a non-stock corporation in
a. Charitable,
accordance with the provisions of this Code, its assets
b. Religious,
shall be applied and distributed as follows:
c. Educational,
d. Professional, • All liabilities and obligations of the corporation shall be
e. Cultural, paid, satisfied and discharged, or adequate provision
f. Recreation, shall be made therefore;
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• Assets held by the corporation upon a condition the remaining assets may be distributed to the members,
requiring return, transfer or conveyance, and which as provided for in the articles of incorporation of by-laws.
condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with In the absence of distribution rules, the remaining assets
such requirements; may be distributed tc such persons, societies,
• Assets received and held by the corporation subject to organizations, or corporations, whether or not organized
limitations permitting their use only for charitable, for profit, as may be specified in a plan of distribution as
religious, benevolent, educational or similar purposes, adopted by the Board of Trustees and ratified by the
but not held upon a condition requiring return, transfer members.
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations, In a regular non-stock corporation it is possible for its net
societies or organizations engaged in activities in the assets and accumulated "earnings" from its operations, to
Philippines substantially similar to those of the inure to the benefit of private individuals (e.g., its own
dissolving corporation according to a plan of members) or entities, but only as a consequence of
distribution adopted pursuant to this Chapter; dissolution.
• Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance Suppletory Effect
with the provisions of the articles of incorporation or The provisions governing stock corporation, when
the by-laws, to the extent that the articles of pertinent, shall be applicable to non-stock corporations,
incorporation or the by-laws, determine the distributive except as may be covered by specific provisions of this
rights of members, or any class or classes of Title.
members, or provide for distribution; and
Conversion between Stock and Non-Stock
• In any other case, assets may be distributed to such
persons, societies, organizations or corporations, Corporation
whether or not organized for profit, as may be specified A non-stock corporation cannot be converted into a stock
in a plan of distribution adopted pursuant to this corporation through mere amendment of its Articles of
Chapter.(Sec. 94) Incorporation as this would be in violation of Section 87
which prohibits distribution of income as dividends to
A non-stock corporation in the process of dissolution may members. (SEC Opinion, 20 March 1995) However, a non-
adopt a plan providing for the distribution of assets, not stock corporation can be converted into a stock corporation
inconsistent with the Code, in the following manner: only if the members dissolve it first and then organize a
• The board of trustees shall, by majority vote, adopt a stock corporation. The result is a new corporation. (SEC
resolution recommending a plan of distribution and Opinion, 13 May 1992)
directing the submission thereof to a vote at a regular
or special meeting of members having voting rights. On the other hand, a stock corporation may be converted
into a non-stock corporation by mere amendment provided
• Written notice setting forth the proposed plan of
all the requirements are complied with. Its rights and
distribution or a summary thereof and the date, time
liabilities will remain.
and place of such meeting shall be given to each
member entitled to vote, within the time and in the
Theory on Non-Stock Corporations
manner provided in this Code for the giving of notice of
A non-stock corporation may only be formed or organized
meetings to members.
for charitable, religious, educational, professional, cultural,
• The plan of distribution shall be adopted upon approval
fraternal, literary, scientific, social, civic or other similar
of at least 2/3 of the members having voting rights
purposes. It may not engage in undertakings such as the
present or represented by proxy at such meeting. (Sec.
investment business where profit is the main or underlying
95)
purpose. Although the non-stock corporation may obtain
profits as an incident to its operation such profits are not to
Note:
be distributed among its members but must be used for the
Although a non-stock corporation cannot distribute
furtherance of its purposes (People v. Menil, G.R. No.
incidental profits or dividends to its members, trustees and
115054-66, 1999).
officers during its corporate term, in the event of
dissolution, after the payment of all liabilities and return of
The incurring of profit or losses does not determine
assets received subject to limitations permitting their use,
whether an activity is for profit or non-profit, and the courts
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will consider whether dividends have been declared or its Term of Board Members
members or that is property, effects or profit was ever used 3 years, but A01 or by-
for personal or individual gain, and not for the purpose of laws may provide
carrying out the objectives of the enterprise (Manila otherwise
1 year
Sanitarium and Hospital v. Gabuco, G.R. No. 13873,
1963). 5 years - educational
Constant terms
institutions
In a mutual life insurance corporation, organized as a non-
stock nonprofit corporation, the so-called "dividend" that is Staggered terms
received by members-policyholders is not a portion of How Board Members Are Elected
profits set aside for distribution to the stockholders in Elected by the Directly elected by the
proportion to their subscription to the capital stock of a stockholders (per Corp. members, unless A01
corporation. One, a mutual company has no capital stock Code) provides otherwise
to which subscription is necessary; there are no Manner of Voting
stockholders to speak of, but only members. And, two, the Straight voting, unless
amount they receive does not partake of the nature of a Straight or cumulative
A01 or by-laws provide
profit or income. The quasi-appearance of profit will not voting
otherwise
change its character; it remains an overpayment, a benefit Can membership be transferred?
to which the member-policyholder is equitably entitled Generally no, EXC: if A01
(Republic v. Sunlife Assurance Company of Canada, GR Generally yes or by-laws provide
No. 158085, 2005). otherwise
Can a stochokder/ member disengage from the
Delinquency in Membership Dues of Non-Stock corporation?
Corporations other Articles or by-laws
Can sell to
A non-stock corporation may seize and dispose of the stockholders OR exercise specifically provide for the
membership share of a fully-paid member on account of method of termination
of appraisal rights
his unpaid monthly dues, when such corporation is
authorized to do so under the by-laws, even when no
Corporation Sole
provision on the matter appears in the articles of
Special form of corporation, usually associated with the
incorporation, and in spite of the fact that Sec. 67 of
clergy and consists of one person only and his successors,
Corporation Code on delinquency sale pertains to payment
who are incorporated by law to give some legal capacities
of shares subscription. (Valley Golf v. De Caram, G.R. No.
and advantages.
155805, 2000)
A corporation sole does not have any nationality but for
Comparative Table: Stock v. Non-Stock Corporations
purposes of applying our nationalization laws, nationality is
STOCK CORP I NON-STOCK CORP determined by the nationality of the members (Roman
Can they earn profit? Catholic Apostolic Church v. LRC, G.R. No. 8451, 1957).
Yes Yes
Distribution of Dividends The doctrine in Republic v. Villanueva (G.R. No. 55418-19,
Yes Fro 1982) anu Republic v. lglesia ni Cristo (G.R. No. 180067,
Name of "Constituents" 1984), that a corporation sole is disqualified to
Stockholders Members acquire/hold alienable lands of the public domain,
Limitation to Purpose because of the constitutional prohibition qualifying only
May not include a purpose individuals to acquire land and the provision under the
No, there can be
which would change or Public Land Act which applied only to Filipino citizens or
secondary purposes
contradict its nature in A01 natural persons, has been expressly overturned in
Kind of Board Director of Lands v. IAC (G.R. No. 66575 1986).
Board of Directors Board of Trustees
Number of Board Members A registered corporation sole can acquire land if its
Min. 5; but may be more members constitute at least 60% Filipinos. (SEC Opinion,
5 < x < 1:-, than 15 8 August 1994)
EXC: special corporations
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G. Foreign Corporations
A corporation formed, organized or existing under any law BUT: Where a single act or transaction is not merely
other than those of the Philippines, and whose laws allow incidental or casual but indicates the foreign corporation's
Filipino citizens and corporations to do business in its own intention to do other business in the Philippines, said single
country or state. (Sec. 123) act or transaction constitutes doing business (Far East Intl.
v. Nankai Kogyo, G.R. No. 13525, 1962).
A foreign corporation is one which owes its existence to the
laws of another state, and generally, has no legal existence Need to Allege: The fact that a foreign corporation is not
within the state in which it is foreign (Avon Insurance PLC doing business in the Philippines must be alleged, if a
v. Court of Appeals, G.R. No. 97642, 1997). foreign corporation desires to sue in Philippines courts
under the "isolated transactions rule" (Atlantic Mutual Inc.
A fundamental rule of international jurisdiction is that no Co. v. Cebu Stevedoring Co., G.R. No. 18961, 1966); if not
state can by its laws, and no court which is only a creature alleged, it can be dismissed for lack of capacity to sue by
of the state, can by its judgments and decrees, directly bind the plaintiff (Commissioner of Customs v. K.M.K. Gani,
or affect property or persons beyond the limits of that state G.R. No. 73722, 1990).
(Time, Inc. v. Reyes, GR No. 28882, 1971).
b. Twin Characterization Test (Mentholatum Co. Inc v.
a. Bases of Authority over Foreign Corporations Mangaliman G.R. No. 47701, 1941)
i. Consent - It is the voluntary surrender of jurisdiction over Substance Test: Consider the body or substance of the
its person in a pending suit before the host state (Salonga, business or the enterprise for which it was ORGANIZED or
Private International Law, 1979 ed., p.344). whether it has substantially retired from it and turned it over
to another.
ii. "Doing Business" with regard to Foreign
Corporations - Continuity of commercial dealings incident Continuity Test: That doing business implies a continuity
to prosecution of purpose and object of the organization. of commercial dealings and arrangements and
Isolated, occasional or casual transactions do not amount contemplates, to that extent, the performance of acts or
to engaging in business. But where the isolated act is not works or the exercise of some of the functions normally
incidenial/casual but indicates the foreign corporation's incidental to, and in ,,progressive prosecution of, the
intention to do other business, said single act constitutes purpose and object of its organization.
engaging in business in the Philippines.
Taken together, DOING BUSINESS in the Philippines
Test to Determine "Doing Business" must cover transactions and series of transactions in
pursuit of the main business goals of the corporation and
a. Isolated Transactions Test: where a foreign done with the intent to continue the same in the
corporation needs to obtain a license and fails to do Philippines.
so, whether it should be denied legal standing to obtain
remedies from local courts and administrative c. Contract Test: if the salient points of a contract do not
agencies or not, depends therefore on the issue find themselves in the Philippines, Philippine
whether it will engage in business in the Philippines. "authorities have no business subjecting the parties to
Not every activity undertaken in the Philippines local registration and licensing requirements (Pacific
amounts to doing business as to require a foreign Vegetable Oil Corp. v Singzon, G.R. No. 7917, 1955)
corporation to obtain such license.
"Doing Business" Under The Foreign Investment Act
Single or isolated acts, contracts, or transactions of foreign and IRR
corporations are not regarded as a doing or carrying on of
business. Typical examples of these are the making of a "Doing Business" in the Philippines - Includes:
single contract, sale, sale with the taking of a note and a. Soliciting orders, service contracts, opening offices,
mortgage in the state to secure payment thereof, whether called "liaison" offices or branches;
purchase, or note, or the mere commission of a tort. In b. Appointing representatives or distributors domiciled in
these instances, there is no purpose to do any other the Philippines;
business within the country (MR. Holdings, Ltd. V. Bajar,
G.R. No. 138104, 2002).
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Note: Includes "appointing representatives or distributors the same, training domestic workers to operate it, and
in the Philippines" but not when the representative or similar incidental services.
distributor "transacts business in its name and for its own
account." (Alfred Hahn v. CA, G.R. No.113074, 1997) No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns,
c. Participating in the management, supervision, or shall be permitted to maintain or intervene in any action,
control of any domestic business, firm, entity, or suit or proceeding in any court or administrative agency of
corporation in the Philippines; and the Philippines; but such corporation may be sued or
d. Any other act or acts that imply a continuity of proceeded against before Philippine courts or
commercial dealings or arrangements, and administrative tribunals on any valid cause of action
contemplate to that extent the performance of acts or recognized under Philippine laws (Lorenzo Shipping Corp.
works, or the exercise of some of the functions v. Chubb & Sons, Inc., et al., G.R. No. 147724, 2004).
normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the b. Necessity of a License to Do Business:
business organization • To place them under the jurisdiction of the courts
• To place them in the same footing as domestic
Note: "Doing business" was upheld against Pioneer corporations
International for soliciting orders and service contracts in • Protection for the public in dealing with said
the performance of acts that imply continuity of commercial corporations.
dealings. Pioneer International's alleged acts in actively
negotiating to employ Todaro to run its pre-mixed concrete i. Requisites for Issuance of License (Sec. 125;
operations in the Philippines, which acts are hypothetically Omnibus Investments Code, Art. 48)
admitted in Pioneer International's motion to dismiss, are 1. Articles of Incorporation and By-Laws
not mere acts of a passive investor in a domestic 2. An application form under oath setting forth
corporation. Such are managerial .and operational acts in i. Date and term of incorporation
directing and establishing commercial operations in the ii. Address of the corporation
Philippines. (Pioneer International, LTD v. Guadiz, G.R. iii. Name, address, _residence of resident agent
No. 156848, 2007) iv: Place of operation
v. Specific purposes
Does Not Include: vi. Names and addresses of directors
a. Mere investment as a shareholder by a foreign entity vii. Statement of Authorized capital stock
in domestic corporations duly registered to do viii. Statement of Outstanding capital stock
business, and/or the exercise of rights as such ix. Statement of Paid-in amount
investor; x. Additional information determined by SEC
Having a nominee director or officer to represent its 3. Statement that the corporation is solvent
interests in such corporation; 4. Duly executed certificate under oath attesting that its
Appointing a representative or distributor domiciled in country permit -Filipinos to do business in that country
the Philippines which transacts business in its own 5. 60% Filipino control requirement
name and for its own account; 6. Business operation not inconsistent with Investment
The publication of a general advertisement through Priorities Plan
any print or broadcast media; 7. Business not in conflict with 1987 Constitution
Maintaining a stock of goods in the Philippines solely 8. Business not adequately exploited by Phil nationals
for the purpose of having the same processed by 9. Entry of applicant not promote monopolies
another entity in the Philippines;
Consignment by a foreign entity of equipment with a ii. Resident Agent
local company to be used in the processing of products Who may be a Resident Agent
for export; a. Individual residing in the Philippines of good moral
Collecting information in the Philippines; and character and of sound financial standing
Performing services auxiliary to an existing isolated b. Domestic corporation lawfully transacting
contract of sale which are not on a continuing basis, business in the Philippines (Sec. 127)
such as Installing in the Philippine machinery it has
manufactured or exported to the Philippines, servicing
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COMMERCIAL LAW
BAR OPERATIONS 2019
Service of Process upon a Foreign Corporation d. A license subsequently granted enables the
Through A Resident Agent foreign corporation to sue on contracts executed
Before a foreign corporation can be issued a license to before the grant of the license (Eriks Ltd. v. Court
transact business in the Philippines, such corporation must of Appeals, G.R. No. 118843, 1997);
first file with the SEC e. Recovery of misdelivered property;
1. A written power of attorney designating some person f. Where the defendant is estopped.
who must be a resident of the Philippines, on whom
any summons and other legal processes may be Section 160 in relation to Section 3 of R.A. No. 8293
served in all actions or other legal proceedings against provides that any foreign corporation not engaged in
such corporation; & business in the Philippines and a national of a country
2. Consent that service upon such resident agent shall be which is a party to any convention, treaty or agreement
admitted and held as valid as if served upon the duly relating to intellectual property rights or the repression of
authorized officers of the foreign corporation at its unfair competition, to which the Philippines is also a party
home office. or extends reciprocal rights, may sue in trademark or
a. Whenever such service of summons or other service mark enforcement action (Sehwani Inc v. In-n-Out
process is made upon SEC, it must, within 10 Burger, G.R. No. 171053, 2007).
days thereafter, transmit by mail a copy of
such summons or other legal process to the Rules Regarding A Foreign Corporation's Right to
corporation at its home or principal office. Bring Suit in the Philippines
When SEC sends such copy, it shall constitute (Agilent Technologies v. Integrated Silicon, G.R. No.
a necessary part of and shall complete such 154618, 2004)
service FOREIGN CORP CAN FC SUE IN PH?
b. In case of a change of address of the resident STATUS
agent, it shall be his or its duty to immediately Doing business in before
Cannot sue
notify SEC in writing. (Sec. 128) Philippines without a Philippine courts
license
c. Personality to Sue Can sue before Philippine
Section 36 enumerates the express powers of a courts on an- isolated
corporation, which includes the corporation's ability to sue Not doing business in the transaction or on a cause
and be sued. Philippines of action entirely
independent of any
The power of the corporation to sue and be sued in any business transaction
court is lodged with the board of directors that exercises its Doing business in the
corporate powers. (Bitong v. CA, G.R. No. 123553, 1998) Philippines without a
license, but Philippine
d. Suability of Foreign Corporations citizen or entity has Can sue before Philippine
Every foreign corporation contracted with said courts due to estoppel
• Doing business in the Philippines with a license may corporation or derived
sue and can be sued in the Philippines benefits from the Foreign
• Doing business in the Philippines without a license Corporation
cannot sue, but may be sued in the Philippines Doing business in the Can sue before Philippine
• Not doing business in the Philippines, on Isolated Philippines and has the courts on any transaction
transactions may sue and can be sued (if jurisdiction required license
can be acquired)
e. Instances When Unlicensed Foreign Corporations
May Be Allowed To Sue:
a. Isolated transactions;
b. Action to protect good name, goodwill, and
reputation of a foreign corporation;
c. The subject contracts provide that Philippine
Courts will be venue to controversies;
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Table: Capability to Sue and Suability of Foreign
Corporations W/N Doing Business The power to merge or consolidate is not within the
NOT DOING inherent powers of the corporation. Therefore, it must be
DOING BUSINESS IN IN expressly granted by law.
BUSINESS
PHILIPPINES - Merger or consolidation does not become effective
PHILIPPINES
Licensed Unlicensed Isolated Transactions by mere agreement of the constituent
Yes, can sue; corporations. The approval of the SEC is -required
(PNB v. Andrada Electric & Engr. Co., Inc., G.R.
NO, cannot No. 142936, 2002).
EXC: if transactions
YES, can sue;
exhibits intent to do
sue Mere Acquisition/Transfer (3 Levels)
business, Foreign
EXC: estoppel a. Assets-Only Level. Purchase of raw assets of the
Corporation needs
license to sue enterprise. Transferee is NOT liable for the debts and
liabilities of the transferor corporation as there is no
YES, can be sued
privity of contract between transferee and creditors,
YES, can
except when there is fraud, assumption of liability, or
be sued Qualifier: as long as summons were
takeover of the assets of a dissolved corporation.
properly served (to acquire jurisdiction)
(Edward J. Nell Co. v Pacific Farms Inc., G.R. No. L-
20850, 1965)
f. Grounds for Revocation of License
b. -Business Enterprise Level. Purchase of substantially
Section 134 provides that the SEC may cancel the
all the assets of the corporation extending to its "going
certificate or license of a foreign corporation on any of the
concern" (ability to do business and make money,
following grounds:
goodwill, clientele, stock-in-trade, etc). There is case
a. Failure to file its annual report or pay any fees as
law, based on equity, that holds transferee liable for
required by Code;
the debts and liabilities of the transferor. A "free and
b. Failure to appoint and maintain a resident agent;
harmless clause" holding the transferee free from the
c. Failure to inform SEC of the change of resident
liabilities of the transferor is binding only between them
agent or the latter's change of address;
and cannot prejudice creditors who are not parties
d. Failure to submit a copy of amended articles of
thereto. (Y-/ Lesisure Philippines, Inc. et al. v James
incorporation or-by- laws; or articles of merger or
Yu, G.R. No. 207161, 2015)
consolidation;
c. Equity Level. Purchaser takes control of the business
e. A -misrepresentation of any material matters in
by purchasing the shareholdings. Purchasing
reports;
corporation is still protected by the limited liability
f. Failure to pay any and all taxes, imposts,
feature but the same can be pierced.
assessments or penalties;
g. Engaged in a business not authorized by SEC;
2. Plan of Merger or Consolidation (Sec. 76)
h. Acting as a dummy of a foreign corporation not
a. Names of corporations
licensed to do business in the Philippines; or
b. Terms of the merger or consolidation and the mode of
i. Any other ground as would render it unfit to
carrying the same into effect
transact business in the Philippines.
c. Statement of Changes of Articles of Incorporation
d. Other provisions
e. Approval by affirmative vote of stockholders or
H. MERGER AND CONSOLIDATION
members representing 2/3 of outstanding capital stock
1. Definition and Concept
3. Articles of Merger or Consolidation (Sec. 78)
Merger a. pigned by the president or vice president and certified
A union whereby one or more existing corporations are by the secretary setting forth:
absorbed by another corporation that survives and i. Plan of merger or consolidation
continues the combined business. ii. Number of outstanding shares or members
Consolidation iii. Number of shares or members voting for or
The union of two or more existing corporations. A new against merger or consolidation
corporation is created, and consolidating corporations are
extinguished.
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4. Procedure of Consolidation or Merger 9. If the SEC is satisfied that the merger or consolidation
1. The board of directors or trustees of each corporation, of the corporations concerned is legal, it shall issue a
party to the merger or consolidation, shall approve a certificate of merger or of consolidation, at which time
plan of merger or consolidation setting forth the the merger or consolidation shall be effective.
following: 10. If the SEC is not satisfied, it shall set a hearing to give
a. Names of the corporations involved; the corporations concerned the opportunity to be
b. Terms and mode of the merger or consolidation; heard. Written notice of the date, time and place of
c. Statement of the changes, if any, in the articles of hearing shall be given to each constituent corporation
incorporation of the surviving corporation in case at least two (2) weeks before said hearing.
of merger; and, with respect to the consolidated
corporation in case of consolidation; and A merger does not become effective upon the mere
d. Other necessary or desirable provisions with agreement of the constituent corporations, but open
respect to the proposed merger or consolidation. approval of the articles of merger by the SEC issuing the
2. The plan of merger or consolidation shall be approved certificate of merger as required by Section 79 of the
by majority vote of each of the boards of the Corporation Code (Bank of Commerce v. Heirs of Rodolfo
corporations involved at separate meetings; dela Cruz).
3. The same shall be submitted for approval by the
stockholders or members of each such corporation at 5. Effectivity and Limits of Merger or Consolidation
separate corporate meetings duly called for the • Submission to SEC for approval
purpose. Notice of such meeting should be given to all • Merger or consolidation of banks or banking
stockholders or members at least 2 weeks before the institutions, building and loan associations, trust
meeting, either personally or by registered mail companies, insurance companies, public ,utilities,
4. At least 2/3 of the outstanding capital stock, if a stock educational institutions and other special
corporation, or 2/3 of the members of the non- stock corporations governed by special laws need
corporation should concur to such plan. favorable recommendation by appropriate
5. Dissenting stockholders may exercise their right of governmental agency
appraisal. However, if the board abandons such plan, • If upon investigation by SEC that merger or
such right is extinguished consolidation is contrary to or inconsistent with the
6. Any amendment to,the plan must be approved by the Corporation Code, it will set a hearing
same votes of the board members or trustees and
stockholders or members required for the original plan. 6. Effects of Merger or Consolidation
7. Once the required number of stockholders or members • The constituent corporations shall become a
approved of the plan, Articles of Merger or Articles of single corporation.
Consolidation shall be executed by each of the • The separate existence of the constituents shall
constituent corporations, signed by the president or cease except that of the surviving corporation (in
vice-president and certified by the secretary or merger) or the consolidated corporation (in
assistant secretary of each corporation, setting forth: consolidation).
a. The plan of the merger or the plan of • The surviving or the consolidated corporation shall
consolidation; possess all the rights, privileges, immunities,
b. As to stock corporations, the number of shares properties and powers and shall be subject to all
outstanding, or in the case of non-stock duties and liabilities of a corporation.
corporations, the number of members; and • The surviving or the consolidated corporation shall
c. As to each corporation, the number of shares possess all the rights, privileges, immunities and
or members voting for and against such plan, franchises of each of the constituent corporations;
respectively. and all property, real or personal, and all
8. Four copies of the Articles of Merger or Articles of receivables due on whatever account, including
Consolidation shall be submitted to the SEC for subscriptions to shares and other choses in action,
approval. However, in the case of special corporations, and all and every other interest of, or belonging to,
like banks, insurance companies, building and loan or due to each constituent corporation, shall be
associations, etc., the favorable recommendation of taken and deemed to be transferred to and vested
the appropriate government agency shall first be in such surviving or consolidated corporation
obtained. without further act or deed; and
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• The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and
obligations of each of the constituent corporations
in the same manner as if such surviving or
consolidated corporation had itself incurred such
liabilities or obligations; and any claim, action or
proceeding pending by or against any of such
constituent corporations may be prosecuted by or
against the surviving or consolidated corporation,
as the case may be. Neither the rights of creditors
nor any lien upon the property of any of such
constituent corporations shall be impaired by such
merger or consolidation.
end of topic
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VI. SECURITIES REGULATION CODE (R.A. No. proprietary or nonproprietary membership certificates
8799) in corporations;
b. Debt Instruments (issuer required to repay principal
TOPIC OUTLINE UNDER THE SYLLABUS amount loaned by fixed maturity date, at stated rate of
interest) — bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
A. Registration requirement; exemptions
B. Prohibitions on fraud, manipulation, and insider C. Investment Instruments — investment contracts,
trading fractional undivided interests in oil, gas or other
C. Protection of investors mineral rights;
1. Tender offer rule
2. Rules on proxy solicitation Note: An investment contract refers to a contract,
3. Disclosure rule itransaction, or scheme whereby a person invests his
money in a common enterprise and is led to expect
profits primarily from the efforts of others. It is
STATE POLICY, PURPOSE presumed to exist whenever a person seeks to use the
money or property of others on the promise of profits.
The State policies underlying the Securities Regulation (Virata v. Wee, G.R. No. 220926, 2017)
Code (SRC) are the following:
a Establish a socially conscious free market that
regulates itself; Hovey Test
Used to determine whether the security being offered takes
b. Encourage the widest participation of ownership in
enterprises; the form of an investment contract. The following must
c. Enhance the democratization of wealth concur for an investment contract to exist:
a. A contract, transaction or scheme;
d. Promote the development of the capital market;
lb. An investment of money;
e. Protect investors;
c. Investment is made in a common enterprise;
f. Ensure full and fair disclosure about securities; and
g. Minimize, if not totally eliminate, insider trading and d. Expectation of profits;
other fraudulent or manipulative devices (SRC, e. Profits arising primarily from the efforts of others.
Sec. 2) (Virata v. Wee, G.R. No. 220926, 2017)
The principal purpose of SRC and its regulations (also Turner Test
known as the Blue Sky Laws) is to protect the public from Used to determine whether a contract is an investment
worthless ventures, that have no basis at all, and the sale contract within the definition of securities.
of securities therein to investors, who are then left holding
certificates representing nothing more than a claim to a Under this test, an investment contract may be a
square of a blue sky. transaction, contract, or scheme whereby a person:
a. Makes an investment of money,
DEFINITION OF SECURITIES b. In a common enterprise,
c. With the expectation of profits,
Securities d. To be derived primarily from the efforts of
Shares, participation or interests in a corporation or in a others
commercial enterprise or profit-making venture evidenced
by a certificate, contract, instrument, whether written or The Turner Test was adopted in the Philippines,
electronic in character. The definition includes investment specifically in the case of Power Homes wherein it was
contracts. (SRC, Sec. 3.1) determined that transactions under a pyramiding scheme
partakes the nature of investment contracts and thus falls
Types of Securities under the definition of "securities" under the SRC (Power
a. Equity Instruments (represent ownership rights in a Homes v. SEC, G.R. No. 164182, 2008).
corporation, i.e., management, surplus profits, assets
upon dissolution)) — shares of stock; certificates of d. Derivative — option and warrants;
interest or participation in a profit sharing agreement;
certificates of deposit for a future subscription;
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e. Trust Instruments — Certificates of assignments,
certificates of participation, trust certificates, voting SEC Powers on Securities Transactions
trust certificates or similar instruments; and The SEC has the following powers with respect to the sale
or offer for sale of securities:
f. Catch-all — Other instruments as SEC may determine a. Grant "conditional approval" of registration statements
in the future. (SRC. Sec. 8.2);
b. Specify terms and conditions under which any written
Note: "Public offering" for purposes of registration, means communication, including any summary prospectus,
a random or indiscriminate offering of securities in general shall not be deemed to constitute an offer for sale
to anyone who will buy, whether solicited or unsolicited. (SRC. Sec. 8.3);
c. Keep and open to public inspection at reasonable
Issuer hours on business days, the Register of Securities
An originator, maker, obligor, or creator of the security. (which shall contain the records of the registration of
(SRC, Sec. 3.2) securities and SEC orders with respect to such
securities) and all documents or information with
Broker respect to registered securities (SRC. Sec. 8.4);
A person engaged in the business of buying and selling d. Audit financial statements, assets and other
securities for the account of others. (SRC, Sec. 3.3) information of applicants for registration of securities,
when necessary to insure full disclosure or to protect
Dealer interests of investors and the public (SRC. Sec. 8.5);
A person, who buys and sells securities for his own Dispense with any requirement or require additional
account in the ordinary course of business. (SRC, Sec. information or documents, including written
3.4) information from an expert, depending on the
necessity thereof or their applicability to the class of
Prospectus securities sought to be registered (SRC. Sec. 12.2).
The document, made by or on behalf of an issuer,
underwriter or dealer, to sell or offer securities for sale to KINDS OF SECURITIES
the public through a registration statement filed with the
SEC. (SRC. Sec. 3.11) 1. Exempt Securities (Sec. 9)
Registration a. Government Issued
General rule: Securities are prohibited to be sold or Issued or guaranteed by the government of the
offered for sale or distribution within the Philippines (SRC. Philippines or by any political subdivision, agency, or
Sec. 8.1): by any person controlled or supervised by, and acting
a. Without registration statement duly filed with and as an instrumentality of the Government; (SRC. Sec.
approved by SEC; and 9.a)
b. Prior to such sale, information on the securities, in
such form and with such substance as SEC may Note: The reason why the Government should not be
prescribe, must be made available to each required to furnish a bond is that the State is
prospective purcnaser. undoubtedly always solvent (Araneta v. Gatmaitan,
G.R. Nos. L-8895, L-9191, 1957).
Exception: The following may be sold without need of
registration: b. Issuanced by Foreign Governments
a. Exempt securities (SRC, Sec. 9) Issued or guaranteed by the government of any
b. Exempt transactions (SRC, Sec. 10) country with which the Philippines maintains
diplomatic relations, or by any state, province or
Note: In approving the registration of the securities, the political subdivision thereof on the basis of reciprocity,
SEC is not only concerned with the requirement that full although the SEC may require compliance with the
disclosure of information is given to the public but the SEC form and content of disclosures; (SRC. Sec. 9.b)
is also concerned with the merit of the securities
themselves and the issuer (PSE v. CA, G.R. No. 125469,
1997).
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c. Certificates issued by receiver or trustee in liquidate a bona fide debt, a security pledged in good
bankruptcy duly approved by the proper adjudicatory faith as security for such debt; (SRC. Sec. 10.b)
body; (SRC. Sec. 9.c)
c. Isolated transaction
d. Those involving the sale or transfer of which, by law, is An isolated transaction in which any security is sold,
under the supervision and regulation of the: (SRC. offered for sale, subscription or delivery by the owner
Sec. 9.d) thereof, or for his account, not being made in the
i. Office of the Insurance Commission; Course of repeated and successive transactions of a
ii. Housing and Land Use Regulatory Board; and like character, and such owner or representative not
iii. Bureau of Internal Revenue being the underwriter of such security (SRC. Sec. 10.c)
Reason: They are already supervised by another Note: This transaction refers to secondary sale of the
government body. Owner of the securities to another investor; and the
owner contemplated herein is not the issuer but an
e. Issued by a bank except its own shares of stock investor; therefore the transaction does not fall under
the definition of public offerings.
Where a bank is a publicly-listed corporation in the
Philippine Stock Exchange (PSE), the mere fact that it d. Stock dividends
is under the supervision of the Bangko Sentral ng Distribution by a corporaticn of securities to its
Pilipinas (BSP) does not exempt it from complying with stockholders or other security holders as stock
the continuing disclosure requirements embodied in dividend or other distribution out of surplus (SRC. Sec.
the assailed Rules (IRR of the Revised Securities Act 10.d)
— predecessor of the SRC). While a bank is primarily
subject to the control of the BSP, as a corporation e. Sale of shares to stockholders not underwritten
trading its securities in the stock market, it is also under Sale of capital stock of a corporation to its own
the supervision of the SEC. These regulations are Stockholders exclusively — stock which has already
meant to assure full, fair and accurate disclosure of been issued (SRC. Sec. 10.e)
information for the protection of investors in the stock
market. Imposing such regulations is a function within ! sI suance of bonds to a single purchaser: Issuance
the jurisdiction of the SEC (Union Bank v. SEC, G.R. of bonds or notes secured by mortgage upon real
No. 138949, 2001). estate or tangible personal property (SRC. Sec. 10.f)
2. Exempt Transactions (SRC, Sec. 10) g. Transaction pursuant to the right of conversion
ssuance and delivery of any security in exchange for
a. Judicial sale of securities any other security of the same issuer pursuant to a
Any judicial sale, or sale by an executor, administrator, right of conversion, provided that the: (SRC. Sec. 10.g)
guardian or receiver or trustee in insolvency or Surrendered has been registered under the
bankruptcy (SRC. Sec. 10.a) SRC or was, exempt, when sold
ii. Security issued and delivered in exchange
Note: As distinguished from exempt securities would, at the time of conversion, fall into the
specially issued by the receiver or trustee in a class entitled to registration
bankruptcy proceeding mentioned above, the shares
covered under exempt transactions are ordinary h. Broker's transactions
shares; however the owner of the shares is bankrupt Broker's transactions, executed upon customer's
and so the shares are sold. orders, on any registered Exchange or trading market
(SRC. Sec. 10.h)
b. Sale of foreclosed securities
By or on account of a pledge holder or mortgagee or Pre-incorporation subscription or subscription to
any other similar lien holder, selling or offering for sale a capital increase: Subscriptions to shares of capital
or delivery in the ordinary course of business, not for stock (1) prior to incorporation or (2) pursuant to an
the purpose of avoiding the provisions of SRC, to ihcrease in authorized capital stock — both to comply
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with the requirements of the law for minimum investors such as by the reason of the small amount
subscription (SRC. Sec. 10.1) involved or the limited character of the public offering.
(SRC, Sec. 10.2)
Exchange of securities with existing security
holders Issuance from authorized but previously unissued capital
Exchange of securities by the issuer exclusively with stock may be granted exemption (Nestle Philippines v. CA,
its existing security holders exclusively, where no G.R. No. 86738, 1991)
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange (SRC. A. Registration Requirement; Exemptions
Sec. 10.j)
1. Procedure for Registration of Securities (SRC,
Note: The difference between (h) and (j) is that the Sec. /2)
exchange in (h) is for any other security of the issuer
while in (j), the exchange is between the issuer and its a. Filing
existing security holders wherein the securities The issuer must file in the main office of the SEC:
exchanged are not from the same issuer. a. Sworn registration statement with respect to such
securities, and
k. Private placements b. Registration statement must include any
Sale of securities by an issuer to fewer than 20 prospectus required (SRC. Sec. 12.1)
persons during any twelve-month period (SRC. Sec.
10.k) Note: A registration statement may be withdrawn by the
issuer only with SEC's consent.
I. Sale to qualified buyers
Sale of securities to any of the following qualified -b. Signature
buyers: (SRC. Sec. 10.1) The registration statement shall be signed by the issuer's
i. Bank executive officer, its principal operating officer, its principal
ii. Registered investment house financial officer, its comptroller, its principal accounting
iii. Insurance company officer, its corporate secretary or persons performing
iv. Pension fund or retirement plan maintained by similar functions accompanied by a duly verified resolution
the government or managed by a bank or of the board of directors of the issuer corporation and
other persons authorized by the BSP to accompanied by:
engage in trust functions a. A duly verified resolution of the board of directors;
V. Investment company and
vi. Such other person at the Commission may b. The written consent of the expert, who certified
determine as qualified any part of the registration statement (SRC. Sec.
12.4)
Notes:
• Reasons for exemption: small amount involved; limited c. Filing Fee
character of public offering; but the security itself may Not more than one-tenth (1/10) of one per centum (1%) of
or may not be exempt. the maximum aggregate price of the securities (SRC. Sec.
• For the exemptions under (k) and (I), you have to file a 12.514)
notice for exemption as mandated under the Rules.
After which, you have to pay to the SEC a fee d. Publication
equivalent to one-tenth (1/10) of one percent (1%) of Notice of the filing of the registration statement shall be
the maximum aggregate price or issued value of the immediately published by the issuer, at its own expense, in
securities. (1RR to the SRC, Rule 10.1) two (2) newspapers of general circulation in the
• The other exemptions do not require filing a notice for Philippines, once a week for two (2) consecutive weeks,
exemption. (!RR to the SRC, Rule 10.1) reciting that:
a. A registration statement for the sale of such security
The SEC may exempt other transactions, if it finds that the has been filed,
requirements of registration under the SRC is not b. The registration statement, and its attachments, are
necessary in the public interest or for the protection of the open to inspection; and
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c. Copies shall be furnished to interested parties at such by the Commission or other competent or
reasonable charge as the SEC may prescribe. (SRC. administrative body for violations of securities,
Sec. 12.5114) commodities, and other related laws.
e. Order Note: The term "competent judicial or

