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STUDY GUIDE OF THE


SPECIAL COMMERCIAL
LAWS
Prof. Tristan A. Catindig
I. BULK SALES LAW
Act 3952 (1932), as amended by RA
111 (1947)
1.1. Topics
A. Purpose
To prevent the defrauding of creditors by the
secret sale or disposal or mortgage in bulk of all
or substantially all of merchants stock of goods
in bulk
B. Types of Sales in Bulk
Sec. 2
1) Any sale, transfer, mortgage or assignment
of a stock of goods, wares, merchandise,
provisions, or materials otherwise than in the
ordinary course of trade and the regular
prosecution of the business of the vendor,
mortgagor, transferor, or assignor; or
2) sale, transfer, mortgage or assignment of all,
or substantially all, of the business or
trade theretofore conducted by the vendor,
mortgagor, transferor, or assignor, or
3) of all, or substantially all, of the fixtures
and equipment used in and about the
business of the vendor, mortgagor, transferor,
or assignor, shall be deemed to be a sale and
transfer in bulk, in contemplation of this Act:
C. Duties of Person Selling in Bulk
Sec 3, 4, 5 and 9
1) Deliver a sworn written statement of the
names and addresses of all creditors to whom
the vendor or mortgagor may be indebted,
indicating the amount of indebtedness due or
owing, or to become due or owing (Sec. 3);
2) To apply the proceeds of the sale or
mortgage pro-rata to creditors (Sec. 4);
3)
At
least
10
days
before
sale/transfer/execution of mortgage, make
detailed inventory and to preserve the same
showing the quantity and, to the extent
possible, the cost price to the vendor, etc. of
each article to be included in the sale, etc. (Sec.
5);
4) Give notice to every creditor at least 10 days
before the sale or transfer (Sec. 5);

5) Registration of the documents in Bureau of


Trade Regulation and Consumer Protection
(Sec. 9).
D. When Law not Applicable
1) All creditors give written waiver (Sec. 2);
2) Judicial sales (Sec. 8)
E. Consequences of non-compliance with duties
From San Beda reviewer
1. Between the parties
Valid contract
2.
Between
persons Valid contract
other than the creditor
3.
As
to
effected Void contract
creditors
of
the
seller/mortgagor
F. Interpretation of Statute
The law is penal in nature and in derogation of
the right to alienate property without
restriction. Thus, its provisions must be strictly
construed against the State and liberally in
favor of the accused.
1.2 Case
Sale Of Foundry Shop Not Covered By BLS
PEOPLE V WONG SZU TUNG (1954)
The object of the sale a foundry shop is not
covered by the provisions of the Bulk sales law.
What was sold was the shop itself, together with
the goodwill and credits, equipment, tools and
machinery thereof (including a Dodge truck),
which are not the stock of merchandise, goods,
wares, provisions or materials in bulk referred
to in the law. A foundry shop manufactures iron
works or processes or casts metals. It does not
sell merchandise.

II. GENERAL BONDED WAREHOUSE


ACT
Act 3893 (1931), as amended by RA
237 (1948)
2.1 Topics
A. Purpose
1)
regulate
the
business
of
receiving
commodities for storage;
2) to protect persons who may want to avail of
the services;
3) to encourage the establishment of more
warehouses.
B. Business of receiving commodity for storage

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Sec. 2
1) the warehouseman is obligated to return the
very same commodity delivered to him or to
pay its value;
2) the commodity delivered is to be milled for
the owner thereof;
3) the commodity delivered is commingled with
the commodity belonging to other persons, and
the warehouseman is obligate to return
commodity of the same kind or to pay its value.
C. Requirement of License
Sec. 3
To achieve the purposes mentioned above, any
person who wants to engage in the business of
receiving commodities for storage is required
by the Act to first secure a license therefore
from the DTI
D. Duties of Bonded Warehouseman
1) insure the commodity received for storage
against fire (Sec. 6);
2) receive for storage any commodity of the
kind customarily stored by him in the
warehouse, so far as his license and the
capacity of his warehouse will permit, without
making any discrimination between the persons
desiring to avail themselves of warehouse
facilities (Sec. 8);
3) keep a complete record of all commodities
received by him, of the receipts issued
therefore, of the withdrawals, of the liquidation,
and of al the receipts returned to and cancelled
by him (Sec. 9)

2.2 Cases
Receipt of Palay for Milling
LIMJOCO
(1965)

DIRECTOR

OF

COMMERCE

FACTS: Petitioner and husband are owners of a


rice mill. The issue was whether of not the
General Bonded Warehouse Act is applicable to
her business. Petitioner argues that since her
business is the milling of palay, the delivery
thereof to her is merely incidental to such
business and does not constitute storage within
the meaning of the statute.
HELD: The General Bonded Warehouse Act is
applicable. SEC 2 is too clear to permit of any
exercise in construction or semantics. It does
not stop at the bare use of the word "storage,"
but expressly provides that any contract or
transaction wherein the palay delivered is to be
milled for and on account of the owner shall be
deemed included in the business of receiving
rice for storage for the purpose of the Act. In
other words, it is enough that the palay is
delivered, even if only to have it milled. The
main intention of the lawmaker is to give
protection to the owner of the commodity
against possible abuses (and we might add
negligence) of the person to whom the physical
control of his properties is delivered.
GOZALES V GO TIONG (1958)
FACTS: Prior to the issuance of the license to Go
Tiong to operate as bonded warehouseman, he
had on several occasions received palay for
deposit from plaintiff Gonzales, totaling 368
sacks, for which he issued .After he was
licensed as bonded warehouseman, Go Tiong
again received various deliveries of palay from
plaintiff, totaling 492 sacks, for which he issued
the corresponding receipts, all the grand total
of 860 sacks, valued at P8,600 at the rate of
P10 per sack.
On or about March 15, 1953, plaintiff demanded
from Go Tiong the value of his deposits in the
amount of P8,600, but he was told to return
after two days, which he did, but Go Tiong
again told him to come back. A few days later,
the warehouse burned to the ground. When
plaintiff filed suit co claim his losses, Go Tiong
argued that the formers claim is governed by
the Civil Code and not by the Bonded
Warehouse Act (Act No. 3893, as amended by
Republic Act No. 247), for the reason that, as
already stated, what Go Tiong issued to plaintiff
were ordinary receipts, not the warehouse
receipts contemplated by the Warehouse

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Receipts Law, and because the deposits of


palay of plaintiff were gratuitous.
HELD: Bonded Warehouse Act applicable. Act
No. 3893 as amended is a special law regulating
the business of receiving commodities for
storage and defining the rights and obligations
of a bonded warehouseman and those
transacting business with him. Consequently,
any deposit made with him as a bonded
warehouseman must necessarily be governed
by the provisions of Act No. 3893. The kind or
nature of the receipts issued by him for the
deposits is not very material much less
decisive. Though it is desirable that receipts
issued by a bonded warehouseman should
conform to the provisions of the Warehouse
Receipts Law, said provisions in our opinion are
not mandatory and indispensable in the sense
that if they fell short of the requirements of the
Warehouse Receipts Act, then the commodities
delivered for storage become ordinary deposits
and will not be governed by the provisions of
the Bonded Warehouse Act. Under SEC 1 of the
Warehouse Receipts Act, one would gather the
impression that the issuance of a warehouse
receipt in the form provided by it is merely
permissive and directory and not obligatory.

III. WAREHOUSE RECEIPTS ACT


Act 2137 (1912)
3.1 Topics
A. Purpose
To prescribe the rights and duties of a
warehouseman and to regulate the relationship
between a warehouseman and:
1) the depositor of goods;
2) holder of a warehouse receipt for the goods;
3) person lawfully entitled to the possession of
the goods; or
4) other persons.
B. Obligation to issue receipt
Sec. 2
A warehouseman is required to issue a receipt
for the commodity he receives for storage. No
form is prescribed, but it should at least contain
the following information:
1. Location of the warehouse
2. Date of Issue
3. Receipt number
4. Language to indicate if the receipt were
negotiable or non-negotiable
5. Rate of storage charges
6. Description of goods or packages containing
them

7. Signature of the warehouseman or his


agentLanguage indicating if the warehouseman
is an owner solely or jointly with others, of the
goods deposited and
8. Statement of advances made by the
warehouseman for which he claims a lien
C. Degree of Care
Sec. 3
That degree of care which a reasonably careful
man would exercise in regard to similar goods
of his own.
D. Kinds or Receipts (Sec. 4-7)
1) Non-negotiable receipt
a. one which states that the goods received by
the warehouseman will be delivered to the
depositor or to any other specified person
b. the word non-negotiable should be placed
plainly upon its face
2) Negotiable receipt
a. One which states that the goods received by
the warehouseman will be delivered to the
bearer or to the order of any person named in
such receipt.
b. Can not be converted to non-negotiable
E. Obligation to Deliver Goods (Sec. 8-9)
1) Deliver to whom upon demand
a. Holder of the receipt for the goods
b. Depositor
2) The demand should be accompanied by:
a. An offer to satisfy the warehousemans lien
b. An offer to surrender the receipt if it is
negotiable
c. A readiness and willingness to sign an
acknowledgement, when the goods are
delivered, that they have been delivered if such
is requested by the warehouseman.
F. Liability for Misdelivery or Conversion (Sec.
10, 17-18)
1) Where a warehouseman delivers the goods
to one who is not in fact lawfully entitled to the
possession of them
2) He would also be liable for misdelivery even
if he delivers to a person holding a nonnegotiable receipt or a negotiable receipt, as
provided in SEC 9(b) or (c) of the Act, if prior to
such delivery he had either:
a. Been requested, by or on behalf of the
person lawfully entitled to a right of property or
possession in the goods, not to make such
deliver; or
b. Had information that the delivery about to be
made was to one not lawfully entitled to the
possession of the goods.
G. Rights of Holder of Receipt Covering Goods
vs. Owner of Goods
Not being a negotiable instrument (but a
Document of Title), the holder of the receipt can

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only acquire such rights /title to the goods as


the person negotiating the receipt had. Thus, as
between the owner of the good, and a holder of
the receipt of the good which was apparently
stolen, the former has a better right.
H. When negotiable receipt not required to be
surrendered (Sec. 9, 14 and 16)
1) Warehouseman is justified in delivering
goods to the following persons (Sec. 9):
a. the person lawfully entitled to the possession
of the goods, or his agent;
b. A person who is either himself entitled to
delivery by the terms of a non-negotiable
receipt issued for the goods, or who has written
authority from the person so entitled either
indorsed upon the receipt or written upon
another paper; or
c. A person in possession of a negotiable receipt
by the terms of which the goods are deliverable
to him or order, or to bearer, or which has been
indorsed to him or in blank by the person to
whom delivery was promised by the terms of
the receipt or by his mediate or immediate
indorser.
2) Where a negotiable receipt has been lost or
destroyed (Sec. 14)
a. A court of competent jurisdiction may order
the delivery of the goods upon:
i. satisfactory proof of such loss or destruction
and
ii. upon the giving of a bond with sufficient
sureties to be approved by the court to protect
the warehouseman from any liability or expense
b. The court may also in its discretion order the
payment of the warehouseman's reasonable
costs and counsel fees.
c. The delivery of the goods under an order of
the court as provided in this SEC, shall not
relieve the warehouseman from liability to a
person to whom the negotiable receipt has
been or shall be negotiated for value without
notice of the proceedings or of the delivery of
the goods.
3) Warehouseman cannot set up title in himself
(Sec. 16)
a. No title or right to the possession of the
goods, on the part of the warehouseman shall
excuse the warehouseman from liability for
refusing to deliver the goods according to the
terms of the receipt.
b. EXECEPT: such title or right is derived directly
or indirectly from a transfer made by the
depositor at the time of or subsequent to the
deposit
for
storage,
or
from
the
warehouseman's lien,
I. Commingling of Goods (Sec. 22-23)
1) A warehouseman must keep the goods of a
depositor separate from the goods of other
depositors, or from the goods of the same

depositor for which a separate receipt has been


issued.
2) Rationale: permit the inspection and
redelivery of the goods deposited at all times
3) EXCEPT:
a. The goods are fungible, AND
b. The commingling is authorized by agreement
or by custom.
J. Other Liabilities of Warehouseman
1) Failure to mark a receipt intended to be nonnegotiable as non-negotiable (Sec. 7)
a. Because the holder of the receipt may treat
the same as negotiable.
2) Failure to take up and cancel a negotiable
receipt when goods are delivered (Sec. 11)
a. The warehouseman shall be liable for failure
to deliver the goods to any one who purchases
for value in good faith
i. WON such purchaser acquired title to the
receipt before or after the delivery of the goods
by the warehouseman.
ii. Shall be guilty of a crime punishable by fine
or imprisonment.
b. EXCEPT:
i. Goods have been lawfully sold to satisfy a
warehousemans lien.
ii. Goods have been lawfully sold or disposed of
because of their perishable or hazardous
nature.
3) Failure to take up and cancel a negotiable
receipt or to place upon it a statement of what
goods have been delivered, when goods are
partly delivered (Sec. 12)
a. Same as #2.
4) For altered receipts
Kind of Alteration
Warehousemans
Liability
Immaterial
Liable according to the
terms of the receipts as
originally issued
Authorized
Liable according to the
terms of the receipts as
authorized
Unauthorized
but Liable according to the
without
fraudulent terms of the receipts as
intent
they were before the
alteration
Unauthorized
but Liable according to the
with fraudulent intent terms of the receipts as
originally issued, even
against: i) a purchaser
of the receipt for value
with notice of the
alteration; 2) to the
person who made the
alteration and to any
person who took it with
notice of the alteration.
However, in the latter
case, such material and

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fraudulent
alteration
shall
excuse
the
warehouseman
from
any other liability to the
said persons.
5) For non-existence or misdescription of goods
(Sec. 20)
a. Liable for damages to holder of a receipt if at
time of its issue, goods not yet existed or by
failure of the goods to match desciption
b. EXCEPT:
i. Statement of the marks or labels upon them
or upon the packages containing them;
ii. Statement that the goods are of a certain
kind at that the packages containing the goods
contain goods of a certain kinds or by words of
similar import
Eg: received box said to contain... and not
box containing
6) For commingling goods (Sec. 24)
a. Shall be liable severally to each depositor for
the care and redelivery of the depositors share
of the mass of commingled goods to the same
extent and under the same circumstances as if
the goods had been kept separate
7) For issuing receipts for goods not received
(Sec. 50)
a. Shall be guilty of a crime if he issues a
receipt for goods that have not actually been
received by him or are not under his actual
control at the time of the issuance of the receipt
8) For issuing receipts containing false
statements (Sec. 51)
a. Shall be guilty of a crime if he fraudulently
issues a receipt for goods knowing that it
contains any false statement
9) For issuing duplicate receipts not so marked
(Sec. 52)
a. Guilty of crime if issues a duplicate or
additional negotiable receipt for goods knowing
that a former negotiable receipt for the same
goods or any part of them is outstanding and
uncancelled, without plainly placing upon the
face of the receipt the word duplicate
b. EXCEPT: in the case of a lost or destroyed
receipt after proceedings as provided for in Sec.
14
10) For issuing receipts for the warehousemans
goods which do not state that fact (Sec. 53)
a. Guilty of a crime if he issues a negotiable
receipt for oods deposited with or held by him
of which he knows that he is the owner, solely
or jointly or in common with others, if he fails to
state such ownership in the receipt
11) For delivery of goods without obtaining
negotiable receipt (sec. 54)
a. Guilty of a crime if he delivers gods our of his
possession knowing that a negotiable receipt is
oustanding and cancelled
b. EXCEPT:

i. Goods have been lawfully sold to satisfy a


warehousemans lien.
ii. Goods have been lawfully sold or disposed of
because of their perishable or hazardous
nature.
iii. In the case of lost or destroyed receipt after
proceedings (Sec. 14)
K. Warehousemans Lien (Sec. 27, 28, 29, and
31)
1) Definition
a. A warehouseman has a lien on the goods
deposited with him or on the proceeds thereof
in the his hands for all lawful charges for
storage and preservation of the goods, money
advanced by him in relation to such goods such
as the expenses of transportation or labor, etc.
2) Against what property
a. All goods belonging to the person liable for
the charges
b. All goods belonging to others deposited by
the person liable for the charges who has been
entrusted with the possession of the goods and
could have validly pledged the same
3) Lose Lien
a. Warehouseman may lose lien by:
i. surrendering the possession of the goods
because it is possessory in nature
ii. refusing to deliver the goods when a demand
is made with which he is bound to comply
4) Effect of sale to satisfy lien
a. The warehouseman shall not, after the sale,
be liable for failure to deliver the goods to the
depositor or owner of the goods or to the holder
of the receipt
3.2 Case
PNB V JUDGE BENITO C. SE, JR. (1996)
FACTS: PNB filed for attachment of several
quedans of sugar in the possession of Noahs
Ark Sugar refinery. The sugar was security for
loans of PNBs clients which they failed to pay.
Noahs Ark claimed that they were the owners
of the sugar.
HELD: While the PNB is entitled to the stocks of
sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the
storage fees. Imperative is the right of the
warehouseman to demand payment of his lien
at this juncture, because, in accordance with
SEC 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon goods by
surrendering possession thereof. In other words,
the lien may be lost where the warehouseman
surrenders the possession of the goods without
requiring payment of his lien, because a
warehousemans lien is possessory in nature.

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SEC 14.
Lost or destroyed receipts. Where
a negotiable receipt has been lost or destroyed,
a court of competent jurisdiction may order the
delivery of the goods upon satisfactory proof of
such loss or destruction and upon the giving of
a bond with sufficient sureties to be approved
by the court to protect the warehouseman from
any liability or expense, which he or any person
injured by such delivery may incur by reason of
the original receipt remaining outstanding. The
court may also in its discretion order the
payment of the warehouseman's reasonable
costs and counsel fees.
The delivery of the goods under an order of the
court as provided in this SEC, shall not relieve
the warehouseman from liability to a person to
whom the negotiable receipt has been or shall
be negotiated for value without notice of the
proceedings or of the delivery of the goods.
SEC 36.
Effect of sale. After goods have
been lawfully sold to satisfy a warehouseman's
lien, or have been lawfully sold or disposed of
because of their perishable or hazardous
nature, the warehouseman shall not thereafter
be liable for failure to deliver the goods to the
depositor or owner of the goods or to a holder
of the receipt given for the goods when they
were deposited, even if such receipt be
negotiable.

IV. CHATTEL MORTGAGE LAW


Act 1508 (1906), in relation to Articles
1484, 1485, 2140 and 2140 Civil Code
Act 1508
Sec. 3 Chattel mortgage defined. A chattel
mortgage is a conditional sale of personal
property as security for the payment of a debt,
or the performance of some other obligation
specified therein, the condition being that the
sale shall be void upon the seller paying to the
purchaser a sum of money or doing some other
act named. If the condition is performed
according to its terms the mortgage and sale
immediately become void, and the mortgagee
is thereby divested of his title.
Sec 4 Validity. A chattel mortgage shall not
be valid against any person except the
mortgagor, his executors or administrators,
unless the possession of the property is
delivered to and retained by the mortgagee or
unless the mortgage is recorded in the office of
the register of deeds of the province in which
the mortgagor resides at the time of making the
same, or, if he resides without the Philippine
Islands, in the province in which the property is
situated: Provided, however, That if the

property is situated in a different province from


that in which the mortgagor resides, the
mortgage shall be recorded in the office of the
register of deeds of both the province in which
the mortgagor resides and that in which the
property is situated, and for the purposes of this
Act the city of Manila shall be deemed to be a
province.
Sec 5 Form. A chattel mortgage shall be
deemed
to
be
sufficient
when
made
substantially in accordance with the following
form, and shall be signed by the person or
persons executing the same, in the presence of
two witnesses, who shall sign the mortgage as
witnesses to the execution thereof, and each
mortgagor and mortgagee, or, in the absence of
the mortgagee, his agent or attorney, shall
make and subscribe an affidavit in substance as
hereinafter set forth, which affidavit, signed by
the parties to the mortgage as above stated,
and the certificate of the oath signed by the
authority administering the same, shall be
appended to such mortgage and recorded
therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
"This mortgage made this ____ day of
______19____ by _______________, a resident of
the municipality of ______________, Province of
____________, Philippine Islands mortgagor, to
____________, a resident of the municipality of
___________,
Province
of
______________,
Philippine Islands, mortgagee, witnesseth:
"That the said mortgagor hereby conveys and
mortgages to the said mortgagee all of the
following-described personal property situated
in the municipality of ______________, Province of
____________ and now in the possession of said
mortgagor,
to
wit:
(Here insert specific description of the property
mortgaged.)
"This mortgage is given as security for the
payment to the said ______, mortgagee, of
promissory notes for the sum of ____________
pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per
centum per annum, according to the terms of
__________, certain promissory notes, dated
_________, and in the words and figures following
(here insert copy of the note or notes secured).
"(If the mortgage is given for the performance
of some other obligation aside from the
payment of promissory notes, describe correctly
but concisely the obligation to be performed.)
"The conditions of this obligation are such that
if the mortgagor, his heirs, executors, or

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administrators shall well and truly perform the


full obligation (or obligations) above stated
according to the terms thereof, then this
obligation
shall
be
null
and
void.
"Executed at the municipality of _________, in
the Province of ________, this _____ day of
19_____
____________________
(Signature of mortgagor.)
"In the presence of
"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing
mortgage is made for the purpose of securing
the obligation specified in the conditions
thereof, and for no other purpose, and that the
same is a just and valid obligation, and one not
entered into for the purpose of fraud."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________,
personally appeared ____________, the parties
who signed the foregoing affidavit and made
oath to the truth thereof before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other
officer, as the case may be.)
Sec 6 Corporations. When a corporation is a
party to such mortgage the affidavit required
may be made and subscribed by a director,
trustee, cashier, treasurer, or manager thereof,
or by a person authorized on the part of such
corporation to make or to receive such
mortgage. When a partnership is a party to the
mortgage the affidavit may be made and
subscribed
by
one
member
thereof.
Sec 7 Descriptions of property. The
description of the mortgaged property shall be
such as to enable the parties to the mortgage,
or any other person, after reasonable inquiry
and investigation, to identify the same.
If the property mortgaged be large cattle," as
defined by SEC one of Act Numbered Eleven
and forty-seven, 2 and the amendments
thereof, the description of said property in the
mortgage shall contain the brands, class, sex,
age, knots of radiated hair commonly known as
remolinos, or cowlicks, and other marks of
ownership as described and set forth in the
certificate of ownership of said animal or
animals, together with the number and place of

issue

of

such

certificates

of

ownership.

If growing crops be mortgaged the mortgage


may contain an agreement stipulating that the
mortgagor binds himself properly to tend, care
for and protect the crop while growing, and
faithfully and without delay to harvest the
same, and that in default of the performance of
such duties the mortgage may enter upon the
premises, take all the necessary measures for
the protection of said crop, and retain
possession thereof and sell the same, and from
the proceeds of such sale pay all expenses
incurred in caring for, harvesting, and selling
the crop and the amount of the indebtedness or
obligation secured by the mortgage, and the
surplus thereof, if any shall be paid to the
mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover
only the property described therein and not like
or substituted property thereafter acquired by
the mortgagor and placed in the same
depository
as
the
property
originally
mortgaged, anything in the mortgage to the
contrary notwithstanding.
Sec. 8 Failure of mortgagee to discharge the
mortgage. If the mortgagee, assign,
administrator, executor, or either of them, after
performance of the condition before or after the
breach thereof, or after tender of the
performance of the condition, at or after the
time fixed for the performance, does not within
ten days after being requested thereto by any
person entitled to redeem, discharge the
mortgage in the manner provided by law, the
person entitled to redeem may recover of the
person whose duty it is to discharge the same
twenty pesos for his neglect and all damages
occasioned thereby in an action in any court
having jurisdiction of the subject-matter
thereof.
Sec. 13 When the condition of a chattel
mortgage is broken, a mortgagor or person
holding a subsequent mortgage, or a
subsequent attaching creditor may redeem the
same by paying or delivering to the mortgagee
the amount due on such mortgage and the
reasonable costs and expenses incurred by
such breach of condition before the sale
thereof. An attaching creditor who so redeems
shall be subrogated to the rights of the
mortgagee and entitled to foreclose the
mortgage in the same manner that the
mortgagee could foreclose it by the terms of
this
Act.
Sec. 14 Sale of property at public auction;
Officer's return; Fees; Disposition of proceeds.
The mortgagee, his executor, administrator,

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or assign, may, after thirty days from the time


of condition broken, cause the mortgaged
property, or any part thereof, to be sold at
public auction by a public officer at a public
place in the municipality where the mortgagor
resides, or where the property is situated,
provided at least ten days' notice of the time,
place, and purpose of such sale has been
posted at two or more public places in such
municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the
mortgagor or person holding under him and the
persons holding subsequent mortgages of the
time and place of sale, either by notice in
writing directed to him or left at his abode, if
within the municipality, or sent by mail if he
does not reside in such municipality, at least
ten days previous to the sale.
The officer making the sale shall, within thirty
days thereafter, make in writing a return of his
doings and file the same in the office of the
register of deeds where the mortgage is
recorded, and the register of deeds shall record
the same. The fees of the officer for selling the
property shall be the same as in the case of
sale on execution as provided in Act Numbered
One hundred and ninety, 4 and the
amendments thereto, and the fees of the
register of deeds for registering the officer's
return shall be taxed as a part of the costs of
sale, which the officer shall pay to the register
of deeds. The return shall particularly describe
the articles sold, and state the amount received
for each article, and shall operate as a
discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be
applied to the payment, first, of the costs and
expenses of keeping and sale, and then to the
payment of the demand or obligation secured
by such mortgage, and the residue shall be paid
to persons holding subsequent mortgages in
their order, and the balance, after paying the
mortgages, shall be paid to the mortgagor or
person holding under him on demand.
If the sale includes any "large cattle," a
certificate of transfer as required by SEC
sixteen of Act Numbered Eleven hundred and
forty-seven 5 shall be issued by the treasurer of
the municipality where the sale was held to the
purchaser thereof.
Art. 1484. In a contract of sale of personal
property the price of which is payable in
installments, the vendor may exercise any of
the following remedies:
(1) Exact fulfillment of the obligation, should the
vendee fail to pay;
(2) Cancel the sale, should the vendee's failure
to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing


sold, if one has been constituted, should the
vendee's failure to pay cover two or more
installments. In this case, he shall have no
further action against the purchaser to recover
any unpaid balance of the price. Any agreement
to the contrary shall be void. (1454-A-a)
Art. 1485. The preceding article shall be
applied to contracts purporting to be leases of
personal property with option to buy, when the
lessor has deprived the lessee of the possession
or enjoyment of the thing. (1454-A-a)
Art. 2140. By a chattel mortgage, personal
property is recorded in the Chattel Mortgage
Register as a security for the performance of an
obligation. If the movable, instead of being
recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a
chattel mortgage. (n)
Art. 2141. The provisions of this Code on
pledge, insofar as they are not in conflict with
the Chattel Mortgage Law shall be applicable to
chattel mortgages. (n)
4.1 Topics
Essential Requisites
1) That it be constituted to secure the fulfilment
of a principal obligation;
2) That the mortgagor be the absolute owner of
the thing mortgaged;
3) That the persons constituting the mortgage
have the free disposal of their property or, in
the absence thereof, that they be legally
authorized for the purpose; and
4) That the object be personal and movable
property.
Formal Requirements
1) Signed by the person executing the same in
the presence of two witnesses;
2) Accompanied by an affidavit of good faith
and a certificate of oath;
3) Mortgaged property must be described in
such a manner as to enable anybody reading
the document, after reasonable inquiry and
investigation, to be able to identify the same.
Registration: When And Where
When
No specific time is provided under the law.
However, such registration must be made:
1) before the mortgagor has complied with his
principal obligation; and
2) no right of an innocent third person is
prejudiced.
Where

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1) Where the mortgagor resides in the


Philippines, in his place of residence;
2) Where the mortgagor resides abroad, in the
place where the property is situated;
3) Where the mortgagor resides in a place
different from where the property is situated, in
the place where the mortgagor resides and
where the property is situated, except where
the amount of the mortgage is more than
Php50,000 in which case the registration of the
mortgage in the province where the property is
situated shall be sufficient registration.
For motor vehicles, the chattel mortgage must
also be registered with the Land Transportation
Office to bind third persons.
After-Acquired, Future Or Substituted Property
Future or after-acquired
property can be
subject of a chattel mortgage if:
1) The properties mortgaged are:
a. Perishable; or
b. Subject to inevitable wear and tear; or
c. Intended to be sold or used but with the
understanding that they would be replaced with
similar properties to be thereafter acquired by
the mortgagor
2) In the case of other properties, if the
inclusion of such future or after-acquired
properties is expressly stipulated and a
supplement to the mortgage specifically listing
and describing such property is executed and
registered in the chattel mortgage register.
Like or substituted property cannot be deemed
covered by a chattel mortgage, unless the
property is described in a supplement to the
mortgage.
After-Incurred Obligation
While a pledge, real estate mortgage, or
antichresis may exceptionally secure afterincurred obligations so long as these future
debts are accurately described, a chattel
mortgage, however, can only cover obligations
existing at the time the mortgage is
constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet
to be contracted can be a binding that can be
compelled upon, the security itself, however,
does not come into existence or arise until after
a
chattel
amending
the
old
contract
conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of
the borrower to execute the agreement so as to
cover
the
after-incurred
obligation
can
constitute an act of default on the part of the
borrower of the financing agreement whereon
the promise is written but, of course, the
remedy of foreclosure can only cover the debts
extant at the time of constitution and during the
life of the chattel mortgage sought to be
foreclosed.

One of the requisites of a chattel mortgage is


the execution of an affidavit of good faith,
which requires an oath that the mortgage is for
the purpose of securing the obligation specified
in the conditions thereof, and for no other
purpose, and that the same is a just and valid
obligation, and one not entered into for the
purpose of fraud.
This requirement makes it obvious that the debt
referred to in the law is a current, not an
obligation that is yet merely contemplated.
(Acme Shoe v CA)
Right Of Junior Mortgagee
Art. 13
After a first mortgage is executed, there
remains in the mortgagor a mere right of
redemption and only this right passes to the
second mortgagee by virtue of the second
mortgage.
Foreclosure Procedure
Art 14; SC Circular No. 7-2002, Dated January
22, 2002
1) 30 days after the condition of a chattel
mortgage is broken, the mortgagee may cause
the mortgaged property or any part thereof to
be sold at public auction by a public officer at a
public place in the municipality where the
mortgagor resides or where the property is
situated.
2) The application for the foreclosure of the
mortgage should be filed with the Executive
Judge through the Clerk of Court.
3) After receipt of the application, the Clerk of
Court shall, among other duties:
a. Raffle the application among the Sheriffs; and
b. Cause the posting of the notice of sale.
4) Notice of the time, place and purpose of such
sale must be posted, at least 10 days before the
date of sale, at 2 or more public places in the
municipality where the mortgagor resides or
where the property is situated.
5) The mortgagee shall notify the mortgagor
and the persons holding subsequent mortgages
of the time and place of sale, at least 10 days
before the sale, either by notice in writing
directed to him or left at his abode, if within the
municipality, or sent by mail if he does not
reside in such municipality.
6) The officer making the sale shall, within 30
days thereafter, make in writing a return of his
doings and file the same in the office of the
registry of deeds where the mortgage is
recorded, and the registry of deeds shall record
the same. The return shall particularly describe
the articles sold and state the amount received
for each article.

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Redemption
There is no right of redemption in Chattel
Mortgage. There is only an EQUITY of
REDEMPTION.
1) Period within which equity of redemption
may be exercised.
From the date the condition of the Chattel
Mortgage is broken but BEFORE the foreclosure
sale of the collateral thereof.
> The 30-day period to foreclose a Chattel
Mortgage is the minimum period after violation
of the mortgage condition for the mortgage
creditor to cause the sale at public auction of
the mortgaged chattel AND is a period of grace
for the mortgagor to discharge the mortgage
obligation.
2) Amount to be paid.
a. The amount due on such mortgage; and
b. The costs and expenses incurred by such
breach of condition before the sale thereof.
3) Persons entitled to redeem.
a. Mortgagor;
b. A person holding a subsequent mortgage;
c. A subsequent attaching creditor.
Claim For Deficiency; Rule And Exception
Rule: A chattel mortgagee may sue for a
deficiency following foreclosure.
Exception: in the case of personal property sold
in
installments
where
the
chattel
mortgagor/vendees failure to pay covers 2 or
more installments.
4.2 Cases
Chattel Mortgage On House Not Binding On
Third Persons Not Parties To Contract
PIANSAY V DAVID (1964)
FACTS: Conrado David received a loan from
Claudia Vda. De Uy Kim. In order to secure the
loan, he executed a chattel mortgage on a
house. The chattel mortgage was registered
with the Register of Deeds. The mortgaged
house was sold to Claudia at a public auction,
which Claudia, in turn, sold to Salvador Piansay.
Meanwhile, Marcos Mangubat filed a complaint
against Conrado for collection of a loan. Marcos
levied upon the house that was in possession of
Salvador, and at the same time, demanded
payment of rentals from Salvador.
ISSUE: WON the chattel mortgage constituted in
favour of Claudia is valid
HELD: NO. Claudia had no right to foreclose the
chattel mortgage constituted in her favor,
because it was in reality a mere contract of an

unsecured loan. Therefore, the contract of sale


between Claudia and Salvador was of no effect.
Regardless of the validity of a contract
constituting a chattel mortgage on a house, as
between the parties to said contract, the same
cannot and does not bind third persons, who
are not parties to the aforementioned contract
or their privies. As a consequence, the sale of
the house is null and void insofar is Marcos
Mangubat is concerned.
Chattel Mortgage Over House Built On Another
Persons Land
TUMALAD V VIVENCIO (1971)
FACTS:
Petitioners executed a chattel
mortgage in favor of respondents over their
house, which is located in a land that is being
rented by petitioners from Madrigal & Company,
Inc. The mortgage was registered in the
Registry of Deeds and was executed to
guarantee a loan.
Since the petitioners defaulted on their loan,
the mortgage was extrajudicially foreclosed and
the house was sold to respondents at a public
auction.
Respondents commenced a civil case in the
municipal court, which decided against the
petitioners and ordered the latter to vacate the
premises and to pay rent until the premises is
completely vacated.
Petitioners argue that the chattel mortgage is
void ab initio relying on the following grounds:
1) That their signatures on the chattel mortgage
was obtained through fraud, deceit or trickery;
and
2) That the subject matter of the chattel
mortgage is a house, and being an immovable,
it can only be subject of a real estate mortgage
and not a chattel mortgage.
ISSUE: WON the chattel mortgage is valid
HELD: YES. That parties to a deed of chattel
mortgage may agree to consider a house as
personal property for the purposes of said
contract is good only insofar as the contracting
parties are concerned. This is based partly upon
the principle of estoppel.
In a case, the SC held that a mortgaged house
built on a rented land was held to be a personal
property, not only because the deed of
mortgage considered it as such, but also
because it did not form part of the land, for it
now settled that an object placed on land by
one who had only a temporary right to the

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same, does not become immobilized by


attachment. Hence, if a house belonging to a
person stands on a rented land belonging to
another person, it may be mortgaged as a
personal property as so stipulated in the
document of mortgage. It should be noted,
however that the principle is predicated on
statements by the owner declaring his house to
be a chattel, a conduct that may conceivably
estop
him
from
subsequently
claiming
otherwise.
In the case at bar, the house on rented land is
expressly designated as chattel mortgage.
Although there is no specific statement
referring to the subject house as personal
property, yet by ceding, selling or transferring a
property by way of chattel mortgage,
petitioners could only have meant to convey
the house as chattel, or at least, intended to
treat the same as such, so that they should not
now be allowed to make an inconsistent stand
by claiming otherwise.
Moreover, the subject house stood on a rented
lot to which petitioners merely ad a temporary
right as lessee, and although this cannot in
itself determine the status of the property, it
does so when combined with other factors to
sustain the interpretation that the parties,
particularly the mortgagors, intended to treat
the house as personalty.
Finally, it is the petitioners themselves, as
debtor-mortgagors, who are attacking the
validity of the chattel mortgage. The doctrine of
estoppels applied to petitioners.
Chattel Mortgage Over Machinery
MAKATI LEASING V WEAREVER TEXTILE
MILLS (1983)
FACTS:
In order to obtain financial
accommodations from petitioner Makati Leasing
and
Finance
Corp.,
private
respondent
Wearever Textile Mills, discounted and assigned
several receivables with the former. To secure
the collection of the receivables assigned,
private
respondent
executed
a
Chattel
Mortgage over certain raw materials inventory
as well as a machinery.

machinery in suit cannot be subject of a chattel


mortgage because it is real property pursuant
to Art. 415 of the New of Civil Code, the same
being attached to the ground by means of bolts
and the only way to remove it would be to drill
out or destroy the concrete floor.
ISSUE: WON the machinery in suit is real or
personal property
HELD: It is personal property. As the parties to
the contract so agree and no innocent third
party will be prejudiced thereby, there is
absolutely no reason why a machinery, which is
movable in its nature and becomes immobilized
only by destination or purpose, may not be
likewise treated as such. This is because one
who has so agreed is stopped from denying the
existence of the chattel mortgage.
The characterization of the subject machinery
as chattel by the private respondent is
indicative of intention and impresses upon the
property the character as determined by the
parties. In other words, the parties to a contract
may by agreement treat as personal property
that which by nature would be real property, as
long as no interest of third parties would be
prejudiced thereby.
In addition, records show that no steps were
taken to nullify the mortgage and that the
private respondent has benefited from the
contract. Equity dictates that one should not
benefit at the expense of another. Private
respondent could not now therefore, be allowed
to impugn the efficacy of the chattel mortgage
after it has benefited therefrom.
After-Acquired Property
TORRES V LIMJAP
FACTS: Jose B. Henson executed in favor of the
respondents a chattel mortgage on his drug
store in order to secure a loan. In the
instrument of the chattel mortgage, it was
stipulated that the mortgagor was authorized to
sell the goods covered thereby and to replace
them with other goods thereafter acquired.

Upon private respondents default, petitioner


filed a complaint to effect the seizure of the
machinery. The lower court issued a writ of
seizure and in order to enforce the said writ, the
sheriff went to the premises and removed the
main drive motor of the subject machinery.

Petitioner attacks the validity of the stipulation


and insists that a stipulation authorizing the
disposal and substitution of the chattels
mortgaged does not operate to extend the
mortgage to after-acquired property, and that
such stipulation is in contravention of the
express provision of the last paragraph of SEC 7
Act No. 1508.

Private respondent questions the act of the


sheriff arguing that the drive motor the

ISSUE: WON the chattel mortgage on the afteracquired property is valid

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HELD: YES.
In the interpretation and
construction of a statute, the intent of the lawmaker should always be ascertained and given
effect. In enacting Act No. 1508, the primary
aim of the law-making body was undoubtedly to
promote business and trade and to give
impetus to the economic development of the
country. Bearing this in mind, it could not have
been the intention of the Philippine Commission
to apply the provision of SEC 7 to stores open to
the public for retail business, where the goods
are constantly sold and substituted with new
stock.
A stipulation in the mortgage, extending its
scope and effect to after-acquired property, is
valid and binding where the after-acquired
property is in renewal of, or in substitution for,
goods on hand when the mortgage was
executed, or is purchased with the proceeds of
the sale of such goods.
In other words, a mortgage may be made to
include future acquisitions of goods to be added
to the original stock mortgaged, but the
mortgage must expressly provide that such
future acquisitions shall be held as included in
the mortgage.
In sum, the court held:
1) That the provision of the last paragraph of
SEC 7 of Act No. 1508 is not applicable to drug
stores, bazaars and all other stores in the
nature of a revolving and floating business; and
2) That the stipulation in the chattel mortgages
in question, extending their effect to afteracquired property, is valid and binding.

After-Incurred Obligation

ACME SHOE V CA (1996)


FACTS: Petitioner Chua Pac, the president and
general manager of co-petitioner Acme Shoe,
Rubber & Plastic Corporation, executed for and
in behalf of the company, a chattel mortgage in
favor of private respondent Producers Bank.
The mortgage stands as a security for
petitioners corporate loan of Php3M. However,
a provision in the chattel mortgage agreement
states that the mortgage shall also stand as a
security for the payment of subsequent
promissory note or notes, either as a renewal or
a new loan.

In due time, the petitioner paid the Php3M loan.


Subsequently, however, it obtained additional
financial accommodations from respondent and
failed
to
settle
this
additional
loan.
Respondent then applied for an extrajudicial
foreclosure of the chattel mortgage. The
petitioner seeks to enjoin the foreclosure.
ISSUE: WON a clause in a chattel mortgage,
which extend its coverage to obligations yet to
be contracted or incurred, is valid and effective
HELD: NO.
While a pledge, real estate
mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as
these future debts are accurately described, a
chattel mortgage, however, can only cover
obligations existing at the time the mortgage is
constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet
to be contracted can be a binding that can be
compelled upon, the security itself, however,
does not come into existence or arise until after
a
chattel
amending
the
old
contract
conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of
the borrower to execute the agreement so as to
cover
the
after-incurred
obligation
can
constitute an act of default on the part of the
borrower of the financing agreement whereon
the promise is written but, of course, the
remedy of foreclosure can only cover the debts
extant at the time of constitution and during the
life of the chattel mortgage sought to be
foreclosed.
One of the requisites of a chattel mortgage is
the execution of an affidavit of good faith,
which requires an oath that the mortgage is for
the purpose of securing the obligation specified
in the conditions thereof, and for no other
purpose, and that the same is a just and valid
obligation, and one not entered into for the
purpose of fraud.
This requirement makes it obvious that the debt
referred to in the law is a current, not an
obligation that is yet merely contemplated. In
the chattel mortgage here involved, the only
obligation specified in the chattel mortgage
contract was the Php3M loan which petitioner
corporation later fully paid. By virtue of SEC 3 of
the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel
mortgage void or terminated.
With the full payment of the Php3M loan, there
was no longer any chattel mortgage that could
cover the new loans that were concluded
thereafter.

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Specific Performance
SOUTHERN MOTORS V MOSCOSO (1961)
FACTS: Private respondent Southern Motors,
Inc. sold to petitioner Angel Moscoso a
Chevrolet truck. Upon making a down payment,
Angel executed a promissory note and a chattel
mortgage on the truck.
Upon the failure of Angel to pay the
installments, Southern Motors filed a complaint
against Angel, to recover the unpaid balance of
the purchase price. A writ of attachment was
issued by the lower court and the Chevrolet
truck and a house and lot belonging to Angel
were attached by the sheriff. The sheriff then
sold the truck at a public auction in which
Southern Motors was the only bidder.
The trial court then condemned Angel to pay
Southern Motors the deficiency.
Angel questions this order of the court and
alleged that the attachment caused to be levied
on the truck and its immediate sale at public
auction, was tantamount to the foreclosure of
the chattel mortgage on said truck.
Southern Motors counters and claims that in
filing the complaint, it chose to exact fulfilment
of the obligation (specific performance) and is
thus entitled to sue for the unpaid balance of
the purchase price.
ISSUE: WON the deficiency of the purchase
price can still be recovered
HELD: YES. The case is governed by Art. 1484
of the New Civil Code. (SEE Art. 1484, NCC)
Southern Motors had chosen the first remedy.
The complaint is an ordinary civil action for
recovery of the remaining unpaid balance die
on the promissory note. This is shown by the
following circumstances:
1) Southern Motors had not adopted the
procedure or methods outlined by Sec. 14 of
the Chattel Mortgage Law but those prescribed
for ordinary civil actions
2) Southern Motors not only attached the truck
but also the house and lot of Angel.
Nothing unlawful or irregular in Southern
Motors act of attaching the mortgaged truck
itself. As Southern Motors has chosen to exact
the fulfilment of Angels obligation, the former
may enforce execution of the judgment
rendered in its favor on the personal and real

property of the latter not exempt from


execution sufficient to satisfy the judgment.
Attachment is merely an incident to an ordinary
civil action. Therefore, the mortgage creditor
may recover judgment on the mortgage debt
and cause an execution on the mortgaged
property and may cause an attachment to be
issued and levied on such property, upon
beginning his civil action.

No Recourse
Property

Against

Additional

Mortgaged

1) Residential house and lot


LEVY HERMANOS V PACIFIC COMMERCIAL
(1941)
FACTS: In addition to a chattel mortgage on the
motor vehicles that they bought, the Hermanos
also executed a mortgage on a residential lot
and house of strong materials.
HELD: The SC held that the mortgage is void
insofar as it included the house and lot of
vendees. It said that the vendor cannot be
allowed to insist on the sale of the house and lot
of the vendees for to do so would be equivalent
to obtaining a writ of execution against them
concerning other properties which are separate
and distinct from those which are sold on
installment. This would be contrary to public
policy limiting the vendors right to foreclose
the chattel mortgage only on the thing sold.
2) Parcel of land mortgaged by third party
CRUZ V FILIPINAS INVESTMENT (1968)
FACTS: Plaintiff Ruperto G. Cruz purchased on
installments, from Far East Motor Corporation,
an Isuzu Diesel Bus, for which Ruperto executed
a promissory note and a chattel mortgage on
the same vehicle.
As an additional security, Felicidad Vda. De
Reyes, in the form of a SECOND MORTGAGE, a
parcel of land and a building.
Far East Motor Corp. then assigned all its rights
and interest in the Deeds of Chattel Mortgage
and in the Deed of Real Estate Mortgage to
Filipinas Investment and Finance Corp.

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Ruperto defaulted. Filipinas took steps to


foreclose the chattel mortgage, however, the
vehicle had been damaged in an accident. This
is the reason why after the foreclosure sale of
the chattel, the proceeds were not sufficient to
discharge fully indebtedness of Ruperto.

recovery of the supposed unsatisfied balance of


the purchase price from the purchaser or his
privy. Certainly, an extrajudicial foreclosure of
real estate mortgage is one such proceeding.

Therefore, Filipinas prepared to foreclose the


real estate mortgage on Mrs. Reyes land by
paying the mortgage indebtedness of Mrs.
Reyes to DBP, requesting the sheriff to take
possession, and by posting notices of sale.

FILIPINAS INVESTMENT V VITUG (1969)

Although Filipinas admits that the remedies in


Art. 1484 of the New Civil Code is alternative, it
claims that what is being withheld from the
vendor therein is only the right to recover
against the purchaser, and not a recourse to
the additional security put up, not by the
purchaser himself, but by a third person.
ISSUE: WON Filipinas, which has already
extrajudicially foreclosed the chattel mortgage
executed by the buyer, Ruperto, may also
extrajudicially
foreclose
the
real
estate
mortgage constituted by Mrs. Reyes on her own
land, as additional security, for the payment of
the balance of Rupertos obligation, still
remaining unpaid
HELD: The remedies in Art. 1484 of the NCC
are alternative, not cumulative, that the
exercise of one would bar the exercise of the
others. The reason for this doctrine was to
remedy the abuses committed in connection
with the foreclosure of chattel mortgages.
To sustain Filipinas argument is to overlook the
fact that if the guarantor should be compelled
to pay the balance of the purchase price, the
guarantor will in turn be entitled to recover
what she has paid from the debtor vendee; so
ultimately, it will be the vendee who will be
made to bear the payment of the balance of the
price, despite the earlier foreclosure of the
chattel mortgage given by him. Thus, the
protection given by Art. 1484 would be
indirectly
subverted,
and
public
policy
overturned.
Neither is there validity to Filipinas allegation
that, since the law speaks of action, the
restriction should be confined only to the
bringing of judicial suits or proceedings in court.
The word action is without a definite or
exclusive meaning. Considering the purpose for
which the prohibition contained in Art. 1484 was
intended, the word action used therein may
be construed as referring to any judicial or
extrajudicial proceeding by virtue of which the
vendor may lawfully be enabled to exact

Right Of Recourse Against Seller/Assignor

FACTS: Julian R. Vitug executed and delivered


to Supreme Sales & Development Corp. a
promissory note, accompanied by a chattel
mortgage to secure his purchase of a 4-door
consul sedan. Then, Supreme Sales negotiated
and assigned all its rights, title, and interests to
the same to Filipinas Investment & Finance
Corp., the assignment indicating that it is with
recourse against Supreme Sales.
Julian defaulted in the payment of 4
installments due which resulted in the entire
obligation becoming due and demandable.
Pursuant to this, Filipinas obtained a writ of
replevin but this became unnecessary as Julian
voluntarily surrendered possession of the car.
The car was sold at a public auction but since
the proceeds still left a deficiency, Filipinas
wants to hold Supreme Sales liable.
Supreme Sales claims that the with-recourse
provision in the assignment is violative of the
Recto Law, which declares null and void any
agreement in contravention thereof.
ISSUE: WON the Recto Law is applicable in the
case at bar, making the with recourse provision
contained in the agreement null and void
HELD: NO. The remedy presently being sought
is not against the buyer of the car but against
the seller. Under the Recto Law, what Congress
seeks to protect are only the buyers on
installment who more often than not have been
victimized by sellers who, before the enactment
of this law, succeeded in unjustly enriching
themselves at the expense of the buyers
because aside from recovering the goods sold,
upon default of the buyer in the payment of two
instalments, still retained for themselves all
amounts already paid, in addition, furthermore,
to other damages, such as attorneys fees, and
costs. Surely, Congress could not have intended
to impair and much less do away with the right
of the seller to make commercial use of his
credit against the buyer, provided said buyer is
not burdened beyond what this law allows.
In the case at bar, the assignment made by
Supreme Sales to Filipinas of the promissory
note and mortgage of Julian Vitug precisely
stipulated that Filipinas had a right of recourse
against the seller should the buyer fail to pay.

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Since the Recto Law is not applicable in this


case, the said provision remains valid.
The case is remanded for further proceedings.
Right Of Unpaid Seller Under Art. 1484, Civil
Code, Alternative Not Cumulative
SPOUSES ROSARIO V PCI LEASING AND
FINANCE, INC. (2005)
FACTS: Spouses Rosario purchased an Isuzu Elf
pick up utility vehicle from Car Merchants, Inc.
covered by a Purchase Agreement. In order to
pay the balance of the purchase price, the
spouses contracted a loan with PCI Leasing
wherein they executed a promissory note in
favor of PCI Leasing agreeing that in case of
default, the sum and interest shall immediately
become due and demandable. In addition, the
spouses also executed a chattel mortgage in
favor of PCI Leasing over the vehicle.
Since the spouses failed to pay their loan, PCI
Leasing instituted a complaint that led to the
issuance of the trial court of a writ of replevin,
in pursuance of which the sheriff seized the
vehicle and turned over the possession to PCI
Leasing.
The spouses Car Merchants had assigned to PCI
Leasing its right to collect the balance; hence, it
was subrogated to the rights of Car Merchants
subject to the limitations of Art. 1484NCC.
Furthermore, they allege that since PCI Leasing
opted to foreclose the chattel mortgage, it was
estopped from collecting the unpaid balance of
the purchase price.
ISSUE: WON PCI Leasing is the assignee of Car
Merchant; WON Art. 1484 of the NCC is
applicable
HELD: NO. There is no factual basis on the
claim that Car Merchants had assigned its rights
to collect the balance of the purchase price to
PCI Leasing. In fact, what the evidence shows is
that the spouses secured a loan from PCI
Leasing and even executed a promissory note
and a chattel mortgage in its favor.
Under Art. 1625 of the NCC, an assignment of
credit, right or action must appear in a public
document to bind third persons. Since there is
no evidence that Car Merchants executed such
a deed, Art 1484 of the NCC does not apply in
this case.
Even assuming that Art 1484 is applicable, PCI
Leasing is not proscribed from suing the
spouses for their unpaid balance. The fact is
that PCI Leasing did not foreclose the chattel
mortgage, but opted to sue the spouses for the

balance of their account under the promissory


note, with a plea for writ of replevin. By
securing a writ of replevin, the respondent did
not thereby foreclose the chattel mortgage. If
there has been no foreclosure of the chattel
mortgage or a foreclosure sale, then the
prohibition against further collection of the
balance price does not apply.
A creditor is not obliged to foreclose a chattel
mortgage even if there is one; precisely the law
says that any of the remedies may be exercised
by the seller.
Only Actual Sale Of Mortgaged Chattel Bars
Foreclosing Creditor From Recovering Unpaid
Balance
MAGNA FINANCIAL SERVICES GROUP, INC.
V COLARINA (2005)
FACTS: Elias Colarina bought on installment a
Suzuki Multicab from Magna Financial Services
Group, Inc. whereby he executed an integrated
promissory note and deed of chattel mortgage
over the vehicle.
Since Colarina failed to pay the monthly
amortization, Magna filed a Complaint for
Foreclosure of Chattel Mortgage with Replevin.
From the complaint, it will show that Magna
availed itself of the first and third remedies
under Art. 1484 of the NCC.
A writ of replevin was issued by the court and
upon service of the same to Colarina, he
voluntarily surrendered possession of the
vehicle to the sheriff, who in turn, surrendered
possession to Magna.
Colarina points to the inconsistency of the
remedies or reliefs sought by the Magna in its
Complaint where it prayed for the custody of
the chattel mortgage and at the same time
asked for the payment of the unpaid balance on
the motor vehicle.
ISSUE: WON Magna opted to foreclose the
chattel mortgage
HELD: YES. A contract of chattel mortgage is in
the nature of a conditional sale of personal
property given as a security for the payment of
a debt, or the performance of some other
obligation specified therein, the condition being
that the sale shall be void upon the seller
paying to the purchaser a sum of money or
doing some other act named. If the condition is
performed according to its terms, the mortgage
and sale immediately become void, and the
mortgagee is thereby divested of his title. On
the other hand, in case of non payment,

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foreclosure is one of the remedies available to a


mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to
secure that for which the mortgage was given.
Foreclosure may be effected either judicially or
extrajudicially, that is, by ordinary action or by
foreclosure under power of sale contained in
the mortgage. Extrajudicial foreclosure, as
chosen by the petitioner, is attained by causing
the mortgaged property to be seized by the
sheriff, as agent of the mortgagee, and have it
sold at public auction in the manner prescribed
by SEC 14 of Act No. 1508, or the Chattel
Mortgage Law. This rule governs extrajudicial
foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably
elected a remedy of foreclosure under Article
1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change
what it has opted for.
ISSUE: WON there has been
foreclosure of the subject vehicle

an

actual

HELD: NO.
Where the mortgagee elects a
remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel.
It is actual sale of the mortgaged chattel in
accordance with Sec. 14 of Act No. 1508 that
would bar the creditor (who chooses to
foreclose) from recovering any unpaid balance.
And it is deemed that there has been
foreclosure of the mortgage when all the
proceedings of the foreclosure, including the
sale of the property at public auction, have
been accomplished.
Be that as it may, although no actual
foreclosure as contemplated under the law has
taken place in this case, since the vehicle is
already in the possession of Magna and it has
persistently and consistently elected the
remedy of foreclosure, the Court of Appeals,
thus, ruled correctly in directing the foreclosure
of the said vehicle without more.
PD 1417
Further Amending SEC 198 Of The Revised
Administrative Code As Amended By
Republic Act Nos. 116 And 2711, By
Increasing
The
Fees
Collectible
In
Connection With Registration Of Chattel
Mortgages
WHEREAS, there has been an unprecedented
increase in the cost of equipment, materials
and supplies used by the Land Registration
Commission;
WHEREAS, it is in consonance with sound fiscal
policy that the registration fees collectible by

the Land Registration Commission through its


registries of deeds be adjusted accordingly.
NOW, THEREFORE, I, FERDINAND E. MARCOS,
President of the Philippines, by virtue of the
powers in me vested by the Constitution, do
hereby decree and order:
SEC 1. SEC 198 of the Revised Administrative
Code, as amended by Republic Act Nos. 116
and 2711, is hereby further amended to read as
follows:
"Sec. 198. Registration of chattel mortgages
and fees collectible in connection therewith.
Every register of deeds shall keep a primary
entry book and a registration book for chattel
mortgages; shall certify on each mortgage filed
for record, as well as on its duplicate, the date,
hour, and minute when the same was by him
received; and shall record in such books any
chattel mortgage, assignment, or discharge
thereof, and any other instruments relating to a
recorded mortgage, and all such instruments
shall be presented to him in duplicate the
original to be filed and the duplicate to be
returned to the person concerned.
The recording of a mortgage shall be effected
by making an entry, which shall be given a
correlative number, setting forth the names of
the mortgages and the mortgagor, the sum or
obligation guaranteed, date of the instrument,
name of the notary before whom it was sworn
to or acknowledged, and a note that the
property mortgaged, as well as the terms and
conditions of the mortgage, is mentioned in
detail in the instrument filed, giving the proper
file number thereof. The recording of other
instruments relating to a recorded mortgage
shall be effected by way of annotations on the
space provided therefor in the registration
book, after the same shall have been entered in
the primary entry book.
The register of deeds shall also certify the
officer's return of sale upon any mortgage,
making reference upon the record of such
officer's return to the volume and page of the
record of the mortgage, and a reference of such
return on the record of the mortgage itself, and
give a certified copy thereof, when requested,
upon payment of the lawful fees for such copy;
and certify upon each mortgage officer's return
of sale or discharge of mortgage, and upon any
other instrument relating to such a recorded
mortgage, both on the original and on the
duplicate, the date, hour and minute when the
same is received for record and record such
certificate with the return itself and keep an
alphabetical
index
or
mortgagors
and
mortgagees, which record and index shall be
open to public inspection.
Duly certified copies of such records and of filed
instruments shall be receivable as evidence in
any court.