Within forty-five (45) days after the date of filing, the SEC administrative body" shall include a foreign court of
shall declare the registration statement effective or competent jurisdiction as provided for under the Rules
rejected (SRC. Sec. 12.6) of Court.
f. Entry of Order d. Where the issuer refused to comply with the order
The SEC will enter an order declaring the registration of SEC for the production of all books and papers,
statement to be effective. (SRC. Sec. 12.6) administration of oath, or examination of its
officers, or any other person connected to its
g. Oath by an Issuer business affairs.
Upon effectivity of the registration statement, the issuer
shall state under oath in every prospectus that all 3. Consequences of an Incomplete or False
registration requirements have been met and that all Inaccurate Statement in a Material Respect in the
information are true and correct as represented by the Registration Statement (SRC, Sec. 14)
issuer or the one making the statement. (SRC. Sec. 12.7)
If the registration statement is on its face incomplete or
2. Grounds for Rejection and Revocation of inaccurate in any material respect
Registration Statement (SRC, Sec. 13) • The Commission shall issue an order directing the
a. When the issuer: amendment of a registration statement; upon
i. Has been judicially declared insolvent; compliance with such order, the amended registration
ii. Has violated any of the provision of the statement shall become effective;
SRC, the rules promulgate pursuant • But if such registration statement has already become
thereto, or any order of the Commission of effective, the issuer needs to publish a notice of the
which the issuer has notice in connection proposed amendments in 2 newspapers of general
with the offering for which a registration circulation in the Philippines stating that the offering in
statement has been filed its current form has been cancelled.
iii. Has been or is engaged or is about to
engage in fraudulent transactions; If the changes shall result to a derogation of rights of
iv. Has made any false or misleading existing security holders or purchasers of subject securities
representation of material facts in any who have paid a portion of the selling price
prospectus concerning the issuer or its • The issuer shall include in the above-mentioned
securities; publication an offer to rescind all transactions that have
v. Has failed to comply with any been completed for sale to date, without making any
requirements that the Commission may deduction and wait for thirty (30) days for purchasers
impose as a condition for registration of to respond to the rescission offer before initiation of the
the security for which the registration amended offering.
statement has been filed; • Purchasers may, within thirty (30) days from the date
b. The registration statement is on its face
of such notification, renounce their purchase of
incomplete or inaccurate in any material respect or
securities.
includes any untrue statements of a material fact
required to be stated therein or necessary to make o The issuer, or any person acting on behalf of
the statement therein not misleading; or the issuer in connection with the distribution of
c. The issuer, any officer, director or controlling said securities, shall, within ten (10) days from
person performing similar functions, or any receipt of notification of such election, return
underwriter has been convicted, by a competent the contributions paid by such purchasers
judicial or administrative body, upon plea of guilty, without making any deduction.
or otherwise, of an offense involving moral
turpitude and /or fraud or is enjoined or restrained
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• Purchasers who decide not to renounce their purchase b. Post on the Commission's website along with a
of securities shall be subject to the terms of the statement that the—
amended offering. i. Offering in its current form has been cancelled;
and
Grounds for Suspension of the Registration of a Security ;i. Issuer subject to such order, or any person,
(SRC, Sec. 15) acting on behalf of such issuer in the distribution
of the subject securities and has in his
If at any time, the information contained in the registration possession any payment for the purchase of
statement filed is or has become misleading, incorrect, securities, has the duty to return any and all
inadequate or incomplete in any material respect payments made by purchasers of the subject
The sale or offering for sale of the security securities within 10 days of such publication,
registered thereunder may work or tend to work a and simultaneously furnish the issuer a copy of
fraud this notice.
Pending further investigation of the security
registered to ascertain whether the registration of Upon receipt of a notice, the issuer and all persons acting
such security should be revoked on any ground on its behalf in the distribution of the subject securities shall
specified in the SRC; or immediately terminate the offering and return any and all
Refusal to furnish information required by the payments received from purchasers within 10 days after
Commission the notice is first published.
4. Procedure for Suspension of the Sale of Securities If the public offering is already terminated and the
(SRC, Sec. 15) Commission, after due notice and hearing, revokes the
SEC may order the suspension of the offer and sale of effectivity of the registration statement under Section 13,
securities pending any investigation, stating the grounds or suspends registration under Section 15, the
for taking such action. Commission shall publish a notice of the order of
revocation or suspension in a newspaper of general
Such order, although binding upon persons notified circulation in the Philippines and/or post in the
thereof, shall be deemed confidential, and shall not be Commission's website.
published.
Note: If the public offering has already terminated, there is
Notice of such order shall be given to the issuer and every no more return of payments.
dealer and broker known as participating in such offering.
5. Material Information
Upon issuance of suspension order, no further offer or sale Generally, it is any fact or omission, which is material to the
of such security shall be made until lifted or set aside by investor in making his decision whether he should invest in
the SEC; otherwise, such sale is void. the security or not.
Upon issuance of an order of suspension, the SEC shall However, the Rules provide for an enumeration of matters
conduct a hearing. considered as material information. With regard to those
specifically included in the enumeration, the issuer cannot
If it determines that the sale of any security should be argue otherwise to say that those are immaterial:
revoked, it shall issue an order prohibiting the sale of such a. Any event or transaction which creates or
security. increases a risk on the investments or on the
securities covered by the registration;
If during a public offering, the Commission, after due notice b. Increase/decrease in the volume of the securities
and hearing, revokes the effectivity of a registration being offered at an issue price higher/lower than
statement under Section 13, or suspends registration the range set and disclosed in the registration
under Section 15. statement and which results to a derogation of the
rights of existing security holders, as may be
Such order shall be published in: determined by the Commission;
a. A newspaper of general circulation in the Philippines c. Major change in the primary business of the
and/or registrant;
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d. Reorganization of the company; (d) The distribution by a corporation actively engaged in

e. Change in the work program or use of proceeds; the business authorized by its articles of incorporation, of
f. Loss, deterioration or substitution of the property securities to its stockholders or other security holders as a
underlying the securities; stock dividend or other distribution out of surplus.
g. Significant or ten percent (10%) or more change in
the financial condition or results of operation of the (e) The sale of capital stock of a corporation to its own
registrant unless a report to that effect is filed with stockholders exclusively, where no commission or other
the Commission and furnished the prospective remuneration is paid or given directly or indirectly in
purchaser; connection with the sale of such capital stock.
h. Classification, de-classification or re-classification
of securities, which results to derogation of rights (f) The issuance of bonds or notes secured by mortgage
of existing security holders, as may be determined upon real estate or tangible personal property, when the
by the Commission. entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single
6. Pre-Need Plan sale.
A contract which provides for the performance of future
services or the payment of future monetary considerations (g) The issue and delivery of any security in exchange for
at the time of actual need, for which plan holders pay in any other security of the same issuer pursuant to a right of
cash or installment at stated prices, with or without interest conversion entitling the holder of the security surrendered
or insurance coverage and includes life, pension, in exchange to make such conversion: Provided, That the
education, interment, and other plans which the SEC may security so surrendered has been
from time to time approve (SRC, Sec. 3.9) registered under this Code or was, when sold, exempt from
the provision of this Code, and that the security issued and
Note: The regulation of sales and offers for sale to the delivered in exchange, if sold at the conversion price,
public of pre-need plans are now transferred from the SEC would at the time of such conversion fall within the class of
to the Insurance Commission (Pre-Need Code, Sec.7, securities entitled to registration under this Code. Upon
repealing SRC, Sec. 16) such conversion the par value of the security surrendered
in such exchange shall be deemed the price at which the
7. Exemptions (SRC, Sec. 10) securities issued and delivered in such exchange are sold.
The requirement of registration shall not apply to the sale
of any security in any of the following transactions: (h) Broker's transaction, executed upon customer's orders,
(a) At any judicial sale, or sale by an executor, on any registered Exchange or other trading market.
administrator, guardian or receiver or trustee in insolvency
or bankruptcy. (i) Subscriptions for shares of the capitals stocks of a
corporation prior to the incorporation thereof or in
(b) By or for the account of a pledge holder, or mortgagee pursuance of an increase in its authorized capital stocks
or any of a pledge lien holder selling of offering for sale or under the Corporation Code, when no expense is incurred,
delivery in the ordinary course of business and not for the or no commission, compensation or remuneration is paid
purpose of avoiding the provision of this Code, to liquidate or given in connection with the sale or disposition of such
a bonafide debt, a security pledged in good faith as securities, and only when the purpose for soliciting, giving
security for such debt. or taking of such subscription is to comply with the
requirements of such law as to the percentage of the
(c) An isolated transaction in which any security is sold, capital stock of a corporation which should be subscribed
offered for sale, subscription or delivery by the owner before it can be registered and duly incorporated, or its
therefore, or by his representative for the owner's account, authorized, capital increase.
such sale or offer for sale or offer for sale, subscription or
delivery not being made in the course of repeated and 0) The exchange of securities by the issuer with the
successive transaction of a like character by such owner, existing security holders exclusively, where no commission
or on his account by such representative and such owner or other remuneration is paid or given directly or indirectly
or representative not being the underwriter of such for soliciting such exchange.
security.
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(k) The sale of securities by an issuer to fewer than twenty and which he knew or had reasonable ground
(20) persons in the Philippines during any twelve-month to believe is false or misleading
period. e. Effect series of transactions for the purpose of
pegging, fixing or stabilizing the price of
(I) The sale of securities to any number of the following security trade in an Exchange, unless
qualified buyers: otherwise allowed by the SRC or the SEC
(i) Bank; rules.
(ii) Registered investment house; (iii) Insurance
company; Examples of Manipulative Practices:
(iv) Pension fund or retirement plan maintained by a. Painting the Tape —• engaging in a series of
the Government of the Philippines or any political transactions in securities that are reported publicly to
subdivision thereof or manage by a bank or other give the impression of activity or price movement in a
persons authorized by the Bangko Sentral to security
engage in trust functions; b. Marking the Close — buying and selling securities at
(v) Investment company or; the close of the market in an effort to alter the closing
(vi) Such other person as the Commission may price of the security
rule by determine as qualified buyers, on the basis c. Improper Matched Orders — engaging in transaction
of such factors as financial sophistication, net where both the buy and sell orders are entered at the
worth, knowledge, and experience in financial and same time with the same price and quantity by different
business matters, or amount of assets under but colluding parties, who have knowledge that such
management. orders would create an appearance of active trading of
the shares
(m) Other transactions, if the Commission finds that the d. Hype and Dump — engaging in buying activity at
requirements of registration under this Code is not increasingly higher prices and then selling securities in
necessary in the public interest or for the protection of the the market at the higher prices after announcing a
investors glossy picture of a particular security as good
investment and thus lure investors to trade.
B. Prohibitions On Fraud, Manipulation And Insider e. Wash Sales — engaging in stock trading where there
Trading is no genuine change in actual beneficial ownership of
a security but makes it appear that the stocks are
1. Manipulation Of Security Prices actively traded.
It shall be unlawful for any person, for himself or f. Squeezing the Float —taking advantage of a shortage
through a dealer or broker, directly and indirectly to — of securities in the market by controlling .the demand
a. Create a false or misleading appearance of side and exploiting market congestion during such
active trading in any listed security traded in shortages in a way as to create artificial prices
an Exchange g. Disseminating false or misleading market
b. Effect along, or with others, a series of information through media, including the internet
transactions in securities that:
i. Raises their price to induce purchase; Manipulative and Deceptive Devices (SRC, Sec. 24)
ii. Depresses their price to induce their a. Short Sales - any sale of a security which the seller
sale; and does not own or any sale which is consummated by
iii. Creates active trading to induce the delivery of a security borrowed by, or for the
purchase or sale through account of the seller
manipulative devices
c. Circulation or dissemination of information to When short sale permissible:
the effect that the price of any such security 1. At a price higher than the last sale or
will or is likely to rise or fall because of market 2. At the price of the sale if and only if that price is
operations; above the next preceding different sale price on
d. Make, regarding any security registered on an such day
exchange, any statement which is false or
misleading with respect to any material fact, b. Mandatory Close-Out - a contract involving a short
sale, which has not resulted in a delivery by the Broker
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Dealer within the settlement period (period for making

full payment for the securities), must be closed by the a) Who is an Insider (TRIGOD)
Broker Dealer, by purchasing (for cash or guaranteed a. Issuer;
delivery) securities of like kind and quantity on the next b. Director or Officer of issuer;
business day after settlement date, unless such c. Person whose Relationship or former relationship
purchase cannot be effected within said period for with issuer gives him access to material
justifiable reasons. information not generally available to the public;
d. Government employee or director or officer of an
c. Option Trading - no member of an Exchange shall, exchange, clearing agency and/or self-regulatory
directly or indirectly, endorse or guarantee the organization who has access to material
performance of any put, call, straddle, option or information; or
privilege in relation to any security registered on a e. A person who learns such information by
securities exchange. communication from any of the foregoing insiders.
i. Options NOTE: In securities parlance, this is called
Contracts that give the buyer the right, but not "tippee." This tippee must know that the tipper is
the obligation, to buy or sell an underlying an insider" (SRC. Sec. 3.8)
security at a predetermined price, called the
exercise or strike price, on or before a b) Defenses Against Insider Trading
predetermined date, called the expiry date, a. Proof that information was not gained from such
which can only be extended in accordance relationship or
with the Exchange rules. b. If the other party buying or selling is identified,
ii. Call Options insider proves that:
Rights to buy an underlying security i. The disclosed the information to the other
iii. Put Options party; or
Rights to sell an underlying security ii. Had reason to beiieve that the other party
iv. Straddle already knew of the information
A combination of put and call
c) Presumption of Insider Trading
2. Fraudulent Transactions (SRC, Sec. 26) Purchase or sale by:
It is unlawful, with respect to the purchase or sale of a. Insider
securities: (EOE) b. Insider's spouse or relatives by affinity or
a. To employ any device, scheme, or artifice to defraud consanguinity within the second (2"d) degree,
b. Obtain money or property by means of any untrue legitimate or common-law, under the following
statement of a material fact or any omission to state a conditions:
material fact, that is necessary in order to make the i. Transacted after the information came into
statements made, in the light of the circumstances existence but
under which they were made, not misleading ii. Prior to dissemination of the information to
c. Engage in any act, transaction, practice, or course of the public and a lapse of a reasonable
business which would operate as a fraud or deceit time for the market to absorb such
upon a person — actual intent to deceive not necessary information
(SRC, Sec. 26)
d) Rebuttal of Presumption
Fraud or deceit is required, not mere negligence, on the Proof that seller or buyer was not aware of the material
part of offender (SEC v. CA, G.R. No. 10465 and 106431- non-public information at the time of the purchase or sale.
32, 1995.)
e) Material Nonpublic Information
3. Insider Trading Information is "material nonpublic" if:
It is unlawful for an insider to sell or buy a security of the a. It has not been generally disclosed to the public
issuer, while in possession of material information with and would likely affect the market price of the
respect to the issuer that is not generally available to the security after being disseminated to the public and
public — does not require taking advantage of information, the lapse of a rriasonable time for the market to
mere possession is enough (SRC, Sec. 27) absorb the information; or
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When Tender Offer Rule is Mandatory:

b. Would be considered by a reasonable person 1. Any person or group of person intends to acquire
important under the circumstances in determining 35% or more of equity shares in a public company,
his course of action whether to buy, sell or hold a in one or more transactions within a period of 12
security (SRC. Sec. 27.2.) months
2. Acquisition of even less than 35% but would result
C. Protection Of Investors in ownership of more than 51% of the total
outstanding equity securities of a public company
3. The coverage of the mandatory tender offer rule
1. Tender Offer Rule (SRC, Sec. 19) covers not only direct acquisition but also indirect
A publicly announced intention by a person, acting alone acquisition or any type of acquisition. The
or in concert with other persons, to acquire equity legislative intent behind the tender offer rule
securities of a public company. makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed
Purpose company through the purchase of shares. Control
Protection of the interests particularly of the minority may [be] effected through a direct and indirect
stockholders of a target company acquisition of stock, and when this takes place,
irrespective of the means, a tender offer must
Cases occur (Cemco Holdings, Inc. v. National Life
A "tender offer" is a publicly announced intention by a Insurance Co., G.R. No. 171815, 2007, as cited in
person acting alone or in concert with other persons to Osmefia v. SSS, G.R. No. 165272, 2007.).
acquire equity securities of a public company, i.e., one
listed on an exchange, among others. Exemptions from Requirement (Purchases):
• The term is also defined as "an offer by the acquiring a. From unissued capital stock, provided that the
person to stockholders of a public company for the acquisition will not result in a 50% or more
latter to tender their shares therein on the terms ownership
specified in the offer." (Morales, The Philippine b. Increase in authorized capital stock
Securities Regulation Code, 2005 ed., p. 153, as cited c. Foreclosure proceedings
in Osmerla v. SSS, G.R. No. 165272, 2007.). d. Privatization by the government
• Tender offer is in place to protect the interests of e. Rehabilitation under court supervision
minority stockholders of a target company against any f. Through an open market at the prevailing market
scheme that dilutes the share value of their price
investments. It affords such minority shareholders the g. Merger or consolidation
opportunity to withdraw or exit from the company under
reasonable terms, a chance to sell their shares at the 2. Rules on Proxy Solicitation (SRC, Sec. 20)
same price as those of the majority stockholders
(Cemco Holdings, Inc. v. National Life Insurance Co., This only refers to solicited proxies.
G.R. No. 171815, 2007, as cited in Osmetia v. SSS,
G.R. No. 165272, 2007). Basic Requirements:
• It is done by filing with the SEC a declaration to that a. In writing; signed by the stockholder or duly
effect, furnishing the issuer with a statement with the authorized representative; and
facts required by the SEC, and the publication of all b. Filed before the scheduled meeting with the
requests or invitations for tender. corporate secretary
c. Valid only for the meeting for which it is intended
Creeping Acquisition
When a person seeks to acquire 35% or more of equity Cannot be valid for a period longer than five years at one
shares in a public company, in one or more transactions, time (Maximum effectivity period: 5 years)
within a period of 12 months.
Broker or dealer who holds or acquires the proxy for at
Note: Under the SRC itself, the creeping acquisition least 10% of the outstanding shares of the issuer shall
threshold is 30%. submit a re ort identifyin the beneficial owner within 10
days after such acquisition to the
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• Issuer of the security; i. Contains an untrue statement of a material

• The Exchange where the security is traded; and fact; or
• SEC ii. Omits to state a material fact required to be
stated therein or necessary to make such
3. Disclosure Rule (SRC, Sec. 17) statements not misleading,
This rule only applies to issuer corporations that satisfy the a. At the time of such acquisition he did
any of the following conditions: not know of such untrue statement or
omission; and
a. Has sold a class of its securities pursuant to a
registration; b. Who suffers damage;
b. Has a class of securities listed for trading on an
Exchange; or c. May sue and recover damages from the following
c. With assets of at least P50 Million (or such other persons:
amount as SEC shall prescribe), and having 200 i. The issuer and every person who signed the
or more holders each holding at least 100 shares registration statement;
of a class of its equity securities ("Public ii. Every person who was a director of, or any
company") other person performing similar functions, or a
partner in, the issuer at the time of the filing of
Reportorial Requirements: the registration statement or any part,
a. Annual Report — for fiscal year in which registration supplement or amendment thereof with
statement became effective and every fiscal year respect to which his liability is asserted;
thereafter, within 135 days after the end of the fiscal iii. Director of, or a person performing similar
year functions, or a partner in, the issuer and whose
b. Quarterly Report — within 45 days after the end of written consent thereto is filed with the
each of the first three quarters of the fiscal year registration statement;
c. Current Report — whenever necessary to make a full, iv. Auditor or auditing firm named as having
fair and accurate disclosure to the public of every certified any financial statements used in
material fact or event that occurs, which would connection with the registration statement or
reasonable be expected to affect investors' decisions prospectus.
in relation to those securities v. Every person who, with his written consent,
d. Monthly Report (for issuers of registered commercial has been named as having prepared or
papers) — regarding commercial paper total issuances certified any part of the registration statement,
outstanding at the end of each month, within 10 or as having prepared or certified any report or
business days following the end of the month valuation which is used in connection with the
registration statement, with respect to the
Note: Reports filed by 5% beneficial owners - any statement, report, or valuation, which purports
person who directly or indirectly acquires the beneficial to have been prepared or certified by him.
ownership of more than five percent (5%) or such lesser vi. Every selling shareholder who contributed to
per centum as the Commission may prescribe, of any class and certified as to the accuracy of a portion of
of equity securities of an Issuer, covered by the Disclosure the registration statement, with respect to that
Rule, shall file a report within five (5) business days after portion of the registration statement which
such acquisition submit to the Issuer, the Exchange where purports to have been contributed by him.
the security is traded, and to the Commission a sworn vii. Every underwriter with respect to such
statement prescribed by the SEC (SRC, Sec. 18) security.
CIVIL LIABILITY Defenses

No person, other than the issuer, shall be liable if he
1. In Connection With False Registration Statement proves:
a. Director Or Officer — that before the effectivity part of
How Committed (SRC, Sec. 56) - any person acquiring a registration statement with respect to which his liability
security is asserted:
a. The registration statement of which or any part thereof
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i. He had resigned from or had taken such includes an untrue statement of material fact
steps to resign from, or ceased or refused or omits to state a material fact necessary in
to act in which he was described in the order to make the statements not misleading;
registration statement; and Or
ii. Has given written notice to the SEC and d. Any person who makes or causes to be made false or
the Issuer; misleading statements with respect to any material fact
b. Non-Expert — he had reasonable ground to in any report or document filed — liability is to person
believe and did believe that the statement therein who relied on such statements in purchasing or selling
was true, and that there was no omission to state a security at a price which was affected by that
a material fact required to be stated therein, or statement
necessary to make the statements therein not
misleading; Defenses: good faith, no knowledge that statement was
c. Expert Himself — on that part of registration false or misleading
statement purporting to be made upon his
authority as an expert: Note:
i. He had reasonable ground to believe and • No action shall be maintained to enforce any liability
did believe that the statements therein created under the SRC unless brought within two (2)
were true, and that there was no omission years after the discovery of the facts constituting the
to state a material fact required to be cause of action and within five (5) years after such
stated therein, or necessary to make the cause of action accrued. (SRC, Sec. 62)
statements therein not misleading; or • All suits to recover damages shall be brought before
ii. Such part of the registration statement did the Regional Trial Court, which shall have exclusive
not fairly represent his statement as an jurisdiction to hear and decide such suits. (SRC, Sec.
expert; 63)
d. Public Official or Document — on that part of • The Court is hereby authorized to award damages in
registration statement purporting to be a statement an amount not exceeding triple the amount of the
made by a public official, or purporting to be from transaction plus actual damages. Exemplary damages
a public official document; may also be awarded in cases of bad faith, fraud,
i. He had no reasonable ground to believe malevolence or wantonness in the violation of the SRC
and did not believe that the statement or its rules and regulations (Id.)
therein were untrue; • The Court is also authorized to award attorney's fees
ii. There was an omission to state a material not exceeding thirty per centum (30%) of the award.
fact required to be stated therein or (Id.)
necessary to make the statements therein
not misleading, or that such part of the end of topic
registration statement did not fairly
represent the statement made by the
public official; or
iii. Was not a fair copy of, or extract from
public official document
2. In Connection with Prospectus, Communications

and Reports (SRC, Sec. 57)
c. Any person who:

i. Offers to sell or sells a security without
complying with the registration requirements;
or
ii. Offers to sell or sells a security by the use of
any means or instruments of transportation or
communication, by means of a prospectus or
other written or oral communication, which
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A. The New Central Bank Act (R.A. No. 7653)

VII. BANKING LAWS
1. Handling of Banks in Distress
When Banks are in Distress
A. The New Central Bank Act (RA 7653, as amended Liquidity
by RA 11211)
Having cash or the ability of an asset to be readily
1. Handling of banks in distress
a. Conservatorship converted into cash. An entity is liquid when it is able to
b. Closure timely pay its liabilities when they fall due.
c. Receivership
d. Liquidation Illiquidity
B. Secrecy of bank deposits (RA 1405, as amended, The bank is not liquid, and it cannot readily meet its current
and RA 6426, as amended) liabilities.
1. Prohibited acts
2. Exceptions from coverage Note: Illiquidity is addressed by conservatorship.
3. Garnishment of deposits, including foreign
deposits
Insolvency
C. General Banking Law of 2000 (RA 8791)
When the actual market value of assets are insufficient to
1. Nature of bank funds and bank deposits
2. Diligence required of banks pay its liabilities, not considering capital stock and surplus
3. Prohibited transactions by bank directors and which are not liabilities for such purpose. An entity is
officers insolvent when it is unable to meet current and long-term
D. Philippine Deposit Insurance Corporation Act (RA obligations.
3591, as amended)
1. Maximum deposit insurance coverage Insolvency is handled by receivership and closure.
2. Meaning of insured deposit
3. Splitting of deposits Methods
Conservatorship, Receivership, and Liquidation
a. Conservatorship (NCBA, Sec. 29)

Involves the appointment of a conservator to preserve the
assets of the bank when the latter is illiquid, and take
measures.
Instances When Conservatorship Is Available:

Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or quasi-bank is:
a. In a state of continuing inability; or
b. Unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of depositors
and creditors (NCBA, Sec. 29):
The Monetary Board May:

a. Appoint a conservator to take charge, for a period not
exceeding 1 year, of the assets, liabilities, and the
management thereof;
b. Reorganize the management;
c. Collect all monies and debts due said bank; and
d. Exercise all powers necessary to restore its viability,
‘vith power to overrule or revoke the actions of the
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previous management and board of directors of the General Rule:

bank or quasi-bank The conservator shall receive remuneration in an amount
not to exceed 2/3 of the salary of the president of the
A bank conservator appointed by the BSP has no power to institution (i.e. the bank under conservatorship) in 1 year,
unilaterally rescind contracts entered into by the previous payable in 12 equal monthly payments
management, such as a CBA, on the mere assertion that
such contracts are highly disadvantageous to the bank. Exception:
(Producers Bank v. NLRC, G.R. No. 118069, 1998). The A conservator connected with the BSP, in which case said
power to revoke or rescind contracts pertains to the courts. conservator shall not be entitled to receive any
remuneration or emolument (NCBA, Sec. 29)
Qualifications of a Conservator
The conservator should be competent and knowledgeable Note: If at any time within one-year period, the
in bank operations and management. (NCBA, Sec. 29) conservatorship is terminated on the ground that the
institution can operate on its own, the conservator shall
The Monetary Board has exclusive power to designate the receive the balance of the remuneration which he would
conservator (Koruga v. Arcenas, G.R. Nos. 168332, 2009) have received up to the end of the year; but if the
conservatorship is terminated on other grounds, the
Responsibilities of Conservator: conservator shall not be entitled to such remaining
a. Reorganize the management balance.
b. Collect all monies and debts due said institution
c. Exercise all powers necessary to restore its viability Duration of Conservatorship
d. Where necessary, overrule or revoke the actions of the Shall not exceed 1 year (NCBA, Sec. 29)
previous management and board of directors of the
bank or quasi-bank Expenses
e. Report and be responsible tolhe Monetary Board The expenses attendant to the conservatorship shall be
borne by the bank or quasi-bank concerned. (NCBA, Sec.
Powers of a Conservator 29)
a. To take charge of the assets, liabilities, and the
management thereof; Termination of Conservatorship
b. To reorganize the management; a. When the Monetary Board is satisfied that the
c. To exercise all powers necessary to restore its viability, institution can continue to operate on its own and the
with the power to overrule or revoke the actions of the conservatorship is no longer necessary;
previous management and board of directors of the b. Should the Monetary Board determine that the
bank or quasi-bank; and continuance in business of the institution would involve
d. Collect all monies and debts due to the said bank probable loss to its depositors or creditors, in which
case, proceedings for receivership and liquidation
The power to revoke cannot extend to post-facto shall be pursued.
repudiation of perfected transactions otherwise they would
infringe against the non-impairment clause of the The remedy of an aggrieved controlling shareholder from
constitution. Thus, the law merely gives the conservator the Monetary Bank order placing the rural bank under
power to revoke contracts that are deemed to be defective conservatorship is a petition for certiorari pursuant to
— void, voidable, unenforceable, or rescissible. (Producers NCBA, Sec. 30. The petition for certiorari must be filed with
Bank v. NLRC, G.R. No. 118069, 1998) the CA, not the SC, in accordance with Rule 65, since the
Monetary Board is a quasi-judicial agency (Vivas, et al. V.
The conservator's power is not unilateral and he cannot Monetary Board, G.R. No. 191424, 2013)
simply repudiate a contract or obligation validly entered
into by the bank. His autority would be only to bring court b. Closure
actions to assail such contracts. (First Philippine Whenever a bank is ordered closed by the Monetary
International Bank v. CA, G.R. No. 115849, 1996) Board, the PDIC shall be designated as receiver and it
shall proceed with the takeover and liquidation of the
Remuneration of a Conservator closed bank in accordance with R.A. No. 3591. (R.A. No.
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3591, Sec. 12[a], as amended by R.A. No. 10846 c. Continue in business without involving probable losses
[hereinafter New PDIC Charter]) to its depositors and creditors (NCBA, Sec. 30[c]); or
Receivership d. Has willfully violated a cease-and-desist order under

The stage within which the PDIC manages the affairs of NCBA, Sec. 37 (Administrative Sanctions) that has
the closed bank and preserves its assets for the benefit of become final and involves acts or transactions which
creditors (R.A. No. 9302, Sec. 10[a][b]) amount to fraud or a dissipation of assets (NCBA, Sec.
30[d])
Receivership is equivalent to an injunction to restrain the
bank in any way. Thus, the appointment of a receiver Grounds under the General Banking Law (hereinafter
operates to suspend the authority of the bank and of its GBL):
directors and officers over its property and effects. a. If the bank or quasi-bank notifies the BSP or publicly
(Villanueva v. CA, G.R. No. 114870, 1995.) announces a bank holiday (GBL, Sec. 53); or
b. If the bank or quasi-bank in any manner suspends the
Grounds for Resolution under the New PDIC Charter payment of its deposit liabilities continuously for more
(New PDIC Charter, Sec. 11): The PDIC, in coordination than 30 days (GBL, Sec. 53); or
with the BSP, may commence the resolution of a bank c. If a bank persists in conducting its business in an
upon — unsafe or unsound manner GBL, Sec. 56) and the
receiver determines that the bank cannot be
a. Failure of prompt corrective action as declared by the rehabilitated or permitted to resume business.
Monetary Board; or (new PDIC Charter, Sec. 11[a][1])
b. Request by a bank to be placed under resolution. (New Mandatory Requirements for Bank Closure
PD1C Charter, Sec. 11[a][2]) 1. Examination by the appropriate BSP department as to
the condition of the bank;
2. Examination showing that the condition of the bank is
The PDIC shall inform the bank of its eligibility for entry into one of insolvency, or that its continuance in business
resolution. Within a period of 180 days from a bank's entry would involve probable loss to its depositors or
into resolution, the PDIC, through the affirmative vote of at creditors;
least 5 members of the board, shall determine whether the 3. Director shall inform the Monetary Bank in writing of
bank may be resolved through the purchase of all its such fact;
assets and ssumption of all its liabilities, or merger or 4. If the Monetary Board shall find the statement of the
consolidation with, or its acquisition, by a qualified investor. department to be true, it shall appoint a receiver of the
(New PDIC Charter, Sec. 11[e]) assets and liabilities of the bank (Banco Filipino v.
Monetary Bank, G.R. No. 70054, 1991); and
Grounds for Receivership 5. Within 60 days, the Monetary Board shall determine
Upon a determination by the PDIC that the bank may not and confirm if the bank is insolvent, and if the public
be resolved, the Monetary Board may act in accordance interest requires, shall order the liquidation of the bank
with Section 30 of the NCBA.
Close Now-Hear Later Doctrine
Grounds under the New Central Bank Act (NCBA) The law does not require prior notice and hearing before
Whenever the Monetary Board finds that a bank or quasi- the bank may be directed to stop operations and placed
bank - under receivership. The purpose is to prevent unwarranted
a. Is unable to pay its liabilities as they become due in the dissipation of the bank's power to protect the depositors,
ordinary course of business (cash flow test) (NCBA, creditors, stockholders and the general public. (Central
Sec. 30[a]); Bank of the Philippines v. CA, G.R. No. 72200, 1993)
Exception: Inability to pay caused by extraordinary
demands induced by financial panic in the banking Notice of Closure and Takeover Activities (New PDIC
community (bank run) (NCBA, Sec. 30[a]); Charter, Sec. 14)
a. Upon the designation of the PDIC as receiver of a
b. Has insufficient realizable assets to meet its liabilities closed bank, it shall serve a notice of closure to the
(balance sheet test) (NCBA, Sec. 30[b]); highest-ranking officer of the bank present in the bank
premise, or in the absence of such officer, post the
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notice of closure -in the bank premises or on its main b. Purchase of Assets and/or Assumption of
entrance. The closure of the bank shall be deemed Liabilities (New PDIC Charter, Sec. 15)
effective upon the service of the notice of closure. The receiver shall have the authority to facilitate and
Thereafter, the receiver shall takeover the bank and implement the purchase of the assets of the closed
exercise the powers of the receiver as provided in this bank and the assumption of its liabilities by another
Act. insured bank, without need for approval of the
b. The receiver shall have authority to use reasonable liquidation court. The exercise of this authoirty shall be
force, including the authority to force open the in accordance with the Rules on Concurrence and
premises of the bank, and exercise such acts Preference of Credits under the Civil Code or other
necessary to take actual physical possession and laws, subject to such terms and conditions as the PDIC
custody of the bank and all its assets, records, may prescribe. The disposition of the branch licenses
documents, and take charge of its affairs upon the and other bank licenses of the closed bank shall be
service of the notice of closure. subject to the approval of the BSP.
c. Directors, officers, employees, or agents of a bank
hold money and other assets of the bank in trust or Note: Such action of the receiver to determine whether a
under administration or management by them for the bank may be subject of a purchase of assets and
bank in their fiduciary capacity. Upon service of the assumption of liabilities transactions shall be final and
notice of closure to the bank, all directors, officers, executory, and may not be set aside by any court.
employees or agents of the closed bank shall have the
duty to immediately account for, surrender and turn Authorities of a Receiver and Effects of Placement of
over tho the receiver, and provide information relative a Bank under Liquidation (New PDIC Charter, Sec. 13)
to, the assets, records, and affairs of the closed bank
in their possession, custody, administration or Authorities of a Receiver
management a. authorized to adopt and implement, without need of
d. When the circumstances so warrant, the local consent of the stockholders, BOD, creditors and
government unit and law enforcement agencies depositors of the closed bank, any or a combination of
concerned shall, upon request, immediately provide the following modes of liquidation:
assistance to the receiver during the service of notice i. Conventional liquidation; and
of closure and actual takeover operations to ensue the ii. Purchase of assets and./or assumption of
orderly conduct thereof. liabilities
c. Receivership b. In addition to the powers of a receiver provided under

Under the new PDIC Charter, banks closed by the existing laws, the PDIC, as receiver of a closed bank
Monetary Board shall no longer be rehabilitated. The is empowered to:
PDIC, as receiver, shall immediately proceed with the i. Represent and act for and on behalf of the
takeover and liquidation. (New PDIC Charter, Sec. 12[a]) closed bank;
ii. Gather and take charge of all the assets,
d. Liquidation records and affairs of the closed bank, and
The recovery and conversation of assets into cash for administer the same for the benefit of its
distribution to all creditors in accordance with the rules on creditors;
concurrence and preference of credits. iii. Convert the assets of the closed bank to cash
or other forms of liquid assets, as far as
Types of Liquidation practicable;
a. Voluntary liquidation (GBL, Sec. 68); iv. Bring suits to enforce liabilities of the directors,
b. Involuntary Liquidation (GBL, Sec. 30-33) officers, employees, agents of the closed bank
and other entitites related or connected to the
Modes of Liquidation closed bank or to collect, recover, and
a. Conventional Liquidation (New PD1C Charter, Sec. preserve all assets, including assets over
16) which the bank has equitable intestest;
The assets gathered by the receiver shall be evaluated v. Appoint or hire persons or entities of
and verified as to their existence, ownersh,p, condition, recognized competence in banking, finance,
and other factors to determine their realizable value. asset management or remedial management,
Page 170 of 250
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as its deputies, assistants or agents, to immediately preceeding paragraph, shall be

perform such powers, and functions of the subject to approval by the liquidation court;
PDIC as receiver of the closed bank, or assist
in the performance thereof; xiv. Distribute the available assets of the closed
vi. Appoint or hire persons or entities of bank, in cash or in kind, to its creditors in
recognized competence in forensic and fraud accordance with the Rules on Concurrence
investigations; and Preference of Credits under the Civil Code
vii. Pay accrued utilities, rentals and salaries of or other laws;
personnel of the closed bank; xv. Dispose records of the closed bank that are no
viii. Collect loans and other claims of the closed longer needed in the liquidation in accordance
bank and for this purpose, modify, with the guidelines set by the PDIC BOD,
compromise or restructure the terms and notwithstanding the laws on archival period
conditions of such loans or claims as may be and disposal of records; and
deemed advantageous to the interests of the xvi. Exercise such other powers as are inherent
creditors of the closed bank; and necessary for the effective discharge of
ix. Hire or retain private counsel as may be the duties of the Corporation as receiver.
necessary;
x. Borrow or obtain a loan, or mortgage, pledge c. After the payment of all liabilities and claims against
or encumber any asset of the closed bank, the closed bank, the receiver shall pay surplus, if any,
when necessary to preserve or prevent dividends at the legal rate of interest from date of
dissipitation of the assets, or to redeem takeover to date of distribution to creditors and
foreclosed assets of the closed bank, or to claimants of the closed bank in accordance with the
minimize losses to its depositors and Rules on Concurrence and Preference of Credits
creditors; under the Civil Code or other laws before distribution
xi. If the stipulated interest rate on deposits is to the shareholders of the closed bank
unusually high compared with prevailing
applicable interest rates, the receiver may Effect of Placement of a Bank under Liquidation
exercise such powers which may include a The officers, employees, deputies, assistants and agents
reduction of the interest rate to a reasonable of the receiver shall have no liability and shall not be
rate; subject to any action, claim or demand in connection with
any act done or omitted to be done by them in good faith
Note: Any modifications or reductions shall in connection with the exercise of their powers and
apply only to earned or unpaid interest functions under the PDIC charter and other applicable
laws, or other actions duly approved by the court. (New
xii. Utilize available funds of the bank, including PDIC Charter, Sec. 131d1)
funds generated by the receiver from the
conversion of assets to pay for reasonable The placement of a bank under liquidation shall have the
costs and expenses incurred for the following effects:
preservation of the assets, and liquidation of,
the closed bank, without need for approval of a. On the CORPORATE FRANCHISE or existence (New
the liquidation court; PDIC Charter, Sec. 15fe1[11)
Upon placement by the Monetary Board of a bank under
Note: For banks with insufficient funds, the liquidation, it shall continue as a body corporate until the
PDIC is authorized to advance the foregoing termination of the winding up period
costs and expenses, and collect payments, as
and when funds become available. Note: Winding up period is 6 months from the date of
publication of notice of the approval by the court of the final
xiii. Charge reasonable fees for the liquidation of asset distribution plan of the closed bank. (New PDIC
the bank from the assets of the bank Charter, Sec. 1610
Provided, that payment of these fees, Such continuation as a body corporate shall only be for the
including any unpaid advances under the purpose of liquidating, settling and closing its assets
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The employer-employee relationship between the closed

Receiver shall represent the closed bank in all cases by or bank and its employees shall be deemed terminated upon
against the closed bank and prosecute and defend suits by service of the notice of closure of the bank
or against it
Payment of separation pay or benefits provided for by law
Note: In no case shall the bank be reopened and permitted shall be made from available assets of the bank in
to resume baking business after being placed under accordance with the Rules on Concurrence and
liquidation. Preference of Credits under the Civil Code or other laws
b. On the POWERS AND FUNCTIONS of its directors, e. On CONTRACTUAL OBLIGATIONS (New PDIC
officers and stockholders (DOS) (New PDIC Charter, Charter, Sec. 15rej[5])
Sec. /5/e][2]) Receiver may cancel, terminate, rescind or repudiate any
The powers, voting rights, functions and duties, as well as contract of the closed bank that is not necessary for the
the allowances, renumeration and perquisites of the DOS orderly liquidation of the bank, or is grossly
of such bank are TERMINATED upon its closure disadvantageous to the closed bank, or for any ground
provided by law
DOS shall be BARRED from interfering in any way with the
assets, records, and affairs of the bank f. On INTEREST PAYMENTS (New PDIC Charter, Sec.
/5fe][6])
Note: The receiver shall exercise all authorities as may be The liability of a bank to pay interest on deposits and all
required to facilitate the liquidation of the closed bank for other obligations as of closure shall cease upon its closure
the benefit of all its creditors. without prejudice to NCBA, Sec. 85
c. On the ASSETS (New PDIC Charter, Sec. 151e1131) Provided: The receiver shall have the authority, without
Upon service of closure, all the assets of the closed bank need for approval of the liquidation court, to assign, as
shall be deemed in custodia legis in the hands of the payment to secured creditors, the bank assets serving as
receiver, and as such, these assets may not be subject to collaterals to their respective loans up to the extent of the
attachment, garnishment, execution, levy or any other outstanding obligations including interests as of date of
court processes closure (valuation based on the prevailing market value of
the collaterals)
A judge, officer of the court or any person who shall issue,
order, process or cause the issuance or implementation of Note: The BSP shall collect interest and other appropriate
the garnishment order, levy, attachment or execution, shall charges on all loans and advances it extends, the closure,
be liable receivership or liquidation of the debtor-institution
notwithstanding. (NCBA, Sec. 85)
Provided: collaterals securing the loans and advances
granted by the BSP shall not be included in the assets of g. On Liability for penalties and surcharges for later
the closed bank for distribution to other creditors payment and nonpayment of TAXES (New PDIC
Charter, Sec. 151e][7])
Provided, further: the proceeds in excess of the amount From the time of closure, the closed bank shall not be liable
secured shall be returned by the BSP to the receiver for the payment of penalties and surcharges arising from
the late payment or non-payment of real property tax,
Note: Any preliminary attachment or garnishment on any capital gains tax, transfer tax and similar charges
of the assets of the closed bank existing at the time of
closure shall not give any preference to the attaching or h. On BANK CHARGES AND FEES on services (New
garnishing party. Upon motion of the receiver, the PDIC Charter, Sec. 15(e1181)
preliminary attachment or garnishment shall be lifted Receiver may impose charges and fees for services
and/or discharged. rendered after bank closure such as the execution of
pertinent deeds and certifications
d. On LABOR RELATIONS (New PDIC Charter, Sec.
15jel(4]) I. On ACTIONS PENDING for or against the closed
bank (New PDIC Charter, Sec. 151b1[91)
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General Rule: Actions pending for or against the closed Board of Directors of the order directing receivership,
bank in any court or quasi-judicial body shall, upon motion conservatorship, or liquidation.
of the receiver, be suspended for a period not exceeding
180 days and referred to mandatory mediation nvoluntary Dissolution and Liquidation
CORPORATION CODE NCBA (MONETARY
Exception: Actions pending before the Supreme Court (SEC) BOARD, PDIC)
Filing of Complaint: Filing of Complaint:
j. On FINAL DECISIONS against the closed bank (New Requires filing of a verified Monetary Board may
PDIC Charter, Sec. 151e1110]) complaint and proper summarily and without
Execution and enforcement of a final decision of a court notice and hearing; need for prior hearing
other than the liquidation court against the assets of a forbid the bank from doing
closed bank shall be STAYED business
Prior to dissolution: Prior to dissolution:
Prevailing party shall file the final decision as a claim with Requires a BIR Tax PDIC shall immediately
the liquidation court and settled in accordance with the Clearance; gather and take charge of
Rules on Concurrence and Preference of Credits under the SEC shall issue final order all its assets and liabilities
Civil Code or other laws of dissolution after
submission of the tax
k. Docket and other COURT FEES (New PDIC Charter, clearance
Sec. 151-4111) Authority of the Authority of the
Payment of docket and other court fees relating to all cases Corporation in the Corporation in the
or actions filed by the receiver with any judicial or quasi- Dissolution: Dissolution:
judicial bodies shall be deferred until the action is Corporation is allowed to Bank is not given the
terminated with finality undertake its own option to undertake its
liquidation or at any time own liquidation
Any such fees shall constitute as a first lien on any during 3 years after its
judgment in favor of the closed bank or in case of dissolution
unfavorable judgment, such fees shall be paid in liquidation (In re: Petition for Assistance in the Liquidation of the Rural
costs and expenses during the distribution of the assets. Bank of Bokod Benguet, Inc., PDIC v. BIR, G.R. No.
158261, 2006)
All assets, records, and documents in the possession of
the closed bank at the time of its closure are presumed General Rule: If there is judicial liquidation of an insolvent
held by the bank in the concept of an owner. (New PDIC bank, all claims against the bank should be filed in the
Charter, Sec. /5/e1/12.1) liquidation proceeding (In re: Petition for Assistance in the
Liquidation of the Rural Bank ofBokod Benguet, Inc., PDIC
The exercise of authority, functions, and duties by the v. BIR, G.R. No. 158261, 2006)
receiver shall be presumed to have been performed in the
regular course of business. (New PDIC Charter, Sec. Exceptions:
151e1113.1) a When re-filing and re-litigating the case before the
liquidation court would be an exercise in futility in view
Assets and documents of the closed bank shall retain their of the number of years the case has been on trial and
private nature even if administered by the receiver. (New additional expenses to the party who is living in poverty
PDIC Charter, Sec. 151e][141) (Valenzuela v. CA, G.R. No. L-56168, 1988)
b. When more inconveniences would be caused to the
Note: Matters relating to the exercise by the receiver of the parties, entailing waste of more money and precious
functions shall be subject to visitorial audit only by the time (Carandang v. CA, G.R. No. L-44932, 1988); and
COA. c. When the issue is the validity of contracts upon which
a claim is based
Challenging the Decision of the Receiver
Only stockholders representing a majority of the capital Note: Even if the case falls within the aforementioned
stock of the bank have the personality to file a petition for exceptions, the claimant should still file the adjudicated
certiorari to be filed within 10 days from receipt by the claim with the liquidator or liquidation court for processing
Page 173 of 250
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of claims to determine the proper concurrence and Rules on Foreign Currency Deposits
preference of credit among the different creditors of the General Rule: Deposits in foreign currency deposits (RA
bank (Cudiamat v. Batangas Savings Bank, G.R. No. No. 6426. 1972) and deposits in offshore banking units (PD
182403, 2010) No. 1246, Sec. 8) are also confidential in nature.
Exception: Disclosure is allowed under said law upon the

B. Law On Secrecy Of Bank Deposits (R.A. No. 1405, written permission of the depositor.
As Amended)
Foreign currency deposits are exempt from attachment,
Purpose garnishment, or any other order or process of any court,
a. To give encouragement to the people to deposit legislative body, government agency or any administrative
their money in banking institutions; and body whatsoever. (RA 6426, Sec. 8)
b. To discourage private hoarding so that the same
may be properly utilized by banks in authorized Rules Applicable for Investment in Trust or Deposit
loans to assist in the economic development of the Substitute
country. (RA 1405 as amended, Sec. 1) For investments in trust accounts or in deposit substitutes,
if these are in the form of investments in government bonds
1. Prohibited Acts or deposits, the protection under RA 1405 and RA 6426
All deposits of whatever nature with the banks in the extends thereto accordingly.
Philippines, including investments in government bonds
are considered absolutely confidential and may not be If these are in other forms of investments, the disclosure of
examined, inquired or looked into by any person except as information related thereto is prohibited as provided by
allowed by law. (RA 1405 as amended, Sec. 2) GBI., Sec. 55.
b. Deposits Covered Note: No director, officer, employee, or agent of any bank

a All deposits of whatever nature with banks or shall, without order of a court of competent jurisdiction,
banking institutions in the Philippines disclose to any unauthorized person any information
b. Investments in bonds issued by the Government relative to the funds or properties in the custody of the bank
of the Philippines, its political subdivisions and its belonging to private individuals, corporations, or any other
instrumentalities. (RA 1405 as amended, Sec. 2) entity. (GBL, Sec. 55[1]141) -
All Bank accounts of whatever nature are absolutely Deposits may not be examined, inquired or looked into by
confidential under the Bank Secrecy Law, including trust any person, government official, bureau or office
accounts. (Ejercito v. Sandiganbayan, G.R. No. 157294-
95, 2006) Rule on Disclosure of Information Concerning
Deposites
Construction of Confidentiality It is also unlawful for any official or employee of a bank to
By force of statute, all bank deposits are absolutely disclose to any person any information concerning
confidential, and that nature is unaltered even by the deposits
legislated exceptions. There is disfavor towards construing
these exceptions in such a manner that would authorize Requisites for Disclosure of Peso Deposits in Court
unlimited discretion on the part of the government or of any Cases
party seeking to enforce those exceptions and inquire into a. There must be a court order;
bank deposits. If there are doubts in upholding the b. The order must be issued by a competent court
absolutely confidential nature of bank deposits against specifically directing the bank concerned to disclose
affirming the authority to inquire into such accounts, then the required information
such doubts must be resolved in Tavor of confidentiality. c. The bank should check and satisfy itself that the
(Republic v. Eugenio, G.R. No. 174629, 2008) deposits or investment in government bonds being
inquired into are either the subject of a case of bribery
or dereliction of duty of public officials, or of a case
where the deposit or investment itself is the subject
matter of the litigation.
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2. Effect of Non-Existence of Requisites d. The Courts were authorized to examine bank deposits
If these requirements are not met, there would be basis for of spouse and unmarried children of government
the bank to request the court to excuse compliance with officials found to have unexplained wealth under the
the court order. Anti-Graft and Corrupt Practices Act
Exceptions (Disclosure Allowed) - Grounds To Allow e. Human Security Act (RA 9372), Sec. 27: The
Examination Of A Bank Account (Sec. 2): provisions of Republic Act No. 1405 as amended, to
a. Where the depositor consents IN WRITING; the contrary notwithstanding, the justices of the Court
b. IMPEACHMENT CASES; of Appeals designated as a special court to handle
Note: it is necessary that there be an order issued anti-terrorism cases after satisfying themselves of the
by the impeachment court or by its authorized existence of probable cause in a hearing called for that
officer to allow examination. purpose may authorize in writing any police or law
c. BY COURT ORDER in cases of: enforcement officer and the members of his/her team
i. Bribery duly authorized in writing by the anti-terrorism council
ii. Dereliction of duty of public officials to:
d. Money invested or deposited is subject of litigation • Examine, or cause the examination of, the
deposits, placements, trust accounts, assets and
Additional Exceptions to the Secrecy of the Bank records in a bank or financial institution; and
Deposit Act (Aside From Those Stated In The Law) • Gather or cause the gathering of any relevant
information about such deposits, placements, trust
a. The Commissioner of Internal Revenue can inquire accounts, assets, and records from a bank or
into the bank accounts of the following taxpayers: financial institution. The bank or financial
• A decedent to determine his gross estate; or institution concerned, shall not refuse to allow
• . Any taxpayer who has filed an application for such examination or to provide the desired
compromise of his tax liability, which application information, when so, ordered by and served with
on the ground of financial incapacity (N1RC, Sec. the written order of the Court of Appeals.
6[0
A taxpayer, information on whose account is f. Under AMLA, Sec. 11:
requested by a foreign tax authority Upon order of a competent court in cases of violation of the
AMLA where there is probable cause of money laundering,
Note: A waiver of rights under the Law on Secrecy of except that no court order is required in cases of:
Bank Deposits (RA 1405) must not only be voluntary, • Kidnapping for ransom
but must have been made knowingly, intelligently, and • Drug trafficking
with sufficient awareness of the relevant • Hijacking, destructive arson and murder, including
circumstances and likely consequences. There must those perpetrated by terrorists against non-
be persuasive evidence to show an actual intention to combatants and similar targets
relinquish the right. Mere silence on the part of the
holder of the right should not be construed as a BSP inquiry into or e-.amination of deposits or investments
surrender thereof. (Dotia Adela Export International, with any bank, when the inquiry or examination is made in
Inc. vs. T1DCORP and BPI, G.R. No. 201931, 2015) the course of the BSP's periodic or special examination
b. In cases of unclaimed balances: Disclosure to the g. Under Sections 1(d) and 4 of the Plunder Law
Treasurer of the Philippines for dormant deposits for at
least 10 years (Act 3936, Sec. 2) h. Under Section 8 of the new PDIC Charter
Whenever upon examination by the Corporation into the
c. Inquiry into or examination of any deposit or condition of any insured bank, it shall be disclosed that an
investment with any banking institution when the insured bank or its directors or agents have committed, are
examination is made by the BSP in the course of a committing or about to commit unsafe or unsound
periodic or special examination in accordance with practices in conducting the business of the bank, or have
the rules of examination of the BSP (RA 9160, Sec. violated, are violating or about to violate any provisions of
11) any law or regulation to which the insured bank is subject,
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the BOD shall submit the report of the examination to the Any information obtained from an examination of his
Monetary Board to secure corrective action. deposits shall be held strictly confidential and may be used
i. In-Camera Inspection by the examiners only in connection with their supervisory
Requisites: and examination responsibility or by the BSP in an
a. Pending case before a court of competent appropriate legal action it has initiated involving the deposit
jurisdiction account. (NCBA, Sec. 26)
b. Account must be clearly identified
c. The inspection is limited to the subject matter of Note: Even in cases not involving prosecution under the
the pending case Anti-Graft and Corrupt Practices Act, an inquiry into the
d. The bank personnel and the account holder must whereabouts of the amount converted necessarily extends
be notified to be present during the inspection, and to whatever is concealed (being in the name of persons
such inspe.ction may cover only the account other than the one responsible for the illegal acquisition)
identified in the pending case. inasmuch as the case is aimed at recovering the amount
converted. (Mellon Bank v. Magsino, G.R. No. 71479,
Note: An investigation by the Office of the Ombudsman is 1990)
not a pending litigation to allow examination of a bank
account. (Marquez v. Desierto, G.R. No. 135882, 2001) Account Names
a. Peso Accounts
Grounds for Disclosure of Foreign Currency Deposits When banks allow the opening of deposit accounts under
a. Upon written permission of the depositor. pseudonyms, it is assumed that: (1) They have exercised
b. When there is probable cause of Money Laundering as due diligence to ascertain the identity of their clients; and
provided under the AMLA Sec. 11. (2) They are aware of the legal provisions and
c. When there is probable cause of Terrorism under the requirements on the use of pseudonyms.
Human Security Act. (Aquino, Banking Laws [2010])
Question: With the issuance of Circular 251, does that
mean there is no longer confidentiality/secrecy of
Disclosures Applicable -to Both Peso and Foreign deposit accounts?
Currency Deposits
Answer: NO. Circular 251 merely disallowed the
• Under the Rules of Court opening of fictitious and anonymous accounts and has
a. Garnishment (Rule 39, Sec. WO not in any way modified nor lessened the safeguards
b. Preliminary attachment (Rule 57, Sec. 10) and protection to depositors under RA 1405. This
means that, notwithstanding Circular 251, deposit
• Waiver in case of DOSRI loans - Any director, officer accounts cannot be examined or looked into except
or stockholder who, together with his related interest, under the limited circumstances provided for in RA
contracts a loan or any form of financial 1405.
accommodation from:
a. His bank; or b. Accounts Using Alias or Account Numbers
b. From a bank On July 7, 2000 and in seeking the adoption of anti-money
i. Which is a subsidiary of a bank holding laundering measures, BSP issued a regulation, Circular
company of which both his bank and the No. 251, providing that, unless othesrwise prescribed
lending bank are subsidiaries; or under existing laws, anonymous accounts or accounts
ii. In which a controlling proportion of the shares under fictitious names are prohibited.
is owned by the same interest that owns a
controlling proportion of the shares of his The exception referred to under Circular No. 251 was RA
bank, in excess of five percent (5%) of the 6426 (The Foreign Currency Deposit Act), which explicitly
capital and surplus of the bank, or in the allows the keeping of numbered accounts for the recording
maximum amount permitted by law, whichever and servicing of deposits.
is lower, shall be required by the lending bank
to waive the secrecy of his deposits of Note: Prior to said date, there was no prohibition.
whatever nature in all banks in the Philippines. However, in the Manual of Regulations issued by BSP and
even before Circular 251, banks were required to: (a) adopt
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systems to establish the identity of their depositors; and (b)

set a minimum of three (3) specimen signatures from each Note: Under R.A. No. 10641, foreign banks may now be
of their depositors subject to regular updating. fully foreign owned, through any of the following modes of
entry:
Even for numbered accounts as authorized under RA (1) Acquiring, purchasing, or owning up to 100% of
6426, BSP has required banks, under Circular 251, to take the voting stock of an existing bank;
necessary measures to establish and record the true (2) Investing in up to 100% of the voting stock of a new
identity of their clients, which identification may be based banking subsidiary incorporated under the laws of
on official or other reliable documents and records. the Philippines; or
(3) Establishing branches with full banking authority;
3. Garnishment of Deposits, Including Foreign Deposits a. However, the foreign bank must be
established, reputable, and financially
The prohibition against examination of or inquiry into a sound
bank deposit under Republic Act 1405 does not preclude b. Further, it must be widely-owned and
its being garnished to insure satisfaction of a judgment. publicly listed in the country of origin
Indeed there is no real inquiry in such a case, and if the
existence of the deposit is disclosed the disclosure is Universal Banks
purely incidental to the execution process. (China Bank v. A universal bank shall have the authority to exercise, in
Ortega, G.R. L-34964, 1973) addition to the powers authorized for a commercial bank in
Section 29, the powers of an investment house as provided
Deposits maintained by banks with the Bangko Sentral as in existing laws and the power to invest in non-allied
part of their reserve requirements shall be exempt from enterprises as provided in this Act. (GBL, Sec. 23)
attachment, garnishments, or any other order or process
of any court, government agency or any other Commercial Banks
administrative body issued to satisfy the claim of a party A commercial bank shall have, in addition to the general
other than the Government, or its political subdivisions or powers incident to corporations:
instrumentalities. (Sec. 103) a. All such powers as may be necessary to carry on the
business of commercial banking such as accepting
Penalties for Violation: drafts and issuing letters of credit;
Any violation of this law will subject offender upon b. Discounting and negotiating promissory notes, drafts,
conviction, to an imprisonment of not more than five years bills of exchange, and other evidences of debt;
or a fine of not more than twenty thousand pesos or both, c. Accepting or creating demand deposits; receiving
in the discretion of the court. (RA 1405, Sec 5.) other types of deposits and deposit substitutes;
d. Buying and selling foreign exchange and gold or silver
C. General Banking Law Of 2000 (R.A. 8791) bullion;
Plereinafter Gbll e. Acquiring marketable bonds and other debt securities;
and
Definition And Classification Of Banks f. Extending credit, subject to such rules as the Monetary
Board may promulgate.
Banks
Entities engaged in the lending of funds obtained in the These rules may include the determination of bonds
form of deposits. (GBL, Sec. 3.1) and other debt securities eligible for investment, the
maturities and aggregate amount of such investment.
Elements
1. Engaged in lending of funds Thrift Banks
2. Obtained in the form of deposits They include savings and mortgage banks, private
3. From the public, which shall mean 20 or more persons development banks, and stock savings and loans
associations organized under existing laws. (R.A. No.7906
How Banks are Structured — Thrift Banks Act)
General Rule: Banks are stock corporations. However,
cooperative banks may also be formed under the
Cooperative Code.
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Rural Banks To determine whether the financial assets are deposit

Banks which are designed to make needed credit available substitutes, the "20 or more individual or corporate lenders"
and readily accessible in the rural areas on reasonable rule must apply. (Id.)
terms. (R.A. No. 7353)
Trust Entities
Cooperative Banks Any bank, investment house or a stock corporation duly
One organized, the majority shares of which is owned and authorized by the Monetary Board to engage in trust,
controlled by cooperatives, primarily to provide financial investment management and fiduciary business
and credit services to cooperatives. (R.A. No. 6938) methodology. (Definitions of MORB, Sec. X410.1)
Islamic Banks TRUST

BANK QUASI-BANK
Created by Congress to promote and accelerate socio- ENTITY
economic development of the Autonomous Region by Entities Entities engaged in Entities engaged
performing banking, financing and investment operations engaged in the borrowing of in trust,
and to establish and participate in agricultural, commercial the lending funds through the investment
of funds issuance or management
and industrial ventures based on the Islamic concept of
obtained in acceptance of and fiduciary
banking. (RA 6848, Sec. 3)
the form of deposit substitutes business
deposits. for the purpose of methodology.
Distinction Of Banks From Quasi-Banks And Trust purchasing
Entities receivables or other
obligations.
Quasi-Banks
Refer to entities engaged in the borrowing of funds through Bank Powers and Liabilities
the issuance, endorsement or assignment with recourse or
acceptance of -deposit substitutes as defined in [NCBA, 1. Corporate Powers
Sec. 95] for purposes of relending or purchasing of As banks are required to organize as stock corporations,
receivables and other obligations. (GBL, Sec. 4, Par. 3) they shall have the powers enumerated under Sec. 36 of
the Corporation Code:
Deposit Substitutes • To sue and be sued in its corporate name;
An alternative form of obtaining funds from the public, other • Of succession by its corporate name for the period
than deposits, through the issuance, endorsement, or of time stated in the articles of incorporation and
acceptance of debt instruments for the borrower's own the certificate of incorporation;
account, for the purpose of relending or purchasing of • To adopt and use a corporate seal;
receivables and other obligations. • To amend its articles of incorporation in
accordance with the provisions of this Code;
Note: The definition of deposit substitutes in the banking
• To adopt by-laws, not contrary to law, morals, or
laws was brought about by an observation that banks and
public policy, and to amend or repeal the same in
non-bank financial intermediaries have increasingly
accordance with this Code;
resorted to issuing a variety of debt instruments, other than
• In case of stock corporations, to issue or sell
bank deposits, to obtain funds from the public. (BD° v.
stocks to subscribers and to sell stocks to
RCBC, G.R. No. 1.98756, 2016)
subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and
Under the NIRC, deposit substitutes include not only the
to admit members to the corporation if it be a non-
issuances and sales of banks and quasi-banks for
stock corporation;
relending or purchasing receivables and other similar
• To purchase, receive, take or grant, hold, convey,
obligations, but also debt instruments issued by
sell, lease, pledge, mortgage and otherwise deal
commercial, industrial, and other non-financial companies
with such real and personal property, including
to finance their own needs or the needs of their agents or
securities and bonds of other corporations, as the
dealers. (Id.)
transaction of the lawful business of the
corporation may reasonably and necessarily
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require, subject to the limitations prescribed by law • The BSP shall provide policy direction in the areas
and the Constitution; of money, banking and credit. Thus, Monetary
To enter into merger or consolidation with other Board may prescribe ratios, ceilings, limitations, or
corporations as provided in this Code; other forms of regulation on the different types of
• To make reasonable donations, including those for accounts and practices of banks and quasi-banks
the public welfare or for hospital, charitable, which shall, to the extent feasible, conform to
cultural, scientific, civic, or similar purposes: internationally accepted standards, including
Provided, That no corporation, domestic or those of the Bank for International Settlements
foreign, shall give donations in aid of any political (BIS).
party or candidate or for purposes of partisan • The Monetary Board may exempt particular
political activity; categories of transactions from such ratios,
To establish pension, retirement, and other plans ceilings and limitations, but not limited to
for the benefit of its directors, trustees, officers and exceptional cases or to enable a bank or quasi-
employees; and bank under rehabilitation or during a merger or
To exercise such other powers as may be consolidation to continue in business with safety to
essential or necessary to carry out its purpose or its creditors, depositors and the general public.
purposes as stated in the articles of incorporation. (GBL, Sec. 5)
(Corporation Code, Sec. 36)
2. Banking and Incidental Powers of BSP a. Nature of Bank Funds and Bank Deposits
Operations and activities of banks shall be subject to Nature of Bank Funds

the supervision of the BSP, which shall include: The bank can make use as its own the money deposited.
• Issuance of rules of conduct or the establishment (Tan Tiong Tick v. American Apothecaries, G.R. No. L-
of standards of operation for uniform application 43682, 1938)
to all institutions or functions covered;
Said amount is not being held in trust for the depositor nor
• Conduct of examination to determine compliance
is it being kept for safekeeping.
with laws and regulations;
• Overseeing to ascertain that laws and regulations
are complied with;
Nature of Bank Deposits
• Regular investigation (not oftener than once a
(NCC, Art. 1980) Fixed, savings and current deposits of
year to determine whether an institution is
money in banks and similar institutions shall be governed
conducting its business on save or sound basis;
by the provisions concerning simple loan.
• Inquiring into solvency and liquidity of the
institution; or
By reason of the fiduciary nature of the bank's relationship
• Enforcing prompt corrective action.
with its depositors, this fiduciary relationship does not
"convert the contract between the bank and its depositors
Examination by BSP from a simple loan to a trust agreement, whether express
The BSP shall, when examining a bank, have the authority or implied." It simply means that the bank is obliged to
to examine an enterprise which is wholly or majority-owned observe "high standards of integrity and performance" in
or controlled by the bank. (GBL, Sec. 7)
complying with its obligations under the contract of simple
loan. (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013)
BSP Authority Over Quasi-Banks and Trust Entities
The BSP shall also have supervision over the operations
Effects of Deposits as Being Simple Loans - Bank as
of and exercise regulatory powers over quasi- banks, trust Debtor
entities and other financial institutions which under special
laws are subject to BSP supervision. (GBL, Sec. 4) Deposit is voluntary agreement; "Know Your Customer"
standards
BSP Powers Policy Direction; Ratios, Ceilings and
Limitations Bank acquires ownership of money deposited; obligation
to pay amount, but no obligation to return the same money
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(Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-60033, In furtherance thereof, the State shall promote and
1984) maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
Payment to proper party-depositor (Fultron Iron Works Co. responsive to the demands of a developing economy.
v. China Banking Corp., G.R. No. 32576, 1930) (GBL, Sec 2)
Deposits are not preferred credits. (Central Bank v. Morfe, Banks are required to exercise the highest degree of
G.R. No. L-38427, 1975) diligence.
Bank has right to set-off or compensation (Guiles v. As a business affected with public interest and because of
Philippine National Bank, G.R. No. 4391, 1935) the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care,
No breach of trust (Mandamus not a remedy) (Lucman v. always having in mind the fiduciary nature of their
Malawi, G.R. No. 159794, 2006) relationship. (Simex International (Manila) Inc. v CA, G.R.
No. 88013, 1990)
Kinds of Deposits Banks are expected to exercise the highest degree of

a. Savings Deposits diligence in the selection and supervision of their
b. Negotiable Order of Withdrawal (NOW) — are employees. By the very nature of their work, the degree of
interest bearing deposit accounts that combine the responsibility, care and trustworthiness expected of their
payable on demand feature and investment feature employees and officials is far greater than those of ordinary
of savings accounts. clerks and employees. (Philippine Commercial and
c. Time Deposits — are one payment of which International Bank v. CA, G.R. No. 121413, 2001)
generally cannot legally be required within a
specified number of days. (BPI Family Savings v. Sec. 2 of GBL expressly imposes a fiduciary duty on the
First Metro Investment, G.R. 132390, 2004) banks when it declares that the State recognizes the
d. Demand Deposits — are those liabilities of the "fiduciary nature of banking that requires high standards of
Bangko Sentral and of other banks, which are integrity and performance." The fiduciary relationship
denominated in Philippine currency and are subject means that the bank's obligation to observe high standards
to payment in legal tender upon demand by the of integrity and pertormance is deemed written into every
presentation of checks. deposit agreement between a bank and its depositor.
(Philippine Banking Corp. v. CA, G.R. No. 127469, 2004)
Only banks duly authorized to do so may accept funds or
create liabilities payable in pesos upon demand by the Since the banking business is impressed with public
presentation of checks, and such operations shall be interest, of paramount importance thereto is the trust and
subject to the control of the Monetary Board in accordance confidence of the public in general, the highest degree of
with the powers granted it with respect thereto under this diligence is expected and .high standards of integrity and
Act. (GBL, Sec. 59) performance are even required of it. (Bank of the Philippine
Islands v. Casa Montessori Internationale, G.R. No.
Checks representing demand deposits do not have legal 149454. 2004)
tender power and their acceptance in the payment of
debts, both public and private, is at the option of the c. Prohibited Transactions By Bank Directors and Officers
creditor: Provided, however, That a check which has been No director, officer, employee, or agent of any bank shall
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in an amount 1. Make false entries in any bank report or statement
or participate in any fraudulent transaction, thereby
equal to the amount credited to his account.
affecting the financial interest of, or causing damage
to, the bank or any person;
b. Diligence Required Of Banks 2. Without order of a court of competent jurisdiction,
The State recognizes the vital role of banks providing an disclose to any unauthorized person any information
environment conducive to the sustained development of relative to the funds or properties in the custody of
the national economy and the fiduciary nature of banking the bank belonging to private individuals,
that requires high standards of integrity and performance. corporations, or any other entity: Provided, That with
Page 180 of 250
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respect to bank deposits, the provisions of existing this Act unless the passbook, certificate of deposit, or other
laws shall prevail; evidence of deposit is determined by the Corporation to be
3. Accept gifts, fees or commissions or any other form an authentic document or record of the issuing bank:
of remuneration in connection with the approval of a Provided, finally, That in case of a condition that threatens
loan or other credit accommodation from said bank; the monetary and financial stability of the banking system
4. Overvalue or aid in overvaluing any security for the that may have systemic consequences, as defined in
purpose of influencing in any way the actions of the
Section 22 hereof, as determined by the Monetary Board,
bank or any bank; or
5. Outsource inherent banking functions. the maximum deposit insurance cover may be adjusted in
(Sec 55.1, RA 8791) such amount, for such a period, and/or for such deposit
products, as may be determined by a unanimous vote of
D. Philippine Deposit Insurance Corporation Act (RA the Board of Directors in a meeting called for the purpose
3591, as amended) and chaired by the Secretary of Finance, subject to the
approval of the President of the Philippines. (New PDIC
1. Maximum deposit insurance coverage Charter, Sec. 5)
The maximum deposit insurance coverage is P500,000.00
per depositor, per bank. (New PDIC Charter, Sec. 3) 3. Splitting of deposits
Splitting of deposits occurs whenever a deposit account
2. Meaning of insured deposit with an outstanding balance of more than the statutory
The term insured deposit means the amount due to any maximum amount of insured deposit maintained under the
bonafide depositor for legitimate deposits in an insured name of natural or juridical persons is broken down and
bank as of the date of closure but not to exceed Five transferred into two (2) or more accounts in the name/s of
hundred thcusand pesos (P500,000.00). Such amount natural or juridical persons or entities who have no
shall be determined according to such regulations as the beneficial ownership on transferred deposits in their names
Board of Directors may prescribe. within one hundred twenty (120) days immediately
preceding or during a bank-declared bank holiday, or
In determining such amount due to any depositor,-there immediately preceding a closure order issued by the
shall be added together all deposits in the bank maintained Monetary Board of the B3ngko Sentral ng Pilipinas for the
in the same right and capacity for his or her benefit either purpose of availing of the maximum deposit insurance
in his or her own name or in the name of others. coverage (New PDIC Charter, Sec. 11)
A joint account regardless of whether the conjunction 'and', end of topic

'or', 'and/or' is used, shall be insured separately from any
individually-owned deposit account: Provided, That
(1) if the account is held jointly by two or more natural
persons, or by two or more juridical persons or entities, the
maximum insured deposit shall be divided into as many
equal shares as there are individuals, juridical persons or
entities, unless a different sharing is stipulated in the
document of deposit, and
(2) if the account is held by a juridical person or entity jointly
with one or more natural persons, the maximum insured
deposit shall be presumed to belong entirely to such
juridical person or entity: Provided, further, That the
aggregate of the interest of each co-owner over several
joint accounts, whether owned by the same or different
combinations of individuals, juridical persons or entities,
shall likewise be subject to the maximum insured deposit
of Five hundred thousand pesos (P500,000.00): Provided,
furthermore, That the provisions of any law to the contrary
notwithstanding, no owner/holder of any passbook,
certificate of deposit, or other evidence of deposit shall be
recognized as a depositor entitled to the rights provided in
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VIII. INTELLECTUAL PROPERTY LAW (exclude INTELLECTUAL PROPERTY RIGHTS,

Implementing Rules and Regulations) IN GENERAL
TOPIC OUTLINE UNDER THE SYLLABUS Definition of Intellectual Property Rights

"Those property rights which result from the physical
A. Patents manifestation of original thought." (Kho vs. CA, G.R. No.
1. Patentable vs. non-patentable inventions 115758, 2002)
2. Ownership of a patent
3. Grounds for cancellation of a patent Differences among the IP Rights
4. Remedy of the true and actual inventor
5. Rights conferred by a patent As to subject Matter
6. Limitations on patent rights
7. Patent infringement A product, process or any
B. Trademarks PATENT improvement of the foregoing which
1. Marks vs. collective marks vs. trade names is a technical solution of a problem.
2. Acquisition of ownership COPYRIGHT A literary or artistic work
a. Concept of actual use
b. Effect of registration Any sign to distinguish the goods or
3. Non-registrable marks TRADEMARK
services of an enterprise.
4. Well-known marks
5. Priority right Elements
6. Rights conferred by registration
7. Cancellation of registration 1. Any technical. solution of a
8. Trademark infringement problem in a field of human
9. Unfair competition activity
C. Copyrights 2. Has a patentable subject;
PATENT 3. the invention must be new
1. Copyrightable works
2. Non-copyrightable works (novelty);
3. Rights conferred by copyright 4. involves an inventive step; (non-
4. Ownership of a copyright obvious) and
5. Limitations on copyright 5. Which is industrially applicable
6. Doctrine of fair use 1. Literary or artistic work
7. Copyright infringement COPYRIGHT 2. Independently created
3. Has a minimum of creativity
1. Any visible sign

2. Capable of distinguishing the
goods or services of an
TRADEMARK
enterprise
3. Must not be excluded by the
laws
How Registered
PATENT Intellectual Property Office

COPYRIGHT the National Library
TRADEMARK Intellectual Property Office
When Protection Starts

upon issuance of letters of patent by
PATENT
the Intellectual Property Office
COPYRIGHT upon creation
Page 182 of 250 F

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Who may File for Patent Protection

upon issuance of the trademark
TRADEMARK
certificate AS TO LEGAL
AS TO NATIONALITY
PERSONALITY
Term of Protection
20 years 1. Filipino nationals 1. Inventor or his

PATENT
2. Foreign nationals or attorney-in-fact
generally up to 50 years after the those domiciled or have 2. Assignee of the
COPYRIGHT a real and effective inventor
death of the author
commercial
TRADEMARK 10 years establishment in a
country which is bound
by a treaty to grant
Filipinos same right as
A. Patents
its own nationals (IP
Code, Sec. 3)
Definition of a Patent
A patent is a grant issued by the government through the
Intellectual Property Office of the Philippines (IP0). It is an
1 Patentable Inventions (Sec. 21, IP Code)
exclusive right granted for a product, process or an
a) Any technical solution of a problem in a field of
improvement of a product or process which is new,
human activity
inventive and useful given to its inventor the right to
b) Which is new (element of novelty)
exclude others from making, using, or selling the product
c) Which involves an inventive step; and
of his invention during the life of the patent.
d) Which in industrially applicable
Three-fold Purpose of Patent Law
Overview of the Elements of a Patent
(a) Seeks to foster and reward invention
(b) Promotes disclosure of inventions to stimulate further An invention is novel if it does not
Element of
innovation, and to permit the public to practice the form part of the prior art. (Sec. 23,
Novelty
invention once the patent expires, IP Code)
(c) The stringent requirements of patent protection seek to An invention involves an inventive
ensure that ideas in the public domain remain there for step if, having regard to prior art, it is
the free use of the public. (Pearl & Dean, Inc. v. not obvious to a person skilled in the
Element of
Shoemart, G.R. No. 148222, 2003) Inventive Step art at the time of filing date or priority
date of application claiming the
Term of Protection invention (Sec.26, IP Code)
A patent has a term of protection of 20 years providing an
inventor significant commercial gain. An invention that can be produced
Element of
and used in any industry shall be
Industrial
Effect of Lapse of Term of Protection industrially applicable. (Sec.27, IP
Applicability
The patent owner must share the full description of the Code)
invention. This information is made :Atonable to the public
in the form of the Intellectual Property Official Gazette and When an Invention is Not New
can be utilized as basis for future research and will in turn Novelty is an essential requisite of patentability of an
promote innovation and development. invention or discovery. An invention is not new if it has
been disclosed or used in public, or sold in the market
before the patent application for the invention is filed.
(Manzano v. Court of Appeals, G.R. No. 113388, 1997)
Non-prejudicial Disclosures
The disclosure of information contained in the application
during the twelve (12) months preceding the filing date or
the priority date of the application shall not prejudice the
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applicant on the ground of lack of novelty if such disclosure a. Scope and content of prior art;
was made by: b. Objective evidence of non-obviousness.
a. The inventor; c. Level of ordinary skill in the art;
b. A patent office and the information was contained d. Differences between the claimed invention and
(a) in another application filed by the inventor and the prior art; and
should not have been disclosed by the office, or e. Prior public use is a bar whether the use was
(b) in an application filed without the knowledge or with or without the consent of the patentee.
consent of the inventor by a third party which
obtained the information directly or indirectly from A mere experimental use is not the public use defined by
the inventor; or the Act, but a single use for profit, not purposely hidden, is
c. A third party which obtained the information directly or such.
indirectly from the inventor. (Sec. 25, IP Code)
The ordinary use of a machine or the practice of a process
Prior Art in a factory in the usual course of producing articles for
Prior Art shall consist of: commercial purposes is a public use. (Electric Storage
i. Everything made available to the public anywhere in Battery Co. vs. Shimadzu, 507 U.S. 613, 1939)
the world, before the filing date or priority date of the
application claiming the invention; and Special Rules with regard to Drugs and Medicines
i. Whole contents of an application for a patent, utility In the case of drugs and
model, or industrial designs registration, published in medicines, there is no inventive
accordance with IP Code, filed or effective in the step if:
Philippines, with a filing or priority date earlier than filing a. The invention results from
or priority date of application. Provided— the mere discovery of a new
a. Application which has validly claimed filing date form or new property of a
of an earlier application under Section 31 of IPC, known substance, which
does not result in the
shall be prior art with effect as of the filing date Element of enhancement of the known
of such earlier application; Inventive efficacy of that substance, or
b. Applicant or inventor identified in both Step b. The mere discovery of any
applications are not one and the same (Sec. 24, new property or new use for
IP Code) a known substance, or
c. The mere use of a known
Person Skilled in the Art process, unless such known
A person skilled in the art is an ordinary practitioner aware process results in a new
of what was common general knowledge in the art at the product that employs at least
relevant date. He is presumed to have: one new reactant.
ii. knowledge of all references that are sufficiently related
to one another and to the pertinent art; Non-Patentable Inventions
iii. knowledge of all arts reasonably pertinent to the a. Discoveries, scientific theories and mathematical
particular problems with which the inventor was methods, and in the case of drugs and medicines, the
involved; and mere discovery of a new form or new property of a
iv. at his disposal the normal means and capacity for known substance which does not result in the
routine work and experimentation. enhancement of the known efficacy of that substance,
or the mere discovery of any new property or new use
Rule on Non-Obviousness (Inventive Step) for a known substance, or the mere use of a known
A claimed invention is not patentable if the differences process unless such known process results in a new
between it and the prior art are such that the subject matter product that employs at least one new reactant.
as a whole would have been obvious at the time the
invention was made to a person having ordinary skill in the For the purpose of this clause, salts, esters, ethers,
art. polymorphs, metabolites, pure form, particle size,
The ultimate determination as to whether or not an isomers, mixtures of isomers, complexes,
invention is obvious is a legal conclusion based on combinations, and other derivatives of a known
underlying: substance shall be considered to be the same
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substance, unless they differ significantly in properties

• However, this shall not apply to micro- organisms
with regard to efficacy
and non- biological and microbiological processes;
• When a discovery is not nature's handiwork, but

e. Aesthetic creations; and
his own; accordingly, it is a patentable subject
matter. The inventions which most benefit f. Anything which is contrary to public order or morality
mankind are those that "push back the frontiers
of chemistry, physics and the like." (Diamond vs.
• The mere combination of a number of old parts or
Chakrabarty, 447 U.S. 303, 1980)
elements, which, in combination, perform or
• It is now commonplace that an application of a produce no new or different function or operation
law of nature or mathematical formula to a than that theretofore performed or produced by
known structure or process may well be them, is not a patentable invention. (Great Atlantic
deserving of patent protection. (Funk Brother & Pacific Tea Co. vs. Supermarket Equipment
Seed Co. v. KaloInnoculant Co., 333 US 127, Corp, 340 U.S. 147, 1950)
1948)
• The conjunction or concert of known elements
• Involvement of a mathematical process does must contribute something; only when the whole in
not automatically render it non-patentable. some way exceeds the sum of its parts is the
accumulation of old devices patentable. (Great
b. Schemes, rules and methods of performing mental Atlantic & Pacific Tea Co. vs. Supermarket
acts, playing games or doing business, and programs Equipment Corp, 340 U.S. 147, 1950)
for computers;
• General rule: Computer programs are in general, 1. Ownership of Patent

the subjects of copyright, not of patents. a. Right to a Patent
• Exception: Patentable if they are part of a process

The right to patent belongs to the inventor, his heirs,
like a business process.
or assigns. When two or more persons have jointly
• It is for the discovery or invention of some practical made an invention, the right shall belong to them
method or means of producing a beneficial result jointly.
or effect that the patent is granted, and not for the
result or effect itself. (Diamond vs. Chakrabarty b. First-to-File Rule
447 U.S. 303, 1980)
If two or more persons have made invention
c. Methods for treatment of human and animal body by separately and independently of each other, right shall
surgery or therapy, and diagnostic methods practiced belong to applicant who has earliest filing date or
on the human or animal body; earliest priority date.
• However, this Shall not apply to products and If two or more applications for the same invention have
composition for use in any of these methods; the same filing date or priority date, the patent will be
issued jointly to all the applicants.(Sec. 29, IP Code)
d. Plant varieties or animal breeds or essentially
biological process for the production of plants or c. Inventions created pursuant to a Commission
animals;
Persons who commissions work shall own patent,
• Provisions under this subsection shall not preclude unless otherwise provided in the contract. However, in
Congress to consider the enactment of a law case employee made invention in course of his
providing sui generis protection of plant varieties employment contract, patent shall belong to:
and animal breeds and a system of community
intellectual rights protection Employee, if inventive activity is not part of his regular
duties even if employee uses time, facilities and
materials of employer, or
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Request before the IPO

Employer, if invention results from performance of his Must contain:
regularly-assigned duties, unless there is an (a) A petition for the grant of the patent;
agreement, express or implied, to the contrary. (Sec. (b) Name and other data of the applicant, inventor and the
30, IP Code) agent; and
(c) Title of the invention
d. Right of Priority
Disclosure and Description of Invention
Application filed by any person who has previously (d) In a manner sufficiently clear and complete for it to be
applied for the same invention in another country carried out by a person skilled in the art;
which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as (e) Where the application concerns a microbiological
filed as of date of filing the foreign application, process or the product thereof and involves the use of
provided that: a micro-organism which cannot be sufficiently
disclosed in the application in such a way as to enable
The local application expressly claims priority; the invention to be carried out by a person skilled in the
art and such material is not available to the public, the
It is filed within 12 months from date earliest foreign application shall be supplemented with a deposit of
application was filed; and such material with an international depositary
institution; and in accordance with the rules and
A certified copy of foreign application together with regulations by the Patent Office with respect to the
English translation is filed within 6 months from date contents of the description and the order of
of Philippine filing. (Sec. 31, IP Code) presentation.
Overview of the Patent Application Process Unity of Invention