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The register of deeds shall collect the following


fees for services rendered by him under this
SEC:
(a) For entry or presentation of any document in
the primary entry book, five pesos. Supporting
papers presented together with the principal
document need not be charged any entry or
presentation fee unless the party in interest
desires that they be likewise entered.
(b) For filing and recording each chattel
mortgage, including the necessary certificates
and affidavits, the fees established in the
following schedule shall be collected:
"1. When the amount of the mortgage does not
exceed six thousand pesos, seven pesos for the
first five hundred pesos or fractional part
thereof, and three pesos for each additional five
hundred pesos or fractional part thereof.
"2. When the amount of the mortgage is more
than six thousand pesos but does not exceed
thirty thousand pesos, forty-eight pesos for the
initial amount not exceeding eight thousand
pesos, and eight pesos for each additional two
thousand pesos or fractional part thereof.
"3. When the amount of the mortgage is more
than thirty thousand pesos but does not exceed
one hundred thousand pesos, one hundred fifty
pesos for initial amount not exceeding thirtyfive thousand pesos, and fourteen pesos for
each additional five thousand pesos or
fractional part thereof.
"4. When the amount of the mortgage is more
than one hundred thousand pesos but does not
exceed five hundred thousand pesos, three
hundred fifty-two pesos for the initial amount
not exceeding one hundred ten thousand pesos
and twenty pesos for each additional ten
thousand pesos or fractional part thereof.
"5. When the amount of the mortgage is more
than five hundred thousand pesos, one
thousand one hundred sixty-two pesos for the
initial amount not exceeding five hundred
twenty thousand pesos, and thirty pesos for
each additional twenty thousand pesos or
fractional part thereof: Provided, however, That
registration of the mortgage in the province
where the property is situated shall be sufficient
registration: And provided, further, That if the
mortgage is to be registered in more than one
city or province, the register of deeds of the city
or province where the instrument is first
presented for registration shall collect the full
amount of the fees due in accordance with the
schedule prescribed above, and the register of
deeds of the other city or province where the
same instrument is also to be registered shall
collect only a sum equivalent to twenty per
centum of the amount of fees due and paid in
the first city or province, but in no case shall the
fees payable in any registry be less than the
minimum fixed in this schedule.

"(c) For recording each instrument of sale,


conveyance, or transfer of the property which is
subject of a recorded mortgage, or of the
assignment of mortgage credit, the fees
established in the preceding schedule shall be
collected on the basis of ten per centum of the
amount of the mortgage or unpaid balance
thereof: Provided, That the latter is stated in the
instrument.
"(d) For recording each notice of attachment,
including the necessary index and annotations,
eight pesos.
"(e) For recording each release of mortgage,
including the necessary index and reference,
the fees established in the schedule under
paragraph (b) above shall be collected on the
basis of five per centum of the amount of the
mortgage.
"(f) For recording each release of attachment,
including the proper annotations, five pesos.
"(g) For recording each sheriff's return of sale,
including the index and reference, seven pesos.
"(h) For recording a power of attorney,
appointment of judicial guardian, administrator,
or trustee, or any other instrument in which a
person is given power to act in behalf of
another in connection with a mortgage, ten
pesos.
"(i) For recording each instrument or order
relating to a recorded mortgage, including the
necessary index and reference, for which no
specific fee is provided above five pesos.
"(j) For certified copies of records, such fees as
are allowed by law for copies kept by the
register of deeds.
"(k) For issuing a certificate relative to, or
showing the existence or non-existence of, and
entry in the registration book, or a document on
file, for each such certificate containing not
more than two hundred words, five pesos; if it
exceeds that number, an additional fee of one
peso shall collected for every one hundred
words or fractional part thereof, in excess of the
first two hundred words.
"(l) For services rendered in attending to
requests for references to, or researches on any
document on file in the registry, there shall be
collected a fee of two pesos per document."
SEC 2. This decree shall take effect upon its
approval.
Done in the City of Manila, this 9th day of June,
in the year of Our Lord, nineteen hundred and
seventy-eight

Circular No. 7-2002


To: All Executive Judges, Clerks Of Court,
Sheriffs In The Office Of The Clerk Of
Court And Branch Sheriffs In The Regional
Trial Courts
Subject:
Guidelines
For
The
Enforcement Of Supreme Court Resolution

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Of December 14, 1999 In Administrative


Matter No. 99-10-05-0 (Re: Procedure In
Extra-Judicial Foreclosure Of
Mortgage),
As
Amended
By
The
Resolutions Dated January 30, 2001 And
August 7, 2001
These guidelines are issued pursuant to the
Supreme Court En Banc Resolution of December
14, 1999 in Administrative Matter No. 99-10-050, as amended by the resolutions of January 30,
2001 and August 7, 2001, directing the Office of
the Court Administrator to prepare the
guidelines for the enforcement of A.M. No. 9910-05-0 on the extra-judicial foreclosure of
mortgages.
Sec. 1. All applications for extra-judicial
foreclosure of mortgage, whether under the
direction of the Sheriff or a notary public
pursuant to Art. No. 3135, as amended, and Act
1508, as amended, shall be filed with the
Executive Judge, through the Clerk of Court,
who is also the Ex-Officio Sheriff (A.M. No. 9910-05-0, as amended, March 1, 2001).
Sec. 2. Upon receipt of the application, the
Clerk of Court shall:
a.
Examine the same to ensure that the
special power of attorney authorizing the extrajudicial foreclosure of the real property is either
inserted into or attached to the deed of real
estate mortgage (Act No. 3135, Sec. 1, as
amended);
b.
Give a file number to the application and
endorse the date and time of its filing and
thereafter docket the same, keeping, in this
connection, separate docket books for extrajudicial foreclosure sales conducted by the
Sheriff and those conducted by notaries public;
c.
For the
conduct
of extra-judicial
foreclosure of real estate or chattel mortgage
under the direction of the sheriff, collect the
appropriate filing fees and issues the
corresponding official receipt pursuant to the
following schedule:
If the amount of the indebtedness or the
mortgagees claim is:
(1)
Less
than
P50,000.00
.. P275.00
(2)
P50,000.00 or more but less
than
P100,000.00 ..... 400.00
(3)
P100,000.00 or more but less
than
P150,000.00 . 500.00
(4)
P150,000.00 or more but less
than
P200,000.00 . 650.00
(5)
P200,000.00 or more but less
than
P250,000.00 .. 1,000.00
(6)
P250,000.00 or more but less
than

P300,000.00 .. 1,250.00
(7)
P300,000.00 or more but less
than
P400,000.00 .. 1,500.00
(8)
P400,000 or more but less than
P500,000.00 .. 1,750.00
(9)
P500,000.00 or more but not
more than
P100,000,000.00 ... 2,000.00
(10)
For each P1,000.00 in excess of
P1,000,000.00.. 10.00
(SEC 7 (c), Rule 141, Rules of Court, as
amended by A.M. No. 00-2-01-SC, February 1,
2000).
Cooperatives, thrift banks, and rural banks are
not exempt from the payment of filing fees and
other fees under these guidelines (A.M. No. 989-280-RTC, September 29, 1998; A.M. No. 99-393-RTC, April 20, 1999; and A.M. No. 92-9-4080).
d. In case the application is for the extra-judicial
foreclosure of mortgages of real estates and/or
chattels in different locations covering one
indebtedness, issue, apart from the official
receipt for the fees, a certificate of payment
indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to
be foreclosed, the real estates and/or chattels
mortgaged and their respective locations, for
purposes of having the application docketed
with the Clerks of Court in the places where the
other properties are located and of allowing the
extra-judicial foreclosure to proceed thereat.
(A.M. No. 99-10-05-0, par. 2(e)).
Sec. 3. The application for extra-judicial
foreclosure shall be raffled under the
supervision of the Executive Judge, with the
assistance of the Clerk of Court and Ex-Oficio
Sheriff, among all Sheriffs including those
assigned to the Office of the Clerk of court and
Sheriffs assigned in the branches of the court. A
Sheriff to whom the case has been raffled shall
be excluded in the succeeding raffles and shall
participate again only after all other Sheriffs
shall have been assigned a case by raffle
(Administrative Circular No. 3-98, Feb. 5, 1998).
Sec. 4. The Sheriff to whom the application for
extra-judicial foreclosure of mortgage was
raffled shall do the following:
a.
Prepare a Notice of Extra-judicial Sale
using the following form:
NOTICE OF EXTRA-JUDICIAL SALE
Upon extra-judicial petition for sale under Act
3135 / 1508 filed __________________ against
(name and address of Mortgator/s) to satisfy the
mortgage indebtedness which as of ___________
amounts to P _________________, excluding
penalties,
charges,
attorneys
fees
and
expenses of foreclosure, the undersigned or his
duly authorized deputy will sell at public auction
on (date of sale) _______________ at 10:00 A.M.
or soon thereafter at the main entrance of the

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___________ (place of sale) to the highest bidder,


for cash or managers check and in Philippine
Currency, the following property with all its
improvements, to wit:
(Description of Property)
All sealed bids must be submitted to the
undersigned on the above stated time and
date.
In the event the public auction should
not take place on the said date, it shall be
held
on
_______________,
_______________
without further notice.
________________ (date)
SHERIFF
b.
(1) In case of foreclosure of real estate
mortgage, cause the publication of the notice of
sale by posting it for not less than twenty (20)
days in at least three (3) public places in the
municipality or city where the property is
situated and if such property is worth more than
four hundred (P400.00) pesos, by having such
notice published once a week for at least three
(3) consecutive weeks in a newspaper of
general circulation in the municipality or city
(Sec. 3, Act No. 3135, as amended). The
Executive Judge shall designate a regular
working day and definite time each week during
which said notice shall be distributed personally
by him for publication to qualified newspapers
or periodicals as defined in Sec. 1 of P.D. No.
1079, which distribution shall be effected by
raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001).
Unless otherwise stipulated by the parties to
the mortgage contract, the debtor-mortgagor
need not be personally served a copy of the
notice of the extra-judicial foreclosure.
For real estate mortgages covering loans not
exceeding P100,000.00, exclusive of interests
due and unpaid, granted by rural banks (RA No.
7353, Sec. 6) or thrift banks (RA No. 7906, Sec.
18),publication in a newspaper shall be
dispensed with, it being sufficient that the
notices of foreclosure are posted for a period of
sixty (60) days immediately preceding the
public auction in the most conspicuous areas of
the municipal building, the municipal public
market, the rural bank, the barangay hall, and
the barangay public market, if any, where the
land mortgaged is situated. Proof of publication
shall be accomplished by an affidavit of the
Sheriff and shall be attached to the records of
the case.
(2) In case of foreclosure of a chattel mortgage,
post the notice for at least ten (10) days in two
(2) or more public places in the municipality
where the mortgagor resides or where the
property is situated (Sec. 14, Act No. 1508, as
amended).
Sec. 5. Conduct of the extra-judicial foreclosure
sale
a.
The bidding shall be made through
sealed bids which must be submitted to the

Sheriff who shall conduct the sale between the


hours of 9 a.m. and 4 p.m. of the date of the
auction (Act 3135, Sec. 4). The property
mortgaged shall be awarded to the party
submitting the highest bid and, in case of a tie,
an open bidding shall be conducted between
the highest bidders. Payments of the winning
bid shall be made either in cash or in managers
check, in Philippine currency, within five (5)
days from notice.
b.
The sale must be made in the province
in which the real property is situated and, in
case the place within the said province in which
the sale is to be made is the subject of
stipulation, such sale shall be made in said
place in the municipal building of the
municipality in which the property or part
thereof is situated (Act No. 3135, as amended,
Sec. 2);
in case of a chattel mortgage, the sale shall be
made at a place in the municipality where the
mortgagor resides or where the property is
situated (Sec. 14, Act No. 1508, as amended).
Sec. 6. After the sale, the Clerk of Courts shall
collect the appropriate fees pursuant to Sec.
9(1), Rule 141, as amended by A.M No. 00-2-01SC, computed on the basis of the amount
actually collected by him, which fee shall not
exceed P100,000.00 (A.M. No. 99-10-05-0,
March 1, 2001, 2[d]). The amount paid shall not
be subject to a refund even if the foreclosed
property is subsequently redeemed.
Sec. 7. In case of foreclosure under Act No.
1508, the Sheriff shall, within thirty (30) days
from the sale, prepare a return and file the
same in the Office of the Registry of Deeds
where the mortgage is recorded.
Sec. 8. The Sheriff or the notary public who
conducted the sale shall report the name/s of
the bidder/s to the Clerk of Court.
Sec. 9. Upon presentation of the appropriate
receipts, the Clerk of Court shall issue and sign
the Certificate of Sale, subject to the approval
of the Executive Judge or, in the latters
absence, the Vice-Executive Judge. Prior to the
issuance of the certificate of Sale, the Clerk of
court
shall,
in
extra-judicial
foreclosure
conducted under the direction of the sheriff,
collect P300.00 as provided in SEC 20(d), Rule
141, as amended, and in extra-judicial
foreclosure sales conducted under the direction
of a notary public, collect the appropriate fees
pursuant to Rule 141, 20(e), which amount
shall not exceed P100,000.00 (Minute Res., A.M.
No. 99-10-05-0, August 7, 2001).
Sec. 10. After the Certificate of Sale has been
issued, the Clerk of Court shall keep the
complete records for a period of one (1) year
from the date of registration of the certificate of
sale with the Register of Deeds, after which the
records shall be archived. Notwithstanding the
foregoing, juridical persons whose property is

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sold pursuant to an extra-judicial foreclosure


shall have the right to redeem the property
until, but not later than, the registration of the
certificate of foreclosure sale which in no case
shall be more than three (3) months after
foreclosure, whichever is earlier (R.A. 8791, SEC
47). In case the property is redeemed, the Clerk
of Court shall assess the redemptioners fee as
provided in SEC 7 (k), Rule 141, as amended. If
the property is not redeemed, the Clerk of Court
shall, as a requisite for the issuance of the final
Deed of Sale, assess the highest bidder the
amount of P300.00 as provided in SEC 20(d),
Rule 141, as amended.
Sec. 11. These guidelines shall take effect on
April 22, 2002.
Issued this 22nd day of January 2002

V. AN ACT TO REGULATE THE SALE


OF PROPERTY UNDER SPECIAL
POWERS INSERTED IN OR ANNEXED
TO REAL ESTATE MORTGAGES
Act 3135, as amended by Act 4118
(1933), Sec 6 RA 7353 (1992), Sec 18
RA 7906 (1995), Sec 47 RA 8791 (2000)
5.1 Topics
Remedies Available To Mortgagee Upon Default
Of Mortgagor
Foreclosure: A remedy available to the
mortgagee where he subjects the mortgaged
property to the satisfaction of the obligation to
secure for which the mortgage was given. It
may
be
effected
either
judicially
or
extrajudicially.
Authority To Foreclose Mortgage Extrajudicially
1) The only instance when an extrajudicial
foreclosure may be effected is when a sale is
made and a Special Power of Attorney to
extrajudicially foreclose is inserted or attached
to the Real Estate Mortgage (REM).
2) If the REM is silent as to the manner of
foreclosing
the
mortgage,
extrajudicial
foreclosure may not be effected and Rule 68 of
the Rules of Court in Judicial Foreclosure shall
apply.
Procedure
Where to file
> Application should be filed with the Executive
Judge through the Clerk of Court.
> After the receipt of the application, the Clerk
of Court shall:
1) examine the same to ensure that the special
power if attorney authorizing the EJF of the real

property is either inserted or attached to the


deed of real estate mortgage.
2) raffle the application among the Sheriffs
3) cause the posting and /or publication of the
notice of sale
Where to sell
> place where each of the mortgaged property
is located.
> The sale must be made in the province where
the property to be sold is situated. Sale outside
the province is illegal.
> If the mortgage deed specified a place in
the municipality in the province where the sale
would be made, such sale shall be made in such
place.
> If the place of sale in the municipality was not
stipulated, the sale shall be made in the
municipal building of the municipality in
which the property or part thereof is situated.
Posting
Requirement/
Publication
Requirement
1) Notices of the sale shall be posted for not
less than 20 days in at least 3 public
places in the city or municipality where the
property is situated.
2) If property is worth more than P400, the
notice of the sale shall also be published once
a week for 3 consecutive weeks in a
newspaper of general circulation in the city
or municipality.
EXCEPTION
to
the
requirement
of
newspaper publication
even if mortgaged property is worth more than
P400:
> For real estate mortgages covering loans not
exceeding P100,000, exclusive of interests due
and unpaid, granted by rural or thrift banks,
publication in a newspaper shall be dispensed
with, it being sufficient that notices of
foreclosure are posted for a period of 60 days
immediately preceding the public auction in the
most conspicuous areas at the premises of the
rural bank or thrift bank, as the case may be,
and at the municipal building, municipal public
market, barangay hall and barangay public
market if any or where the land is situated
Unless otherwise stipulated by the parties
in
the
mortgage
contract,
the
debtor/mortgagor need not be personally
served a copy of the notice of extrajudicial
foreclosure.
No personal notice is required because an EJF is
an action in rem requiring only the publication
of the notice of the sale to bind the parties
interested.
> Failure to post notice is NOT per se a ground
for invalidating the sale provided that the notice

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thereof is duly published in a newspaper of


general circulation. (DBP vs. Aguirre)
> The object of the notice is to inform the
public of the sale and to secure as many
bidders as possible to get the best price for the
property.
> Republication: Republication in the manner
prescribed by Act 3135 is necessary for the
validity of a postponed EJF sale. The absence of
such republication invalidates the foreclosure
sale.
Conduct Of Sale
1) Sale shall be by public auction or bidding
made through sealed bids.
2) Sealed bids are submitted to the Sheriff who
shall conduct the sale between the hours of
9:00 A.M. to 4:00 P.M. of the date of auction.
The sale shall be under the direction of:
a. Sheriff of the province; or
b. Municipality or auxiliary municipal judge of
the municipality in which the sale is to be
made; or
c. Notary public of the said municipality
3) Property shall be awarded to the highest
bidder, in case of a tie, an open bidding shall be
conducted between the highest bidders.
> No auction sale shall be held unless there are
at least 2 participating bidders (in case of
second sale, if there is only one bidder, the sale
shall proceed)
4) Payment of the winning bid shall be made
either in cash or in managers check, in
Philippine currency, within 5 days from notice.
> Inadequacy of the price would not nullify the
sale unless the price is so inadequate as to
shock the conscience of the court. In fact the
property may be sold for less than its FMV
because the lesser the price the easier for the
owner to effect redemption. (Valmonte v CA)
> If the proceeds of the sale are in excess of
the amount claimed by the mortgagee, the
excess shall be turned over to the mortgagor.
5) Creditor may be barred from participating in
the bidding, only IF so provided in the mortgage
deed. Hence, creditor or any of his
representatives may participate absent any
express provision in the mortgage or trust deed
barring him.
6) Certificate of sale issued by the clerk of court
must be approved by the executive judge or in
his absence the vice-executive judge. No
certificate of sale shall be issued in favor of the
highest bidder until all fees have been paid

use of the property for a period of 12 months.


Upon approval of the bond, the court shall order
the issuance of a writ of possession.
However, a writ of possession may be issued in
an EJF of REM, only if the debtor is in possession
and no third party has intervened. (PNB vs. CA)
2. After the lapse of the redemption
period
Consolidation of the title becomes a matter of
right on the part of the purchaser and the
issuance of a certificate of sale in his favor
becomes ministerial upon the Registry of
Deeds.
To obtain possession, the purchaser may either
ask for a writ of possession or bring an
independent action such as a suit of ejectment.
Remedy Of Debtor If Foreclosure Not Proper
The debtor, in the proceedings in which
possession was requested, but not later than 30
days after the purchaser was given possession,
petition the sale to be set aside and the writ of
possession cancelled, specifying the damages
suffered by him, because the mortgage was not
violated or the sale was not made in
accordance with the provisions hereof, and the
court shall take cognizance of this petition in
accordance with the summary procedure
provided in SEC 112 of Act 496 (now SEC 108 of
PD 1529) and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all
or part of the bond which the parties may have
furnished by the person who obtained the
possession. Either of the parties may appeal
from the order of the judge in accordance with
SEC 14 of Act 496 (no SEC 33 of PD 1529), but
the order of possession shall continue in effect
during the pendency of the appeal.

Redemption
Who may redeem
1) the debtor
2) his successor in interest
3) any judicial creditor having an interest
4) any person having a lien on the property
subsequent to the mortgage under which the
property is sold.

Possession By Purchaser Of Foreclosed Property

Period of Redemption
One year from the date of the registration of
certificate of sale.

1. During redemption period


The purchaser of the foreclosed property is not
automatically entitled to possession of the
property. He must file an ex parte application
and give a bond in the amount equivalent to the

SEC 6. In all cases in which an extrajudicial sale


is made under the special power hereinbefore
referred to, the debtor, his successors in
interest or any judicial creditor or judgment
creditor of said debtor, or any person having a

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lien on the property subsequent to the


mortgage or deed of trust under which the
property is sold, may redeem the same at any
time within the term of one year from and
after the date of the sale, and such
redemption shall be governed by the provisions
of SECs 29-31 and 35 of the Rules of Court.
Date of Sale: has been construed by the
Supreme Court as the date of registration of the
sheriffs certificate of foreclosure sale in the
office of the Register of Deeds concerned.
Where the mortgaged property sold to third
party by the mortgagor: transfers only the right
to redeem the property and the right to
possess, use and enjoy the same during the
redemption period.
Where the mortgaged property sold to third
party by mortgagee after the foreclosure: the
mortgagor may still redeem it at the amount of
the principal obligation plus interest until the
time of actual redemption and not of the
purchase price.
Requisites For A Valid Exercise Of Right Of
Redemption
1) The redemption must have been made within
a year from the date of registration of the
certificate of sale.
2) Payment of the Purchase price of the
property plus 1% interest per month with the
taxes, if paid by the purchaser and the amount
of his prior lien, if any computed from the date
of the registration of the sale up to the time of
redemption.
3) Written notice of the redemption must be
served on the officer who made the sale and a
duplicate filed with the proper Registry of
Deeds.
4) The redemption must be made before the
sale is confirmed by the court.
5. Tender of payment must be made for the full
amount of the purchase price, otherwise, to
allow payment by instalments would be to allow
the extension of the redemption period.
2 Kinds of Redemption
1) Equity of Redemption right of the
mortgagor in case of a judicial foreclosure to
recover the mortgaged property after his
default in the performance the conditions of the
mortgage but before the confirmation of sale of
the mortgaged property.
2) Right of redemption right of the mortgagor
in case of extrajudicial foreclosure to
redeem the mortgaged property within a
certain period after it was sold for the
satisfaction of the mortgage debt. This is the
kind of redemption contemplated in ACT 3135.
Equity
Redemption

of

Right of Redemption

Governing Law
Governed by Rule 68
of the Rules of Court
Applicability
1.
in
judicial
foreclosure of REM;
2. in EJF of REM
involving a bank as a
mortgagee
and
a
juridical person as a
mortgagor

To whom conferred
Conferred by law only
to the mortgagor but
acquired by second
mortgagee since his
right is subordinate to
the first mortgagee.
Period
Can
be
exercised
within a period of not
less than 90 days nor
more than 120 days
from
entry
of
judgment or even after
foreclosure of sale but
prior to confirmation.
When Exercised
Can be exercised after
entry of judgment but
before foreclosure sale
and after foreclosure
sale
but
prior
to
confirmation of sale.
Redemption Price
Redemption
price
depends
on
the
judgment of the court
as to the amount due
to
plaintiff
upon
mortgage debt with
interest and charges
approved by the court
and costs.

5.2 Cases

Governed by SEC 2931 of Rule 39


1.
in
judicial
foreclosure of REM
involving a bank as a
mortgagee,
whether
the mortgagor is a
natural or a juridical
person;
2. in EJF of REM
However, no right of
redemption exists if it
involves a bank as a
mortgagee
and
a
juridical person as a
mortgagor.
Conferred by law to
the
mortgagor,
his
successors-in-interest
or
any
judgment
creditor
of
the
mortgagor.
Can
be
exercised
within 1 year from
date of registration of
certificate of sale.

Can be exercised ONLY


after the foreclosure
sale.

Redemption
price
depends
on
the
purchase price as fixed
in Sec 26 Rule 39 ROC
except in cases under
SEC 78 of the General
Banking
Law,
the
amount
and
the
interest to be paid by
the mortgagor will be
the amount due and
the rate stipulated in
the mortgage loan not
the purchase price and
legal interest under
the ROC.

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Action For Foreclosure Of Mortgage Prescribes


After 10 Years From The Time The Right Of
Action Accrued, I.E. When The Mortgagor
Defaults In The Payment Of His Obligation
CANDO V SPOUSES OLAZO (2007)
Even from a cursory reading of the appeal, it is
indelibly clear that the trial court committed an
appalling blunder when it ruled that an action
for foreclosure of mortgage prescribes after ten
(10) years from the date of the mortgage
contract. Under Article 1142 of the Civil Code, a
mortgage action prescribes after ten (10) years.
Jurisprudence, however, has clarified this rule
by holding that a mortgage action prescribes
after ten (10) years from the time the right of
action accrued, which is obviously not the same
as the date of the mortgage contract. Stated
differently, an action to enforce a right arising
from a mortgage should be enforced within ten
(10) years from the time the right of action
accrues; otherwise, it will be barred by
prescription and the mortgage creditor will lose
his rights under the mortgage. The right of
action accrues when the mortgagor defaults in
the payment of his obligation to the mortgagee.
Remedies Available To Mortgagee Alternative,
Not Successive Or Cumulative
CALTEX PHILS v IAC (1989)
Where a debt is secured by a mortgage and
there is a default in payment on the part of the
mortgagor, the mortgagee has a choice of one
(1) of two (2) remedies, but he cannot have
both. The mortgagee may: 1) foreclosure the
mortgage; or 2) file an ordinary action to collect
the debt.
When the mortgagee chooses the foreclosure of
the mortgage as a remedy, he enforces his lien
by the sale on foreclosure of the mortgaged
property. The proceeds of the sale will be
applied to the satisfaction of the debt. With this
remedy, he has a prior lien on the property. In
case of a deficiency, the mortgagee has the
right to claim for the deficiency resulting from
the price obtained in the sale of the real
property at public auction and the outstanding
obligation at the time of the foreclosure
proceedings
On the other hand, if the mortgagee resorts to
an action to collect the debt, he thereby waives
his mortgage lien. He will have no more priority
over the mortgaged property. If the judgment in
the action to collect is favorable to him, and it
becomes final and executory, he can enforce
said judgment by execution. He can even levy
execution on the same mortgaged property, but

he will not have priority over the latter and


there may be other creditors who have better
lien on the properties of the mortgagor.
CALTEX submits that the principles enunciated
in the Bachrach case are not applicable nor
determinative of the case at bar for the reason
that the factual circumstances obtained in the
said case are totally different from the instant
case. In the Bachrach case, the plaintiff
instituted an action to foreclose the mortgage
after the money judgment in its favor remained
unsatisfied whereas in the present case,
CALTEX initially filed a complaint for collection
of the debt and during the pendency thereof
foreclosed extrajudicially the mortgage.
We disagree. Although the facts in the Bachrach
case and in the present case are not identical,
there is similarity in the fact that the plaintiffs in
these two cases availed of both remedies
although they are entitled to a choice of only
one.
BANK OF AMERICA NT & SA V AMERICAN
REALTY CORP (1999)
Anent real properties in particular, the Court
has laid down the rule that a mortgage creditor
may institute against the mortgage debtor
either a personal action for debt or a real action
to foreclose the mortgage.
In our jurisdiction, the remedies available to the
mortgage creditor are deemed alternative and
not cumulative. Notably, an election of one
remedy operates as a waiver of the other. For
this purpose, a remedy is deemed chosen upon
the filing of the suit for collection or upon the
filing of the complaint in an action for
foreclosure of mortgage, pursuant to the
provision of Rule 68 of the of the 1997 Rules of
Civil Procedure. As to extrajudicial foreclosure,
such remedy is deemed elected by the
mortgage creditor upon filing of the petition not
with any court of justice but with the Office of
the Sheriff of the province where the sale is to
be made, in accordance with the provisions of
Act No. 3135, as amended by Act No. 4118.
In the case at bench, private respondent ARC
constituted real estate mortgages over its
properties as security for the debt of the
principal debtors. By doing so, private
respondent subjected itself to the liabilities of a
third party mortgagor. Under the law, third
persons who are not parties to a loan may
secure the latter by pledging or mortgaging
their own property. Notwithstanding, there is no
legal provision nor jurisprudence in our
jurisdiction which makes a third person who
secures the fulfillment of another's obligation by
mortgaging his own property, to be solidarily

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bound with the principal obligor. The signatory


to the principal contract - loan - remains to be
primarily bound. It is only upon default of the
latter that the creditor may have recourse on
the mortgagors by foreclosing the mortgaged
properties in lieu of an action for the recovery
of the amount of the loan.
SUICO RATTAN & BURI INTERIORS V CA
(2006)
The remedy of extrajudicial foreclosure is
deemed chosen not on the day of the sale but
on the day of the filing of a petition for
foreclosure with the office of the Provincial
Chief. Since the filing of petition for foreclosure
was earlier than the filing of action for sum of
money, the remedy of foreclosure was chosen
first, even if the actual foreclosure sale was
conducted after the filing of action for sum of
money.
The rule is that the remedies of action for sum
of money and foreclosure are alternative and
not cumulative. Hence, the action for sum of
money by Metrobank was validly dismissed
because it already filed a petition for
foreclosure before it filed the action. If it had
filed an action for recovery of deficiency instead
of collection of sum of money, it would not have
been dismissed.
(Because recovery of
deficiency is allowed for Real Estate Mortgage
within 10 years after foreclosure)
Mortgage invalid if mortgagor not the property
owner; doctrine of mortgagee in good faith not
applicable
ERENA V QUERRER-KAUFFMAN (2006)
One of the essential requisites of a mortgage
contract is that the mortgagor must be the
absolute owner of the thing mortgaged. A
mortgage is thus invalid if the mortgagor is not
the property owner. In this case, the trial court
and the CA are one in finding that based on the
evidence on record, the owner of the property is
Kauffman who was not the one who mortgaged
the same to Erena.
The doctrine of mortgagee in good faith cannot
apply in this case. This doctrine is based on the
rule that persons dealing with properties
covered by a TCT are not required to go beyond
what appears on the face of the title. But this is
only in a situation where the mortgagor has a
fraudulent or defective title, but not when the
mortgagor is an impostor and a forger.
In a forged mortgage, as in this case, the
doctrine of mortgagee in good faith cannot be

applied and will not benefit a mortgagee no


matter how large is his or her reservoir of good
faith and diligence. Such mortgage is void and
cannot prejudice the registered owner whose
signature to the deed is falsified. When the
instrument presented is forged, even if
accompanied
by
the
owners
duplicate
certificate of title, the registered owner does
not lose his title, and neither does the assignee
in the forged deed acquire any right or title to
the property. An innocent purchaser for value is
one who purchases a titled land bay virtue of a
deed executed by the registered owner himself
not a forged deed.
Newspaper of General Circulation
PEREZ V PEREZ (2005)
To be newspaper of general circulation, it is
enough
that
it
is
published
for
the
dissemination of local news and general
information; that it has a bona fide subscription
list of paying subscribers and that it is published
at regular intervals.
The newspaper must not also be devoted to the
interests or published for the entertainment of a
particular class, profession, trade, calling, race,
or religious denomination. The newspaper need
not have the largest circulation as long as it is
of general circulation.
In this case, the Olongapo News was the only
newspaper in general circulation in Bataan at
the time the notice of auction was published
Waiver By Parties Of Posting And Publication
Requirements Void
PNB V NEPOMUCENO PRODUCTIONS, INC.
(2002)
FACTS: Petitioner PNB granted respondents a 4
Million Pesos credit line to finance the filming of
the movie Pacific Connection. The loan was
secured by mortgages on respondents real and
personal properties, to wit: (1) the Malugay
property; (2) the Forbes property; and (3)
several motion picture equipments. The credit
line was later increased to 6 Million Pesos and
finally to 7.5 Million Pesos. Respondents
defaulted in their obligation. Petitioner sought
foreclosure of the mortgaged properties. The
auction sale was re-scheduled several times
without need of republication of the notice of
sale, as stipulated in the Agreement to
Postpone Sale, until finally, the auction sale
proceeded, with petitioner as the highest bidder
in the amount of P10,432,776.97. Aggrieved,
respondents filed a Civil Case with the RTC, an
action for annulment of foreclosure sale and

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damages
with
injunction.
Respondents
contended that the foreclosure sale is null and
void because: (1) the obligation is yet to mature
as there were negotiations for an additional
loan amount; (2) lack of publication; (3) the
purchase price was grossly inadequate and
unconscionable; and (4) the foreclosure
proceedings were initiated by petitioner in bad
faith.
RTC ordered the annulment and setting aside of
the foreclosure proceedings and auction sale on
the ground that there was lack of
publication of the notice of sale. Petitioner
appealed to the CA. CA dismissed petitioners
appeal with regard to the Forbes Park property
as the same was already the subject of a Deed
of Reconveyance executed by petitioner in
favor of respondents as well as a Compromise
Agreement dated between the same parties.
As to the Malugay property, CA affirmed the
RTC decision.
ISSUE: WON the parties to the mortgage can
validly waive the posting and publication
requirements mandated by Act No. 3135.
HELD
NO.
Act. No. 3135, as amended,
governing
extrajudicial
foreclosure
of
mortgages on real property is specific with
regard to the posting and publication
requirements of the notice of sale, to wit:
Sec. 3. Notice shall be given by posting notices
of the sale for not less than twenty days in at
least three public places of the municipality or
city where the property is situated, and if such
property is worth more than four hundred
pesos, such notice shall also be published once
a week for at least three consecutive weeks in a
newspaper of general circulation in the
municipality or city.
On this score, it is well settled that what Act No.
3135 requires is: (1) the posting of notices of
sale in three public places; and, (2) the
publication of the same in a newspaper of
general circulation. Failure to publish the notice
of sale constitutes a jurisdictional defect, which
invalidates the sale.
Petitioner and
respondents have absolutely no right to waive
the posting and publication requirements of Act
No. 3135. While it is established that rights
may be waived, Article 6 of the Civil Code
explicitly provides that such waiver is subject to
the condition that it is not contrary to law,
public order, public policy, morals, or good
customs, or prejudicial to a third person with a
right recognized by law.
The principal object of a notice of sale in a
foreclosure of mortgage is not so much to notify
the mortgagor as to inform the public generally

of the nature and condition of the property to


be sold, and of the time, place, and terms of the
sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the
statutory
requirements
of
posting
and
publication are mandated, not for the
mortgagors benefit, but for the public or third
persons.
In fact, personal notice to the
mortgagor
in
extrajudicial
foreclosure
proceedings is not even necessary, unless
stipulated. As such, it is imbued with public
policy considerations and any waiver thereon
would be inconsistent with the intent and letter
of Act No. 3135. Moreover, statutory provisions
governing publication of notice of mortgage
foreclosure sales must be strictly complied with
and slight deviations therefrom will invalidate
the notice and render the sale at the very least
voidable.
Thus, in the recent case of Development Bank
of the Philippines v. Aguirre, the foreclosure
sale held more than two (2) months after the
published date of sale was considered void for
lack of republication. Similarly, in the instant
case, the lack of republication of the notice of
the subject foreclosure sale renders it void.

OUANO V CA (2003)
FACTS: Julieta M. Ouano obtained a loan from
the PNB in the amount of P104,280.00. As
security for said loan, she executed a real
estate mortgage over two parcels of land. She
defaulted on her obligation. PNB filed a petition
for extrajudicial foreclosure with the City Sheriff
of Mandaue City. The sheriff prepared a notice
of sale setting the date of public auction of the
two parcels of land on December 5, 1980 at
9:00 a.m. to 4:00 p.m. He caused the notice to
be published in the Cebu Daily Times, a
newspaper of general circulation in Mandaue
City, in its issues of November 13, 20 and 27,
1980. He likewise posted copies thereof in
public places in Mandaue City and in the place
where the properties are located. However, the
sale as scheduled and published did not take
place as the parties, on four separate dates,
executed Agreements to Postpone Sale
(Agreements). These Agreements were
addressed to the sheriff, requesting the latter to
defer the auction sale to another date at the
same time and place, without any further
republication of the Notice. In all the
postponements, no new notice of sale was
issued, nor was there any republication or
reposting of notice for the rescheduled dates.
Finally, on May 29, 1981, the sheriff conducted
the auction sale, awarding the two parcels of
land to PNB, the only bidder. He executed a

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Certificate of Sale certifying the sale for and in


consideration of P195, 510.50.
As Julieta failed to redeem the properties within
the one year period from registration of sale,
PNB consolidated its title on February 12, 1983.
On February 23 of the same year, it conveyed
the properties to Alfredo Ouano, the brother of
Julieta, under a Deed of Promise to Sell payable
in five years. On March 28, 1983, Julieta sent
demand letters to PNB and Ouano, pointing out
irregularities in the foreclosure sale. On April
18, 1983, Julieta filed a complaint with the RTC
of Cebu for the nullification of the May 29, 1981
foreclosure sale. Ouano filed a motion for
leave to intervene, and filed his Answer in
Intervention to protect his rights over the
properties.

invalidating the sale. Consequently, such defect


renders the sale absolutely void and no title
passes.
Ouano, however, insists that there was
substantial compliance with the publication
requirement, considering that prior publication
and posting of the notice of the first date were
made.

In Tambunting v. Court of Appeals, we held that


republication in the manner prescribed by Act
No. 3135 is necessary for the validity of a
postponed extrajudicial foreclosure sale. Thus
we stated:

While the case was pending, on February 25,


1986, PNB executed a Deed of Sale in favor of
Ouano. The Register of Deeds of Mandaue City
accordingly cancelled the TCTs in PNBs name
and issued in lieu thereof TCTs in the name of
petitioner over the two parcels of land. On
January 29, 1990, the Regional Trial Court of
Cebu rendered a decision in favor of Julieta,
holding that the lack of republication rendered
the foreclosure sale void. Not satisfied, PNB
and Ouano brought the case to the CA. In its
decision, said court affirmed the trial courts
ruling on the same ground that there was no
compliance with the mandatory requirements of
posting and publication of notice of sale. Ouano
filed a motion for reconsideration, which was
denied for lack of merit by the same court on
April 15, 1997.

Where required by the statute or by the terms


of the foreclosure decree, public notice of the
place and time of the mortgage foreclosure sale
must be given, a statute requiring it being held
applicable to subsequent sales as well as to the
first advertised sale of the property

ISSUE: WON requirements of Act No. 3135 were


complied with in the May 29, 1981 foreclosure
sale

The principal object of a notice of sale in a


foreclosure of mortgage is not so much to notify
the mortgagor as to inform the public generally
of the nature and condition of the property to
be sold, and of the time, place, and terms of the
sale. Notices are given to secure bidders and
prevent a sacrifice of the property. Clearly, the
statutory requirements of posting and
publication are mandated, not for the
mortgagors benefit, but for the public or third
persons. In fact, personal notice to the
mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless
stipulated. As such, it is imbued with public
policy considerations and any waiver thereon
would be inconsistent with the intent and letter
of Act No. 3135. Publication, therefore, is
required to give the foreclosure sale a
reasonably wide publicity such that those
interested might attend the public sale. To allow
the parties to waive this jurisdictional
requirement would result in converting into a
private sale what ought to be a public auction.

HELD: NO. Act No. 3135 (as amended by Act


No. 4118) SEC 3, which provides:
SEC. 3. Notice shall be given by posting notices
of the sale for not less than twenty (20) days in
at least three public places of the municipality
or city where the property is situated, and if
such property is worth more than four hundred
pesos, such notice shall also be published once
a week for at least three consecutive weeks in a
newspaper of general circulation in the
municipality of city.
It is a well-settled rule that statutory provisions
governing publication of notice of mortgage
foreclosure sales must be strictly complied
with, and that even slight deviations therefrom
will invalidate the notice and render the sale at
least voidable. Failure to advertise a mortgage
foreclosure sale in compliance with statutory
requirements constitutes a jurisdictional defect

Ouano further contends that republication may


be waived voluntarily by the parties.

This argument has no basis in law.

See PNB vs. Nepomuceno

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Moreover, assuming arguendo that the written


waivers are valid, we find noticeable flaws that
would nevertheless invalidate the foreclosure
proceedings. First, the Agreements, as worded,
only waived further republication of the notice
of sale. Nothing in the Agreements indicates
that the parties likewise dispensed with the
reposting of the notices of sale. As there was no
reposting of notice of the May 29, 1981 sale,
the foreclosure fell short of the requirements of
Act No. 3135. Second, we observe that the
Agreements were executed and filed with the
sheriff several days after each rescheduled
date. The first agreement was timely filed, two
days prior to the originally scheduled sale on
December 5, 1980. The subsequent
agreements, however, was executed and filed
several days after the rescheduled sales. On the
rescheduled dates, therefore, no public sale
occurred, nor was there any request to
postpone filed with the sheriff, except for the
first one. In short, the Agreements are clearly
defective for having been belatedly executed
and filed with the sheriff. PNB is at fault. It is the
mortgagee who causes the mortgaged property
to be sold, and the date of sale is fixed upon his
instruction. PNBs inaction on the scheduled
date of sale and belated filing of requests to
postpone may be deemed as an abandonment
of the petition to foreclose it filed with the
sheriff. Consequently, its right to foreclose the
mortgage based on said petition lapsed.
Ouano asserts that Rule 39, SEC 24 of the Rules
of Court, which allows adjournment of execution
sales by agreement of the parties should be
applied.

The said provision provides:


Sec. 24. Adjournment of Sale By written
consent of debtor and creditor, the officer may
adjourn any sale upon execution to any date
agreed upon in writing by the parties. Without
such agreement, he may adjourn the sale from
day to day, if it becomes necessary to do so for
lack of time to complete the sale on the day
fixed in the notice.
Distinction should be made of the three
different kinds of sales under the law, namely:
an ordinary execution sale (ROC Rule 39)
a judicial foreclosure sale (ROC Rule 68)
an extrajudicial foreclosure sale (Act 3135)
A different set of law applies to each class of
sale mentioned. The cited provision in the
Rules of Court hence does not apply to an

extrajudicial foreclosure sale. Moreover, even


assuming that the aforecited provision applies,
all it authorizes is the adjournment of the
execution sale by agreement of the parties.
Nowhere does it state that republication and
reposting of notice for the postponed sale may
be waived. Thus, it cannot, by any means,
sanction the waiver in the case at bar.
Publication Of Notice Of Foreclosure Sale More
Than Sufficient Compliance With The Posting
Notice Requirement Of The Law
OLIZON V CA(1994)
We take judicial notice of the fact that
newspaper publications have more far-reaching
effects than posting on bulletin boards in public
places. There is a greater probability that an
announcement or notice published in a
newspaper of general circulation, which is
distributed nationwide, shall have a readership
of more people than that posted in a public
bulletin board, no matter how strategic its
location may be, which caters only to a limited
few. Hence, the publication of the notice of sale
in the newspaper of general circulation alone is
more than sufficient compliance with the noticeposting requirement of the law. By such
publication, a reasonably wide publicity had
been effected such that those interested might
attend the public sale, and the purpose of the
law had been thereby subserved.
The object of a notice of sale is to inform the
public of the nature and condition of the
property to be sold, and of the time, place and
terms of the sale. Notices are given for the
purpose of securing bidders and to prevent a
sacrifice of the property. If these objects are
attained, immaterial errors and mistakes will
not affect the sufficiency of the notice; but if
mistakes or omissions occur in the notices of
sale, which are calculated to deter or mislead
bidders, to depreciate the value of the property,
or to prevent it from bringing a fair price, such
mistakes or omissions will be fatal to the
validity of the notice, and also to the sale made
pursuant thereto.
In the instant case, the aforesaid objective was
attained since there was sufficient publicity of
the sale through the newspaper publication.
There is completely no showing that the
property was sold for a price far below its value
as to insinuate any bad faith, nor was there any
showing or even an intimation of collusion
between the sheriff who conducted the sale and
respondent bank. This being so, the alleged
non-compliance with the posting requirement,

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even if true, will not justify the setting aside of


the sale.
Foreclosure Void If Sale Does Not Take Place On
The Date Specified In Published Notice
DBP V AGUIRRE (2001)
Failure to post notice is not per se a ground for
invalidating the sale, provided notice is duly
published in a newspaper of general circulation.
In Olizon vs. CA, the Court held that newspaper
have more-far-reaching effects than posting on
bulletin boards in public places. Because of the
greater probability of readership of more people
and
that
newspapers
are
distributed
nationwide, there is a reasonably wide publicity.
Those interested might attend the public sale.
Publication in the newspaper of general
circulation alone is more than sufficient
compliance with the notice-posting requirement
of the law.
Here, the sale was held more than two months
after the published date of the sale, rendering
the sale void. In Masantol Rural Bank, Inc. v.
CA the Court stated that failure to publish the
notice of auction sale as required by the statute
constitutes a jurisdictional defect which
invalidates the sale. Masantol squarely applies.
Although lack of republication of notice of sale
has not been raised, SC may rule on the
relevant issue of DBPs lack of jurisdiction to
hold the foreclosure sale.
Republication Of Notice Of Sale
DBP V CA (2003)
Posting requirement was complied with in this
case but not the publication requirement. DBP
published the notice of auction sale scheduled
on 12 August 1986. However, no auction sale
took place on 12 August 1986 because DBP, at
the instance of ERHC, agreed to postpone the
same to 11 September 1986.
The Court held recently in Ouano v. Court of
Appeals that republication in the manner
prescribed by Act No. 3135 is necessary for the
validity of a postponed extrajudicial foreclosure
sale. Another publication is required in case the
auction sale is rescheduled, and the absence of
such republication invalidates the foreclosure
sale.
The Court also ruled in Ouano that the parties
have no right to waive the publication
requirement in Act No. 3135.
Publication, therefore, is required to give the
foreclosure sale a reasonably wide publicity

such that those interested might attend the


public sale. To allow the parties to waive this
jurisdictional requirement would result in
converting into a private sale what ought to be
a public auction.
Foreclosure Of Mortgage Arising Out Of A
Settlement Of Estate Not Covered By Act 3135
PNB V CA (2001)
WON Act 3135 is applicable in the case? NO.
WON PNB may still recover deficiency from the
estate? NO. Since it elected to extra-judicially
foreclose the mortgage.
The case at bar involves a foreclosure of
mortgage arising out of a settlement of estate,
wherein the administrator mortgaged a
property belonging to the estate of the
decedent, pursuant to an authority given by the
probate court. The Rules of Court on Special
Proceedings comes into play decisively. SEC 7,
Rule 86 of the Rules of Court is appropriately
applicable to the case at hand and not Act
3135.
Case law now holds that this rule grants to the
mortgagee three distinct, independent and
mutually exclusive remedies that can be
alternatively pursued by the mortgagee creditor
for the satisfaction of his credit in case the
mortgagor dies, among them:
1. To waive the mortgage and claim the entire
debt from the estate of the mortgagor as an
ordinary claim;
2. To foreclose the mortgage judicially and
prove any deficiency as an ordinary claim; and
3. To rely on the mortgage exclusively,
foreclosing the same at any time before it is
barred by prescription without right to file a
claim for deficiency.
The plain result of adopting the last mode of
foreclosure, which PNB did in this case, is that
the creditor waives his right to recover any
deficiency from the estate.

Inadequacy of Bid Price


VALMONTE V CA (1999)
It is well-settled that when there is right to
redeem, inadequacy of price is of no moment
for the reason that the judgment debtor has
always had the chance to redeem and reacquire
the property. In fact, the property may be sold

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for less of its fair market value precisely


because the lesser the price, the easier for the
owner to effect redemption.
Issuance Of A Writ Of Possession
SAMSON V RIVERA (2004)
This Court has consistently held that the duty of
the trial court to grant a writ of possession is
ministerial. Such writ issues as a matter of
course upon the filing of the proper motion and
the approval of the corresponding bond. No
discretion is left to the trial court. Any question
regarding the regularity and validity of the sale,
as well as the consequent cancellation of the
writ, is to be determined in a subsequent
proceeding as outlined in SEC 8 of Act 3135.
Such question cannot be raised to oppose the
issuance of the writ, since the proceeding is ex
parte. The recourse is available even before the
expiration of the redemption period provided by
law and the Rules of Court.
The purchaser, who has a right to possession
that extends after the expiration of the
redemption period, becomes the absolute
owner of the property when no redemption is
made.
Hence, at any time following the
consolidation of ownership and the issuance of
a new transfer certificate of title in the name of
the purchaser, he or she is even more entitled
to possession of the property. In such a case,
the bond required under SEC 7 of Act 3135 is no
longer necessary, since possession becomes an
absolute right of the purchaser as the confirmed
owner.
This Court has long settled that a pending
action for annulment of mortgage or foreclosure
does not stay the issuance of a writ of
possession. Therefore, the contention of
petitioners
that
the
RTC
should
have
consolidated Civil Case No. 01-6219 with LR
Case No. 01-2698 and resolved the annulment
case prior to the issuance of the Writ of
Possession is unavailing.
DBP V SPOUSES GATAL (2005)
WON the RTC validly dismissed the petition for
writ of possession on the ground of Litis
Pendentia given that a complaint for injunction
with TRO was pending, in which action sought
to declare the sale to Torrefranca as void and to
uphold the spouses right to pre-emption. NO.
The rights asserted and the reliefs sought by
the parties in both cases are not identical. Thus,
Litis Pendentia is unavailing.