Filing Date An application shall relate to one invention only or to a
The filing date of a patent application is the date when the group of inventions forming a single general inventive
applicant filed all of the following: concept. .
(a) An express or implicit indication that a Philippine patent
is sought; Note: if several independent inventions are claimed in one
(b) Information identifying the applicant; and application, the Director may require that application -be
(c) Description of the invention and one (1) or more claims restricted to a single invention. A later application filed 'for
in Filipino or English an invention divided out shall be considered as having
Note: If any of these elements is not submitted within the been filed on the same day as the first application.
period set; the application shall be considered withdrawn. provided that the later application is filed within 4 months
after the requirement to divide becomes final, or within
The Patent Application such additional time not exceeding 4 months, as may be
Patent application shall be in Filipino or English and shall granted. (Sec. 38, IP Code)
contain the following:
a. A request for the grant of a patent; Concept of Divisional Application
b. A description of the invention; This comes into play when two or more inventions are
c. Drawings necessary for the understanding of the claimed in a single application, but are of such a nature
invention; that a single patent may not be issued for them. The
d. One or more claims; and applicant thus is required to divide," that is, to limit the
e. An abstract claims to whichever not elected may be made the subject
of separate applications which are called "divisional
Note: No patent may be granted unless the application applications." (Smith Kline Beckman Corp vs. CA, G.R. No.
identifies the inventor. If applicant is not the inventor, IPO 126627, 2003)
may require him to submit said authority.
Publication and Search
The application shall be published in IPO Gazette, togethe-
with a search document established by or on behalf of the
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IPO citing any documents that reflect prior art after decision/order to cancel by immediately executory even
expiration of 18 months from filing date of priority date. pending appeal.
(Sec. 44, IP Code)
3. Remedies of The True and Actual Inventor
Confidentiality before Publication When true and actual inventor is deprived of patent without
An application which has not yet been published, and all his consent or through fraud, and so declared by final
related documents, shall not be made available for order, court shall order for his substitution as patentee, or
inspection without the applicant's consent (Sec.45, IP at the option of true inventor, cancel the patent, and award
Code) actual and other damages in his favor as warranted.
Actions should be filed within 1 year from application.
Grant of Patent
Patent shall take effect on date of publication of grant of Application by persons not having right to patent
patent in IPO Gazette. If a person other than the applicant is declared by final
court order or decision as having the patent right, such
Effect of Issuance of Letters of Patent person may, within 3 months after decision has become
Issuance of letters of patent creates presumption which final:
yields only to clear and cogent evidence that patentee was a. Prosecute his application as his own in place of
the original and first inventor. Burden of providing want of applicant;
novelty is on him who avers it and burden is a heavy one b. File new patent application in respect of same
which is met only by clear and satisfactory proof which invention;
overcomes every reasonable doubt. (Manzano vs. CA, C. Request that application be refused;
G.R. No. 11338, 1997) d. Seek cancellation of patent, if already been issued
Annual Fees 4. Rights Conferred by a Patent Application After

To maintain patent application or patent, annual fee shall Publication
be paid upon expiration of 4 years from date application Patent shall confer on its owner the following exclusive
was published and on each subsequent anniversary date. rights:
If the annual fee is not paid, patent application is deemed (a) Where patent covers a PRODUCT — to restrain,
withdrawn or patent considered lapsed. prohibit, and prevent any unauthorized person or entity
from making, using, offering for sale, selling, or
2. Grounds for Cancellation of Patents importing that product; as well as to assign, or transfer
Interested party may, upon petition and payment of by succession the patent, and to conclude licensing
required fee, petition to cancel patent or any claim thereof, contracts for the same.
or parts of claim, on any of the following grounds: (b) Where patent covers a PROCESS — to restrain,
a. The claimed invention does not qualify for registration prevent or prohibit any unauthorized person or entity
as a utility model and is among the inventions which from using process, and from manufacturing, dealing
are not patentable; in, using, selling or offering for sale, or importing any
b. The description and the claims do not comply with the product obtained directly or indirectly from such
prescribed requirements; process; as well as to assign, or transfer by succession
c. No drawing which is necessary for the understanding the patent, and to conclude licensing contracts for the
of the invention was furnished; and same. (Sec. 46, IP Code)
d. The owner of the registration of the utility model is not
the inventor or his successor in title. What can be Assigned
Assignment may be of entire patent and invention covered
Note: Where the grounds for cancellation relate to some thereby, or of an undivided share of entire patent and
of claims or parts of claim, cancellation may be effected to invention, in which event, parties become joint- owners.
such extent only. Assignment may be limited to specified territory.
Effect of Cancellation Form of assignment

The rights conferred by patent or any specified claim or Assignment must be in writing, and notarized.
claims shall terminate, with notice of cancellation published
in IPO Gazette. But unless restrained by Director General,
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Recording of Assignments
Instruments shall be void as against any subsequent a. Prior User
purchaser or mortgagee without notice, unless recorded in
IPO within 3 months from date of instrument, or prior to Any prior user, who, in good faith, was using the invention
subsequent purchase or mortgage. or has undertaken serious preparations to use the
invention in his enterprise or business, before filing date or
Rights of joint owners priority date of application on which a patent is granted,
If two or more persons own patent and invention covered shall have the right to continue use thereof as envisaged.
thereby, each of the joint owners shall be entitled to
personally make, use, sell or import the invention for his The right of prior user may only be transferred or assigned
own profit. Provided, neither of joint owners shall be together with enterprise or business, or with the part of his
entitled to grant licenses or to assign his right, title or enterprise or business in which use or preparations for use
interest or part thereof without consent of other owner or have been made.
owners, or without proportionally dividing proceeds
therewith. b. Use of Invention by the Government
5. Limitations of Patent Rights A government agency or third person authorized by the

Patent owner has no right to prevent third parties from Government may exploit the invention without agreement
performing, in the following circumstances: of the patent owner where:
• Using patent products which has been put on • Public interest, national security, nutrition, health or the
Philippine market by owner of product, or with his development of other sectors, as determined by
express consent, insofar as such use is performed appropriate government agency, so requires; or
after that product has been so put on the said market; • Judicial or administrative body has ruled anti-
• Where the act is done privately and on a non- competitive exploitation of patent by owner or licensee
commercial scale for a non- commercial purpose,
provided that it does not significantly prejudice 6. Patent Infringement
owner's economic interests; Patent infringement constitutes:
• Making,- using, offering for sale, selling or importing
• Where act consists of making or using exclusively for patented product or obtained from patented
purpose of experiments that relate to subject matter of processes; or
patent invention; • Use of patented processes without authorization of
patentee.
• Where act consists of preparation for individual cases,
in a pharmacy or by a medical professional, of a Note:
medicine in accordance with a medical prescription or • Infringement is not limited to the unauthorized
acts concerning medicine so prepared; manufacture of a patented invention. It includes the
• Under R.A. 9502, otherwise known as the importation, marketing and use of the patented
"Cheaper Medicines Act of 2008", private third invention without authorization of the patent owner.
parties have the unqualified right to import or (Parke, Davis & Company v. Lukas Pharmaceuticals,
possess "unregistered imported drugs". Inc., G.R. No. 53162-R, 1981)
Moreover, an "unregistered drug" is not the same • In order to infringe a patent, a machine or device must
as "counterfeit drug" which is prohibited by a perform the same function, or accomplish the same
previous statute. (Roma Drug vs. RTC and result by identical or substantially identical means and
GlaxoSmithKline, G.R. No. 149907, 2009) the principle or mode of operation must be
substantially the same. (Del Rosario vs. CA, G.R. No.
• Where the invention is used in any ship, vessel, 115106, 1996)
aircraft, or land vehicle of any other country entering • If the subject matter of a patent is a process for
Philippine territory temporarily or accidentally. obtaining a product, any identical product shall be
presumed to have been obtained through the use of
• Term of Patent shall be 20 years from the filing the patented process if the product is new or there is
date of the application. substantial likelihood that the identical product was
made by the process and the owner of the patent has
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been unable despite reasonable efforts, to determine determine whether there is exact identity of all material
the process actually used. In ordering the defendant to elements. (Godines vs. CA, G.R. No. 97343, 1993)
prove that the process to obtain the identical product
is different from the patented process, the court shall ii. Doctrine of Equivalents
adopt measures to protect, as far as practicable, his For the purpose of determining the extent of protection
manufacturing and business secrets. conferred by the patent, due account shall be taken of
• Defendant must prove that the process to obtain the elements which are equivalent to the elements expressed
identical product is different from the patented in the claims, so that a claim shall be considered to cover
process. not only all the elements as expressed therein, but also
• The court shall adopt measures to protect, as far as equivalents.
practicable, defendant's manufacturing and business
secrets. The doctrine of equivalents infringement takes place
• An action for infringement of patents falls within the when a device appropriates a prior invention by
jurisdiction of the regular courts rather than the incorporating its innovative concept and, although with
intellectual Property Office. (Amancor, Inc. v. Salas, some modification and change, performs substantially the
AC.-G.R. SP No. 06049, 1985) same function in substantially the same way to achieve
• There can be no infringement of a patent if the substantially the same result (Smith Kline Beckman Corp
application is still pending and the patent has not yet v. CA, 409 SCRA 33, 2003).
been granted, since whatever right one has to the
invention covered by the patent arises alone from the Contributory Infringer
grant of thereof. (Cresser Precisions Systems, Inc. v. A contributory infringer is any person who:
Court of Appeals, G.R. No. 118708, 1998) • Actively induces the infringement of patent or
• A civil action for infringement of a patent may be filed • Provides the infringer with a component of a patented
despite the pendency of a petition in the Intellectual product or of a product produced because of a
Property Office for cancellation of the patent. (Abbot patented process knowing it to be especially adopted
Laboratories Phils. v. Salvador, 7 CARA 799, 1989) for infringing the patented invention and not suitable
• A patentee only has exclusive rights over the patent for substantial non-infringement
during the pendency of such patent. After such period,
he loses such rights. (Phil Pharmawealth vs. Pfizer, Liability of a Contributory Infringer is jointly and severally
G.R. No. 167715, 2010) liable with the infringer.
• To be able to effectively and legally preclude others
Aside from the infringer, anyone who actively induces the
from copying and profiting from the invention, a patent
infringement of a patent or provides the infringer with a
is a primordial requirement. No patent, no protection.
(Pearl & Dean v. Shoemart, G.R. No. 148222, 2003) component of a patented product or of a product produced
because of a patented process knowing it to be especially
• Even if a device serves the same function as another
adopted for infringing the patented invention and not
device, there is no infringement if it lacks the features,
suitable for substantial non-infringing use is liable jointly
methods, or arrangements of the other device.
and severally with the infringer as a contributory infringer.
(Castillo v. Mungcal, 90 0.G. 4194, 1990)
Infringement Action by Foreign National
7. Patent Infringement
Any foreign national or juridical entity who meets the
requirements of Section 3 and not engaged in business in
a. Tests in Patent Infringement
Philippines, to which a patent had been granted or
assigned under, may bring an action for infringement.
i. Literal Infringement
In using literal infringement as a test, resort must be made
to the words of the claim. If the challenged matter clearly
falls within the claim, literal infringement exists. To
Rights of Patentee When there is Infringement
determine whether the challenged matter falls within the
• Bring civil action before courts to recover from infringer
literal meaning of the patent claim, the claims of the patent
such damages sustained thereby, plus attorney's fees
and the challenged matter should be compared within the
and other expenses of litigation; am
overall context of the claims and specifications, to
• To secure an injunction for the protection of his rights
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the reenactment of RPC Art. 189, the matter must strictly

Note: The burden of proof to substantiate a charge of be construed against the State and liberally in favor of the
patent infringement rests on the plaintiff. (Smith Kline accused in unfair competition. (Kenneth Roy Savage v.
Beckman Corp vs. CA, G.R. 126627, 2003) Taypin, G.R. No. 134217, 2000)
Extent of Protection and Interpretation of Claims Administrative

The extent of protection conferred by the patent shall be Bureau of Legal Affairs shall exercise original jurisdiction
determined by the claims, which are to be interpreted in the in administrative complaints for violations of laws involving
light of the description and drawings. intellectual property rights: Provided,
1. That its jurisdiction is limited to complaints where the
For the purpose of determining the extent of protection total damages claimed are not less than P200,000:
conferred by the patent, due account shall be taken of 2. That availrnent of the provisional remedies may be
elements which are equivalent to the elements expressed granted in accordance with the Rules of Court. The
in the claims, so that a claim shall be considered to cover Director of Legal Affairs shall have the power to hold
not only all the elements as expressed therein, but also and punish for contempt all those who disregard orders
equivalents. or writs issued in the course of the proceedings.
3. The condemnation or seizure of products which are
Actions for Infringement (Literal and Equivalent) subject of the offense. The goods seized hereunder
shall be disposed of in such manner as may be
Civil Action for Infringement deemed appropriate by the Director of Legal Affairs,
1. Any patentee, or anyone possessing any right, title or such as by sale, donation to distressed local
interest in and to the patented invention, whose rights governments or to charitable or relief institutions,
have been infringed, may bring a civil action before a exportation, recycling into other goods, or any
court of competent jurisdiction, to recover from the combination thereof, under such guidelines as he may
infringer such damages sustained thereby, plus provide;
attorney's fees and other expenses of litigation, and to 4. The forfeiture of paraphernalia and all real and
secure an injunction for the protection of his rights. personal properties which have been used in the
2. If damages are inadequate or cannot be reasonably commission of the offense;
ascertained, court may award by way of damages a 5. The imposition of administrative fines in such amount
sum equivalent to reasonable royalty. as deemed reasonable by the Director of Legal Affairs,
3. Court may, according to the circumstances of the case, which shall in no case be less than P5,000 nor more
award damages in a sum above the amount found as than P150,000. In addition, an additional fine of not
actual damages sustained. But not to exceed 3 times more than P1,000 shall be imposed for each day of
amount of actual damages. continuing violation;
4. Court may, in its discretion, order that the infringing 6. The cancellation of any permit, license, authority, or
goods, materials and implements predominantly used registration which may have been granted by the
in the infringement be disposed of outside the Office, or the suspension of the validity thereof for such
channels of commerce or destroyed, without period of time as the Director of Legal Affairs may
compensation. deem reasonable which shall not exceed 1 year;
7. The withholding of any permit, license, authority, or
Criminal Action for Repetition of Infringement registration which is being secured by the respondent
If the infringement is repeated by infringer or by anyone in from the Office;
connivance with him after finality of judgment against 8. The assessment of damages;
infringer, offenders shall, without prejudice to institution of 9. Censure; and
civil action for damages, be criminally liable. Such criminal 10. Other analogous penalties or sanctions.
action shall prescribe in 3 years from date of commission
of crime. Note: The proper remedy against an interlocutory order
issued by the BLA-IPO is to file a petition for certiorari to
The definition of "unfair competition" under Sec. 168 of the the CA. (Phil Pharmawealth v. Pfizer, G.R. No. 167715,
IP Code does not mention any crime of unfair competition 2010)
involving design patents. Since it is unclear whether the
crime exists, for the enactment of RA 8293 did not result in
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Rule on Damages right to fix the sale or resale prices of the products
Damages CANNOT be recovered for infringement manufactured on the basis of the license;
committed before the infringer had known, or had 3. Those that contain restrictions regarding the volume
reasonable grounds to know of a patent. and structure of production;
4. Those that prohibit the use of competitive technologies
However, it is presumed that infringer had knowledge if on in a non-exclusive technology transfer arrangement;
patented product, on container, or package, or on 5. Those that establish full or partial purchase option in
advertising, are placed words "Philippine Patent" with favor of the licensor;
number of patent. 6. Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that may
Limitations of Actions for Damages be obtained through the use of the licensed
No damages can be recovered for acts of infringement technology;
committed more than 4 years before institution of 7. Those that require payment of royalties to the owners
infringement action. of patents for patents which are not used;
8. Those that prohibit the licensee to export the licensed
b. Defenses in Action for Infringement product unless justified for the protection of the
• In an infringement action, defendant may show legitimate interest of the licensor such as exports to
invalidly of the patent, or any claim thereof, on any of countries where exclusive licenses to manufacture
the grounds on which a petition of cancellation can be and/or distribute the licensed product(s) have a!ready
brought been granted;
• In an action for infringement, if court shall find patent 9. Those which restrict the use of the technology supplied
or any claim to be invalid, it shall cancel the same, and after the expiration of the technology transfer
Director of Legal Affairs upon receipt of the final arrangement, except in cases of early termination of
judgment of cancellation, shall record that fact in IPO the technology transfer arrangement due to reason(s)
Registry and publish notice to that effect in IPO attributable to the licensee;
Gazette 10. Those which require payments for patents and other
• What is claimed as the invention is not new or industrial property rights after, their expiration or
patentable; termination of the technology transfer arrangement;
• The patent does not disclose the invention in a manner 11. Those which require that the technology recipient shall
sufficiently clear and complete for it to be carried out not contest the validity of any of the patents of the
by any person skilled in the art; or technology supplier;
• The patent is contrary to public order or morality. (Phil 12. Those which restrict the research and development
Pharmawealth vs. Pfizer, G.R. No. 167715, 2010) activities of the licensee designed to absorb and adapt
the transferred technology to local conditions or to
initiate research and development programs in
Licensing connection with new products, processes or
equipment;
a. Voluntary Licensing 13. Those which prevent the licensee from adapting the
To encourage transfer and dissemination of technology, imported technology to local conditions, or introducing
prevent or control practices and conditions that may in innovation to it, as long as it does not impair the
particular cases constitutes an abuse of intellectual standards prescribed by the licensor; and
property rights having an adverse effect on competition 14. Those which exempt the licensor from liability for non-
and trade, all technology transfer arrangements shall fulfillment of his responsibilities under the technology
comply with the provisions of IPO. transfer arrangement and/or liability arising from third
party suits brought about by the use of the licensed
Prohibited Clauses product or the licensed technology.
1. Those which impose upon the licensee the obligation
to acquire from a specific source capital goods, Mandatory Provisions
intermediate products, raw materials, and other The following provisions shall be included in voluntary
technologies, or of permanently employing personnel license contracts:
indicated by the licensor; 1. That the laws of the Dhilippines shall govern the
interpretation of the agreement and in the event of
2. Those pursuant to which the licensee reserves the
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litigation, the venue shall be the proper court in the b. Compulsory Licensing
place where the licensee has its principal office;
2. Continued access to improvements in techniques and General rule: One cannot exploit a patent without the
processes related to the technology shall be made consent of the patentee.
available during the period of the technology transfer
arrangement; Exception: Through compulsory license
3. In the event the technology transfer arrangement shall
provide for arbitration, the Procedure of Arbitration of Grounds for Compulsory Licensing
the Arbitration Law of the Philippines or the Arbitration The Director of Legal Affairs may grant license to exploit
Law of the United Nations Commission on patented invention, even without agreement of patent
International Trade Law (UNCITRAL) or the Rules of owner, in favor of person who has show his capability to
Conciliation and Arbitration of the International exploit invention, under any of the following circumstances:
Chamber of Commerce shall apply and the venue of 1. National emergency or other circumstances of
arbitration shall be the Philippines or any neutral extreme urgency
country; and 2. Where public interest, in particular, national security,
4. The Philippine taxes on all payments relating to the nutrition, health or development of other vital sectors
technology transfer arrangement shall be borne by the of national economy as determined by the appropriate
licensor. agency of the Government, so requires; or
3. Where a judicial or administrative body has
Rights of Licensor determined that manner of exploitation by patent
Absent a contrary provision in technology transfer owner or his licensee is anti- competitive; or
arrangement, the grant of a license shall not prevent the 4. In case of public non-commercial use of patent by
licensor from granting further license to third person nor patentee, without satisfactory reason;
from exploiting the subject matter of the technology 5. If patented invention is not being worked in Philippines
transfer arrangement himself on commercial scale, although not capable of being
worked, without satisfactory reason. Provided that
Rights of Licensee importation-of patented article shall constitute working
Licensee entitled to exploit the subject matter of the or using the patent
technology transfer arrangement during-the whole term of
agreement. Requirement to Obtain License on Reasonable
Commercial Terms
Exceptional Cases
General rule: License will only be granted after petition
When Exemption From Any Of The Requirements In A has made unsuccessful efforts to obtain authorization from
Voluntary Licensing Contract May Be Allowed — where, patent owner on reasonable commercial terms and
after evaluation by the DITT Bureau, substantial benefits conditions within a reasonable time.
will accrue to the economy such as:
a. High technology content Exceptions:
b. Increase in foreign exchange earnings a. Where petition for compulsory license seeks to remedy
C. Employment generation a practice determined after judicial or administrative
d. Regional dispersal of industries and/or process to be anti- competitive;
e. Substitution with or use of local raw materials or b. In situations of national emergency or other
f. Registered companies with pioneer status circumstances of extreme urgency (in which case the
right holder shall be notified as soon as reasonably
Non-Registration practicable);
Technology transfer arrangements that conform with the c. In cases of public non-commercial use
forgoing provisions need not be registered. But the non-
conformance with any of provisions shall automatically Sec. 34 of the Patent Law which authorizes the BPTT to
render arrangement unenforceable, unless approved and grant a compulsory license to a local is not contrary to the
registered with Documentation, Information and Paris Convention. The legislative intent in the grant of
Technology Transfer Bureau (DITTB) compulsory license was not only to afford others an
opportunity to provide the public with quantity of the
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patented product, but also to prevent the growth of Amendment, Cancellation, Surrender of Compulsory
monopolies. (Smith Kline v. CA, G.R. No. 121267, 2001) License
Upon request of patentee, or licensee, Director of Legal
The grant of compulsory license will not result in Affairs may amend decision granting compulsory license,
deprivation of property to the registrant owner without just upon proper showing of new facts or circumstances
compensation, since the owner of exclusive rights to justifying such amendment; or may cancel compulsory
manufacture, use and sell the patent would still receive license if:
royalties for use of such product. (Smith Kline v. CA, G.R. a. Ground for grant of compulsory license no longer
No. 121267, 2001) exists and is unlikely to recur;
b. Licensee has neither begun to supply domestic market
Compulsory License Based on Interdependence of nor made serious preparation therefore;
Patents c. Licensee not complied with prescribed terms of license
If the invention is protected by a patent, hereafter, referred
to as "second patent," within the country cannot be worked Licensee's Exemption from Liability
without infringing another patent, hereafter referred to as Any person who works a patented product, substance
"first patent," granted on a prior application or benefiting and/or process under a compulsory license, shall be free
from an earlier priority, a compulsory license may be from any liability for infringement. In case of voluntary
granted to owner of second patent to the extent necessary licensing, no collusion with licensor is proven. This is
for the working of his invention, subject to the following without prejudice to rightful patent owner to recover from
conditions: licensor whatever he may receive as royalties under the
1. Invention claimed in second patent involves an license.
important technical advance of considerable economic
significance in relation to first patent; 7. Assignment and Transmission of Rights
2. First patent owner entitled to cross- license on Patents or application for patents and invention to which
reasonable terms to use invention claimed in second they relate, shall be protected in the same way as the rights
patent; of other property under the Civil Code. (IP Code, Sec
3. Use authorized in respect of first patent shall be non- 1oq. )
assignable except with assignment of second patent;
and Inventions and any right, title or interest in and to patents
4. Required terms and conditions: and inventions covered by them, may be assigned or
i. Scope and duration of license limited to transmitted by inheritance or bequest or may be the
purpose for which it was authorized; subject of a licensing agreement. (IP Code, Sec 103.2)
ii. License shall be non-exclusive
iii. License shall be non-registrable, except with Requirements for Recording of Assignment
part of enterprise or business with which a. It must be in writing and accompanied by an English
invention is exploited; translation, if it is in a language other than English or
iv. Use of subject matter of license shall be Filipino;
devoted predominantly for supply of Philippine b. It must be notarized;
market. Provided, limitation shall not apply c. It must be accompanied by an appointment of a
where grant of license is based on ground that resident agent, if the assignee is not residing in the
patentee's manner of exploiting patent is Philippines;
determined anti- competitive judicially or d. It must identify the letters patent involved by number
administratively; and date and give the name of the owner of the patent
v. License may be terminated upon proper and the title of the invention. In the case of an
showing that circumstances which led to its application for a patent, it should state the application
grant have ceased to exist and are unlikely to number and the filing date of the application and give
recur; and the name of the applicant and the title of the invention.
vi. Patentee shall be paid adequate remuneration If the assignment was executed concurrently with or
taking into account the economic value of the subsequent to the execution of the application but
grant or authorization before the application is filed or before its application
number is ascertained, it should adequately identify
the application by its date of execution, the name of
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the applicant, and the title of the invention. (Rules and Regulations on Utility Models and
e. It must be accompanied by the required fees. Industrial Design, Rule 203)
Note: Note:
• The assignment of a patent is void as against any • A utility model registration shall expire at the end of the
subsequent purchaser or mortgagee for valuable seventh year after the date of the filing of the
consideration and without notice unless it is recorded application without any renewal. (IP Code, Sec. 109)
in the Intellectual Property Office within three months • Provisions governing patents shall apply, mutatis
from the date of the assignment or prior to the mutandis to the registration of utility models (IP Code,
subsequent purchase or mortgage. (/P Code, Sec. Sec. 108).
106.2) o However, where the right to a patent conflicts with
• Notice of the recording will be published in the the right to a utility model registration in the case
Intellectual Property Gazette. (Rules and Regulations referred to in Section 29, the said provision shall
on Inventions, Rule 1205) apply as if the word "patent" were replaced by the
words "patent or utility model registration" (IP
Utility Models Code, Sec 108.2)
• A utility model is a new model of implement or tools • An invention qualifies for registration as a utility model
or of any industrial product or of part of it which does if it is new and industrially applicable. (IP Code, Sec.
not possess the quality of invention but which is of 109.1)
practical utility by reason of its form, configuration, • "Patentable Inventions", shall apply except the
construction or composition. To qualify for reference to inventive step as a condition of protection.
registration, a utility model must be new and (IP Code, Sec. 109.1)
industrially applicable. • A utility model registration shall expire, without any
• A utility model varies from an invention, for which a possibility of renewal, at the end of the seventh year
patent for invention is, likewise available, on at least after the date of the filing of the application. (IP Code,
3 aspects: Sec. 109.3)
• The requisite of "inventive step" in a patent for
invention is not required Conversion of Patent Application for Utility Model
• The maximum term of protection is only 7 years, Registration
compared to a patent which is 20 years, both At any time before the grant or refusal of a patent, an
reckoned from the date of the application, applicant for a patent may, upon payment of the prescribed
• The provisions on utility model dispense with its fee, convert his application into an application for
substantive examination and prefer for a less registration of a utility model, which shall be accorded the
complicated system. (Ching v. Salinas, G.R. No. filing date of the initial application. An application may be
161295, 2005) converted only once. (IP Code, Sec. 110:1)
• A utility model shall not be considered "new" if before
the application for a patent it has been publicly known At any time before the grant or refusal of a utility model
or publicly used in this country or has been described registration, an applicant for a utility model registration
in a printed publication within the country, or it is may, upon payment of the prescribed fee, convert his
substantially similar to any other utility model so application into a patent application, which shall be
known, used or described within the country. accorded the filing date of the initial application. (IP Code,
(Manzano •v. Court of Appeals, G.R. No. 113388, Sec. 110.2)
1997)
Prohibition against Filing of Parallel Applications
Requirements for Application for Registration An applicant may not file two (2) applications for the same
• Request for registration; subject, one for utility model registration and the other for
• Description of the utility model; the grant of a patent whether simultaneously or
consecutively. (IP Code, Sec. 111).
• Claim or claims;
• Drawings or pictorial representation disclosing
Industrial Designs
completely the utility model; and
Any composition of lines or colors or any three —
• Payment of the filing fee.
dimensional form, whether associated with lines or colors,
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provided that such composition or form gives a special o On date of first commercial exploitation, anywhere
appearance to and can serve as pattern for an industrial in the world, provided that application filed with
product or handicraft (IP Code, Sec 111.2) IPO within 2 years from such date;
o On filing date accorded to application if layout-
-Integrated Circuit design has not been previously exploited
A product, in its final form, or an intermediate form, in which commercially anywhere in the world.
the elements, at least one of which is an active element
and some or all of the interconnections are integrally Rights Conferred to Owner of Layout Design
formed in and/or on a piece of material, and which is Registration
intended to perform an electronic function (IP Code, Sec a. To reproduce, whether by incorporation, in an
112.2) integrated circuit or otherwise, layout- design in its
entirety or any party thereof, except an act of
Layout-Design reproducing any party that does not comply with
This term is synonymous with 'Topography' and means the requirement of originality; and
three-dimensional disposition, however expressed, of the b. To sell or otherwise distribute for commercial
elements, at least one of which is an active element, and purposes the registered layout design, an article or
of some or all of the interconnections of an integrated an integrated circuit in which the registered layout-
circuit, or such a three-dimensional disposition prepared design is incorporated.
for an integrated circuit intended for manufacture (IP Code, (IP Code, Sec 119.4)
Sec 112.3)
Limitations of Layout Rights
A layout- design is considered original if it is the result of • The owner of a layout design has no right to prevent
its creator's own intellectual effort and is not commonplace third parties from reproducing, selling or otherwise
among creators of layout- designs and manufacturers of distributing for commercial purposes the registered
integrated circuits at the time of its creation. (IP Code, Sec layout-design in the following circumstances:
113.3) • Reproduction of the registered layout-design for
private purposes or for the sole purpose of evaluation,
Industrial designs dictated essentially by technical or analysis, research or teaching;
functional considerations to obtain a technical result or • Where the act is performed in respect of a layout-
those that are contrary to public order, health or morals design created on the basis of such analysis or
shall not be protected. (IP Code, Sec 113.2) evaluation and which is itself original in the meaning
as provided herein;
Substantive Conditions for Protection • Where the act is performed in respect of a registered
• Only industrial designs that are new or ornamental lay-out-design, or in respect of an integrated circuit in
shall benefit from protection (IP Code, Sec 112.3) which such a layout-design is incorporated, that has
• Only layout designs that are original shall benefit from been put on the market by or with the consent of the
protection. right holder;
• A layout design consisting of a combination of • In respect of an integrated circuit where the person
elements and interconnections that are commonplace performing or ordering such an act did not know and
shall be protected only if the combination taken as a had no reasonable ground to know when acquiring the
whole is original. integrated circuit or the article incorporating such an
integrated circuit, that it incorporated an unlawfully
Term of Industrial Design Registration reproduced layout-design; or
• The registration shall be for 5 years from application's • Where the act is performed in respect of an identical
filing date. layout-design which is original and has been created
o Registration may be renewed for not more than 2 independently by a third party (IP Code, Sec 119.5)
consecutive periods of 5 years each, each time
paying renewal fee.
• Registration of layout design shall be valid for 10
years, without renewal, and such validity shall be
counted from date of commencement of protection:
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B. Trademarks engaged in trade or commerce." (Etepha v. Director of

Patents, G.R. No. L-20635, 1966)
Definitions of Marks, Collective Marks, Trade Names,
and Trademarks The following may not be used as tradenames:
a. If by its nature or the use to which the name or
Mark designation may be put, it is contrary to public order or
Any visible sign capable of distinguishing the goods morals.
(TRADEMARK) or services (SERVICE MARK) of an b. If it is liable to deceive the public as to the nature of the
enterprise and shall include a stamped or marked enterprise identified by the name.
container of goods. (IP CODE, Sec.121.1) c. If the trade name is similar to a mark or a trade name
owned by another person and its use would likely
Collective Mark mislead the public.
• Any visible sign designated as such in,the application
for registration and capable of distinguishing the origin Functions of Trademark
or any other common characteristic, including the • Indicate origin or ownership or the articles to which
quality of goods or services of different enterprises they are attached
which use the sign under the control of the registered • Guarantee that those articles come up to a certain
owner of the collective mark; (IP Code, Sec.121.2, see standard of quality
also Sec. 167) • Advertise the articles they symbolize (Mipuri v. CA,
• The objects of a trademark are "to point out distinctly G.R. No. 114508, 1999)
the origin or ownership of the articles to which it is
affixed, to secure to him who has been instrumental in Distinguishing "Trademark" from "Tradename"
bringing into market a superior article or merchandise Under RA8293, Sec. 1, a mark means any visible sign
the fruit of his industry and skill, and to prevent fraud capable of distinguishing the goods (trademark) or
and imposition." (Etepha v. Director of Patents, G.R. services (service mark) of an enterprise and shall include
No. L-20635, 1966) a stamped or marked container of goods, while a
tradename means the name or designation identifying or
• Today, the trademark is not merely a symbol of origin distinguishing an enterprise.
and goodwill; it is often the most effective agent for the
actual creation and protection of goodwill. It imprints Simply put, a tradename refers to the business and its
upon the public mind an anonymous and impersonal goodwill; a trademark refers to the goods. (Canon
guaranty of satisfaction, creating a desire for further Kabushiki Kaisha v. CA, G.R. No. 120900, 2000)
satisfaction. In other words, the mark actually sells the
goods. (Mirpuri v. CA, GR 114508, 1999) Exercise of Intellectual Property Rights = Monopoly
Note: In determining whether a trademark should be Monopoly

registered, the similarity of the features of the competing The control obtained by one supplier over the commercial
trademarks as well as the entirety of the marks as applied market within a given region.
to the products should be examined. (Nestle v. Puregold,
G.R. No. 217194, 2017) In a way, Intellectual Property Rights is a form of
monopoly. Copyrights allow others to enjoy an author's
Tradename economic rights when there is permission. Trademarks
The name or designation identifying or distinguishing an protect goodwill and it does not prevent production of
enterprise (IP Code, Sec.121.3) is defined by the same law similar goods. It is only allowed by the Constitution
as including "individual names and surnames, firm names, because it provides incentive for innovation and
tradenames, devices or words used by manufacturers, technological advancement.
industrialists, merchants, agriculturalists, and others to
identify their business, vocations, or occupations; the Salient Features of the Paris Convention on
names or titles lawfully adopted and used by natural or Trademarks
juridical persons, unions, and any manufacturing, • National Treatment Principle — foreign nationals are
industrial, commercial, agricultural or other organizations to be given the same treatment in each of the member
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countries as that country makes available in its own • Agency for the creation
citizens. and perpetuation of
• Right of Priority — any person who has duly filed goodwill.
registration for trademark shall enjoy a right of priority
of six (6) months.
Spectrum of Distinctiveness of Tradename
• Protection Against Unfair Competition
(Zantarain's Inc. v. Old Grove Smokehouse, 698 F. 2d
• Protection of Trade Names — protected in all
786, 1983) (from weakest to strongest)
countries without obligation of filing or registration
• Generic — refers to a particular genus or class of which
• Protection of Well-Known Marks — each country-
an individual article or service is but a member (i.e.
member of the Union may refuse, cancel the
escalator, cellophane).
registration and prohibit the use Of a trademark which
o It can never attain trademark protection.
is a reproduction, imitation or translation (or any
o Further, if at any time a registered trademark
essential part of which constitutes such), liable to
becomes generic as to a particular product or
create confusion; of a mark considered by competent
service, the mark's registration is subject to
authority where protection is sought to be well-known
cancellation.
in the country as being the mark of a person entitled
• Descriptive —identifies a characteristic or quality of an
to the benefits of the convention; and used for similar
article or service such as its color, odor, function,
or identical goods.
dimensions or ingredients.
o General Rule: it is not ordinarily protectable
The question of whether respondent's trademarks are
as a trademark because like a generic term, it
considered "well-known" is factual in nature, involving as
belongs to the public domain. (Ong Al Gui V.
it does the appreciation of evidence adduced before the
Director Of Patents, G.R. No. L-6235, 1955)
BLA-IPO. (Sehwani v. CA, G.R. No. 171053, 2007)
o Exception: when the doctrine of secondary
meaning applies in such a way that it has
1. MARKS VS COLLECTIVE MARKS V TRADENAMES
acquired a secondary meaning in the minds of
the consumers.
Trademark v. Collective Mark
— • Suggestive — requires the consumer to exercise the
TRADEMARK COLLECTIVE MARK OR imagination in order to draw a conclusion as to the
COLLECTIVE nature of the goods or services.
TRADENAME • Arbitrary or Fanciful — bear no relationship to the
Any visible sign designated products or services to which they are applied. They
Any visible sign capable of
are protectable without proof of secondary meaning
distinguishing the goods or as such in the application
(e.g. Kodak, Ivory — soap).
services. (IP CODE, Sec for registration and capable
121.1) of distinguishing the origin
or any other common 1. Acquisition of Ownership of Mark
Prior to RA 8293, the rights to a trademark were acquired
Three (3) Distinct characteristic, including the
through the "first-to-use" system (RA 166)
Functions of quality of goods or services
Trademarks: of different enterprises
The rights in a mark shall be acquired through
• To indicate origin or which use the sign under
REGISTRATION. (IP Code, Sec. 122)
ownership. (Hanover v. the control of the registered
Metcalf, 240 U.S. 403, owner of the collective
mark. (IP CODE, 121.2) Note: Any person who shall procure registration in the
1916.)
Office of a mark by a false or fraudulent declaration or
• To identify the goods representation, whether oral or in writing, or by any false
as satisfactory
means, shall be liable in a civil action by any person injured
(guarantee the quality
thereby for any damages sustained in consequence
of goods) and thereby
thereof. (IP Code, Sec. 162)
stimulate further
purchases by the
Nothing shall adversely affect the rights on the
consuming public.
enforcement of rights in patents, utility models, industrial
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desions, marks and works, acquired in good faith prior to 3. Non-Registrable Marks
the effective date of this Act (1998). (IP Code, Sec. 236) • Consists of an immoral, deceptive or scandalous
matter or a matter which may disparage or falsely
• The registration of trademark under Sec. 21 of the suggest a connection with persons living or dead,
law is required to give notice that this mark is institutions, beliefs, or national symbols, or bring
registered by displaying the same with the words: them into contempt or disrepute;
"Registered Phil. Patent Office." • Consists of the flag or coat of arms or other
• Failure to mark will prevent the registrant from insignia of the Philippines or any of its political
recovering damages for infringement, unless the subdivisions, or of any foreign nation, or any
offender has actual notice of the same. The victim, simulation of them;
however, still has a cause of action under other • Consists of a name, portrait or signature
laws. (Cagayan v. CA, G.R. No. 78413, 1959) identifying a particular living individual except by
his written consent, or the name, signature, or
However, the owner of the registered mark shall not be portrait of a deceased President of the Philippines
entitled to recover profits or damages in any suit for during the lifetime of his widow, except by written
infringement, unless the acts have been committed with consent of-the widow;
knowledge that such limitation is likely to cause confusion, • Is identical with a registered trademark belonging
to cause mistake, or to deceive. Such knowledge is to a different proprietor or a trademark with an
presumed if the registrant gives notice that his mark is earlier filing or priority date under any of the
registered by displaying with the mark the words following circumstances:
"Registered Mark" or the letter R within a circle or if the o Refers to same goods or services;
defendant had otherwise actual notice of the registration. o Refers to closely related goods or services; or
(IP Code, Sec. 158) o Nearly resembles such a trademark as to be
likely to deceive or cause confusion;
2. Acquisition of Ownership of Trade Name • Is identical with or confusingly similar to or is a
Prior to the IP Code, ownership of a mark or trade name translation of a trademark, which is considered -by
may be acquired not necessarily by registration but by the competent authority of the Philippines to be
adoption and use in trade or commerce. As between well-known internationally and in the Philippines,
actual use of a mark without registration, and whether it is registered in the Philippines, as being
registration of the mark without actual use thereof, the already the trademark of someone other than the
former prevails over the latter. For a rule widely accepted applicant for registration, and used for identical or
and firmly entrenched, because it has come dcwn through similar goods or services. In determining whether
the years, is that actual use in commerce or business is a a mark is well-known, account should be taken of
pre-requisite to the acquisition of the right of ownership. the knowledge of the relevant sector of the public,
The IP Code has dispensed with the requirement of prior rather than of the public at large, including
use at the time of registration. Although prior use is basis knowledge in the Philippines which has been
for ownership of trade and -business names. (Shangri- La obtained as a result of the promotion of the
International Hotel Management v. Developers Group of trademark;
Companies, G.R. No. 159938, 2006) • Is identical with or confusingly similar to or is a
translation of a trademark considered well-known
Notwithstanding any laws or regulations providing for any which is registered in the Philippines as regards to
obligation to register trade names, such names shall be goods or services which are not similar to those
protected, even prior to or without registration, against with respect to which registration is applied for.
any unlawful act committed by third parties. (IP Code, Sec. The use of the trademark in relation to those goods
165.2.a) or services indicates a connection between those
goods and services and the owner of the
In particular, any subsequent use of the trade name by a registered trademark, and the interests of the
third party, whether as a trade name or a mark or collective owner of the registered trademarks are likely to be
mark, or any such use of a similar trade name or mark, damaged by such use;
likely to mislead the public, shall be deemed unlawful (IP • Is likely to mislead the public, particularly as to the
Code, Sec. 165.2.b) nature, quality, characteristics or geographical
origin of the goods or services.
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• Consists exclusively of signs that are generic for Tests To Determine Confusing Similarity Between
the goods or services they seek to identify; Marks
• Consists exclusively of signs or of indications that DOMINANCY TEST HOLISTIC TEST
have became customary or usual to designate the
goods or services, in everyday language or in Focuses on the similarity of Requires the court to
bona fide and established trade practice; the prevalent features of the consider the entirety of the
• Consists exclusively of signs or of indications that competing trademarks that marks as applied to the
may serve in trade to designate the kind, quality, might cause confusion. products, including the
quantity, intended purpose, value, geographical - the "colorable imitation of labels and packaging, in
origin, time or production of the goods or rendering a registered mark xxx or determining confusing
of the services or other characteristics of the a dominant feature thereof." similarity. (Great White
goods or service; (IP CODE, Sec 155.1) Shark, Inc. v. Caralder,
• Consists of shapes that may be necessitated by Jr., G.R. No. 192294,
technical factors or by the nature of the goods 2012)
themselves or factors that affect their intrinsic
value;
• Consists of color alone, unless defined by a given The HOLISTIC TEST has been abandoned by the
form; Supreme Court.
• Is contrary to public order or morality; Abandoned by the Supreme Court in the cases of
• Is the emblem, official seal, or name of the United McDonald's Corporation v. L.C. Big Mak Burger, Inc.
Nations, whether in its full or abbreviated form. (2004) and Societe des Produits Nestle, S.A. v. CA (2001)
(IP Code, Sec. 123) but came back and used it in Diaz v People (2013) and in
at least 2 more cases after McDonalds and Nestle.
Prior Use of Mark as a Requirement
It used to be that ownership in a mark could be acquired The Court holds that the DOMINANCY TEST IS
upon proof of actual commercial use. APPLICABLE. In recent cases with similar factual milieu,
the Court has consistently applied the dominancy test. In
The Trademark Law. is very clear. It requires actual Prosource International, Inc., the Court applied the
commercial use of the mark prior to its registration. There dominancy test in holding that "PCO-GENOLS" is
is no dispute that respondent corporation was the first confusingly similar to "PYCNOGENOL." (Societe Des
registrant, yet it failed to fully substantiate its claim that it Produits Nestle. S.A. v. Martin Dy, G.R. No. 172276, 2010)
used in trade or business in the Philippines the subject
mark; it did not present proof to invest it with exclusive, The totality or holistic test is contrary to the elementary
continuous adoption of the trademark which should consist postulate of the law on trademarks and unfair competition
among others, of considerable sales since its first use. that confusing similarity is to be determined on the basis of
(Pagasa Industrial v. CA, G.R. No. L-54158, 1982) visual, aural, connotative comparisons and overall
impressions engendered by the marks in controversy as
The rights in a mark shall be acquired through registration they are encountered in the realities of the
made validly in accordance with the provisions of this law marketplace. The totality or holistic test only relies on
(IP Code, Sec 122) visual comparison between two trademarks whereas the
dominancy test relies not only on the visual but also on the
aural and connotative comparisons and overall
impressions between the two trademarks.
(Societe Des Produits Nestle, S.A v. CA, G.R. No. 112012,
2001)
However, in Berris Agricultural vs. Norvy Abyadang G.R.

No. 183404, 2010, the Court applied the holistic test since
under the dominancy test, the alleged act would not have
been an infringement but it would have been an
infringement if the holistic test was applied.
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4. Well-Known Marks Department of Trade and Industry will not deprive the
Criteria for determining whether a mark is well-known: owner thereof the right granted to him by the IP Code.
a. Duration, extent and geographical area of any use of
the mark, in particular, the duration, extent and Right of Owner of Tradename
geographical area of any promotion of the mark, The IP Code deems unlawful any subsequent use of the
including advertising or publicity and the presentation, trade name by a third party, whether as a trade name or a
at fairs or exhibitions, of the goods and/or services to mark or collective mark, or any such use of a similar
which the mark applies; tradename or mark, likely to mislead the public. The
b. Market share, in the Philippines and in other countries, remedy against the unlawful use of a trade name would be
of the goods and/or services to which the mark a civil action for damages and injunction.
applies;
c. Degree of the inherent or acquired distinction of the Grounds for Refusal of Trademark Registration
mark; • The word Selecta is an ordinary or common word but
d. Quality-image or reputation acquired by the mark; once adopted or coined in connection with one's
e. Extent to which the mark has been registered in the business as an emblem or as a badge of authenticity,
world; it may acquire a secondary meaning as to be
f. Exclusivity of registration attained by the mark in the exclusively associated with its products and business.
world; (Arce & Sons v. Selecta Biscuit Co., G.R. Nos. L-
g. Extent to which the mark has been used in the world; 14761 and L-17981, 1961)
h. Exclusivity of use attained by the mark in the world; • Actual use of goods in the local market establishes
I. Commercial value attributed to the mark in the world; trademark use which serves as the basis for action
j. Record of successful protection of the rights in the aimed at trademark pre-emption. Sales invoices are
mark; best proof of actual sales of the products in the
k. Outcome of litigations dealing with the issue of whether Philippines. (Converse Rubber Corp. v. Universal
the mark is a well-known mark; and, Rubber Products, G.R. No. L-27906, 1987)
I. Presence or absence of identical or similar marks • The right to use a corporate name is a property right,
validly registered for or used on identical or similar a right in rem which it may assert. Corporation Code
goods or services and owned by persons other than gives two (2) requirements:
the person claiming that his mark is a well-known a. That complaint acquired a priorright over such
mark. name and
(Rules and Regulations On Trademarks, b. That the proposed name is identical,
Servicemarks, Tradenarnes and Marked or Stamped deceptively or confusingly similar, or patently
Containers, Rule 102) deceptive.
5. Priority Right (IP Code, Sec.131) The test is whether it would be confusing to an ordinary
An application for registration of a mark filed in the person. (Philips Export B. V. v. Court of Appeals, GR No.
Philippines by a person referred to in Section 3, and who 96161, 1992)
previously duly filed an application for registration of the
same mark in one of those countries, shall be considered Ownership of trademark is a property right which is entitled
as filed as of the day the application was first filed in the to protection. However, when a TM is used for a product in
foreign country. which the other party does not deal, the use of the same
trademark on the latter's product cannot be validly objected
No registration of a mark in the Philippines by a person to. Trademark owner is entitled to protection when junior
described in this section shall be granted until such mark user (2nd user) forestalls the normal expansion of the
has been registered in the country of origin of the business, but Canon Japan has failed to attach evidence
applicant. that would convince that it has also embarked in the
production of footwear products. (Canon Kabushiki v.
6. Rights Conferred By Registration Court of Appeals, G.R. No. 120900, 2000)
Trade names are protected even prior to or without
registration. Thus, non-registration of the trade name with Trademark, copyright and patents are different intellectual
the Securities and Exchange Commission or the property rights that cannot be interchanged with one
another. (Kho v. Court of Appeals, G.R. No. 115758, 2002)
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person shall pass off the goods manufactured by him

The certificate of registration can confer the exclusive right or in which he deals, or his business, or services, for
to use its own symbol only to those goods specified in the those of another who has already established goodwill
certificate and that one who has adopted and used a for his similar goods, business, or services, or any acts
trademark on his goods does not prevent the adoption and - calculated to produce the same result.
use of the same trademark by others for products, which • Nobody can acquire any exclusive right to market
are of a different description. (Pearl & Dean v. Shoemart, articles supplying a simple human need in containers
G.R. No. 148222, 2003) or wrappers of the general form, size, and character
commonly and immediately used in marketing such
The prima facie presumption brought about by the articles. (Asia Brewery Inc. v. Court of Appeals GR No.
registration of a mark may be challenged and overcome, in 103543, 1993)
an appropriate action, by proof of the nullity of the
registration or of non-use of the mark, except when Dissent of Justice Cruz in Asia Brewery Case — The test
excused. Moreover, the presumption may likewise be is not whether the two (2) articles are distinguishable by
defeated by evidence of prior use by another person, i.e., their labels when put side by side, but whether the general
it will controvert a claim of legal appropriation or of confusion made by the article upon the eye of the casual
ownership based on registration by a subsequent customer, who is unsuspicious and off his guard, is such
user. This is because a trademark is a creation of use and as is likely to result in confounding it with the original, not
belongs to one who first used it in trade or commerce. side by side comparison.
(Berris Agricultural v. Norvy Abyadang, G.R. No. 183404,
2010) Use by Third Parties Of Names, Etc. Similar to
Registered Mark
"Hoarding" of bottles does not fall within the coverage of Registration of the mark shall not confer on the registered
the IP Code and of Section 168 in particular. It does not owner the right to preclude third parties from using bona
relate to any patent, trademark, trade name or service fide their names, addresses, pseudonyms, a geographical
mark that the respondents have invaded, intruded into or name, or exact indications concerning the kind, quality,
used without proper authority from the petitioner. Nor are quantity, destination, value, place of origin, or time of
the respondents alleged to be fraudulently "passing off' production or of supply, of their goods or services:
their products or services as those of the petitioner. The Provided, That such use is confined to the purposes of
respondents are not also alleged to be undertaking any mere identification or information and cannot mislead the
representation or misrepresentation that would confuse or public as to the source of the goods or services.
tend to confuse the goods of the petitioner with those of the
respondents, or vice versa. What in fact the petitioner 7. Infringement and Remedies
alleges is an act foreign to the Code, to the concepts it
embodies and to the acts it regulates; as alleged, hoarding Territorial Limits of a Trademark
inflicts unfairness by seeking to limit the opposition's sales The territorial limits of a trademark extend beyond the
by depriving it of the bottles it can use for these sales. country where said trademark may have been registered.
(Coca-Cola Bottlers v. Quintin J. Gomez, G.R. No. 154491, Under RA 8293, Sec. 3, any person who is a national or
2008) who is domiciled or has a real and effective industrial
establishment in a country whici is a party to any
Doctrine of Secondary Meaning convention, treaty, or agreement relating to intellectual
• A word or phrase originally incapable of exclusive property rights or the repression of unfair competition, to
appropriation with reference to an article in the market which the Philippines is also a party, or extends reciprocal
(because it is geographically or otherwise descriptive) rights to nationals of the Philippines by law, shall be
might nevertheless have been used for so long and so entitled to benefits to the extent necessary to give effect to
exclusively by one producer with reference to his any provision of such convention, treaty or reciprocal law,
article that, in the trade and to that branch of the in addition to the rights to which any owner of an intellectual
purchasing public, the word or phrase has come to property right is otherwise entitled by the Act.
mean that the article was his property. (Ang v.
Teodoro, G.R. No. L-48226, 1942) (See the Paris Convention on the Protection of Industrial
• Unfair competition is the employment of deception or Property to which the Philippines is a signatory)
any other means contrary to good faith by which a
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a. Trademark Infringement
To establish trademark infringement, the following On application of the complainant, the court may impound
elements: during the pendency of the action, sales invoices and other
• Validity of plaintiff's mark, documents evidencing sales.
• The plaintiffs ownership of the mark, and
• Use of the mark or its colorable imitation by the alleged In cases where actual intent to mislead the public or to
infringer results in the likelihood of confusion. defraud the complainant is shown, in the discretion of the
(McDonald's Corporation v. LC Big Mak Burgers Inc., court, the damages may be doubled.
GR No. 143993, 2004)
The complainant, upon proper showing, may also be
Factors to consider in deciding TM infringement when the granted injunction.
products are different:
• Strength of the mark c. Requirement of Notice
Upon the filing of an opposition, the Office shall -serve
• Degree of similarity between the two marks
notice of the filing on the applicant, and of the date of the
• Proximity of the products
hearing thereof upon the applicant and the oppositor and
• Likelihood that the prior owner will bridge the gap
all other persons having any Tight, title or interest in the
• Actual confusion
mark covered by the application, as appear of record in the
• Defendant's good faith in adopting its own mark Office.
• Quality of the defendant's product
• Sophistication of the buyers
(Polaroid Corp v. Polaroid Elect. Corp., 287 F. 2d 492, Kinds of Confusion, Which Can be Brought by
1961) Infringement
CONFUSION OF GOODS CONFUSION OF
The question is whether the general confusion made by the BUSINESS
article upon the eye of the casual purchaser, who is
unsuspicious and off his guard, is such as to likely result in When the ordinarily When although the goods
his confounding it with the original. prudent purchaser would of the parties are different,
be induced to purchase the defendant's products is
The general impression of the ordinary purchaser buying one product in the belief such as might be
under the normally prevalent conditions in trade and giving that he was purchasing the reasonably be assumed to
the attention such purchasers usually give in buying that other. (Great White Shark, originate with the plaintiff,
class of goods, is the touchstone. (Del Monte Corp v. Court Inc. v. Caralder, Jr., G.R. and the public would then
of Appeals, GR No. 78325, 1990) No. 192294, 2012) be deceived either into that
belief or into the belief that
b. Damages there is some connection
The owner of a registered mark may recover damages between the plaintiff and
from any person who infringes his rights. The measure of defendant which, in fact,
the damages suffered shall be either: does not exist. (Great
• The reasonable profit which the complaining party White Shark, Inc. v.
would have made, had the defendant not infringed his Caralder, Jr., G.R. No.
rights, or 192294, 2012)
• The profit which the defendant actually made out of the
infringement, or
• In the event such measure of damages cannot be
readily ascertained with reasonable certainty, then the Trademark Infringement v. Unfair Competitiqn
court may award as damages a reasonable The "true test" of unfair competition is whether the acts of
percentage based upon the amount of gross sales of the defendant have the intent of deceiving or are calculated
the defendant or the value of the services in to deceive the ordinary buyer making his purchases under
connection with which the mark or trade name was the ordinary conditions of the particular trade to which the
used in the infringement of the rights of the controversy relates. One of the essential requisites in an
complaining party. action to restrain unfair competition is proof of fraud; the
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intent to deceive, actual or probable must be shown before ordinary purchaser mulls upon the product and is likely to
the right to recover can exist. (Superior Commercial buy the same under the belief that he is buying another.
Enterprises v. Kunnan Enterprises Ltd., et. al., G.R. No. The test of fraudulent simulation is to be found in the
169974, 2010) likelihood or the possibility of deception of some persons
in some measure acquainted with an established design
Essentially, what the law punishes is the act of giving one's and desirous of purchasing the commodity with which that
goods the general appearance of the goods of another, design has been associated. (Levi Strauss v. Tony Lim,
which would likely mislead the buyer into believing that G.R. No. 162311, 2008)
such goods belong to the latter.
Master tapes are not essential for the determination of
The law on unfair competition is broader and more probable cause for the issuance of a warrant in trademark
inclusive than the law on trademark infringement. infringement cases. To restrict the exercise of discretion by
Trademark infringement is a more exclusive right derived a judge by adding a particular requirement (the
from the trademark adoption and registration by the person presentation of master tapes, as intimated by 20th Century
whose goods or business is first associated with it. The law Fox) not provided nor implied in the law for a finding of
on trademarks is a specialized subject distinct from the law probable cause is beyond the realm of judicial competence
on unfair competition, although the two subjects are or statesmanship. It serves no purpose but to stultify and
entwined with each other and are dealt with together in the constrict the judicious exercise of a court's prerogatives
IP code. and to denigrate the judicial duty of determining the
existence of probable cause to mere ministerial or
Table: Trademark Infringement v. Unfair Competition mechanical functions. There is no law or rule which
requires that the existence of probable cause is or should
TRADEMARK UNFAIR
be determined solely by a specific kind of evidence.
INFRINGEMENT COMPETITION
(People v. Choi, G.R. No. 152950, 2006)
Essence -Unauthorized use of Passing off one's A Preliminary Injunction in trademark infringement cases
a mark, goods as that of may only issue if applicant has clear and unmistakable
another. exclusive right over the mark. If the registrability of the
mark or its ownership is in question, the injunction may not
Intent Not necessary that Intent to deceive or issue since this would, if allowed, dispose of the case on
there be bad faith. bad faith is the merits as it effectively will enjoin the use of the word
present. "Ginebra" without the benefit of a full-blown trial. (Tanduay
Distillery v. Ginebra San Miguel Inc., G.R. No. 164324,
Registra- Prior registration of Registration is not
2009)
tion mark alleged to be necessary.
infringed is required.
Right of Foreign Corporation to Sue in Trademark or
Service Mark Enforcement Action
Related Goods Doctrine Any foreign national or juridical person who meets the
When goods are so related that the public may be, or is requirements of Section 3 of this Act and does not engage
actually, deceived and misled that they come from the in business in the Philippines may bring a civil or
same maker or manufacturer, trademark infringement administrative action hereunder for opposition,
occurs. cancellation, infringement, unfair competition, or false
designation of origin and false description, whether or not
Remedies Available to Registrant In Order to Stop the it is licensed to do business in the Philippines under
Infringement of Mark existing laws. (IP Code, Sec. 160)
• Judicial
o Civil
o Criminal Prosecution
• Administrative
The SC held that he probability of deception must be

tested at the point of sale since it is at tnis point that the
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Limits of Trademark Protection person as that for another constitutes actionable unfair
competition. (Alhambra Cigar vs. Mojica, G.R. No. L-8937,
TERM TERRITORIAL LIMIT
1914)
A certificate of registration of a The registration of a • If one fails to establish his exclusive property right to a
mark shall remain in force for mark will have force and trademark, he may still obtain relief on the ground of -his
ten (10) years. effect within the territory competitor's unfairness or fraud.
It is required, however, that of the Philippines.
the owner of a mark show that Conduct constitutes unfair competition if the effect is to
he is using the mark or that his pass off on the public the goods of one man as the goods
non-use of the same is due to of another. (Mighty Corp v. E & J Gallo Winery, G.R. No.
causes beyond his control by 154342, 2004)
filing an Affidavit of Use or
Excusable Non-Use, with the Essentially, what the law punishes is the act of giving one's
BT within one (1) year from goods the general appearance of the goods of another,
the 5th anniversary of the which would likely mislead the buyer into believing that
registration of the marks. such goods belong to the latter. (Manuel C. Espiritu et. al.
v. Petron Corp. et. G.R. No. 170891, 2009)
The registration may also be
renewed for a period of ten Director of BLA of the IPO may cancel Certificate of
(10) years after its expiration. registration issued to one party even if the hearing
There is no limit as to the regarding the cancellation of registration was for the
number of times the registrant registration of the other party and even if there was no
may request for the renewal of petition for cancellation to that effect. (E. Y. Industrial Sales
his registration. Inc., v. Shen Dar Electricity and Machinery Co. Ltd.. G.R.
No. 184850, 2010)
The registered trademark owner enjoys protection in Trade Names or Business Names
product and market areas that are the normal potential Trade name of business name is an essential part of
expansion of his business. (McDonalds Corporation v. Big business since it is usually used when dealing with clients
Mak Burger, G.R. 143993, 2004) or customers. If it is a Single Proprietorship Business, it
must be registered with the Department of Trade and
8. Cancellation of Registration of Trademark Industry. if it is a corporation or partnership, it must first be
When —Within five (5) years from the registration of mark registered with the SEC. After the SEC certificate of
registration, the corporation or partnership may register its
Who - Any person who believes that he will be damaged name with DTI to ensure exclusivity of the usage of that
by the registration of a mark. name. (RA 3883)
Grounds: Collective Marks

Any of the grounds to reject the registration of a mark which
• An application for registration of a collective mark shall
are enumerated as absolute or relative grounds for refusal.
designate the mark as a collective mark and shall be
accompanied by a copy of the agreement, if any,
Non-use for an uninterrupted period of three (3) years is
governing the use of the collective mark.
also a ground for cancellation.
• The registered owner of a collective mark shall notify
the Director of any changes made in respect of the
9. Unfair Competition
agreement.
Unfair competition is passing off or attempting to pass off
• The Court shall cancel the registration of a collective
upon the public the goods/business of one person as for
mark if the person requesting the cancellation proves
the goods/business of another.
that only the registered owner uses the mark, or that
he uses or permits its use in contravention of the
Any conduct the end and probable effect of which is to
agreements or that he uses or permits its use in a
deceive the public or pass off the goods or business of a
manner liable to deceive trade circles or the public as
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to the origin or any other common characteristics of the codes, schemes or in any other form, which is capable
goods or services concerned. when incorporated in a medium that the computer can
• The registration of a collective mark, or an application read, of causing the computer to perform or achieve a
therefor shall not be the subject of a license contract. particular task or result;
e. Public Lending — the transfer of possession of the
C. Copyright original or a copy of a work or sound recording for a
limited period, for non-profit purposes, by an institution
Basic Principles the services of which are available to the public, such
as public library or archive;
What is Copyright? Public Performance — in the case of a work other
a. A bundle of rights that an author enjoys on the form of than an audiovisual work, is the recitation, playing,
expression of the ideas. dancing, acting or otherwise performing the work,
b. Copyright refers to finished works, not concepts. either directly or by means of any device or process; in
(Joaquin v. Drilon, G.R. No. 108946, 1999) the case of an audiovisual work, the showing of its
c. It is only the treatment of the subject and the images in sequence and the making of the sounds
expression of the idea that are protected by copyright. accompanying it audible; and, in the case of a sound
(Abiva v. Weinbrenner, 6 CAR (2s) 1023, 1964) recording, making the recorded sounds audible at a
place or at places where persons outside the normal
Note: Author must be a natural person (IP Code, Sec circle of a family and that family's closest social
171.1) acquaintances are or can be present, irrespective of
whether they are or can be present at the same place
Rights Granted and at the same time, or at different places and/or at
a. Economic Rights different times, and where the performance can be
b. Moral Rights perceived without the need for communication within
c. Neighboring Rights the meaning of Subsection 171.3;
g- Published Works — works, which, with the consent
Criteria for Copyright Protection of the authors, are,made available to the public by wire
a. Originality — Act of authorship, answers the question or wireless means in such a way that members of the
"did you make it?" public may access these works from a place and time
b. Copyrightability — does the law allow the work to be individually chosen by them: Provided, That availability
the subject of copyright? of such copies has been such, as to satisfy the
reasonable requirements of the public, having regard
(Fixation is NOT REQUIRED under our IP Code. See: Sec. to the nature of the work;
172.2) h. Work of applied art — an artistic creation with
utilitarian functions or incorporated in a useful article,
Definitions whether made by hand or produced on an industrial
a. Author — is the natural person who has created the scale;
work;
b. Collective Work — work which has been created by 1. Copyrightable Works
two (2) or more natural persons at the initiative and
under the direction of another with the understanding Original Literary or Artistic Works
that it will be disclosed by the latter under his own These are original intellectual creations in the literary and
name and that contributing natural persons will not be artistic domain protected from the moment of their creation
identified; and shall include in particular:
c. Communication to the Public — the making of a • Books, pamphlets, articles and other writings;
work available to the public by wire or wireless means • Periodicals and newspapers;
in such a way that members of the public may access • Lectures, sermons, addresses, dissertations prepared
these works from a place and time individually chosen for oral delivery, whether or not reduced in writing or
by them; other material form;
d. Computer — an electronic or similar device having • Letters;
information-processing capabilities, and a "computer • Dramatic or dramatico-musical compositions;
program" is a set of instructions expressed in words, choreographic works or entertainment in dumb shows;
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• Musical compositions, with or without words; original of the building to which that copyright relates.
• Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or Published Edition of Work
designs for works of art; In addition to the right to publish granted by the author, his
• Original ornamental designs or models for articles of heirs, or assigns, the publisher shall have a copyright
manufacture, whether or not registrable as an consisting merely of the right of reproduction of the
industrial design, and other works of applied art; typographical arrangement of the published edition of the
• Illustrations, maps, plans, sketches, charts and three- work
dimensional works relative to geography, topography,
architecture or science; Note:
• Drawings or plastic works of a scientific or technical • Works shall be protected:
character; o By the sole fact of their creation, not registration
o Irrespective of their mode or form of expression,
• Photographic works including works produced by a
content, quality and .purpose
process analogous to photography; lantern slides;
• The copyright for a work is acquired by an intellectual
• Audiovisual works and cinematographic works and
creator from the moment of creation even in the
works produced by a process analogous to
cinematography or any process for making audio- absence of registration and deposit (Columbia Pictures
visual recordings; v. CA, G.R. No. 110318, 1996)
• To be entitled to copyright, the -thing being copyrighted
• Pictorial illustrations and advertisements;
must be an original, created by the author through his
• Computer programs; and
own skill, labor and judgment, without directly copying
• Other literary, scholarly, scientific and artistic works.
or evasively imitating the work of another (Sambar v.
Levi Strauss & Co, G.R. No. 132604, 2002)
Note: Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as
2. Non-Copyrightable Works
of their content, quality and purpose
• Any idea, procedure, system, method of operation,
concept, principle, discovery or mere data as such, „-
Derivative Works
even if they are expressed, explained, illustrated or
• Dramatizations, translations, adaptations,
embodied in a work;
abridgments, arrangements, and 'other alterations of
• News of the day and other miscellaneous facts having
literary or artistic works (PD No. 49, Sec. 2, [Pk and
the character of mere items of press information; or
• Collections of literary, scholarly cr artistic works, and
• Any official text of a legislative, administrative or legal
compilations of data and other materials which are
nature, as well as any official translation thereof
original by reason of the selection -or coordination or
• Works of the Government.
arrangement of theircontents. (PD No. 49, Sec. 2[Q])
• However, prior approval of the government agency or
S . Derivative works shall be protected as new works,
office wherein the work is created shall be necessary
provided however, That such new work:
for exploitation of such work for profit. Such agency or
o Shall not affect the force of any subsisting
office may, among other things, impose as a condition
copyright upon the original works employed or any
the payment of royalties.
part thereof, or
o Be construed to imply any right to such use of the • But, no prior approval or conditions shall be required
original works, or to secure or extend copyright in for the use of any purpose of statutes, rules and
such original works. (PD No. 49, Sec. 8; TRIPS, regulations, and speeches, lectures, sermons,
Art. 10) addresses, and dissertations, pronounced, read or
rendered in courts of justice, before administrative
Architectural Designs agencies, in deliberative assemblies and in meetings
shall include the right to control the erection of any building of public character.
which reproduces the whole or substantial part of the work • Nevertheless, the author of speeches, lectures,
either in its original form or in any form recognizably sermons, addresses, and dissertations mentioned in
derived from the original, provided that the copyright the preceding paragraphs shall have the exclusive
therein shall not include the right to control the right of making a collection of his works
reconstruction or rehabilitation in the same style as the • Notwithstanding the foregoing provisions,
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i. Government is not precluded from receiving and shall belong to author;

holding copyrights transferred to it by In joint authorship, co-authors shall be original
•
assignment, bequest or otherwise; owners of copyright and in the absence of
ii. Such publication or republication by the agreement; their rights shall be governed by rules
Government in a public document of any work in on co-ownership. However, in work of joint
which copyright is subsisting ownership consists of parts that can be used
• Shall not be taken to cause any abridgment or separately and author of each part can be
annulment of the copyright, or identified, author of each part shall be the original
• Shall not authorize any use or appropriation of such owner of the copyright in the part that he has
work without the consent of the copyright owner created.
• Useful articles, whose sole purpose is utilitarian, and • In work created by an author during and in the
have no separate artistic value, are not copyrightable. course of his employment:
It has no separate artistic value; to be distinguished o The employee, if the creation of the object
from a work of applied art in that while the latter has of copyright is not a part of his regular
utilitarian functions, there is an identifiable artistic work duties even if the employee uses the time,
or creation incorporated thereto facilities and materials of the employer.
• Works of Public Domain — these are works whose term o The employer, if the work is the result of
of copyright protection has expired. the performance of his regularly-assigned
duties, unless there is an agreement,
3. Rights of a Copyright Owner express or implied, to the contrary.
• In the case of a work commissioned by a person
(a) Copyright or Economic Rights other than an employer of the author and who pays
Shall consist of the exclusive right to carry out, authorize for it and the work is made in pursuance of the
or prevent the following acts: (RETRANS - FIRE - DPPR - commission, the person who so commissioned the
OTHER) work shall have ownership of the work, but the
• Reproduction of the work or substantial portion of the copyright thereto shall remain with the creator,
work; unless there is a written stipulation to the contrary;
• Transformation of the work; • In the case of audio-visual work, the copyright
• First public distribution of the original and each copy of shall belong to the producer, the author of the
the work by sale or other forms of transfer of scenario, the composer of the music, the film
ownership; director, and the author of the work so adapted.
However, subject to contrary or other stipulations
• Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work; among the creators, the producer shall exercise
the copyright to an extent required for the
• Public display of the original or a copy of the work;
exhibition of the work in any manner, except for the
• Public performance of the work;
right to collect performing license fees for the
• Rental of the original or a copy of an audiovisual or
performance of musical compositions, with or
cinematographic work, a work embodied in a sound
without words, which are incorporated into the
recording, a computer program, a compilation of data
work; and
and other materials or a musical work in graphic form,
• In respect of letters, the copyright shall belong to
irrespective of the ownership of the original or the copy
the writer subject to the provisions of Article 723 of
which is the subject of the rental; and
the Civil Code.
• Other communication to the public of the work.
• Anonymous and Pseudonymous Works. The
publishers shall be deemed to represent the
Note: Substantial reproduction doesn't necessarily mean
authors of articles and other writings published
that the entire work, or even a large portion, be copied. If
without the names of the authors or under
so much is taken that the value of the original work is
pseudonyms; except
substantially diminished, there is infringement (Habana v.
a. When the contrary appears;
Robles, 310 SCRA 511, 1999)
b. The pseudonyms or adopted name
leaves no doubt as to the author's identity;
(")) Copyright Ownership
or
• In original literary and artistic works, copyright
c. if the author of the anonymous works
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discloses his identity. Absent special contract at the time creator licenses/permits
another to use his work, the following are deemed NOT to
(c) Transfer or Assignment of Copyright contravene creator's moral rights, provided they are done
• Copyright may be assigned in whole or in part. Within in accordance w/ reasonable customary standards or
the scope of the assignment, the assignee is entitled requisites of the medium: (DA2ME)
to all the rights and remedies which the assignor had o Dramatization
with respect to the copyright. • Arranging
• Copyright is not deemed assigned inter vivos in whole o Adaptation
or in part unless there is a written indication of such o Mechanical and electrical reproduction
intention. • Editing
• The submission of a literary, photographic or artistic
work to a newspaper, magazine or periodical for Complete destruction of work unconditionally transferred
publication shall constitute only a license to make a by creator
single publication unless a greater right is expressly
granted. If 2 or more persons jointly own a copyright or Breach of Contract
any part thereof, neither of the owners shall be entitled An author cannot be compelled to perform his contract to
to grant licenses without the prior written consent of create a work or for the publication of his work already in
the other owner or owners. existence. However, he may be held liable for damages for
• Since copyright is distinct from the property in the breach of such contract.
material object subject to it:
o Transfer or assignment of copyright shall not itself Waiver of Moral Rights
constitute a transfer of the material object; General rule: Moral rights can be waived in writing by
o Transfer or assignment of the sole copy or one or expressly stating such waiver.
several copies Of the work shall not imply transfer
or assignment of the copyright Exceptions: Even if writing, waiver is still not valid if:
• Copyright owners or their heirs may designate a • To use the name of the author, or the title of his work,
society of artists, writers, or composers to enforce their or otherwise to make use of his reputation with respect
economic rights and moral rights, on their behalf to any version or adaptation of his work which,
because of alterations therein, would substantially
tend to injure the literary or artistic reputation of
(a) Moral Rights
Scope of Moral Rights another author; or
The author of a work shall, independently of the economic • To use the name of the author with respect to a work
rights in Section 177 or the grant of an assignment or he did not create.
license with respect to such right, have the right (mob -
re2st) Contribution to Collective Work
When an author contributes to a collective work, his right
• To Make any alterations of his work prior to, or to
withhold it from publication; to have his contribution attributed to him is deemed waived
unless he expressly reserves it.
• To 2I2ject to any distortion, mutilation or other
modification of, or other derogatory action in relation
Term of Moral Rights
to, his work which would be prejudicial to his honor or
reputation; • Shall last during author's lifetime;
• To Require that the authorship of the works be • And for 50 years after his death
attributed to him, in particular, the right that his name, • Shall not be assignable or subject to license
as far as practicable, be indicated in a prominent way o Person(s) charged with posthumous enforcement
on the copies, and in connection with the public use of of these rights shall be named in writing filed with
his work; and National Library
• To Restrain the use of his name with respect to any o In default of such person(s), such enforcement
work not of his own creation or in a distorted version of shall devolve upon either the author's heirs;
his work. o In default of the heirs, Director of National Library
• Damages may be availed of under Civil Code
Exceptions of Moral Rights • Any damage recovered after creator's death shall be
held in trust remitted to his heirs, and in default of heirs,
f
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to the Government performances fixed in sound recordings, in any

• No damages may be recovered under IP Code after 4 manner or form;
years from time cause of action arose. b. First public distribution of original and copies of
their performance fixed in sound recording through
(b) Rights to Proceeds in Subsequent Transfers or sale or rental or other forms of transfer of
Droit De Suite ownership;
Sale or Lease of Work. - In every sale or lease of an c. Commercial rental to public of original and copies
original work of painting or sculpture or of the original of their performances fixed in sound recordings,
manuscript of a writer or composer, subsequent to the first even after distribution of them by, or pursuant to
disposition thereof by the author, the author or his heirs authorization by performer;
shall have an inalienable right to participate in the gross d. Making available to public of their performances
proceeds of the sale or lease to the extent of five percent fixed in sound recordings, by wire or wireless
(5%). This right shall exist during the lifetime of the author means, in such a way that members of public may
and for fifty (50) years after his death. access them from a place and time individually
chosen by them.
This rule shall not apply to prints, etchings, engravings,
works of applied art, or works of similar kind wherein the Moral Rights of Performers
author primarily derives gain from the proceeds of Independent of a performer's economic rights, the
reproductions. performer, shall, as regards his live aural performances or
performances fixed in sound recordings, have the right to
(c) Neighboring Rights claim to be identified as the performer of his performances,
• These are the rights of a performer, producers and except where the omission is dictated by the manner of the
broadcasting organization in relation to an original use of the performance, and to object to any distortion,
work. (chapters XII, XIII, XIV) mutilation or other modification of his performances that
• Exclusive Rights would be prejudicial to his reputation
• Moral rights - specifically the right of the performer
to claim to be identified as such performer. DURATION: maintained and exercised fifty (50) years
• Include the right to proceeds in subsequent after his death, by his heirs, and in default of heirs, the
government, where protection is claimed.
transfers - equivalent to 5% of the compensation
received for the original performance. (IP Code,
Limitation on Performer's Rights
Secs. 184 and 185 shall apply mutatis mutandis —
see: Secs. 205 and 210) • Once the performer has authorized the broadcasting
or fixation of his performance, the provisions of Section
Neighboring Rights Does Not Apply To The Following 203 shall have no further application.
• Exclusive use of a natural person for own personal • Fair use and limitations to copyrights shall apply
purposes mutatis mutandis to performers.
• Short excerpts for reporting current events
Additional Remuneration for Subsequent
• Sole use for the purpose of teaching or for scientific
Communications or Broadcasts
research
Unless otherwise provided in the contract, in every
• Fair use of the broadcast
communication to the public or broadcast of a performance
subsequent to the first communication or broadcast thereof
(d) Rights of Performers. Producers of Sound
by the broadcasting organization, the performer shall be
Recordings and Broadcasting Organizations
entitled to an additional remuneration equivalent to at least
five percent (5%) of the original compensation he or she
Scope of Performer's Rights
received for the first communication or broadcast.
As regards their performances, the right of authorizing:
• The broadcasting and other communication to the
Nothing shall deprive performers of the right to agree by
public of their performance; and
contracts on terms and conditions more favorable for them
• The fixation of their unfixed performance.
in respect of any use of their performance.
• Of authorizing:
a. Direct or indirect reproduction of their (e) Terms of Protection, In General
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• Life of the author, plus 50 years after his death, in d. Independent Contractor's Work
case of sole authorship. • Ownership belongs to the person other than the
employer who commissioned the work and who
• Life of the last surviving author, plus 50 years after pays for it
his death, in case of joint authorship. • Copyright remains with the creator, unless there is
a written stipulation to the contrary
• 50 years from publication of anonymous or e. Audiovisual work
pseudonymous works, or 50 years from making if • Copyright belongs to the producer, the author of
unpublished: the scenario, the composer of the music, the film
director, and the author of the work so adapted
Provided that if the author's identity is revealed • Subject to contrary or other stipulations among the
prior to the expiration of such period, protection creators, the producer shall exercise the copyright
shall be as provided in the case of sole authorship to an extent required for the exhibition of the work
in any manner
• 25 years from the date of making, in case of works Exception: the right to collect performing
of applied art. license fees for the performance of musical
compositions, with or without words, which are
• 50 years from publication or from date of making if incorporated into the work
unpublished, in case of photographic works and f. Letters
audio-visual works. • Copyright belongs to the writer subject to the
provisions of Article 723 of the Civil Code. (/P
Note: Term of protection subsequent to author's death Code, Sec. 178)
shall run from death of his death or of publication, but such
terms shall always be deemed to begin on the first day of 5. Limitations On Copyright
January of year following event which gave rise to them
Acts That Do Not Constitute Infringement
4. Rules on Ownership of Copyright a. Recitation or performance of a work
• Lawfully made accessible to public
a. Original literary and artistic works • Done privately & free of charge or
• Copyright belongs to the author of the work, • Made strictly for charitable or religious institution
subject to the provisions of this section or society
b. Joint authorship b. Making quotations from a published work provided:
• Co-authors shall be the original owners of the • Compatible with fair use and
copyright • Extent: justified for the purpose
• Absence of agreement, rights shall be governed • Source & name of author, if appearing on the work,
by the rules on co-ownership are mentioned
Joint authorship consists of parts c. Reproduction or communication to the public by mass
• Author shall be the original owner of the copyright media of articles of current PRESS provided:
in the part he has created if: • Delivered in public
o Parts can be used separately and • Use: info purposes
o Author of each part can be identified • Not expressly reserved
c. Employee's Work • Source: clearly indicated
• Copyright shall belong to: d. Reproduction or communication to public of literary,
a) Employee: creation of the object of copyright artistic, scientific works
is not a part of his regular duties even if the • Part of reports of current events
employee uses the time, facilities and • By means of photo, cinema, broadcasting
materials of the employer • Extent necessary for that purpose
b) Employer: work is the result of the e. Inclusion of a work in any communication to the public:
performance of his regularly-assigned duties, • Made by illustration for teaching purposes
unless there is an agreement, express or • Compatible with fair use: source/name of author,
implied, to the contrary mentioned
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f. Recording in schools, university and educational of an independently created computer program

institutions
• Intended for broadcast for such schools Effect of Fair Use as a Defense in Infringement
• Recording: deleted w/in reasonable period after • The defendant relieves the prosecution of the burden
they were 1st broadcast of presenting evidence showing the use of the
• Recordings: may NOT be made from AV works are copyright, as the defendant admits having used it. But
part of the general feature films except for brief evidence should still be presented for the purpose of
excerpts of the works. proving damages.
g. Making of ephemeral recordings by broad-orgs by its • Infringement consists in the doing of any person,
own facilities and for use of its own broadcasts without the consent of the copyright owner, of
h. Use of work made by or under the direction/control of anything, the sole right to do which is conferred by
Government statute to the owner of the copyright (Habana v.
• By National Library or any education, scientific or Robles, 310 SCRA 511, 1999)
professional (SEP) institution
• Use: public interest 7. Copyright Infringement
• Compatible with fair use
Elements of Infringement
i. Public performance/communication of a work:
a. Existence of a Valid Copyright
• In a place: no admission fee
b. Unauthorized Copying
• By a club/institution for education and charitable
• Direct evidence of actual copying
purpose: aim is NOT profit-making
• Indirect evidence of access to the original
• Subject to such other limitations as may be
work
provided in the regulations
j. Public display of original/copy of work NOT made
Copyright infringement and unfair competition are not
• By any media means
limited to the act of selling counterfeit goods. They cover a
• Either work has been published, sold, given away,
whole range of acts from copying, assembling, packaging
transferred to another person by author or his
to marketing, including the mere offering for sale of
successor in title (SGT)
counterfeit goods. (Microsoft Corp v. Maxicorp Inc., GR
k. Use: work for purpose of:
No. 140946, 2004)
• Any judicial proceedings
• For giving of professional advice by legal Technology Transfer Arrangements
practitioner Contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a product,
6. Doctrine of Fair Use the application of a process, rendering of a service
The fair use of copyrighted work for criticism, news
including management contracts; and the transfer,
reporting, teaching (including multiple copies for classroom
assignment or licensing of all forms of intellectual property
use), research, and similar purposes is not an infringement
rights, including licensing of computer software except
of copyright.
computer software developed for mass market.
Factors to Determine Fair Use (PuCLa — NaCo - ASuE)

The signing of the Intellectual Property (IP) Code (RA
• Purpose & Character of the use
8293) liberalizes regulations on technology transfer
• Nature of the Copyrighted work registration particularly the rate of fees or royalties and
• Amount & Substantiality of the portion used in relation strengthens intellectual property rights protection in the
to the whole thing as a whole Philippines. Voluntary Licensing has been provided by the
• Effect of the use: on the potential market or the value Code. The law makes it necessary for the recording of
of the copyrighted work these agreements with the intellectual property office.
• The fact that a work is unpublished shall not by itself However, registration is no longer required where the
bar a finding of fair use if such finding is made upon agreement is in conformity of the requirements of the law
consideration of all the above factors under Sections 87 and 88.
Decompilation is understood here to be the

reproduction/translation of code to achieve interoperability end of topic
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IX. ANTI MONEY LAUNDERING ACT ANTI-MONEY LAUNDERING LAW (R.A 9160, AS
AMENDED BY R.A. 9194)
AS Policy of the Law