Sec 33, Rule 39 of the ROC: if no redemption be


made within a year from the date of the
registration of the certificate of sale, the
purchaser is entitled to a conveyance and
possession of the property,
Here, no redemption was made within a year
from January 1996. So in August, 1997, more
than a year after, DBP filed a petition for writ of
possession. This is in order.
Where, as here, the title is consolidated in the
name of the mortgagee, the writ of possession
becomes a matter of right on the part of the
mortgagee, and a ministerial duty on the part of
the court to issue the same.
The pendency of a separate civil suit
questioning the validity of the sale of the
mortgaged property cannot bar the issuance of
the writ of possession.
Posting Of Bond Not Necessary If Writ Of
Possession Applied For After Ownership Has
Vested On The Creditor-Mortgagee
METROPOLITAN
BANK
AND
TRUST
COMPANY V SPOUSES BANCE (2008)
The writ of possession was not irregular despite
the fact that petitioner did not post a bond. The
posting of a bond as a condition for the
issuance of the writ of possession becomes
necessary only if it is applied for within one year
from the registration of the sale with the
register of deeds, i.e., during the redemption
period inasmuch as ownership has not yet
vested on the creditor-mortgagee. After the
one-year period, and no redemption was made,
the mortgagor loses all interest over it. In this
case, respondents were already stripped of
their rights over the properties when they failed
to redeem the same within one year from May
3, 1999, the date of registration of the sale.
Hence, when petitioner applied for the writ after
the expiration of the redemption period there
was even more reason to issue the writ.
Exception To The Rule That Issuance Of Writ Of
Possession Ministerial And May Be Done Ex
Parte
CHINA BANKING CORP V SPOUSES LOZADA
(2008)
The exception provided under SEC 33 of Rule
39 of the Revised Rules of Court (to the general
rule that issuance of a writ of possession is
ministerial and may be done ex parte)
contemplates a situation in which a third party
holds the property by adverse title or right,

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such as that of a co-owner, tenant or


usufructuary.
The co-owner, agricultural
tenant, and usufructuary possess the property
in their own right, and they are not merely the
successor or transferee of the right of
possession of another co-owner or the owner of
the property. The spouses Lozada cannot claim
that their right of possession over Unit No. 402
is analogous to any of these.
It is true that in the case presently before this
Court, PPGI executed in favor of the spouses
Lozada the Contract to Sell covering Unit No.
402 before it constituted in favor of CBC the
real estate mortgages on 51 Project units
including Unit No. 402. Nonetheless, it must be
emphasized that what PPGI executed in favor of
the spouses Lozada was a Contract to Sell, a
mere promise to sell, which, at the moment of
its execution, did not yet transfer possession,
much less, title to Unit No. 402 from PPGI to the
spouses Lozada. When PPGI constituted the
real estate mortgage on Unit No. 402 in favor of
CBC six months later, possession of and title to
the property still resided in PPGI. And when
PPGI subsequently ceded possession of Unit No.
402, upon its completion, to the spouses
Lozada, such right was already burdened by the
terms and conditions of the mortgage
constituted thereon. By merely stepping into
the shoes of PPGI, the spouses Lozadas right of
possession to Unit No. 402 cannot be less or
more than PPGIs.
The spouses Lozada, having succeeded PPGI in
the possession of Unit No. 402, cannot be
considered a third party holding the said
property adversely to PPGI, the defaulting
debtor/mortgagor.
Resultantly, the general
rule, and not the exception, applies to the
instant Petition. It was the mandatory and
ministerial duty of the Makati City RTC to grant
the ex parte petition of CBC and order the
issuance of a writ of possession in the latters
favor over Unit No. 402.
It was likewise
mandatory and ministerial for the Clerk of Court
to comply with the Makati City RTC order by
issuing the writ of possession, and for the
Sheriff to implement the writ by first issuing a
notice to vacate to the occupants of Unit No.
402.
Nature Of Redemption Period
SPOUSES LANDRITO V CA (2005)
In Lazo v. Republic Surety & Insurance Co., Inc.,
this Court has made it clear that it is only
where, by voluntary agreement of the parties,
consisting of extensions of the redemption
period, followed by commitment by the debtor
to pay the redemption price at a fixed date, will

the concept of legal redemption be converted


into one of conventional redemption.
Here, there is no showing whatsoever that
petitioners agreed to pay the redemption price.
On the contrary, their act of filing their
complaint to declare the nullity of the
foreclosure sale is indicative of their refusal to
pay the redemption price on the alleged
deadline set by the husband. At the very least,
if they so believed that their loan obligation was
only for P1,000,000.00, petitioners should have
made an offer to redeem within one (1) year
from the registration of the sheriffs certificate
of sale, together with a tender of the same
amount. This, they never did.
It must be remembered that the period of
redemption is not a prescriptive period but a
condition precedent provided by law to restrict
the right of the person exercising redemption.
Correspondingly, if a person exercising the right
of redemption has offered to redeem the
property within the period fixed, he is
considered to have complied with the condition
precedent prescribed by law and may
thereafter
bring
an
action
to
enforce
redemption. If, on the other hand, the period is
allowed to lapse before the right of redemption
is exercised, then the action to enforce
redemption will not prosper, even if the action
is brought within the ordinary prescriptive
period. Moreover, the period within which to
redeem the property sold at a sheriffs sale is
not suspended by the institution of an action to
annul the foreclosure sale. It is clear, then, that
petitioners have lost any right or interest over
the subject property primarily because of their
failure to redeem the same in the manner and
within the period prescribed by law.
Their
belated attempts to question the legality and
validity of the foreclosure proceedings and
public auction must accordingly fail.
One Year Of Period Of Redemption Computed
From Date Of Registration Of Certificate Of
Foreclosure Sale
REYES V NOBLEJAS (1967)
Redemption is not the concern merely of the
auction-vendee and the mortgagor, but also of
the latters successors in interest or any judicial
creditor or judgment creditor of said mortgagor,
or any person having a lien on the property
subsequent to the mortgage under which the
property has been sold. It is precisely for this
reason that the certificate of sale should be
registered, for only upon such registration may
it legally be said that proper notice, though
constructive, has been served unto possible
redemptioners contemplated in the law. It is for

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this reason that the date of sale mentioned in


SEC 6 of Act 3135 should be construed to mean
the date of registration of the certificate of sale
in the office of the register of deeds concerned.
The Land Registration Commissioner was right
in ordering the Register of Deeds of Rizal to
deny the registration of the Deed of Sale and
the Affidavit of Consolidation of Ownership, the
simultaneous registration of which documents
was sought by herein petitioner even before the
certificate of sale issued by the sheriff was
registered.
Extension Of 1-Year Redemption Period
LAZO V REPUBLIC SURETY (1970)
The parties had abandoned entirely the concept
of legal redemption in this case and converted
it into one of conventional redemption, in which
the only governing factor was the agreement
between them.
The plaintiffs' repeated requests for time within
which to redeem, each with a definite date of
expiration, generated binding contracts when
approved by the defendant company. A
contract, needless to say, has the force of law
between the parties. In any event, the principle
of estoppel would step in to prevent the
plaintiffs from going back upon their own acts
and representations to the prejudice of the
other party who relied upon them. This is a
principle of equity and natural justice, expressly
adopted in our Civil Code (Arts. 1431 et seq.)
and articulated as one of the conclusive
presumptions in Rule 31, Sec. 3(a), of our Rules
of Court as follows:
Whenever a party has, by his own declaration,
act, or omission, intentionally and deliberately
led another to believe a particular thing true,
and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or
omission, be permitted to falsify it.
IBAAN RURAL BANK V CA (1999)
When petitioner received a copy of the
Certificate of Sale registered in the Office of the
Register of Deeds of Lipa City, it had actual and
constructive knowledge of the certificate and its
contents. For two years, it did not object to the
two-year redemption period provided in the
certificate. Thus, it could be said that petitioner
consented to the two-year redemption period
especially since it had time to object and did
not. When circumstances imply a duty to speak
on the part of the person for whom an
obligation is proposed, his silence can be
construed as consent. By its silence and

inaction, petitioner misled private respondents


to believe that they had two years within which
to redeem the mortgage. After the lapse of two
years, petitioner is estopped from asserting that
the period for redemption was only one year
and that the period had already lapsed.
The doctrine in Lazo vs. Republic Surety and
Insurance Co., Inc. does not apply in this case.
In that case the court held that the one year
period of redemption provided in Act No. 3135
is only directory and can be extended by
agreement of the parties. But it bears noting
that in Lazo the parties voluntarily agreed to
extend the redemption period.
Thus, the
concept of legal redemption was converted by
the
parties
in
Lazo
into
conventional
redemption. This is not so in the instant case.
There was no voluntary agreement. In fact, the
sheriff unilaterally and arbitrarily extended the
period of redemption to two (2) years in the
Certificate of Sale. The parties were not even
privy to the extension made by the sheriff.
Nonetheless, as above discussed, the bank
cannot after the lapse of two years insist that
the redemption period was one year only.
Additionally, the rule on redemption is liberally
interpreted in favor of the original owner of a
property. The fact alone that he is allowed the
right to redeem clearly demonstrates the
solicitousness of the law in giving him another
opportunity, should his fortune improve, to
recover his lost property.
Right Of Redemption Distinguished From Equity
Of Redemption
HUERTA ALBA RESORT V CA (2000)
From the various decisions, resolutions and
orders a quo it can be gleaned that what
petitioner has been adjudged to have was only
the equity of redemption over subject
properties.
On the distinction between the
equity of redemption and right of redemption,
the case of Gregorio Y. Limpin vs. Intermediate
Appellate Court,7 [166 SCRA 87.] comes to the
fore:
The equity of redemption is, to be sure,
different from and should not be confused with
the right of redemption.
The right of redemption in relation to a
mortgage - understood in the sense of a
prerogative to re-acquire mortgaged property
after registration of the foreclosure sale - exists
only in the case of the extrajudicial foreclosure
of the mortgage. No such right is recognized in
a judicial foreclosure except only where the

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mortgagee is the Philippine National Bank or a


bank or banking institution.
Where a mortgage is foreclosed extrajudicially,
Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the
registration of the sheriffs certificate of
foreclosure sale.
Where the foreclosure is judicially effected,
however, no equivalent right of redemption
exists.
The law declares that a judicial
foreclosure sale, when confirmed by an order
of the court, x x shall operate to divest the
rights of all the parties to the action and to vest
their rights in the purchaser, subject to such
rights of redemption as may be allowed by law.
Such rights exceptionally allowed by law (i.e.,
even after confirmation by an order of the
court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and
2938), and the General Banking Act (R.A. 337).
These laws confer on the mortgagor, his
successors in interest or any judgment creditor
of the mortgagor, the right to redeem the
property sold on foreclosure - after confirmation
by the court of the foreclosure sale - which right
may be exercised within a period of one (1)
year, counted from the date of registration of
the certificate of sale in the Registry of
Property.
But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or a
bank or banking institution. In such a case, the
foreclosure sale, when confirmed by an order
of the court. x x shall operate to divest the
rights of all the parties to the action and to vest
their rights in the purchaser. There then exists
only what is known as the equity of redemption.
This is simply the right of the defendant
mortgagor to extinguish the mortgage and
retain ownership of the property by paying the
secured debt within the 90-day period after the
judgment becomes final, in accordance with
Rule 68, or even after the foreclosure sale but
prior to its confirmation.
This is the mortgagors equity (not right) of
redemption which, as above stated, may be
exercised by him even beyond the 90-day
period from the date of service of the order,
and even after the foreclosure sale itself,
provided it be before the order of confirmation
of the sale. After such order of confirmation, no
redemption can be effected any longer.
Redemption
Price
To
Accommodation Mortgagors
BELO V PNB (2001)

Be

Paid

By

Eduardo Belo, assignor of the petitioners, is an


accommodation mortgagor. Accommodation
mortgagors as such are not in any way liable for
the payment of the loan or principal obligation
of the debtor/borrower. The liability of the
accommodation mortgagor extends only up to
the loan value of their mortgaged property and
not to the entire loan itself. Hence, it is only just
that they be allowed to redeem their mortgaged
property by paying only the winning bid price
plus interest at the public auction sale with
respect only to the property belonging to the
accommodation mortgagor.
The principle of indivisibility of mortgage
contracts does not apply to the right of
redemption of an accommodation mortgagor
and her assignees. Indivisibility arises only
where there is a debt, that is, there is a debtorcreditor relationship. But, this relationship is
wanting in the case at bar in the sense that
petitioners are assignees of an accommodation
mortgagor and not of a debtor-mortgagor.
Hence, it is fair and logical to allow the
petitioners to redeem only the property
belonging to their assignor, Eduardo Belo.
With respect to the 4 parcels of land belonging
to Eslabon Spouses, petitioners being total
strangers to said lots lack legal personality to
redeem the same. Fair play and justice demand
that respondent PNBs interest of recovering its
entire bank claim should not be at the expense
of petitioners, as assignees of Belo, who is not
indebted to it.
Preserving The Right Of Redemption Beyond
Redemption Period
HI-YIELD REALTY V CA (2002)
What is the redemptioners option therefore
when the redemption period is about to expire
and the redemption cannot take place on
account of disagreement over the redemption
price?
According to jurisprudence, the redemptioner
faced with such a problem may preserve his
right of redemption through judicial action
which in every case must be filed within the
one-year period of redemption. The filing of the
court action to enforce redemption, being
equivalent to a formal offer to redeem, would
have the effect of preserving his redemptive
rights and "freezing" the expiration of the oneyear period.
This is a fair interpretation
provided the action is filed on time and in good
faith, the redemption price is finally determined
and paid within a reasonable time, and the
rights of the parties are respected.

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Stated otherwise, the foregoing interpretation,


as applied to the case at bar, has three critical
dimensions:
(1) timely redemption or
redemption by expiration date (or, as what
happened in this case, the redemptioner was
forced to resort to judicial action to "freeze" the
expiration of the redemption period); (2) good
faith as always, meaning, the filing of the
private respondents action on August 13, 1993
must have been for the sole purpose of
determining the redemption price and not to
stretch the redemptive period indefinitely; and
(3) once the redemption price is determined
within a reasonable time, the redemptioner
must make prompt payment in full.
In the instant case, the respondents did not
tender payment within the period set by the
trial court. Instead, they asked for a 45-day
extension to tender payment. Such 45-day
extension for payment must be denied.
The pendency of the right of redemption
depresses the market value of the land until the
period expires. Permitting private respondent to
file a suit for redemption, with either party
unable to foresee when final judgment will
come, renders meaningless the period fixed by
the statute for effecting the redemption. It
makes the redemptive period indefinite and
cripples any effort of the landowner to realize
the value of his land. In the same way, the
buyer
cannot
immediately
recover
his
investment. Thus, unless and until the
redemption is resolved with finality, both the
landowners and buyers needs cannot be met.
Petitioner and private respondent herein were
thus basically posed on similar footing before
redemption. But whoever of them stands to be
irreparably injured in the long run deserves the
Courts equitable protection.
In the instant case, the fact that private
respondent made a formal offer to redeem
before the expiration of the period to redeem
was not squarely at issue. The focal issue here
is whether or not the extension of the
redemptive period by the trial court was well
within private respondents preserved right to
redeem. The circumstances clearly show it was
not.
The opportunity to redeem the subject property
was never denied to private respondent. His
timely formal offer through judicial action to
redeem was likewise recognized. But that is
where it ends. We cannot sanction and grant
every succeeding motion or petition - specially
if frivolous or unreasonable - filed by him
because
this
would
manifestly
and

unreasonably delay the final resolution


ownership of the subject property.

of

In this case, no definite tender of payment was


made
since
there
is no
consignation.
Consignation should have been made to show
good faith and financial capability to redeem.
Failure to consign was downright reflective of
Franciscos incapability to pay from the very
start
Case For Judicial Redemption Not Filed In Good
Faith But For The Purpose Of Stretching The
Period Of Redemption Indefinitely
TOLENTINO V CA (2007)
The general rule in redemption is that it is not
sufficient that a person offering to redeem
simply manifests his/her desire to do so. The
statement of intention must be accompanied by
an actual and simultaneous tender of payment.
This constitutes the exercise of the right to
repurchase. Bona fide redemption necessarily
implies a reasonable and valid tender of the
entire purchase price, otherwise the rule on the
redemption period fixed by law can easily be
circumvented.
The records show that the correct redemption
price had been determined prior to the filing of
the complaint for judicial redemption. Petitioner
had been furnished updated Statements of
Account specifying the redemption price even
prior to the consolidation of the title of the
foreclosed property in the bank's name. The
inclusion of late payment charges, foreclosure
expense, attorney's fees, liquidated damages,
foreclosure fee, and interests therein was
pursuant to the Loan Agreement. Considering
that the Loan Agreement was read and freely
adhered to by petitioner, the stipulations
therein are binding on her. Based on the
foregoing, it is clear that petitioner did not file
the instant case for judicial redemption in good
faith. It was not filed for the purpose of
determining the correct redemption price but to
stretch the redemption period indefinitely,
which is not allowed by law.

VI.
BANGKO
PILIPINAS LAW
RA 7653
6.1 Topics
State Policies

SENTRAL

NG

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SEC 1 Declaration of Policy. The State


shall maintain a central monetary authority that
shall function and operate as an independent
and accountable body corporate in the
discharge of its mandated responsibilities
concerning money, banking and credit. In line
with this policy, and considering its unique
functions and responsibilities, the central
monetary authority established under this Act,
while being a government-owned corporation,
shall enjoy fiscal and administrative autonomy.
How State Policies Are To Be Achieved
SEC 2 Creation of the Bangko Sentral.
There is hereby established an independent
central monetary authority, which shall be a
body corporate known as the Bangko Sentral ng
Pilipinas, hereafter referred to as the Bangko
Sentral. The capital of the Bangko Sentral shall
be Fifty billion pesos (P50,000,000,000), to be
fully subscribed by the Government of the
Republic, hereafter referred to as the
Government,
Ten
billion
pesos
(P10,000,000,000) of which shall be fully paid
for by the Government upon the effectivity of
this Act and the balance to be paid for within a
period of two (2) years from the effectivity of
this Act in such manner and form as the
Government, through the Secretary of Finance
and the Secretary of Budget and Management,
may thereafter determine.
SEC 6. Composition of the Monetary
Board. The powers and functions of the
Bangko Sentral shall be exercised by the
Bangko Sentral Monetary Board, hereafter
referred to as the Monetary Board, composed of
seven (7) members appointed by the President
of the Philippines for a term of six (6) years.
The seven (7) members are:
(a) the Governor of the Bangko Sentral, who
shall be the Chairman of the Monetary Board.
The Governor of the Bangko Sentral shall be
head of a department and his appointment shall
be subject to confirmation by the Commission
on Appointments. Whenever the Governor is
unable to attend a meeting of the Board, he
shall designate a Deputy Governor to act as his
alternate: Provided, That in such event, the
Monetary Board shall designate one of its
members as acting Chairman;
(b) a member of the Cabinet to be designated
by the President of the Philippines. Whenever
the designated Cabinet Member is unable to
attend a meeting of the Board, he shall
designate an Undersecretary in his Department
to attend as his alternate; and

(c) five (5) members who shall come from the


private sector, all of whom shall serve full-time:
Provided, however, That of the members first
appointed under the provisions of this subSEC,
three (3) shall have a term of six (6) years, and
the other two (2), three (3) years. No member
of the Monetary Board may be reappointed
more than once.
SEC 9. Disqualifications. In addition to the
disqualifications imposed by Republic Act No.
6713, a member of the Monetary Board is
disqualified from being a director, officer,
employee, consultant,
lawyer, agent or
stockholder of any bank, quasi-bank or any
other institution which is subject to supervision
or examination by the Bangko Sentral, in which
case such member shall resign from, and divest
himself of any and all interests in such
institution before assumption of office as
member of the Monetary Board.
The members of the Monetary Board coming
from the private sector shall not hold any other
public office or public employment during their
tenure. No person shall be a member of the
Monetary Board if he has been connected
directly with any multilateral banking or
financial institution or has a substantial interest
in any private bank in the Philippines, within
one (1) year prior to his appointment; likewise,
no member of the Monetary Board shall be
employed in any such institution within two (2)
years after the expiration of his term except
when he serves as an official representative of
the Philippine Government to such institution.
SEC 11. Meetings. The Monetary Board
shall meet at least once a week. The Board may
be called to a meeting by the Governor of the
Bangko Sentral or by two (2) other members of
the Board.
The presence of four (4) members shall
constitute a quorum: Provided, That in all cases
the Governor or his duly designated alternate
shall be among the four (4).
Unless otherwise provided in this Act, all
decisions of the Monetary Board shall require
the concurrence of at least four (4) members.
The Bangko Sentral shall maintain and preserve
a complete record of the proceedings and
deliberations of the Monetary Board, including
the tapes and transcripts of the stenographic
notes, either in their original form or in
microfilm.
SEC 15. Exercise of Authority. In the
exercise of its authority, the Monetary Board
shall:

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(a) issue rules and regulations it considers


necessary for the effective discharge of the
responsibilities and exercise of the powers
vested upon the Monetary Board and the
Bangko Sentral. The rules and regulations
issued shall be reported to the President and
the Congress within fifteen (15) days from the
date of their issuance;
(b) direct the management, operations, and
administration
of
the
Bangko
Sentral,
reorganize its personnel, and issue such rules
and regulations as it may deem necessary or
convenient for this purpose. The legal units of
the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board;
(c) establish a human resource management
system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal
of all personnel. Such system shall aim to
establish professionalism and excellence at all
levels of the Bangko Sentral in accordance with
sound principles of management.
A compensation structure, based on job
evaluation studies and wage surveys an subject
to the Board's approval, shall be instituted as
an integral component of the Bangko Sentral's
human
resource
development
program:
Provided, That the Monetary Board shal make
its own system conform as closely as possible
with the principles provided for under Republic
Act No. 6758: Provided, however, That
compensation and wage structure of employees
whose positions fall under salary grade 19 and
below shall be in accordance with the rates
prescribed under Republic Act No. 6758.
On the recommendation of the Governor,
appoint, fix the remunerations and other
emoluments, and remove personnel of the
Bangko Sentral, subject to pertinent civil service
laws: Provided, That the Monetary Board shall
have exclusive and final authority to promote,
transfer, assign, or reassign personnel of the
Bangko Sentral and these personnel actions are
deemed made in the interest of the service and
not disciplinary: Provided, further, That the
Monetary Board may delegate such authority to
the Governor under such guidelines as it may
determine.
(d) adopt an annual budget for and authorize
such expenditures by the Bangko Sentral as are
in the interest of the effective administration
and operations of
(e) the Bangko Sentral in accordance with
applicable laws and regulations; and
(f) indemnify its members and other officials of
the Bangko Sentral, including personnel of the

departments
performing
supervision
and
examination functions against all costs and
expenses reasonably incurred by such persons
in connection with any civil or criminal action,
suit or proceedings to which he may be, or is,
made a party by reason of the performance of
his functions or duties, unless he is finally
adjudged in such action or proceeding to be
liable for negligence or misconduct.
In the event of a settlement or compromise,
indemnification shall be provided only in
connection with such matters covered by the
settlement as to which the Bangko Sentral is
advised by external counsel that the person to
be indemnified did not commit any negligence
or misconduct.
The costs and expenses incurred in defending
the aforementioned action, suit or proceeding
may be paid by the Bangko Sentral in advance
of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by
or on behalf of the member, officer, or
employee to repay the amount advanced
should it ultimately be determined by the
Monetary Board that he is not entitled to be
indemnified as provided in this subSEC.
SEC 16. Responsibility. Members of the
Monetary Board, officials, examiners, and
employees of the Bangko Sentral who willfully
violate this Act or who are guilty of negligence,
abuses or acts of malfeasance or misfeasance
or fail to exercise extraordinary diligence in the
performance of hi duties shall be held liable for
any loss or injury suffered by the Bangko
Sentral or other banking institutions as a result
of
such
violation,
negligence,
abuse,
malfeasance, misfeasance or failure to exercise
extraordinary diligence.
Similar responsibility shall apply to members,
officers, and employees of the Bangko Sentral
for:
(1) the disclosure of any information of a
confidential nature, or any information on the
discussions or resolutions of the Monetary
Board, or about the confidential operations of
the Bangko Sentral, unless the disclosure is in
connection with the performance of official
functions with the Bangko Sentral, or is with
prior authorization of the Monetary Board or the
Governor; or
(2) the use of such information for personal gain
or to the detriment of the Government, the
Bangko Sentral or third parties: Provided,
however, That any data or information required
to be submitted to the President and/or the
Congress, or to be published under the

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provisions of this Act shall not be considered


confidential.
SEC 18. Representation of the Monetary
Board and the Bangko Sentral. The
Governor of the Bangko Sentral shall be the
principal representative of the Monetary Board
and of the Bangko Sentral and, in such capacity
and in accordance with the instructions of the
Monetary Board, he shall be empowered to:
(a) represent the Monetary Board and the
Bangko Sentral in all dealings with other offices,
agencies
and
instrumentalities
of
the
Government and all other persons or entities,
public or private, whether domestic, foreign or
international;
(b) sign contracts entered into by the Bangko
Sentral, notes and securities issued by the
Bangko Sentral, all reports, balance sheets,
profit and loss statements, correspondence and
other documents of the Bangko Sentral.
The signature of the Governor may be in
facsimile whenever appropriate;
(c) represent the Bangko Sentral, either
personally or through counsel, including private
counsel, as may be authorized by the Monetary
Board, in any legal proceedings, action or
specialized legal studies; and
(d) delegate his power to represent the Bangko
Sentral, as provided in subSECs (a), (b) and (c)
of this SEC, to other officers upon his own
responsibility: Provided, however, That in order
to preserve the integrity and the prestige of his
office, the Governor of the Bangko Sentral may
choose not to participate in preliminary
discussions with any multilateral banking or
financial institution on any negotiations for the
Government within or outside the Philippines.
During the negotiations, he may instead be
represented by a permanent negotiator.
SEC 47. Appointment and Personnel. The
Chairman of the Commission on Audit shall act
as the ex officio auditor of the Bangko Sentral
and, as such, he is empowered and authorized
to appoint a representative who shall be the
auditor of the Bangko Sentral and, in
accordance with law, fix his salary, and to
appoint and fix salaries and number of
personnel to assist said representative in his
work. The salaries and other emoluments shall
be paid by the Commission. The auditor of the
Bangko Sentral and personnel under him may
be removed only by the Chairman of the
Commission.
The representative of the Chairman of the
Commission must be a certified public

accountant with at least ten (10) years


experience as such. No relative of any member
of the Monetary Board or the Chairman of the
Commission within the sixth degree of
consanguinity or affinity shall be appointed
such representative.
How The BSP Handles In Distress?
Conservatorship (RA 7653 SEC 29 and RA
8971 SEC 67)
SEC 29. Appointment of Conservator.
Whenever, on the basis of a report submitted
by the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors, the
Monetary Board may appoint a conservator with
such powers as the Monetary Board shall deem
necessary to take charge of the assets,
liabilities, and the management thereof,
reorganize the management, collect all monies
and debts due said institution, and exercise all
powers necessary to restore its viability. The
conservator shall report and be responsible to
the Monetary Board and shall have the power to
overrule or revoke the actions of the previous
management and board of directors of the bank
or quasi-bank. The conservator should be
competent
and
knowledgeable
in
bank
operations and management.
The conservatorship shall not exceed one (1)
year.
The conservator shall receive remuneration to
be fixed by the Monetary Board in an amount
not to exceed two-thirds (2/3) of the salary of
the president of the institution in one (1) year,
payable in twelve (12) equal monthly
payments: Provided, That, if at any time within
one-year period, the conservatorship is
terminated on the ground that the institution
can operate on its own, the conservator shall
receive the balance of the remuneration which
he would have received up to the end of the
year; but if the conservatorship is terminated
on other grounds, the conservator shall not be
entitled to such remaining balance. The
Monetary Board may appoint a conservator
connected with the Bangko Sentral, in which
case he shall not be entitled to receive any
remuneration or emolument from the Bangko
Sentral during the conservatorship. The
expenses attendant to the conservatorship shall
be borne by the bank or quasi-bank concerned.

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The Monetary Board shall terminate the


conservatorship when it is satisfied that the
institution can continue to operate on its own
and the conservatorship is no longer necessary.
The
conservatorship
shall
likewise
be
terminated should the Monetary Board, on the
basis of the report of the conservator or of its
own findings, determine that the continuance in
business of the institution would involve
probable loss to its depositors or creditors, in
which case the provisions of SEC 30 shall apply.
SEC 67. Conservatorship. The grounds
and procedures for placing a bank under
conservatorship, as well as, the powers and
duties of the conservator appointed for the
bank shall be governed by the provisions of SEC
29 and the last two paragraphs of SEC 30 of the
New Central
Bank Act: Provided, That this SEC shall also
apply to conservatorship proceedings of quasibanks. (n)
Closure (SEC 30 and R.A. 8791 SECs 53 &
56.4)
SEC 30. Proceedings in Receivership and
Liquidation. Whenever, upon report of the
head of the supervising or examining
department, the Monetary Board finds that a
bank or quasibank:
(a) is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, That this shall
not include inability to pay caused by
extraordinary demands induced by
financial panic in the banking
community;
(b) by the Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business without
involving probable losses to its
depositors or creditors; or
(d) has willfully violated a cease and
desist order under SEC 37 that has
become final, involving acts or
transactions which amount to fraud
or a dissipation of the assets of the
institution; in which cases, the
Monetary Board may summarily and
without need for prior hearing forbid
the institution from doing business in
the Philippines and designate the
Philippine
Deposit
Insurance
Corporation as receiver of the
banking institution.

For a quasi-bank, any person of recognized


competence in banking or finance may be
designed as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit
of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court
but shall not, with the exception of
administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
any asset of the institution: Provided, That the
receiver may deposit or place the funds of the
institution in nonspeculative investments. The
receiver shall determine as soon as possible,
but not later than ninety (90) days from take
over,
whether
the
institution
may
be
rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public: Provided, That
any determination for the resumption of
business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding
paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and
direct the receiver to proceed with the
liquidation of the
institution. The receiver shall:

1. file ex parte with the proper regional

2.

trial court, and without requirement


of prior notice or any other action, a
petition for assistance in the
liquidation of the institution pursuant
to a liquidation plan adopted by the
Philippine
Deposit
Insurance
Corporation for general application to
all closed banks. In case of quasibanks, the liquidation plan shall be
adopted by the Monetary Board.
Upon acquiring jurisdiction, the court
shall, upon motion by the receiver
after due notice, adjudicate disputed
claims against the institution, assist
the
enforcement
of
individual
liabilities
of
the
stockholders,
directors and officers, and decide on
other issues as may be material to
implement
the liquidation
plan
adopted. The receiver shall pay the
cost of the proceedings from the
assets of the institution.
convert the assets of the institutions
to money, dispose of the same to
creditors and other parties, for the

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purpose of paying the debts of such


institution in accordance with the
rules on concurrence and preference
of credit under the Civil Code of the
Philippines and he may, in the name
of the institution, and with the
assistance of counsel as he may
retain, institute such actions as may
be necessary to collect and recover
accounts and assets of, or defend
any action against, the institution.
The assets of an institution under
receivership or liquidation shall be
deemed in custodia legis in the
hands of the receiver and shall, from
the moment the institution was
placed under such receivership or
liquidation, be exempt from any
order
of
garnishment,
levy,
attachment, or execution.

The bank shall perform the services permitted


under SubSECs 53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it receives duly separate from the bank's
own assets and liabilities.
The Monetary Board may regulate the
operations authorized by this SEC in order to
ensure that such operations do not endanger
the interests of the depositors and other
creditors of the bank.
In case a bank or quasi-bank notifies the
Bangko Sentral or publicly announces a bank
holiday, or in any manner suspends the
payment of its deposit liabilities continuously
for more than thirty (30) days, the Monetary
Board may summarily and without need for
prior hearing close such banking institution and
place it under receivership of the Philippine
Deposit Insurance Corporation. (72a)

The actions of the Monetary Board taken under


this SEC or under SEC 29 of this Act shall be
final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or
excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board
of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
The
designation
of
a
conservator under SEC 29 of this Act or the
appointment of a receiver under this SEC shall
be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is
not a precondition to the designation of a
receiver.

SEC 56. Conducting Business in an Unsafe


or Unsound Manner. In determining
whether a particular act or omission, which is
not otherwise prohibited by any law, rule or
regulation affecting banks, quasi-banks or trust
entities, may be deemed as conducting
business in an unsafe or unsound manner for
purposes of this SEC, the Monetary Board shall
consider any of the following circumstances:

SEC 53. Other Banking Services. In


addition
to
the
operations
specifically
authorized in this Act, a bank may perform the
following services:
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell, by
order of and for the account of their customers,
shares, evidences of indebtedness and all types
of securities;
53.3. Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
53.4. Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or administrator of investment
management/advisory/consultancy
accounts;
and
53.5. Rent out safety deposit boxes.

56.4. The act or omission involves entering into


any contract or transaction manifestly and
grossly disadvantageous to the bank, quasibank or trust entity, whether or not the director
or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity
persists in conducting its business in an unsafe
or unsound manner, the Monetary Board may,
without
prejudice
to
the
administrative
sanctions provided in SEC 37 of the New Central
Bank Act, take action under SEC 30 of the same
Act and/or immediately exclude the erring bank
from clearing, the provisions of law to the
contrary notwithstanding. (n)
Receivership ( SEC 30; and R.A. 8791 SECs
69-70)
SEC 30. Proceedings in Receivership and
Liquidation. Whenever, upon report of the
head of the supervising or examining
department, the Monetary Board finds that a
bank or quasibank:
(a) is unable to pay its liabilities as they
become due in the ordinary course of
business: Provided, That this shall
not include inability to pay caused by
extraordinary demands induced by

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financial panic in the banking


community;
(b) by the Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business without
involving probable losses to its
depositors or creditors; or
(d) has willfully violated a cease and
desist order under SEC 37 that has
become final, involving acts or
transactions which amount to fraud
or a dissipation of the assets of the
institution; in which cases, the
Monetary Board may summarily and
without need for prior hearing forbid
the institution from doing business in
the Philippines and designate the
Philippine
Deposit
Insurance
Corporation as receiver of the
banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be
designed as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit
of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court
but shall not, with the exception of
administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
any asset of the institution: Provided, That the
receiver may deposit or place the funds of the
institution in nonspeculative investments. The
receiver shall determine as soon as possible,
but not later than ninety (90) days from take
over,
whether
the
institution
may
be
rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public: Provided, That
any determination for the resumption of
business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding
paragraph, the Monetary Board shall notify in
writing
the board of directors of its findings and direct
the receiver to proceed with the liquidation of
the
institution. The receiver shall:
1. file ex parte with the proper regional trial
court, and without requirement of prior notice
or any other action, a petition for assistance in
the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine

Deposit Insurance Corporation for general


application to all closed banks. In case of quasibanks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction,
the court shall, upon motion by the receiver
after due notice, adjudicate disputed claims
against the institution, assist the enforcement
of individual liabilities of the stockholders,
directors and officers, and decide on other
issues as may be material to implement the
liquidation plan adopted. The receiver shall pay
the cost of the proceedings from the assets of
the institution.
2. convert the assets of the institutions to
money, dispose of the same to creditors and
other parties, for the purpose of paying the
debts of such institution in accordance with the
rules on concurrence and preference of credit
under the Civil Code of the Philippines and he
may, in the name of the institution, and with
the assistance of counsel as he may retain,
institute such actions as may be necessary to
collect and recover accounts and assets of, or
defend any action against, the institution. The
assets of an institution under receivership or
liquidation shall be deemed in custodia legis in
the hands of the receiver and shall, from the
moment the institution was placed under such
receivership or liquidation, be exempt from any
order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under
this SEC or under SEC 29 of this Act shall be
final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or
excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board
of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
The
designation
of
a
conservator under SEC 29 of this Act or the
appointment of a receiver under this SEC shall
be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is
not a precondition to the designation of a
receiver.
SEC 69. Receivership and Involuntary
Liquidation. The grounds and procedures
for placing a bank under receivership or
liquidation, as well as the powers and duties of
the receiver or liquidator appointed for the bank
shall be governed by the provisions of SECs 30,
31, 32, and 33 of the New Central Bank Act:
Provided, That the petitioner or plaintiff files

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with the clerk or judge of the court in which the


action is pending a bond, executed in favor of
the Bangko Sentral, in an amount to be fixed by
the court. This SEC shall also apply to the
extent possible to the receivership and
liquidation proceedings of quasi-banks. (n)
SEC 70. Penalty for Transactions After a
Bank Becomes Insolvent. Any director or
officer of any bank declared insolvent or placed
under receivership by the Monetary Board who
refuses to turn over the bank's records and
assets to the designated receivers, or who
tampers
with
banks
records,
or
who
appropriates for himself or another party or
destroys or causes the misappropriation and
destruction of the bank's assets, or who
receives or permits or causes to be received in
said bank any deposit, collection of loans and/or
receivables, or who pays out or permits or
causes to be paid out any funds of said bank, or
who transfers or permits or causes to be
transferred any securities or property of said
bank shall be subject to the penal provisions of
the New Central Bank Act. (85a)
Liquidation (SEC 30; and R.A. 8791 SEC
69)
SEC 30. Proceedings in Receivership and
Liquidation. Whenever, upon report of the
head of the supervising or examining
department, the Monetary Board finds that a
bank or quasibank:
(a) is unable to pay its liabilities as they become
due in the ordinary course of business:
Provided,
That this shall not include inability to pay
caused by extraordinary demands induced by
financial panic in the banking community;
(b) by the Bangko Sentral, to meet its liabilities;
or
(c) cannot continue in business without
involving probable losses to its depositors or
creditors; or
(d) has willfully violated a cease and desist
order under SEC 37 that has become final,
involving
acts or transactions which amount to fraud or a
dissipation of the assets of the institution; in
which cases, the Monetary Board may
summarily and without need for prior hearing
forbid the
institution from doing business in the
Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the
banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be
designed

as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit
of its creditors, and exercise the general powers
of a
receiver under the Revised Rules of Court but
shall not, with the exception of administrative
expenditures, pay or commit any act that will
involve the transfer or disposition of any asset
of the institution: Provided, That the receiver
may deposit or place the funds of the institution
in nonspeculative investments. The receiver
shall determine as soon as possible, but not
later than ninety (90) days from take over,
whether the institution may be rehabilitated or
otherwise placed in such a condition so that it
may be permitted to resume business with
safety to its depositors and creditors and
the general public: Provided, That any
determination for the resumption of business of
the institution shall be subject to prior approval
of the Monetary Board.
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding
paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and
direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
1. file ex parte with the proper regional trial
court, and without requirement of prior notice
or any other action, a petition for assistance in
the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine
Deposit Insurance Corporation for general
application to all closed banks. In case of quasibanks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction,
the court shall, upon motion by the receiver
after due notice, adjudicate disputed claims
against the institution, assist the enforcement
of individual liabilities of the stockholders,
directors and officers, and decide on other
issues as may be material to implement the
liquidation plan adopted. The receiver shall pay
the cost of the proceedings from the assets of
the institution.
2. convert the assets of the institutions to
money, dispose of the same to creditors and
other parties, for the purpose of paying the
debts of such institution in accordance with the
rules on concurrence and preference of credit
under the Civil Code of the Philippines and he
may, in the name of the institution, and with
the assistance of counsel as he may retain,
institute such actions as may be necessary to
collect and recover accounts and assets of, or
defend any action against, the institution. The
assets of an institution under receivership or

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liquidation shall be deemed in custodia legis in


the hands of the receiver and shall, from the
moment the institution was placed under such
receivership or liquidation, be exempt from any
order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under
this SEC or under SEC 29 of this Act shall be
final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or
excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board
of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
The
designation
of
a
conservator under SEC 29 of this Act or the
appointment of a receiver under this SEC shall
be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is
not a precondition to the designation of a
receiver.
SEC 69. Receivership and Involuntary
Liquidation. The grounds and procedures
for placing a bank under receivership or
liquidation, as well as the powers and duties of
the receiver or liquidator appointed for the bank
shall be governed by the provisions of SECs 30,
31, 32, and 33 of the New Central Bank Act:
Provided, That the petitioner or plaintiff files
with the clerk or judge of the court in which the
action is pending a bond, executed in favor of
the Bangko Sentral, in an amount to be fixed by
the court. This SEC shall also apply to the
extent possible to the receivership and
liquidation proceedings of quasi-banks. (n)
How The BSP Handles Exchange Crises?
SEC
72.
Emergency
Restrictions
on
Exchange Operations. In order to achieve
the
primary objective of the Bangko Sentral as set
forth in SEC 3 of this Act, or protect the
international
reserves of the Bangko Sentral in the
imminence of, or during an exchange crisis, or
in time of national
emergency and to give the Monetary Board and
the Government time in which to take
constructive
measures to forestall, combat, or overcome
such a crisis or emergency, the Monetary
Board, with the

concurrence of at least five (5) of its members


and with the approval of the President of the
Philippines,
may temporarily suspend or restrict sales of
exchange by the Bangko Sentral, and may
subject all
transactions in gold and foreign exchange to
license by the Bangko Sentral, and may require
that any
foreign exchange thereafter obtained by any
person residing or entity operating in the
Philippines be
delivered to the Bangko Sentral or to any bank
or agent designated by the Bangko Sentral for
the
purpose, at the effective exchange rate or
rates: Provided, however, That foreign currency
deposits
made under Republic Act No. 6426 shall be
exempt from these requirements.
Functions of the BSP
SEC 50. Exclusive Issue Power. The
Bangko Sentral shall have the sole power and
authority to issue currency, within the territory
of the Philippines. No other person or entity,
public or private, may put into circulation notes,
coins or any other object or document which, in
the opinion of the Monetary Board, might
circulate as currency, nor reproduce or imitate
the facsimiles of Bangko Sentral notes without
prior authority from the Bangko Sentral.
The Monetary Board may issue such regulations
as it may deem advisable in order to prevent
the circulation of foreign currency or of
currency substitutes as well as to prevent the
reproduction of facsimiles of Bangko Sentral
notes.
The Bangko Sentral shall have the authority to
investigate, make arrests, conduct searches
and seizures in accordance with law, for the
purpose of maintaining the integrity of the
currency.
Violation of this provision or any regulation
issued by the Bangko Sentral pursuant thereto
shall constitute an offense punishable by
imprisonment of not less than five (5) years but
not more than ten(10) years. In case the
Revised Penal Code provides for a greater
penalty, then that penalty shall be imposed.
SEC 51. Liability for Notes and Coins.
Notes and coins issued by the Bangko Sentral
shall be liabilities of the Bangko Sentral and
may be issued only against, and in amounts not
exceeding,

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the assets of the Bangko Sentral. Said notes


and coins shall be a first and paramount lien on
all assets
of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes
and coins shall not be considered as part of its
currency issue and, accordingly, shall not form
part of the assets or liabilities of the Bangko
Sentral.
SEC 52. Legal Tender Power. All notes
and coins issued by the Bangko Sentral shall
be fully guaranteed by the Government of the
Republic of the Philippines and shall be legal
tender in the
Philippines for all debts, both public and private:
Provided, however, That, unless otherwise fixed
by the
Monetary Board, coins shall be legal tender in
amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and
above, and in amounts not exceeding Twenty
pesos
(P20.00) for denominations of Ten centavos or
less.
SEC 53. Characteristics of the Currency.
The Monetary Board, with the approval of
the President of the Philippines, shall prescribe
the
denominations,
dimensions,
designs,
inscriptions
and other characteristics of notes issued by the
Bangko Sentral: Provided, however, That said
notes
shall state that they are liabilities of the Bangko
Sentral and are fully guaranteed by the
Government of
the Republic of the Philippines. Said notes shall
bear the signatures, in facsimile, of the
President of the
Philippines and of the Governor of the Bangko
Sentral.
Similarly, the Monetary Board, with the
approval of the President of the Philippines,
shall
prescribe the weight, fineness, designs,
denominations and other characteristics of the
coins issued by
the Bangko Sentral. In the minting of coins, the
Monetary Board shall give full consideration to
the
availability of suitable metals and to their
relative prices and cost of minting.
SEC 54. Printing of Notes and Mining of
Coins. The Monetary Board shall prescribe
the amounts of notes and coins to be printed
and minted, respectively, and the conditions to
which the

printing of notes and the minting of coins shall


be subject. The Monetary Board shall have the
authority
to contract institutions, mints or firms for such
operations.
All expenses incurred in the printing of notes
and the minting of coins shall be for the account
of
the Bangko Sentral.
SEC 55. Interconvertibility of Currency.
The Bangko Sentral shall exchange, on
demand
and without charge,
Philippine
currency of any denomination for Philippine
notes and coins of
any other denomination requested. If for any
reason the Bangko Sentral is temporarily unable
to
provide notes or coins of the denominations
requested, it shall meet its obligations by
delivering notes
and coins of the denominations which most
nearly approximate those requested.
SEC 56. Replacement of Currency Unfit for
Circulation. The Bangko Sentral shall
withdraw from circulation and shall demonetize
all notes and coins which for any reason
whatsoever are
unfit for circulation and shall replace them by
adequate notes and coins: Provided, however,
That the
Bangko Sentral shall not replace notes and
coins the identification of which is impossible,
coins which
show signs of filing, clipping or perforation, and
notes which have lost more than two-fifths (2/5)
of their
surface or all of the signatures inscribed
thereon. Notes and coins in such mutilated
conditions shall be
withdrawn from circulation and demonetized
without compensation to the bearer.
SEC 57. Retirement of Old Notes and
Coins. The Bangko Sentral may call in for
replacement
notes
of
any
series
or
denomination which are more than five (5)
years old and coins which
are more than (10) years old.
Notes and coins called in for replacement in
accordance with this provision shall remain
legal
tender for a period of one (1) year from the
date of call. After this period, they shall cease
to be legal
tender but during the following year, or for such
longer period as the Monetary Board may
determine,

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they may be exchanged at par and without


charge in the Bangko Sentral and by agents
duly authorized
by the Bangko Sentral for this purpose. After
the expiration of this latter period, the notes
and coins
which have not been exchanged shall cease to
be a liability of the Bangko Sentral and shall be
demonetized. The Bangko Sentral shall also
demonetize all notes and coins which have
been called in
and replaced.
B. DEMAND DEPOSITS
SEC 58. Definition. For purposes of this
Act, the term "demand deposits" means all
those liabilities of the Bangko Sentral and of
other banks which are denominated in
Philippine currency
and are subject to payment in legal tender upon
demand by the presentation of checks.
SEC 59. Issue of Demand Deposits. Only
banks duly authorized to do so may accept
funds or create liabilities payable in pesos upon
demand by the presentation of checks, and
such
operations shall be subject to the control of the
Monetary Board in accordance with the powers
granted
it with respect thereto under this Act.
SEC 60. Legal Character. Checks
representing demand deposits do not have
legal
tender power and their acceptance in the
payment of debts, both public and private, is at
the option of
the creditor: Provided, however, That a check
which has been cleared and credited to the
account of the
creditor shall be equivalent to a delivery to the
creditor of cash in an amount equal to the
amount
credited to his account.
SEC 61. Guiding Principle. The Monetary
Board shall endeavor to control any
expansion
or
contraction
in
monetary
aggregates which is prejudicial to the
attainment or maintenance
of price stability.
SEC 62. Power to Define Terms. For
purposes of this article and of this Act, the
Monetary Board shall formulate definitions of
monetary aggregates, credit and prices and
shall make
public such definitions and any changes
thereof.

SEC
63.
Action
When
Abnormal
Movements
Occur
in
the
Monetary
Aggregates, Credit, or Price Level.
Whenever abnormal
movements
in the
monetary aggregates, in credit, or in
prices endanger the stability of the Philippine
economy or important sectors thereof, the
Monetary Board
shall:
(a) take such remedial measures as are
appropriate and within the powers granted to
the
Monetary Board and the Bangko Sentral under
the provisions of this Act; and
(b) submit to the President of the Philippines
and the Congress, and make public, a detailed
report which shall include, as a minimum, a
description and analysis of:
(1) the causes of the rise or fall of the monetary
aggregates, of credit or of prices;
(2) the extent to which the changes in the
monetary aggregates, in credit, or in prices
have been reflected in changes in the level of
domestic output, employment, wages
and economic activity in general, and the
nature and significance of any such
changes; and
(3) the measures which the Monetary Board has
taken and the other monetary, fiscal or
administrative measures which it recommends
to be adopted.
Whenever the monetary aggregates, or the
level of credit, increases or decreases by more
thanfifteen percent (15%), or the cost of living
index increases by more than ten percent
(10%), in relation to the level existing at the
end of the corresponding month of the
preceding year, or even though any of these
quantitative guidelines have not been reached
when in its judgment the circumstances so
warrant, the Monetary Board shall submit the
reports mentioned in this SEC, and shall state
therein whether, in the opinion of the Board,
said changes in the monetary aggregates,
credit or cost of living represent a threat to the
stability of the Philippine economy or of
important sectors thereof.
The Monetary Board shall continue to submit
periodic reports to the President of the
Philippines and to Congress until it considers
that the monetary, credit or price disturbances
have disappeared or have been adequately
controlled.
SEC
64.
International
Monetary
Stabilization. The Bangko Sentral shall
exercise its powers under this Act to preserve
the international value of the peso and to
maintain its convertibility into other freely
convertible currencies primarily for, although

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not necessarily limited to, current payments for


foreign trade and invisibles.
SEC 65. International Reserves. In order
to maintain the international stability and
convertibility of the Philippine peso, the Bangko
Sentral shall maintain international reserves
adequate to meet any foreseeable net demands
on the Bangko Sentral for foreign currencies.
In judging the adequacy of the international
reserves, the Monetary Board shall be guided
by the prospective receipts and payments of
foreign exchange by the Philippines. The Board
shall give special attention to the volume and
maturity of the Bangko Sentral's own liabilities
in foreign currencies, to the volume and
maturity of the foreign exchange assets and
liabilities of other banks operating in the
Philippines and, insofar as they are known or
can be estimated, the volume and maturity of
the foreign exchange assets and liabilities of all
other persons and entities in the Philippines.
SEC 66. Composition of the International
Reserves. The international reserves of
the Bangko Sentral may include but shall not be
limited to the following assets:
(a) gold; and
(b) assets in foreign currencies in the form of:
documents
and
instruments
customarily
employed
for the international transfer of funds; demand
and time deposits in central banks, treasuries
and
commercial
banks
abroad;
foreign
government securities; and foreign notes and
coins.
The Monetary Board shall endeavor to hold the
foreign exchange resources of the Bangko
Sentral in freely convertible currencies;
moreover, the Board shall give particular
consideration to the
prospects
of
continued
strength
and
convertibility of the currencies in which the
reserve is maintained,
as well as to the anticipated demands for such
currencies. The Monetary Board shall issue
regulations
determining the other qualifications which
foreign exchange assets must meet in order to
be included in
the international reserves of the Bangko
Sentral.
The Bangko Sentral shall be free to convert any
of the assets in its international reserves into
other assets as described in subSECs (a) and (b)
of this SEC.

SEC 81. Guiding Principles. The


rediscounts, discounts, loans and advances
which
the Bangko Sentral is authorized to extend to
banking institutions under the provisions of the
present
article of this Act shall be used to influence the
volume of credit consistent with the objective of
price
stability.
SEC 82. Authorized Types of Operations.
Subject to the principle stated in the
preceding SEC of this Act, the Bangko Sentral
may normally and regularly carry on the
following
credit operations with banking institutions
operating in the Philippines:
(a) Commercial credits. The Bangko Sentral
may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit
instruments with maturities of not more than
one hundred eighty (180) days from the date of
their rediscount, discount or acquisition by
the Bangko Sentral and resulting from
transactions related to:
(1) the importation, exportation, purchase or
sale of readily saleable goods and products,
or their transportation within the Philippines; or
(2) the storing of non-perishable goods and
products which are duly insured and
deposited, under conditions assuring their
preservation, in authorized bonded
warehouses or in other places approved by the
Monetary Board.
(b) Production credits. The Bangko Sentral
may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit
instruments having maturities of not more
than three hundred sixty (360) days from the
date of their rediscount, discount or acquisition
by the Bangko Sentral and resulting from
transactions related to the production or
processing
of agricultural, animal, mineral, or industrial
products. Documents or instruments acquired in
accordance with this subSEC shall be secured
by a pledge of the respective crops or
products: Provided, however, That the crops or
products need not be pledged to secure the
documents if the original loan granted by the
Bangko Sentral is secured by a lien or mortgage
on real estate property seventy percent (70%)
of the appraised value of which equals or
exceeds the amount of the loan granted.
(c) Other credits. Special credit instruments
not otherwise rediscountable under the
immediately preceding subSECs (a) and (b) may
be eligible for rediscounting in
accordance with rules and regulations which the
Bangko Sentral shall prescribe. Whenever

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necessary, the Bangko Sentral shall provide


funds from non-inflationary sources: Provided,
however, That the Monetary Board shall
prescribe additional safeguards for disbursing
these
funds.
(d) Advances. The Bangko Sentral may grant
advances against the following kinds of
collaterals for fixed periods which, with the
exception of advances against collateral named
in
clause (4) of the present subSEC, shall not
exceed one hundred eighty (180) days:
(1) gold coins or bullion;
(2) securities representing obligations of the
Bangko Sentral or of other domestic
institutions of recognized solvency;
(3) the credit instruments to which reference is
made in subSEC (a) of this SEC;
(4) the credit instruments to which reference is
made in subSEC (b) of this SEC, for
periods which shall not exceed three hundred
sixty (360) days;
(5) utilized portions of advances in current
amount covered by regular overdraft
agreements related to operations included
under subSECs (a) and (b) of this
SEC, and certified as to amount and liquidity by
the institution soliciting the
advance;
(6) negotiable treasury bills, certificates of
indebtedness, notes and other negotiable
obligations of the Government maturing within
three (3) years from the date of the
advance; and
(7) negotiable bonds issued by the Government
of the Philippines, by Philippine
provincial, city or municipal governments, or by
any Philippine Government
instrumentality, and having maturities of not
more than ten (10) years from the date of
advance.
The rediscounts, discounts, loans and advances
made in accordance with the provisions of this
SEC may not be renewed or extended unless
extraordinary circumstances fully justify such
renewal
or extension.
Advances made against the collateral named in
clauses (6) and (7) of subSEC (d) of this
SEC may not exceed eighty percent (80%) of
the current market value of the collateral.
C. SPECIAL CREDIT OPERATION
SEC 83. Loans for Liquidity Purposes.
The Bangko Sentral may extend loans and
advances
to banking institutions for a period of not more
than seven (7) days without any collateral for
the purpose

of providing liquidity to the banking system in


times of need.
D. EMERGENCY CREDIT OPERATION
SEC 84. Emergency Loans and Advances.
In periods of national and/or local
emergency or of imminent financial panic which
directly threaten monetary and banking
stability, the
Monetary Board may, by a vote of at least five
(5) of its members, authorize the Bangko
Sentral to grant
extraordinary loans or advances to banking
institutions secured by assets as defined
hereunder:
Provided, That while such loans or advances are
outstanding, the debtor institution shall not,
except
upon prior authorization by the Monetary Board,
expand the total volume of its loans or
investments.
The Monetary Board may, at its discretion,
likewise authorize the Bangko Sentral to grant
emergency loans or advances to banking
institutions, even during normal periods, for the
purpose of
assisting a bank in a precarious financial
condition or under serious financial pressures
brought by
unforeseen events, or events which, though
foreseeable, could not be prevented by the
bank
concerned: Provided, however, That the
Monetary Board has ascertained that the bank
is not insolvent
and has the assets defined hereunder to secure
the advances: Provided, further, That a
concurrent vote
of at least five (5) members of the Monetary
Board is obtained.
The amount of any emergency loan or advance
shall not exceed the sum of fifty percent (50%)
of total deposits and deposit substitutes of the
banking institution and shall be disbursed in two
(2) or
more tranches. The amount of the first tranche
shall be limited to twenty-five percent (25%) of
the total
deposit and deposit substitutes of the institution
and shall be secured by government securities
to the
extent of their applicable loan values and other
unencumbered first class collaterals which the
Monetary
Board may approve: Provided, That if as
determined by the Monetary Board, the
circumstances
surrounding the emergency warrant a loan or
advance greater than the amount provided
hereinabove,

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the amount of the first tranche may exceed


twenty-five percent (25%) of the bank's total
deposit and
deposit substitutes if the same is adequately
secured
by
applicable
loan
values
of
government
securities and unencumbered first class
collaterals approved by the Monetary Board,
and the principal
stockholders of the institution furnish an
acceptable undertaking to indemnify and hold
harmless from
suit a conservator whose appointment the
Monetary Board may find necessary at any
time.
Prior to the release of the first tranche, the
banking institution shall submit to the Bangko
Sentral
a resolution of its board of directors authorizing
the Bangko Sentral to evaluate other assets of
the
banking institution certified by its external
auditor to be good and available for collateral
purposes
should the release of the subsequent tranche
be thereafter applied for.
The Monetary Board may, by a vote of at least
five (5) of its members, authorize the release of
a subsequent tranche on condition that the
principal stockholders of the institution:
(a) furnish an acceptable undertaking to
indemnify and hold harmless from suit a
conservator
whose appointment the Monetary Board may
find necessary at any time; and
(b) provide acceptable security which, in the
judgment of the Monetary Board, would be
adequate to supplement, where necessary, the
assets tendered by the banking institution to
collateralize the subsequent tranche.
In connection with the exercise of these powers,
the prohibitions in SEC 128 of this Act shall
not apply insofar as it refers to acceptance as
collateral of shares and their acquisition as a
result of
foreclosure proceedings, including the exercise
of voting rights pertaining to said shares:
Provided,
however, That should the Bangko Sentral
acquire any of the shares it has accepted as
collateral as a
result of foreclosure proceedings, the Bangko
Sentral shall dispose of said shares by public
bidding
within one (1) year from the date of
consolidation of title by the Bangko Sentral.
Whenever a financial institution incurs an
overdraft in its account with the Bangko
Sentral, the

same shall be eliminated within the period


prescribed in SEC 102 of this Act.
E. CREDIT TERMS
SEC 85. Interest and Rediscount. The
Bangko Sentral shall collect interest and other
appropriate charges on all loans and advances
it extends, the closure, receivership or
liquidations of the
debtor-institution
notwithstanding.
This
provision shall apply prospectively.
The Monetary Board shall fix the interest and
rediscount rates to be charged by the Bangko
Sentral on its credit operations in accordance
with the character and term of the operation,
but after due
consideration has been given to the credit
needs of the market, the composition of the
Bangko Sentral's
portfolio, and the general requirements of the
national
monetary
policy.
Interest
and
rediscount rates
shall be applied to all banks of the same
category uniformly and without discrimination.
SEC 86. Endorsement. The documents
rediscounted, discounted, bought or accepted
as collateral by the Bangko Sentral in the
course of the credit operations authorized in
this article shall
bear the endorsement of the institution from
which they are received.
SEC
87.
Repayment
of
Credits.