ANTI-MONEY LAUNDERING LAW (R.A 9160,
• To protect and preserve the integrity and
AMENDED BY R.A. 9194)
confidentiality of bank accounts;
• To ensure that the Philippines would not be used as a
A. Covered institutions and their obligations
B. Covered and suspicious transactions money laundering site for the proceeds of any unlawful
C. Safe harbor provision activity; and
D. When is money laundering committed • To promote cooperation in transnational investigations
(including predicate crimes) and prosecution of persons involved in money
E. Authority to inquire into bank deposits laundering activities whenever committed. (R.A. No.
F. Freezing and forfeiture 9610, Sec. 2)
A. Covered Institutions
'Covered persons', natural or juridical, refer to (BIS-J2SS):
(1) Banks, non-banks, quasi-banks, trust entities, foreign

exchange dealers, pawnshops, money changers,
remittance and transfer companies and other similar
entities and all other persons and their subsidiaries and
affiliates supervised or regulated-by the Bangko Sentra! ng
Pilipinas (BSP);
(2) Insurance companies, pre-need companies and all

other persons supervised or regulated by the Insurance
Commission (IC);
(3) The following entities administering Securities:

(i) Securities dealers, brokers, salesmen, investment
houses and other similar persons managing securities
or rendering services as investment agent, advisor, or
consultant;
(ii) Mutual funds, close-end investment companies,

common trust funds, and other similar persons; and
(iii) Other entities administering or otherwise dealing

in currency, commodities -or financial derivatives
based thereon, valuable objects, cash substitutes and
other similar monetary instruments or property
supervised or regulated by the Securities and
Exchange Commission (SEC);
(4) Jewelry dealers in precious metals, who, as a business,

trade in precious metals, for transactions in excess of One
million pesos (P1,000,000.00);
(5) Jewelry dealers in precious stones, who, as a business,

trade in precious stones, for transactions in excess of One
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million pesos (P1,000,000.00); agency to engage in gaming operations." (Sec. 3)
(6) Company Service providers which, as a business, • The AMLA also states that single cash
provide any of the following services to third parties: transactions of casinos in excess of P5 million or
(i) Acting as a formation agent of juridical persons; its equivalent in any other currency, must be
reported to the Anti-Money Laundering Council
(ii) Acting as (or arranging for another person to act (AMLC). (Sec. 3b)
as) a director or corporate secretary of a company, a
partner of a partnership, or a similar position in
relation to other juridical persons; 1. Obligations of Covered Institutions
(iii) Providing a registered office, business address or Section 9. Prevention of Money Laundering; Customer
accommodation, correspondence or administrative Identification Requirements and Record Keeping. — (CRR)
address for a company, a partnership or any other
legal person or arrangement; and a. Customer Identification, -
(iv) Acting as (or arranging for another person to act Covered institutions shall establish and record the true
as) a nominee shareholder for another person; and identity of its clients based on official documents.
(7) Persons who provide any of the following Services: They shall maintain a system of verifying the true
(i) Managing of client money, securities or other identity of their clients and, in case of corporate clients,
assets; require a system of verifying their legal existence and
organizational structure, as well as the authority and
(ii) Management of bank, savings or securities identification of all persons purporting to act on their
accounts; behalf.
(iii) Organization of contributions for the creation, The provisions of existing laws to the contrary
operation or management of companies; and notwithstanding, anonymous accounts, accounts
under fictitious names, and all other similar accounts
(iv) Creation, operation or management of juridical shall be absolutely prohibited.
persons or arrangements, and buying and selling
business entities. Peso and foreign currency non-checking numbered
accounts shall be allowed.
The term 'covered persons' shall exclude lawyers and
accountants acting as independent legal professionals in The BSP may conduct annual testing solely limited to
relation to information concerning their clients or where the determination of the existence and true identity of
disclosure of information would compromise client the owners of such accounts.
confidences or the attorney-client relationship: Provided,
That these lawyers and accountants are authorized to b. Record Keeping —
practice in the Philippines and shall continue to be subject
to the provisions of their respective codes of conduct All records of all transactions of covered institutions
and/or professional responsibility or any of its shall be maintained and safely stored for five (5) years
amendments. (R.A. No. 10365, Sec. 3) from the date of transactions.
Note: Republic Act No. 10927, enacted July 14, 2017, With respect to closed accounts, the records on
effectively amends AMLA, or Republic Act No. 9160, to customer identification, account files and business
include casinos as "covered persons", to wit: "(8) casinos, correspondence, shall be preserved and safety stored
including internet and ship-based casinos, with respect to for at least five (5) years from the dates when they
their casino cash transactions related to their gaming were closed.
operations."
• Casinos, as defined by the law, are businesses c. Reporting of Covered and Suspicious Transactions. —
"authorized by the appropriate government Covered persons shall report to the AMLC all covered
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transactions and suspicious transactions within five (5) be prescribed by the AMLC (R.A. No. 10365, Sec. 6)
working days from occurrence thereof, unless the
AMLC prescribes a different period not exceeding 2. Suspicious Transactions
fifteen (15) working days. (R.A. No. 9160, as amended Transactions with covered institutions, regardless of the
by R.A. No. 10365, Sec. 9[13]) amounts involved, where any of the following
circumstances exist (PCA-SDUS):
Lawyers and accountants acting as independent legal
professionals are not required to report covered and a. There is no underlying legal or trade obligation,
suspicious transactions if the relevant information was Purpose or economic justification;
obtained in circumstances where they are subject to b. The Client is not properly identified;
professional secrecy or legal professional privilege c. The Amount involved is not commensurate with
the business or financial capacity of the client;
Should a transaction be determined to be both a d. Taking into account all known circumstances, it
covered transaction and a suspicious transaction, the may be perceived that the client's transaction is
covered institution shall be required to report the same Structured in order to avoid being the subject of
as a suspicious transaction. reporting requirements under the Act;
e. Any circumstances relating to the transaction
When reporting covered or suspicious transactions to which is observed to Deviate from the profile of the
the AMLC, covered persons and their officers and client and/or the client's past transactions with the
employees are prohibited from communicating, covered institution;
directly or indirectly, in any manner or by any means, f. The transactions is in a way related to an Unlawful
to any person or entity, the media, the fact that a activity or offense under this Act that is about to
covered or suspicious transaction has been reported be, is being or has been committed; or
or is about to be reported, the contents of the report, g. Any transactions that is Similar or analogous to
or any other information in relation thereto. Neither any of the foregoing.
may such reporting be published or aired in any
manner or form by the mass media, electronic mail, or 3. When is Money Laundering Committed
other similar devices. In case of violation thereof, the A crime whereby the proceeds of an unlawful activity are
concerned officer and employee of the covered person transacted, thereby making them appear to have
and media shall be held criminally liable. (R.A. No. originated from legitimate sources (R.A. No. 9160, Sec. 4)
9160, as amended by R.A. No. 9194, Sec. 9)
Money laundering is committed by any person who,
B. Covered Transactions (CPR) knowing that any monetary instrument or property
Any transaction in cash or other equivalent monetary represents, involves, or relates to the proceeds of any
instrument involving a total amount in excess of Five unlawful activity
hundred thousand pesos (PhP 500,000.00) within one (1)
banking day. (R.A. No. 9160, Sec. 31-b], as amended) a. Transacts said monetary instrument or property;
b. Converts, transfers, disposes of, moves, acquires,
Other Transactions possesses or uses said monetary instrument or
(1) Jewelry dealers in precious metals, who, as a business, property;
trade in precious metals, for transactions in excess of One c. Conceals or disguises the true nature, source,
million pesos (P1,000,000.00); location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
(2) Jewelry dealers in precious stones, who, as a business, property;
trade in precious stones, for transactions in excess of One d. Attempts or conspires to commit money laundering
million pesos (P1,000,000.00); offenses referred to in paragraphs (a), (b) or (c);
e. Aids, abets, assists in or counsels the commission of
(3) The Land Registration Authority, and all its Registries the money laundering offenses referred to in
of Deeds to submit to the AMLC, reports on all Real Estate paragraphs (a), (b) or (c) above; and
Transactions involving an amount in excess of Five f. Performs or fails to perform any act as a result of which
hundred thousand pesos (P500,000.00) within 15 days he facilitates the offense of money laundering referred
from the date of registration of the transaction, in a form to to in paragraphs (a), (b) or (c) above.
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4. Unlawful Activities or Predicate Crimes

Money laundering is also committed by any covered 'Unlawful activity' refers to any act or omission or series or
person who, knowing that a covered or suspicious combination thereof involving or having direct relation to
transaction is required under this Act to be reported to the following:
Anti-Money Laundering Council (AMLC), fails to do so.
a. Kidnapping for ransom;
Three Steps in Money Laundering b. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of
(1) Placement Republic Act No. 9165, otherwise known as the
At this stage, the launderer inserts the dirty money into a Comprehensive Dangerous Act of 2002;
legitimate financial institution, usually in the form of cash c. Section 3 paragraphs B, C, E, G, H and I of Republic
deposits Act No. 3019, as amended, otherwise known as the
Anti-Graft and Corrupt Practices Act;
(2) Layering d. Plunder;
Involves sending money through various financial e. Robbery and extortion under Articles 294, 295, 296,
transactions to change its form and make it more difficult 299, 300, 301 and 302 of the Revised Penal Code, as
to follow. It may consist of bank-to-bank transfers, amended;
changing currency, or purchasing high value items. f. Jueteng and Masiao punished as illegal gambling;
g. Piracy on the high seas;
(3) Integration h. Qualified theft;
The money re-enters mainstream economy in legitimate- i. Swindling;
looking form, appearing to have come from some j. Smuggling under the Revised Administrative Code
legitimate transaction. It may involve a final bank transfer and the Tariff and Customs Laws;
into the account of a local business in which the launderer k. Violations under the Electronic Commerce Act of 2000;
is "investing" in exchange for a cut of the profits or the sale I. Hijacking and other violations under the Anti-Hijacking
of high value items bought during the layering stage. (IRR, Law; destructive arson and murder;
R.A. No. 9160, Rule 4, Sec. 1) m. Terrorism and conspiracy to commit terrorism;
n. The following violations under the Terrorism Financing
Monetary Instruments Prevention and Suppression Act of 2012:
(1) Coins or currency of legal tender of the Philippines, or • Financing of terrorism;
of any other country; • Attempt or conspiracy;
• Accomplice;
(2) Drafts, checks and notes; • Accessory;
• Dealing with property or funds of designated
(3) Securities or negotiable instruments, bonds,
persons
commercial papers, deposit certificates, trust certificates,
o. Bribery and Corruption of Public Officers;
custodial receipts or deposit substitute instruments, trading
p. Frauds and Illegal Exactions and Transactions;
orders, transaction tickets and confirmations of sale or
q. Malversation of Public Funds and Property;
investments and money market instruments;
r. Forgeries and Counterfeiting;
s. The following violations under the Anti-Trafficking in
(4) Contracts or policies of insurance, life or non-life, and
Persons Act of 2003:
contracts of suretyship; and
• Acts of trafficking in persons;
(5) Other similar instruments where title thereto passes to • Acts to promote trafficking in persons;
another by endorsement, assignment or delivery. • Qualified trafficking in persons;
t. The following violations of the Revised Forestry Code
of the Philippines:
• Payment, collection, and remittance of forest
charges;
• Sale of wood products;
u. Violations under the Philippine Fisheries Code of
1998;
v. Violations under the Philippine Mining Act of 1995;
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w. The following violations under the Wildlife Resources (3) Chairman of the Securities and Exchange Commission
Conservation and Protection Act: (R.A. No. 9160, Sec. 8)
• Effecting acts in critical habitats;
6. Functions of AMLC
• Trading of wildlife;
The AMLC shall act unanimously in the discharge of its
• Collecting, hunting or possessing wildlife, their by-
functions as defined hereunder:
products and derivatives;
• Gathering or destroying of active nests and the • To require and receive covered or suspicious
like;
transaction reports from covered institutions;
• Transporting of wildlife; • To issue orders addressed to the appropriate
x. Consuming, selling, bartering, etc., without authority, Supervising Authority or the covered institutions to
any cave resource under the National Caves and Cave determine the true identity of the owner of any
Resources Management Protection Act; monetary instrument or property subject of a covered
y• Violation of the Anti-Carnapping Act of 2002; transaction or suspicious transaction report or request
The following violations of the decree Codifying the for assistance from a foreign State, or believed by the
Laws on Illegal/Unlawful Possession, Manufacture, Council, on the basis of substantial evidence, to be, in
Dealing In, Acquisition or Disposition of Firearms, whole or in part, wherever located, representing,
Ammunition or Explosives: involving, or related to directly or indirectly, in any
• Unlawful manufacture, sales, acquisition, manner or by any means, the proceeds of an unlawful
disposition or possession of firearms, ammunition activity.
or instruments; • To institute civil forfeiture proceedings and all other
• Unlawful manufacture, sales, acquisition, remedial proceedings through the Office of the
disposition or possession of explosives; Solicitor General;
• Tampering of firearm's serial number; • To cause the filing of complaints with the Department
aa. Violation of the Anti-Fencing Law; of Justice or the Ombudsman for the prosecution of
bb. Violations relating to Illegal Recruitment under the money laundering offenses;
Migrant Workers and Overseas Filipinos Act of 1995; • To investigate suspicious transactions and covered
cc. Violation of the Intellectual Property Code of the transactions deemed suspicious after an investigation
Philippines; by AMLC, money laundering activities and other
dd. Violation of the Anti-Photo and Video Voyeurism Act of violations of this Act;
2009; • To apply before the Court of Appeals, ex parte, for the
ee. Violation of the Anti-Child Pornography Act of 2009; freezing of any monetary instrument or property
if. Violation of the Special Protection of Children Against alleged to be the proceeds of any unlawful activity as
Abuse, Exploitation and Discrimination Act; defined in Section 3(i) (R.A. No. 10365, Sec. 6);
gg. Fraudulent practices and other violations under the • To implement such measures as may be necessary
Securities Regulation Code of 2000; and justified under this Act to counteract money
hh. Felonies or offenses of a similar nature that are laundering;
punishable under the penal laws of other countries. • To receive and take action in respect of, any request
from forfign states for assistance in their own anti-
Safe Harbor Provision money 12undering operations provided in this Act;
No administrative, criminal or civil or civil proceedings shall • To develop educational programs on the pernicious
lie against any person for having made a covered effects of money laundering, the methods and
transaction report in the regular performance of his duties techniques used in the money laundering, the viable
and in good faith, whether or not such reporting results in means of preventing money laundering and the
any criminal prosecution under AMLA or any other effective ways of prosecuting and punishing offenders;
Philippine law (BSP Circular 706 dated January 5, 2011) • To enlist the assistance of any branch, department,
bureau, office, agency, or instrumentality of the
5. Anti-Money Laundering Council (AMLC) government, including government-owned and -
controlled corporations, in undertaking any and all anti-
Composition of the AMLC money laundering operations, which may include the
(1) BSP Governor - Chairman use of its personnel, facilities and resources for the
(2) Commissioner of the Insurance Commission
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more resolute prevention, detection, and investigation No court shall issue a temporary restraining order or a writ
of money laundering offenses and prosecution of of injunction against any freeze order, except the Supreme
offenders; Court.
• To impose administrative sanctions for the violation of
laws, rules, regulations, and orders and resolutions 8. Authority to Inquire into Bank Deposits
issued pursuant thereto (R.A. No. 9194, Sec. 5); and
• To require the Land Registration Authority and all its General Rule: Court Order Required
Registries of Deeds to submit to the AMLC, reports on Notwithstanding the provisions of Republic Act No. 1405,
all real estate transactions involving an amount in as amended; Republic Act No. 6426, as amended;
excess of Five hundred thousand pesos Republic Act No. 8791; and other laws:
(P500,000.00) within fifteen (15) days from the date of
registration of the transaction, in a form to be The AMLC may inquire into or examine any particular
prescribed by the AMLC. The AMLC may also require deposit or investment, including related accounts, with any
the Land Registration Authority and all its Registries of banking institution or non-bank financial institution upon
Deeds to submit copies of relevant documents of all order of any competent court based on:
real estate transactions. (R.A. No. 9160, Sec. 7, as (1) An ex parte application in cases of violations of this
amended) Act;
(2) When it has been established that there is
7. Freezing of Monetaty Instrument or Property probable cause that the deposits or investments,
including related accounts involved, are related to
The AMLC's power to freeze accounts has been deleted an unlawful activity as defined in Section 3(i)
under R.A. No. 9194, Sec. 7. hereof or a money laundering offense under
Section 4 hereof;
However, the CA may issue a freeze order which shall be
effective immediateiy, and which shall not exceed 6 Exceptions: No court order shall be required in the
months depending upon the circumstances of the case, following cases:
upon: (1) Kidnapping for ransom under Art. 267, RPC;
(2) Violations of the Comprehensive Dangerous
(1) A verified ex parte petition by the AMLC; and Drugs Act of 2002 (R.A. No. 9165, Secs. 4, 5, 6, 8,
(2) After determination that probable cause exists that any 9, 10, 12, 13, 14, 15, and 16);
▪ monetary instrument or property is in any way related to an (3) Highjacking and other violations under R.A. No.
unlawful activity defined in Sec. 3(i) of R.A. No. 10365 6235;
(4) Destructive arson and murder under the RPC,
The court should act on the petition to freeze within 24 including those perpetrated by terrorists against
hours from filing of the petition. If the application is filed a non-combatant persons and similar targets;
day before a nonworking day, the computation of the 24- (5) Felonies or offenses of a nature similar to those
hour period shall exclude the nonworking days. mentioned above, which are punishable under the
penal laws or other countries; and
If there is no case filed against a person whose account (6) Terrorism and conspiracy to commit terrorism as
has been frozen within the period determined by the court, defined and penalized under R.A. No. 9372 (R.A.
the freeze order shall be deemed ipso facto lifted. No. 10167, Sec. 2)
This rule shall not apply to pending cases in the courts. Time for CA to act on application
The Court of Appeals shall act on the application to inquire
Remedy Against Freeze Order into or examine any deposit or investment with any banking
A person whose account has been frozen may file a motion institution or non-bank financial institution within twenty-
to lift the freeze order and the court must resolve this four (24) hours from filing of the application.
motion before the expiration of the freeze order.
To ensure compliance with this Act, the Bangko Sentra! ng
Pilipinas may, in the course of a periodic or special
examination, check the compliance of a Covered institution
with the requirements of the AMLA and its implementing
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rules and regulations.
Related Accounts
Accounts, the funds and sources of which originated from
and/or are materially linked to the monetary instrument(s)
or property(ies) subject of the freeze order(s). (R.A. No.
10167, Sec. 2)
A court order ex parte must first be obtained before the

AMLC can inquire into these related Accounts: Provided,
That the procedure for the ex parte application of the ex
parte court order for the principal account shall be the
same with that of the related accounts.
The authority to inquire into or examine the main account

and the related accounts shall comply with the
requirements of Article Ill, Sections 2 and 3 of the 1987
Constitution, which are hereby incorporated by reference.
end of topic
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X.ELECTRONIC COMMERCE ACT OF 2000 (R.A. ELECTRONIC COMMERCE ACT OF 2000

No. 8792) and A.M. No. 01-7-01-SC or the Rules
on Electronic Evidence A. Legal Recognition of Electronic Writing or
Document and Data Messages
Topics under the Syllabus
Electronic Data Message
A. Legal recognition of electronic data messages, Refers to information generated, sent, received or stored
documents, and signatures by electronic, optical or similar means. (R.A. No. 8792,
B. Presumption relating to electronic signatures Sec. 5[0
C. Admissibility and evidential weight of electronic
data message or electronic document Legal Recognition of Electronic Data Messages
D. Obligation of confidentiality Information shall not be denied legal effect, validity or
enforceability solely on the grounds that it is in the data
message purporting to give rise to such legal effect, or that
it is merely referred to in that electronic data message.
(R.A. No. 8792, Sec. 6)
Electronic Document
Refers to information or the representation of information,
data, figures, symbols or other modes of written
expression, described or however represented, by which a
right is established or an obligation extinguished, or by
which a fact may be prove and affirmed, which is receive,
recorded, transmitted, stored, processed, retrieved or
produced electronically. (R.A. No. 8792. Sec. 51-ti)
Legal Recognition of Electronic Documents

(a) Where the law requires a document to be in writing, that
requirement is met by an electronic document if the said
electronic document maintains its integrity and reliability
and can be authenticated so as to be usable for
subsequent reference, in that —
(i) The electronic document has remained complete

and unaltered, apart from the addition of any
endorsement and any authorized change, or any
change which arises in the normal course of
communication, storage and display; and
(ii) The electronic document is reliable in the light of

the purpose for which it was generated and in the light
of all relevant circumstances.
(b) Paragraph (a) applies whether the requirement therein

is in the form of an obligation or whether the law simply
provides consequences for the document not being
presented or retained in its original from.
(c) Where the law requires that a document be presented

or retained in its original form, that requirement is met by
an electronic document if —
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(i) There exists a reliable assurance as to the integrity In any proceedings involving an electronic signature, it
of the document from the time when it was first shall be presumed that —
generated in its final form; and
(a) The electronic signature is the signature of the person
(ii) That document is capable of being displayed to the to whom it correlates; and
person to whom it is to be presented. No provision of
this Act shall apply to vary any and all requirements of (b) The electronic signature was affixed by that person with
existing laws on formalities required in the execution of the intention of signing or approving the electronic
documents for their validity. document unless the person relying on the electronically
signed electronic document knows or has noticed of
For evidentiary purposes, an electronic document shall be defects in or unreliability of the signature or reliance on the
the functional equivalent of a written document under electronic signature is not reasonable under the
existing laws. (R.A. No. 8792, Sec. 7) circumstances. (R.A. No. 8792, Sec. 9)
B. Electronic Signature Rule on Ordinary Documents

Refers to any distinctive mark, characteristic and/or sound (1) Where the law requires information to be presented o'r
in electronic form, representing the identity of a person and retained in its original form, that requirement is met by an
attached to or logically associated with the electronic data electronic data message or electronic document if;
message or electronic document or any methodology or
procedures employed or adopted by a person and (a) the integrity of the information from the time when
executed or adopted by such person with the intention of it was first generated in its final form, as an electronic
authenticating or approving an electronic data message or data message or electronic document is shown by
electronic document. (R.A. No. 8792, Sec. 5[e]) evidence aliunde or otherwise; and
Legal Recognition of Electronic Signatures (b) where it is required that information be resented,
An electronic signature on the electronic document shall that the information is capable of being displayed to
be equivalent to the signature of a person on a written the person to whom it is to be presented.
document if that signature is proved by showing that a
prescribed procedure, not alterable by the parties (2) Paragraph (1) applies whether the requirement therein
interested in the electronic document, existed under which is in the form of an obligation or whether the law simply
provides consequences for the information not being
presented or retained in its original form.
(a) A method is used to identify the .party sought to be
bound and to indicate said party's access to the electronic (3) For the purpose of subparagraph (a) of paragraph (1):
document necessary for his consent or approval through
the electronic signature; (a) the criteria for assessing integrity shall be whether
the information has remained complete and unaltered,
(b) Said method is reliable and appropriate for the purpose apart from the addition of any endorsement and any
for which the electronic document was generated or change which arises in the normal course of
communicated, in the light of all circumstances, including communication, storage and display ; and
any relevant agreement;
(b) the standard of reliability required shall be
(c) It is necessary for the party sought to be bound, in or assessed in the light of purposed for which the
order to proceed further with the transaction, to have information was generated and in the light of all the
executed or provided the electronic signature; and relevant circumstances. (R.A. No. 8792, Sec. 10)
(d) The other party is authorized and enabled to verify the C. Admissibility and Evidential Weight of Electronic
electronic signature and to make the decision to proceed Data Message or Electronic Document
with the transaction authenticated .by the same. (R.A. No.
8792, Sec. 8) Nothing in the application of the rules on evidence shall
deny the admissibility of an electronic data message or
electronic document in evidence —
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D.Oblioation of Confidentiality
(a) On the sole ground that it is in electronic form; or Except for the purposes authorized under this Act, any
person who obtained access to any electronic key,
(b) On the ground that it is not in the standard written electronic data message, or electronic document, book,
form, and the electronic data message or electronic register, correspondence, information, or other material
document meeting, and complying with the pursuant to any powers conferred under this Act, shall
requirements under Sections 6 or 7 hereof shall be NOT convey to or share the same with any other person.
the best evidence of the agreement and transaction (Sec. 32, R.A. 8792)
contained therein.
Choice of Security Methods
In assessing the evidential weight of an electronic data Subject to applicable laws and /or rules and guidelines
message or electronic document, the reliability of the promulgated by the Department of Trade and Industry with
manner in which it was generated, stored or other appropriate government agencies, parties to any
communicated, the reliability of the manner in which its electronic transaction shall be free to determine the type of
originator was identified, and other relevant factors shall be level of electronic data message and electronic document
given due regard. (R.A. No. 8792, Sec. 12) security needed, and to select and use or implement
appropriate technological methods that suit their need.
Formation of Contracts In Electronic Form (R.A. No. 8792, Sec. 24)
Except as otherwise agreed by the parties, an offer, the
acceptance of an offer and such other elements required Electronic Commerce in Carriage Of Goods
under existing laws for the formation of contracts may be
expressed in, demonstrated and proved by means of Actions Related to Contracts of Carriage of Goods
electronic data messages or electronic documents and no (a) (i) furnishing the marks, number, quantity or weight of
contract shall be denied validity or enforceability on the goods; (ii) stating or declaring the nature or value of
sole ground that it is in the form of an electronic data goods; (iii) issuing a receipt for goods; (iv) confirming
message or electronic document, or that any or all of the that goods have been loaded;
elements required under existing laws for the formation of
contracts is expressed, demonstrated and proved by (b) (i) notifying a person of terms and conditions of the
means of electronic data messages or electronic contract; (ii) giving instructions to a carrier;
documents.
(c) (i) claiming delivery of goods; (ii) authorizing release of
Electronic transactions made through networking among goods; (iii) giving notice of loss of, or damage to goods;
banks, or linkages thereof with other entities or networks,
and vice versa, shall be deemed consummated upon the (d) giving any other notice or statement in connection with
actual dispensing of cash or the debit of one account and the performance of the contract;
the corresponding credit to another, whether such
transaction is initiated by the depositor or by an authorized (e) undertaking to deliver goods to a named person or a
collecting party: Provided, that the obligation of one bank, person authorized to claim delivery;
entity, or person similarly situated to another arising
therefrom shall be considered absolute and shall not be (f) granting, acquiring, renouncing, surrendering,
subjected to the process of preference of credits. (R.A. No. transferring or negotiating rights in goods;
8792, Sec. 16)
(g) acquiring or transferring rights and obligations under
As between the originator and the addressee of an the contract. (R.A. No. 8792, Sec. 25)
electronic data message or electronic document, a
declaration of will or other statement shall not be denied Transport Documents
legal effect, validity or enforceability solely on the ground (1) Where the law requires that any action referred to
that it is in the form of an electronic data message. (R.A. contract of carriage of goods be carried out in writing
No. 8792, Sec. 17) or by using a paper document, that requirement is met
if the action is carried out by using one or more data
messages or electronic documents.
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(2) Paragraph (1) applies whether the requirement there in

is in the form of an obligation or whether the law simply (ii) The necessary technical means by which electronic
provides consequences for failing either to carry out documents of an originator may be stored and made
the action in writing or to use a paper document. accessible to designated or undesignated third party.
(3) If a right is to be granted to, or an obligation is to be Such service providers shall have no authority to modify or
acquired by, one person and no person, and if the law alter the content of the electronic data message or
requires that, in order to effect this, the right or electronic document received or to make any entry therein
obligation must be conveyed to that person by the on behalf of the originator, addressee or any third party
transfer, or use of, a paper document, that requirement unless specifically authorized to do so, and who shall retain
is met if the right or obligation is conveyed by using the electronic document in accordance with the specific
one or more electronic data messages or electronic request or as necessary for the purpose of performing the
documents unique; services it was engaged to perform. (R.A. No. 8792, Sec.
(4) For the purposes of paragraph (3), the standard of

reliability required shall be assessed in the light of the Liability of Service Provider
purpose for which the right or obligation was conveyed No person or party shall be subject to any civil or criminal
and in the light of all the circumstances, including any liability in respect of the electronic data message or
relevant agreement. electronic document for which the person or party acting
as a service provider merely provides access if such
(5) Where one or more data messages are used to effect liability is founded on —
any action in subparagraphs (f) and (g) of Section 25,
no paper document used to effect any such action is (a) The obligations and liabilities of the parties under the
valid unless the use of electronic data message or electronic data message or electronic document;
electronic document has been terminated and
replaced by the used of paper documents. A paper (b) The making, publication, dissemination or distribution
document issued in these circumstances shall contain of such material or any statement made in such material,
a statement of such termination. The replacement of including possible infringement of any right subsisting in or
the electronic data messages or electronic documents in relation to such material. Provided, That:
by paper documents shall not affect the rights or
obligation of the parties involved. (i) The service provider does not have actual
knowledge, or is not aware of the facts or
(6) If a rule of laws is compulsorily applicable to a contract circumstances from which it is apparent, that the
of carriage of goods which is in, or is evidenced by, a making, -publication, dissemination or distribution of
paper document, that rule shall not be inapplicable to such material is unlawful or infringes any rights
such a contract of carriage of goods which is subsisting in or in relation to such material
evidenced by one or more electronic data messages
or electronic documents by reason of the fact that the (ii) The service provider does not knowingly receive a
contract is evidenced by such electronic data financial benefit directly attributable to the unlawful or
messages or electronic documents instead of by a infringing activity; and
paper document. (R.A. No. 8792, Sec. 26)
(iii) The service provider does not directly commit any
When a Service Provider Can Be Liable Under the Act infringement or other unlawful act and does not induce
or cause another person or party to commit any
"Service provider" refers to a provider of — infringement or other unlawful act and/or does not
benefit financially from the infringing activity or
(i) On-line services or network access or the operator of unlawful act or another person or party;
facilities therefor, including entities offering the
transmission, routing, or providing of connections for online Provided, further, That nothing in this Section shall
communications, digital or otherwise, between or among affect —
points specified by a user, of electronic documents of the
user's choosing; or (a) Any obligation founded on contract;
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A facsimile transmission cannot be considered as

(b) The obligation of a service provider as such under electronic evidence. It is not the functional equivalent of
a licensing or other regulatory regime established an original under the Best Evidence Rule and is not
under written law; or admissible as electronic evidence. (MCC v. Ssangyong,
(c) Any obligation imposed under any written law; G.R. No. 170633, 2007)
(d) The civil liability of any party to the extent that such Note: For purposes of these Rules, the term "electronic
liability forms the basis for injunctive relief issued by a document" may be used interchangeably with electronic
court under any law requiring that the service provider data message". (REE, Rule 2, Sec 1(h)
take or refrain from actions necessary to remove, block
or deny access to any material, or to preserve Electronic evidence as functional equivalent of paper
evidence of a violation of law. (R.A. No. 8792, Sec. 30) based documents - Whenever a rule of evidence refers
to the term writing, document, record, instrument,
C. Rules ON ELECTRONIC EVIDENCE memorandum or any other form of writing, such term shall
be deemed to include an electronic document as defined
a. Scope; Coverage; Meaning Of Electronic in these Rules. (REE, Rule 3, Sec. 1)
Evidence; Electronic Data Message
b. Probative Value Of Electronic Documents Or
Scope and Coverage Evidentiary Weight; Method Of Proof
The Rules on Electronic Evidence (REE) shall apply
whenever an electronic document or electronic data Admissibility
message as defined in these rules is offered or used in An electronic document is admissible in evidence if:
evidence. (REE, Rule 1 Sec. 1) 1. It complies with the rules on admissibility prescribed by
the Rules of Court and related laws; and
These Rules shall apply to all civil actions and 2. It is authenticated in the manner prescribed by these
proceedings, as well as quasi-judicial and administrative Rules. (REE, Rule 3, Sec. 2)
cases. (REE, Rule 1 Sec. 2)
Best Evidence Rule Under the REE
Applicability to Criminal Actions An electronic document shall be regarded as the
As to the admissibility of the text messages, the RTC equivalent of an original document under the Best
admitted them in conformity with the Court's earlier Evidence Rule if it is a printout or output readable by sight
Resolution applying the Rules on Electronic Evidence to or other means, shown to reflect the data accurately. (REE,
criminal actions. (People v. Enojas, G.R. No. 204894, Rule 4, Sec. 1)
2014)
When copies or duplicates of a document shall be
Electronic Document - information or the representation regarded as original:
of information, data, figures, symbols or other modes of 1. It is in two or more copies executed at or about the
written expression, described or however represented, by same time with identical contents; or
which a right is established or an obligation extinguished, 2. It is a counterpart produced by the same
or by which a fact may be proved and affirmed, which is impression as the original, or from the same
received, recorded, transmitted, stored, processed, matrix, or by mechanical or electronic re-
retrieved or produced electronically. recording, or by chemical reproduction, or by other
equivalent techniques which accurately
It includes digitally signed documents and any print-out or reproduces the original
output, readable by sight or other means, which accurately Such copies or duplicates shall be regarded as the
reflects the electronic data message or electronic equivalent of the original. (REE, Rule 4, Sec. 2)
document. (REE, Rule 2, Sec. 1(h))
Note: Notwithstanding the foregoing, copies or duplicates
Electronic Data Message - information generated, sent, shall not be admissible to the same extent as the original
received or stored by electronic, optical or similar means. if: (REE, Rule 4, Sec. 2)
(REE, Rule 2, Sec. 1(g)) 1. A genuine question is raised as to the authenticity of
the original; or
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2. In the circumstances it would be unjust or inequitable Affidavit Evidence - All matters relating to the
to admit the copy in lieu of the original. admissibility and evidentiary weight of an electronic
document may be established by an affidavit stating facts
Factors in Determining Evidentiary Weight of of:
Electronic Evidence (REE, Rule 7, Sec. 1 and 2) (i) direct personal knowledge of the affiant; or
(ii) based on authentic records
In assessing the evidentiary weight of an electronic
document, the following factors may be considered: (REE, The affidavit must affirmatively show the competence of
Rule 7, Sec. 1) the affiant to testify on the matters contained therein. (REE,
t The reliability of the manner or method in which it was Rule 9, Sec. 1)
generated, stored or communicated, including but not
limited to input and output procedures, controls, tests Cross-Examination of Deponent — The affiant shall be
and checks for accuracy and reliability of the electronic made to affirm the contents of the affidavit in open court
data message or document, in the light of all the and may be cross-examined as a matter of right by the
circumstances as well as any relevant agreement; adverse party. (REE, Rule 9, Sec. 2)
2. The reliability of the manner in which its originator was
identified; Examination of Witness
3. The integrity of the information and communication
system in which it is recorded or stored, including but Electronic Testimony - After summarily hearing the
not limited to the hardware and computer programs or parties pursuant to Rule 9 of these Rules, the court may
software used as well as programming errors; authorize the presentation of testimonial evidence by
4. The familiarity of the witness or the person who made electronic means. Before so authorizing, the court shall
the entry with the communication and information determine the necessity for such presentation and
system; prescribe terms and conditions as may be necessary under
5. The nature and quality of the information which went the circumstances, including the protection of the rights of
into the communication and information system upon the parties and witnesses concerned. (REE, Rule 10, Sec.
which the electronic data message or electronic 1)
document was based; or
6. Other factors which the court may consider as affecting Transcript of electronic testimony - When examination
the accuracy or integrity of the electronic document or of a witness is done electronically, the entire proceedings,
electronic data message. including the questions and answers, shall be transcribed
by a stenographer, stenotypist or other recorder authorized
In any dispute involving the integrity of the information and for the purpose, who shall certify as correct the transcript
communication system in which an electronic document or done by him. The transcript should reflect the fact that the
electronic data message is recorded or stored, the court proceedings, either in whole or in part, had been
may consider, among others, the following factors: (REE, electronically recorded. (REE, Rule 10, Sec. 2)
Rule 7, Sec. 2)
1. Whether the information and communication system or c. Authentication Of Electronic Documents And
other similar device was operated in a manner that did Electronic Signatures
not affect the integrity of the electronic document, and
there are no other reasonable grounds to doubt the Authentication of Electronic Documents (REE, Rule 5,
integrity of the information and communication system; Section 1 to 3)
2. Whether the electronic document was recorded or
stored by a party to the proceedings with interest Burden of proving authenticity
adverse to that of the party using it; or The person seeking to introduce an electronic document in
3. Whether the electronic document was recorded or any legal proceeding has the burden of proving its
stored in the usual and ordinary course of business by authenticity in the manner provided in this Rule. (REE,
a person who is not a party to the proceedings and who Rule 5, Sec. 1)
did not act under the control of the party using it.
Manner of authentication
Method of Proof Beforc any private electronic document offered as
authentic is received in evidence, its authenticity must be
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proved by any of the following means: (REE, Rule 5, Sec. This exception (to the hearsay rule) may be overcome by
2) evidence of the untrustworthiness of the source of
1. By evidence that it had been digitally signed by the information or the method or circumstances of the
person purported to have signed the same; preparation, transmission or storage thereof. (REE, Rule
2. By evidence that other appropriate - security 8, Sec. 2)
procedures or devices as may be authorized by the
Supreme Court or by law for authentication of
electronic documents were applied to the document;
or
3. By other evidence showing its integrity and reliability to
the satisfaction of the Judge.
Proof of electronically notarized document

A document electronically notarized in accordance with the
rules promulgated by the Supreme Court shall be
considered as a public document and proved as a notarial
document under the Rules of Court. (REE, Rule 5, Sec. 3)
Authentication of Electronic Signature

An electronic signature or a digital signature authenticated
in the manner prescribed hereunder is admissible in
evidence as the functional equivalent of the signature of a
person on a written document. (REE, Rule 6, Sec. 1)
An electronic signature may be authenticated in any of the

following manner: (REE, Rule 6, Sec. 2)
1. By evidence that a method or process was utilized to
establish a digital signature and verify the same;
2. By any other means provided by law; or;
3. By any other means satisfactory to the judge as
establishing the genuineness of the electronic
signature.
d. Business Records As Exception To The Hearsay

Rule (REE, Rule 8, Section 1 And 2)
A memorandum, report, record or data compilation of acts,

events, conditions, opinions, or diagnoses, made by
electronic, optical or other similar means is an exception to
the hearsay rule provided that the following are shown by
the testimony of the custodian or other qualified witness:
1. That it was made at or near the time of or from
transmission or supply of information;
2. That it was made by a person with knowledge thereof;
3. That it was kept in the regular course or conduct of a
business activity; and
4. That such was the regular practice to make the
memorandum, report, record, or data compilation by
electronic, optical or similar means (REE, Rule 8, Sec.
1)
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e. Audio, Photographic, Video And Ephemeral

Evidence
Ephemeral Electronic Communication - refers to

telephone conversations, text messages, chatroom
sessions, streaming audio, streaming video, and other
electronic forms of communication the evidence of which
is not recorded or retained. (PEE, Rule 2, Sec. 1(k))
Text messages have been classified as "ephemeral

electronic communication" under Section 1(k), Rule 2 of
the -Rules on Electronic Evidence, and "shall be proven by
the testimony of a person who was a party to the same or
has personal knowledge thereof." (Vidallon-Magtolis v.
Salud, A.M. No. CA-05- 20-P, 2005)
Admissibility (REE, Rule 11, Section 1 and 2)
Audio, photographic and video evidence

Audio, photographic and video evidence of events, acts or
transactions shall be admissible provided: (REE, Rule 11,
Sec. 1)
1. It shall be shown, presented or displayed to the court;
and
2. It shall be identified, explained or authenticated by the
person who made the recording or by scme other
person competent to testify on the accuracy thereof
Ephemeral electronic communications

Ephemeral evidence shall be proven by the testimony of a
person who was a party to the same or has personal
knowledge thereof.
• In the absence or unavailability of such witnesses,
other competent evidence may be admitted.
A recording of the telephone conversation or ephemeral

electronic communication shall be covered by the
immediately preceding section.
Note: If the foregoing communications are recorded or

embodied in an electronic document, then the provisions
of Rule 5 on authentication of electronic documents shall
apply. (REE, Rule 11, Sec. 2)
end of topic
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I IX. DATA PRIVACY ACT (R.A. No. 10173) I A. Personal V. Sensitive Personal Information
Personal Information
TOPIC OUTLINE UNDER THE SYLLABUS Refers to any information whether recorded in a material
form or not, from which the identity of an individual is
A. Personal vs. Sensitive personal information apparent or can be reasonably and directly ascertained by
B. Scope the entity holding the information, or when put together with
C. Processing of Personal information other information would directly and certainly identify an
D. Rights of Data Subject individual
• Information about an identified or identifiable person
Example: A company ID number is personal

information because it is about an identifiable person.
It can be put together with records of a company's
Human Resource Department to directly identify an
individual
In Breyer v. Germany, the Court of Justice of the

European Union ruled that a dynamic internet protocol
address (IP address) may be considered personal
data. (because additional information may be made
available by the internet service provider to identify a
person)
Sensitive Personal Information

Refers to personal information:
1) About an individual's race, ethnic origin, marital status,
age, color, and religious, philosophical or political
affiliations;
2) About an individual's health, education, genetic or
sexual life of a person, or to any proceeding for any
offense committed or alleged to have been committed
by such person, the disposal of such proceedings, or
the sentence of any court in such proceedings;
3) Issued by government agencies peculiar to an
individual which includes, but not limited to:
a. Social Security numbers
b. Previous or current health records
c. Licenses or its denials
d. Suspension or revocation
e. Tax returns
4) Specifically established by an executive order or an act
of Congress to be kept classified
• Sensitive personal information is personal

information, that is specifically considered by law
to be sensitive in nature.
• Note that the law also covers privileged
information.
Importance of Distinction
Sensitive personal information requires stronger data

protection or security measures.
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Criteria to allow processing of sensitive personal • Personal Information Processors

information is stricter. Refers to any natural or juridical person or any other body
to whom a personal information controller may outsource
When what is involved in a personal data breach is or instruct the processing of personal data pertaining to a
sensitive personal information, mandatory breach data subject.
notification is generally required.
If a personal information processor uses the personal
Penalties for violation of the Data Privacy Act will be information any other purpose not provided by the
higher if sensitive personal information is involved. controller, then the personal information processor
becomes the personal information controller.
B. Scope
Scope • Covers only information about individuals (natural

In general, applies to the processing of all types of persons) and not juridical persons (Information
personal information and to any natural and juridical about a comoany is outside the scope)
person involved in personal information processing, • The Personal Information Controllers (P/C) or
including: Personal Information Processor (PIP) may be
juridical persons.
• Personal information controllers and processors • Example: A customer ordering from a fast food
who: chain will call a hotline number being operated by
o Use equipment that are located in the a call center, to be able to order from the fast Tood
Philippines, regardless if found or chain. -; The customer is the data subject, the
established in Philippines fast food chain the PIC, and the call center the PIP.
o Maintain an office, branch or agency in the The fast food chain (P/C) outsourced to the call
Philippines center (PIP) processing of personal information of
customer.
Provided, publishers, editors or duly accredited reporters
of any newspaper, magazine or periodical of general
circulation are given protection from being compelled to Extraterritorial application: The law generally has
reveal the source of any news report or information extraterritorial application to the extent that a
appearing in said publication which was related in particular company has links to the Philippines, with
confidence to such publisher, editor, or reporter (Sec. 5 RA due consideration to international law and comity.
10173 in relation to RA 53) (Ex, Processing done in Philippines, Company doing
business in Philippines)
Processing refers to any operation performed upon the Does Not Apply to:
personal data including, but not limited to: collection, A) Information about any individual who is or was an
recording, organization, storage, updating or modification, officer or employee of a government institution
retrieval, consultation, use, consolidation, blocking, that relates to the position or functions of the
erasure or destruction. individual including:
1) Fact that the individual or is or was an officer
All Types of Personal Information: or employee of the government institution;
• Personal Information, Sensitive Personal 2) The title, business address and office
Information, Privileged Information telephone number of the individual;
3) The classification, salary range and
Natural and juridical person involved in personal responsibilities of the position held by the
information processing: individual;
4) Name of the individual on a document
• Personal Information Controllers prepared by the individual in the course of
Refers to a natural or juridical person, or any other body employment with the government
who controls the processing of personal data, or instructs B) Information about an individual who is or was
another to process personal data on its behalf. performing service under contract for a
government institution that relates to the services
Does not refer to the employee in charge of computer performed, including:
systems, encoders, or the head of IT department. 1) Terms of the contract
2) Name of the individual given in the course of
the performance of services
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C) Information relating to any discretionary benefit of

a financial nature, such as: Legitimate Purpose — Processing of information shall be
1) Granting of a license or permit given by the compatible with a declared and specified purpose which
government to an individual, including the must not be contrary to law, morals, or public policy.
name of individual and exact nature of the
benefit Proportionality — Processing shall be adequate, relevant,
D) Personal information processed for journalistic, suitable, necessary, and not excessive in relation to a
artistic, literary or research purposes declared and specified purpose. Personal information shall
E) Information necessary in order to carry out the be processed only if the purpose of the processing could
functions of public authority not be reasonably be fulfilled by other means.
1) Processing of personal data for the
performance by the independent Personal Information must, be:
2) Central monetary authority a.) Collected for specified and legitimate purposes
3) Law enforcement and regulatory agencies, of determined and declared before, or as soon as
their constitutionally and statutorily mandated reasonably practicable after collection, and later
functions processed in a way compatible with such declared
F) Information necessary for banks and other financial purposes only;
institutions under the jurisdiction of the central b.) Processed fairly and lawfully;
monetary authority or Banko Sentral ng Pilipinas, c.) Accurate, relevant and, where necessary for
to comply the Anti-Money Laundering Act and purposes for which it is to be used, be kept up to
other applicable laws date;
G) Personal information originally collected from o Inaccurate or incomplete data must be
residents of foreign jurisdictions in accordance with rectified, supplemented, destroyed or their
the laws of those foreign jurisdictions, including any further processing restricted
applicable data privacy laws, which is being processed d.) Adequate and not excessive in relation to the
in the Philippines purposes for which they are collected and
processed;
• Those outside the scope refer to information only. e.) Retained only for as long as necessary for the
The National Privacy Commission has opined that fulfillment of the purposes for which the data was
entities or agencies processing personai obtained or for the establishment, exercise or -
information remain to be covered by the DPA, and defense of legal claims, or for legitimate business
are subject to requirements of implementing purposes, or as provided by law;
security measures even if the particular f.) Kept in a form which permits identification of data
information being processed is outside the scope. subjects for no longer than is necessary for the
• Example: Banks remain covered by the DPA and purposes for which data were collected and
must secure the personal information they hold, processed
even if part of the information they have are a. Provided, personal information collected
outside the scope of the DPA (Ex. Reporting for other purposes may lie processed for
suspicious transcations under AIVILA) historical, statistical or scientific purposes,
and in cases laid down in law may be
C. Processing OF PERSONAL INFORMATION stored for longer periods
b. Adequate safeguards are guaranteed by
said laws authorizing their processing
General Data Privacy Principles
Personal information controller must ensure
General Rule: Processing of personal information shall be
implementation of personal information processing
allowed,
Subject to the following: principles set out herein
1.) Compliance with requirements of this act and other
Criteria for Lawful Processing
laws allowing disclosure of information to the
public Processing of personal information (not sensitive or
2.) Adherence to the principles of transparency, privileged) shall be permitted only if:
legitimate purpose and proportionality. a. Not otherwise prohibited by law; and
b. When at least one of the following conditions exist:
Transparency —Data subject must be aware of the nature, i. Data subject has given consent;
purpose and extent of the processing of his or her personal ii. Processing is necessary and is related to the
data. Any information relating to the processing of personal fulfillment of a contract with data subject;
data should be easy to access and understand.
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iii. Necessary for compliance with a legal Subcontract of Personal Information

obligation to which personal information A personal information controller may subcontract the
controller is subject; processing of personal information.
iv. Necessary to protect vitally important interests
of data subject; The personal information controller must ensure that
v. Necessary in order to respond to national proper safeguards are in place to ensure the confidentiality
emergency, comply with public order and of the personal information processed, prevent its
safety, or to fulfill functions of public authority unauthorized use, and comply with processing
vi. Necessary for purposes of legitimate interests requirements.
pursued by the personal information controller
or by a third party to whom data is disclosed Extension of Privileged Communication
i. EXCEPT where such interests are Personal information controllers may invoke the principle
overridden by fundamental rights and of privileged communication over privileged information
freedoms of the data subject that they lawfully control or process. Subject to existing
laws and regulations, any evidence gathered on
Criteria for Processing of Sensitive Personal Information privileged information is inadmissible.
and Privileged Information
Sensitive Personal Information and Privileged D. Rights Of The Data Subject

Information
Generally, processing of sensitive personal information Rights of data subjects, in general, include:
and privileged information shall be prohibited 1. Right to be informed on matters pertaining to the
processing of personal data, including intended
EXCEPT in the following cases: changes to the processing;
a. Data subject has given consent, specific to the 2. Right to object to the processing of personal.data;
purpose prior to the processing, or in the case of 3. Right to access upon demand;
privileged information, all parties to the exchange have 4. Right to correct errors and inaccuracies in the personal
given consent prior to processing; data being processed;
b. Processing is provided for by existing laws and 5. Right to erasure or blocking of personal data when no
regulations; longer necessary for the purpose of collection, and
i. Such regulations guarantee the protection of when rights of data subjects are already being violated;
sensitive personal and privileged information 6. Right to data portability, or the right to request for
ii. Consent of the data subjects are not required by copies of his or personal data which are being
law or regulation processed by electronic means in commonly used
c. Processing is necessary to protect the life and health formats;
of the data subject or another person, and the data 7. Right to damages when the data subject is injured by
subject is not legally or physically able to express his an unlawful or unauthorized processing, or by other
or her consent prior to the processing; acts violating his or her rights; and
d. Processing is necessary to achieve lawful and 8. Right to file a complaint with the National Privacy
noncommercial objectives of public organizations and Commission
associations;
i. Only confined to the bona fide members of these • DPA also has provisions on transmissibility of
organizations rights of data subject to lawful heirs and assigns of
ii. Sensitive information are not transferred to third the data subject at any time after the death of the
parties data subject, or when the data subject is
iii. Consent of data subject was obtained prior to incapacitated or incapable of exercising rights
processing • Limitation of rights of data subject: depending on
e. Processing is necessary for Medical treatment, carried circumstances, rights of data subjects may not
out by a medical practitioner or institution, and an apply or may be limited for:
adequate level of protection of personal information is (1) Scientific and statistical research
ensured; (2) Investigations in relation to any criminal,
f. Personal information necessary for the protection of administrative or tax liabilities
lawful rights and interests of natural or legal persons in
court proceedings, or the establishment, exercise or
defense of legal claims, or when provided to ----end of topic----
government or public authority •
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XII.FINANCIAL REHABILITATION AND Governing Statute and Rules

INSOLVENCY ACT OF 2010 (R.A. No. 10142) 1. Financial Rehabilitation and Insolvency Act of 2010
(R.A. No. 10142) [hereinafter FRIA]
Topics under the Syllabus 2. Financial Rehabilitation Rules of Procedure, A.M. No.
12-12-11-SC [hereinafter FR Rules]
A. Basic concepts 3. Financial Liquidation and Suspension of Payments
1. Rehabilitation Rules of Procedure for Insolvent Debtors, A.M. No. 15-
2. Insolvent 04-06-SC [hereinafter FLSP Rules]
3. Liquidation
4. Suspension of payments A. Basic Concepts
B. Modes of rehabilitation
1. Court-supervised rehabilitation Rehabilitation and Insolvency
a. Voluntary vs. involuntary
b. Commencement order (including stay Rehabilitation
order)
The restoration of the debtor to a condition of successful
c. Rehabilitation receiver and management
committee operation and solvency, if it is shown that its continuance
d. Determination of claims of operation is economically feasible and its creditors can
e. Rehabilitation plan recover by way of the present value of payments projected
i. Concept of feasibility in the plan, more if the debtor continues as a going concern
ii. Material financial commitments than if it is immediately liquidated. (FR/A, Sec. 4[0])
iii. Liquidation analysis
f. Creditor approval and confirmation Rehabilitation contemplates a continuance of corporate life
g. Failure of rehabilitation and activities in an effort to restore and reinstate the
2. Pre-negotiated rehabilitation corporation to its former position of successful operation
a. How initiated
and solvency (Wonder Book Corporation v. Phil. Bank of
b. Period and effect of approval
3. Out-of-Court or Informal Restructuring Communications, G.R. No. 187316, 2012)
Agreement or Rehabilitation Plan
a. Minimum requirements (BERNABE)The basic issues in rehabilitation proceedings
b. Standstill period concern the viability and desirability of continuing the
c. Cram down effect business operations of distressed corporations, all with a
C. Liquidation view of effectively restoring to a state of solvency or to its
1. Voluntary liquidation vs. involuntary former healthy financial condition through the adoption of
liquidation vs. conversion a rehabilitation plan (BPI Family Savings Bank v. St.
2. Procedure Michael Medical Center, G.R. No. 205469, 2015)
a. Liquidation order; effects
3. Determination of claims
D. Suspension of Payments; Suspension of Payment Inso!vency
Order The financial condition of a debtor that is generally unable
E. Remedies to pay its or his liabilities as they fall due in the ordinary
1. Motion for reconsideration course of business or has liahilities that are greater than its
2. Petition for certiorari or his assets (FR/A, Sec. 4[p])
Debtors
The term "debtor" shall refer to (PICS):
a. Partnership duly registered with the SEC;
b. Individual debtor who has become insolvent;
c. Corporation duly organized and existing under
Philippine laws; or
d. Sole Proprietorship registered with the DTI (FR/A,
Sec. 4[k])
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Note: An individual debtor shall refer to a natural person Individual Suspension of Payment (FRIA, Sec.
who is a resident and citizen of the Philippines that has Debtor 94)
become insolvent (FRIA, Sec. 4[b]) Voluntary Liquidation (FRIA, Sec.
103)
Debtors NOT covered by FRIA Involuntary Liquidation (FRIA, Sec.
a. Banks; 105)
b. Insurance Companies;
C. Pre-Need Companies; and Nature of Proceedings under FRIA
d. National and Local Government Agencies or Units a. In Rem — Jurisdiction over all persons affected by the
(FRIA, Sec. 5) proceedings shall be considered as acquired upon
publication of the notice of the commencement of the
Government financial institutions other than banks and proceedings in any newspaper of general circulation in
GOCCs shall be covered by this Act, unless their specific the Philippines as prescribed under the Supreme
charter provides otherwise (FRIA, Sec. 5) Court rules of procedure; and
b. Summary and Non-Adversarial (FR Rules, Sec. 4)
Creditors and Claims Covered By Fria
B. Types of Rehabilitation Proceedings
Creditor
A natural or juridical person which has a claim against the Three Main Types of ,Rehabilitation Proceedings:
debtor that arose on or before the commencement date (a) Court Supervised, which may be:
(FRIA, Sec. 4[h]) i. Voluntary, if initiated by Debtor
Involuntary, 'if initiated by Creditor
Claim (b) Pre-Negotiated, and
All claims or demands of whatever nature or character (c) Out of Court or Informal Proceedings.
against the debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, including, a. Court Supervised Rehabilitation
but not limited to: Court Supervised Rehabilitation Proceedings may either
be voluntary or involuntary.
(1) All claims of the government, whether national or 10C21,
including taxes, tariffs and customs duties; and i. Voluntary Proceedings
(2) Claims against directors and officers of the debtor Initiation of Voluntary Proceedings
arising from acts done in the discharge of their
functions falling within the scope of their authority. This Who may Petition for Voluntary Rehabilitation
inclusion does not prohibit the creditors or third parties 1. The owner in case of a sole proprietorship, or
from filing cases against the directors and officers 2. A majority of the partners in case of a partnership, or
acting in their personal capacities 3. A majority vote of the board of directors or trustees and
authorized by the vote of the stockholders representing
Proceedings Covered By FRIA at least two-thirds (2/3) of the outstanding capital stock,
DEBTOR PROCEEDING in stock corporations, or of the members, in case of non-
Sole Voluntary Rehabilitation (FRIA, Sec. stock corporation
Proprietorship 12);
Partnership Involuntary Rehabilitation (FRIA, Sec. An insolvent debtor may initiate voluntary proceedings
under this Act by filing a petition for rehabilitation with the
Corporation 13);
Pre-Negotiated Rehabilitation (FRIA, court and on the grounds hereinafter specifically provided.
Sec. 76);
Voluntary Liquidation (FRIA, Sec. 90); A group of debtors shall refer to:
Involuntary Liquidation (FRIA, Sec. (1) corporations that are financially related to one another
91) as parent corporations, subsidiaries or affiliates;
(2) partnerships that are owned more than fifty percent
(50%) by the same person; and
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(3) single proprietorships that are owned by the same

person. When the petition covers a group of debtors, Circumstances Necessary to Start Involuntary
all reference under these rules to debtor shall include Proceedings
and apply to the group of debtors (FR/A, Sec. 4[n]) These proceedings may be initiated against the debtor by
filing a petition for rehabilitation with the court if:
Grounds for Voluntary Rehabilitation a. There is no genuine issue of fact on law on the claim/s
A group of debtors may jointly file for rehabilitation when: of the petitioner/s, and that the due and demandable
a. One or more of its members foresee the impossibility of payments thereon have not been made for at least 60
meeting debts when they respectively fall due, and days or that the debtor has failed generally to meet its
b. The financial distress would likely adversely affect the liabilities as they fall due; or
financial condition and/or operations of the other b. A creditor, other than the petitioner/s, has initiated
members of the group and/or the participation of the foreclosure proceedings against the debtor that will
other members of the group is essential under the prevent the debtor from paying its debts as they
terms and conditions of the proposed Rehabilitation become due or will render it insolvent. (FR Rules, Rule
Plan. (FR Rules, Rule 2, Sec. 1) 2, Sec. 5)
Petition for Voluntary Proceedings Petition for Involuntary Proceedings

The petition shall be verified to establish the insolvency of The creditor/s' petition for rehabilitation shall be verified to
the debtor and the viability of its rehabilitation, and include, establish the substantial likelihood that the debtor may be
whether as an attachment or as part of the body of the rehabilitated, and include:
petition, as a minimum the following: a. Identification of the debtor its principal activities and its
a. Identification of the debtor, its principal activities and address;
its addresses; b. The circumstances sufficient to support a petition to
b. Statement of the fact of and the cause of the debtor's initiate involuntary rehabilitation proceedings under
insolvency or inability to pay its obligations as they Section 13 of this Act;
become due; c. The specific relief sought under this Act;
c. The specific relief sought pursuant to this Act; d. A Rehabilitation Plan;
d. The grounds upon which the petition is based; e. The names of at least 3 nominees to the, position of
e. Other information that may be required under this Act rehabilitation receiver;
depending on the form of relief requested; f. Other information that may be required under this Act
f. Schedule of the debtor's debts and liabilities including depending on the form of relief requested; and
a list of creditors with their addresses, amounts of g. Other documents required to be filed with the petition
claims and collaterals, or securities, if any; pursuant to this Act and the rules of procedure as may
g. An inventory of all its assets including receivables and be promulgated by the Supreme Court.
claims against third parties;
h. A Rehabilitation Plan; Common Provisions to Voluntary and Involuntary
i. The names of at least 3 nominees to the position of Proceedings
rehabilitation receiver; and
Other documents required to be filed with the petition Venue
pursuant to this Act and the rules of procedure as may RTC having jurisdiction over the principal office of the
be promulgated by the Supreme Court. debtor as specified in its articles of incorporation or
partnership or in its registration papers with the DTI in
ii. Involuntary Proceedings cases of sole proprietorship (FR Rules, Rule 1, Sec. 6)
Initiation of Involuntary Proceedings Note: The petition for court assistance to execute or
implement either a standstill agreement or out of court
Who may petition for involuntary proceedings restructuring agreement may be filed with the RTC having
1. Any creditor or group of creditors with a claim of, or the jurisdiction over the place in which the insolvent debtor
aggregate of whose claims is, whichever of is higher of: resides or has its principal place of business (FR Rules,
a. At least Php1,000,000.00; or Rule 4, Sec. 8)
b. At least 25% of the subscribed capital stock or partners'
contributions (FR Rules, Rule 2, Sec. 4)
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Action on the Petition k. Prohibit the debtor's suppliers of goods or services

1. If the court finds the petition to be substantial in form and from withholding the supply of goods and services in
substance, the commencement order shall be issued the ordinary course of business for as long as the
within 5 working days from its filing debtor makes payments for the services or goods
supplied after the issuance of the Commencement
2. If found deficient within the same period, the court may Order;
give 5 working days from receipt of the notice of order I. Authorize the payment of administrative expenses as
to satisfy the deficiency. they become due;
m. Set the case for initial hearing, which shall not be more
3. The court shall dismiss the petition if the deficiency is than 40 days from the date of filing of the petition for
not complied within the extended 5-day period (FR the purpose of determining whether there is
Rules, Rule 2, Sec. 7) substantial likelihood for the debtor to be rehabilitated;
n. Make available copies of the petition and rehabilitation
1. Commencement Order plan for examination and copying by any interested
Rehabilitation proceedings commence upon the issuance party;
of the Commencement Order. The Commencement Order o. Indicate the location or locations at which documents
contains the following: regarding the debtor and the proceedings under Act
may be reviewed and copied;
a. Identify the debtor, its principal business or activity/ies p. State that any creditor or debtor who is not the
and its principal place of business; petitioner, may submit the name or nominate any other
b. Summarize the ground/s for initiating the proceedings; qualified person to the position of rehabilitation
c. State the relief sought under this Act and any receiver at least 5 days before the initial hearing;
requirement or procedure particular to the relief q. Include a Stay or Suspension Order. (FR/A, Sec. 16)
sought;
d. State the legal effects of the Commencement Order; Effects of the Commencement Order
e. Declare that the debtor is under rehabilitation; a. Vest the rehabilitation with all the powers and functions
f. Direct the publication of the Commencement Order in provided for this Act, such as the right to review and
a newspaper of general circulation in the Philippines obtain records to which the debtor's management and
once a week for at least 2 consecutive weeks, with the directors have access, including bank accounts or
first publication to be made within 7 days from the time whatever nature of the debtor subject to the approval
of its issuance; by the court of the performance bond filed by the
g. If the petitioner is the debtor direct the service by rehabilitation receiver;
personal delivery of a copy of the petition on each b. Prohibit or otherwise serve as the legal basis rendering
creditor holding at least 10% of the total liabilities of the null and void the results of any extrajudicial .activity or
debtor as determined from the schedule attached to process to seize property, sell encumbered property,
the petition within 5 days; if the petitioner/s is/are or otherwise attempt to collection or enforce a claim
creditor/s, direct the service by personal delivery of a against the debtor after commencement date unless
copy of the petition on the debtor within 5 days; otherwise allowed in this Act, subject to the provisions
h. Appoint a rehabilitation receiver who may or not be of Section 50 hereof;
from among the nominees of the petitioner/s and who c. Exempt the debtor from liability for taxes and fees,
shall exercise such powers and duties defined in this including penalties, interests, and charges due to the
Act as well as the procedural rules that the Supreme government;
Court will promulgate; d. Serve as the legal basis for rendering null and void any
i. Summarize the requirements and deadlines for setoff after the commencement date of any debt owed
creditors to establish their claims against the debtor to the debtor by any of the debtor's creditors;
and direct all creditors to their claims with the court at e. Serve as the legal basis for rendering null and void the
least 5 days before the initial hearing; perfection of any lien against the debtor's property
Direct Bureau of internal Revenue (BIR) to file and after the commencement date; and
serve on the debtor its comment on or opposition to f. Consolidate the resolution of all legal proceedings by
the petition or its claim/s against the debtor under such and against the debtor to the court; provided, however,
procedures as the Supreme Court provide; that the court may allow the continuation of cases on
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other courts where the debtor had initiated the suit. (FR e. Must submit the name of the person designated to
Rules, Rule 2, Sec. 9) discharge the responsibilities and powers of a
rehabilitation receiver and the names of the employees
Effectivity and Duration of the Commencement Order and other persons authorized to assist the designated
The Commencement Order shall be effective for the representative, together with a sworn certification that
duration of the rehabilitation proceedings, unless: these persons possess the qualifications and none of
1. Earlier lifted by the court; the disqualifications required from natural persons;
2. The Rehabilitation P12...n is seasonably confirmed or f. Must submit a sworn undertaking, duly approved in
approved; or accordance with law, binding itself to be solidarily liable
3. The Rehabilitation proceedings are ordered terminated with the persons designated by it to discharge the
by the court FR Rules, Rule 2, Sec. 11) functions and responsibilities of a rehabilitation
receiver;
2. Rehabilitation Receiver g. Willing and able to file a bond in such amount as may
be determined by the court;
Rehabilitation Receiver h. Not disqualified to discharge the duties of a
The person or persons, natural or juridical, appointed as rehabilitation receiver under the Constitution and other
such by the court pursuant to this Act and which shall be relevant laws (FR Rules, Rule 2, Sec. 21)
entrusted with such powers and duties as set forth herein.
(FR Rules, Rule 1, Sec. 5[p]) Additional Requirements for Representatives of
Juridical Persons
Minimum Qualifications of a Rehabilitation Receiver a. Duly designated and authorized to act for and on
behalf of the juridical entity;
If the rehabilitation receiver is a natural person: b. Must be a director, officer, stockholder or partner of the
a. Citizen of the Philippines or a resident of the juridical entity; and
Philippines in the 6 months prior to nomination; c. Must submit a sworn undertaking that he shall be
b. Not been earlier dismissed as a rehabilitation receiver; solidarily liable with his firm for all the obligations and
c. As far as practicable, has expertise and acumen to responsibilities of a rehabilitation receiver. (FR Rules,
manage and operate a business similar in size and Rule 2, Sec. 21)
complexity of that of the debtor;
d. Has a general familiarity with the rights of creditors Other qualifications and disqualifications of the
subject to suspension of payment or rehabilitation and rehabilitation receiver shall be set forth in procedural rules,
a general understanding of the duties and obligations taking into consideration the nature of the business of the
of a rehabilitation receiver; debtor and the need to protect the interest of all
e. Of good moral character and with acknowledged stakeholders concerned.
integrity, impartiality and independence;
f. No conflict of interest; Principal Duties of the Rehabilitation Receiver
a. Preserving and maximizing the value of the assets of
9- Has an operating knowledge in management, finance,
and rehabilitation of distressed companies; and the debtor during the proceedings;
h. Willing and able to file a bond in such amount as b. Determining the viability of the rehabilitation;
determined by the court FR Rules, Rule 2, Sec. 21[A]) C. 7reparing and recommending a Rehabilitation Plan to
the court; and Implementing the approved
The conflict of interest requirement may be waived, Rehabilitation Plan (FR Rules, Rule 2, Sec. 26)
expressly or impliedly, by a party who may be prejudiced
thereby. (FR/A, Sec. 29[d]) Removal of a Rehabilitation Receiver
The rehabilitation receiver may be removed at any time by
If the rehabilitation receiver is a juridical person: the court, either motu proprio or upon motion by any
a. Duly authorized to do business in the Philippines for at creditor/s holding more than 50% of the total obligations of
least six (6) years prior to its appointment; the debtor (FR Rules, Rule 2, Sec. 27)
b. Good standing as certified by the appropriate
regulatory agency/ies;
c. No conflict of interest;
d. Not been earlier dismissed as a rehabilitation receiver;
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Grounds for Removal enumerated above may however waive his right to object
a. Incompetence, gross negligence, failure to perform or to such appointment and, if the waiver is unreasonably
failure to exercise the proper degree of tare in the withheld, the court may disregard the conflict of interest,
performance of his duties and powers; taking into account the general interest of the stakeholders.
b. Lack of a particular or specialized competency
required by the specific case; Management of Debtor's Business
c. Illegal acts or conduct in the performance of his duties General Rule: The management of the juridical debtor
and powers; shall remain with existing management.
d. Lack of qualification or presence of any
disqualification; Exception: Displacement of Existing Management by the
e. Conflict Of interest that arises after his appointment; Rehabilitation Committee
f. Manifest lack of independence that is detrimental to
the general body of the stakeholders; Upon motion of any interested party and within the soonest
g. Failure, without just cause, to perform any of his possible time, the court may appoint and direct the
powers and functions under these Rules; or rehabilitation receiver to assume the powers of
h. Any of the grounds for removing a trustee .under the management of the debtor, or appoint a management
general principles of trusts. committee that will undertake the management of the
debtor, upon clear and convincing evidence of any of the
Cases of Conflict of Interest following circumstances:
An individual shall be deemed to have a conflict of interest
if he is so situated as to be materially influenced in the (A) Actual or imminent danger of dissipation, loss,-wastage
exercise of his judgment for or against any party to the or destruction of the debtors as-sets or other properties; or
proceedings. Without limiting the generality of the (B) Paralyzation of the business operations of the debtor;
foregoing, an individual shall be deemed to have a conflict or
of interest if: (C) Gross mismanagement of the debtor, fraud or other
a. He is a creditor, owner, partner or stockholder of the wrongful conduct on the part of, or gross or willful violation
debtor; of the Act by the existing management of the debtor or the
b. He is engaged in a line of business which competes owner, partner, director, officer or representative/s in
with-that of the debtor; management of the debtor.
c. He is, or was, within 5 years from the filing Of the
petition, a director, officer, owner, partner or employee In case the court appoints the rehabilitation receiver to
of the debtor or any of the creditors, or the auditor or assume the management of the debtor, the court may:
accountant of the debtor;
d. He is, or was, within 2 years from the filing of the (1) Require the rehabilitation receiver to post an additional
petition, an underwriter of the outstanding securities of bond;
the debtor; (2) Authorize him to engage the services or to employ
e. is related by consanguinity or affinity -within the fourth persons or entities to assist him in the discharge of his
civil degree to any individual creditor, owner/s of a sale managerial functions; and
proprietorship-debtor, partners of a partnership-debtor (3) Authorize a commensurate increase in his
or to any stockholder, director, officer, employee or compensation.
underwriter of a corporation-debtor; or
f. He has any other direct or indirect material interest in Rules and Liability on Conflicting Decisions
the debtor or any of the creditors. (FR Rules, Rule 2, In case the rehabilitation receiver is a juridical person, the
Sec. 22) acts of its designated representative shall be presumed to
be carried out in accordance with the authority vested in
Any rehabilitation receiver, member of the management him by the juridical entity which he represents.
committee or persons employed or contracted by them
possessing any conflict of interest shall make the In case of conflict, the decision of the governing body of
appropriate disclosure either to the court or to the creditors the juridical entity shall prevail.
in case of out-of-court rehabilitation proceedings. Any party
to the proceeding adversely affected by the appointment of However, the rehabilitation receiver and its
any person with a conflict of interest to any of the positions representative/s shall remain solidarily liable for all
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obligations and responsibilities, subject to the right of d. Use the services of or employ such person or persons,
withdrawal prior to the implementation of the disputed such as lawyers, accountants, auditors, appraisers
decision. and staff as are necessary to perform its functions and
duties as management committee;
Note: Upon assumption of management, the receiver shall e. Report to the court any material adverse change in the
exercise the same powers granted under Sec. 26 in business of the entity under management;
addition to the powers granted to the management f. Evaluate the existing equity, capital, assets and
committee (FR Rules, Rule 2, Sec. 32) liabilities, earnings, and operations of the entity under
management;
3. Management Committee g. Determine and recommend to the court the best way
to salvage and protect the interest of the creditors,
Role of the Management Committee stockholders and the general public, including the
1. Take custody of and control all assets owned or rehabilitation of the entity under management;
possessed by the debtor; h. Prohibit and report to the court any encumbrance,
2. Take the place of the management and governing body transfer, or disposition of the debtor's property outside
of the debtor; and of the ordinary course of business or beyond what is
3. Assume the powers, rights and responsibilities of the allowed by the court
debtor (FR Rules, Rule 2, Sec. 33) i. Prohibit and report to the court payments made outside
the ordinary course of business;
Note: A majority of all members shall be necessary for the j. Have unlimited access to the employees, premises,
management committee to act or make a decision (FR books, records and financial documents of the entity
Rules, Rule 2, Sec. 35) under management during business hours;
k. Inspect, copy, photocopy or photograph any
Composition of the Management Committee document, paper, book, account or letter, whether in
The management committee shall be composed of three the possession of the entity or other persons, that
qualified members appointed by the court, as follows: pertain to the business of the debtor;
a. Nominated by the debtor; I. Gain entry into any property owned by he entity under
b. Nominated by the creditor/s holding more than 50% of management for the purposes of inspecting,
the total obligations of the debtor; measuring, surveying, or taking photos or videos of
c. A chairman nominated by the first and second any designated relevant object or operation thereon;
members within 10 days from the appointment (FR m. Bring to the attention of the court any material change
Rules, Rule 2, Sec. 34) affecting the entity's ability to meet its obligations;
n. Take the appropriate steps to modify, nullify, or revoke
The management committee may overrule or revoke the transactions coming to its knowledge which it deems
actions of the previous management or governing body of detrimental or prejudicial to the interest of the entity
the debtor (FR Rules, Rule Z Sec. 33) under management;
o. Recommend the termination of the proceedings and
Powers and Duties of the Committee the dissolution of the entity if it determines that the
The specific powers and duties of the management continuance in business of such entity will no longer
committee, whose members shall also be considered as work to the best interest of the stakeholders and
officers of the court, are the following: creditors;
a. Investigate the acts, conduct, properties, liabilities, and p. Apply to the court for any order or directive that it may
financial condition of the corporation, association or deem necessary or desirable to aid it in the exercise of
partnership under management; its powers and performance of its duties and functions,
b. Examine under oath the directors and officers of the including the power to examine parties and witnesses
entity and any other witnesses that the committee may under oath; and
deem appropriate; q. Exercise such other powers as the court may, from
c. Report to the court any ascertained fact pertaining to time to time confer upon it.
the causes of the problems, fraud, misconduct, (FR Rules, Rule 2, Sec. 33)
mismanagement and irregularities committed by any
other person;
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Qualifications of Members of the Management d. The Rehabilitation Plan would likely provide the
Committee objecting class of creditors with compensation, which
Same as with rehabilitation receivers (FR Rules, Rule 2, has a net present value greater than that which they
Sec. 36) would have received if the debtor were under
liquidation. (FR Rules, Rule 2, Sec. 62)
Immunity from Suit
The rehabilitation receiver, the members of the The rehabilitation receiver shall submit the approved Plan
management committee, and all persons they engage to the court for confirmation. Within five (5) days from
shall not be subject to any action, claim or demand for any receipt of the Rehabilitation Plan, the court shall notify the
act or omission in good faith in the exercise of their powers creditors that the Rehabilitation Plan has been submitted
and functions (FR Rules, Rule 2, Sec. 38) for confirmation. (FR Rules, Rule 2, Sec. 63)
4. Rehabilitation Plan Objections by creditors may be filed 20 days from notice