Documents
rediscounted,
discounted
or
accepted as
collateral by the Bangko Sentral must be
withdrawn by the borrowing institution on the
dates of their
maturities, or upon liquidation of the obligations
which they represent or to which they relate
whenever
said obligations have been liquidated prior to
their dates of maturity.
Banks shall have the right at any time to
withdraw any documents which they have
presented to
the Bangko Sentral as collateral, upon payment
in full of the corresponding debt to the Bangko
Sentral,
including interest charges.
SEC 88. Other requirements. The
Monetary Board may prescribe, within the
general
powers granted to it under this Act, additional
conditions which borrowing institutions must
satisfy in
order to have access to the credit of the Bangko
Sentral. These conditions may refer to the rates
of

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interest charged by the banks, to the purposes


for which their loans in general are destined,
and to any
other clearly definable aspect of the credit
policy of the bank.

money, the Bangko Sentral shall not pay


interest on the reserves maintained with it
unless the Monetary
Board decides otherwise as warranted by
circumstances.

SEC 89. Provisional Advances to the


National Government. The Bangko Sentral
may make direct provisional advances with or
without interest to the National Government to
finance
expenditures
authorized
in
its
annual
appropriation: Provided, That said advances
shall be repaid before
the end of three (3) months extendible by
another three (3) months as the Monetary
Board may allow
following the date the National Government
received such provisional advances and shall
not, in their
aggregate, exceed twenty percent (20%) of the
average annual income of the borrower for the
last three
(3) preceding fiscal years.

SEC 102. Interbank Settlement. The


Bangko Sentral shall establish facilities for
interbank clearing under such rules and
regulations as the Monetary Board may
prescribe: Provided,
That
the
Bangko
Sentral
may
charge
administrative
and other fees for the
maintenance of such
facilities.

SEC 94. Reserve Requirements. In order


to control the volume of money created by
the credit operations of the banking system, all
banks operating in the Philippines shall be
required to
maintain reserves against their deposit
liabilities: Provided, That the Monetary Board
may, at its
discretion, also require all banks and/or quasibanks to maintain reserves against funds held
in trust and
liabilities for deposit substitutes as defined in
this Act. The required reserves of each bank
shall be
proportional to the volume of its deposit
liabilities and shall ordinarily take the form of a
deposit in the
Bangko Sentral. Reserve requirements shall be
applied to all banks of the same category
uniformly and
without discrimination.
Reserves against deposit substitutes, if
imposed, shall be determined in the same
manner as
provided for reserve requirements against
regular bank deposits, with respect to the
imposition,
increase, and computation of reserves.
The Monetary Board may exempt from reserve
requirements deposits and deposit substitutes
with remaining maturities of two (2) years or
more, as well as interbank borrowings.
Since the requirement to maintain bank
reserves is imposed primarily to control the
volume of

The deposit reserves maintained by the banks


in the Bangko Sentral in accordance with the
provisions of SEC 94 of this Act shall serve as
basis for the clearing of checks and the
settlement of
interbank balances, subject to such rules and
regulations as the Monetary Board may issue
with respect
to such operations: Provided, That any bank
which incurs on overdrawing in its deposit
account with the
Bangko Sentral shall fully cover said overdraft,
including interest thereon at a rate equivalent
to onetenth
of one percent (1/10 of 1%) per day or the
prevailing ninety-one-day treasury bill rate plus
three
percentage points, whichever is higher, not
later than the next clearing day: Provided,
further, That
settlement of clearing balances shall not be
effected for any account which continues to be
overdrawn
for five (5) consecutive banking days until such
time as the overdrawing is fully covered or
otherwise
converted into an emergency loan or advance
pursuant to the provisions of SEC 84 of this Act:
Provided, finally, That the appropriate clearing
office shall be officially notified of banks with
overdrawn
balances. Banks with existing overdrafts with
the Bangko Sentral as of the effectivity of this
Act shall,
within such period as may be prescribed by the
Monetary Board, either convert the overdraft
into an
emergency loan or advance with a plan of
payment, or settle such overdrafts, and that,
upon failure to
so comply herewith, the Bangko Sentral shall
take such action against the bank as may be
warranted
under this Act.

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SEC 103. Exemption from Attachment and


Other Purposes. Deposits maintained
by banks with the Bangko Sentral as part of
their reserve requirements shall be exempt
from
attachment, garnishments, or any other order
or process of any court, government agency or
any other
administrative body issued to satisfy the claim
of a party other than the Government, or its
political
subdivisions or instrumentalities.
SEC 110. Designation of Bangko Sentral as
Banker of the Government. The
Bangko Sentral shall act as a banker of the
Government, its political subdivisions and
instrumentalities.
SEC
111.
Representation
with
the
International Monetary Fund. The Bangko
Sentral shall represent the Government in all
dealings, negotiations and transactions with the
International Monetary Fund and shall carry
such accounts as may result from Philippine
membership
in, or operations with, said Fund.
SEC 112. Representation with Other
Financial Institutions. The Bangko Sentral
may be authorized by the Government to
represent it in dealings, negotiations or
transactions with the
International Bank for Reconstruction and
Development and with other foreign or
international financial
institutions or agencies. The President may,
however, designate any of his other financial
advisors to
jointly represent the Government in such
dealings, negotiations or transactions.
SEC 113. Official Deposits. The Bangko
Sentral shall be the official depository of the
Government, its political subdivisions and
instrumentalities as well as of governmentowned or
controlled corporations and, as a general policy,
their cash balances should be deposited with
the
Bangko Sentral, with only minimum working
balances to be held by government-owned
banks and such
other banks incorporated in the Philippines as
the Monetary Board may designate, subject to
such rules
and regulations as the Board may prescribe:
Provided, That such banks may hold deposits of
the
political subdivisions and instrumentalities of
the Government beyond their minimum working
balances

whenever such subdivisions or instrumentalities


have outstanding loans with said banks.
The Bangko Sentral may pay interest on
deposits of the Government or of its political
subdivisions and instrumentalities, as well as on
deposits of banks with the Bangko Sentral.
SEC 114. Fiscal Operations. The Bangko
Sentral shall open a general cash account
for the Treasurer of the Philippines, in which the
liquid funds of the Government shall be
deposited.
Transfers of funds from this account to other
accounts shall be made only upon order of the
Treasurer of the Philippines.
SEC 115. Other Banks as Agents of the
Bangko Sentral. In the performance of its
functions as fiscal agent, the Bangko Sentral
may engage the services of other governmentowned and
controlled banks and of other domestic banks
for operations in localities at home or abroad in
which the
Bangko Sentral does not have offices or
agencies adequately equipped to perform said
operations:
Provided, however, That for fiscal operations in
foreign countries, the Bangko Sentral may
engage the
services of foreign banking and financial
institutions.
SEC 116. Remuneration for Services. The
Bangko Sentral may charge equitable
rates, commissions or fees for services which it
renders to the Government, its political
subdivisions and
instrumentalities.

ARTICLE
II.
THE
MARKETING
AND
STABILIZATION OF SECURITIES FOR THE
ACCOUNT OF THE GOVERNMENT
A.
THE
ISSUE
AND
PLACING
OF
GOVERNMENT SECURITIES
SEC 117. Issue of Government Obligations.
The issue of securities representing
obligations of the Government, its political
subdivisions or instrumentalities, may be made
through the
Bangko Sentral, which may act as agent of, and
for the account of, the Government or its
respective
subdivisions or instrumentality, as the case may
be: Provided, however, That the Bangko Sentral
shall

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not guarantee the placement of said securities,


and shall not subscribe to their issue except to
replace
its maturing holdings of securities with the
same type as the maturing securities.
SEC 118. Methods of Placing Government
Securities. The Bangko Sentral may
place the securities to which the preceding SEC
refers through direct sale to financial
institutions and
the public.
The Bangko Sentral shall not be a member of
any stock exchange or syndicate, but may
intervene therein for the sole purpose of
regulating their operations in the placing of
government
securities.
The Government, or its political subdivisions or
instrumentalities, shall reimburse the Bangko
Sentral for the expenses incurred in the placing
of the aforesaid securities.
SEC 119. Servicing and Redemption of the
Public Debt. The servicing and
redemption of the public debt shall also be
effected through the Bangko Sentral.
B. BANGKO SENTRAL SUPPORT OF THE
GOVERNMENT SECURITIES MARKET
SEC 120. The Securities Stabilization Fund.
There shall be established a
"Securities Stabilization Fund" which shall be
administered by the Bangko Sentral for the
account of the
Government.
The operations of the Securities Stabilization
Fund shall consist of purchases and sales, in the
open market, of bonds and other evidences of
indebtedness issued or fully guaranteed by the
Government. The purpose of these operations
shall be to increase the liquidity and stabilize
the value
of said securities in order thereby to promote
investment in government obligations.
The Monetary Board shall use the resources of
the Fund to prevent, or moderate, sharp
fluctuations
in
the
quotations
of
said
government obligations, but shall not endeavor
to alter movements
of the market resulting from basic changes in
the pattern or level of interest rates.
The Monetary Board shall issue such regulations
as may be necessary to implement the
provisions of this SEC.
SEC 121. Resources of the Securities
Stabilization Fund. Subject to SEC 132
of this Act, the resources of the Securities
Stabilization Fund shall come from the balance
of the fund as

held by the Central Bank under Republic Act No.


265 as of the effective date of this Act.
SEC 122. Profits and Losses of the Fund.
The Securities Stabilization Fund shall
retain net profits which it may make on its
operations, regardless of whether said profits
arise from
capital gains or from interest earnings. The
Fund shall correspondingly bear any net losses
which it
may incur.
ARTICLE III. FUNCTIONS AS FINANCIAL
ADVISOR OF THE GOVERNMENT
SEC 123. Financial Advice on Official
Credit Operations. Before undertaking any
credit operation abroad, the Government,
through the Secretary of Finance, shall request
the opinion, in
writing, of the Monetary Board on the monetary
implications of the contemplated action. Such
opinions
must similarly be requested by all political
subdivisions and instrumentalities of the
Government before
any credit operation abroad is undertaken by
them.
The opinion of the Monetary Board shall be
based on the gold and foreign exchange
resources
and obligations of the nation and on the effects
of the proposed operation on the balance of
payments
and on monetary aggregates.
Whenever the Government, or any of its
political
subdivisions
or instrumentalities,
contemplates
borrowing within the Philippines, the prior
opinion of the Monetary Board shall likewise be
requested in
order that the Board may render an opinion on
the probable effects of the proposed operation
on
monetary aggregates, the price level, and the
balance of payments.
SEC 124. Representation on the National
Economic and Development Authority.
In order to assure effective coordination
between the economic, financial and fiscal
policies of the
Government and the monetary, credit and
exchange policies of the Bangko Sentral, the
Deputy
Governor designated by the Governor of the
Bangko Sentral shall be an ex officio member of
the
National Economic and Development Authority
Board.

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Exclusive issue power


SEC 50. Exclusive Issue Power. The
Bangko Sentral shall have the sole power and
authority to issue currency, within the territory
of the Philippines. No other person or entity,
public or
private, may put into circulation notes, coins or
any other object or document which, in the
opinion of the
Monetary Board, might circulate as currency,
nor reproduce or imitate the facsimiles of
Bangko Sentral
notes without prior authority from the Bangko
Sentral.
The Monetary Board may issue such regulations
as it may deem advisable in order to prevent
the circulation of foreign currency or of
currency substitutes as well as to prevent the
reproduction of
facsimiles of Bangko Sentral notes.
The Bangko Sentral shall have the authority to
investigate, make arrests, conduct searches
and
seizures in accordance with law, for the purpose
of maintaining the integrity of the currency.
Violation of this provision or any regulation
issued by the Bangko Sentral pursuant thereto
shall
constitute
an
offense
punishable
by
imprisonment of not less than five (5) years but
not more than ten
(10) years. In case the Revised Penal Code
provides for a greater penalty, then that penalty
shall be
imposed.
Liability for notes and coins
SEC 51. Liability for Notes and Coins.
Notes and coins issued by the Bangko Sentral
shall be liabilities of the Bangko Sentral and
may be issued only against, and in amounts not
exceeding,
the assets of the Bangko Sentral. Said notes
and coins shall be a first and paramount lien on
all assets
of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes
and coins shall not be considered as part of its
currency issue and, accordingly, shall not form
part of the assets or liabilities of the Bangko
Sentral.
Legal Tender Power
SEC 53. Characteristics of the Currency.
The Monetary Board, with the approval of

the President of the Philippines, shall prescribe


the
denominations,
dimensions,
designs,
inscriptions
and other characteristics of notes issued by the
Bangko Sentral: Provided, however, That said
notes
shall state that they are liabilities of the Bangko
Sentral and are fully guaranteed by the
Government of
the Republic of the Philippines. Said notes shall
bear the signatures, in facsimile, of the
President of the
Philippines and of the Governor of the Bangko
Sentral.
Similarly, the Monetary Board, with the
approval of the President of the Philippines,
shall
prescribe the weight, fineness, designs,
denominations and other characteristics of the
coins issued by
the Bangko Sentral. In the minting of coins, the
Monetary Board shall give full consideration to
the
availability of suitable metals and to their
relative prices and cost of minting.

Instruments of action
Setting of bank reserve requirements
SEC 94. Reserve Requirements. In order
to control the volume of money created by
the credit operations of the banking system, all
banks operating in the Philippines shall be
required to
maintain reserves against their deposit
liabilities: Provided, That the Monetary Board
may, at its
discretion, also require all banks and/or quasibanks to maintain reserves against funds held
in trust and
liabilities for deposit substitutes as defined in
this Act. The required reserves of each bank
shall be
proportional to the volume of its deposit
liabilities and shall ordinarily take the form of a
deposit in the
Bangko Sentral. Reserve requirements shall be
applied to all banks of the same category
uniformly and
without discrimination.

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Reserves against deposit substitutes, if


imposed, shall be determined in the same
manner as
provided for reserve requirements against
regular bank deposits, with respect to the
imposition,
increase, and computation of reserves.
The Monetary Board may exempt from reserve
requirements deposits and deposit substitutes
with remaining maturities of two (2) years or
more, as well as interbank borrowings.
Since the requirement to maintain bank
reserves is imposed primarily to control the
volume of
money, the Bangko Sentral shall not pay
interest on the reserves maintained with it
unless the Monetary
Board decides otherwise as warranted by
circumstances.
SEC 95. Definition of Deposit Substitutes.
The term "deposit substitutes" is defined
as an alternative form of obtaining funds from
the public, other than deposits, through the
issuance,
endorsement,
or
acceptance
of
debt
instruments for the borrower's own account, for
the purpose of
relending or purchasing of receivables and
other obligations. These instruments may
include, but need
not be limited to, bankers acceptances,
promissory notes, participations, certificates of
assignment and
similar
instruments
with
recourse,
and
repurchase agreements. The Monetary Board
shall determine
what specific instruments shall be considered
as deposit substitutes for the purposes of SEC
94 of
this Act: Provided, however, That deposit
substitutes of commercial, industrial and other
non-financial
companies for the limited purpose of financing
their own needs or the needs of their agents or
dealers
shall not be covered by the provisions of SEC 94
of this Act.
SEC 96. Required Reserves Against Peso
Deposits. The Monetary Board may fix
and, when it deems necessary, alter the
minimum reserve ratios to peso deposits, as
well as to deposit
substitutes, which each bank and/or quasi-bank
may maintain, and such ratio shall be applied
uniformly
to all banks of the same category as well as to
quasi-banks.

SEC 97. Required Reserves Against


Foreign Currency Deposits. The Monetary
Board is similarly authorized to prescribe and
modify the minimum reserve ratios applicable
to deposits
denominated in foreign currencies.
SEC 98. Reserves Against Unused Balances
of Overdraft Lines. In order to
facilitate Bangko Sentral control over the
volume of bank credit, the Monetary Board may
establish
minimum reserve requirements for unused
balances of overdraft lines.
The powers of the Monetary Board to prescribe
and modify reserve requirements against
unused balances of overdraft lines shall be the
same as its powers with respect to reserve
requirements
against demand deposits.
SEC 99. Increase in Reserve Requirements.
Whenever in the opinion of the
Monetary Board it becomes necessary to
increase reserve requirements against existing
liabilities, the
increase shall be made in a gradual manner and
shall not exceed four percentage points in any
thirtyday
period. Banks and other affected financial
institutions shall be notified reasonably in
advance of the
date on which such increase is to become
effective.
SEC 100. Computation on Reserves. The
reserve position of each bank or quasibank
shall be calculated daily on the basis of the
amount, at the close of business for the day, of
the
institution's reserves and the amount of its
liability accounts against which reserves are
required to be
maintained: Provided, That with reference to
holidays or non-banking days, the reserve
position as
calculated at the close of the business day
immediately preceding such holidays and nonbanking days
shall apply on such days.
For the purpose of computing the reserve
position of each bank or quasi-bank, its
principal
office in the Philippines and all its branches and
agencies located therein shall be considered as
a
single unit.
SEC 101. Reserve Deficiencies. Whenever
the reserve position of any bank or quasibank,
computed in the manner specified in the
preceding SEC of this Act, is below the required

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minimum, the bank or quasi-bank shall pay the


Bangko Sentral one-tenth of one percent (1/10
of 1%)
per day on the amount of the deficiency or the
prevailing ninety-one-day treasury bill rate plus
three
percentage points, whichever is higher:
Provided, however, That banks and quasi-banks
shall ordinarily
be permitted to offset any reserve deficiency
occurring on one or more days of the week with
any
excess reserves which they may hold on other
days of the same week and shall be required to
pay the
penalty only on the average daily deficiency
during the week. In cases of abuse, the
Monetary Board
may deny any bank or quasi-bank the privilege
of offsetting reserve deficiencies in the
aforesaid
manner.
If a bank or quasi-bank chronically has a
reserve deficiency, the Monetary Board may
limit or
prohibit the making of new loans or investments
by the institution and may require that part or
all of the
net profits of the institution be assigned to
surplus.
The Monetary Board may modify or set aside
the reserve deficiency penalties provided in this
SEC, for part or the entire period of a strike or
lockout affecting a bank or a quasi-bank as
defined in
the Labor Code, or of a national emergency
affecting operations of banks or quasi-banks.
The
Monetary Board may also modify or set aside
reserved deficiency penalties for rehabilitation
program of
a bank.
SEC 102. Interbank Settlement. The
Bangko Sentral shall establish facilities for
interbank clearing under such rules and
regulations as the Monetary Board may
prescribe: Provided,
That
the
Bangko
Sentral
may
charge
administrative
and other fees
for the
maintenance of such
facilities.
The deposit reserves maintained by the banks
in the Bangko Sentral in accordance with the
provisions of SEC 94 of this Act shall serve as
basis for the clearing of checks and the
settlement of

interbank balances, subject to such rules and


regulations as the Monetary Board may issue
with respect
to such operations: Provided, That any bank
which incurs on overdrawing in its deposit
account with the
Bangko Sentral shall fully cover said overdraft,
including interest thereon at a rate equivalent
to onetenth
of one percent (1/10 of 1%) per day or the
prevailing ninety-one-day treasury bill rate plus
three
percentage points, whichever is higher, not
later than the next clearing day: Provided,
further, That
settlement of clearing balances shall not be
effected for any account which continues to be
overdrawn
for five (5) consecutive banking days until such
time as the overdrawing is fully covered or
otherwise
converted into an emergency loan or advance
pursuant to the provisions of SEC 84 of this Act:
Provided, finally, That the appropriate clearing
office shall be officially notified of banks with
overdrawn
balances. Banks with existing overdrafts with
the Bangko Sentral as of the effectivity of this
Act shall,
within such period as may be prescribed by the
Monetary Board, either convert the overdraft
into an
emergency loan or advance with a plan of
payment, or settle such overdrafts, and that,
upon failure to
so comply herewith, the Bangko Sentral shall
take such action against the bank as may be
warranted
under this Act.
SEC 103. Exemption from Attachment and
Other Purposes. Deposits maintained
by banks with the Bangko Sentral as part of
their reserve requirements shall be exempt
from
attachment, garnishments, or any other order
or process of any court, government agency or
any other
administrative body issued to satisfy the claim
of a party other than the Government, or its
political
subdivisions or instrumentalities.
Control of bank credit
SEC 104. Guiding Principle. The Monetary
Board shall use the powers granted to it
under this Act to ensure that the supply,
availability and cost of money are in accord
with the needs of

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the Philippine economy and that bank credit is


not granted for speculative purposes prejudicial
to the
national
interests.
Regulations
on bank
operations shall be applied to all banks of the
same category
uniformly and without discrimination.
SEC 105. Margin Requirements Against
Letters of Credit. The Monetary Board
may at any time prescribe minimum cash
margins for the opening of letters of credit, and
may relate the
size of the required margin to the nature of the
transaction to be financed.
SEC 106. Required Security Against Bank
Loans. In order to promote liquidity and
solvency of the banking system, the Monetary
Board may issue such regulations as it may
deem
necessary with respect to the maximum
permissible maturities of the loans and
investments which the
banks may make, and the kind and amount of
security to be required against the various
types of credit
operations of the banks.
SEC 107. Portfolio Ceilings. Whenever the
Monetary Board considers it advisable to
prevent or check an expansion of bank credit,
the Board may place an upper limit on the
amount of
loans and investments which the banks may
hold, or may place a limit on the rate of
increase of such
assets within specified periods of time. The
Monetary Board may apply such limits to the
loans and
investments of each bank or to specific
categories thereof.
In no case shall the Monetary Board establish
limits which are below the value of the loans or
investments of the banks on the date on which
they are notified of such restrictions. The
restrictions
shall be applied to all banks uniformly and
without discrimination.
SEC 108. Minimum Capital Ratios. The
Monetary Board may prescribe minimum
ratios which the capital and surplus of the
banks must bear to the volume of their assets,
or to specific
categories thereof, and may alter said ratios
whenever it deems necessary.
SEC
37.
Loans
and
Other
Credit
Accommodations Against Real Estate.
Except as

the Monetary Board may otherwise prescribe,


loans and other credit accommodations against
real estate
shall not exceed seventy-five percent (75%) of
the appraised value of the respective real
estate security,
plus sixty percent (60%) of the appraised value
of the insured improvements, and such loans
may be
made to the owner of the real estate or to his
assignees. (78a)
SEC
38.
Loans
and
Other
Credit
Accommodations on Security of Chattels
and
Intangible Properties. Except as the
Monetary Board may otherwise prescribe, loans
and other credit
accommodations on security of chattels and
intangible properties, such as, but not limited
to, patents,
trademarks, trade names, and copyrights shall
not exceed seventy-five percent (75%) of the
appraised
value of the security, and such loans and other
credit accommodations may be made to the
title-holder of
the chattels and intangible properties or his
assignees. (78a)
SEC 43. Authority to Prescribe Terms and
Conditions of Loans and Other Credit
Accommodations. The Monetary Board
may, similarly, in accordance with the authority
granted to it
in SEC 106 of the New Central Bank Act, and
taking into account the requirements of the
economy for
the effective utilization of long-term funds,
prescribe the maturities, as well as related
terms and
conditions for various types of bank loans and
other credit accommodations. Any change by
the Board in
the maximum maturities shall apply only to
loans and other credit accommodations made
after the date of
such action.
The Monetary Board shall regulate the interest
imposed on microfinance borrowers by lending
investors and similar lenders, such as, but not
limited to, the unconscionable rates of interest
collected on
salary loans and similar credit accommodations.
(78a)
Moral Influence
SEC 68. Means of Action. In order to
achieve the primary objective of price stability,

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the Monetary Board shall rely on its moral


influence and the powers granted to it under
this Act for the
management of monetary aggregates.
CASES:
No Need For Prior Hearing

RURAL BANK OF BUHI vs. CA


G.R. No. L-61689
20 June 1988
Facts:
Buhi is a rural bank that started its operations
only on 26 Dec 1975
In 1980, an examination of the books and
affairs of Buhi was ordered conducted by the
Rural Banks and Savings and Loan Association
(DRBSLA), Central Bank of the Philippines
which by law, has charge of the supervision and
examination of rural banks and savings and
loan associations in the Philippines
Buhi refused
Financial assistance was suspended
DRBSLA (through Odra) conducted a general
examination of Buhis affairs and operations
It found , among others, massive irregularities
in its operations consisting of loans to unknown
and fictitious borrowers
The money due in favor of Central Bank
amounted to almost P3M
Promissory notes evidencing these loans were
rediscounted by CB for cash
Buhi became insolvent and prejudiced its
depositors and creditors
Odra recommended the placing of Buhi under
receivership
The Monetary Board placed Buhi under under
receivership with Odra as the receiver
Odra authorized deputied to take control,
possession and charge of Buhi
Rosario, manager of Buhi, filed a petition for
injunction against Odra and the deputies
She is assailing the action of Odra in
recommending receivership as against the
Rural Banks Act and done with gadalej
CB Monetary Board ordered the liquidation of
Buhi
OSG filed a petition for Assistance in the
Liquidation of Buhi
CB filed MTD on the complaint submitted by
Rosario
Receivership is now moot and academic since
the bank is already in liquidation
Judge denied MTD and issued a TRO enjoining
CB from further managing and administering
Buhi and to deliver the possession and control
thereof to Buhi under the same conditions and

with the same financial status as when the


same was taken over, upon filing of bond
Bond was filed, Judge issued writ of execution
was made directing the sheriff to implement
courts order
Sheriff went to the premises of Buhi but the
vault was locked and no inventory was made
Buhi filed petitions to:
Force open bank vault
(later) order manager of City Trust to allow Buhi
to withdraw rural bank deposits
Order manager of Metrobank to release
deposits of Buhi
All granted by court (wow accommodating
court)
CB, Odra et al filed a petition for certiorari and
prohibition with CA
CA issued a resolution restraining Judge from
enforcing his order
Buhi did not comply with order of CA and file
MR. MR denied
CB et al filed a motion with CA to cite Buhi in
contempt
CA gave show cause order to Buhi and directed
Ministry of National Defense to cause the return
of the possession and management of Buhi to
CB and Odra
Buhi filed objection to both
Alleging that the properties were already in the
possession of Buhi who is the lawful owner and
the return could no longer be done
CA rendered its decision setting aside the order
of lower court and dismissing the petition of
Buhi. MR denied
Buhi agreed and promised in open court to
restore and return to CB the possession and
control of the bank within 3 days
After 3 days, manager of the bank adamantly
refused to surrender the premises
Manager placed under arrest since she still
refused to obey the CA
Buhi filed petition for review on certiorari with
preliminary injunctionanager also filed a
petition for the issuance of writ of habeas
corpus
Manager released
Issue: WON Monetary Board may place Buhi
under receivership without prior notice
Held: Yes
Ratio:
Relevant provision: SEC 29, Republic Act No.
265
SEC. 29. Proceedings upon insolvency. Whenever, upon examination
by the head of the appropriate supervising and examining
department or his examiners or agents into the condition of any
banking institution, it shall be disclosed that the condition of the
same is one of insolvency, or that its continuance in business would
involve probable loss to its depositors or creditors, it shall be the
duty of the department head concerned forthwith, in writing, to
inform the Monetary Board of the facts, and the Board may, upon
finding the statements of the department head to be true, forbid the
institution to do business in the Philippines and shall designate an
official of the Central Bank, or a person of recognized competence in
banking, as receiver to immediately take charge of its assets and

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liabilities, as expeditiously as possible collect and gather all the


assets and administer the same for the benefit of its creditors,
exercising all the powers necessary for these purposes including, but
not limited to, bringing suits and foreclosing mortgages in the name
of the banking institution.
The Monetary Board shall thereupon determine within sixty days
whether the institution may be recognized or otherwise placed in
such a condition so that it may be permitted to resume business
with safety to its depositors and creditors and the general public and
shall prescribe the conditions under which such redemption of
business shall take place as the time for fulfillment of such
conditions. In such case, the expenses and fees in the collection and
administration of the assets of the institution shall be determined by
the Board and shall be paid to the Central Bank out of the assets of
such banking institution.
If the Monetary Board shall determine and confirm within the said
period that the banking institution is insolvent or cannot resume
business with safety to its depositors, creditors and the general
public, it shall, if the public interest requires, order its liquidation,
indicate the manner of its liquidation and approve a liquidation plan.
The Central Bank shall, by the Solicitor General, file a petition in the
Court of First Instance reciting the proceedings which have been
taken and praying the assistance of the court in the liquidation of
the banking institution. The Court shall have jurisdiction in the same
proceedings to adjudicate disputed claims against the bank and
enforce individual liabilities of the stockholders and do all that is
necessary to preserve the assets of the banking institution and to
implement the liquidation plan approved by the Monetary Board.
The Monetary Board shall designate an official of the Central Bank or
a person of recognized competence in banking, as liquidator who
shall take over the functions of the receiver previously appointed by
the Monetary Board under this SEC. The liquidator shall, with all
convenient speed, convert the assets of the banking institution to
money or sell, assign or otherwise dispose of the same to creditors
and other parties for the purpose of paying the debts of such bank
and he may, in the name of the banking institution, institute such
actions as may be necessary in the appropriate court to collect and
recover accounts and assets of the banking institution.
The provisions of any law to the contrary notwithstanding the
actions of the Monetary Board under this SEC and the second
paragraph of SEC 34 of this Act shall be final and executory, and can
be set aside by the court only if there is convincing proof that the
action is plainly arbitrary and made in bad faith. No restraining order
or injunction shall be issued by the court enjoining the Central Bank
from implementing its actions under this SEC and the second
paragraph of SEC 34 of this Act, unless there is convincing proof that
the action of the Monetary Board is plainly arbitrary and made in
bad faith and the petitioner or plaintiff files with the clerk or judge of
the court in which the action is pending a bond executed in favor of
the Central Bank, in an amount to be fixed by the court. The
restraining order or injunction shall be refused or, if granted, shall be
dissolved upon filing by the Central Bank of a bond, which shall be in
the form of cash or Central Bank cashier's check, in an amount twice
the amount of the bond of the petitioner, or plaintiff conditioned that
it will pay the damages which the petitioner or plaintiff may suffer by
the refusal or the dissolution of the injunction. The provisions of Rule
58 of the New Rules of Court insofar as they are applicable and not
inconsistent with the provisions of this SEC shall govern the issuance
and dissolution of the restraining order or injunction contemplated in
this SEC.
Insolvency, under this Act, shall be understood to mean the inability
of a banking institution to pay its liabilities as they fall due in the
usual and ordinary course of business: Provided, however, that this
shall not include the inability to pay of an otherwise non-insolvent
bank caused by extraordinary demands induced by financial panic
commonly evidenced by a run on the banks in the banking
community.
The appointment of a conservator under SEC 28-A of this Act or the
appointment of receiver under this SEC shall be vested exclusively
with the Monetary Board, the provision of any law, general or
special, to the contrary notwithstanding.

There is no requirement whether express


or implied, that a hearing be first conducted
before a banking institution may be placed
under receivership.

Conditions prerequisite to the action of


the Monetary Board to forbid the institution to
do business in the Philippines and to appoint a
receiver to immediately take charge of the
bank's assets and liabilities.
An examination made by the examining
department of the Central Bank;

Report by said department to the Monetary


Board; and
Prima facie showing that the bank is in a
condition of insolvency or so situated that its
continuance in business would involve probable
loss to its depositors or creditors.
Whenever it shall appear prima facie that a
banking institution is in "a condition of
insolvency" or so situated "that its continuance
in business would involved probable loss to its
depositors or creditors," the Monetary Board
has authority:
To forbid the institution to do business and
appoint a receiver therefor; and
To determine, within 60 days, whether or not:
The institution may be reorganized and
rehabilitated to such an extent as to be
permitted to resume business with safety to
depositors, creditors and the general public; or
It is indeed insolvent or cannot resume business
with safety to depositors, creditors and the
general public, and public interest requires that
it be liquidated.
If the bank can no longer resume business with
safety to depositors, creditors and the public,
etc., its liquidation will be ordered and a
liquidator appointed by the Monetary Board.
The Central Bank shall thereafter file a petition
in the Regional Trial Court praying for the
Court's assistance in the liquidation of the bank.
Buhi argues that there is also that constitutional
guarantee that no property shall be taken
without due process of law
The contention is without merit.
It has long been established and recognized in
this jurisdiction that the closure and liquidation
of a bank may be considered as an exercise of
police power.
Exercise may, however, be subject to judicial
inquiry and could be set aside if found to be
capricious, discriminatory, whimsical, arbitrary,
unjust or a denial of the due process and equal
protection clauses of the Constitution
Courts may interfere with the Central Bank's
exercise of discretion in determining whether or
not a distressed bank shall be supported or
liquidated.
A hearing or an opportunity to be heard may be
subsequent to the closure.
One can just imagine the dire consequences of
a prior hearing: bank runs would be the order of
the day, resulting in panic and hysteria. In the
process, fortunes may be wiped out, and
disillusionment will run the gamut of the entire
banking community.
Courts may appoint receivers without prior
presentation of evidence and solely on the basis
of the averments of the pleadings. Rule 59 of
the Revised Rules of Court allows the
appointment of a receiver upon an ex parte
application.

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Decisions of CB regarding receivership, etc are


final and executory
Only one ground to set aside: convincing proof
that the action is plainly arbitrary and done with
bad faith

remain in the trial court where other claims may


still be pending
In this case of corporate liquidation, there was
failure to file record on appeal. Hence, it being a
special proceeding, the appeal was not
perfected.

Nature Of Liquidation Proceedings

AUTHORITY OF CONSERVATOR TO REVOKE CONTRACTS

PACIFIC
BANKING
CORPORATION
EMPLOYEES ORGANIZATION, et al vs. CA
G.R. No. 109373
20 March 1995
Held:
Distinction Between an Ordinary Action and a
Special Proceeding:
It was necessary in this case to classify what
was filed-- whether it was an ordinary action or
a special proceedingbecause the two have
different periods for appeal.
Action is the act by which one sues another in a
court of justice for the enforcement or
protection of a right, or the prevention or
redress of the wrong; while special proceeding
is the act by which one seeks to establish the
status or right of a party, or a particular fact.
A petition for liquidation of an insolvent
corporation is a special proceeding.
It does not seek the enforcement or protection
of a right nor the prevention or redress of a
wrong against a party.
It does not pray for affirmative relief for an
injury arising from a partys wrongful act or
omission nor state a cause of action that can be
enforced against any person.
The petition only seeks a declaration of the
corporations state of insolvency and the
concomitant right of creditors and the order of
payment of their claims in the disposition of the
corpos assets.
Different from an Interpleader
An Interpleader involves claims on a subject
matter against a person who has no interest
therein.
Not the case in liquidation proceedings where
the Liquidator, as representative of the
corporation, takes charge of its assets and
liabilities for the benefit of the creditors.
Appeal
As in settlement of the estate of the deceased,
multiple appeals are allowed. The several
claims of the creditors are separate ones and a
decision or final order with respect to any claim
can be appealed.
In special proceedings, unlike in ordinary
actions, a record on appeal must be filed in
order for the appeal to be perfected. This is
because the original record of the case must

FIRST PHILIPPINE INTERNATIONAL BANK


vs. CA
G.R. No. 115849
24 January 1996
Facts:
The defendant Producer Bank of the Philippines
acquired six parcels of land with a total area of
101 hectares located at Don Jose, Sta. Rose,
Laguna. The original plaintiffs, Demetrio
Demetria and Jose O. Janolo, wanted to
purchase the property and thus initiated
negotiations for that purpose.
In the early part of August 1987 said plaintiffs,
upon the suggestion of BYME (previous owner of
lands who mortgaged it to Producer Bank)
investment's legal counsel, Jose Fajardo, met
with defendant Mercurio Rivera, Manager of the
Property Management Department of the
defendant bank. After the meeting, plaintiff
Janolo, following the advice of defendant Rivera,
made a formal purchase offer to the bank
through a letter.
Rivera replied and made a counter offer of P 5.5
M. Janolo amended his offer to 4.250 M. There
was no reply to Janolo's last offer. What took
place was a meeting on September 28, 1987
between the plaintiffs and Luis Co, the Senior
Vice-President of defendant bank. Rivera as well
as Fajardo, the BYME lawyer, attended the
meeting.
Janolo wrote again saying that
they are
accepting the 5.5 offer.
On October 12, 1987, the conservator of the
bank
(which
has
been
placed
under
conservatorship by the Central Bank since
1984) was replaced by an Acting Conservator in
the
person
of
defendant
Leonida
T.
Encarnacion. Rivera wrote back to say the
proposal is under consideration.
What thereafter transpired was a series of
demands by the plaintiffs for compliance by the
bank with what plaintiff considered as a
perfected contract of sale, which demands were
in one form or another refused by the bank. As
detailed by the trial court in its decision, on
November 17, 1987, plaintiffs through a letter
to defendant Rivera (Exhibit "G") tendered
payment of the amount of P5.5 million
"pursuant to (our) perfected sale agreement."
Defendants refused to receive both the
payment and the letter. Plaintiffs demanded the
execution by the bank of the documents on

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what was considered as a "perfected


agreement."
However, no response came from the Acting
Conservator. On December 14, 1987, Janolo and
Demetria made a second tender of payment
this time through the Acting Conservator,
defendant Encarnacion. The letter contained
checks and an acknowledgment of the receipt
of payment.
The foregoing letter drew no response for more
than four months. Then, on May 3, 1988,
plaintiff, through counsel, made a final demand
for compliance by the bank with its obligations
under the considered perfected contract of sale.
Defendants
through
Acting
Conservator
Encarnacion repudiated the authority of
defendant Rivera and claimed that his dealings
with the plaintiffs, particularly his counter-offer
of P5.5 Million are unauthorized or illegal.
Plaintiffs filed a suit for specific performance
with damages against the bank, its Manager
Rivers and Acting Conservator Encarnacion.
In the course of the proceedings in the
respondent
Court,
Carlos
Ejercito
was
substituted in place of Demetria and Janolo, in
view of the assignment of the latters' rights.
Issue1: WON the Contract Perfected
Held: Yes
Ratio:
There is no dispute that the object of the
transaction is that property owned by the
defendant bank as acquired assets consisting of
six (6) parcels of land. It is likewise beyond
cavil that the bank intended to sell the
property. The procedure in the sale of acquired
assets as well as the nature and scope of the
authority of Rivera on the matter is clearly
delineated in the testimony of Rivera himself.
The plaintiffs, therefore, at that meeting of
August 1987 regarding their purpose of buying
the property, dealt with and talked to the right
person. Necessarily, it being inherent in his
authority, Rivera is the officer from whom
official information regarding the price, as
determined by the Committee and approved by
the Conservator, can be had. And Rivera
confirmed his authority when he talked with the
plaintiff in August 1987.
What transpired after the meeting of early
August 1987 are consistent with the authority
and the duties of Rivera and the bank's internal
procedure in the matter of the sale of bank's
assets. Considering an aspect of the official
duty of Rivera as some sort of intermediary
between the plaintiffs-buyers with their
proposed buying price on one hand, and the
bank
Committee,
the
Conservator
and
ultimately the bank itself with the set price on
the other, and considering further the
discussion of price at the meeting of August
resulting in a formal offer of P3.5 Million in cash,

there can be no other logical conclusion than


that when, on September 1, 1987, Rivera
informed plaintiffs by letter that "the bank's
counter-offer is at P5.5 Million for more than
101 hectares on lot basis," such counter-offer
price had been determined by the Past Due
Committee and approved by the Conservator
after Rivera had duly presented plaintiffs' offer
for discussion by the Committee of such
matters as original loan of borrower, bid price
during foreclosure, total claim of the bank, and
market value.
Article 1318 of the Civil Code enumerates the
requisites of a valid and perfected contract as
follows: "(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of
the contract; (3) Cause of the obligation which
is established."
There is no dispute on requisite no. 2. There is,
however, a dispute on the first and third
requisites.
Petitioners allege that "there is no counter-offer
made by the Bank, and any supposed counteroffer which Rivera (or Co) may have made is
unauthorized. Since there was no counter-offer
by the Bank, there was nothing for Ejercito (in
substitution of Demetria and Janolo) to accept."
From the evidence found by respondent Court,
it is obvious that petitioner Rivera has apparent
or implied authority to act for the Bank in the
matter of selling its acquired assets. (evidence:
letters, meetings, etc)
In the very recent case of Limketkai Sons
Milling, Inc. vs. Court of Appeals, et. al. 32, the
Court, through Justice Jose A. R. Melo, affirmed
the doctrine of apparent authority as it held
that the apparent authority of the officer of the
Bank of P.I. in charge of acquired assets is
borne out by similar circumstances surrounding
his dealings with buyers.
To be sure, petitioners attempted to repudiate
Rivera's apparent authority through documents
and testimony which seek to establish Rivera's
actual authority. These pieces of evidence,
however, are inherently weak as they consist of
Rivera's self-serving testimony and various
inter-office memoranda that purport to show his
limited actual authority, of which private
respondent cannot be charged with knowledge.
In any event, since the issue is apparent
authority, the existence of which is borne out by
the respondent Court's findings, the evidence of
actual authority is immaterial insofar as the
liability of a corporation is concerned
Petitioners also alleged that Demetria's and
Janolo's P4.25 million counter-offer in the letter
dated September 17, 1987 extinguished the
Bank's offer of P5.5 million 34 .They disputed
the respondent Court's finding that "there was a
meeting of minds when on 30 September 1987
Demetria and Janolo through Annex "L" (letter
dated September 30, 1987) "accepted" Rivera's

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counter offer of P5.5 million under Annex "J"


(letter dated September 17, 1987).
However, the above-cited authorities and
precedents cannot apply in the instant case
because, as found by the respondent Court
which reviewed the testimonies on this point,
what was "accepted" by Janolo in his letter
dated September 30, 1987 was the Bank's offer
of P5.5 million as confirmed and reiterated to
Demetria and Atty. Jose Fajardo by Rivera and
Co during their meeting on September 28,
1987. Note that the said letter of September 30,
1987 begins with"(p)ursuant to our discussion
last 28 September 1987 . . .
We note that the Bank's repudiation, through
Conservator Encarnacion, of Rivera's authority
and action, particularly the latter's counter-offer
of P5.5 million, as being "unauthorized and
illegal" came only on May 12, 1988 or more
than seven (7) months after Janolo' acceptance.
Such delay, and the absence of any
circumstance which might have justifiably
prevented the Bank from acting earlier, clearly
characterizes the repudiation as nothing more
than a last-minute attempt on the Bank's part
to get out of a binding contractual obligation.
Issue2: Is the Contract Enforceable?
Held: Yes
Ratio:
The bank's letter of September 1, 1987
(together with the other letters including
Janolos first offer) on the official price and the
plaintiffs' acceptance of the price on September
30, 1987, are not, in themselves, formal
contracts of sale. They are however clear
embodiments of the fact that a contract of sale
was perfected between the parties, such
contract being binding in whatever form it may
have been entered into (case citations omitted).
But let it be assumed arguendo that the
counter-offer during the meeting on September
28, 1987 did constitute a "new" offer which was
accepted by Janolo on September 30, 1987.
Still, the statute of frauds will not apply by
reason of the failure of petitioners to object to
oral testimony proving petitioner Bank's
counter-offer of P5.5 million. Hence, petitioners
by such utter failure to object are deemed to
have waived any defects of the contract under
the statute of frauds, pursuant to Article 1405
of the Civil Code.
Issue3: May the Conservator Revoke the
Perfected and Enforceable Contract?
Held: No
Ratio:
It is not disputed that the petitioner Bank was
under a conservator placed by the Central Bank
of the Philippines during the time that the
negotiation and perfection of the contract of
sale took place. Petitioners energetically

contended that the conservator has the power


to revoke or overrule actions of the
management or the board of directors of a
bank, under SEC 28-A of Republic Act No. 265
(otherwise known as the Central Bank Act) as
follows:
Whenever, on the basis of a report submitted
by the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a non-bank financial intermediary
performing quasi-banking functions is in a state
of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate
to protect the interest of depositors and
creditors, the Monetary Board may appoint a
conservator to take charge of the assets,
liabilities, and the management of that
institution, collect all monies and debts due said
institution and exercise all powers necessary to
preserve the assets of the institution,
reorganize the management thereof, and
restore its viability. He shall have the power to
overrule or revoke the actions of the previous
management and board of directors of the bank
or non-bank financial intermediary performing
quasi-banking functions, any provision of law to
the contrary notwithstanding, and such other
powers as the Monetary Board shall deem
necessary.
In the first place, this issue of the Conservator's
alleged authority to revoke or repudiate the
perfected contract of sale was raised for the
first time in this Petition as this was not litigated
in the trial court or CA. It cannot be raised for
the first time on appeal
In the second place, there is absolutely no
evidence that the Conservator, at the time of
the contract was perfected, actually repudiated
or overruled said contract of sale. The Bank's
acting conservator at the time, Rodolfo Romey,
never objected to the sale of the property to
Demetria and Janolo. What petitioners are really
referring to is the letter of Conservator
Encarnacion, who took over from Romey after
the sale was perfected on September 30, 1987
(Annex
V,
petition)
which
unilaterally
repudiated not the contract but the authority of
Rivera to make a binding offer and which
unarguably came months after the perfection of
the contract. It denied the counter offer. It said
that
only
only
the
Board
of
Directors/Conservator may authorize the sale of
any property of the corportion/bank..
In the third place, while admittedly, the Central
Bank law gives vast and far-reaching powers to
the conservator of a bank, it must be pointed
out that such powers must be related to the
"(preservation of) the assets of the bank, (the
reorganization of) the management thereof and
(the restoration of) its viability." Such powers,
enormous and extensive as they are, cannot
extend to the post-facto repudiation of

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perfected transactions, otherwise they would


infringe against the non-impairment clause of
the Constitution. If the legislature itself cannot
revoke an existing valid contract, how can it
delegate such non-existent powers to the
conservator under SEC 28-A of said law?
Obviously, therefore, SEC 28-A merely gives the
conservator power to revoke contracts that are,
under existing law, deemed to be defective i.e.,
void, voidable, unenforceable or rescissible.
Hence, the conservator merely takes the place
of a bank's board of directors. What the said
board cannot do such as repudiating a contract
validly entered into under the doctrine of
implied authority the conservator cannot do
either. Ineluctably, his power is not unilateral
and he cannot simply repudiate valid
obligations of the Bank. His authority would be
only to bring court actions to assail such
contracts as he has already done so in the
instant case. A contrary understanding of the
law would simply not be permitted by the
Constitution. Neither by common sense. To rule
otherwise would be to enable a failing bank to
become solvent, at the expense of third parties,
by simply getting the conservator to unilaterally
revoke all previous dealings which had one way
or another or come to be considered
unfavorable to the Bank, yielding nothing to
perfected contractual
rights
nor vested
interests of the third parties who had dealt with
the Bank.
ADDITIONAL MATERIAL:
CIRCULAR NO. 537
Series of 2006
Pursuant to SEC 52 of Republic Act No. 7653
and Monetary Board Resolution No. 862 dated 6
July 2006, the maximum amount of coins to be
considered as legal tender is adjusted as
follows:
1. One thousand pesos (P1,000.00) for
denominations of 1-Piso, 5-Piso and 10Piso coins; and
2. One hundred pesos (P100.00) for
denominations of 1-sentimo, 5-sentimo,
10-sentimo, and 25-sentimo coins.
This Circular shall take effect after fifteen (15)
days following its publication in the Official
Gazette or in a newspaper of general
circulation.

VII. THE GENERAL BANKING LAW


OF 2000
7.1 Topics
State Policy

Concept of Intermediation
Distinction between banks and quasibanks
SEC 2. Declaration of Policy. The State
recognizes the vital role of banks in providing
an environment conducive to the sustained
development of the national economy and the
fiduciary nature
of banking that requires high standards of
integrity and performance. In furtherance
thereof, the State
shall promote and maintain a stable and
efficient banking and financial system that is
globally
competitive, dynamic and responsive to the
demands of a developing economy. (n)
SEC 4. Supervisory Powers. The
operations and activities of banks shall be
subject to
supervision of the Bangko Sentral. "Supervision"
shall include the following:
4.1. The issuance of rules of conduct or the
establishment of standards of operation for
uniform
application to all institutions or functions
covered,
taking
into
consideration
the
distinctive
character of the operations of institutions and
the substantive similarities of specific functions
to which such rules, modes or standards are to
be applied;
4.2. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3. Overseeing to ascertain that laws and
regulations are complied with;
4.4. Regular investigation which shall not be
oftener than once a year from the last date of
examination
to
determine
whether
an
institution is conducting its business on a safe
or
sound
basis:
Provided,
That
the
deficiencies/irregularities
found
by
or
discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
powers over quasi-banks, trust entities and
other financial institutions which under special
laws are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall
refer to entities engaged in the borrowing of

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funds through the issuance, endorsement or


assignment with recourse or acceptance of
deposit
substitutes as defined in SEC 95 of Republic Act
No. 7653 (hereafter the "New Central Bank
Act") for
purposes of relending or purchasing of
receivables and other obligations. (2-Da)
Classification of banks
3.2. Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of: (i) Savings and
mortgage banks, (ii) Stock savings and loan
associations, and (iii) Private development
banks, as defined in Republic Act No. 7906
(hereafter the "Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No.
7353 (hereafter the "Rural Banks Act");
(e) Cooperative banks, as defined in Republic
Act No. 6938 (hereafter the "Cooperative
Code");
(f) Islamic banks as defined in Republic Act No.
6848, otherwise known as the "Charter of Al
Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as determined
by the Monetary Board of the Bangko Sentral
ng Pilipinas. (6-Aa)
SEC 71. Other Banking Laws. The
organization,
ownership
and
capital
requirements,
powers, supervision and general conduct of
business of thrift banks, rural banks and
cooperative banks
shall be governed by the provisions of the Thrift
Banks Act, the Rural Banks Act, and the
Cooperative
Code, respectively.
The organization, ownership and capital
requirements, powers, supervision and general
conduct
of business of Islamic banks shall be governed
by special laws.
The provisions of this Act, however, insofar as
they are not in conflict with the provisions of
the
Thrift Banks Act, the Rural Banks Act, and the
Cooperative Code shall likewise apply to thrift
banks, rural
banks, and cooperative banks, respectively.
However, for purposes of prescribing the
minimum ratio
which the net worth of a thrift bank must bear
to its total risk assets, the provisions of SEC 33
of this
Act shall govern. (n)

Distinction between
commercial banks

universal

banks

and

SEC 23. Powers of a Universal Bank. A


universal bank shall have the authority to
exercise, in addition to the powers authorized
for a commercial bank in SEC 29, the powers of
an
investment house as provided in existing laws
and the power to invest in non-allied
enterprises as
provided in this Act. (21-B)
SEC 24. Equity Investments of a Universal
Bank. A universal bank may, subject to
the conditions stated in the succeeding
paragraph, invest in the equities of allied and
non-allied
enterprises as may be determined by the
Monetary Board. Allied enterprises may either
be financial or
non-financial.
Except as the Monetary Board may otherwise
prescribe:
24.1. The total investment in equities of allied
and non-allied enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one
enterprise, whether allied or non-allied, shall
not exceed
twenty-five percent (25%) of the net worth of
the bank.
As used in this Act, "net worth" shall mean the
total of the unimpaired paid-in capital including
paid-in surplus, retained earnings and undivided
profit, net of valuation reserves and other
adjustments as
may be required by the Bangko Sentral.
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board
which shall promulgate appropriate guidelines
to govern such investments. (21-Ba)
SEC
30.
Equity
Investments
of
a
Commercial Bank. A commercial bank may,
subject
to the conditions stated in the succeeding
paragraphs, invest only in the equities of allied
enterprises as
may be determined by the Monetary Board.
Allied enterprises may either be financial or
non-financial.
Except as the Monetary Board may otherwise
prescribe:
30.1. The total investment in equities of allied
enterprises shall not exceed thirty-five percent
(35%) of the net worth of the bank; and
30.2. The equity investment in any one
enterprise shall not exceed twenty-five percent
(25%) of the

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net worth of the bank.


The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board
which shall promulgate appropriate guidelines
to govern such investments. (21A-a; 21-Ca)

Distinction
between
universal
commercial banks and other banks

banks

or

SEC 33. Acceptance of Demand Deposits.


A bank other than a universal or
commercial bank cannot accept or create
demand deposits except upon prior approval of,
and subject to
such conditions and rules as may be prescribed
by the Monetary Board. (72-Aa)
Distinction between
enterprises

allied

and

non-allied

SEC 23. Powers of a Universal Bank. A


universal bank shall have the authority to
exercise, in addition to the powers authorized
for a commercial bank in SEC 29, the powers of
an
investment house as provided in existing laws
and the power to invest in non-allied
enterprises as
provided in this Act. (21-B)
Institutions subject to BSP supervisory and
regulatory powers
SEC 4. Supervisory Powers. The
operations and activities of banks shall be
subject to
supervision of the Bangko Sentral. "Supervision"
shall include the following:
4.1. The issuance of rules of conduct or the
establishment of standards of operation for
uniform
application to all institutions or functions
covered,
taking
into
consideration
the
distinctive
character of the operations of institutions and
the substantive similarities of specific functions
to which such rules, modes or standards are to
be applied;
4.2. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3. Overseeing to ascertain that laws and
regulations are complied with;

4.4. Regular investigation which shall not be


oftener than once a year from the last date of
examination
to
determine
whether
an
institution is conducting its business on a safe
or
sound
basis:
Provided,
That
the
deficiencies/irregularities
found
by
or
discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
powers over quasi-banks, trust entities and
other financial institutions which under special
laws are
subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall
refer to entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit
substitutes as defined in SEC 95 of Republic Act
No. 7653 (hereafter the "New Central Bank
Act") for
purposes of relending or purchasing of
receivables and other obligations. (2-Da)
R.A.7653
SEC 25. Supervision and Examination.
The Bangko Sentral shall have supervision
over, and conduct periodic or special
examinations of, banking institutions and quasibanks, including
their subsidiaries and affiliates engaged in allied
activities.
For purposes of this SEC, a subsidiary means a
corporation more than fifty percent (50%) of
the voting stock of which is owned by a bank or
quasi-bank and an affiliate means a corporation
the
voting stock of which, to the extent of fifty
percent (50%) or less, is owned by a bank or
quasi-bank or
which is related or linked to such institution or
intermediary through common stockholders or
such other
factors as may be determined by the Monetary
Board.
The department heads and the examiners of
the supervising and/or examining departments
are
hereby authorized to administer oaths to any
director, officer, or employee of any institution
under their
respective supervision or subject to their
examination and to compel the presentation of
all books,

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documents, papers or records necessary in their


judgment to ascertain the facts relative to the
true
condition of any institution as well as the books
and records of persons and entities relative to
or in
connection with the operations, activities or
transactions
of
the
institution
under
examination, subject to
the provision of existing laws protecting or
safeguarding the secrecy or confidentiality of
bank deposits
as well as investments of private persons,
natural or juridical, in debt instruments issued
by the
Government.
No restraining order or injunction shall be
issued by the court enjoining the Bangko
Sentral from
examining any institution subject to supervision
or examination by the Bangko Sentral, unless
there is
convincing proof that the action of the Bangko
Sentral is plainly arbitrary and made in bad
faith and the
petitioner or plaintiff files with the clerk or judge
of the court in which the action is pending a
bond
executed in favor of the Bangko Sentral, in an
amount to be fixed by the court. The provisions
of Rule
58 of the New Rules of Court insofar as they are
applicable and not inconsistent with the
provisions of
this SEC shall govern the issuance and
dissolution of the restraining order or injunction
contemplated
in this SEC.

Sentral, examine, inspect or investigate the


books and records of such person or entity.
Upon issuance of
this authority, such person or entity may
commence to engage in banking operations or
quasi-banking
functions and shall continue to do so unless
such authority is sooner surrendered, revoked,
suspended or
annulled by the Bangko Sentral in accordance
with this Act or other special laws.
The department head and the examiners of the
appropriate supervising and examining
department are hereby authorized to administer
oaths to any such person, employee, officer, or
director
of any such entity and to compel the
presentation or production of such books,
documents, papers or
records that are reasonably necessary to
ascertain the facts relative to the true functions
and operations
of such person or entity. Failure or refusal to
comply with the required presentation or
production of such
books, documents, papers or records within a
reasonable time shall subject the persons
responsible
therefore to the penal sanctions provided under
the New Central Bank Act.
Persons or entities found to be performing
banking or quasi-banking functions without
authority
from the Bangko Sentral shall be subject to
appropriate sanctions under the New Central
Bank Act and
other applicable laws. (4a)

Authority to engage in banking institutions

Stock corporation

SEC 6. Authority to Engage in Banking and


Quasi-Banking Functions. No person or
entity shall engage in banking operations or
quasi-banking functions without authority from
the Bangko
Sentral: Provided, however, That an entity
authorized by the Bangko Sentral to perform
universal or
commercial banking functions shall likewise
have the authority to engage in quasi-banking
functions.
The determination of whether a person or entity
is performing banking or quasi-banking
functions
without Bangko Sentral authority shall be
decided by the Monetary Board. To resolve such
issue, the
Monetary Board may, through the appropriate
supervising and examining department of the
Bangko

SEC 8. Organization. The Monetary Board


may authorize the organization of a bank or
quasi-bank subject to the following conditions:
8.1. That the entity is a stock corporation (7);
8.2. That its funds are obtained from the public,
which shall mean twenty (20) or more persons
(2-Da); and
8.3. That the minimum capital requirements
prescribed by the Monetary Board for each
category
of banks are satisfied. (n)
No new commercial bank shall be established
within three (3) years from the effectivity of this
Act. In the
exercise of the authority granted herein, the
Monetary Board shall take into consideration
their capability
in terms of their financial resources and
technical expertise and integrity. The bank
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incorporate an assessment of the bank's


ownership structure, directors and senior
management, its
operating plan and internal controls as well as
its projected financial condition and capital
base.
Not a close corporation
Par value stock
SEC 9. Issuance of Stocks. The Monetary
Board may prescribe rules and regulations
on the types of stock a bank may issue,
including the terms thereof and rights
appurtenant thereto to
determine compliance with laws and regulations
governing capital and equity structure of banks:
Provided, That banks shall issue par value
stocks only.
Ownership of shares
SEC 11. Foreign Stockholdings. Foreign
individuals and non-bank corporations may
own or control up to forty percent (40%) of the
voting stock of a domestic bank. This rule shall
apply to
Filipinos and domestic non-bank corporations.
(12a; 12-Aa)
The percentage of foreign-owned voting stocks
in a bank shall be determined by the citizenship
of
the individual stockholders in that bank. The
citizenship of the corporation which is a
stockholder in a
bank shall follow the citizenship of the
controlling stockholders of the corporation,
irrespective of the place
of incorporation. (n)
MB Certificate of authority
Power of a universal bank
SEC 23. Powers of a Universal Bank. A
universal bank shall have the authority to
exercise, in addition to the powers authorized
for a commercial bank in SEC 29, the powers of
an
investment house as provided in existing laws
and the power to invest in non-allied
enterprises as
provided in this Act. (21-B)
SEC 24. Equity Investments of a Universal
Bank. A universal bank may, subject to
the conditions stated in the succeeding
paragraph, invest in the equities of allied and
non-allied

enterprises as may be determined by the


Monetary Board. Allied enterprises may either
be financial or
non-financial.
Except as the Monetary Board may otherwise
prescribe:
24.1. The total investment in equities of allied
and non-allied enterprises shall not exceed fifty
percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one
enterprise, whether allied or non-allied, shall
not exceed
twenty-five percent (25%) of the net worth of
the bank.
As used in this Act, "net worth" shall mean the
total of the unimpaired paid-in capital including
paid-in surplus, retained earnings and undivided
profit, net of valuation reserves and other
adjustments as
may be required by the Bangko Sentral.
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board
which shall promulgate appropriate guidelines
to govern such investments. (21-Ba)
SEC 25. Equity Investments of a Universal
Bank in Financial Allied Enterprises. A
universal bank can own up to one hundred
percent (100%) of the equity in a thrift bank, a
rural bank or a
financial allied enterprise.
A publicly-listed universal or commercial bank
may own up to one hundred percent (100%) of
the
voting stock of only one other universal or
commercial bank. (21-B; 21-Ca)
SEC 26. Equity Investments of a Universal
Bank in Non-Financial Allied Enterprises.
A universal bank may own up to one hundred
percent (100%) of the equity in a non-financial
allied
enterprise. (21-Ba)
SEC 27. Equity Investments of a Universal
Bank in Non-Allied Enterprises. The
equity investment of a universal bank, or of its
wholly or majority-owned subsidiaries, in a
single nonallied
enterprise shall not exceed thirty-five percent
(35%) of the total equity in that enterprise nor
shall it
exceed thirty-five percent (35%) of the voting
stock in that enterprise. (21-B)
SEC 28. Equity Investments in QuasiBanks. To promote competitive conditions in

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financial markets, the Monetary Board may


further limit to forty percent (40%) equity
investments of
universal banks in quasi-banks. This rule shall
also apply in the case of commercial banks. (12E)
SEC 29. Powers of a Commercial Bank. A
commercial bank shall have, in addition to
the general powers incident to corporations, all
such powers as may be necessary to carry on
the
business of commercial banking, such as
accepting drafts and issuing letters of credit;
discounting and
negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt;
accepting or creating
demand deposits; receiving other types of
deposits and deposit substitutes; buying and
selling foreign
exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities;
and extending
credit, subject to such rules as the Monetary
Board may promulgate. These rules may
include the
determination of bonds and other debt
securities eligible for investment, the maturities
and aggregate
amount of such investment. (21a)
SEC 53. Other Banking Services. In
addition
to
the
operations
specifically
authorized in this Act, a bank may perform the
following services:
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell, by
order of and for the account of their customers,
shares, evidences of indebtedness and all types
of securities;
53.3. Make collections and payments for the
account of others and perform such other
services for
their customers as are not incompatible with
banking business;
53.4. Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or
administrator
of
investment
management/advisory/consultancy
accounts;
and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under SubSECs 53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it
receives duly separate from the bank's own
assets and liabilities.

The Monetary Board may regulate the


operations authorized by this SEC in order to
ensure
that such operations do not endanger the
interests of the depositors and other creditors
of the bank.
In case a bank or quasi-bank notifies the
Bangko Sentral or publicly announces a bank
holiday, or
in any manner suspends the payment of its
deposit liabilities continuously for more than
thirty (30) days,
the Monetary Board may summarily and without
need for prior hearing close such banking
institution and
place it under receivership of the Philippine
Deposit Insurance Corporation. (72a)
Powers of a commercial bank
SEC 29. Powers of a Commercial Bank. A
commercial bank shall have, in addition to
the general powers incident to corporations, all
such powers as may be necessary to carry on
the
business of commercial banking, such as
accepting drafts and issuing letters of credit;
discounting and
negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt;
accepting or creating
demand deposits; receiving other types of
deposits and deposit substitutes; buying and
selling foreign
exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities;
and extending
credit, subject to such rules as the Monetary
Board may promulgate. These rules may
include the
determination of bonds and other debt
securities eligible for investment, the maturities
and aggregate
amount of such investment. (21a)
SEC
30.
Equity
Investments
of
a
Commercial Bank. A commercial bank may,
subject
to the conditions stated in the succeeding
paragraphs, invest only in the equities of allied
enterprises as
may be determined by the Monetary Board.
Allied enterprises may either be financial or
non-financial.
Except as the Monetary Board may otherwise
prescribe:
30.1. The total investment in equities of allied
enterprises shall not exceed thirty-five percent

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(35%) of the net worth of the bank; and


30.2. The equity investment in any one
enterprise shall not exceed twenty-five percent
(25%) of the
net worth of the bank.
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board
which shall promulgate appropriate guidelines
to govern such investments. (21A-a; 21-Ca)
SEC
31.
Equity
Investments
of
a
Commercial Bank in Financial Allied
Enterprises.
A commercial bank may own up to one hundred
percent (100%) of the equity of a thrift bank or
a rural
bank.
Where the equity investment of a commercial
bank is in other financial allied enterprises,
including another commercial bank, such
investment shall remain a minority holding in
that enterprise.
(21-Aa; 21-Ca)
SEC
32.
Equity
Investments
of
a
Commercial Bank in Non-Financial Allied
Enterprises. A commercial bank may own
up to one hundred percent (100%) of the equity
in a nonfinancial allied enterprise. (21-Aa)
SEC 53. Other Banking Services. In
addition
to
the
operations
specifically
authorized
in this Act, a bank may perform the following
services:
53.1. Receive in custody funds, documents and
valuable objects;
53.2. Act as financial agent and buy and sell, by
order of and for the account of their customers,
shares, evidences of indebtedness and all types
of securities;
53.3. Make collections and payments for the
account of others and perform such other
services for
their customers as are not incompatible with
banking business;
53.4. Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or
administrator
of
investment
management/advisory/consultancy
accounts;
and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under SubSECs 53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it
receives duly separate from the bank's own
assets and liabilities.

The Monetary Board may regulate the


operations authorized by this SEC in order to
ensure
that such operations do not endanger the
interests of the depositors and other creditors
of the bank.
In case a bank or quasi-bank notifies the
Bangko Sentral or publicly announces a bank
holiday, or
in any manner suspends the payment of its
deposit liabilities continuously for more than
thirty (30) days,
the Monetary Board may summarily and without
need for prior hearing close such banking
institution and
place it under receivership of the Philippine
Deposit Insurance Corporation. (72a)
Areas of supervision and regulation of banks
Examination and investigation of banks
SEC 4. Supervisory Powers. The
operations and activities of banks shall be
subject to
supervision of the Bangko Sentral. "Supervision"
shall include the following:
4.1. The issuance of rules of conduct or the
establishment of standards of operation for
uniform
application to all institutions or functions
covered,
taking
into
consideration
the
distinctive
character of the operations of institutions and
the substantive similarities of specific functions
to which such rules, modes or standards are to
be applied;
4.2. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3. Overseeing to ascertain that laws and
regulations are complied with;
4.4. Regular investigation which shall not be
oftener than once a year from the last date of
examination
to
determine
whether
an
institution is conducting its business on a safe
or
sound
basis:
Provided,
That
the
deficiencies/irregularities
found
by
or
discovered by an audit
shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
powers over quasi-banks, trust entities and
other financial institutions which under special
laws are
subject to Bangko Sentral supervision. (2-Ca)

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For the purposes of this Act, "quasi-banks" shall


refer to entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit
substitutes as defined in SEC 95 of Republic Act
No. 7653 (hereafter the "New Central Bank
Act") for
purposes of relending or purchasing of
receivables and other obligations. (2-Da)
R.A. 7653 SEC 28. Examination and Fees.
The supervising and examining department
head,
personally or by deputy, shall examine the
books of every banking institution once in every
twelve (12)
months, and at such other times as the
Monetary Board by an affirmative vote of five
(5) members, may
deem expedient and to make a report on the
same to the Monetary Board: Provided, That
there shall be
an interval of at least twelve (12) months
between annual examinations.
The bank concerned shall afford to the head of
the appropriate supervising and examining
departments and to his authorized deputies full
opportunity to examine its books, cash and
available
assets and general condition at any time during
banking hours when requested to do so by the
Bangko
Sentral: Provided, however, That none of the
reports and other papers relative to such
examinations
shall be open to inspection by the public except
insofar as such publicity is incidental to the
proceedings
hereinafter authorized or is necessary for the
prosecution of violations in connection with the
business
of such institutions.
Banking and quasi-banking institutions which
are subject to examination by the Bangko
Sentral
shall pay to the Bangko Sentral, within the first
thirty (30) days of each year, an annual fee in
an amount
equal to a percentage as may be prescribed by
the Monetary Board of its average total assets
during
the preceding year as shown on its end-ofmonth balance sheets, after deducting cash on
hand and
amounts due from banks, including the Bangko
Sentral and banks abroad.

Acquisition by banks of own shares


SEC 10. Treasury Stocks. No bank shall
purchase or acquire shares of its own capital
stock or accept its own shares as a security for
a loan, except when authorized by the Monetary
Board:
Provided, That in every case the stock so
purchased or acquired shall, within six (6)
months from the time
of its purchase or acquisition, be sold or
disposed of at a public or private sale. (24a)
Stockholdings of family groups and related
interests
SEC 12. Stockholdings of Family Groups or
Related Interests. Stockholdings of
individuals related to each other within the
fourth degree of consanguinity or affinity,
legitimate or
common-law, shall be considered family groups
or related interests and must be fully disclosed
in all
transactions by such an individual with the
bank. (12-Da)
SEC 13. Corporate Stockholdings. Two or
more corporations owned or controlled by
the same family group or same group of
persons shall be considered related interests
and must be fully
disclosed
in
all
transactions
by
such
corporations or related groups of persons with
the bank. (12-Ba)
Independent directors
SEC 15. Board of Directors. The provisions
of the Corporation Code to the contrary
notwithstanding, there shall be at least five (5),
and a maximum of fifteen (15) members of the
board of
directors of bank, two (2) of whom shall be
independent
directors.
An
"independent
director" shall mean a
person other than an officer or employee of the
bank, its subsidiaries or affiliates or related
interests. (n)
Non-Filipino citizens may become members of
the board of directors of a bank to the extent of
the
foreign participation in the equity of said bank.
(Sec. 7, RA 7721)
The meetings of the board of directors may be
conducted through modern technologies such
as,
but not limited to, teleconferencing and videoconferencing. (n)

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and officers: the fit

SEC 16. Fit and Proper Rule. To maintain


the quality of bank management and afford
better protection to depositors and the public in
general, the Monetary Board shall prescribe,
pass upon
and
review
the
qualifications
and
disqualifications of individuals elected or
appointed bank directors or
officers and disqualify those found unfit.
After due notice to the board of directors of the
bank, the Monetary Board may disqualify,
suspend or remove any bank director or officer
who commits or omits an act which render him
unfit for the
position.
In determining whether an individual is fit and
proper to hold the position of a director or
officer of
a bank, regard shall be given to his integrity,
experience,
education,
training,
and
competence. (9-Aa)
Prohibition on public officials
SEC 19. Prohibition on Public Officials.
Except as otherwise provided in the Rural
Banks Act, no appointive or elective public
official, whether full-time or part-time shall at
the same time
serve as officer of any private bank, save in
cases where such service is incident to financial
assistance
provided by the government or a governmentowned or controlled corporation to the bank or
unless
otherwise provided under existing laws. (13)
Compensation and other benefits of directors
and officers
SEC 18. Compensation and Other Benefits
of Directors and Officers. To protect the
funds of depositors and creditors, the Monetary
Board may regulate the payment by the bank to
its
directors
and
officers
of compensation,
allowance, fees, bonuses, stock options, profit
sharing and fringe
benefits only in exceptional cases and when the
circumstances warrant, such as but not limited
to the
following:
18.1. When a bank is under comptrollership or
conservatorship; or
18.2. When a bank is found by the Monetary
Board to be conducting business in an unsafe or
unsound manner; or

18.3. When a bank is found by the Monetary


Board to be in an unsatisfactory financial
condition.
(n)
Ratio of net worth to total risk assets
SEC 34. Risk-Based Capital. The Monetary
Board shall prescribe the minimum ratio
which the net worth of a bank must bear to its
total risk assets which may include contingent
accounts.
For purposes of this SEC, the Monetary Board
may require that such ratio be determined on
the basis of the net worth and risk assets of a
bank and its subsidiaries, financial or otherwise,
as well as
prescribe the composition and the manner of
determining the net worth and total risk assets
of banks and
their subsidiaries: Provided, That in the exercise
of this authority, the Monetary Board shall, to
the extent
feasible, conform to internationally accepted
standards, including those of the Bank for
International
Settlements (BIS), relating to risk-based capital
requirements: Provided, further, That it may
alter or
suspend compliance with such ratio whenever
necessary for a maximum period of one (1)
year: Provided,
finally, That such ratio shall be applied
uniformly to banks of the same category.
In case a bank does not comply with the
prescribed minimum ratio, the Monetary Board
may limit
or prohibit the distribution of net profits by such
bank and may require that part or all of the net
profits be
used to increase the capital accounts of the
bank until the minimum requirement has been
met. The
Monetary Board may, furthermore, restrict or
prohibit the acquisition of major assets and the
making of
new investments by the bank, with the
exception of purchases of readily marketable
evidences of
indebtedness of the Republic of the Philippines
and of the Bangko Sentral and any other
evidences of
indebtedness or obligations the servicing and
repayment of which are fully guaranteed by the
Republic of
the Philippines, until the minimum required
capital ratio has been restored.
In case of a bank merger or consolidation, or
when a bank is under rehabilitation under a
program

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approved by the Bangko Sentral, the Monetary


Board may temporarily relieve the surviving
bank,
consolidated bank, or constituent bank or
corporations under rehabilitation from full
compliance with the
required capital ratio under such conditions as it
may prescribe.
Before the effectivity of the rules which the
Monetary Board is authorized to prescribe under
this
provision, SEC 22 of the General Banking Act, as
amended, SEC 9 of the Thrift Banks Act, and all
pertinent rules issued pursuant thereto, shall
continue to be in force. (22a)
BASLE ACCORD
Limits on loans, the SBL rules
SEC
35.
Limit
on
Loans,
Credit
Accommodations and Guarantees.
35.1. Except as the Monetary Board may
otherwise prescribe for reasons of national
interest, the
total amount of loans, credit accommodations
and guarantees as may be defined by the
Monetary Board that may be extended by a
bank to any person, partnership, association,
corporation or other entity shall at no time
exceed twenty percent (20%) of the net worth
of
such bank. The basis for determining
compliance with single-borrower limit is the
total credit
commitment of the bank to the borrower.
35.2. Unless the Monetary Board prescribes
otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in
the preceding paragraph may be increased
by an additional ten percent (10%) of the net
worth of such bank provided the additional
liabilities of any borrower are adequately
secured by trust receipts, shipping documents,
warehouse receipts or other similar documents
transferring or securing title covering readily
marketable, non-perishable goods which must
be fully covered by insurance.
35.3. The above prescribed ceilings shall
include: (a) the direct liability of the maker or
acceptor of
paper discounted with or sold to such bank and
the liability of a general indorser, drawer or
guarantor who obtains a loan or other credit
accommodation from or discounts paper with or
sells papers to such bank; (b) in the case of an
individual who owns or controls a majority
interest
in
a
corporation,
partnership,
association or any other entity, the liabilities of
said
entities to such bank; (c) in the case of a
corporation, all liabilities to such bank of all

subsidiaries in which such corporation owns or


controls a majority interest; and (d) in the
case of a partnership, association or other
entity, the liabilities of the members thereof to
such bank.
35.4. Even if a parent corporation, partnership,
association, entity or an individual who owns or
controls a majority interest in such entities has
no liability to the bank, the Monetary Board
may prescribe the combination of the liabilities
of subsidiary corporations or members of the
partnership,
association,
entity
or
such
individual
under
certain
circumstances,
including but
not limited to any of the following situations: (a)
the parent corporation, partnership,
association, entity or individual guarantees the
repayment of the liabilities; (b) the liabilities
were incurred for the accommodation of the
parent corporation or another subsidiary or of
the partnership or association or entity or such
individual; or (c) the subsidiaries though
separate
entities
operate
merely
as
departments or divisions of a single entity.
35.5. For purposes of this SEC, loans, other
credit accommodations and guarantees shall
exclude:
(a) loans and other credit accommodations
secured by obligations of the Bangko Sentral or
of the Philippine Government; (b) loans and
other credit accommodations fully guaranteed
by the
government as to the payment of principal and
interest;
(c)
loans
and
other
credit
accommodations
covered by assignment of deposits maintained
in the lending bank and held in the Philippines;
(d)
loans, credit accommodations and acceptances
under letters of credit to the extent covered by
margin deposits; and (e) other loans or credit
accommodations which the Monetary Board
may from
time to time, specify as non-risk items.
35.6. Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by
a bank to any other bank or non-bank entity,
whether locally or abroad, shall be subject to
the limits as herein prescribed.
35.7. Certain types of contingent accounts of
borrowers may be included among those
subject to
these prescribed limits as may be determined
by the Monetary Board. (23a)
Restrictions on bank exposure;
rules

the

DOSRI

SEC 36. Restriction on Bank Exposure to


Directors, Officers, Stockholders and Their

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Related Interests. No director or officer of


any bank shall, directly or indirectly, for himself
or as the
representative or agent of others, borrow from
such bank nor shall he become a guarantor,
indorser or
surety for loans from such bank to others, or in
any manner be an obligor or incur any
contractual liability
to the bank except with the written approval of
the majority of all the directors of the bank,
excluding the
director concerned: Provided, That such written
approval shall not be required for loans, other
credit
accommodations and advances granted to
officers under a fringe benefit plan approved by
the Bangko
Sentral. The required approval shall be entered
upon the records of the bank and a copy of such
entry
shall
be
transmitted
forthwith
to
the
appropriate
supervising
and
examining
department of the Bangko
Sentral.
Dealings of a bank with any of its directors,
officers or stockholders and their related
interests
shall be upon terms not less favorable to the
bank than those offered to others.
After due notice to the board of directors of the
bank, the office of any bank director or officer
who
violates the provisions of this SEC may be
declared vacant and the director or officer shall
be subject
to the penal provisions of the New Central Bank
Act.
The Monetary Board may regulate the amount
of
loans,
credit
accommodations
and
guarantees
that may be extended, directly or indirectly, by
a bank to its directors, officers, stockholders
and their
related interests, as well as investments of such
bank in enterprises owned or controlled by said
directors,
officers,
stockholders
and
their
related
interests. However, the outstanding loans,
credit accommodations
and guarantees which a bank may extend to
each of its stockholders, directors, or officers
and their
related interests, shall be limited to an amount
equivalent to their respective unencumbered
deposits and
book value of their paid-in capital contribution
in the bank: Provided, however, That loans,
credit
accommodations and guarantees secured by
assets considered as non-risk by the Monetary
Board shall

be excluded from such limit: Provided, further,


That loans, credit accommodations and
advances to
officers in the form of fringe benefits granted in
accordance with rules as may be prescribed by
the
Monetary Board shall not be subject to the
individual limit.
The Monetary Board shall define the term
"related interests."
The limit on loans, credit accommodations and
guarantees prescribed herein shall not apply to
loans, credit accommodations and guarantees
extended by a cooperative bank to its
cooperative
shareholders. (83a)
Microfinancing
SEC 40. Requirement for Grant of Loans or
Other Credit Accommodations. Before
granting a loan or other credit accommodation,
a bank must ascertain that the debtor is
capable of
fulfilling his commitments to the bank.
Toward this end, a bank may demand from its
credit applicants a statement of their assets
and
liabilities and of their income and expenditures
and such information as may be prescribed by
law or by
rules and regulations of Monetary Board to
enable the bank to properly evaluate the credit
application
which includes the corresponding financial
statements submitted for taxation purposes to
the Bureau of
Internal Revenue. Should such statements
prove to be false or incorrect in any material
detail, the bank
may terminate any loan or other credit
accommodation granted on the basis of said
statements and shall
have the right to demand immediate repayment
or liquidation of the obligation.
In formulating rules and regulations under this
SEC, the Monetary Board shall recognize the
peculiar characteristics of microfinancing, such
as cash flow-based lending to the basic sectors
that are
not covered by traditional collateral. (76a)
SEC 43. Authority to Prescribe Terms and
Conditions of Loans and Other Credit
Accommodations. The Monetary Board
may, similarly, in accordance with the authority
granted to it
in SEC 106 of the New Central Bank Act, and
taking into account the requirements of the
economy for

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the effective utilization of long-term funds,


prescribe the maturities, as well as related
terms and
conditions for various types of bank loans and
other credit accommodations. Any change by
the Board in
the maximum maturities shall apply only to
loans and other credit accommodations made
after the date of
such action.
The Monetary Board shall regulate the interest
imposed on microfinance borrowers by lending
investors and similar lenders, such as, but not
limited to, the unconscionable rates of interest
collected on
salary loans and similar credit accommodations.
(78a)
SEC 44. Amortization on Loans and Other
Credit Accommodations. The
amortization schedule of bank loans and other
credit accommodations shall be adapted to the
nature of
the operations to be financed.
In
case
of
loans
and
other
credit
accommodations with maturities of more than
five (5) years,
provisions must be made for periodic
amortization payments, but such payments
must be made at least
annually: Provided, however, That when the
borrowed funds are to be used for purposes
which do not
initially produce revenues adequate for regular
amortization payments therefrom, the bank
may permit the
initial amortization payment to be deferred until
such time as said revenues are sufficient for
such
purpose, but in no case shall the initial
amortization date be later than five (5) years
from the date on
which the loan or other credit accommodation is
granted. (79a)
In
case
of
loans
and
other
credit
accommodations to microfinance sectors, the
schedule of loan
amortization shall take into consideration the
projected cash flow of the borrower and adopt
this into the
terms and conditions formulated by banks. (n)
Prepayment of loans
SEC 45. Prepayment of Loans and Other
Credit Accommodations. A borrower may
at any time prior to the agreed maturity date
prepay, in whole or in part, the unpaid balance
of any bank
loan and other credit accommodation, subject
to such reasonable terms and conditions as
may be agreed

upon between the bank and its borrower. (80a)

Real Estate investments and acquisitions


SEC 51. Ceiling on Investments in Certain
Assets. Any bank may acquire real estate
as shall be necessary for its own use in the
conduct of its business: Provided, however, That
the total
investment
in
such
real
estate
and
improvements
thereof,
including
bank
equipment, shall not exceed fifty
percent (50%) of combined capital accounts:
Provided, further, That the equity investment of
a bank in
another corporation engaged primarily in real
estate shall be considered as part of the bank's
total
investment in real estate, unless otherwise
provided by the Monetary Board. (25a)
SEC 52. Acquisition of Real Estate by Way
of Satisfaction of Claims.
Notwithstanding the limitations of the preceding
SEC, a bank may acquire, hold or convey real
property under the following circumstances:
52.1. Such as shall be mortgaged to it in good
faith by way of security for debts;
52.2. Such as shall be conveyed to it in
satisfaction of debts previously contracted in
the course of
its dealings; or
52.3. Such as it shall purchase at sales under
judgments, decrees, mortgages, or trust deeds
held
by it and such as it shall purchase to secure
debts due it.
Any real property acquired or held under the
circumstances enumerated in the above
paragraph
shall be disposed of by the bank within a period
of five (5) years or as may be prescribed by the
Monetary Board: Provided, however, That the
bank may, after said period, continue to hold
the property
for its own use, subject to the limitations of the
preceding SEC. (25a)
Outsourcing of bank functions
SEC 55. Prohibited Transactions.
55.1. No director, officer, employee, or agent of
any bank shall
(e) Outsource inherent banking functions.
Employment
personnel

of

casual

and

probationary

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SEC 55.4. Consistent with the provisions of


Republic Act No. 1405, otherwise known as the
Banks
Secrecy Law, no bank shall employ casual or
nonregular
personnel
or
too
lengthy
probationary personnel in the conduct of its
business involving bank deposits.
Declaration of dividends
SEC
57.
Prohibition
on
Dividend
Declaration. No bank or quasi-bank shall
declare
dividends greater than its accumulated net
profits then on hand, deducting therefrom its
losses and bad
debts. Neither shall the bank nor quasi-bank
declare dividends, if at the time of declaration:
57.1 Its clearing account with the Bangko
Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor
for government deposits for five (5) or more
consecutive days; or
57.3 It does not comply with the liquidity
standards/ratios prescribed by the Bangko
Sentral for
purposes of determining funds available for
dividend declaration; or
57.4 It has committed a major violation as may
be determined by the Bangko Sentral. (84a)
Authority to engage in trust business
Trust Receipt
SEC 79. Authority to Engage in Trust
Business. Only a stock corporation or a
person duly authorized by the Monetary Board
to engage in trust business shall act as a
trustee or
administer any trust or hold property in trust or
on deposit for the use, benefit, or behoof of
others. For
purposes of this Act, such a corporation shall be
referred to as a trust entity. (56a; 57a)
Diligence required
SEC 80. Conduct of Trust Business. A
trust entity shall administer the funds or
property under its custody with the diligence
that a prudent man would exercise in the
conduct of an
enterprise of a like character and with similar
aims.
No trust entity shall, for the account of the
trustor or the beneficiary of the trust, purchase
or
acquire property from, or sell, transfer, assign
or lend money or property to, or purchase debt
instruments

of, any of the departments, directors, officers,


stockholders, or employees of the trust entity,
relatives
within the first degree of consanguinity or
affinity, or the related interests, of such
directors, officers and
stockholders,
unless
the
transaction
is
specifically authorized by the trustor and the
relationship of the
trustee and the other party involved in the
transaction is fully disclosed to the trustor or
beneficiary of the
trust prior to the transaction.
The Monetary Board shall promulgate such
rules and regulations as may be necessary to
prevent
circumvention of this prohibition or the evasion
of the responsibility herein imposed on a trust
entity. (56)
Deposit required as security
performance of trust duties

for

faithful

SEC
84.
Deposit
for
the
Faithful
Performance of Trust Duties. Before
transacting
trust business, every trust entity shall deposit
with the Bangko Sentral as security for the
faithful
performance of its trust duties, cash or
securities approved by the Monetary Board in
an amount equal to
not less than Five hundred thousand pesos
(P500,000.00) or such higher amount as may be
fixed by the
Monetary Board: Provided, however, That the
Monetary Board shall require every trust entity
to increase
the amount of its cash or securities on deposit
with the Bangko Sentral whenever in its
judgment such
increase is necessary by reason of the trust
business of such entity: Provided, further, That
the paid-in
capital and surplus of such entity must be at
least equal to the amount required to be
deposited with the
Bangko Sentral in accordance with the
provisions of this paragraph. Should the capital
and surplus fall
below said amount, the Monetary Board shall
have the same authority as that granted to it
under the
provisions of the fifth paragraph of SEC 34 of
this Act.
A trust entity so long as it shall continue to be
solvent and comply with laws or regulations
shall
have the right to collect the interest earned on
such securities deposited with the Bangko
Sentral and,

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from time to time, with the approval of the


Bangko Sentral, to exchange the securities for
others. If the
trust entity fails to comply with any law or
regulation, the Bangko Sentral shall retain such
interest on the
securities deposited with it for the benefit of
rightful claimants. All claims arising out of the
trust business
of a trust entity shall have priority over all other
claims as regards the cash or securities
deposited as
above provided. The Monetary Board may not
permit the cash or securities deposited in
accordance with
the provisions of this SEC to be reduced below
the prescribed minimum amount until the
depositing
entity shall discontinue its trust business and
shall satisfy the Monetary Board that it has
complied with all
its obligations in connection with such business.
(65a)
Separation
business

of trust

business

from

general

SEC 87. Separation of Trust Business from


General Business. The trust business
and all funds, properties or securities received
by any trust entity as executor, administrator,
guardian,
trustee, receiver, or depositary shall be kept
separate and distinct from the general business
including all
other funds, properties, and assets of such trust
entity. The accounts of all such funds,
properties, or
securities shall likewise be kept separate and
distinct from the accounts of the general
business of the
trust entity. (61)
Exemption of trust assets from claims
SEC 92. Exemption of Trust Assets from
Claims. No assets held by a trust entity in
its capacity as trustee shall be subject to any
claims other than those of the parties interested
in the
specific trusts. (65)
Penalties for violations
Fine, imprisonment, etc.
R.A. 7653
SEC 34. Refusal to Make Reports or Permit
Examination. Any officer, owner, agent,
manager, director or officer-in-charge of any
institution subject to the supervision or
examination by the

Bangko Sentral within the purview of this Act


who, being required in writing by the Monetary
Board or by
the head of the supervising and examining
department willfully refuses to file the required
report or
permit any lawful examination into the affairs of
such institution shall be punished by a fine of
not less
than Fifty thousand pesos (P50,000) nor more
than One hundred thousand pesos (P100,000)
or by
imprisonment of not less than one (1) year nor
more than five (5) years, or both, in the
discretion of the
court.
R.A. 7653
SEC 35. False Statement. The willful
making of a false or misleading statement on a
material fact to the Monetary Board or to the
examiners of the Bangko Sentral shall be
punished by a
fine of not less than One hundred thousand
pesos (P100,000) nor more than Two hundred
thousand
pesos (P200,000), or by imprisonment of not
more than (5) years, or both, at the discretion
of the court.
R.A. 7653
SEC 36. Proceedings Upon Violation of
This Act and Other Banking Laws, Rules,
Regulations, Orders or Instructions.
Whenever a bank or quasi-bank, or whenever
any person or
entity willfully violates this Act or other
pertinent banking laws being enforced or
implemented by the
Bangko Sentral or any order, instruction, rule or
regulation issued by the Monetary Board, the
person or
persons responsible for such violation shall
unless otherwise provided in this Act be
punished by a fine
of not less than Fifty thousand pesos (P50,000)
nor more than Two hundred thousand pesos
(P200,000) or by imprisonment of not less than
two (2) years nor more than ten (10) years, or
both, at
the discretion of the court.
Whenever a bank or quasi-bank persists in
carrying on its business in an unlawful or unsafe
manner, the Board may, without prejudice to
the penalties provided in the preceding
paragraph of this
SEC and the administrative sanctions provided
in SEC 37 of this Act, take action under SEC 30
of this Act.
R.A. 7653

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SEC 37. Administrative Sanctions on Banks


and Quasi-banks. Without prejudice to
the criminal sanctions against the culpable
persons provided in SECs 34, 35, and 36 of this
Act, the
Monetary Board may, at its discretion, impose
upon any bank or quasi-bank, their directors
and/or
officers, for any willful violation of its charter or
by-laws, willful delay in the submission of
reports or
publications thereof as required by law, rules
and regulations; any refusal to permit
examination into the
affairs of the institution; any willful making of a
false or misleading statement to the Board or
the
appropriate
supervising
and
examining
department or its examiners; any willful failure
or refusal to
comply with, or violation of, any banking law or
any order, instruction or regulation issued by
the
Monetary Board, or any order, instruction or
ruling by the Governor; or any commission of
irregularities,
and/or conducting business in an unsafe or
unsound manner as may be determined by the
Monetary
Board, the following administrative sanctions,
whenever applicable:
(a) fines in amounts as may be determined by
the Monetary Board to be appropriate, but in no
case to exceed Thirty thousand pesos (P30,000)
a day for each violation, taking into
consideration the attendant circumstances,
such as the nature and gravity of the violation
or
irregularity and the size of the bank or quasibank;
(b) suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange
operations or authority to accept new deposits
or
make new investments;
(d) suspension of interbank clearing privileges;
and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not
exempt such director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted
by circumstances, preventively suspend any
director or officer of a bank or quasi-bank
pending an investigation: Provided, That should
the case be
not finally decided by the Bangko Sentral within
a period of one hundred twenty (120) days after
the

date of suspension, said director or officer shall


be reinstated in his position: Provided, further,
That
when the delay in the disposition of the case is
due to the fault, negligence or petition of the
director or
officer, the period of delay shall not be counted
in computing the period of suspension herein
provided.
The above administrative sanctions need not be
applied in the order of their severity.
Whether or not there is an administrative
proceeding, if the institution and/or the
directors and/or
officers concerned continue with or otherwise
persist in the commission of the indicated
practice or
violation, the Monetary Board may issue an
order requiring the institution and/or the
directors and/or
officers concerned to cease and desist from the
indicated practice or violation, and may further
order
that immediate action be taken to correct the
conditions resulting from such practice or
violation. The
cease and desist order shall be immediately
effective upon service on the respondents.
The respondents shall be afforded an
opportunity to defend their action in a hearing
before the
Monetary Board or any committee chaired by
any Monetary Board member created for the
purpose,
upon request made by the respondents within
five (5) days from their receipt of the order. If
no such
hearing is requested within said period, the
order shall be final. If a hearing is conducted, all
issues
shall be determined on the basis of records,
after which the Monetary Board may either
reconsider or
make final its order.
The Governor is hereby authorized, at his
discretion, to impose upon banking institutions,
for
any failure to comply with the requirements of
law, Monetary Board regulations and policies,
and/or
instructions issued by the Monetary Board or by
the Governor, fines not in excess of Ten
thousand
pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory
until
reversed, modified or lifted by the Monetary
Board on appeal.

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Suspension or removal of director or officer


SEC 66. Penalty for Violation of this Act.
Unless otherwise herein provided, the
violation of any of the provisions of this Act
shall be subject to SECs 34, 35, 36 and 37 of
the New
Central Bank Act. If the offender is a director or
officer of a bank, quasi-bank or trust entity, the
Monetary
Board may also suspend or remove such
director or officer. If the violation is committed
by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor
General. (87)
Dissolution of bank
SEC 66. Penalty for Violation of this Act.
Unless otherwise herein provided, the
violation of any of the provisions of this Act
shall be subject to SECs 34, 35, 36 and 37 of
the New
Central Bank Act. If the offender is a director or
officer of a bank, quasi-bank or trust entity, the
Monetary
Board may also suspend or remove such
director or officer. If the violation is committed
by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor
General. (87)
ADDITIONAL MATERIALS
BSP CIRCULARS
BSP CIRCULAR NOS. 488, 493, 543, 548,
642
Re:
FUNCTIONS
THAT
BANKS
COULD
OUTSOURCE
SEC 1. Subsec. X169.3 Outsourcing of other
banking functions of the MORB is hereby
amended to read, as follows:
Subject to prior approval of the Monetary
Board, banks may outsource the following
functions, services or activities:
1. data imaging, storage, retrieval and
other related systems;
2. clearing and processing of checks not
included in the Philippine Clearing House
System;
3. printing of bank deposit statements;
4. credit card services;
5. credit investigation and collection;
6. processing of export, import and other
trading transactions;
7. property appraisal;
8. property management services;

9. internal audit, subject to the following


conditions:
a)
the board of directors and senior
management of the regulated entity remain
responsible for maintaining an effective system
of internal control and for providing active
oversight of the outsourced internal audit
activities/functions;
b) the external service provider shall be an
independent external auditor included in the list
of BSP selected external auditors or a parent
company which owns or controls more than
fifty percent (50%) of the subscribed capital
stock of the outsourcing entity: provided, that
item b. of the general requirements under
SEC 2 of Circular no.410, series of 2003 shall
apply to the parent company while items b.,
d., e., and f. shall apply to the
independent external auditor.
c) the contract/service agreement with the
external service provider shall not be entered
into for a period longer than five (5) years;
d)
There shall be a contingency plan to
mitigate any significant disruption, discontinuity
or gap in audit coverage, particularly for highrisk areas;
e) The written engagement contract or service
agreement with the external service provider
shall, as a minimum:
i.
Define the rights, expectations and
responsibilities of both parties;
ii. Set the scope and frequency of, and the
fees to be paid for, the work to be performed by
the external service provider;
iii. State that the outsourced internal audit
services are subject to regulatory review and
that BSP examiners shall be granted full and
timely access to internal audit reports and
related working papers;
iv. State that the external service provider will
not perform management functions, make
management decisions, or act or appear to act
in a capacity equivalent to that of a member of
management or an employee of the institution,
and will comply with professional and
regulatory independence guidelines;
v. Specify that the external service provider
must maintain the audit reports and related
working papers/files for at least five (5) years;
vi. State that internal audit reports are the
property of the institution, that the institution
will be provided with copies of related working
papers/files it deems necessary, and any
information pertaining to the institution must be
kept confidential; and
vii. Establish a protocol for changing the terms
of the service contract and stipulations for
default and termination of the contract;
10. marketing loans, deposits and other
bank products and services, provided it
does not involve the actual opening of
deposit accounts;

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11. general bookkeeping and accounting


services, provided that these activities
do not include servicing bank deposits or
other inherent banking functions;
12. offsite records storage services;
13. front/back office functions, i.e., trade
support
services
and
downstream
processing activities, by parent to a
subsidiary or vice-versa, subject to the
following conditions:
a) The bank intending to outsource the
aforementioned functions shall certify that the
front office functions to be done by its
parent/subsidiary (service provider) shall be
limited to trade support services;
b) The bank shall remain a parent/subsidiary
of its subsidiary/ parent (service provider) and
such service provider shall service only entities
belonging to its business group;
c) The bank shall certify that no inherent
banking functions involving deposit transactions
shall be outsourced to its parent/subsidiary
(service provider);
d) The bank shall submit a Service Level
Agreement duly signed by the concerned
parties and any amendments thereto, detailing
the functions to be outsourced, the respective
responsibilities of the bank and its parent/
subsidiary
(service
provider),
and
a
confidentiality clause; and
e) Any breach in any of the above conditions
shall
subject
the
outsourcing
of
the
aforementioned banking functions to all the
requirements of this SEC; and
14. back-up and data recovery operations; (as
amended by BSP CIR# 493) and
15. Call center operations for credit card and
bank services provided that such bank services
do not involve inherent banking functions; (as
amended by BSP CIR#543) and16.
16. Such other activities as may be determined
by the Monetary Board."
The bank concerned must submit the same
documentary requirements listed in Subsec.
X169.2b hereof, except where they exclusively
pertain to information technology operations.
Without need of prior Monetary Board approval,
banks may outsource the following functions,
services or activities:
1. printing of bank loan statements and other
non-deposit
records,
bank
forms
and
promotional materials;
2. transfer agent services for debt and equity
securities;
3. messenger, courier and postal services;
4. security guard services;
5. vehicle service contracts;
6. janitorial services;
7.
public relations services, procurement
services, and temporary staffing, provided that
these activities do not include servicing bank
deposits or other inherent banking functions;

8. sorting and bagging of notes and coins;


9. maintenance of computer hardware, e.g.,
disk drives, printers, monitors, UPS, network
cabling systems;
10. payroll of bank employees;
11. telephone operator/receptionist services;
12. sale/disposal of acquired assets (ROPOA);
13. Human-resource related services (such as
personnel
training
and
development,
background
investigation
and
salary
benchmarking service) (as amended by BSP
CIR#642);
14.
building, ground and other facilities
maintenance; and
15. legal services from local legal counsel
(amended by BSP CIR#493);
16. compliance risk assessment and testing;
(amended by BSP CIR#493)
17. tax compliance services, provided that the
service provider is not also the external auditor
of the bank; (as amended by BSP CIR#548)
18. such other activities as may be determined
by the Monetary Board."
SEC 2. The provisions on outsourcing of SEC
X169 and Subsecs. X169.1 to X169.5 of the
Manual of Regulations for Banks (MORB) in so
far as they are applicable to quasi-banks and
other non-bank financial institutions are hereby
incorporated in the Manual of Regulations for
Non-Bank Financial Institutions (MORNBFI).
This Circular shall take effect fifteen (15) days
following its publication either in the Official
Gazette or in a newspaper of general
circulation.

BSP CIRCULAR NO. 341


Series of 2002
RE:
UNSAFE
AND
UNSOUND
PRACTICES

BANKING

Pursuant to Monetary Board Resolution No.


1055 dated 25 July 2002, the following
guidelines shall be observed in implementing
SEC 56 of the General Banking Law of 2000 or
Republic Act No. 8791:
SEC 1. Whether a particular activity may be
considered as conducting business in an unsafe
or unsound manner, all relevant facts must be
considered. An analysis of the impact thereof
on
the
banks/quasi-banks/trust
entities'
operations and financial conditions must be
undertaken, including evaluation of capital
position,
asset
condition,
management,
earnings posture and liquidity position.
In determining whether a particular act or
omission, which is not otherwise prohibited by
any law, rule or regulation affecting banks,
quasi-banks or trust entities, may be deemed as

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conducting business in an unsafe or unsound


manner, the Monetary Board, upon report of the
head of the supervising or examining
department
based
on
findings
in
an
examination or a complaint, shall consider any
of the following circumstances:
a. The act or omission has resulted or may
result in material loss or damage, or abnormal
risk or danger to the safety, stability, liquidity or
solvency of the' institution;
b. The act or omission has resulted or may
result in material loss or damage or abnormal
risk to the institution's depositors, creditors,
investors, stockholders or to the Bangko Sentral
or to the pubiic in general;
c The act or omission has caused any undue
injury, or has given unwarranted benefits,
advantage or preference to the bank or any
party in the discharge by the director or officer
of his duties and responsibilities through
manifest partiality, evident bad faith or gross
inexcusable negligence; or
d. The act or omission involves entering into
any contract or transaction manifestly and
grossly disadvantageous to the bank, quasibank or trust entity, whether or not the director
or officer profited or will profit thereby.
Attached for guidance is a list of activities which
may be considered unsafe and unsound. (Annex
A) The Monetary Board may consider any other
acts/omissions
as
unsafe
and
unsound
practices.
SEC 2. The Monetary Board may, at its
discretion and based on the seriousness and
materiality of the acts or omissions, impose any
or all of the following sanctions provided under
SEC 37 of Republic Act No. 7653 and SEC 56 of
Republic Act No. 8791, whenever a bank, quasibank or trust entity conducts business in an
unsafe and unsound manner:
a. Issue an order requiring the institution to
cease and desist from conducting business in
an unsafe and unsound manner and may
further order that immediate action be taken to
correct the conditions resulting from such
unsafe or unsound practice;
b. Fines in amounts as may be determined by
the Monetary Board to be appropriate, but in no
case to exceed Thirty Thousand pesos
(P30,000.00) a day on a per transaction basis
taking into consideration
the attendant
circumstances, such the gravity of the act or
omission and the size of the bank, quasi-bank or
trust entity, to be imposed on the bank, quasibanks or trust entities, their directors and/or
responsible officers;
c.
Suspension
of
interbank
clearing
privileges/immediate exclusion from clearing;
d. Suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;

e. Suspension of lending or foreign exchange


operations or authority to accept new deposits
or make new investments;
f. Suspension of responsible directors and/or
officers;
g. Revocation of quasi-banking cense; and/or
h. Receivership and liquidation under SEC 30 of
RA 7653.
All other provisions of SECs 30 and 37 of R.A.
7653 whenever appropriate shall also be
applicable on the conduct of business in an
unsafe or unsound manner.
The imposition of the above sanctions is without
prejudice to the filing of appropriate criminal
charges against culpable persons as provided in
SECs 34, 35 and 36 of R.A. 7653.
This Circular shall take effect immediately.
Annex A
List of Activities Which May Be Considered
Unsafe and Unsound Banking Practices
The
activities
enumerated
herein
are
considered only as guidelines and are not
irrebutably presumed to be unsafe or unsound.
Conversely, not all practices which might under
the circumstances be termed unsafe or
unsound are mentioned here. The Monetary
Board may NOW AND THEN consider any other
acts/omissions as unsafe or unsound practices.
(opening par. As amended by BSP CIR#640)
a. Operating with management whose policies
and practices are detrimental to the bank, quasi
bank or trust entity and jeopardize the safety of
its deposits/deposit substitutes/trust accounts.
b. Operating with total adjusted capital and
reserves that are inadequate in relation to the
kind and quality of the assets of the bank,
quasi-bank or trust entity.
c. Operating in a way that produces a
deficit in net operating income WITHOUT
ADEQUATE MEASURES TO ENSURE A SURPLUS
IN NET OPERATING INCOME IN THE FUTURE. (as
amended by BSP CIR#640)
d. Operating with a serious lack of liquidity,
especially
in view
of the
asset and
deposit/deposit substitute/liability structure of
the bank, quasi-bank or trust entity.
e. Engaging in speculative and hazardous
investment policies.
f. Paying excessive cash dividends in relation to
the capital position, earnings capacity and asset
quality of the bank, quasi-bank or trust entity.
g. Excessive reliance on large, high-COST or
volatile
deposits/
borrowings
TO
FUND
AGGRESSIVE
GROWTH
THAT
MAY
BE
UNSUSTAINABLE.

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FOR THIS PURPOSE, A BANK IS CONSIDERED


OFFERING HIGH-COST DEPOSITS/ BORROWINGS
IF THE EFFECTIVE INTEREST RATE PAID ON SAID
DEPOSITS/ BORROWINGS AND/OR NON-CASH
INCENTIVES IS 50% OVER THE PREVAILING
COMPARABLE MARKET MEDIAN RATE FOR
SIMILAR BANK CATEGORIES, MATURITIES AND
CURRENCY DENOMINATION AND ACCOMPANIED
BY OTHER CIRCUMSTANCE/S SUCH AS:
1. UNDUE RELIANCE ON SOLICITATION AND
ACCEPTANCE OF BROKERED DEPOSITS;
2. BANK INCURS LARGE SUM OF DEPOSIT
GENERATION EXPENSES IN THE FORM OF
COMMISSIONS, REFERRAL AND SOLICITATION
FEES AND RELATED EXPENSES AND/OR
PAYMENT OF ADVANCE INTEREST ON DEPOSITS;
3. DEFERRAL OF THE ABOVE DEPOSIT
GENERATION EXPENSES INCURRED TO DELAY
RECORDING
OF
EXPENSES
AND/OR
INACCURATE AMORTIZATION OF ADVANCE
INTEREST PAID ON DEPOSITS;
4. DEPOSIT PACKAGES OFFERED INCLUDE
NON-CASH INCENTIVES DISPROPORTIONATE TO
THE AMOUNT OF DEPOSITS SOUGHT WHICH
GIVE UNDUE OR UNWARRANTED ADVANTAGE
OR PREFERENCE FOR THE BANK; AND
5. BANK MARKETS, SOLICITS AND ACCEPTS
DEPOSITS OUTSIDE THE BANK PREMISES
INCLUDING BRANCHES, UNLESS OTHERWISE
AUTHORIZED BY THE BSP UNDER SECS X213
(SERVICING
DEPOSITS
OUTSIDE
BANK
PREMISES) OR X621 (ELECTRONIC BANKING
SERVICES) OF THE MANUAL OF REGULATIONS
FOR BANKS. (As amended by BSP CIR#640)
h. Excessive reliance on letters of credit either
issued by the bank or accepted as collateral to
loans advanced.
i. Excessive amounts of loan participations sold,
j. Paying interest on participations without
advising participating institution that ths course
of interest was not from the borrower,
k. Selling participations without disclosing to the
purchasers of those participations materia!,
non-public information known to the bank
i. Failure to limit, control and document
contingent liabilities,
m. Engaging in hazardous lending and lax
collection policies and practices, as evidenced
by:
1 ) An excessive volume of loans subject to
adverse classification;
2) An excessive volume of loans without
adequate documentation,
including credit information;
3) Excessive net loan losses;
4) An excessive volume of loans in relation to
the
total
assets
and
deposits/deposit
substitutes/trust liabilities of the bank, quasibank or trust entity;
5) An excessive volume of weak and selfserving loans to persons connected with the

bank, quasi-bank or trust entity, especially if a


significant portion of these loans are adversely
classified;
6) excessive concentrations of credit, especially
if a substantial portion of this credit is adversely
classified;
7) indiscriminate participation in weak and
undocumented loans originated by other
institutions;
8) failing to adopt written loan policies;
9) an excessive volume of past due or nonperforming loans;
10) failure to diversify the loan portfolio/asset
mix of the institution
11) failure to make provision for an adequate
reserve for possible loan losses
n. Permitting officers to engage in lending
practices beyond the scope of their position,
o. Operating the bank, quasi-bank or trust
entity with inadequate internal controls,
p. Failure to keep accurate and updated books
and records.
q. Operating the institution with excessive
volume of out-of-territory loans,
r. Excessive volume of non-earning assets.
s. Failure to heed warnings and admonitions of
the supervisory authorities of the institution.
t. Continued and flagrant violation of any laws,
rules, regulations or written agreements
between the institution and the Bangko Sentral
ng Pilipinas.
u. Any action likely to cause insolvency or
substantial dissipation of assetsor earnings of
the institution or likely to seriously weaken its
condition or otherwise seriously prejudice the
interest of its depositors/investors/clients.