(FR Rules, Rule 2, Sec. 64).
Rehabilitation Plan
A plan by which the financial well-being and viability of an Grounds for Objection on the Rehabilitation Plan
insolvent debtor can be restored using various means a. The creditors' support was induced by fraud;
including, but not limited to, debt forgiveness, debt b. The documents or data relied upon in the
rescheduling, reorganization or quasi- reorganization, Rehabilitation Plan are materially false or
dacion en pago, debt-equity conversion and sale of the misleading; or
business (or parts of it) as a going concern, or setting-up c. The Rehabilitation Plan is in fact not supported by
of new business entity, or other similar arrangements as the voting creditors. (FR Rules, Rule 2. Sec. 64)
may be approved by the court or creditors. (FR/A, Sec.
4[4) Confirmation of the Rehabilitation Plan
The court shall issue an order confirming the Rehabilitation
Approval of the Rehabilitation Plan Plan in any of the following instances:
Within 20 days from notice to, creditors and stakeholders, a. No objections are filed within the twenty (20)-day
the creditors shall be convened for purposes of voting on period from receipt of notice from the court that a
the approval of the Rehabilitation Plan. The Plan shall be Rehabilitation Ran has been submitted to court;
deemed rejected unless approved by aIl classes of b. The court finds the objections lacking in merit;
creditors. (FR/A, Sec. 64) c. The basis for the objection has been cured; or
d. The debtor has-complied with the order to cure the
The Plan is deemed to have been approved by a class of objection.
creditors if members of the said class holding more than
50% of the total class vote in favor of the plan (FR Rules, The court may confirm the Rehabilitation Plan
Rule 2, Sec. 62) notwithstanding unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions for
Confirmation of Plan Notwithstanding Rejection paying such claims.
Notwithstanding the rejection of the Rehabilitation Plan,
the court may, motu proprio or upon motion of any If the court finds that there is no substantial likelihood that
interested party within ten (10) days from notice of the the debtor can be rehabilitated, it shall not confirm the
rejection of the Rehabilitation Plan, confirm the Plan if all Rehabilitation Plan and, instead, declare a failure of
of the following circumstances are present: rehabilitation.
a. The Rehabilitation Plan complies with the The court shall have the power to approve or implement
requirements specified in the FRIA and the FR Rules; the Rehabilitation Plan despite the lack of approval, or
b. The rehabilitation receiver recommends the objection from the owners, partners or stockholders of the
confirmation of the Rehabilitation Plan; insolvent debtor: provided, that the terms thereof are
C. The shareholders, owners or partners of the juridical necessary to restore the financial well-being and viability
debtor lose at least their controlling interest as a result of the insolvent debtor.
of the Rehabilitation Plan; and
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The order confirming the Rehabilitation Plan shall specify Maintain the security interest of secured creditors and
the portions approved by the court and the portions preserve the liquidation value of the security unless
rejected during consideration or cured by the rehabilitation such has been waived or modified voluntarily;
receiver. (FR Rules, Rule 2, Sec. 66) k. Disclose all payments to creditors for pre-
commencement debts made during the proceedings
The approval of the Rehabilitation Plan shall not affect the and the justifications thereof;
rights of creditors to pursue separate actions against I. Describe the disputed claims and the provisioning of
general partners of a partnership to the extent they are funds to account for appropriate payments should the
liable under relevant legislation for the debts thereof. (FR claim be ruled valid or its amount adjusted;
Rules, Rule 2, Sec. 68) m. Identify the debtor's role in the implementation of the
Plan;
Amounts of any indebtedness or obligations reduced or n. State any rehabilitation covenants of the debtor, the
forgiven in connection with a Plan's approval shall not be breach of which shall
subject to any tax. (FR Rules, Rule 2, Sec. 69) be considered a material breach of the Plan;
o. Identify those responsible for the future management
Minimum Contents of a Rehabilitation Plan of the debtor and the supervision and implementation
a. Specify the underlying assumptions, the financial of the Plan, their affiliation with the debtor and their
goals and the procedures proposed to accomplish remuneration;
such goals; p. Address the treatment of claims arising after the
b. Compare the amounts expected to be received by the confirmation of the Rehabilitation Plan;
creditors under the Rehabilitation Plan with those that q. Require the debtor and its counter-parties to adhere to
they will receive if liquidation ensues within the next the terms of all contracts that the debtor has chosen to
120 days; confirm;
c. Contain information sufficient to give the various r. Arrange for the payment of all outstanding
classes of creditors a reasonable basis for determining administrative expenses as a condition to the Plan's
whether supporting the Plan is in their financial interest approval unless such condition has been waived in
when compared to the immediate liquidation of the writing by the creditors concerned;
debtor, including any reduction of principal interest and s. Arrange for the payment of all outstanding taxes and
penalties' payable to the creditors; assessments, or an adjusted amount pursuant to a
d. Establish classes of voting creditors; compromise settlement with the BIR Or other
e. Establish subclasses of voting creditors if prior applicable tax authorities;
approval has been granted by the court; t. Include a certified copy of a certificate of tax clearance
f. Indicate how the insolvent debtor will be rehabilitated or evidence of a compromise settlement with the BIR;
including, but not limited to, debt forgiveness, debt u. Include a valid and binding resolution of a meeting of
rescheduling, reorganization or quasi- reorganization, the debtor's stockholders to increase the shares by the
dacion en pago, debt-equity conversion and sale of the required amount in cases where the Plan
business (or parts of it) as a going concern, or setting- contemplates an additional issuance of shares by the
up of a new business entity or other similar debtor;
arrangements as may be necessary to restore the v. State the compensation and status, if any, of the
financial well-being and viability of the insolvent rehabilitation receiver after the approval of the Plan;
debtor; and
g. Specify the treatment of each class or subclass w. Contain provisions for conciliation and/or mediation as
described in subsections (d) and (e); a prerequisite to court assistance or intervention in the
h. Provide for equal treatment of all claims within the event of any disagreement in the interpretation or
same class or subclass, unless a particular creditor implementation of the Rehabilitation Plan.
voluntarily agrees to less favorable treatment;
i. Ensure that the payments made under the plan follow G. Failure of Rehabilitation
the priority established under the provisions of the Civil
Code on concurrence and preference of credits and 1. Termination of Proceedings (Sec. 74)
other applicable laws; The rehabilitation proceedings, upon motion by any
stakeholder or the rehabilitation receiver, shall be
termination by order of the court either declaring a
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successful implementation of the rehabilitation plan or a

failure of rehabilitation. 2. Pre-Negotiated Rehabilitation
Pre-Negotiated Rehabilitation Plans, when approved by
There is Failure of Rehabilitation in the following the court, have the same legal effect as confirmation of a
cases: judicially supervised plan.
a. Dismissal of the petition by the court;
b. Debtor fails to submit a Rehabilitation Plan; Pre-Negotiated Rehabilitation Petition
c. Under the Rehabilitation Plan, there is no substantial An insolvent debtor, by itself or jointly with any of its
likelihood that the debtor can be rehabilitated within a creditors, may file a verified petition with the court for the
reasonable period; approval of a pre-negotiated Rehabilitation Plan which has
d. The Rehabilitation Plan or its amendment is approved been endorsed or approved by creditors holding at least
by the court but in the implementation, the debtor fails two-thirds (2/3) of the total liabilities of the debtor, including
to perform its obligations thereunder OR there is a secured creditors holding more than 50% of the total
failure to realize the objectives, targets or goals set secured claims of the debtor and unsecured creditors
forth therein, including the timelines and conditions for holding more than 50% of the total unsecured claims of the
the settlement of the obligations due to the creditors debtor.
and other claimants;
e. The commission of fraud in securing the approval of The petition shall include as a minimum:
the Rehabilitation Plan or its amendment; and a. Schedule of the debtor's debts and liabilities;
f. Other analogous circumstances as may be defined by b. Inventory of the debtor's assets;
the rules of procedure c. The pre-negotiated Rehabilitation Plan, including the
names of at least 3 qualified nominees for
2. Action of Court Upon Termination (Sec. 74) rehabilitation receiver; and
Upon -a breach of, or upon a failure of the Rehabilitation d. Summary of disputed claims against the debtor and a
Plan the court upon motion by an affected party may: report on the provisioning of funds to account for
a. Issue an order directing that the breach be cured within appropriate payments should any such. claim-s be ruled
a specified period of time, falling which the valid or their amounts adjusted.
proceedings may be converted to a liquidation;
b. Issue an order converting the proceedings to a If Petition Deemed Sufficient
liquidation; Within five (5) working days, and after determination that
c. Allow the debtor or rehabilitation receiver to submit the petition is sufficient in form and substance, -the court
amendments to the Rehabilitation Plan, the approval shall issue an Order which shall;
of which shall be governed by the same requirements a. 'Identify the debtor, its principal business of activity/ies
for the approval of a Rehabilitation Plan; and its principal place of business;
d. Issue any other order to remedy the breach consistent b. Declare that the debtor is under rehabilitation;
with the present regulation, other applicable law and c. Summarize the grounds for the filling of the petition;
the best interests of the creditors; or d. Direct the publication of the Order in a newspaper of
e. Enforce the-applicable provisions of the Rehabilitation general circulation in the Philippines once a week for
Plan through a writ of execution. at least 2 consecutive weeks. with the first publication
to be made within 7 days from the time of its issuance;
3. Effects of Termination (Sec. 75) e. Direct the service by personal delivery of a copy of the
Discharge of the rehabilitation receiver subject to this petition on each creditor who is not a petitioner holding
submission of a final accounting and Lifting of the Stay at least 10')/0 of the total liabilities -of the debtor, as
Oorder and any other court order holding in abeyance any determined in the schedule attached to the petition,
action for the enforcement of a claim against the debtor within 3 days;
f. State that copies of the petition and the Rehabilitation
Provided, however, that if the termination of proceedings Plan are available for examination and copying by any
is due to failure of rehabilitation or dismissal of the petition interested party;
for reasons other than technical grounds, the proceedings g. State that creditors and other interested parties
shall be immediately converted to liquidation as provided opposing the petition or Rehabilitation Plan may file
in Sec. 92. their objections or comments thereto within a period of
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not later than 20 days from the second publication of 7. Approved by creditors holding at least 85% of the total
the Order; liabilities, secured and unsecured, of the debtor.
h. Appoint a rehabilitation receiver, if provided for in the (Secs. 83 and 84)
Plan; and
Include a Suspension or Stay Order as described in b.Standstill Period
this Act. A standstill period that may be agreed upon by the parties
pending negotiation and finalization of the out-of-court or
Approval of the Pre-Negotiated Plan informal restructuring/workout agreement or Rehabilitation
Within 10 days from the date of the second publication of Plan contemplated herein shall be effective and
the Order, the court shall approve the Rehabilitation Plan enforceable not only against the contracting parties but
unless a creditor or other interested party submits an also against the other creditors: Provided, that:
objection to it in accordance with the next succeeding a. Such agreement is approved by creditors
section. representing more than 50% of the total
liabilities of the debtor;
Objections to the Pre-Negotiated Plan b. Notice thereof is published in a newspaper of
Any creditor or other interested party may submit to the general circulation in the Philippines once a
court a verified objection to the petition or the week for 2 consecutive weeks; and
Rehabilitation Plan not later than 8 days from the date of c. The Standstill period DOES NOT exceed 120
the second publication of the Order. days from the date of effectivity
The grounds for objection are limited to the following: Note: Notice must invite creditors to participate in the
a. Allegations in the petition or the Rehabilitation Plan or negotiation for out-of-court rehabilitation or restructuring
the attachments thereto are materially false or agreement and notify them that said agreement will be
misleading; binding on all creditors if the required majority votes
b. Majority of any class of creditors do not in fact support prescribed in Sec. 84 are met.
the Rehabilitation Plan;
c. The Rehabilitation Plan fails to accurately account for c.Cram Down Effect
a claim against the debtor and the claim in not
categorically declared as a contested claim; or Two Aspects of the Cram Down Power of The
d. Support of the creditors, or any of them was induced Rehabilitation Court
by fraud. a. Approval despite opposition; and
b. Binding effect of the approved plan
Copies of any objection to the petition of the Rehabilitation Cram-Down
Plan shall be served on the debtor, the rehabilitation The power of the rehabilitation court to approve and
receiver (if applicable), the secured creditor with the largest implement a rehabilitation plan notwithstanding the
claim and who supports the Rehabilitation Plan, and the objection of the majority of creditors. The "cram-down"
unsecured creditor with the largest claim and who supports clause is necessary to curb the majority creditors' natural
the Rehabilitation Plan. tendency to dictate their own terms and conditions to the
rehabilitation, absent due regard to the greater long-term
3. Out of Court or Informal Rehabilitation benefit of all stakeholders. Otherwise stated, it forces the
creditors to accept the terms and conditions of the
a.Minimum Requirements rehabilitation plan, preferring long-term viability over
For an out-of-court or informal restructuring/workout immediate but incomplete recovery. (Bank of the Philippine
agreement or Rehabilitation Plan to qualify, it must meet Islands vs. Sarabia Manor Hotel Corporation, GR No.
the following minimum requirements: 175844, 2013)
4. Debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation The Court may approve a rehabilitation plan over the
Plan; objection of the creditors, if, in its judgment, the
5. Approved by creditors representing at least 67% of the rehabilitation of the debtors is feasible and the opposition
secured obligations of the debtor; of the creditors is manifestly unreasonable. The criteria for
6. Approved by creditors represent at least 75% of the manifest unreasonableness are:
unsecured obligations of the debtor; and
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a. The rehabilitation plan complies with the requirements

specified in Section 18 of Rule 3, A.M. No. 00-8-10- The issuance of the Commencement Order and the
SC; Suspension or Stay Order, and any other provision of the
b. The rehabilitation plan would provide the objecting Act, shall not in any way diminish or impair the security or
class of creditors with payments whose present value lien of a secured creditor, or the value of his lien or security,
projected in the plan would be greater than that which except that his right to enforce the security or lien may be
they would have received if the assets of the debtor suspended during the term of the Stay Order. The court
were sold by a liquidator within a six (6)month period may allow the enforcement of the security or lien if the
from the date of filing of the petition; and property is not necessary fo,r the rehabilitation of the
c. The rehabilitation receiver has recommended approval debtor. (FR Rules, Rule 2, Sec. 59)
of the plan. (Victorio-Aquino v. Pacific Plans, G.R. No.
193108, 2014) The Stay or Suspension Order does not apply in the
following cases:
Effects of Confirmation of Rehabilitation Plan a. Cases already pending appeal in the Supreme Court
a. The Plan and its provisions shall bind the debtor and as of commencement date Provided, That any final
all persons who may be affected thereby, including the and executory judgment arising from such appeal shall
creditors, whether or not such persons have be referred to the court for appropriate action;
participated in the proceedings or opposed the Plan or b. Subject to the discretion of the court, to cases pending
whether or not their claims have been scheduled; or filed at a specialized court or quasi-judicial agency
b. The debtor shall comply with the provisions of the Plan which, upon determination by the court is capable of
and shall take all actions necessary to carry them out; resolving the claim more quickly, fairly and efficiently
c. Payments shall be made to the creditors in accordance than the court; Provided, That any final and executory
with the provisions of the Plan; judgment of such court or agency shall be referred to
d. Contracts and other arrangements between the debtor the court and shall be treated as a non-disputed claim;
and its creditors shall remain valid and continue to c. Enforcement of claims against sureties and other
apply to the extent that they do not conflict with the persons solidarily liable with the debtor, and third party
provisions of the Plan; or accommodation mortgagors as well as issuers of
e. Any compromises on amounts or rescheduling of letters of credit, unless the property subject of the third
timing of payments by the debtor shall be binding on party or accommodation mortgage is necessary for the
the creditors regardless of whether or not the Plan is rehabilitation of the debtor as determined by the court
successfully implemented; and upon recommendation by the rehabilitation receiver;
f. Claims arising after the approval of the Plan that are d. Any form of action of customers or clients of a
otherwise not treated by the Plan are not subject to any securities market participant to recover or otherwise
Suspension Order. (FR Rules, Rule 2, Sec. 67) claim moneys and securities entrusted to the latter in
the ordinary course of the latter's business as well as
D. Stay or Suspension Order any action of such securities market participant or the
appropriate regulatory agency or self-regulatory
A Stay or Suspension Order has the following effects: organization to pay or settle such claims or liabilities;
a. Suspend all actions or proceedings, in court or e. Actions of a licensed broker or dealer to sell pledged
otherwise, for the enforcement of claims against the securities of a debtor pursuant to a securities pledge
debtor; or margin agreement for the settlement of securities
b. Suspend all actions to enforce any judgment, transactions in accordance with the provisions of the
attachment or other provisional remedies against the Securities Regulation Code and its implementing rules
debtor; and regulations;
c. Prohibit the debtor from selling, encumbering, f. Clearing and settlement of financial transactions
transferring or disposing in any manner any of its through the facilities of a clearing agency or similar
properties except in the ordinary course of business; entities duly authorized, registered and/or recognized
and by the appropriate regulatory agency like the Bangko
d. Prohibit the debtor from making any payment of its Sentral ng Pilipinas (BSP) and the SEC as well as any
liabilities outstanding as of the commencement date form of actions of such agencies or entities to
except as may be provided herein. (FR Rules, Rule 1, reimburse themselves for any transactions settled for
Sec. 51r- 1) the debtor; and
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g. Any criminal action against individual debtor or owner, c. Schedule of the debtor's debts and liabilities including
partner, director or officer of a debtor shall not be a list of creditors with their addresses, amounts of
affected by any proceeding commend under this Act. claims and collaterals, or securities, if any;
(FR Rules, Rule 2, Sec. 10) d. Inventory of all its assets including receivables and
claims against third parties; and
C. Liquidation e. Schedule of current income and expenditures within
three (3) months prior to the filing of the petition;
a. Kinds of Debtors f. List of all properties acquired by the debtor in the
immediately preceding two (2) years;
i. Juridical Debtors g. List of all properties sold, disposed of, or donated by
the debtor in the immediately preceding two (2) years;
1. Voluntary Liquidation h. Schedule of the debtor's executory contracts and
unexpired leases;
Party Applicant i. Audited financial statements of the debtor for the
An insolvent debtor may apply for liquidation by filing a immediately preceding three (3) years; and
petition for liquidation Income tax return of the debtor for the immediately
preceding year
Where to file the application
RTC which has jurisdiction over its principal office as 2. Involuntary Liquidation
specified in its articles of incorporation or partnership.
Where the principal office of the corporation or partnership Party Applicant to Petition for Liquidation
as registered with the Securities and Exchange The applicants must be made up of 3 or more creditors
Commission (SEC) is in Metro Manila, the petition must be whose claim(s) is/are:
filed in the RTC Court of the city or municipality where the a. At least P1,000,000; or
head office is located. b. At least 25% of the subscribed capital stock or
partners' contributions (FLSP Rules, Rule 2, Sec.
Petition for Voluntary Liquidation 4)
The petition shall be verified, shall establish the insolvency
of the debtor and shall indicate the names of at least 3 Where to file the Petition
nominees to the position of liquidator. RTC which has jurisdiction over its principal office as
specified in its articles of incorporation or partnership.
Where the principal office of the corporation or partnership
It shall include, as minimum attachments, the following: as registered with the Securities and Exchange
a. Certificate attesting to the holding of a meeting of the Commission (SEC) is in Metro Manila, the petition must be
Board of Directors of a stock corporation or the Board filed in the RTC Court of the city or municipality where the
of Trustees of a non-stock corporation, as the case head office is located.
may be, called for the purpose and the approval during
the meeting of a resolution to file the petition, signed Petition for Involuntary Liquidation
by the secretary of the meeting and at least a majority The motion shall be verified, shall indicate the names of at
of the member of the Board present during the least 3 nominees to the position of liquidator, and must
meeting; show that:
b. Certificate attesting to the holding of a meeting of the a. There is no genuine issue of fact or law on the claims/s
stockholders, members or partners comprising the of the petitioner/s, and that the due and demandable
debtor, as the case may be, called for the purpose and payments thereon have not been made for at least one
the approval during the meeting of a resolution to file hundred eighty (180) days or that the debtor has failed
the petition by the stockholders holding at least two- generally to meet its liabilities as they fall due; and
thirds (2/3) of the outstanding capital stock of the stock b. There is no substantial likelihood that the debtor may
corporation, or two-thirds (2/3) of the members or be rehabilitated
partners in case of a non-stock corporation,
association or partnership, as the case may be, signed The petition shall also include information to the best
by the chairman and the secretary of the meeting knowledge of the petitioners on:
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a. The schedule of debts and liabilities, including a list of Court Action in Suspension of Payments
its known creditors with their addresses, amounts of If the court finds the petition sufficient in form and
claims and collaterals, or securities, if any; substance, it shall, within 5 working days from the filing of
b. The debtor's assets, including receivables and claims the petition, issue a Suspension of Payments Order:
against third parties; and a. Prohibiting creditors from suing or instituting
C. Audited financial statements of the debtor for the proceedings for collection against the debtor, except:
immediately preceding three (3) years. (FLSP Rules, (i) creditors having claims for personal labor,
Rule 2, Sec. 4) maintenance, expense of last illness and funeral of the
wife or children of the debtor incurred within 60 days
The petitioners shall post a bond in an amount at least immediately prior to the filing of the petition; and (ii)
equal in value to the aggregate of their claims, conditioned secured creditors;
upon payment to the debtor of all expenses and damages b. Calling a meeting of all the creditors named in the
it may incur by reason of the filing of the petition if the same schedule of debts and 'liabilities at such time not less
is later denied or dismissed by the court, or withdrawn by than 15 days nor more than 40 days from the date of
the petitioners without the consent of the debtor. (FLSP such Order and designating the date, time and place
Rules, Rule 2, Sec. 5) of the meeting;
c. Directing such creditors to prepare and present written
ii. Individual Debtors evidence of their claims before the scheduled
creditors' meeting;
1. Suspension of Payments d. Directing the publication of the said order in a
newspaper of general circulation published in the
Party Applicant province or city in which the petition is filed once a
An individual debtor who, possessing sufficient property to week for 2 consecutive weeks, with the first publication
cover all his debts but foreseeing the impossibility of to be made within seven 7 days from the time of the
meeting them when they respectively fall due, may file a issuance .of the Order;
verified petition that he be declared in the state of e. Directing the -clerk of court to cause the sending of a
suspension of payments by the court of the province or city copy of the Order by -registered mail, postage prepaid,
in which he has resides for six (6) months prior to the filing to all creditors named in the schedule of debts and
of his petition. (FLSP Rules, Rule 3, Sec. 1) liabilities;
f. Forbidding the individual debtor from selling,
Petition for Suspension of Payments transferring, encumbering or disposing in any manner
The petition shall indicate the names of at least 3 nominees of his property, except those used in the ordinary
to the position of commissioner and shall include, as operations of commerce or of industry in which the
minimum attachments, the following: petitioning individual debtor is engaged so long as the
a. Schedule of debts and liabilities, including a list of proceedings relative to the suspension of payments
creditors with their addresses, amount of claims and are pending;
collaterals, if any; g. Prohibiting the individual debtor from making any
b. Inventory of all the debtor's assets, including payment outside of the necessary or legitimate
receivables and claims against third parties; expenses of his business or industry, so long as the
c. Schedule of current income and expenditures within proceedings relative to the suspension of payments
three (3) months prior to the filing of the petition; are pending; and
d. Income tax return of the debtor for the immediately h. Appointing a commissioner to preside over the
preceding year; creditors' meeting. (FLSP Rules, Rule 3, Sec. 2)
e. List of all properties acquired by the debtor in the
immediately preceding two (2) years; Actions Suspended by a Suspension Order
f. List of all properties sold, disposed of, or donated by Upon motion filed by the individual debtor, the court may
the debtor in the immediately preceding two (2) years; issue an order suspending any pending execution against
g. Schedule of the debtor's executory contracts and the individual debtor. Properties held as security by
unexpired leases; and secured creditors shall not be the subject of such
h. Proposed agreement with the creditors. (FLSP Rules, suspension order.
Rule 3, Sec. 1)
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The suspension order shall lapse when three (3) months Acts of Insolvency
shall have passed without the proposed agreement being The following shall be considered acts of insolvency, and
accepted by the creditors or as soon as such agreement is the petition for liquidation shall set forth or allege at least
denied. (FLSP Rules, Rule 3, Sec. 3) one of such acts:
a. Such person is about to depart or has departed from
2. Voluntary Liquidation the Republic of the Philippines, with intent to defraud
his creditors;
Party Applicant b. Being absent from the Republic of the Philippines, with
An individual debtor whose properties are not sufficient to intent to defraud his creditors, he remains absent;
cover his liabilities, and owing debts exceeding c. He conceals himself to avoid the service of legal
Php500,000.00, may apply to be discharged from his debts process for the purpose of hindering or delaying the
and liabilities by filing a verified petition with the court of the liquidation or of defrauding his creditors;
province or city in which he has resided for 6 months prior d. He conceals, or is removing, any of his property to
to the filing of such petition. (FLSP Rules, Rule 3, Sec. 11) avoid its being attached or taken on legal process;
e. He has suffered his property to remain under
Petition for Voluntary Liquidation attachment or legal process for 3 days for the purpose
The petition shall indicate the names of at least 3 nominees of hindering or delaying the liquidation or of defrauding
to the position of commissioner and shall include, as his creditors;
minimum attachments, the following: f. He has confessed or offered to allow judgment in favor
a. Schedule of debts and liabilities, including a list of of any creditor or claimant for the purpose of hindering
creditors with their addresses, amount of claims and or delaying the liquidation or of defrauding any
collaterals, if any; creditors or claimant;
b. Inventory of all the debtor's assets, including g. He has willfully suffered judgment to be taken against
receivables and claims against third parties; him by default for the purpose of hindering or delaying
c. Schedule of current income and expenditures within the liquidation or of defrauding his creditors;
three (3) months prior to the filing of the petition; h. He has suffered or procured his property to be taken
d. Income tax return of the debtor for the immediately on legal process with intent to give a preference to one
preceding year; or more of his creditors and thereby hinder or delay the
e. List of all properties acquired by the debtor in the liquidation or defraud any one of his creditors;
immediately preceding two (2) years; i. He has made any assignment, gift, sale, conveyance
f. List of all properties sold, disposed of, or donated by or transfer of his estate, property, rights or credits with
the debtor in the immediately preceding two (2) years; intent to hinder or delay the liquidation or defraud his
and creditors;
g. Schedule of the debtor's executory contracts and He has, in contemplation of insolvency, made any
unexpired leases (FLSP Rules, Rule 3, Sec. 11) payment, gift, grant, sale, conveyance or transfer of his
estate, property, rights or credits;
If the court finds the petition sufficient in form and k. Being a merchant or tradesman, he has generally
substance it shall, within five (5) working days issue the defaulted in the payment of his current obligations for
Liquidation Order (FLSP Rules, Rule 3, Sec. 12) a period of 30 days;
I. For a period of 30 days, he has failed, after demand,
Note: The official copy of the FLSP Rules states Rule 3, to pay any moneys deposited with him or received by
Sec. 12 as Rule 3, Sec. 3. him in a fiduciary; and
m. An execution having been issued against him on final
3. Involuntary Liquidation judgment for money, he shall have been found to be
without sufficient property subject to execution to
Party Applicant satisfy the judgment. (FLSP Rules, Rule 3, Sec. 13)
Any creditor or group of creditors with a claim of, or with
claims aggregating at least Php500,000.00 may file a Court Action in Involuntary Liquidation
verified petition for liquidation with the court of the province The court shall issue an Order requiring the individual
or city in which the individual debtor resides. (FLSP Rules, debtor to show cause, at a time and place to be fixed by
Rule 3, Sec. 13) the said court, why he should not be adjudged an insolvent.
(FLSP Rules, Rule 3, Sec. /5)
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b. At least 25% of the subscribed capital stock or

Upon good cause shown, the court may issue an Order partners' contributions
forbidding the individual debtor from making payments of
any of his debts, and transferring any property belonging The motion shall be verified & shall contain/set forth the
to him. However, nothing contained herein shall affect or same matters mentioned in the FLSP Rules, Sec. 4. (FLSP
impair the rights of a secured creditor to enforce his lien in Rules, Rule 2, Sec. 6)
accordance with its terms.
Action on the Petition or Motion
2. Procedure If the petition or motion is sufficient in form and substance,
the court shall issue an Order:
i. Conversion of Rehabilitation Proceedings to • Directing the publication of the petition or motion in a
Liquidation Proceedings newspaper of general circulation once a week for 2
During the pendency of court-supervised or pre-negotiated consecutive weeks;
rehabilitation proceedings, the court may order the • Directing the debtor and all creditors who are not the
conversion of rehabilitation proceedings to liquidation petitioners to file their comment on the petition or
proceedings pursuant to: motion within 15 days from the date of last publication;
a. Section 25(c) of the FRIA which states that and
conversions can be done when the debtor is insolvent • Directing that a copy of the petition or motion be served
and there is no substantial likelihood for the debtor to on the debtor and on all known creditors, unless they
be successfully rehabilitated; or exceed 20 in number, in which case, service shall be
b. Section 72 of the FRIA or if no Rehabilitation Plan is made on at least the first 20 largest known creditors of
confirmed within 1 year from the date of the filing of a the debtor in terms of credits held. However, if there
petition to confirm the rehabilitation plan, the are more than 20 known creditors (who are not
proceedings may, upon motion or motu proprio, be petitioners) and one or more of them acquired their
converted into one for the liquidation of the debtor; or credit/s within the 6-month period immediately
c. Section 75 of the FRIA or if termination of proceedings preceding the filing of the petition, the number of
is due to failure of rehabilitation or dismissal of the creditors to be served copies of the petition shall be
petition for reasons other than technical grounds, the increased by the same number.
proceedings shall be immediately converted to
liquidation; or If, after considering the comments filed, the court
d. Section 90 of the FRIA or if during the pendency of determines that the petition or motion is meritorious, it shall
court-supervised or pre-negotiated rehabilitation issue the Liquidation Order. (FLSP Rules, Rule 2, Sec. 8)
proceedings, the debtor may also initiate liquidation
proceedings by filing a motion in the same court where After notice and hearing, the court where rehabilitation
the rehabilitation proceedings are pending to 'convert proceedings are pending may also order the conversion of
the rehabilitation proceedings into liquidation rehabilitation proceedings into liquidation proceedings in
proceedings. those cases authorized by law, or at any other time upon
e. At any other time upon the recommendation of the the recommendation of the rehabilitation receiver or
rehabilitation receiver that the rehabilitation of the management committee that the rehabilitation of the
debtor is not feasible. debtor is no longer feasible. (FLSP Rules, Rule 2, Sec. 9)
Motion to Convert Rehabilitation Proceedings Into Thereupon, the court shall issue the Liquidation Order.
Liquidated Proceedings
At any time during the pendency of or after a rehabilitation ii. Liquidation Order
court-supervised or pre-negotiated rehabilitation The Liquidation Order shall:
proceedings, creditors may compel a debtor who is a. Declare the debtor insolvent;
undergoing rehabilitation to liquidate instead. The following b. Order the liquidation of the debtor and, in the case of
are the requisites: a juridical debtor, declare it as dissolved;
c. Order the sheriff to take possession and control of all
The applicants must be made up of 3 or more creditors the property of the debtor, except those that may be
whose claim(s) is/are: exempt from execution;
a. At least P1,000,000; or
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d. Order the publication of the petition or motion in a a. Waive his right under the security or lien, prove his
newspaper of general circulation once a week for 2 claim in the liquidation proceedings and share in the
consecutive weeks; distribution of the assets of the debtor; or
e. Direct payments of any claims and conveyance of any b. Maintain his rights under the security or lien.
property due the debtor to the liquidator;
f. Prohibit payments by the debtor and the transfer of any Failure to file a manifestation means that the secured
property by the debtor; creditor is deemed to have opted to maintain his right
g. Direct all creditors to file their claims with the liquidator under the security or lien (FLSP Rules, Rule 4, Sec. 5)
within the period set by the rules of procedure
h. Authorize the payment of administrative expenses as Nature of Waiver
they become due; A secured creditor shall not be deemed to have waived his
i. State that the debtor and creditors who are not right under the security or lien unless the waiver is made in
petitioneris may submit the names of other nominees a public document, in unequivocal language, and with full
to the position of liquidator; and knowledge of the consequences of his action. If a secured
Set the case for hearing for the election and creditor waives his right, he shall be entitled to participate
appointment of the liquidator, which date shall not be in the liquidation proceedings as an unsecured creditor.
less than 30 days nor more than 45 days from the date (FLSP Rules, Rule 4, Sec. 6)
of the last publication. (FLSP Rules, Rule 4, Sec. 2)
If the secured creditor maintains his rights under the
iii. Effects of the Liquidation Order security or lien:
Upon issuance of the Liquidation Order: a. The value of the property may be fixed in a manner
a. Juridical debtor shall be deemed dissolved and its agreed upon by the creditor and the liquidator. When
corporate or juridical existence terminated; the value of the property is less than the claim it
b. Legal title to and control of all the assets of the debtor, secures, the liquidator may convey the property to the
except those that may be exempt from execution, shall secured creditor and the latter will be admitted in the
be deemed vested in the liquidator or, pending his liquidation proceedings as a creditor for the balance. If
election or appointment, with the court; its value exceeds the claim secured, the liquidator may
c. All contracts of the debtor shall be deemed terminated convey the property to the creditor and waive the
and/or breached, unless the liquidator, within 90 days debtor's right of redemption upon receiving the excess
from the date of his assumption of office, declares from the creditor;
otherwise and the contracting party agrees; b. Liquidator may sell the property and satisfy the
d. No separate action for the collection of an unsecured secured creditor's entire claim from the proceeds of the
claim shall be allowed. Such actions already pending sale; or
will be transferred to the Liquidator for him to accept c. Secure creditor may enforce the lien or foreclose on
and settle or contest. If the liquidator contests or the property pursuant to applicable laws. (FLSP Rules,
disputes the claim, the court shall allow, hear and Rule 4, Sec. 7)
resolve such contest except when the case is already
on appeal. In such a case, the suit may proceed to Powers, Duties, and Responsibilities of the Liquidator
judgment, and any final and executor judgment therein
for a claim against the debtor shall be filed and allowed The Liquidator
in court; and The Liquidator is a natural person or juridical entity
e. No foreclosure proceeding shall be allowed for a appointed as such by the court and entrusted with such
period of 180 days. (FLSP Rules, Rule 4, Sec. 3) powers and duties.
iv. Rights of Secured Creditors If the liquidator is a juridical entity, it must designated a
The Liquidation Order shall not affect the right of a secured natural person who possesses all the qualifications and
creditor to enforce his lien in accordance with the none of the disqualifications as its representative, it being
applicable contract or law, unless he waives his right. understood that the juridical entity and the representative
(FLSP Rules, Rule 4, Sec. 4) are solidarity liable for all obligations and responsibilities of
the liquidator. (FLSP Rules, Rule 4, Sec. 8)
Options available to a secured creditor
A secured creditor may:
Page 247 of 250
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Election of a Liquidator and recovering the assets of the debtor, with the end of
The creditors entitled to vote will elect the liquidator in open liquidating them and discharging to the extent possible all
court. The nominee receiving the highest number of votes the claims against the debtor. The powers, duties and
cast in terms of amount of claims and who is qualified shall responsibilities of the liquidator shall include, but not
be appointed as the liquidator. limited to:
a. Sue and recover all the assets, debts and claims,
Only creditors who have filed their claims within the period belonging or due to the debtor;
set by the court, and whose claims are not barred by the b. Take possession of all the property of the debtor
statute of limitations, will be allowed to vote in the election except property exempt by law from execution;
of the liquidator. c. Sell, with the approval of the court, any property of the
A secured creditor will not be allowed to vote unless: debtor which has come into his possession or control;
a. He waives his security or lien; or d. Redeem all mortgages and pledges, and so satisfy any
b. Has the value of the property subject of his judgement which may be an encumbrance on any
security or lien fixed by agreement with the property sold by him;
liquidator, and is admitted for the balance of his e. Settle all accounts between the debtor and his
claim. (FLSP Rules, Rule 4, Sec. 9) creditors, subject to the approval of the court;
f. Recover any property or its value, fraudulently
Appointment of a Liquidator conveyed by the debtor;
The court may appoint the liquidator if: g. Recommend to the court the creation of a creditors'
a. On the date set for the election of the liquidator, committee which will assist him in the discharge of the
the creditors do not attend; functions and which shall have powers as the court
b. Creditors who attend, fail or refuse to elect a deems just, reasonable and necessary; and
liquidator; h. Upon approval of the court, to engage such
c. After being elected, the liquidator fails to qualify; professional as may be necessary and reasonable to
or assist him in the discharge of his duties.
d. Vacancy occurs for any reason whatsoever, In any
of the cases provided herein, the court may In addition to the rights and duties of a rehabilitation
instead set another hearing of the election of the receiver, the liquidator, shall have the right and duty to take
liquidator. all reasonable steps to manage and dispose of the debtor's
assets with a view towards maximizing the proceedings
Qualifications of a Liquidator therefrom, to pay creditors and stockholders, arid to
The liquidator shall have the same qualifications as the terminate the debtor's legal existence. Other duties of the
rehabilitation receiver: liquidator in accordance with this section may be
• Citizen of the Philippines or a resident of the established by procedural rules. (FLSP Rules, Rule 4, Sec.
Philippines in the 6months immediately preceding 12)
his nomination;
• Good moral character and with acknowledged Removal of Liquidator
integrity, impartiality and independence; The liquidator may be removed at any time by the court
• Has the requisite knowledge of insolvency and either motu proprio or upon motion by the debtor or any
other relevant commercial laws, rules and creditor or creditors on any of the following grounds:
procedures, as well as the relevant training and/or a. He did not actually receive the highest number of votes
experience that may be necessary to enable him during the election for liquidator;
to properly discharge the duties and obligations of b. Incompetence, gross negligence, failure to -perform or
a rehabilitation receiver; and exercise the proper degree of care in the performance
• Has no conflict of interest: Provided, That such of his duties and powers;
conflict of interest may be waived, expressly or c. Lack of a particular or specialized competency
impliedly, by a party who may be prejudiced required by the specific case;
thereby. (FLSP Rules, Rule 4, Sec. 8) d. Illegal acts or conduct in the performance of his duties
and powers;
Powers, Duties and Responsibilities of a Liquidator e. Lack of any of the qualifications stated under Section
The liquidator shall be deemed an officer of the court with 8 of the FLSP Rules or presence of any
the principal duly of preserving and maximizing the value disqualification;
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f. Conflict of interest, unless, waived, expressly or If the debtor and creditor are mutually debtor and creditor
impliedly, by a party who may be prejudiced thereby; of each other, one debt shall be set off against the other
9- Partiality or lack of independence; or and only the balance, if any, shall be allowed in the
h. Any other ground analogous to the foregoing. (FLSP liquidation proceedings. (FLSP Rules, Rule 4, Sec. 18)
Rules, Rule 4, Sec. 13)
vii. Liquidation Plan
3. Determination of Claims Within 3 months from his assumption into office, the
Liquidator shall submit a Liquidation Plan to the court. The
Registry of Claims Liquidation Plan shall, as a minimum enumerate all the
Within 20 days from his assumption into office the assets of the debtor and a schedule of liquidation of the
liquidator shall prepare a preliminary registry of claims of assets and payment of the claims. (FLSP Rules, Rule 4,
secured and unsecured creditors. Secured creditors who Sec. 23)
have waived their security or lien, or have fixed the value
of the property subject of their security or lien by Properties Exempt from Liquidation
agreement with the liquidator and is admitted as a creditor It shall be the duty of the court, upon petition and after
for the balance, shall be considered as unsecured hearing, to exempt and set apart, for the use and benefit of
creditors. the said insolvent, such real and personal property as is by
law exempt from execution, and also a homestead.
The liquidator shall make the registry available for public
inspection and provide publication notice to creditors, However, no such petition shall be heard as aforesaid until
individual debtors owner/s of the sole proprietorship- it is first proved that notice of the hearing of the application
debtor, the partners of the partnership-debtor and therefor has been duly given by the clerk, by causing such
shareholders or members of the corporation-debtor, on notice to be posted it at least 3 public places in the province
where and when they may inspect it. All claims must be or city at least 10 days prior to the time of such hearing,
duly proven before being paid. (FLSP Rules, Rule 4, Sec. which notice shall set forth the name of the said insolvent
17) debtor, and the time and place appointed for the hearing of
such application, and shall briefly indicate the homestead
Challenging/Opposing Claims sought to be exempted or the property sought to be set
Within thirty 30 days from the expiration of the period for aside; and the decree must show that such proof was
filing of applications for recognition of claims: made to the satisfaction of the court, and shall be
1. creditors, conclusive evidence of that fact.
2. individual debtors,
3. owner/s of the sole proprietorship-debtor, Preference of Credit
4. partners of the partnership-debtor and The Liquidation Plan and its Implementation shall ensure
5. shareholders or members of the corporation-debtor that the concurrence and preference of credits as
and enumerated in the Civil Code and other relevant laws shall
6. other interested parties be observed, unless a preferred creditor voluntarily waives
his preferred right. For purposes of this chapter, credits for
may submit a challenge to claim or claims to the cOurt, services rendered by employees or laborers to the debtor
serving a certified copy on the liquidator and the creditor shall enjoy first preference under Article 2244 of the Civil
holding the challenged claim. Code, unless the claims constitute legal liens under Article
2241 and 2242 thereof. (FLSP Rules, Rule 4, Sec. 25)
Upon the expiration of the 30 day period, the rehabilitation
receiver shall submit to the court the registry of claims Court Action upon Completion of Liquidation —
containing the undisputed claims that have not been Removal from Registry of Legal Entries and
subject to challenge. Such claims shall become final upon Termination of Liquidation Proceeding
the filling of the register and may be subsequently set aside Upon determining that the liquidation has been completed,
only on grounds or fraud, accident, mistake or inexcusable the court shall issue an Order approving the report and
neglect. (FLSP Rules, Rule 4, Sec. 19) ordering the SEC to remove the debtor from the registry of
legal entities.
Right of Set-Off
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Upon receipt of evidence showing that the debtor has been

removed from the registry of legal entities at the SEC, the
court shall issue an Order terminating the proceedings.
(FLSP Rules, Rule 4, Sec. 29)
E. Remedies
1. Motion for Reconsideration

a. For Suspension of Payments
A party may file a motion for reconsideration of a
Suspension of Payments Order, or any order issued by the
court prior to its order confirming or disapproving the
proposed agreement. No relief can be extended to the
party aggrieved by the court's order on the motion through
a special civil action for certiorari under Rule 65 of the
Rules of Court. (Rule 5, Sec. I of FLSP Rules)
b. In Liquidation Proceedings
A party may file a motion for reconsideration of any order
issued by the court prior to the issuance of the Liquidation
Order. No relief can be extended to the party aggrieved by
the Court's order on the motion through a special civil
action for certiorari under Rule 65 of the Rules of Court.
(Rule 5, Sec. 3 of FLSP Rules)
2. Petition for Certiorari

a. For Suspension of Payments
The Court's dismissal of the petition for suspension of
payments on the ground of insufficiency in form and
substance resulting in the non-issuance of a Suspension
of Payments Order, and its order confirming or
disapproving the proposed agreement can only be
reviewed through a petition for certiorari to the Court of
Appeals under Rule 65 of the Rules of Court within 15 days
from notice of order. (Rule 5, Sec. 2 of FLSP Rules)
b. In Liquidation Proceedings
The Liquidation Order and the order approving or
disapproving the Liquidation Plan can only be reviewed
through a petition for certiorari to the Court of Appeals
under Rule 65 of the Rules of Court within 15 days from
notice of order. (Rule 5, Sec. 4 of FLSP Rules)
end of topic
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ATENEO

JORGE ALFONSO C. MELO

ATENEO CENTRAL BAR OPERATIONS

PATRICK EDWARD BALISONG

KATRINA Y. COSCOLLUELA JONATHAN VICTOR NOEL CZARINA CHER CUERPO

DEAN JOSE MARIA HOFILENA

I. LETTERS OF CREDIT AND TRUST RECEIPTS

II. NEGOTIABLE INSTRUMENTS LAW

III. INSURANCE CODE

V. CORPORATION LAW (Provisions of BP 68, not affected by RA 11232)

VI. SECURITIES REGULATION CODE R.A. No. 8799

A. Registration requirement; exemptions 157

VII. BANKING LAWS

VIII. INTELLECTUAL PROPERTY LAW

IX. ANTI-MONEY LAUNDERING ACT (R.A. 9160, as amended by R.A. 9194)

A. Covered institutions and their obligations 212

A. Legal recognition of electronic data messages, documents, and signature 219

A. Personal vs. Sensitive personal information 226

A. Basic Concepts 231

I. LETTERS OF CREDIT AND TRUST Kinds of Letters of Credit

b) Confirmed Letter of Credit a) Simple

4. According to Method of Payment 6. According to Provision for Renewal

In an acceptance credit, it is stipulated that the drafts be c) Non-Cumulative

5. According to Method of Reimbursement

b) Foreign Currency c. The approximate value of the goods to be shipped

2. Confirming Bank In a letter of credit, transaction means that a bank, in

In letters of credit transactions, fraud is an exception to the

The requirements for such injunction to the issue are

Nature or Legal Relations Arising From Letters of

3. Doctrine of Strict Compliance

When Letter of Credit Considered Consummated

a. The Holder Of The Receipt Does Not Satisfy The

Evidence shows that Gonzalez executed an affidavit

As Against Innocent Purchasers for Value

In order to be validly prosecuted for estafa in relation to

When both parties enter into an agreement knowing fully

Transferee who is a Transferee is subject to all COMPLETION AND DELIVERY

Promissory Note v. Bill of Exchange Presumption as to Date

Delivered Undelivered Undelivered

Personal Real Personal

Signature by Procuration As regards corporations, incapacity to indorse shall apply

Rules on Forgery: Promissory Notes Indorsers subsequent to Indorsers may be made

Except as against: 2. Effect of Material Alteration

Holder for Value

c) What Constitutes A Holder For Value

ACCOMODATION PARTY as an accommodation party. (Bautista v. Auto Plus

Negotiation v. Assignment How Indorsement Is Made

Summary of Indorsements and Effects

• Acquisition of the transferee or indorsee must be in

Summary: Rules and Requirements for Status of HDC

2. Drawer Sec. 124. If an instrument that has been materially altered

Liabilities of Maker, Drawer, and Acceptor

5. Warranties • The warranty is to the capacity of prior parties at the

PRESENTMENT FOR PAYMENT • Acts needed in order to charge persons secondarily

a. Drawee is a fictitious person or a person not

6. Dispensation Of Notice DISCHARGE OF A NEGOTIABLE INSTRUMENT

Renunciation, Defined 4. Rules Governing Acceptance

Constructive Acceptance maturity of the instrument; or