BSP CIRCULAR NO. 650Series of 2009


RE: AUTHORITY OF THRIFT BANKS TO ISSUE
FOREIGN LETTERS OF CREDIT
Subject :
Authority of Thrift Banks to Issue
Foreign
Letters
of
Credit
(LCs)
and
Pay/Accept/Negotiate Import/Export Drafts/Bills
of Exchange
Pursuant to Monetary Board Resolution No. 283
dated 19 February 2009, the Manual of
Regulations for Banks (MORB) is hereby
amended, as follows:
SEC 1. Subsec. 2101.7 on authority of thrift
banks to issue foreign letters of credit (LCs) and
pay/accept/negotiate import/export drafts/bills
of exchange is hereby added and shall read, as
follows:
Subsec. X2101.7 Authority of thrift
banks to issue foreign letters of credit (LCs) and
pay/accept/negotiate import/export drafts/bills
of exchange.
With prior Monetary Board
approval, thrift banks may be authorized to
issue foreign letters of credit (LCs) and
pay/accept/negotiate import/export drafts/bills
of exchange, subject to compliance with the

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following conditions (at the time of application


unless otherwise indicated):
a) Minimum capital requirement of P= 1.0
billion;
b) Ten percent (10%) risk-based capital
adequacy ratio (CAR);
c) CAMELS composite rating not lower than 3,
with Management component score not lower
than 3 in the latest examination of the bank;
d) Risk management system appropriate to its
operations, characterized by clear delineation of
responsibility for risk management, adequate
risk
measurement
system,
appropriately
structured risk limits, effective internal control
system and complete, timely and efficient risk
reporting system;
e) Articles of incorporation which shall include
among its powers or purposes, the issuance of
foreign
LCs
and
payment/acceptance/negotiation
of
import/export drafts/bills of exchange (which
may be submitted any time prior to engaging in
said activities);
f) Correspondent
banking
relationship
or
arrangement with reputable foreign banks
(which should be in place prior to engaging in
said activities);
g) Appointment of the officer with actual
experience of at least two (2) years as in-charge
or at least as assistant in-charge of import and
export financing operations in a universal/
commercial bank who will be in-charge of the
said operations (prior to engaging in said
activities);
h) Appointment of bank personnel with actual
experience and/or training of at least six (6)
months in import and export financing
operations in a universal/commercial bank who
will handle the said operations (prior to
engaging in said activities);
i) No net weekly regular and liquidity reserve
deficiencies during the twelve (12) week period
immediately preceding the date of application;
j) No deficiency in asset and liquid asset cover
for FCDU liabilities for three (3) months
immediately preceding the date of application;
k) No deficiency in liquidity floor requirement
for government funds held during the twelve
(12) week period immediately preceding the
date of application;
l) No float items outstanding for more than sixty
(60) calendar days in the Due From/To Head
Office/Branches/Offices and Due from BSP
accounts exceeding 1% of the total resources
as of end of month preceding the date of
application;
m) No unbooked valuation reserves;
n) Compliant with ceilings on loans, other credit
accommodations and guarantees to directors,
officers, stockholders, and their related
interests (DOSRI) for the quarter immediately
preceding the date of application;

o) Compliant with the single borrowers loan


limit (SBL);
p) Compliant with the limit on real estate and
improvements, including bank equipment;
q) No uncorrected findings of unsafe and
unsound banking practices;
r) Generally compliant with banking laws, rules
and regulations, orders or instructions of the
Monetary Board and/or BSP Management; and
s) No past due obligations with the BSP or with
any financial institution.
SEC 2. Subsec. 2101.8 on application for
authority to issue foreign letters of credit and
pay/accept/negotiate import/export drafts/bills
of exchange is hereby added, and shall read as
follows:
Subsec. 2101.8
Application for
authority to issue foreign letters of credit (LCs)
and
pay/accept/negotiate
import/export
drafts/bills of exchange. An application for
authority
to
issue
foreign
LCs
and
pay/accept/negotiate import/export drafts/bills
of exchange shall be signed by the president of
the bank or officer of equivalent rank and shall
be accompanied by a certified true copy of the
resolution of the banks board of directors
authorizing the application.
This Circular shall take effect fifteen (15) days
following its publication either in the Official
Gazette or in a newspaper of general
circulation.
CASES
PHILIPPINE BANKING CORPORATION vs. CA
G.R. No. 127469
15 January 2004
Facts:
On 30 August 1989, Leonilo Marcos (Marcos)
filed with the trial court a Complaint for Sum of
Money with Damages[3] against petitioner
Philippine Banking Corporation (BANK).
Marcos alleged that sometime in 1982, the
BANK
through
Florencio
B.
Pagsaligan
(Pagsaligan), one of the officials of the BANK
and a close friend of Marcos, persuaded him to
deposit money with the BANK. Marcos yielded
to Pagsaligans persuasion and claimed he
made a time deposit with the BANK on two
occasions. The first was on 11 March 1982 for
P664,897.67.
On 12 March 1982, Marcos
claimed he again made a time deposit with the
BANK for P764,897.67. The BANK did not issue
an official receipt for the second deposit but it
acknowledged a deposit of this amount through
a letter-certification Pagsaligan issued. The time
deposits earned interest at 17% per annum and
had a maturity period of 90 days.

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Marcos alleged that Pagsaligan kept the various


time deposit certificates on the assurance that
the BANK would take care of the certificates,
interests and renewals. Marcos claimed that
from the time of the deposit, he had not
received the principal amount or its interest.
Sometime in March 1983, Marcos wanted to
withdraw from the BANK his time deposits and
the accumulated interests to buy materials for
his construction business. However, the BANK
through Pagsaligan convinced Marcos to keep
his time deposits intact and instead to open
several domestic letters of credit. The BANK
required Marcos to give a marginal deposit of
30% of the total amount of the letters of credit.
The time deposits of Marcos would secure 70%
of the letters of credit. Since Marcos trusted
the BANK and Pagsaligan, he signed blank
printed forms of the application for the
domestic letters of credit, trust receipt
agreements and promissory notes.
Marcos
executed
three
Trust
Receipt
Agreements totalling P851,250, broken down as
follows: (1) Trust Receipt No. CD 83.7 dated 8
March 1983 for P300,000; (2) Trust Receipt No.
CD 83.9 dated 15 March 1983 for P300,000; and
(3) Trust Receipt No. CD 83.10 dated 15 March
1983 for P251,250.
Marcos deposited the
required 30% marginal deposit for the trust
receipt agreements. Marcos claimed that his
obligation to the BANK was therefore only
P595,875 representing 70% of the letters of
credit.
Marcos believed that he and the BANK became
creditors and debtors of each other. Marcos
expected the BANK to offset automatically a
portion of his time deposits and the
accumulated interest with the amount covered
by the three trust receipts totalling P851,250
less the 30% marginal deposit that he had paid.
Marcos argued that if only the BANK applied his
time deposits and the accumulated interest to
his remaining obligation, which is 70% of the
total amount of the letters of credit, he would
have paid completely his debt. Marcos further
pointed out that since he did not apply for a
renewal of the trust receipt agreements, the
BANK had no right to renew the same.
Marcos accused the BANK of unjustly
demanding payment for the total amount of the
trust receipt agreements without deducting the
30% marginal deposit that he had already
made.
He decried the BANKs unlawful
charging of accumulated interest because he
claimed there was no agreement as to the
payment of interest. The interest arose from
numerous alleged extensions and penalties.
Marcos reiterated that there was no agreement
to this effect because his time deposits served
as the collateral for his remaining obligation.
Marcos also denied that he obtained another
loan from the BANK for P500,000 with interest

at 25% per annum supposedly covered by


Promissory Note No. 20-979-83 dated 24
October 1983. Marcos bewailed the BANKs
belated claim that his time deposits were
applied to this void promissory note on 12
March 1985.
In sum, Marcos claimed that:
His time deposit with the BANK in the total
sum
of
P1,428,795.34[5]
has
earned
accumulated interest since March 1982 up to
the
present
in
the
total
amount
of
P1,727,305.45 at the rate of 17% per annum so
his total money with defendant (the BANK) is
P3,156,100.79 less the amount of P595,875
representing the 70% balance of the marginal
deposit
and/or
balance
of
the
trust
agreements; and
His indebtedness was only P851,250 less the
30% paid as marginal deposit or a balance of
P595,875, which the BANK should have
automatically deducted from his time deposits
and accumulated interest, leaving the BANKs
indebtedness to him at P2,560,025.79.
Marcos prayed the trial court to declare
Promissory Note No. 20-979-83 void and to
order the BANK to pay the amount of his time
deposits with interest.
He also sought the
award of moral and exemplary damages as well
as attorneys fees for P200,000 plus 25% of the
amount due.
On 9 October 1989, the BANK filed its Answer
with Counterclaim.
The BANK denied the
allegations in the complaint.
The BANK
believed that the suit was Marcos desperate
attempt to avoid liability under several trust
receipt agreements that were the subject of a
criminal complaint.
The BANK alleged that as of 12 March 1982, the
total amount of the various time deposits of
Marcos was only P764,897.67 and not
P1,428,795.35 as alleged in the complaint. The
P764,897.67 included the P664,897.67 that
Marcos deposited on 11 March 1982.
The BANK pointed out that Marcos delivered to
the BANK the time deposit certificates by virtue
of the Deed of Assignment dated 2 June 1989.
Marcos executed the Deed of Assignment to
secure his various loan obligations. The BANK
claimed that these loans are covered by
Promissory Note No. 20-756-82 dated 2 June
1982 for P420,000 and Promissory Note No. 20979-83 dated 24 October 1983 for P500,000.
The BANK stressed that these obligations are
separate and distinct from the trust receipt
agreements.
When Marcos defaulted in the payment of
Promissory Note No. 20-979-83, the BANK
debited his time deposits and applied the same
to the obligation that is now considered fully
paid. The BANK insisted that the Deed of
Assignment authorized it to apply the time

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deposits in payment of Promissory Note No. 20979-83.


In March 1982, the wife of Marcos, Consolacion
Marcos, sought the advice of Pagsaligan.
Consolacion informed Pagsaligan that she and
her husband needed to finance the purchase of
construction materials for their business, L.A.
Marcos Construction Company.
Pagsaligan
suggested the opening of the letters of credit
and the execution of trust receipts, whereby the
BANK would agree to purchase the goods
needed by the client through the letters of
credit. The BANK would then entrust the goods
to the client, as entrustee, who would
undertake to deliver the proceeds of the sale or
the goods themselves to the entrustor within a
specified time.
The BANK claimed that Marcos freely entered
into the trust receipt agreements. When Marcos
failed to account for the goods delivered or for
the proceeds of the sale, the BANK filed a
complaint for violation of Presidential Decree
No. 115 or the Trust Receipts Law. Instead of
initiating negotiations for the settlement of the
account, Marcos filed this suit.
The BANK denied falsifying Promissory Note No.
20-979-83.
The BANK claimed that the
promissory note is supported by documentary
evidence such as Marcos application for this
loan and the microfilm of the cashiers check
issued for the loan. The BANK insisted that
Marcos could not deny the agreement for the
payment of interest and penalties under the
trust receipt agreements. The BANK prayed for
the dismissal of the complaint, payment of
damages, attorneys fees and cost of suit.
The trial court rendered its decision in favor of
Marcos. Aggrieved, the BANK appealed to the
Court of Appeals.
On 10 December 1996, the Court of Appeals
modified the decision of the trial court by
reducing the amount of actual damages and
deleting the attorneys fees awarded to Marcos.
Issue: WON the bank is liable for offsetting his
time deposits
Held: Yes
Ratio:
The BANK is liable to Marcos for offsetting his
time deposits with a fictitious promissory note.
The existence of Promissory Note No. 20-979-83
could have been easily proven had the BANK
presented the original copies of the promissory
note and its supporting evidence. In lieu of the
original copies, the BANK presented the
machine copies of the duplicate of the
documents. These substitute documents have
no evidentiary value. The BANKs failure to
explain the absence of the original documents
and to maintain a record of the offsetting of this
loan with the time deposits bring to fore the

BANKs dismal failure to fulfill its fiduciary duty


to Marcos.
SEC 2 of Republic Act No. 8791 (General
Banking Law of 2000) expressly imposes this
fiduciary duty on banks when it declares that
the State recognizes the fiduciary nature of
banking that requires high standards of
integrity and performance.
This statutory
declaration
merely
echoes
the
earlier
pronouncement of the Supreme Court in Simex
International (Manila) Inc. v. Court of Appeals
requiring banks to treat the accounts of its
depositors with meticulous care, always having
in mind the fiduciary nature of their
relationship. The Court reiterated this fiduciary
duty of banks in subsequent cases.
Although RA No. 8791 took effect only in the
year 2000, at the time that the BANK
transacted with Marcos, jurisprudence had
already imposed on banks the same high
standard of diligence required under RA No.
8791. This fiduciary relationship means that the
banks obligation to observe high standards of
integrity and performance is deemed written
into every deposit agreement between a bank
and its depositor.
The fiduciary nature of banking requires banks
to assume a degree of diligence higher than
that of a good father of a family. Thus, the
BANKs fiduciary duty imposes upon it a higher
level of accountability than that expected of
Marcos, a businessman, who negligently signed
blank forms and entrusted his certificates of
time deposits to Pagsaligan without retaining
copies of the certificates.
The business of banking is imbued with public
interest. The stability of banks largely depends
on the confidence of the people in the honesty
and efficiency of banks. In Simex International
(Manila) Inc. v. Court of Appeals[36] we pointed
out the depositors reasonable expectations
from a bank and the banks corresponding duty
to its depositor, as follows:
In every case, the depositor expects the bank to
treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is to
reflect at any given time the amount of money
the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to
whomever he directs.
As the BANKs depositor, Marcos had the right
to expect that the BANK was accurately
recording his transactions with it. Upon the
maturity of his time deposits, Marcos also had
the right to withdraw the amount due him after
the BANK had correctly debited his outstanding
obligations from his time deposits.

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By the very nature of its business, the BANK


should have had in its possession the original
copies of the disputed promissory note and the
records and ledgers evidencing the offsetting of
the loan with the time deposits of Marcos. The
BANK inexplicably failed to produce the original
copies of these documents. Clearly, the BANK
failed to treat the account of Marcos with
meticulous care.
The BANK claims that it is a reputable banking
institution and that it has no reason to forge
Promissory Note No. 20-979-83. The trial court
and appellate court did not rule that it was the
bank that forged the promissory note. It was
Pagsaligan, the BANKs branch manager and a
close friend of Marcos, whom the trial court
categorically blamed for the fictitious loan
agreements.
The trial court held that
Pagsaligan made up the loan agreement to
cover up his inability to account for the time
deposits of Marcos.
Whether it was the BANKs negligence and
inefficiency or Pagsaligans misdeed that
deprived Marcos of the amount due him will not
excuse the BANK from its obligation to return to
Marcos the correct amount of his time deposits
with interest.
The duty to observe high
standards of integrity and performance
imposes on the BANK that obligation. The BANK
cannot also unjustly enrich itself by keeping
Marcos money.
Assuming Pagsaligan was behind the spurious
promissory note, the BANK would still be
accountable to Marcos. We have held that a
bank is liable for the wrongful acts of its officers
done in the interest of the bank or in their
dealings as bank representatives but not for
acts outside the scope of their authority. Thus,
we held:
A bank holding out its officers and agents as
worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled
to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no
benefit may accrue to the bank therefrom (10
Am Jur 2d, p. 114). Accordingly, a banking
corporation is liable to innocent third persons
where the representation is made in the course
of its business by an agent acting within the
general scope of his authority even though, in
the particular case, the agent is secretly
abusing his authority and attempting to
perpetrate a fraud upon his principal or some
other person, for his own ultimate benefit.
Note: The promissory note was considered as
forged as the bank did not show the original.
Applying the Best Evidence Rule, the original
should have been shown not the machine printout, which was what was given by the Bank.

VIII.
PHILIPPINE
DEPOSIT
INSURANCE CORPORATION ACT
Basic Policy (Sec.1)
To promote and safeguard the interests of the
depositing public by way of providing
permanent and continuing insurance coverage
on all insured deposits.
Main Functions
1. Insurance of Banks (Sec.5)
To insure the deposit liabilities of any bank or
banking institution engaged in the business of
receiving deposits or which thereafter may
engage in the business of receiving deposits.
2. Examination of Banks (Sec. 8 and 9)
To conduct examination of banks with prior
approval
of
the
Monetary
Board.
No
examination can be conducted within twelve
months from the last examination date.
The Board of Directors shall appoint examiners
who shall have power, on behalf of the PDIC to
examine any insured bank. Such examiner shall
have the power to make a thorough
examination of all the affairs of the bank and in
doing so, he shall have the power to administer
oaths, to examine and take and preserve the
testimony of any of the officers and agents
thereof, and, to compel the presentation of
books, documents, papers, or records necessary
in his judgment to ascertain the facts relative to
the condition of the bank; and shall make a full
and detailed report of the condition of the bank
to the PDIC.
The Board of Directors shall appoint claim
agents who shall have the power to investigate
and examine all claims for insured deposits and
transferred deposits. Each claim agent shall
have the power to administer oaths and to
examine under oath and take and preserve
testimony of any person relating to such claim
3. Rehabilitation of Banks (Sec.17)
Money of the PDIC not otherwise employed shall
be invested in obligations of the Republic of the
Philippines or in obligations guaranteed as to
principal and interest by the Republic of the
Philippines.
The banking or checking accounts of the PDIC
shall be kept with the Bangko Sentral ng
Pilipinas, with the Philippine National Bank, or
with any other bank designated as depository or
fiscal agent of the Philippine government.
4. Receivership of Closed Banks (Sec.10)
The PDIC as receiver shall control, manage and
administer the affairs of the closed bank.
Effective immediately upon takeover as
receiver of such bank, the powers, functions
and duties, as well as all allowances,
remunerations and perquisites of the directors,
officers, and stockholders of such bank are
suspended, and the relevant provisions of the

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Articles of InPDIC and By-laws of the closed


bank are likewise deemed suspended.
The assets of the closed bank under
receivership shall be deemed in custodia legis
in the hands of the receiver. From the time the
closed bank is placed under such receivership,
its assets shall not be subject to attachment,
garnishment, execution, levy or any other court
processes.
5. Liquidation of Closed Banks (Sec.30,
R.A.7653)
Whenever, upon report of the head of the
supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become
due in the ordinary course of business:
Provided, That this shall not include inability to
pay caused by extraordinary demands induced
by financial panic in the banking community;
(b) has insufficient realizable assets, as
determined by the Bangko Sentral, to meet its
liabilities; or
(c) cannot continue in business without
involving probable losses to its depositors or
creditors; or
(d) has willfully violated a cease and desist
order under SEC 37 that has become final,
involving acts or transactions which amount to
fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board
may summarily and without need for prior
hearing forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance PDIC as receiver of
the banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be
designed as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit
of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court
but shall not, with the exception of
administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
any asset of the institution: Provided, That the
receiver may deposit or place the funds of the
institution in non-speculative investments. The
receiver shall determine as soon as possible,
but not later than ninety (90) days from take
over,
whether
the
institution
may
be
rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public: Provided, That
any determination for the resumption of
business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding

paragraph, the Monetary Board shall notify in


writing the board of directors of its findings and
direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial
court, and without requirement of prior notice
or any other action, a petition for assistance in
the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine
Deposit Insurance PDIC for general application
to all closed banks. In case of quasi-banks, the
liquidation plan shall be adopted by the
Monetary Board. Upon acquiring jurisdiction, the
court shall, upon motion by the receiver after
due notice, adjudicate disputed claims against
the institution, assist the enforcement of
individual liabilities of the stockholders,
directors and officers, and decide on other
issues as may be material to implement the
liquidation plan adopted. The receiver shall pay
the cost of the proceedings from the assets of
the institution.
(2) convert the assets of the institutions to
money, dispose of the same to creditors and
other parties, for the purpose of paying the
debts of such institution in accordance with the
rules on concurrence and preference of credit
under the Civil Code of the Philippines and he
may, in the name of the institution, and with
the assistance of counsel as he may retain,
institute such actions as may be necessary to
collect and recover accounts and assets of, or
defend any action against, the institution. The
assets of an institution under receivership or
liquidation shall be deemed in custodia legis in
the hands of the receiver and shall, from the
moment the institution was placed under such
receivership or liquidation, be exempt from any
order of garnishment, levy, attachment, or
execution.
The actions of the Monetary Board taken under
this SEC or under SEC 29 of this Act shall be
final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or
excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board
of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
Insured Deposits (Sec.4(g))
The amount due to any bona fide depositor for
legitimate deposits in an insured bank net of
any obligation of the depositor to the insured
bank as of date of closure, but not to exceed
P500,000.00.

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Liability to Depositors
1. Deposit Liabilities Required to be Insured
(Sec.5)
The deposit liabilities of any bank or banking
institution, which is engaged in the business of
receiving deposits or which thereafter may
engage in the business of receiving deposits,
shall be insured with the PDIC.
2. Commencement of Liability (Sec.14)
Whenever an insured bank shall have been
closed by the Monetary Board, payment of the
insured deposits on such closed bank shall be
made by the PDIC as soon as possible either (1)
by cash or (2) by making available to each
depositor a transferred deposit in another
insured bank in an amount equal to insured
deposit of such depositor.
The PDIC, in its discretion, may require proof of
claims to be filed before paying the insured
deposits, and that in any case where the PDIC is
not satisfied as to the viability of a claim for an
insured
deposit,
it
may
require
final
determination of a court of competent
jurisdiction before paying such claim.
Failure to settle the claim, within six (6) months
from the date of filing of claim for insured
deposit, where such failure was due to grave
abuse of discretion, gross negligence, bad faith,
or malice, shall, upon conviction, subject the
directors, officers or employees of the PDIC
responsible for the delay, to imprisonment from
six (6) months to one (1) year. The period shall
not apply if the validity of the claim requires the
resolution of issues of facts and or law by
another office, body or agency including the
case mentioned in the first proviso or by the
PDIC together with such other office, body or
agency.
3. Deposit Accounts Not Entitled to
Payment (Sec.4(f))
Any obligation of a bank which is payable at the
office of the bank located outside of the
Philippines shall not be a deposit or included as
part of the total deposits or of insured deposit.
Subject to the approval of the Board of
Directors,
any
insured
bank
which
is
incorporated under the laws of the Philippines
which maintains a branch outside the
Philippines may elect to include for insurance its
deposit obligations payable only at such branch.
4. Liability for Contents of Safety Box
Not liable the Bank has no way of knowing
what a depositor places in his security deposit
box (Catindig).
5. Determination of Insured Deposits
(Sec.16)
The PDIC shall commence the determination of
insured deposits due the depositors of a closed
bank upon its actual takeover of the closed
bank.
6. Calculation of Liability (Sec. 4(g))
Per Depositor, Per Capacity

In determining such amount due to any


depositor, there shall be added together all
deposits in the bank maintained in the same
right and capacity for his benefit either in his
own name or in the name of others.
Joint Accounts
A joint account regardless of whether the
conjunction "and," "or," "and/or" is used, shall
be insured separately from any individuallyowned deposit account.
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.
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.
The aggregate of the interests 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 P250,000.00.
Mode of Payments (Sec.14)
Payment shall be made by cash or transferred
deposit.
Transferred Deposit. Deposit in another insured
bank in an amount equal to insured deposit of
such depositor.
Effect of Payment (Secc. 15, 16(b))
Payment (a) of an insured deposit to any person
by the PDIC and (b) payment of a transferred
deposit to any person by the new bank or by an
insured bank in which a transferred deposit has
been made available shall discharge the PDIC.
Payment as Preferred Credit (Art.2244, Civil
Code)
Failure to Settle Claim of an Insured Depositor
(Sec. 14)
The PDIC, in its discretion, may require proof of
claims to be filed before paying the insured
deposits, and that in any case where the PDIC is
not satisfied as to the viability of a claim for an
insured
deposit,
it
may
require
final
determination of a court of competent
jurisdiction before paying such claim.
Failure to settle the claim, within six (6) months
from the date of filing of claim for insured
deposit, where such failure was due to grave
abuse of discretion, gross negligence, bad faith,
or malice, shall, upon conviction, subject the
directors, officers or employees of the PDIC
responsible for the delay, to imprisonment from
six (6) months to one (1) year.

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The period shall not apply if the validity of the


claim requires the resolution of issues of facts
and or law by another office, body or agency
including the case mentioned in the first proviso
or by the Corporation together with such other
office, body or agency.
Failure of Depositor to Claim Insured Deposit
(Sec.16(e))
If the depositor in the closed bank shall fail to
claim his insured deposits with the Corporation
within two (2) years from actual takeover of the
closed bank by the receiver, or does not enforce
his claim filed with the corporation within two
(2) years after the two-year period to file a
claim as mentioned hereinabove, all rights of
the depositor against the Corporation with
respect to the insured deposit shall be barred;
however, all rights of the depositor against the
closed bank and its shareholders or the
receivership estate to which the Corporation
may have become subrogated, shall thereupon
revert to the depositor. Thereafter, the
Corporation shall be discharged from any
liability on the insured deposit.
Other Powers of the PDIC
1. To adopt and use a corporate seal;
2. To have succession until dissolved by
an Act of Congress;
3. To make contracts
4. To sue and be sued, complain and
defend, in any court of law in the
Philippines
5. To appoint its Board of Directors,
officers and employees
6. To prescribe its by-laws
7. To exercise all powers granted
8. To prescribe rules and regulations
9. To establish its own provident fund
10. To compromise, condone, release
any claim or settled liability
11. To underwrite or advance litigation
costs or expenses
Prohibition against the Splitting of Deposits
(Sec.21(f)(5))
Splitting of deposits occurs whenever a deposit
account with an outstanding balance of more
than the statutory maximum amount of insured
deposit maintained under the name of natural
or juridical persons is broken down and
transferred into two or more accounts in the
name/s of natural or juridical persons or entities
who have no beneficial ownership on
transferred deposits in their names within thirty
(30) days immediately preceding or during a
bank-declared bank holiday, or immediately
preceding a closure order issued by the
Monetary Board of the Bangko Sentral ng
Pilipinas for the purpose of availing of the
maximum deposit insurance coverage.

Prohibition against Issuance of TROs (Sec.22)


No court, except the Court of Appeals, shall
issue
any
temporary
restraining
order,
preliminary injunction or preliminary mandatory
injunction against the PDIC for any action under
the PDIC Act.
This prohibition shall apply in all cases, disputes
or controversies instituted by a private party,
the insured bank, or any shareholder of the
insured bank.
The Supreme Court may issue a restraining
order or injunction when the matter is of
extreme urgency involving a constitutional
issue, such that unless a temporary restraining
order is issued, grave injustice and irreparable
injury will arise. The party applying for the
issuance of a restraining order or injunction
shall file a bond in an amount to be fixed by the
Supreme Court, which bond shall accrue in
favor of the Corporation if the court should
finally decide that the applicant was not entitled
to the relief sought.
Any restraining order or injunction issued in
violation of this is void and of no force and
effect and any judge who has issued the same
shall suffer the penalty of suspension of at least
sixty (60) days without pay.

IX.
LAW ON SECRECY OF BANK
DEPOSITS
Purpose
To encourage people to deposit their money in
banks and thereby discourage private hoarding
so that the banks may lend out the money and
assist in the economic development of the
country.
Prohibited Acts
1. The examination and inquiry or looking
into all deposits of whatever nature with
banks in the Philippines (including
investments in bonds issued by the
Government)
by
any
person,
government, bureau or office.
2. The disclosure by any official or
employee
of
any
bank
to
any
unauthorized person of any information
concerning said deposits.
Exceptions
1. Upon written permission of the depositor
2. In cases of impeachment
3. Upon order of a competent court in
cases of bribery or dereliction of duty of
a public official
4. In cases where the money deposited or
invested is the subject matter of the
litigation

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5. Upon court order in cases of unexplained


wealth (RA3019)
6. Upon order of the Commissioner of
Internal Revenue in respect of bank
deposits of a decedent for the purpose of
determining gross estate
7. Upon order of the Commissioner of
Internal Revenue in respect of bank
deposits of a taxpayer who has filed an
application for compromise of his tax
liability by reason of financial incapacity
8. Upon court order in cases filed by the
Ombudsman
a. In case of unclaimed balances
b. Without court order if the AntiMoney
Laundering
Council
determines that a particular
deposit or investment is related
to any one of the following
unlawful activities:
i. Kidnapping for ransom
ii. Violations
of
the
Comprehensive
Dangerous Drugs Act
iii. Hijacking,
destructive
arson, murder
c. Upon court order if the AntiMoney
Laundering
Council
determines that a particular
deposit or investment is related
to a money laundering offense
d. Inquiry into or examination when
made by the Bangko Sentral
Garnishment of Deposit
China Banking Corporation v. Ortega
FACTS Judgment by default was rendered against
Bautista Logging Co., Inc., B&B Forest
Development Corporation and Marino Bautista
in an action for the collection of a sum of
money. To satisfy the judgment, Tan Kim Liong
sought the garnishment of a bank deposit of
B&B Forest with China Banking Corporation.
ISSUE Whether or not a banking institution may
validly refuse to comply with a court process
garnishing the bank deposit of a judgment
debtor, by invoking the provisions of Republic
Act No. 1405.
HELD No. It was not the intention of the
legislature to place bank deposits beyond the
reach of execution to satisfy a final judgment.
There is no real inquiry in an order for
garnishment and if the existence of the deposit
were disclosed, the disclosure was purely
incidental to the execution process.
PCIB v. CA

FACTS An action was filed by a group of laborers,


who obtained a favorable judgment for the
payment of backwages against Marinduque
Mining Corporation (MMC). The NLRC issued a
writ of execution. The Sheriff of Negros
Occidental then prepared a Notice of
Garnishment addressed to six banks directing
the banks concerned to immediately issue a
check in the name of the Deputy Provincial
Sheriff of Negros Occidental in an amount
equivalent to the amount of the garnishment
and that proper receipt would be issued
therefor. PCIB Bank Manager Jose Henares
issued a debit memo for the full balance of
MMCs account and allowed its encashment.
ISSUE Whether or not PCIB violated Republic Act
No. 1405 when it allowed the sheriff to garnish
the deposit of MMC pursuant to a writ of
execution issued by the NLRC.
HELD No. Garnishment is considered as a specie
of attachment for reaching credits belonging to
the judgment debtor and owing to him from a
stranger to the litigation. Under the above-cited
rule, the garnishee is obliged to deliver the
credits to the proper officer issuing the writ. The
law exempts from liability the person having in
his possession or under his control any credits
or other personal property belonging to the
defendant if such property be delivered or
transferred to the clerk, sheriff, or other officer
of the court in which the action is pending.
Since there is no evidence that PCIB divulged
the information that the MMC had an account
with it, and it is undisputed that the said
account was properly the object of the notice of
garnishment and writ of execution carried out
by the deputy sheriff, a duly authorized officer
of the court, PCIB is not liable.
Concealment of Illegally Acquired Property
Banco Filipino v. Purisima
FACTS A complaint was filed by the Bureau of
Internal Revenue against Manuel Caturla. In the
course of the preliminary investigation thereof,
the Tanodbayan issued a subpoena duces
tecum to the Banco Filipino Savings & Mortgage
Bank, commanding its representative to to
furnish the Tanodbayan with duly certified
copies of the records in all its branches of the
loans, savings and time deposits and other
banking transactions appearing in the names of
Caturla, his wife and their children.
ISSUE Whether or not such an inquiry is allowed
as regards public officials under investigation
for a violation of the Anti-Graft & Corrupt
Practices Act
HELD Yes. while Republic Act No. 1405 provides
that bank deposits are absolutely confidential

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and therefore may not be examined, inquired or


looked into, except in those cases enumerated
therein, the Anti-Graft Law directs in mandatory
terms that bank deposits shall be taken into
consideration in the enforcement of this SEC,
notwithstanding any provision of law to the
contrary. The only conclusion possible is that
the Anti-Graft Law is intended to amend
Republic Act No. 1405 by providing an
additional exception to the rule against the
disclosure of bank desposits.
Cases of unexplained wealth are similar to
cases of bribery or dereliction of duty and no
reason is seen why these two classes of cases
cannot be excepted from the rule making bank
deposits confidential. The policy as to one
cannot be different from the policy as to the
other. This policy expresses the notion that a
public office is a public trust and any person
who enters upon its discharge does so with the
full knowledge that his life, so far as relevant to
his duty, is open to public scrutiny.
The inquiry into illegally acquired property
extends to cases where such property is
concealed by being held by or recorded in the
name of other persons. This proposition is made
clear by R.A. No. 3019 which quite categorically
states that the term, legitimately acquired
property of a public officer or employee shall
not include property unlawfully acquired by the
respondent, but its ownership is concealed by
its being recorded in the name of, or held by,
respondent's spouse, ascendants, descendants,
relatives or any other persons.
Mellon Bank v. Magsino
FACTS Dolores Ventosa requested the transfer of
$1,000 from the First National Bank of
Moundsville, West Virginia, U.S.A. to Victoria
Javier in Manila through the Prudential Bank.
First National Bank requested Mellon Bank, to
effect the transfer. Unfortunately the wire sent
by Mellon Bank to Manufacturers Hanover Bank,
a correspondent of Prudential Bank, indicated
the amount transferred as US$1,000,000.00
instead of US$1,000.00. Javiers husband used
the money to purchase real property from
Honorio Poblador, Jr.
ISSUE Whether or not the accounts of third
parties can be looked into.
HELD Yes. Republic Act No. 1405 allows the
disclosure of bank deposits in cases where the
money deposited is the subject matter of the
litigation. Inasmuch as the case is aimed at
recovering the amount converted by the Javiers
for their own benefit, necessarily, an inquiry
into the whereabouts of the illegally acquired
amount extends to whatever is concealed by
being held or recorded in the name of persons

other than the one responsible for the illegal


acquisition.
Case Pending in Court Required Before
Ombudsman Can Examine Bank Accounts
Marquez v. Desierto
FACTS The Ombudsman attempted to inspect
certain deposit accounts maintained at the Julia
Vargas Branch of Union Bank involved in a case
pending with the Ombudsman.
ISSUE Whether or not the power of the
Ombudsman to examine and have access to
bak accounts and records holds notwithstanding
the provisions of Republic Act No. 1405.
HELD No. Before an in camera inspection may be
allowed, there must first be a pending case
before a court of competent jurisdiction. The
account must be clearly identified, the
inspection limited to the subject matter of the
pending case, and the bank personnel as well
as the account holder must be notified to be
present during the inspection.
Foreign Currency Deposit Act
Salvacion v. Central Bank
FACTS Karen Salvacion was detained and raped
by Greg Bartelli, an American citizen. Bartelli
was arrested but was able to escape from jail.
The civil case for damages continued, and
judgment was rendered against Bartelli.
ISSUE Whether or not Bartellis deposits with
China Banking Corporation can be garnished.
HELD Yes. Republic Act No. 6426 does not
protect and would not apply to the foreign
currency deposit of a transient alien depositor
under the peculiar circumstances of this case.

Anti-Money Laundering Act


Common Stages of Money Laundering
Placement, layering, integration
Covered Institutions
1. Banks, non-banks, quasi-banks, trust
entities, and all other institutions and
their
subsidiaries
and
affiliates
supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP)
2. Insurance companies and all other
institutions supervised or regulated by
the Insurance Commission
3. (i) Securities dealers, brokers, salesmen,
investment houses and other similar
entities managing securities or rendering
services as investment agent, advisor, or

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consultant, (ii) mutual funds, close and


investment companies, common trust
funds, pre-need companies and other
similar entities, (iii) foreign exchange
corporations, money changers, money
payment, remittance, and transfer
companies and other similar entities,
and (iv) 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 Securities and Exchange
Commission
Covered Transactions
'Covered transaction' is a transaction in cash or
other equivalent monetary instrument involving
a total amount in excess of P500,000.00 within
one banking day.
Suspicious Transactions
Transactions
with
covered
institutions,
regardless of the amounts involved, where any
of the following circumstances exist:
1. There is no underlying legal or trade
obligation,
purpose
or
economic
justification
2. The client is not properly identified
3. The
amount
involved
is
not
commensurate with the business or
financial capacity of the client
4. Taking
into
account
all
known
circumstances, it may be perceived that
the client's transaction is structured in
order to avoid being the subject of
reporting requirements under the Act
5. Any circumstances relating to the
transaction which is observed to deviate
from the profile of the client and/or the
client's past transactions with the
covered institution
6. The transactions is in a way related to an
unlawful activity or offense under this
Act that is about to be, is being or has
been committed
7. Any transactions that is similar or
analogous to any of the foregoing
Unlawful Activities or Predicate Crimes
'Unlawful activity' refers to any act or omission
or series or combination thereof involving or
having direct relation to following:
1. Kidnapping for ransom
2. Violations of the Comprehensive Drugs
Act of 2002
3. Violations of the Anti-Graft and Corrupt
Practices Act
4. Plunder under Republic Act No. 7080
5. Robbery and extortion

6.
7.
8.
9.
10.
11.

Jueteng and Masiao


Piracy on the high seas
Qualified theft
Swindling
Smuggling
Violations of the Electronic Commerce
Act
12. Hijacking, destructive arson and murder
13. Fraudulent Practices under the Securities
Regulation Code
14. Felonies or offenses of a similar nature
that are punishable under the penal laws
of other countries
Money Laundering Offenses
Money laundering is a crime whereby the
proceeds of an unlawful activity as herein
defined are transacted, thereby making them
appear to have originated from legitimate
sources. It is committed by the following:
1. Any person knowing that any monetary
instrument or property represents,
involves, or relates to, the proceeds of
any unlawful activity, transacts or
attempts to transacts said monetary
instrument or property.
2. Any person knowing that any monetary
instrument or property involves the
proceeds of any unlawful activity,
performs or fails to perform any act as a
result of which he falicitates the offense
of money laundering referred to in
paragraph (a) above.
3. Any person knowing that any monetary
instrument or property is required under
this Act to be disclosed and filed with the
Anti-Money Laundering Council (AMLC),
fails to do so.
Anti-Money Laundering Council
The Anti-Money Laundering Council is hereby
created and shall be composed of the Governor
of the Bangko Sentral ng Pilipinas as chairman,
the Commissioner of the Insurance Commission
and the Chairman of the Securities and
Exchange Commission as member. The AMLC
shall shall act unanimously in the discharge of
its functions as defined hereunder:
1. To require and receive covered or
suspicious transaction reports from
covered institutions
2. To issue orders addressed to the
appropriate Supervising Authority or the
covered institutions to determine the
true identity of the owner of any
monetary instrument or preperty subject
of a covered transaction or suspicious
transaction report or request for
assistance from a foreign State, or
believed by the Council, on the basis fo
substantial evidence, to be, in whole or
in part, wherever located, representing,
involving, or related to directly or

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3.
4.

5.

6.

7.
8.

9.

10.

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indirectly, in any manner or by any


means, the proceeds of an unlawful
activitity
To institute civil forfeiture proceedings
and all other remedial proceedings
through the Office of th Solicitor General
To cause the filing of complaints with the
Department
of
Justice
or
the
Ombudsman for the prosecution of
money laundering offenses
To investigate suspicious transactions
and
covered
transactions
deemed
suspicious after an investigation by
AMLC, money laundering activities and
other violations of this Act
To apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be the
proceeds of any unlawful activity
To implement such measures as may be
necessary and justified under this Act to
counteract money laundering
To receive and take action in respect of,
any request from foreign states for
assistance in their own anti-money
laundering operations
To develop educational programs on the
pernicious effects of money laundering,
the methods and techniques used in the
money laundering, the viable means of
preventing money laundering and the
effective ways of prosecuting and
punishing offenders
To impose administrative sanctions for
the violation of laws, rules, regulations,
and orders and resolutions issued
pursuant thereto

Basic Activities Required of Covered Institutions


to Prevent Money Laundering
Covered institutions shall report to the AMLC all
covered
transactions
and
suspicious
transactions within five(5) working days from
occurrences thereof, unless the Supervising
Authority prescribes a longer period not
exceeding ten working days. Should a
transaction be determined to be both a covered
transaction and a suspicious transaction, the
covered institution shall be required to report
the same as a suspicious transaction.
Freezing of Monetary Instrument or Property
The Court of Appeals, upon application ex parte
by the AMLC and after determination that
probable cause exists that any monetary
instrument or property is in any way related to
an unlawful activity, may issue a freeze order
which shall be effective immediately. The freeze
order shall be for a period of twenty days unless
extended by the court.
Authority to Inquire Into Bank Deposits

The AMLC may inquire into or examine any


particular deposit or investment with any
banking institution or non-bank financial
institution upon order of any competent court in
cases of violation of the Anti-Money Laundering
Act, when it has been established that there is
probable cause that the deposits or investments
are related to an unlawful activity or a money
laundering except that no court order shall be
required in cases involving kidnapping for
ransom, violations of the Comprehensive
Dangerous Drugs act, hijacking, destructive
arson, and murder.
Penal Provisions
1. Malicious Reporting. Any person who,
with malice, or in bad faith, reports or
files a completely unwarranted or false
information relative to money laundering
transaction against any person shall be
subject to a penalty to six (6) months to
four (4) years imprisonment and a fine of
not less than P100,000.00 but not more
than P500,000.00, at the discretion of
the court: Provided, That the offender is
not entitled to avail the benefits of the
Probation Law.
2. Breach
of
Confidentiality.
The
punishment of imprisonment ranging
from three (3) to eight (8) years and a
fine of not less than P500,000.00 but not
more than P1,000,000.00 shall be
imposed. In the case of a breach of
confidentiality that is published or
reported by media, the responsible
reporter, writer, president, publisher,
manager and editor-in-chief shall be
liable.
Prohibitions Against Political Harrassment
Act shall not be used for political prosecution or
harassment or as an instrument to hamper
competition in trade and commerce.No case for
money laundering may be filed against and no
assets shall be frozen, attached or forfeited to
the prejudice of a candidate for an electoral
office during an election period.
Human Security Act
Judicial
Authorization
to
Examine
Bank
Deposits, Accounts and Records
The provisions of Republic Act No. 1405 as
amended, to the contrary notwithstanding, the
justices of the Court of Appeals designated as a
special court to handle anti-terrorism cases
after satisfying themselves of the existence of
probable cause in a hearing called for that
purpose that: (1) a person charged with or
suspected of the crime of terrorism or,
conspiracy to commit terrorism, (2) of a
judicially declared and outlawed terrorist

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organization, association, or group of persons;


and (3) of a member of such judicially declared
and outlawed organization, association, or
group of persons, may authorize in writing any
police or law enforcement officer and the
members of his/her team duly authorized in
writing by the anti-terrorism council to: (a)
examine, or cause the examination of, the
deposits, placements, trust accounts, assets
and records in a bank or financial institution;
and (b) gather or cause the gathering of any
relevant information about such deposits,
placements, trust accounts, assets, and records
from a bank or financial institution. The bank or
financial institution concerned, shall not refuse
to allow such examination or to provide the
desired information, when so, ordered by and
served with the written order of the Court of
Appeals.
Application to Examine Bank Deposits, Accounts
and Records
The written order of the Court of Appeals
authorizing the examination of bank deposits,
placements, trust accounts, assets, and
records: (1) of a person charged with or
suspected of the crime of terrorism or
conspiracy to commit terrorism; (2) of any
judicially declared and outlawed terrorist
organization, association, or group of persons,
or (3) of any member of such organization,
association, or group of persons in a bank or
financial institution, and the gathering of any
relevant information about the same from said
bank or financial institution, shall only be
granted by the authorizing division of the Court
of Appeals upon an ex parte application to that
effect of a police or of a law enforcement official
who has been duly authorized in writing to file
such ex parte application by the Anti-Terrorism
Council created in SEC 53 of this Act to file such
ex parte application, and upon examination
under oath or affirmation of the applicant and,
the witnesses he may produce to establish the
facts that will justify the need and urgency of
examining and freezing the bank deposits,
placements, trust accounts, assets, and
records: (1) of the person charged with or
suspected of the crime of terrorism or
conspiracy to commit terrorism; (2) of a
judicially declared and outlawed terrorist
organization, association or group of persons; or
(3) of any member of such organization,
association, or group of persons.
Effective Period of Court Authorization
The authorization issued or granted by the
authorizing division of the Court of Appeals to
examine or cause the examination of and to
freeze bank deposits, placements, trust
accounts, assets, and records, or to gather
information about the same, shall be effective

for the length of time specified in the written


order of the authorizing division of the Court of
Appeals, which shall not exceed a period of
thirty (30) days from the date of receipt of the
written order of the authorizing division of the
Court of Appeals by the applicant police or law
enforcement official.
The authorizing division of the Court of Appeals
may extend or renew the said authorization for
another period, which shall not exceed thirty
(30) days renewable to another thirty (30) days
from the expiration of the original period:
Provided, That the authorizing division of the
Court of Appeals is satisfied that such extension
or renewal is in the public interest: and,
Provided, further, That the application for
extension or renewal, which must be filed by
the original applicant, has been duly authorized
in writing by the Anti-Terrorism Council.
In case of death of the original applicant or in
case he is physically disabled to file the
application for extension or renewal, the one
next in rank to the original applicant among the
members of the ream named in the original
written order of the authorizing division of the
Court of Appeals shall file the application for
extension or renewal: Provided, That, without
prejudice to the liability of the police or law
enforcement personnel under SEC 19 hereof,
the applicant police or law enforcement official
shall have thirty (30) days after the termination
of the period granted by the Court of Appeals as
provided in the preceding paragraphs within
which to file the appropriate case before the
Public Prosecutor's Office for any violation of
this Act.
If no case is filed within the thirty (30)-day
period, the applicant police or law enforcement
official shall immediately notify in writing the
person subject of the bank examination and
freezing of bank deposits, placements, trust
accounts, assets and records. The penalty of
ten (10) years and one day to twelve (12) years
of imprisonment shall be imposed upon the
applicant police or law enforcement official who
fails to notify in writing the person subject of
the bank examination and freezing of bank
deposits, placements, trust accounts, assets
and records.

X. TRUTH IN LENDING ACT


RA 3765 (1963)
10.1 Topics
Purpose
SEC 2. Declaration of Policy. It is hereby
declared to be the policy of the State to protect
its citizens from a lack of awareness of the true
cost of credit to the user by assuring a full

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disclosure of such cost with a view of


preventing the uninformed use of credit to the
detriment of the national economy.
Obligation of creditors
SEC 3. As used in this Act, the term
(4) "Creditor" means any person engaged in the
business of extending credit (including any
person who as a regular business practice make
loans or sells or rents property or services on a
time, credit, or installment basis, either as
principal or as agent) who requires as an
incident to the extension of credit, the payment
of a finance charge.
SEC 4. Any creditor shall furnish to each person
to whom credit is extended, prior to the
consummation of the transaction, a clear
statement in writing setting forth, to the extent
applicable and in accordance with rules and
regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the
property or service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set
forth under clauses (1) and (2);
(4) the charges, individually itemized, which are
paid or to be paid by such person in connection
with the transaction but which are not incident
to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of
pesos and centavos; and
(7) the percentage that the finance bears to the
total amount to be financed expressed as a
simple annual rate on the outstanding unpaid
balance of the obligation.
Covered and excluded transactions
Covered transactions
SEC 3. As used in this Act, the term
(2) "Credit" means any loan, mortgage, deed of
trust, advance, or discount; any conditional
sales contract; any contract to sell, or sale or
contract of sale of property or services, either
for present or future delivery, under which part
or all of the price is payable subsequent to the
making of such sale or contract; any rentalpurchase contract; any contract or arrangement
for the hire, bailment, or leasing of property;
any option, demand, lien, pledge, or other claim
against, or for the delivery of, property or
money; any purchase, or other acquisition of, or
any credit upon the security of, any obligation
of claim arising out of any of the foregoing; and
any transaction or series of transactions having
a similar purpose or effect.

Sec. 3, CB Circular No. 158 implementing RA


3765
a) Any loans, mortgages, deeds of trust,
advances and discounts;
b) Any conditional sales contracts, any
contract to sell, or sale or contract of
sale of property or services, either for
present or future delivery, under which
part or all of the price is payable
subsequent to the making of such sale
or contract;
c) Any rental-purchase contract;
d) Any contract for the hire, bailment or
leasing of property;
e) Any option, demand, lien, pledge or
other claim against or for delivery of,
property or money;
f) Any purchase, or other acquisition of, or
any credit upon the security of, any
obligation or claim arising out of any of
the foregoing; and
g) Any transaction or series of transactions
having a similar purpose or effect.

Excluded transactions
Sec. 3, CB Circular 158
a) Those that do not involve the payment
of any finance charge by the debtor; and
b) Those in which the debtor is the one
specifying a definite and fixed set of
credit terms such as bank deposits,
insurance contracts, sale of bonds, etc.
Finance and non-finance charges
Finance charges
SEC 3. As used in this Act, the term
(3) "Finance charge" includes interest, fees,
service charges, discounts, and such other
charges incident to the extension of credit as
the Board may be regulation prescribe.
Sec. 2 (h), CB Circular 158
Finance charges are the amounts to be paid by
the debtor incident to the extension of credit
such as interests, discounts, collection fees,
credit investigation fees and attorneys fees.
Non-finance charges
Sec. 2(f), CB Circular 158
Non-finance charges are the amounts advanced
by a creditor for items normally associated with
the ownership of property or the availment of
the services purchased which are not incident
to the extension of credit. For example, when a
debtor purchases a car on credit, the creditor
may advance the insurance premium as well as
the registration fee for the account of the
debtor.

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Consequences
obligation

of

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non-compliance

with

SEC 6. (a) Any creditor who in connection with


any credit transaction fails to disclose to any
person any information in violation of this Act or
any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an
amount equal to twice the finance charged
required by such creditor in connection with
such transaction, whichever is the greater,
except that such liability shall not exceed
P2,000 on any credit transaction. Action to
recover such penalty may be brought by such
person within one year from the date of the
occurrence of the violation, in any court of
competent jurisdiction. In any action under this
subSEC in which any person is entitled to a
recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as
determined by the court.
(b) Except as specified in subSEC (a) of this
SEC, nothing contained in this Act or any
regulation contained in this Act or any
regulation thereunder shall affect the validity or
enforceability of any contract or transactions.
(c) Any person who willfully violates any
provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,00
or more than P5,000 or imprisonment for not
less than 6 months, nor more than one year or
both.
(d) No punishment or penalty provided by this
Act shall apply to the Philippine Government or
any agency or any political subdivision thereof.
(e) A final judgment hereafter rendered in any
criminal proceeding under this Act to the effect
that a defendant has willfully violated this Act
shall be prima facie evidence against such
defendant in an action or proceeding brought
by any other party against such defendant
under this Act as to all matters respecting which
said judgment would be an estoppel as between
the parties thereto.
10.2 Cases
Excessive interests, penalties and other charges
not revealed in disclosure statements issued by
banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in
Lending Act
New Sampaguita Builders Construction, Inc., et
al. v. PNB
No penalty charges or increases thereof
appear either in the Disclosure Statements or in
any of the clauses in the second and the third
Credit Agreements earlier discussed. While a
standard penalty charge of 6 percent per
annum has been imposed on the amounts
stated in all three Promissory Notes still

remaining unpaid or unrenewed when they fell


due, there is no stipulation therein that would
justify any increase in that charges. The effect,
therefore, when the borrower is not clearly
informed of the Disclosure Statements -- prior
to the consummation of the availment or
drawdown -- is that the lender will have no right
to collect upon such charge or increases
thereof, even if stipulated in the Notes. The
time is now ripe to give teeth to the often
ignored forty-one-year old Truth in Lending
Act and thus transform it from a snivelling
paper tiger to a growling financial watchdog of
hapless borrowers.
Failure to disclose required information in
disclosure statement cured by disclosure
thereof in loan transaction documents
DBP v. Arcilla
Issue: WON DBP complied with the disclosure
requirement of RA 3765 and CB Circular 158?
Held: Yes. Under Circular No. 158 of the Central
Bank, the information required by R.A. No. 3765
shall be included in the contract covering the
credit transaction or any other document to be
acknowledged and signed by the debtor. If the
borrower is not duly informed of the data
required by the law prior to the consummation
of the availment or drawdown, the lender will
have no right to collect such charge or
increases thereof, even if stipulated in the
promissory note. However, such failure shall not
affect the validity or enforceability of any
contract or transaction. In the present case,
DBP failed to disclose the requisite information
in the disclosure statement form authorized by
the Central Bank, but did so in the loan
transaction documents between it and Arcilla.
Contrary to appellee's claim that he was not
sufficiently informed of the details of the loan,
the records disclose that the required
informations were readily available in the three
(3) promissory notes he executed. Thus, DBP
substantially complied with RA 3765 and CB
Circular 158.
10.3 Additional Materials
a) Implementing Rules: CB Circular No.
158-63
b) Additional Implementing Rules: CB
Circular No. 431-74
10.4 Related Statute
Access Devices Regulation Act of 1998 (RA
8484)
a) Disclosure required upon credit card
application or solicitation

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SEC 4. Credit Card Application and


Solicitation. Any application to open a credit
card account for any person under an open-end
credit plan or a solicitation to open such an
account, either by mail, telephone or other
means, shall disclose in writing or orally, as the
case may be, the following information:
(a) Annual Percentage Rate
1) Each annual percentage rate
of interest on the amount of
credit obtained by the credit
card holder under such credit
plan. Where an extension of
credit is subject to a variable
rate, the fact that the rate is
variable, and the annual
percentage rate in effect at
the time of the mailing.
2) Where more than one rate
applies, the range of balances
to which each rate applies.
(b) Annual and other Fees
1) Any annual fee, other periodic
fee,
or
membership
fee
imposed for the issuance or
availability of a credit card,
including
any
account
maintenance fee or any other
charge imposed based on
activity or inactivity for the
account during the billing
cycle.
2) Any minimum finance charge
imposed for each period
during which any extension of
credit which is subject to a
finance charge is outstanding.
3) Any
transaction
charge
imposed in connection with
use of the card to purchase
goods or services.
4) Any fee, penalty or surcharge
imposed for the delay in
payment of an account.
(c) Balance Calculation Method the name or a
detailed explanation of the balance calculation
method used in determining the balance upon
which the finance charge is computed.
(d) Cash Advance Fee any fee imposed for an
extension of credit in the form of cash.
(e) Over-the-Limit-Fee any fee imposed in
connection with an extension of credit in excess
of the amount of credit authorized to be
extended with respect to such amount:
Provided, however, That in case the application
or solicitation to open a credit card account for
any person under an open-end consumer credit
plan be made through catalogs, magazines, or
other publications, the following additional
information shall be disclosed:

1) A statement, in a conspicuous
and prominent location on the
application
or
solicitation,
that:
i. the
information
is
accurate as of the date
the
application
or
solicitation was printed;
ii. the information contained
in the application or
solicitation is subject to
change after such date;
iii. the
applicant
should
contact the creditor for
information on any change
in
the
information
contained
in
the
application or solicitation
since it was printed;
2) The date the application or
solicitation was printed; and
3) In
a
conspicuous
and
prominent location on the
application or solicitation, a
toll free telephone number or
mailing address which the
applicant may contact to
obtain any change in the
information provided in the
application
or
solicitation
since it was printed.

b) Detailed explanation and clear illustration of


computation of charges and fees
SEC 5. Computations. In addition to the
foregoing, a credit card issuer must, to the
extent
practicable,
provide
a
detailed
explanation and a clear illustration of the
manner by which all charges and fees are
computed.
c) Exceptions to the disclosure requirement
SEC 6. Exceptions. The disclosures required
under SEC 4 of this Act may be omitted in any
telephone solicitation or application if the credit
card issuer:
(a) does not impose any fee in connection with
paragraph (b)(1), SEC 4 of this Act;
(b) does not impose any fee in connection with
telephone solicitation unless the consumer
signifies acceptance by using the card;
(c) discloses clearly the information described in
SEC 4 of this Act in writing within thirty (30)
days after the consumer requests the card, but
in no event later than the date of delivery of the
card; and
(d) discloses clearly that the consumer is not
obligated to accept the card or account and the

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consumer will not be obligated to pay any fees


or charges disclosed unless the consumer elects
to accept the card or account by using the card.
d) Disclosure required prior to renewal
SEC 7. Disclosure Prior to Renewal.
Except in telephone solicitations a card issuer
that imposes any fee described in SEC 4 shall
transmit to a consumer's credit card account a
clear and conspicuous disclosure of:
(a) the date by which, the month by which, or
the billing period at the close of which, the
account will expire if not renewed;
(b) the information described in SEC 4 which
shall be transmitted to a consumer at least
thirty (30) days prior to the scheduled renewal
date of the consumer's credit card account;
(c) the information described in SEC 4 (a) (1)
which shall be transmitted to a consumer's
credit card account; and
(d) the method by which the consumer may
terminate continued credit availability under
the account: Provided, That the disclosures
required by this SEC must be made prior to
posting a fee described in SEC 4 (b) (1) to the
account, or with the periodic billing statement
first disclosing that the fee has been posted to
the account subject to the condition that the
consumer is given thirty (30) day period to
avoid payment of the fee or to have the fee
recredited to the account in any case where the
consumer does not wish to continue the
availability of the credit.
e) Penalty for failure to disclose
SEC 8. Failure to Disclose. Credit card
companies which shall fail to disclose the
information required under SECs 4, 5 and 7 of
this Act, after due notice and hearing, shall be
subject to suspension or cancellation of their
authority to issue credit cards by the Bangko
Sentral ng Pilipinas, Securities and Exchange
Commission and such other government
agencies.

XI. LETTERS OF CREDIT


ART 567-572 CODE OF COMMERCE
11.1 Topics
Governing Law
1.
Articles 567-572 of the Code of
Commerce,
which
provides
a
skeletal
introduction to the subject of letters of credit
2.
The Uniform Customs and Practice for
Documentary
Credits
issued
by
the
International Chamber of Commerce, which

reflects accepted commercial usage and


practice on the subject of letters of credit and
the application of which in the Philippines has
been acknowledged by the Supreme Court
based on Article 2 of the Code of Commerce
which provides that in the absence of any
applicable provision in the Code of Commerce,
commercial transactions shall be governed by
usages generally observed. (See BPI v. De Reny
Fabric Industries; Feati Bank v. CA; and Bank of
America, NT & SA v. CA)
Concept and nature
ARTICLE 567. Letters of credit are those issued
by one merchant to another or for the purpose
of attending to a commercial transaction.
Essential conditions
ARTICLE 568. The essential conditions of
letters of credit shall be:
1. To be issued in favor of a definite person
and not to order.
2. To be limited to a fixed and specified
amount, or to one or more undetermined
amounts, but within a maximum the limits of
which has to be stated exactly.
Those which do not have any of these last
circumstances shall be considered as mere
letters of recommendation.
Period of validity
ARTICLE 572. If the bearer of a letter of credit
does not make use thereof within the period
agreed upon with the drawer, or, in default of a
period fixed, within six months, counted from its
date in any point in the Philippines, and within
twelve months anywhere outside thereof, it
shall be void in fact and in law.
Basic parties and governing contracts
Basic parties of a letter of credit
a) The buyer, who procures the letter of
credit and obliges himself to reimburse
the issuing bank upon receipt of the
documents of title;
b) The bank issuing the letter of credit,
which undertakes to pay the seller upon
receipt of the draft and proper
documents of titles and to surrender the
documents
to
the
buyer
upon
reimbursement; and
c) The seller, who in compliance with the
contract of sale ships the goods to the
buyer and delivers the documents of title
and draft to the issuing bank to recover
payment. (See Bank of America v. NT &
SA)

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Governing contracts
a) Issuing
bank
and
applicant/buyer/importer

Their
relationship is governed by the terms of
the application and agreement for the
issuance of the letter of credit by the
bank
b) Issuing
bank
and
beneficiary/seller/exporter

Their
relationship is governed by the terms of
the letter of credit issued by the bank
c) Applicant and beneficiary Their
relationship is governed by the sales
contract. (See Reliance Commodities v.
Deawoo Industrial)
Opening bank buyers bank which issues the
letter of credit
Notifying bank corresponding bank of the
opening bank through which it advises the
beneficiary of the existence of the letter of
credit
Negotiating bank any bank in the city of the
beneficiary
Paying bank - buys or discounts the drafts if
such draft is drawn on the opening bank or on
another designated bank not in the city of the
beneficiary
Confirming bank upon the request of the
beneficiary confirms the letter of credit issued
by the opening bank
Independence principle
The independence principle in a letter of credit
transactions means that a bank, in determining
compliance with the terms of a letter of credit is
required to examine only the shipping
documents presented by the seller and is
precluded from determining whether the main
contract is actually accomplished or not. This
arrangement assures the seller of prompt
payment, independent of any breach of the
main sales contract. (See Bank of America NT &
SA).
Rule of strict compliance
The rule of strict compliance in a letter of credit
transaction
means
that
the
documents
tendered by the seller or beneficiary must
strictly conform to the terms of the letter 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. (See Feati Bank)
Documents associated
credit transactions

with

letters

of

a) Draft sometimes called a bill of


exchange, it is an order written by an
exporter/seller
instructing
an
importer/buyer or its agent to pay a
specified amount of money at a specified
time.
b) Bill of lading document issued to the
exporter
by
a
common
carrier
transporting the merchandise. It serves
three purposes: as a receipt, a contract
and a document of title.
c) Commercial
invoice a document
signed and issued by the seller and
contains a precise description of the
merchandise and the terms of the sale
such as unit prices, amount due from the
buyer and shipping conditions related to
charges.
d) Consular invoice a document issued by
the consulate of the importing country to
provide
customs
information
and
statistics for that country and to help
prevent false declarations of value.
e) Certificate of analysis a document that
may be required to ascertain that certain
specifications
of
weight,
purity,
sanitation, etc. have been met.
f) Packing list an enumeration of the
contents of containers so that they can
be identified, either for customs
purposes or for importer identification of
the contents of separate containers.
g) Export declaration a document
prepared by the exporter to assist the
government to prepare export statistics.
11.2 Cases
Nature of letters of credit
Prudential Bank v. IAC
A letter of credit is defined as an engagement
by a bank or other person made at the request
of a customer that the issuer will honor drafts or
other demands for payment upon compliance
with the conditions specified in the credit.
Through a letter of credit, the bank merely
substitutes its own promise to pay for the
promise to pay of one of its customers who in
return promises to pay the bank the amount of
funds mentioned in the letter of credit plus
credit or commitment fees mutually agreed
upon.
Bank of America v. CA
A letter of credit is a financial device developed
by merchants as a convenient and relatively
safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interest of a
seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have

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control of the goods before paying. To break the


impasse, the buyer may be required to contract
a bank to issue a letter of credit in favor of the
seller so that, by virtue of the letter of the letter
of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them
upon their presentment simultaneously with the
tender of documents required by the letter of
credit. The buyer and the seller agree on what
documents are to be presented for payment,
but ordinarily they are documents of title
evidencing or attesting to the shipment of the
goods to the buyer. Under this arrangement,
the seller gets paid only if he delivers the
documents of title over the goods, while the
buyer acquires the said documents of title over
the goods only after reimbursing the bank.
Process
1.
Once the credit is established, the seller
ships the goods to the buyer and in the process
secures the shipping documents or DOT
2.
To get paid, the seller executes a draft
and presents it together with the required
documents to the issuing bank
3.
The issuing bank redeems the draft and
pays cash to the seller if it finds the documents
submitted by the seller conform with what the
letter of credit requires
4.
The bank obtains possession of the
documents upon paying the seller
5.
Transaction is completed when the
buyer reimburses the issuing bank and acquires
the documents entitling him to the goods.
Lee v. CA
Modern letters of credit are usually not made
between natural persons. They involve bank-tobank transactions. Historically, letters of credit
was developed to facilitate the sale of goods
between distant and unfamiliar buyers and
sellers. It was an arrangement under which a
bank, whose credit was acceptable to the seller,
would at the instance of the buyer agree to pay
drafts drawn on it by the seller, provided that
certain documents are presented such as bills
of lading accompanied the corresponding
drafts.

5.
Negotiating bank any bank in the city
of the beneficiary
6.
Paying bank buys or discounts the
drafts if such draft is drawn on the opening
bank or on another designated bank not in the
city of the beneficiary
7.
Confirming bank upon the request of
the beneficiary confirms the letter of credit
issued by the opening bank
Standby letters of credit
Transfield Philippines, Inc. v. Luzon Hydro
Corporation
Facts: Transfield Philippines and LHC entered
into a turnkey contract whereby the former
undertook to construct a hydro-electric power
station by June 1, 2000. To secure performance
of the obligation on or before the target
completion date, Transfield opened in favor of
LHC 2 standby letters of credit. Transfeild failed
to complete the project by the target date.
Transfield filed a Complaint for Injunction to
restrain LHC from calling on the securities.
Issue: WON the banks should dispose of the
securities upon application by LHC? Yes.
Held:
Concept of Standby letters of credit The use of
credits in commercial transactions serves to
reduce the risk of non-payment of the purchase
price under the contract of sale of goods.
Standby credits however are used in non-sale
settings where they serve to reduce the risk of
non-performance.
Commercial credit v. standby credit
1. Commercial credit involve of payment of
money under a contract of sale.
2. Commercial credits become payable
upon the presentation by the seller of
documents that show he has taken
affirmative steps to comply with the
sales agreement. Standby credits is
payable upon certification of a partys
nonperformance of the agreement.
3. Beneficiary of commercial credit must
present
documents
that
he
has
performed
his
contract.
While
beneficiary of standby credit must certify
that his obligor has not performed the
contract.
Independence principle

Parties to a commercial letter of credit


1.
Buyer or importer
2.
Seller or the beneficiary
3.
Opening bank buyers bank which
issues the letter of credit
4.
Notifying bank corresponding bank of
the opening bank through which it advises the
beneficiary of the existence of the letter of
credit

BPI v. De Reny Fabric Industries


Facts: De Reny Fabric obtained letters of credit
from BPI covering the purchase by the
corporation of dyestuffs from its American
supplier. Upon presentment of the bills of lading
and drafts covering the goods to the
corresponding bank of BPI in the US the supplier

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was paid. De Reny refused to pay BPI on the


ground that the goods delivered were defective.
Issue: WON the foreign corresponding banks of
BPI had the duty to take the necessary
precaution to insure that the goods shipped
conformed with the item appearing of the
letters of credit?
Held: No.
Under the terms of their commercial letter of
credit agreements with the bank, De Reny
agreed that the Bank shall not be responsible or
liable for any defect or loss of the goods. But
even without such stipulation, the burden of
loss still cannot be shifted to the Bank on
account of the seller breach of its obligation.
Under Uniform Customs and Practice for
Commercial Documentary Credits, banks in
providing financing in international business
transactions, do not deal with the property to
be exported or shipped to the importer but only
deal
with
the
documents.
Custom
in
international banking and financing circles
negate any duty on the part of a bank to verify
whether what has been described in letters of
credit or drafts or shipping documents actually
tallies with what was loaded abroad ship.
Rule of strict compliance
Feati Bank v. CA
Facts: The letter of credit provided that the
draft should be presented to the issuing bank
with the following documents: commercial
invoice, tally sheets, bills of lading and a
certification
from
Han-Axel
Christiansen
(consignor). The latter refused to issue the
certification. Feati Bank, a corresponding bank
of the issuing bank in the Philippines, refused to
honor the drafts without the certification.
Issue: WON a correspondent bank can be held
liable under the letter of credit despite noncompliance by the beneficiary with the terms
thereof.
Held: It is as settled rule in commercial
transactions involving letters of credit that the
documents tendered must strictly conform to
the terms of the letter of credit. The tender of
documents by the beneficiary must include all
documents
required
by
the
letter.
A
correspondent bank which departs from what
has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to
recover from the buyer or the issuing bank the
money thus paid to the beneficiary. Thus the
rule of strict compliance.
Since a bank deals only with documents, it is
not in a position to determine whether or not
the documents required by the letter of credit
are material or superfluous. There mere fact
that the document was specified therein readily

means that the document is of vital importance


to the buyer.

XII. TRUST RECEIPTS LAW


PD 115 (1973)
12.1 Topics
Origin
The Trust Receipts Law has no legislative
history to speak of as it was a presidential
issuance. It was closely patterned after the
Uniform Trust Receipts Act promulgated in 1993
by
the
US
National
Conference
of
Commissioners on Uniform State Laws and
adopted by roughly two-thirds of the states. The
UTRA was replaced in 1952 by the Uniform
Commercial Code. The UTRA, just like the Trust
Receipts Law, contemplated a tripartite
arrangement under which a buyer, called an
entrustee, purchased goods from a seller, with
the financing being provided by a lender called
the entruster.
Nature and tripartite character of trust
receipts transaction
SEC 4. What constitutes a trust receipt
transaction. A trust receipt transaction, within
the meaning of this Decree, is any transaction
by and between a person referred to in this
Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby
the entruster, who owns or holds absolute title
or security interests over certain specified
goods, documents or instruments, releases the
same to the possession of the entrustee upon
the latter's execution and delivery to the
entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to
hold the designated goods, documents or
instruments in trust for the entruster and to sell
or otherwise dispose of the goods, documents
or instruments with the obligation to turn over
to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or
as appears in the trust receipt or the goods,
documents or instruments themselves if they
are unsold or not otherwise disposed of, in
accordance with the terms and conditions
specified in the trust receipt, or for other
purposes substantially equivalent to any of the
following:
1. In the case of goods or documents, (a) to sell
the goods or procure their sale; or (b) to
manufacture or process the goods with the
purpose of ultimate sale: Provided, That, in the
case of goods delivered under trust receipt for
the purpose of manufacturing or processing
before its ultimate sale, the entruster shall

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retain its title over the goods whether in its


original or processed form until the entrustee
has complied fully with his obligation under the
trust receipt; or (c) to load, unload, ship or
tranship or otherwise deal with them in a
manner preliminary or necessary to their sale;
or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some
transactions involving delivery to a depository
or register; or
d) to effect their presentation, collection or
renewal
The sale of goods, documents or instruments by
a person in the business of selling goods,
documents or instruments for profit who, at the
outset of the transaction, has, as against the
buyer, general property rights in such goods,
documents or instruments, or who sells the
same to the buyer on credit, retaining title or
other interest as security for the payment of the
purchase price, does not constitute a trust
receipt transaction and is outside the purview
and coverage of this Decree.
Distinguish from pledge, conditional sale,
chattel mortgage and consignment
Pledge
In a pledge, the person doing the financing has
possession of the property; in a trust receipt,
the property is in the possession of the person
financed.
Conditional Sale
In a conditional sale, there is a sale of the
property from the seller to the buyer; in a trust
receipt, there is no sale of the property from the
entruster to the entrustee.
Chattel Mortgage
A chattel mortgage involves the creation of a
lien on the property; a trust receipt does not
involve the creation of a lien.
Consignment
In a consignment, the consignor retains title to
the property to secure the indebtedness due
from the consignee; in a trust receipt, the seller
does not retain title to the property but
transfers such title to the entruster.

Rights of entruster
SEC 7. Rights of the entruster. The entruster
shall be entitled to the proceeds from the sale
of the goods, documents or instruments

released under a trust receipt to the entrustee


to the extent of the amount owing to the
entruster or as appears in the trust receipt, or
to the return of the goods, documents or
instruments in case of non-sale, and to the
enforcement of all other rights conferred on him
in the trust receipt provided such are not
contrary to the provisions of this Decree.
The entruster may cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time upon
default or failure of the entrustee to comply
with any of the terms and conditions of the trust
receipt or any other agreement between the
entruster and the entrustee, and the entruster
in possession of the goods, documents or
instruments may, on or after default, give
notice to the entrustee of the intention to sell,
and may, not less than five days after serving
or sending of such notice, sell the goods,
documents or instruments at public or private
sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any such
sale, whether public or private, shall be applied
(a) to the payment of the expenses thereof; (b)
to the payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The
entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in
writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to
the entrustee's last known business address.
Obligations of entrustee
SEC 9. Obligations of the entrustee. The
entrustee shall (1) hold the goods, documents
or instruments in trust for the entruster and
shall dispose of them strictly in accordance with
the terms and conditions of the trust receipt; (2)
receive the proceeds in trust for the entruster
and turn over the same to the entruster to the
extent of the amount owing to the entruster or
as appears on the trust receipt; (3) insure the
goods for their total value against loss from fire,
theft, pilferage or other casualties; (4) keep said
goods or proceeds thereof whether in money or
whatever form, separate and capable of
identification as property of the entruster; (5)
return the goods, documents or instruments in
the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to
the provisions of this Decree.
Non-liability of entruster for sale of goods
made by entrustee

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SEC 8. Entruster not responsible on sale by


entrustee. The entruster holding a security
interest shall not, merely by virtue of such
interest or having given the entrustee liberty of
sale or other disposition of the goods,
documents or instruments under the terms of
the trust receipt transaction be responsible as
principal or as vendor under any sale or
contract to sell made by the entrustee.
Risk of loss of goods borne by entrustee
SEC 10. Liability of entrustee for loss. The risk
of loss shall be borne by the entrustee. Loss of
goods, documents or instruments which are the
subject of a trust receipt, pending their
disposition, irrespective of whether or not it was
due to the fault or negligence of the entrustee,
shall not extinguish his obligation to the
entruster for the value thereof.
Acquisition by purchaser of goods free
from entrusters security interest
SEC 11. Rights of purchaser for value and in
good faith. 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
instruments for value and in good faith from the
entrustee, acquires said goods, documents or
instruments free from the entruster's security
interest.
Security interest of entruster valid against
all creditors of entrustee
SEC 12. Validity of entruster's security interest
as against creditors. The entruster's security
interest in goods, documents, or instruments
pursuant to the written terms of a trust receipt
shall be valid as against all creditors of the
entrustee for the duration of the trust receipt
agreement.
12.2 Cases
Liability of entrustee not extinguished by return
of goods to entruster
Vintola v. IBAA
Facts: Vintolas were granted a letter of credit by
IBAA to cover its purchase of seashells.
Thereafter, the Vintolas received the seashells
from the seller. Vintolas then executed a trust
receipt agreement with IBAA. The Vintolas
defaulted on their obligation as they were
unable to sell the seashells. After IBAA
demanded payment from them, they returned
the seashells to IBAA. The Vintolas claim that

their obligation to IBAA has been extinguished


inasmuch as they have relinquished possession
thereof to IBAA, as owner of the goods.
Issue: WON the obligation of the Vintolas under
the trust receipt agreement was extinguished?
No
Held: IBAA did not become the real owner of the
goods. It was merely the holder of a security of
title for the advances it had made to the
Vintolas. The goods remain the property of the
Vintolas and they hold it at their own risk. The
trust receipt agreement did not convert IBAA in
to an investor, the latter remained a lender and
creditor. Since the IBAA is not the factual owner
of the goods, the Vintolas cannot claim that
because they have surrendered the goods to
IBAA they are absolutely relieved of their
obligation to pay their loan because of their
inability to dispose of the goods.
Trust receipts law deemed to cover capital
goods
Allied Banking v. Ordones
Facts: PBM was given letter of credit by Allied
Banking to cover the purchase of Dolomites and
Nozzle Bricks (insulating materials which do not
form part of the steel products). The drafts
drawn against the letter of credit was honored
and paid by Allied Banking. A trust receipt
agreement was entered into between PBM and
Allied Banking. PBM failed to turn over the
proceeds of the sale of the goods or to return
the goods themselves. Allied Banking filed a
criminal case against PBM for violation of PD
115. The DOJ held that PD 115 covers only
goods or components of goods which are
ultimately destined for sale.
Issue: WON PD 115 also covers goods that do
not form part of the finished product which are
ultimately sold but are instead used up in the
operation of the equipment and machineries of
the entrustee-manufacturer? Yes
Held: The Court takes judicial notice of
customary banking and business practices
where trust receipts are used for importation of
heavy equipment, machineries and supplies
used
in
manufacturing
operations.
A
construction should be avoided when it affords
an opportunity to defeat compliance with the
terms of a statute. The penal provision of PD
115 encompasses any act violative of an
obligation covered by the trust receipt; it is not
limited to transactions in goods which are to be
sold, reshipped, stored or processed as a
component of a product ultimately sold. To

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uphold the DOJs ruling would contravene not


only the letter but the spirit of PD 115.
Bipartite transaction deemed covered by trust
receipts law
Robles v. CA
Facts: Ng entrusted to Robles office equipment
which were all covered by delivery trust
receipts. For all these items, Robles agreed to
sell them and remit the proceeds of the sales to
Ng or to return the items if unsold. When Robles
failed to comply with his obligation, Ng filed a
case for estafa against him. Robles claims that
the trust receipts were merely intended to
evidence the fact that the articles listed therein
were delivered to and received by him. He
claims that these transactions were in fact sales
on a trial basis for a period of 2 days. Thus,
when he failed to return the pieces of
equipment within the 2 day period he was
deemed to have purchased the same and his
liability should therefore only be civil i.e. to pay
the purchase price.
Held: The provisions of the trust receipts clearly
show that (1) Ng retained ownership of the
office equipment covered by the receipts; (2)
that possession of the goods were conveyed to
Robles subject to the fiduciary obligation either
to return them within a specified period of time
or to pay or account for the price of proceeds
thereof.
Surrounding
circumstances
also
showed that the transactions were not ordinary
sales on trial basis. There were 6 transactions
and each transaction involved the delivery of
several equipment indicating that Robles was
not an ordinary buyer who would himself use
the articles bought but rather a commission
merchant.
Violation of trust receipts law offense against
public order, not against property
People v. Nitafan
Facts: Allied Banking Corporation charged Ang
with estafa under PD 115. Judge Nitafan
dismissed the cased on the ground that the
penal clause of PD 115 is inoperative because it
does actually punish an offense mala prohibita.
Nitafan
also asserts
that
PD
115
is
unconstitutional as it violates the constitutional
prohibition against imprisonment for nonpayment of a debt.
Issue: WON an entrustee in a trust receipt
agreement who fails to deliver the proceeds of
the sale or to return the goods if not sold to the
entruster bank is liable for the crime of estafa?
Yes

Held: The Trusts Receipts Law punishes


dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of
another regardless of whether the latter is the
owner or not. The law does not seek to enforce
payment of the loan. Thus, there can be no
violation of a right against imprisonment for
non-payment of a debt. PD 115 like BP 22
punished the act not as an offense against
property, but as an offense against public
order. It is in the context of upholding public
interest that the law now specifically designates
a breach of a trust receipt agreement to be an
act that shall make one liable for estafa.
Transaction a simple loan, not a trust receipt
transaction
Colinares v. CA
Facts: Colinares obtained materials from CM
Builders to renovate the Carmelite Sisters
Convent. The next day, Colinares applied for a
letter of credit from PBC in favor of the CM
Builders. PBC approved the letter of credit to
cover the full invoice value of the goods.
Colinares signed a pro-forma trust receipt as
security. Colinares was charged for violation of
PD 115.
Issue: WON the transaction was an ordinary
loan and not a trust receipt agreement under
the Trust Receipts Law?
Held: The transaction intended by the parties
was a simple loan not a trust receipt
agreement. Colinares received the merchandise
from CM Builders on October 30. On that day,
ownership over the merchandise was already
transferred to Colinares who was to use the
materials for his construction project. It was
only a day later that Colinares went to the bank
to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a
pure trust receipt transaction where goods are
owned by the bank and only released to the
importer in trust subsequent to the grant of the
loan. The bank acquires a security interest in
the goods as holder of a security title for the
advances it had made to the entrustee. The
ownership of the merchandise continues to be
vested in the person who had advanced
payment until he has been paid in full, or if the
merchandise has already been sold, the
proceeds of the sale should be turned over to
him by the importer or by his representative or
successor in interest. To secure that the bank
will be paid it takes full title to the goods at the
very beginning and continues to hold that title
as his indispensible security until the goods are
sold and the vendee is called upon to pay for
them. Hence the importer has never owned the

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goods and is not able to deliver possession. In a


certain manner, trust receipts partake the
nature of a conditional sale where the importer
becomes
the
absolute
owner
of
the
merchandise as soon as he has paid its price.
Acquittal in criminal case for estafa under Sec.
13 of PD 115 does not extinguish civil liability
arising from breach of trust receipts contract
Tupaz IV v. CA
Facts: BPI charged Tupaz with estafa under Sec.
13 PD 115. The trial court rendered judgment
acquitting Tupaz of estafa on reasonable doubt.
However, the trial court found Tupaz solidarily
liable for the balance of the principle debt under
the trust receipts.
Issue: WON Tupazs acquittal of estafa under
Sec. 13 PD 115 extinguished their civil liability?
Held: The rule is that where the civil action is
impliedly instituted with criminal action, the
civil liability is not extinguished by acquittal:
1. where the acquittal is based on
reasonable
doubt
as
only
preponderance of evidence is required
in civil cases;
2. where the court expressly declares that
the liability of the accused is not
criminal but civil in nature and
3. where the civil liability does not arise
from or is not based upon the criminal
act of which the accused was acquitted.
Although the trial court aquitted Tupaz his
acquittal did not extinguish his civil liability. His
liability arose not from the criminal act of which
he was acquitted but from the trust receipt
contract (ex contractu) which he signed in his
personal capacity.
Entrustee has no authority to mortgage goods
covered by trust receipts
DBP v. Prudential Bank
Facts: Litex opened a letter of credit from
Prudential Bank to cover the importation of
spindles etc. Prudential Bank released the
spindles to Litex under a trust receipt
agreement. Subsequently, Litex obtained a loan
from DBP which was secured by real estate and
chattel
mortgages
over
its
plant
and
machineries including the goods covered by the
trust receipts. When Litex failed to pay its loan,
DBP foreclose the mortgages. Prudential filed a
case for damages against DBP.
Issue: WON Litex as entrustee could mortgage
the goods covered by the trust receipts?

Held: The articles were owned by Prudential


Bank and they were only held by Litex in trust.
While it was allowed to sell the items, Litex had
no authority to dispose of them or any part
thereof or their proceeds through conditional
sale, pledge or any other means. Article 2085
(2) of the Civil Code requires that, in a contract
of pledge or mortgage, it is essential that the
pledgor or mortgagor should be the absolute
owner of the thing pledged or mortgaged.
Article 2085 (3) further mandates that the
person constituting the pledge or mortgage
must have the free disposal of his property, and
in the absence thereof, that he be legally
authorized for the purpose. Litex had neither
absolute ownership, free disposal nor the
authority to freely dispose of the articles. Litex
could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was
void and had no legal effect. There being no
valid mortgage, there could also be no valid
foreclosure or valid auction sale.

XIII.
MERCHANTS
COMMERCIAL TRANSACTIONS
CODE OF COMMERCE (1888)

AND

Who are merchants?


ARTICLE 1. For purposes of this Code,
merchants are:
1. Those who, having legal capacity to
engage in commerce, habitually devote
themselves to it;
2. The commercial or industrial companies
which may be created in accordance with [this
Code] existing legislation.
ARTICLE 2. Acts of commerce, whether
those who execute them be merchants or not,
and whether specified in this Code or not,
should be governed by the provisions contained
in it, in their absence, by the usages of
commerce generally observed in each place;
and in the absence of both rules, by those of
the civil law.
Those acts contained in this Code and all
others of analogous character shall be deemed
acts of commerce.

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ARTICLE 3.
The legal presumption of
habitually engaging in commerce shall exist
from the moment the person who intends to
engage therein announces through circulars,
newspapers, handbills, posters exhibited to the
public, or in any other manner whatsoever, an
establishment which has for its object some
commercial operation.
ARTICLE 4. Persons who possess the following
qualifications shall have legal capacity to
habitually engage in commerce:
1. Having completed the age of twenty-one
years.
2. Not being subject to the authority of the
father or of the mother nor to marital authority.
3. Having the free disposition of their
property.
ARTICLE 5. Those under twenty-one years of
age and those incapacitated may continue,
through their guardians, the business engaged
in by their parents or their predecessors. If the
guardians do not have legal capacity to trade or
are under some disqualifications, they shall be
obliged to appoint one or more factors having
the legal qualifications who shall substitute
them in conduct of the business.
ARTICLE 6. (Repealed) 1
ARTICLE 7. (Repealed) 2
ARTICLE 8. The husband may freely revoke the
authorization impliedly or expressly granted to
his wife to trade, stating the revocation in a
public instrument which shall also be recorded
in the commercial registry, published in the
official periodical of the town, if there be one, or
otherwise in that of the town, if there be one, or
otherwise in that of the province, and
announced to her correspondents by means of
circulars. The publication may also be made, if
the husband so demands, by proclamations and
common criers.
This revocation may, in no case,
prejudice rights acquired before its publication
in the official periodical.
ARTICLE
ARTICLE
ARTICLE
ARTICLE

9. (Repealed) 3
10. (Repealed) 4
11. (Repealed) 5
12. (Repealed) 6

Who may NOT engage in commerce?


ARTICLE 13. The following may not engage
in commerce nor hold office or have any direct
administrative or financial intervention in
commercial or industrial companies:
1. Those sentenced to the penalty of civil
interdiction, while they have not served their
sentence or have not been amnestied or
pardoned.

2. Those declared bankrupt, while they have


not obtained their discharge [or have not been
authorized, by virtue of an agreement accepted
at a general meeting of creditors and approved
by judicial authority, to continue at the head of
the
establishment,
the
authority
being
understood in such case as limited to that
expressed in the agreement.]
3. Those who on account of special laws or
provisions can not trade.
ARTICLE 14. The following cannot engage in
the mercantile profession, in person or through
another, nor hold office or have any direct
administrative or financial intervention in
commercial or industrial associations, within the
limits of the districts, provinces or towns in
which they discharge their duties:
1. Justices, judges and officials of the fiscals
office
in
active
service.
This provision shall not be applicable to the
municipal mayors, judges and prosecuting
attorneys, nor to those who may temporarily
discharge judicial or prosecution duties.
2. Administrative, economic or military
heads of districts, provinces, or posts.
3. Those employed in the collection and
administration of funds of the State, appointed
by
the
Government.
Those who administer and collect under
contract and their representative are excepted.
4. Stock and commercial brokers of
whatever class they may be.
5. Those who, under special laws and
provisions, cannot trade in specified territory.
ARTICLE 15.
Foreigners and companies
created abroad may engage in commerce in the
Philippines, subject to the laws of their country
with respect to their capacity to contract, and to
the provisions of this Code as regard the
creation of their establishments in Philippine
territory, their mercantile operations, and the
jurisdiction of the courts of the nation.
The provisions of the article shall be
understood to be without prejudice to what, in
particular cases, may be established by treaties
or agreements with other powers.
Title II - Commercial Registries
ARTICLE 16. In all the capitals of provinces
shall be opened a mercantile registry composed
of two independent books in which shall be
inscribed:
1. Individual merchants.
2.
Associations.
In the coastal provinces and in the interior ones
where it is considered convenient because of
the presence of navigation, the registry shall
include a third book for the registration of
vessels.

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ARTICLE 17. Registration in the mercantile


registry shall be optional for individual
merchants and compulsory for associations
which are created in accordance with this Code
or with special laws, and for vessels.
ARTICLE 18. The unregistered merchant
cannot request the inscription of any document
in the mercantile registry, nor take advantage
of its legal effects.
ARTICLE 19. The register shall keep the books
necessary for registration, stamped, folioed and
with a memorandum on the first page of the
number of pages which each book contains,
signed by the justice of the peace.
Where there are several justices of the peace,
any one of them may sign the memorandum.
ARTICLE 20. The registrar shall enter in
chronological order in the registry and general
index all the merchants and companies which
are registered, giving each sheet the correlative
number which corresponds to it.
ARTICLE 21. On the record sheet of each
merchant or company shall be entered:
1. The name, firm name, or title. cd
2. The class of commerce or transactions in
which engaged.
3. The date on which the transactions shall
commence or have commenced.
4. The domicile, with a specification of the
branches which may have been established,
without prejudice to the registration of the
branches in the registry of the province in which
they may be domiciled.
5. Instruments for the creation of
commercial associations, whatever their object
or denomination may be, as well as those for
the modification, rescission or dissolution of
such associations.
6. [General powers of attorney, and the
revocation of the same, should there be any,
given to managers, factors, employees and any
other agents.]
7. [The authorization of the husband for his
wife to engage in commerce and the legal or
judicial authority of the wife to administer her
property on account of the absence or
incapacity of the husband.]
8. [The revocation of the permission given
to the wife to trade.]
9. [Dotal instruments], marriage settlement
and the title which prove the ownership of the
paraphernal
property
of
the
wives
of
merchants.
10. The issue of shares, certificates, and
bonds of railroads and of all classes of
associations, be they associations for public
works, credit companies, or others, stating the
series and number of the certificates of each
issue, their participation, interest, payment and

premium, should they have one or the other,


the total amount of the issue, and the property,
works, rights or mortgages, should there be
any, by which their payment is secured. The
issues which may be made by individuals shall
also be recorded in accordance with the
provisions of the preceding paragraph.
11. [The issues of bank notes, stating the
date, class, series, quantity and value of each
issue.]
12. [The titles of industrial property, patents,
and trademarks, in the form and manner
established by law.]
Foreign associations which desire to establish
themselves or create branches in the
Philippines shall present and record in the
registry, besides their by-laws and the
documents required of Filipinos, a certificate
issued by the Philippine consul that they are
constituted and authorized in accordance with
the laws of their respective countries.
ARTICLE 22. [In the registry of vessels there
shall be stated:
1. The name of the vessel, kind of
equipment, system or power of the engines, if it
is a steamer, stating whether they are nominal
or indicated horsepower; place of construction
of the hull and engines; year thereof, material
of the hull, stating whether it is of wood, iron,
steel, or mixed; principal dimensions of length,
breadth of beam, and depth of hold; the gross
and net tonnage; distinctive signal which it
bears in the International Code of Signals;
finally, the names and domiciles of the owners
or part owners of the same.
2. The changes in the ownership of vessels,
in their name, or in any of the other conditions
enumerated in the foregoing paragraph.
3. The
imposition,
modification
or
cancellation of liens of any class whatsoever
which encumber vessels.]
ARTICLE 23. As a general rule, the registration
shall be made by virtue of notarial copies of the
documents which the interested party may
present.
The registration of notes, bonds, or order
and bearer instruments which do not carry
mortgages of immovable property shall be
made upon presentation of the certified
minutes where in appears the resolution of the
person or persons who made the issue, and the
conditions, requisites and guaranties thereof.
When these guaranties consist of mortgage of
immovables, the corresponding instrument shall
be presented for annotation in the mercantile
registry.
ARTICLE
24.
Unregistered
articles
of
association shall produce effect among the
members who execute them, but they shall not

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prejudice third person who, however, may make


use thereof in so far as favorable.
ARTICLE 25. All the resolutions or acts which
effect an increase or reduction in the capital of
commercial
associations,
whatever
their
denomination may be, and those which modify
or alter the conditions of recorded instruments,
shall also be recorded in the mercantile
registry. The omission of this requisite shall
produce the effects mentioned in the preceding
article.
ARTICLE 26. Registered documents shall
produce legal effect to the prejudice of third
persons only from the date of their registration,
and cannot be invalidated by prior or
subsequent unregistered documents.
ARTICLE 27. [Dotal] instruments [and those]
referring to paraphernal property of the
merchants wife, not registered in the
mercantile registry, shall have no right of
preference
over
other
credits.
Immovable property and real rights over
them, acquired by the wife prior to the creation
of the concurrent credits, shall be excepted.
ARTICLE 28. If a merchant should fail to make
in the registry the inscription of the [dotal or]
paraphernal property of his wife, the latter
herself may request it or it may be done for her
by her parents, by others or uncles by
consanguinity, as well as by those who
discharge or may have discharged the duties of
guardians or curators of the wife, [or who
constitute or may have constituted the dowry.]
ARTICLE 29. [Unregistered powers of attorney
shall give rise to actions between the principal
and the agent, but they cannot be used to the
prejudice of third persons, who, however, may
rely thereon in so far as they may be favorable.]
ARTICLE 30. The mercantile registry shall be
public. The registrar shall furnish those who
may request it any data referring to what may
appear on the registration sheet of each
merchant, association or vessel. Likewise, he
shall issue true copies of the whole or part of
said sheet to anyone who may ask for it in a
signed request.
ARTICLE 31. [The commercial registrar shall
have under his charge, where there is an
exchange, copies of the daily quotations of the
properties negotiated and the exchanges fixed
therein.
The copies shall serve as original
instruments in all cases of investigation and
verfication of exchanges and quotations on
determined dates.]

ARTICLE 32. [The office of commercial


registrar shall be filled by the government after
a competitive examination.]
TITLE III - BOOKS

AND

BOOKKEEPING

OF

COMMERCE

ARTICLE 33. Merchants shall necessarily keep:


1. A book of inventories and balances.
2. A journal.
3. A ledger.
4. A book or books for copies of letters and
telegrams.
5. Other books which may be required by
special laws.
Associations and companies shall also
keep a book or books of minutes, in which shall
be entered all resolutions referring to the
progress and operations of the entities,
approved at general meetings or at those of
managing boards.
ARTICLE 34. They may also keep other books
which they may deem convenient, according to
the system of bookkeeping they may adopt.
These books shall not be subject to the
provisions of Article 36; but they may legalize
those which they may consider proper.
ARTICLE 35. Merchants may keep their books
personally or through persons whom they
authorize for the purpose. If a merchant does
not keep his books personally, authorization
shall be presumed granted to him who keeps
them unless there is proof to the contrary.
ARTICLE 36. Merchants shall present the
books referred to in Article 33, bound, ruled,
and folioed, to the justice of the peace of the
municipality in which they have their
commercial establishments in order that he
may put on the first page of each one a signed
memorandum of the number of pages which the
book contains. The seal of the justice of the
peace legalizing it shall, furthermore, be
stamped on all the pages of each book.
ARTICLE 37. The book of inventories and
balance shall begin with the inventory which
the merchant must prepare at the time he
starts his operations, and shall contain:
1. An exact statement of the money,
securities, credits, notes receivable, movable
and immovable property, merchandise and
goods of all kinds, appraised at their true value,
and which constitute his assets.
2. An exact statement of the debts and all
kinds of pending obligations, should there be
any, and which form his liabilities.
3. He shall determine, in proper cases, the
exact difference between the assets and the
liabilities, which shall be the capital with which
he
begins
his
operations.

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The
merchant
shall,
furthermore,
prepare annually and enter in the same book
the general balance of his business, with the
details mentioned in this article, and in
accordance with the entries in the journal,
without any reservations or omissions, under
his signature and responsibility.
ARTICLE 38. In the journal shall be entered as
the first item the result of the inventory
mentioned in the preceding article, divided into
one or various consecutive accounts, according
to the system of bookkeeping adopted.
Thereafter, all his operations shall follow
day by day, each entry stating the credit and
debit
of
the
respective
accounts.
When the operations are numerous,
whatever their importance may be, or when
they have taken place outside the domicile,
those referring to each account and which have
taken place in each day may be included in a
single entry, but observing in their statement, if
itemized, the same order in which they took
place.
Likewise, the amounts which the
merchant uses for his household expenses shall
be entered on the date on which they are
withdrawn from the funds, and they shall be
carried into a special account to be opened for
that purpose in the ledger.

ARTICLE 43. Besides complying with and


fulfilling
the
conditions
and
formalities
prescribed in this title, merchants must keep
their books with clearness, in the order of dates,
without blanks, interpolations, erasures or blots,
and without showing signs of having been
altered by substituting or tearing out folios, or
in any other manner whatsoever.
ARTICLE 44. Merchants shall correct the
errors or omissions which they may make in
entering in their books, immediately upon
noticing them, explaining clearly in what they
consisted, and writing the entry as it should
have been written.
If some time should have elapsed since
the error was committed or since the omission
was incurred, they shall make the proper entry
of correction, adding on the margin of the
erroneous entry a memorandum indicating the
correction.
ARTICLE 45. No judge or court or authority
may, on his own initiative, make an inquiry to
ascertain if merchants keep their books in
accordance with the provisions of this Code, nor
make a general investigation or examination of
the bookkeeping in the offices or countinghouses of merchants.

ARTICLE 39. The accounts referring to each


object or person in particular shall, furthermore,
be opened with Debit and Credit in the ledger,
and to each of these accounts shall be
transferred, in strict order of dates, the entries
in the journal referring to them.

ARTICLE 46. [Neither may the communication,


delivery or general examination of the books,
correspondence and other documents of
merchants, be decreed at the instance of a
party, except in the cases of liquidation,
universal succession or bankruptcy.]

ARTICLE 40. In the book of minutes which


each association shall carry shall be entered
verbatim the resolutions agreed upon at its
meetings or at those of its managers, stating
the date of each one, those present in them,
the votes cast, and other matters conducive to
an exact knowledge of what as agreed upon,
authenticated with the signatures of the
managers, directors or administrators charged
with the management of the association or
designated by the by-laws or regulations by
which it is governed.

ARTICLE 47. [Outside of the cases mentioned


in the preceding article, the exhibition of the
books and documents of merchants may be
decreed at the instance of a party or at the
initiative of the court, only when the person to
whom they belong has an interest or
responsibility in the case in which the exhibition
is made.
The examination shall be made in the
counting-house of the merchant, in his presence
or in that of the person whom he commissions,
and shall be limited to the points related to the
question at issue; these being the only ones
that may be verified.]

ARTICLE 41. All the letters which a merchant


may write regarding his business and the
telegraphic dispatches which he may send shall
be transferred, either by hand or by any
mechanical means, to the book for copies., fully
and successively by order of dates, including
the subscribing clause and the signatures.
ARTICLE 42. Merchants shall carefully keep, in
bundles and in proper order, the letters and
telegraphic dispatches which they may receive
relative to their transactions.

ARTICLE 48. In order to measure the


probative force of the books of merchants, the
following rules shall be observed:
1. The books of merchants shall be evidence
against themselves, no proof to the contrary
being admissible; but the adverse party cannot
accept the entries which may be favorable to
him and reject those which may prejudice him,
but having accepted this means of proof, he
shall be bound by the result which it may show

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in its entirety, taking into equal consideration all


the entries relative to the question in litigation.
2. If there should be a conflict in the entries
of the books kept by two merchant, and those
of one should have been kept with all the
formalities mentioned in this title, and those of
the other should suffer from any defect or
should lack the requisites prescribed by this
Code, the entries of the books properly kept
shall be admitted against those of the defective
one. unless the contrary is shown by means of
other evidence admissible in law.
3. If one of the merchants should not present
his books or should manifest that he does not
have them, those of his adversary, kept with all
the legal formalities, shall be admitted against
him, unless it is shown that the absence of such
books is due to force majeure, and always
saving proof by other means admissible in suits
against the entries exhibited.
4. If the books of the merchants should have
all the legal requisites and should be
contradictory, the court shall decide by the
other proofs, weighing them according to the
general rules of law.
ARTICLE 49. Merchants and their heirs or
successors shall keep the books, telegrams,
and correspondence of their business in
general, during all the time that this may last
and for five years after the liquidation of all
their
business
and
commercial
affairs.
Documents which specially concern
specific acts or transactions may be rendered
useless or destroyed upon the laps of the
prescriptive period of the actions which may
arise therefrom, unless some questions
referring directly or indirectly to them should be
pending, in which case, they must be kept until
the conclusion thereof.
TITLE

IV - GENERAL PROVISIONS
COMMERCIAL CONTRACTS

RELATING

TO

ARTICLE 50.
Commercial contracts, in
everything
relative
to
their
requisites,
modifications, exceptions, interpretations and
extinction and to the capacity of the contracting
parties, shall be governed in all matters not
expressly provided for in this Code or in special
laws, by the general rules of the civil law.
[Telegraphic correspondence shall only be the
basis of an obligation between contracting
parties who have previously admitted this
medium in a written contract, and provided the
telegrams fulfill the conventional conditions or
conventional signs which may have been
previously fixed and agreed to by the
contracting parties.]
ARTICLE 51. Commercial contracts shall be
valid and shall give rise to obligations and

causes of action in suits, whatever the form and


language in which they may be executed, the
class to which they may belong, and the
amount they may involve, provided their
existence is shown by any means established
by the civil law. However, the testimony of
witness alone shall not be sufficient to prove
the existence of a contract which involves an
amount exceeding 1,500 pesetas unless
supported by some other evidence.
ARTICLE 52. From the provisions of the
preceding article shall be excepted:
1. Contracts which, in accordance with this
Code or with special laws, must be reduced to
writing or require forms or formalities necessary
for their efficacy.
2. Contracts executed in a foreign country in
which the law requires certain instruments,
forms or formalities for their validity, although
Philippine law does not require them.
In either case, contracts which do not satisfy
the circumstances respectively required shall
not give rise to obligations or causes of action.
ARTICLE 53. Illicit agreements do not give rise
to obligations or causes of action even should
they refer to commercial transaction.
ARTICLE 54. Contracts entered into by
correspondence shall be perfected from the
moment an answer is made accepting the offer
or the conditions by which the latter may be
modified.
ARTICLE 55. Contracts in which an agent or
broker intervenes shall be perfected when the
contracting parties shall have accepted his
offer.
ARTICLE 56. In a commercial contract in
which a penalty for indemnification against the
party failing to comply therewith is fixed, the
injured party may demand through legal means
the fulfillment of the contract or the penalty
stipulated; but the recourse to one of these
actions shall extinguish the other unless the
contrary is stipulated.
ARTICLE 57. Commercial contracts shall be
executed and complied with in good faith,
according to the terms in which they were
made and drawn up, without evading through
arbitrary interpretations the plain, proper and
usual meaning of the spoken or written words,
or limiting the effects which are naturally
derived from the manner in which the
contracting parties may have expressed their
will and contracted their obligations.
ARTICLE 58. If a discrepancy should appear
between the copies of a contract which the
contracting parties present, and, in its

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execution, an agent or broker should have


intervened, that which appears in the books of
the latter shall prevail provided they are kept in
accordance with law.
ARTICLE 59. If doubts which cannot be
decided in accordance with what is provided in
Article 2 of this Code should arise, the question
shall be decided in favor of the debtor.
ARTICLE 60. In all computations of days,
months and years, it shall be understood that a
day has twenty four hours, the months as
designated in the Gregorian calendar, and the
year has three hundred sixty-five days.
Bills of exchange, promissory notes, and loans,
with respect to which that specially provided for
them by this Code shall govern, are excepted.
ARTICLE 61. Days of grace, courtesy or others
which under any name whatsoever defer the
fulfillment of commercial obligations, shall not
be recognized, except those which the parties
may have previously fixed in the contract or
which are based on a definite provision of law.
ARTICLE 62. Obligations which do not have a
period previously fixed by the parties or
by the provisions of this Code, shall be
demandable ten days after having been
contracted if they give rise only to an ordinary
action, and on the next day if they involve
immediate execution.
ARTICLE 63. The effect of default in the
performance of commercial obligations shall
commence:
1. In contracts with a day for performance
fixed by the will of the parties or by the law, on
the day following their maturity.
2. In those which do not have such day fixed,
from the day on which the creditor makes a
judicial demand on the debtor or notifies him of
the protest for loss and damages made against
him before a judge, notary or other public
official authorized to admit the same.
TITLE II - JOINT ACCOUNTS
ARTICLE
239.
Merchants may interest
themselves in the transaction of other
merchants, contributing thereto the amount of
capital they may agree upon, and participating
in the favorable or unfavorable results thereof
in the proportion they may
determine.
ARTICLE 240. With regard to their formation,
joint accounts shall not be subjected to any
formality, and may be privately contracted
orally or in writing, and their existence may be
proved by any of the means accepted by law, in
accordance with the provisions of Article 51.

ARTICLE 241. In the transactions treated of in


the foregoing articles, no commercial name
common to all the participants can be adopted,
nor can any further direct credit be made use of
except that of the merchant who transacts and
manages the business in his own name and
under his individual liability.
ARTICLE 242. Persons transacting business
with the merchant carrying on the joint
business shall only have a right of action
against the latter and not against the other
persons interested, and the latter, on the other
hand, shall have no right of action against the
third person who made the transaction with the
manager unless said manager formally cedes
his rights to them.
ARTICLE 243. The liquidation shall be effected
by the manager, and after the transactions
have been concluded, he shall render a proper
account of its results.
Commerce (definition) It is the exchange of
goods, productions, or property of any kind. It is
intercourse by way of trade and traffic between
different peoples or states and the citizens or
inhabitants thereof, including not only the
purchase, sale, exchange of commodities, but
also the instrumentalities and agencies by
which it is promoted and the means and
appliances by which it is carried on, and
transportation of persons as well as goods.
Law merchant is an old translation of the
Latin lex mercatoria: an old international law of
merchants and mariners growing out of their
customary practices. It was a law practiced and
enforced by businessmen and shipowners in
their own courts, without professional judges or
lawyers.
Who are merchants under the Commercial
Code? (Art. 1)
1. those who having capacity engage in
commerce, habitually devote themselves
thereto; and
2. commercial or industrial associations
organized in accordance with the Code
NOTE: The legal presumption of habitually
engaging in commerce shall exist from the time
the person who intends to engage therein gives
announcement
by
means
of
circulars,
newspapers, handbills, posters, etc. for the
purpose
of
conducting
any
commercial
transaction.
What are commercial transactions?
Commercial transactions refer to those acts
covered by the Code of Commerce and all
others of analogous character. They are

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governed by the provisions of the Code of


Commerce; in default of such provisions, by the
commercial usages observed in each place; and
in the absence of both, by the rules of civil law.
Who cannot engage in commerce?
The following cannot engage in commerce:
1. persons sentenced to civil interdiction;
2. persons declared bankrupt
3. persons who, on account of laws or
special provisions, may not engage in
commerce.
For some of the rules to be observed in respect
of commercial contracts, see Articles 50-57
above (important parts are already underlined).
Joint Accounts / cuentas en participacion
is an arrangement among merchants who
interest themselves in the transactions of other
merchants, contributing thereto the part of the
capital they may agree upon, and who
participate in the favorable or unfavorable
results thereof in the proportion they may
determine (Art. 239). (see Articles 240-243
above for rules governing joint accounts)
Joint Accounts vs. Partnerships
Joint Accounts
Partnership
1. has no separate 1.
has
juridical
juridical
personality; personality and may
can sue and be sued sue and be sued under
only in the name of the partnership name
the ostensible partner
2.
prohibited
from 2. has a firm name
having a commercial
name (thus, business
is conducted in the
name of the ostensible
partner)
3.
business
is 3. general partners
managed
by
the have the right of
ostensible partner
management
4. liquidation shall be 4. liquidation may, by
made
by
the agreement,
be
ostensible partner
entrusted to a partner
or partners
Case:
Bourns vs. Carman G.R. L-2800
Facts:

The plaintiff in this action seeks to


recover the sum of $437.50, balance due on a
contract for the sawing of lumber for the lumber
yard of Lo-Chim-Lim. Lo-Chim-Lim
and
his
codefendants alleged that at the time the
contract was made, they were the joint
proprietors and operators of the said lumber
yard engaged in the purchase and sale of
lumber under the name and style of Lo-ChimLim. Apparently the plaintiff tries to show that

the other defendants were the partners of LoChim-Lim in the said lumber yard business.
Held:
As far as the evidence shows it seems
that the business was conducted by Lo-ChimLim in his own name, although he gave to the
appellants a share of the earnings of the
business; but what that share was has not been
shown with certainty. The contracts made with
the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no
evidence that the partnership ever contracted
in any other form. Under such circumstances we
find nothing upon which to consider this
partnership other than as a partnership of
cuentas en participacion. It may be that, as a
matter of fact, it is something different, but the
uncertain and scant evidence introduced by the
parties does not permit of any other designation
of this partnership. We see nothing, according
to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his
own name, the names of other persons
interested in the profits and losses of the
business nowhere appearing.
A partnership constituted in such a
manner, the existence of which was only known
to those who had an interest in the same, there
being no mutual agreements between the
partners, and without a corporate name
indicating to the public in some way that there
were other people besides the one who
ostensibly managed and conducted the
business, is exactly the accidental partnership
of cuentas en participacion defined in article
239 of the Code of Commerce.
Those who contract with the person
under whose name the business of such
partnership of cuentas en participacion is
conducted, shall have only a right of action
against such person and not against the other
persons interested, and the latter, on the other
hand, shall have no right of action against the
third person who contracted with the manager
unless such manager formally transfers his right
to them. (Art 242 of the code Of Commerce.) It
follows, therefore that the plaintiff has no right
to demand from the appellants the payment of
the amount claimed in the complaint, as LoChim-Lim was the only one who contracted with
him. the action of the plaintiff lacks, therefore, a
legal foundation and should be accordingly
dismissed.

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XIV. THE INSOLVENCY LAW


ACT 1956 (1909), AS AMENDED BY ACT
3544 (1929), ACT 3616 (1929), AND
ACT 3692 (1932)
14.1 Purpose
The purpose of the law is to provide for
an orderly mechanism by which the assets of
the insolvent debtor could be converted into
money for distribution among his creditors and
thereby relieve the debtor from the weight of
his debts and permit him to start anew free
from such debts.
14.2 Sources
(Spanish Code of Commerce
suspension of payments)

as

to

Mitsui Bussan Kaisha vs. Hongkong &


Shanghai Banking Corp. G.R. 11079
Held:
(Actually, this is only narrates the history of
Philippine Insolvency Law)
In 1908 two bills (Assembly Bill No. 126
and Commission Bill No. 87) were introduced in
the Philippine Legislature and both were
rejected. The committee of the Commission, in
reporting upon the Assembly bill, stated in its
report of June 12, 1908, that "The law seeks to
blend the American laws of insolvency and
bankruptcy with the Spanish law of bankruptcy.
Such a policy is sure to result in complications
and to bring about a system so cumbersome
and unwieldly as to make it impracticable and
uneconomical."
Later a joint conference committee was
appointed from the two houses and it prepared
a bill which was designated Assembly Bill No.
576. This bill was passed without any material
changes and became Act No. 1956. By
comparing the Commission Bill No. 87 with Act
No. 1956, it will be seen that every SEC of the
former is embodied in the latter. The only
apparent exception is SEC 41 of the
Commission Bill, but the substantial provisions
of that SEC appear in subSEC 9 of SEC 48 of the
Act. Furthermore, there is little in the Act from
SEC 14 which is not in the Commission Bill.
SubSEC 3 of SEC 71 of the Act contains penal
provisions which relate to the suspension of
payments and which are not in the Commission
Bill. SEC 48 of the Act has no counterpart in the
Commission Bill. Again, a comparison of
Commission Bill No. 87 with the Insolvency Act
of California, enacted in 1895, SEC by SEC and
clause by clause, shows that the former is, in a
great many respects, a copy of the latter. The
Commission Bill omits one of the acts of
bankruptcy named in SEC 9 of the California

Act. Also SEC 15 and 26, subSEC 5 of SEC 25,


and subSEC 3 of SEC 1, and several minor
portions of the other SECs of the California Act
are omitted. These relate to procedure in the
main and are substantially governed by other
provisions in the Commission Bill. The
concluding SECs of the Commission Bill and of
the California Act are different. The most
important difference is the inclusion in the
Commission Bill of SEC 34, which is wholly
lacking in the California Act. This SEC deals with
preferred claims and has its counterpart in SEC
48b of the United States Bankruptcy Act of
1898. Another addition is chapter 7 of the
Commission Bill entitled "Compositions." This
chapter corresponds closely to SEC 12 and 13 of
the United States Bankruptcy Act of 1898. The
result is that the only provisions in Act No.
1956, which tend to show that the Legislature
did not intend to adopt in this jurisdiction the
American theory of bankruptcy, are found in
SEC 48. This SEC, by its nine subdivisions,
specifies what property in the hands of the
insolvent may not be taken by the assignee.
These provisions are found neither in the United
States Bankruptcy Act of 1898 nor in the
California Act of 1895. They are found, however,
in Assembly Bill No. 126 and were inserted for
the purpose of avoiding a conflict between Act
No. 1956 and certain well defined provisions of
the Civil Code.
Act No. 1956 deals with three principal
subjects, namely, suspension of payments,
voluntary
insolvency,
and
involuntary
insolvency. That part of the Act referring to the
first appears to have been taken from the
Spanish Code of Commerce, as amended by
the law of June 10, 1897. Formerly there were in
England and America marked distinctions
between bankruptcy laws and insolvency laws.
The two principal distinctions, which have been
given by various authors, between these laws
are: First, bankruptcy laws applied only to
traders and merchants, while insolvency laws
applied to all classes of persons; second, the
former discharged absolutely the debts of the
honest debtor, while the latter discharged only
the person of the debtor from arrest and
imprisonment,
but
left
the
property
subsequently acquired by the debtor liable to
the demands of his creditors. More recently in
some jurisdictions no attempt has been made to
distinguish between them. A bankruptcy law
may contain those regulations which are
generally found in insolvency laws, and an
insolvency law may deal with those which are
common in bankruptcy laws. Whether these
distinctions
were
recognized
and
maintained in the Spanish system is of no
importance. It is sufficient to say that the
Act, in so far as it relates to voluntary and
involuntary insolvency, is essentially a

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bankruptcy law because it discharges the


honest debtor.
Insolvency Act of California of 1895, as to
voluntary and involuntary insolvency
Sun Life
16475

Assurance

vs.

Ingersoll

G.R.

Held:
(again, historical background lang to ng
Insolvency Law) Now, it is a well-known fact in
our legislative history that the Insolvency Law
(Act No. 1956) is in great part a copy of the
Insolvency Act of California, enacted in 1895,
though it contains a few provisions from the
American Bankruptcy Law of 1898 (see
observation of Justice Trent in Mitsui Bussan
Kaisha vs. Hongkong and Shanghai Banking
Corporation, 36 Phil., 27, 37). Again, upon
comparing the California Insolvency Law of
1895 with the American Bankruptcy Act of
1867, it will be found that the former contains
much in common with the latter; and among
the provisions common to the Bankruptcy Act of
1867, the California Insolvency Law of 1895,
and the Insolvency Law in force in these Islands
(Act No. 1956), is precisely the provision which
appears as SEC 32 of our Act, defining the
property which passes as assets to the assignee
in insolvency. (Bankruptcy Act of 1867, sec. 14;
California Insolvency Law of 1895, sec. 21;
Philippine Insolvency Law, sec. 32.)
Under each of said laws the assignee
acquires all the real and personal property,
estate, and effects of the debtor, not exempt by
law from execution, with all deeds, books and
papers relating thereto; and while this language
is
broad,
it
nevertheless
lacks
the
comprehensiveness of SEC 70 (a) of the
American Bankruptcy Law of 1898 in the least
two particulars; for under subSEC 3 of SEC 70
(a) of the last mentioned law, the trustee in
bankruptcy acquires the right to exercise any
powers which the insolvent might have
exercised for his own benefit, and under subSEC
5 the trustee acquires any property of the
insolvent which the latter could by any means
have assigned to another. The Insolvency Law
here in force, in common with the predecessor
laws above-mentioned, contains nothing similar
to these provisions.
14.3 Applicability to banks, quasi banks,
and insurance companies
The Insolvency law is NOT applicable to banks,
quasi-banks, and insurance companies.
SUSPENSION OF PAYMENTS
Nature
Who could file petition

SEC 2. The debtor who, possessing sufficient


property to cover all his debts, be it an
individual person, be it a sociedad or
corporation, foresees the impossibility of
meeting them when they respectively fall due,
may petition that he be declared in the state of
suspension of payments by the court, or the
judge thereof in vacation, of the province or of
the city in which he has resided for six months
next preceding the filing of his petition.
He shall necessarily annex to his petition a
schedule and inventory in the form provided in
SECs fifteen, sixteen, and seventeen of this Act,
in addition to the statement of his assets and
liabilities and the proposed agreement he
requests of his creditors.
Differentiate from insolvency proceeding
Suspension of payments vs. Insolvency
proceeding
Suspension
of Insolvency
Payments
Proceeding
1. object of suspension 1. object is to compel
of payments is the presentment
of
all
deferment
of
the debts, due or not due,
payment of debts until and secure a complete
such time as the discharge from such
debtor, who possesses debts
sufficient property to
cover all his debts, is
able to convert such
assets into cash or
otherwise acquires the
cash necessary to pay
his debts
2. amount of debts is 2.
the
creditors
not affected although receive less than what
their
payment
is they are entitled to; in
postponed
some cases, where
preferences
are
proper, some creditors
may not receive any
amount at all
Effect of filing of petition
On
execution
pending
against
debtor
On
execution
against
property
specially mortgaged
On action to collect sum of money
still to be filed against debtor
On other actions
SEC 6. If any execution be pending against the
debtor it shall not be consolidated with this
proceeding, but the course thereof shall be
suspended before sale of property is made
thereunder, provided the debtor makes a
request therefor to the court before which the
proceeding for suspension of payments is
pending, unless the execution be against
property especially mortgaged which is hereby

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exempted from the provisions of this SEC. The


suspension ordered by virtue of this SEC shall
lapse when three months shall have passed
without
the proposed
agreement being
accepted by the creditors or as
soon as it is denied. No creditor other than
those mentioned in SEC nine shall sue or
institute proceedings to collect his claim from
the debtor from the moment that suspension of
payments is applied for and while the
proceedings are pending.
Procedure
(a) filing of petition by the debtor
(b) issuance by the court of an order calling
for a meeting of the creditors
(c) publication of the order and service
thereof on the creditors
(d) meeting of creditors for approval or
disapproval of the debtors proposition
(e) objection, if any and if justified, to the
decision of the meeting of creditors
Issuance, publication and delivery of order
calling creditors to meeting (Secs. 3 and
5)
SEC 3. Upon receiving and filing the petition
with the schedule and documents mentioned in
the next preceding SEC, the court, or the judge
thereof in vacation, shall make an order calling
a meeting of creditors to take place in not less
than two weeks nor more than eight weeks
from the date of such order. Said order shall
designate the day, hour, and place of meeting
of said creditors as well as a newspaper of
general circulation published in the province or
city in which the petition is filed, if there be one,
and if there be none, in a newspaper which, in
the judgment of the judge, will best give notice
to the creditors of the said debtor, and in the
newspaper so designated said order shall be
published as often as may be prescribed by the
court
or
the
judge
thereof.
Said order shall further contain an
absolute injunction forbidding the petitioning
debtor from disposing in any manner of his
property, except in so far as concerns the
ordinary operations of commerce or of industry
in which the petitioner is engaged, and,
furthermore, from making any payments
outside of the necessary or legitimate expenses
of his business or industry, so long as the
proceedings relative to the suspension of
payments are pending, and said proceedings for
the purposes of this Act shall be considered to
have been instituted from the date of the filing
of the petition.

SEC 5. Only creditors included in the schedule


filed by the debtor shall be cited to appear and
take part in the meeting mentioned in SEC
three, and they shall be notified upon delivery
or transmission to them of a copy of the order
calling the meeting to appear at same with the
written evidences of their respective claims,
without which they shall not be admitted.
Required quorum for holding of meeting
Required vote for approval of debtors
proposal
SEC 8. The presence of the creditors
representing at least three-fifths of the
liabilities shall be necessary for holding a
meeting. The meeting shall be held on the day
and at the hour and place designated, the
judge, or commissioner deputized by him when
he is absent from the province where the
meeting is held, acting as president and the
clerk as secretary thereof, subject to the
following rules:
(a) The clerk shall prepare for insertion in
the minutes of the meeting a statement of the
persons present and their claims; the judge, or,
in default thereof, the commissioner, shall
examine the written evidences of the claims
and the powers of attorney, if any. If the
persons present who have complied with the
foregoing rules represent at least three-fifths of
the liabilities, the judge or commissioner shall
declare the meeting open for business.
(b) The petition of the debtor, the
schedule of debts and of property, the
statement of assets and liabilities, and the
proposed agreement filed therewith shall be
read forthwith by the clerk, and the discussion
shall be opened.
(c) The debtor may modify his proposition
or propositions in view of the result of the
debate, or insist upon the ones already made,
and the judge or commissioner, without further
discussion, shall clearly and succinctly place
these several propositions before the meeting
for a vote thereupon.
(d) The vote shall be taken by a call of
names and shall be inserted in and the minutes;
a majority vote shall rule.
(e) To form a majority it is necessary

1. That two-thirds of the creditors


voting unite upon the same proposition.
2. That the claims represented by
said majority vote amount to at least threefifths of the total liabilities of the debtor
mentioned in the petition.
(f) After the result of the voting has been
announced, all protests made against the
majority vote shall be admitted and stated in
the record, and the meeting shall be closed.

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(g) The minutes of the meeting,


containing a succinct statement of all
proceedings had therein, shall be drawn up, and
there shall be inserted therein the proposition
or propositions voted upon, which, after having
been read and approved, shall be signed by the
judge or commissioner together with all persons
taking part in the voting; if any such persons
shall be unable to write, any person present
shall sign, at their request, and the clerk shall
certify to all of the above.
Persons not bound
debtors proposal

by

agreement

meeting. The court may also issue all orders


which may be proper to enforce the agreement
on motion of any of the parties litigant. The
order directing the agreement to be made
effective shall be binding upon all creditors
included in the schedule of the debtor who may
have been properly summoned, but not upon
creditors mentioned in SEC nine who failed to
attend the meeting or refrained from voting
therein, and their rights shall not be affected by
the agreement unless they may have expressly
or impliedly consented thereto.

on

SEC 9. Persons having claims for personal


labor, maintenance, expenses of last illness and
funeral of the wife or children of the debtor,
incurred in the sixty days immediately
preceding the filing of the petition, and persons
having legal or contractual mortgages, may
refrain from attending the meeting and from
voting therein. Such persons shall not be bound
by any agreement determined upon at such
meeting, but if they should join in the voting
they shall be bound in the same manner as are
the other creditors.
Termination of proceedings
SEC 11. If the decision of the meeting be
negative as regards the proposed agreement or
if no decision is had in default of such number
or of such majorities, the proceeding shall be
terminated without recourse and the parties
concerned shall be at liberty to enforce the
rights which may correspond to them. If the
decision is favorable to the debtor it may be
objected to within ten days following the date of
the meeting by any creditor who attended the
meeting and who dissented from and protested
against the vote of the majority. The opposition
or objection to the decision of the majority
favorable to the debtor shall be proceeded with
as in any other incidental motion, the debtor
and the creditors who shall appear declaring
their purpose to sustain the decision of the
meeting being the defendants. The court shall
hear and pass upon such objection as soon as
possible and in a summary manner, and in its
order, which shall be final, it shall declare
whether or not the decision of the meeting is
valid. In case that the decision of the meeting is
held to be null, the court shall declare the
proceeding
terminated
and
the
parties
concerned at liberty to exercise the rights which
may correspond to them; and in case the
decision of the meeting is declared valid, or
when no opposition or objection to said decision
has been presented, the court shall order that
the agreement be carried out and the persons
concerned shall be bound by the decision of the

Consequences of debtors
perform agreement

failure

to

SEC 13. If the debtor fails wholly or in part to


perform the agreement decided upon at the
meeting of the creditors, all the rights which the
creditors had against the debtor before the
agreement shall revest in them. In such case
the debtor may be made subject to the
bankruptcy and insolvency proceedings in the
manner established by the following chapters of
this Act.
VOLUNTARY INSOLVENCY
14.5 Nature
Who could file petition
Schedule of debts and liabilities
Inventory of property
Differentiate
from
involuntary
insolvency
Voluntary vs. Involuntary Insolvency
In voluntary insolvency, a debtor is
deemed insolvent upon his filing of a petition
for voluntary insolvency; while in involuntary
insolvency, the debtor is considered insolvent
upon the issuance by the court of an order
declaring him insolvent.
Procedure
a. filing of petition by the debtor
b. issuance by the court of an
order declaring, among other
things, that the petitioner is
insolvent
c. publication of order and
service
thereof
on
the
creditors
d. meeting of creditors for
election
of
assignee
in
insolvency
e. conveyance
of
debtors
property
to
assignee
in
insolvency

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f. liquidation
g.
h.
i.

of assets and
payment of debts
discharge of the debtor
objections to discharge, if any
appeal to the Supreme Court
in certain cases.

Filing of petition an act of insolvency


SEC 14. An insolvent debtor, owing debts
exceeding in amount the sum of one thousand
pesos, may apply to be discharged from his
debts and liabilities by petition to the Court of
First Instance of the province or city in which he
has resided for six months next preceding the
filing of such petition. In his petition he shall set
forth his place of residence, the period of his
residence therein immediately prior to filing
said petition, his inability to pay all his debts in
full, his willingness to surrender all his property,
estate, and effects not exempt from execution
for the benefit of his creditors, and an
application to be adjudged an insolvent. He
shall annex to his petition a schedule and
inventory in the form hereinafter provided. The
filing of such petition shall be an act of
insolvency.
SEC 15. Said schedule must contain a full and
true statement of all his debts and liabilities,
together with a list of all those to whom, to the
best of his knowledge and belief, said debts or
liabilities are due, the place of residence of his
creditors and the sum due each, the nature of
the indebtedness or liability and whether
founded on written security, obligation, contract
or otherwise, the true cause and consideration
thereof, the time and place when and where
such indebtedness or liability accrued, a
declaration of any existing pledge, lien,
mortgage, judgment, or other security for the
payment of the debt or liability, and an outline
of the facts giving rise or which might give rise
to a cause of action against such insolvent
debtor.
SEC 16. Said inventory must contain, besides
the creditors, an accurate description of all the
real and personal property, estate, and effects
of the petitioner, including his homestead, if
any, together with a statement of the value of
each item of said property, estate, and effects
and its location, and a statement of the
incumbrances thereon. All property exempt by
law from execution shall be set out in said
inventory with a statement of its valuation,
location, and the incumbrances thereon, if any.
The inventory shall contain an outline of the
facts giving rise, or which might give rise, to a
right of action in favor of the insolvent debtor.

SEC 17. The petition, schedule, and inventory


must be verified by the affidavit of the
petitioner, annexed thereto, and shall be in
form substantially as follows: I, _______________,
do solemnly swear that the schedule and
inventory now delivered by me contain a full,
correct, and true discovery of all my debts and
liabilities and of all goods, effects, estate, and
property of whatever kind or class to me in any
way belonging. The inventory also contains a
full, true and correct statement of all debts
owing or due to me, or to any person or persons
in trust for me and of all securities and
contracts whereby any money may hereafter
become due or payable to me or by or through
which any benefit or advantage whatever may
accrue to me or to my use, or to any other
person or persons in trust for me. The schedule
contains a clear outline of the facts giving rise,
or which might give rise, to a cause of action
against me, and the inventory contains an
outline of the facts giving rise, or which might
give rise, to any cause of action in my favor. I
have no lands, money, stock, or estate,
reversion, or expectancy, or property of any
kind, except that set forth in said inventory. I
have in no instance created or acknowledged a
debt for a greater sum than I honestly and truly
owe. I have not, directly or indirectly,
concealed, fraudulently sold, or otherwise
fraudulently disposed of, any part of my real or
personal property, estate, effects, or rights of
action, and I have not in any way compounded
with any of my creditors in order to secure such
creditors, or to receive or to accept any profit or
advantage therefrom, or to defraud or deceive
in any manner any creditor to whom I am
indebted. So help me God.
SEC 18. Upon receiving and filing said petition,
schedule, and inventory, the court, or the judge
thereof in vacation, shall make an order
declaring the petitioner insolvent, and directing
the sheriff of the province or city in which the
petition is filed to take possession of, and safely
keep, until the appointment of a receiver or
assignee, all the deeds, vouchers, books of
account, papers, notes, bonds, bills, and
securities of the debtor, and all his real and
personal property, estate, and effects, except
such as may be by law exempt from execution.
Said order shall further forbid the payment to
the debtor of any debts due to him and the
delivery to the debtor, or to any person for him,
of any property belonging to him, and the
transfer of any property by him, and shall
further appoint a time and place for a meeting
of the creditors to choose an assignee of the
estate. Said order shall designate a newspaper
of general circulation published in the province
or city in which the petition is filed, if there be
one, and if there be none, in a newspaper
which, in the opinion of the judge, will best give

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notice to the creditors of the said insolvent, and


in the newspaper so designated said order shall
be published as often as may be prescribed by
the court or the judge thereof. The time
appointed for the election of an assignee shall
not be less than two, nor more than eight,
weeks from the date of the order of
adjudication. Upon the granting of said order all
civil proceedings pending against the said
insolvent shall be stayed. When a receiver is
appointed, or an assignee chosen, as provided
in this Act, the sheriff shall thereupon deliver to
such receiver or assignee, as the case may be,
all the property, assets, and belongings of the
insolvent which have come into his possession,
and he shall be allowed and paid as
compensation for his services the same
expenses and fees as would by law be
collectible if the property had been levied upon
and safely kept under attachment.
SEC 19. A copy of said order shall immediately
be published by the clerk of said court, in the
newspaper designated therein, for the number
of times and as prescribed by the court or the
judge thereof, and a copy of said order shall be
delivered personally or sent by the clerk
forthwith by registered mail, postage prepaid,
to all creditors named in the schedule. There
shall be deposited, in addition to twenty-four
pesos, which shall be received by the clerk on
commencing such proceedings, a sum of money
sufficient to defray the expense of the
publication ordered by the court, necessary
postage, and ten centavos for each copy, to be
delivered personally or mailed to the creditors,
which last-named sum is hereby constituted the
legal fee of the clerk for the personal delivery or
mailing required by this SEC.

INVOLUNTARY INSOLVENCY
Nature
Who could file petition
Must be accompanied by bond
Acts of insolvency
SEC 20. An adjudication of insolvency may be
made on the petition of three or more
creditors, residents of the Philippine Islands,
whose credits or demands accrued in the
Philippine Islands, and the amount of which
credits or demands are in the aggregate not
less than one thousand pesos: Provided, That
none of said creditors has become a creditor by
assignment, however made, within thirty days
prior to the filing of said petition. Such petition
must be filed in the Court of First Instance of
the province or city in which the debtor resides
or has his principal place of business, and must
be verified by at least three of the petitioners.

The following shall be considered acts of


insolvency, and the petition for insolvency
shall set forth one or more of such acts: (1)
That such person is about to depart or has
departed from the Philippine Islands, with intent
to defraud his creditors; (2) that being absent
from the Philippine Islands, with intent to
defraud his creditors, he remains absent; (3)
that he conceals himself to avoid the service of
legal process for the purpose of hindering or
delaying or defrauding his creditors; (4) that he
conceals, or is removing, any of his property to
avoid its being attached or taken on legal
process; (5) that he has suffered his property to
remain under attachment or legal process for
three days for the purpose of hindering or
delaying or defrauding his creditors; (6) that he
has confessed or offered to allow judgment in
favor of any creditor or claimant for the purpose
of hindering or delaying or defrauding any
creditor or claimant; (7) that he has willfully
suffered judgment to be taken against him by
default for the purpose of hindering or delaying
or defrauding his creditors; (8) that he has
suffered or procured his property to be taken on
legal process with intent to give a preference to
one or more of his creditors and thereby hinder,
delay, or defraud any one of his creditors; (9)
that he has made any assignment, gift, sale,
conveyance, or transfer of his estate, property,
rights, or credits with intent to delay, defraud,
or hinder his creditors; (10) that he has, in
contemplation of insolvency, made any
payment, gift, grant, sale conveyance, or
transfer of his estate, property, rights, or
credits; (11) that being a merchant or
tradesman he has generally defaulted in the
payment of his current obligations for a period
of thirty days; (12) that for a period of thirty
days he has failed, after demand, to pay any
moneys deposited with him or received by him
in a fiduciary capacity; and (13) that an
execution having been issued against him on
final judgment for money, he shall have been
found to be without sufficient property subject
to execution to satisfy the judgment. The
petitioners may, from time to time, by leave of
the court, amend and correct the petition, so
that the same shall conform to the facts, such
amendment or amendments to relate back to
and be received as embraced in the original
petition. The said petition shall be accompanied
by a bond, approved by the court, with at least
two sureties, in such penal sum as the court
shall direct, conditioned that if the petition in
insolvency be dismissed by the court, or
withdrawn by the petitioner, or if the debtor
shall not be declared an insolvent, the
petitioners will pay to the debtor alleged in the
petition to be insolvent all costs, expenses, and
damages occasioned by the proceedings in
insolvency, together with a reasonable counsel

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fee to be fixed by the court. The court may,


upon motion, direct the filing of an additional
bond, with different sureties, when deemed
necessary
Determination of solvency or insolvency of
debtor
SEC 23. At the time fixed for the hearing of
said order to show cause, or at another time to
which such hearing may be adjourned, the
debtor must answer the petition, or may demur
for the same causes as are provided for
demurrer in other cases by the Code of Civil
Procedure. If he demur and the demurrer be
overruled, the debtor shall immediately answer
the petition. Such answer shall contain a
specific denial of the material allegations of the
petition controverted by him, and shall be
sworn to; and the issues raised thereon shall be
promptly tried and disposed of. If, upon such
trial, the issues are found in favor of the
respondent, the proceedings shall be dismissed,
and the respondent shall be allowed all costs,
counsel fees, expenses, and damages sustained
by reason of the proceedings therein. Counsel
fees, costs, expenses, and damages shall be
fixed and allowed by the court.
PROVISIONS COMMON TO VOLUNTARY
AND INVOLUNTARY INSOLVENCIES
14.7 Procedure if debtor defaults or is
found insolvent
Debtor to file schedule of debts and
liabilities and inventory of property
SEC 24. If the respondent shall make default,
or if, after trial, the issues are found in favor of
the petitioners, the court shall make an order
adjudging that said respondent is and was, at
the time of filing the petition, an insolvent
debtor and that the debtor was guilty of the
acts and things charged in the petition, or such
of them as the court may find to be true; and
shall require said debtor, within such time as
the court may designate, not to exceed three
days, to file in court the schedule and inventory
provided for in SECs fifteen and sixteen of this
Act, duly verified as required of a petitioning
debtor: Provided, That in the affidavit of the
insolvent, touching his property and its
disposition, he shall not be required to swear
that he has not made any fraudulent preference
or committed any other act in conflict with the
provisions of this Act; but he may do so if he
desires. Said order shall further direct the
sheriff of the province or city where the
insolvency petition is filed, or the receiver, if
one has been theretofore appointed, to take
possession of and safely keep, until the
appointment of an assignee, all the deeds,

vouchers, books of account, papers, notes, bills,


bonds and securities of the debtor, and all his
real and personal property, estate and effects,
except such as may be by law exempt from
execution. Said order shall further forbid the
payment to the debtor of any debts due to him,
and the delivery to the debtor, or to any person
for him, of any property belonging to him, and
the transfer of any property by him, and shall
further appoint a time and place for a meeting
of the creditors to choose an assignee of the
estate. Said order shall designate a newspaper
of general circulation published in the province
or city in which the petition is filed, if there be
one, and if there be none, in a newspaper
which, in the opinion of the judge, will best give
notice to the creditors of the said insolvent, and
in the newspaper so designated said order shall
be published as often as may be prescribed by
the court or the judge thereof. The time
appointed for the election of an assignee shall
not be less than two nor more than eight weeks
from the date of the order of adjudication. Upon
the granting of said order, all civil proceedings
pending against the said insolvent shall be
stayed. When an assignee is chosen as
provided in this Act, the sheriff or receiver, if
there be one, shall thereupon deliver to such
assignee all the property, estate, and
belongings of the insolvent, which have come
into his possession, and he shall be allowed and
paid as compensation for his services the same
expenses and fees as would by law be
collectible if the property had been levied upon
and safely kept under attachment.
Sheriff to take possession of insolvents
property
SEC 26. In all cases where the debtor resides
out of the Philippine Islands; or has departed
from the Philippine Islands; or can not, after due
diligence, be found within the Philippine Islands;
or conceals himself to avoid service of the order
to show cause, or any other preliminary process
or orders in the matter; or is a foreign
corporation having no managing or business
agent, cashier, or secretary within the Philippine
Islands upon whom service or orders and
process can be made, and it therefore becomes
necessary to obtain service of process and
order to show cause, as provided in SEC twentytwo of this Act, then the petitioning creditors,
upon submitting the affidavits requisite to
procure an order of publication, and presenting
a bond in double the amount of the aggregate
sum of their claims against the debtor, shall be
entitled to an order of the court directing the
sheriff of the province or city in which the
matter is pending to take into his custody a
sufficient amount of property of the debtor to

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satisfy the demands of the petitioning creditors


and the costs of the proceedings. Upon
receiving such order of the court to take into
custody property of the debtor, it shall be the
duty of the sheriff to take possession of the
property and effects of the debtor, not exempt
from execution, to an extent sufficient to cover
the amount provided for, and to prepare, within
three days from the time of taking such
possession, a complete inventory of all the
property so taken, and to return it to the court
as soon as completed. The time for taking the
inventory and making return thereof may be
extended for good cause shown to the court or
a judge thereof. The sheriff shall also prepare a
schedule of the names and residences of the
creditors, and the amount due each, from the
books of the debtor, or from such other papers
or data of the debtor available as may come to
his possession, and shall file such schedule list
of creditors and inventory with the clerk of the
court
Meeting of creditors for election of
assignee in insolvency
Filing of claims by creditors prior to
election
SEC 29. No creditor shall be entitled to vote for
the election of an assignee unless he shall have
filed his claim in the office of the clerk of the
court in which the proceedings are pending at
least two days prior to the time appointed for
such election. All claims shall contain a
statement showing the amount and nature of
the claim and security, if any. The claim shall be
verified by the claimant, or his duly authorized
agent or attorney. No claim barred by the
statute of limitations shall be proved or allowed
against the estate of an insolvent debtor for any
purpose. Any person interested in the estate of
the insolvent may file exceptions to the legality
or good faith of any claim, by setting forth
specifically in writing his interest in the estate,
and the grounds of his objection to such claim.
Such exceptions shall be verified by the
affidavit of the party objecting, or his duly
authorized agent or attorney, and the affidavit
shall set out that such exceptions are not made
for the purpose of delay and are made in good
faith in the best interests of said estate.
Exceptions to any claim must be filed with the
clerk of the court at least one day before the
time appointed for the election of an assignee,
and such exceptions shall be heard and
disposed of by the court, on affidavit or other
evidence, in a summary manner, before the
election of an assignee. No creditor or claimant
who holds any mortgage, pledge, or lien of any
kind whatever as security for the payment of his
claim or attachment or execution on property of

the debtor duly recorded and not dissolved


under this Act shall be permitted to vote at the
election of the assignee any part of his secured
claim unless he shall first have the value of
such security fixed as provided in SEC fifty-nine
of this Act, or shall surrender to the sheriff or
receiver of the estate of the insolvent, if there
be a receiver, all such property, or assign such
lien to such sheriff or receiver. The surrender or
assignment of such security or lien shall be for
the benefit of all creditors of the estate of the
insolvent. The value of such security, if fixed by
the court, shall be so fixed at least one day
before the day appointed for the election of an
assignee, in which event the claimant may
prove his demand as provided in this SEC for
any unsecured balance, subject to the filing of
exceptions as in all other claims.
Conveyance
assignee

of

insolvents

property

to

SEC 32. As soon as an assignee is elected or


appointed and qualified, the clerk of the court
shall, by an instrument under his hand and seal
of the court, assign and convey to the assignee
all the real and personal property, estate, and
effects of the debtor with all his deeds, books,
and papers relating thereto, and such
assignment shall relate back to the
commencement of the proceedings in
insolvency, and shall relate back to the acts
upon which the adjudication was founded, and
by operation of law shall vest the title to all
such property, estate, and effects in the
assignee, although the same is then attached
on mesne process, as the property of the
debtor. Such assignment shall operate to vest
in the assignee all of the estate of the insolvent
debtor not exempt by law from execution. It
shall also dissolve any attachment levied within
one month next preceding the commencement
of the insolvency proceedings and vacate and
set aside any judgment entered in any action
commenced within thirty days immediately
prior to the commencement of insolvency
proceedings and shall vacate and set aside any
execution issued thereon and shall vacate and
set aside any judgment entered by default or
consent of the debtor within thirty days
immediately prior to the commencement of the
insolvency proceedings.
Assignees right to recover insolvents
property to assignee, etc.
SEC 33. The assignee shall have the right to
recover all the estate debts, and effects of said
insolvent. If, at the time of the commencement
of proceedings in insolvency, an action is
pending in the name of the debtor, for the

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recovery of a debt or other thing which might or


ought to pass to the assignee by the
assignment, the assignee shall be allowed and
admitted to prosecute the action, in like manner
and with like effect as if it had been originally
commenced by him. If there are any rights of
action in favor of the insolvent for damages, on
any account, for which an action is not pending,
the assignee shall have the right to prosecute
the same with the same effect as the insolvent
might have done himself if no proceedings in
insolvency had been instituted. If any action or
proceeding in which the insolvent is defendant
is pending at the time of the adjudication, the
assignee may defend the same in the same
manner and with like effect as it might have
been defended by the insolvent. In a suit
prosecuted or defended by the assignee, a
certified copy of the assignment made to him
shall be conclusive evidence of his authority to
sue or defend.
Powers of assignee
SEC 36. The said assignee shall have power:
1. To sue and recover all the estate,
assets, debts, and claims, belonging to or due
to such debtor; and no set-off or counterclaim
shall be allowed in any such for debts
contracted by the insolvent within thirty days
immediately preceding the filing of the petition
of insolvency except in case of creditors
specified in SEC fifty of this Act.
2. To take into his possession all the
estate of such debtor except property exempt
by law from execution, whether attached or
delivered to him, or afterwards discovered, and
all books, vouchers, evidence of indebtedness,
and securities belonging to the same.
3. In case of a non-resident or absconding
or concealed debtor, to demand and receive of
every sheriff who shall have attached any of the
property of such debtor, or who shall have in his
possession any moneys arising from the sale of
such property, all such property and moneys,
on paying him his lawful costs and charges for
attaching and keeping the same.
4. From time to time to sell at public
auction after advertisement in the manner
provided by subSECs (1), (2), and (3) of SEC
four hundred and fifty-four of the Code of Civil
Procedure, upon order of the court, any of the
estate, real and personal, which has come into
his possession, and which is vested in him as
such assignee, and on such sales to execute the
necessary conveyances and bills of sale.
5. To redeem all valid mortgages and
conditional contracts, and all valid pledges of
personal property, and to satisfy any judgments
which may be an incumbrance on any property
sold by him; or to sell such property, subject to

such mortgage, contracts, pledges, judgments,


or liens.
6. To settle all matters and accounts
between such debtor and his creditors, subject
to the approval of the court.
7. Under the order of the court or judge
appointing him, to compound with any person
indebted to such debtor, and thereupon
discharge all demands against such person.
8. To recover from any person receiving a
conveyance,
gift,
transfer,
payment,
or
assignment, made contrary to any provision of
this Act, the property thereby transferred or
assigned; or in case a re-delivery of the
property can not be had, to recover the value
thereof, with damages for the detention.

Conversion of insolvents property into


money
SEC 39. The assignee shall as speedily as
possible convert the estate, real and personal,
into money. He shall keep a regular account of
all moneys received by him as assignee, to
which every creditor or other person interested
therein may, at all reasonable times, have
access. No private sale of any property of the
estate of any insolvent debtor shall be valid
unless made under the order of the court, upon
a petition in writing, which shall set forth the
facts showing the sale to be necessary. Upon
filing the petition, notice of the hearing thereof
of at least ten days shall be given by publication
and mailing, in the same manner as is provided
in SEC nineteen of this Act. If it appears that a
private sale is for the best interests of the
estate, the court shall order it to be made.

Proof of debts (SECs 53-62)


SEC 53. All debts due and payable from the
debtor at the time of the adjudication of
insolvency, and all debts then existing but not
payable until a future time, a discount being
made if no interest is payable by the terms of
the contract, may be proved against the estate
of the debtor.
SEC 54. If the debtor is bound as indorser,
surety, bail, or guarantor, upon any bill, bond,
note, or other specialty or contract, or for any
debt of any person, and his liability shall not
have become absolute until after the
adjudication of insolvency, the creditor may
prove the same after such liability shall have
become fixed, and before the final dividend
shall have been declared.

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SEC 55. In all cases of contingent debts and


contingent liabilities, contracted by the debtor,
and not herein otherwise provided for, the
creditor may make claim therefor and have his
claim allowed, with the right to share in the
dividends, if the contingency shall happen
before the order of the final dividend; or he
may, at any time, apply to the court to have the
present value of the debt or liability ascertained
and liquidated, which shall be done in such
manner as the court shall order, and it shall be
allowed for the amount so ascertained.
SEC 56. Any person liable as bail, surety, or
guarantor, or otherwise, for the debtor, who
shall have paid the debt, or any part thereof, in
discharge of the whole, shall be entitled to
prove such debt, or to stand in the place of the
creditor, if he shall have proved the same,
although such payments shall have been made
after the proceedings in insolvency were
commenced; and any person so liable for the
debtor, and who has not paid the whole of said
debt, but is still liable for the same, or any part
thereof, may, if the creditor shall fail or omit to
prove such debt, prove the same in the name of
the creditor.
SEC 57. Where the debtor is liable to pay rent,
or other debt falling due at fixed and stated
periods, the creditor may prove for a
proportionate part thereof up to the time of the
insolvency, as if the same became due from
day to day, and not at such fixed and stated
periods.
SEC 58. In all cases of mutual debts and
mutual credits between the parties, the account
between them shall be stated, and one debt set
off against the other, and the balance only shall
be allowed and paid. But no set-off or
counterclaim shall be allowed of a claim in its
nature not provable against the estate:
Provided, That no set-off or counterclaim shall
be allowed in favor of any debtor to the
insolvent of a claim purchased by or transferred
to such debtor within thirty days immediately
preceding the filing, or after the filing of the
petition by or against the insolvent.
SEC 59. When a creditor has a mortgage, or
pledge of real or personal property of the
debtor, or a lien thereon, for securing the
payment of a debt owing to him from the
debtor, or an attachment or execution on
property of the debtor duly recorded and not
dissolved under this Act, he shall be admitted
as a creditor for the balance of the debt only,
after deducting the value of such property, such
value to be ascertained by agreement between
him and the receiver, if any, and if no receiver,
then upon such sum as the court or a judge
thereof may decide to be fair and reasonable,

before the election of an assignee, or by a sale


thereof, to be made in such manner as the
court or judge thereof shall direct; or the
creditor may release or convey his claim to the
receiver, if any, or if no receiver then to the
sheriff, before the election of an assignee, or to
the assignee if an assignee has been elected,
upon such property, and be admitted to prove
his whole debt. If the value of the property
exceeds the sum for which it is so held as
security, the assignee may release to the
creditor the debtors right of redemption
thereon on receiving such excess; or he may
sell the property, subject to the claim of the
creditor thereon, and in either case the
assignee and creditor, respectively, shall
execute all deeds and writings necessary or
proper to consummate the transaction. If the
property is not sold or released, and delivered
up, or its value fixed, the creditor shall not be
allowed to prove any part of his debt, but the
assignee shall deliver to the creditor all such
property upon which the creditor holds a
mortgage, pledge, or lien, or upon which he has
an attachment or execution.
SEC 60. No creditor, proving his debt or claim,
shall be allowed to maintain any suit therefor
against the debtor, but shall be deemed to have
waived all right of action and suit against him,
and all proceedings already commenced, or any
unsatisfied judgment already obtained thereon,
shall be deemed to be discharged and
surrendered thereby; and after the debtors
discharge, upon proper application and proof to
the court having jurisdiction, all such
proceedings shall be dismissed, and such
unsatisfied judgments satisfied of record:
Provided, That no valid lien existing in good
faith thereunder shall be thereby affected. A
creditor proving his debt or claim shall not be
held to have waived his right of action or suit
against the debtor when a discharge has have
been refused or the proceedings have been
determined without a discharge. No creditor
whose debt is provable under this Act shall be
allowed,
after
the
commencement
of
proceedings in insolvency, to prosecute to final
judgment any action therefor against the debtor
until the question of the debtors discharge
shall have been determined, and any such suit
or proceeding shall, upon the application of the
debtor or of any creditor, or the assignee, be
stayed to await the determination of the court
on the question of discharge: Provided, That if
the amount due the creditor is in dispute, the
suit, by leave of the court in insolvency, may
proceed to judgment for the purpose of
ascertaining the amount due, which amount,
when adjudged, may be allowed in the
insolvency proceedings, but execution shall be
stayed as aforesaid.

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SEC 61. Any person who shall have accepted


any preference, having reasonable cause to
believe that the same was made or given by the
debtor contrary to any provision of this Act,
shall not be allowed to prove the debt or claim
on account of which the preference was made
or given, nor shall he receive any dividend
thereon, until he shall have surrendered to the
assignee all property, money, benefit, or
advantage received by him under such
preference.
SEC 62. The court may, upon the application of
the assignee, or of any creditor, or without any
application, before or after adjudication in
insolvency, examine upon oath the debtor in
relation to his property and his estate and may
examine any other person tendering or making
proof of claims, and may subpoena witnesses to
give evidence relating to such matters. All
examinations of witnesses shall be had and
depositions shall be taken in accordance with
and in the same manner as is provided by the
Code of Civil Procedure.

Discharge (SECs 64-69)


When debtor may apply for discharge
SEC 64. At any time after the expiration of
three months from the adjudication of
insolvency, but not later than one year from
such adjudication, unless the property of the
insolvent has not been converted into money,
the debtor may apply to the court for a
discharge from his debts, and the court shall
thereupon order notice to be given to all
creditors who have proved their debts to appear
on a day appointed for that purpose and show
cause why a discharge should not be granted to
the debtor; said notice shall be given by
registered mail and by publication at least once
a week, for six weeks, in a newspaper published
in the province or city, or, if there be none, in a
newspaper which, in the opinion of the judge,
will best give notice to the creditors of the said
insolvent: Provided, That if no debts have been
proven, such notice shall not be required.
When discharge may not be granted
SEC 65. No discharge shall be granted, or if
granted shall be valid, (1) if the debtor shall
have sworn falsely in his affidavit annexed to
his petition, schedule, or inventory, or upon any
examination in the course of the proceedings in
insolvency, in relation to any material fact
concerning his estate or his debts or to any
other material fact; or (2) if he has concealed
any part of his estate or effects, or any books or

writing relating thereto; or (3) if he has been


guilty of fraud or willful neglect in the care or
custody of his property or in the delivery to the
assignee of the property belonging to him at
the time of the presentation of his petition and
inventory, excepting such property as he is
permitted to retain under the provisions of this
Act; or (4) if, within one month before the
commencement of such proceedings, he has
procured his real estate, goods, moneys, or
chattels to be attached or seized on execution;
or (5) if he has destroyed, mutilated, altered, or
falsified any of his books, documents, papers,
writings, or securities, or has made, or been
privy to the making of, any false or fraudulent
entry in any book of account or other document
with intent to defraud his creditors; or (6) if he
has given any fraudulent preference, contrary
to the provisions of this Act, or has made any
fraudulent payment, gift, transfer, conveyance,
or assignment of any part of his property, or
has admitted a false or fictitious debt against
his estate; or (7) if, having knowledge that any
person has proven such false or fictitious debt,
he has not disclosed the same to his assignee
within one month after such knowledge; or (8)
if, being a merchant or tradesman, he has not
kept proper books of account in Arabic
numerals and in accordance with the provisions
of the Code of Commerce; or (9) if he, or any
other person on his account, or in his behalf,
has influenced the action of any creditor, at any
stage of the proceedings, by any pecuniary
consideration or obligation; or (10) if he has, in
contemplation of becoming insolvent, made any
pledge, payment, transfer, assignment, or
conveyance of any part of his property, directly
or indirectly, absolutely or conditionally, for the
purpose of preferring any creditor or person
having a claim against him, or who is, or may
be, under liability for him, or for the purpose of
preventing the property from coming into the
hands of the assignee, or of being distributed
under this Act in satisfaction of his debts; or
(11) if he has been convicted of any
misdemeanor under this Act, or has been guilty
of fraud contrary to the true intent of this Act;
or (12) in case of voluntary insolvency, has
received the benefit of this or any other Act of
insolvency or bankruptcy within six years next
preceding his application for discharge; or (13)
if insolvency proceedings in which he could
have applied for a discharge are pending by or
against him in the Court of First Instance of any
other province or city in the Philippine Islands.
Before any discharge is granted, the debtor
shall take and subscribe an oath to the effect
that he has not done, suffered, or been privy to
any act, matter, or thing specified in this Act as
grounds for withholding such discharge or as
invalidating such discharge, if granted.

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SEC 66. Any creditor opposing the discharge of


a debtor shall file his objections thereto,
specifying the grounds of his opposition, and
after the debtor has filed and served his answer
thereto, which pleadings shall be verified, the
court shall try the issue or issues raised,
according to the practice provided by law in
civil actions.
SEC 67. If it shall appear to the court that the
debtor has in all things conformed to his duty
under this Act, and that he is entitled under the
provisions thereof to receive a discharge, the
court shall grant him a discharge from all his
debts, except as hereinafter provided, and shall
give him a certificate thereof, under the seal of
the court, in substance as follows: In the Court
of First Instance of the _____________, Philippine
Islands. Whereas, ______________, has been duly
adjudged an insolvent under the Insolvency Law
of the Philippine Islands, and appears to have
conformed to all the requirements of law in that
behalf, it is therefore ordered by the court that
said _______________ be forever discharged from
all debts and claims, which by said Insolvency
Law are made provable against his estate, and
which existed on the _______ day of _________,
on which the petition of adjudication was filed
by (or against) him, excepting such debts, if
any, as are by said Insolvency Law excepted
from the operation of a discharge in insolvency.
Given under my hand, and the seal of the court,
this ____ day of ______________, Anno Domini
______________ Attest: ____________, clerk. (Seal)
_____________, judge.
Debts not discharged
SEC 68. No tax or assessment due to the
Insular Government or any provincial or
municipal government, whether proved or not
as provided for in this Act, shall be discharged.
Nor shall any debt created by the fraud or
embezzlement of the debtor, or by his
defalcation as a public officer or while acting in
a fiduciary capacity, be discharged under this
Act, but the debt may be proved, and the
dividend thereon shall be a payment on account
of said debt. No discharge granted under this
Act shall release, discharge or affect any person
liable for the same debt, for or with the debtor,
either as partner, joint contractor, indorser,
surety, or otherwise.
SEC 69. A discharge, duly granted under this
Act, shall, with the exceptions aforesaid, release
the debtor from all claims, debts, liabilities, and
demands set forth in his schedule, or which
were or might have been proved against his
estate in insolvency, and may be pleaded by a
simple averment that on the day of its date

such discharge was granted to him, setting


forth the same in full, and the same shall be a
complete bar to all suits brought on any such
debts, claims, liabilities, or demands, and the
certificate shall be prima facie evidence in favor
of such fact and of the regularity of such
discharge: Provided, however, That any creditor
whose debt was proved or provable against the
estate in insolvency who shall see fit to contest
the validity of such discharge on the ground
that it was fraudulently obtained and who has
discovered the facts constituting the fraud
subsequent to the discharge, may, at any time
within one year after the date thereof, apply to
the court which granted it to set it aside and
annul the same.
Commissions due assignee
SEC 42. Assignees shall be allowed all
necessary expenses in the care, management,
and settlement of the estate, and shall be
entitled to charge and receive for their services
commissions upon all sums of money coming to
their hands and accounted for by them, as
follows: For the first thousand pesos, at the rate
of seven per centum; for all above that sum and
not exceeding ten thousand pesos, at the rate
of five per centum; and for all above that sum,
at the rate of four per centum: Provided,
however, That if the person acting as assignee
was receiver of the property of the estate
pending the election of an assignee, any
compensation allowed him as such receiver
shall be deducted from the compensation to
which he otherwise would be entitled as such
assignee: And provided further, That if there
should be two or more assignees the court shall
order an equitable division of the compensation
herein provided, and if for any reason an
assignees term is completed before the final
settlement of the estate and a successor is
appointed the court shall not allow to any such
assignee prior to the settlement of the estate
an amount exceeding four per centum of the
sums of money coming into his hands. Upon the
final settlement of the estate an equitable
distribution of the compensation of the assignee
shall be made.
Composition
SEC 63. An insolvent may offer terms of
composition to his creditors after, but not
before, he has filed in court a schedule of his
property and list of his creditors as provided in
this Act. An application for the confirmation of a
composition may be filed in the insolvency
court after, but not before, it has been accepted
in writing by a majority in number of all
creditors whose claims have been allowed,

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which number must represent a majority in


amount of such claims and after the
consideration to be paid by the insolvent to his
creditors and the money necessary to pay all
debts which have priority and the costs of
proceedings have been deposited in such place
as shall be designated by and subject to the
order of the court. A time shall be fixed by the
court for the hearing upon an application for the
confirmation of a composition, and for the
hearing of such objections as may be made to
its confirmation. The court shall confirm a
composition if satisfied that (1) it is for the best
interest of the creditors; (2) that the insolvent
has not been guilty of any of the acts, or of a
failure to perform any of the duties, which
would create a bar to his discharge; and (3) that
the offer and its acceptance are in good faith,
and have not been made or procured except as
herein provided, or by any means, promises, or
acts herein forbidden. Upon the confirmation of
a composition the consideration shall be
distributed as the judge shall direct, and the
case dismissed, and the title to the insolvents
property shall revest in him. Whenever a
composition is not confirmed, the estate in
insolvency shall be administered as herein
provided. The court may, upon application of a
party in interest, filed at any time within six
months after the composition has been
confirmed, set the same aside, and reinstate
the case if it shall be made to appear upon a
trial that fraud was practiced in the procuring of
such composition, and that the knowledge
thereof has come to the petitioner since the
confirmation of such composition.
Fraudulent preferences and transfers
SEC 70. If any debtor, being insolvent, or in
contemplation of insolvency, within thirty days
before the filing of a petition by or against him,
with a view to giving a preference to any
creditor or person having a claim against him or
who is under any liability for him, procures any
part of his property to be attached,
sequestered, or seized on execution, or makes
any payment, pledge, mortgage, assignment,
transfer, sale, or conveyance of any part of his
property, either directly or indirectly, absolutely
or conditionally, to any one, the person
receiving such payment, pledge, mortgage,
assignment, transfer, sale, or conveyance, or to
be benefited thereby, or by such attachment or
seizure, having reasonable cause to believe that
such debtor is insolvent, and that such
attachment, sequestration, seizure, payment,
pledge, mortgage, conveyance, transfer, sale,
or assignment is made with a view to prevent
his property from coming to his assignee in
insolvency, or to prevent the same from being

distributed ratably among his creditors, or to


defeat the object of, or in any way hinder,
impede, or delay the operation of or to evade
any of the provisions of this Act, such
attachment, sequestration, seizure, payment,
pledge, mortgage, transfer, sale, assignment, or
conveyance is void, and the assignee, or the
receiver, may recover the property, or the value
thereof, as assets of such insolvent debtor. If
such payment, pledge, mortgage, conveyance,
sale, assignment, or transfer is not made in the
usual and ordinary course of business of the
debtor, or if such seizure is made under a
judgment which the debtor has confessed or
offered to allow, that fact shall be prima facie
evidence of fraud. Any payment, pledge,
mortgage, conveyance, sale, assignment, or
transfer of property of whatever character
made by the insolvent within one month before
the filing of a petition in insolvency by or
against him, except for a valuable pecuniary
consideration made in good faith, shall be void.
All
assignments,
transfers,
conveyances,
mortgages, or incumbrances of real estate shall
be deemed, under this SEC, to have been made
at the time the instrument conveying or
affecting such realty was filed for record in the
office of the register of deeds of the province or
city where the same is situated.
Dividends in insolvency
SEC 45. Whenever any dividend has been duly
declared, the distribution of it shall not be
stayed or affected by reason of debts being
subsequently proved, but any creditor proving
such a debt shall be entitled to a dividend equal
to those already received by the other creditors
before any further dividend is made to the
latter, if the failure to prove such claim shall not
have resulted from his own neglect.
Articles 2236-2251 of Civil Code
Art. 2236. The debtor is liable with all his
property, present and future, for the fulfillment
of his obligations, subject to the exemptions
provided by law. (1911a)
Art. 2237. Insolvency shall be governed by
special laws insofar as they are not inconsistent
with this Code. (n)
Art. 2238. So long as the conjugal partnership
or absolute community subsists, its property
shall not be among the assets to be taken
possession of by the assignee for the payment
of the insolvent debtor's obligations, except
insofar as the latter have redounded to the
benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal
partnership of absolute community may, by
order of the court, be transferred to the wife or
to a third person other than the assignee. (n)

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Art. 2239. If there is property, other than that


mentioned in the preceding article, owned by
two or more persons, one of whom is the
insolvent debtor, his undivided share or interest
therein shall be among the assets to be taken
possession of by the assignee for the payment
of the insolvent debtor's obligations. (n)
Art. 2240. Property held by the insolvent debtor
as a trustee of an express or implied trust, shall
be excluded from the insolvency proceedings.
(n)
CHAPTER 2
CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable
property of the debtor, the following claims or
liens shall be preferred:
(1) Duties, taxes and fees due thereon to the
State or any subdivision thereof;
(2) Claims arising from misappropriation,
breach of trust, or malfeasance by public
officials committed in the performance of their
duties, on the movables, money or securities
obtained by them;
(3) Claims for the unpaid price of movables
sold, on said movables, so long as they are in
the possession of the debtor, up to the value of
the same; and if the movable has been resold
by the debtor and the price is still unpaid, the
lien may be enforced on the price; this right is
not lost by the immobilization of the thing by
destination, provided it has not lost its form,
substance and identity; neither is the right lost
by the sale of the thing together with other
property for a lump sum, when the price thereof
can be determined proportionally;
(4) Credits guaranteed with a pledge so long as
the things pledged are in the hands of the
creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or
mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping
or preservation of personal property, on the
movable thus made, repaired, kept or
possessed;
(6) Claims for laborers' wages, on the goods
manufactured or the work done;
(7) For expenses of salvage, upon the goods
salvaged;
(8) Credits between the landlord and the
tenant, arising from the contract of tenancy on
shares, on the share of each in the fruits or
harvest;
(9) Credits for transportation, upon the goods
carried, for the price of the contract and
incidental expenses, until their delivery and for
thirty days thereafter;
(10) Credits for lodging and supplies usually
furnished to travellers by hotel keepers, on the
movables belonging to the guest as long as

such movables are in the hotel, but not for


money loaned to the guests;
(11) Credits for seeds and expenses for
cultivation and harvest advanced to the debtor,
upon the fruits harvested;
(12) Credits for rent for one year, upon the
personal property of the lessee existing on the
immovable leased and on the fruits of the
same, but not on money or instruments of
credit;
(13) Claims in favor of the depositor if the
depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables to which
the lien or preference attaches have been
wrongfully taken, the creditor may demand
them from any possessor, within thirty days
from the unlawful seizure. (1922a)
Art. 2242. With reference to specific immovable
property and real rights of the debtor, the
following claims, mortgages and liens shall be
preferred, and shall constitute an encumbrance
on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold,
upon the immovable sold;
(3) Claims of laborers, masons, mechanics and
other workmen, as well as of architects,
engineers and contractors, engaged in the
construction, reconstruction or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
(6)
Expenses
for
the
preservation
or
improvement of real property when the law
authorizes reimbursement, upon the immovable
preserved or improved;
(7) Credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments or executions, upon the property
affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the
partition of an immovable among them, upon
the real property thus divided;
(9) Claims of donors or real property for
pecuniary charges or other conditions imposed
upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property
insured, for the insurance premium for two
years. (1923a)
Art. 2243. The claims or credits enumerated in
the two preceding articles shall be considered
as mortgages or pledges of real or personal
property, or liens within the purview of legal
provisions
governing
insolvency.
Taxes
mentioned in No. 1, Article 2241, and No. 1,
Article 2242, shall first be satisfied. (n)

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Art. 2244. With reference to other property, real


and personal, of the debtor, the following claims
or credits shall be preferred in the order named:
(1) Proper funeral expenses for the debtor, or
children under his or her parental authority who
have no property of their own, when approved
by the court;
(2) Credits for services rendered the insolvent
by employees, laborers, or household helpers
for one year preceding the commencement of
the proceedings in insolvency;
(3) Expenses during the last illness of the
debtor or of his or her spouse and children
under his or her parental authority, if they have
no property of their own;
(4) Compensation due the laborers or their
dependents under laws providing for indemnity
for damages in cases of labor accident, or
illness resulting from the nature of the
employment;
(5) Credits and advancements made to the
debtor for support of himself or herself, and
family, during the last year preceding the
insolvency;
(6) Support during the insolvency proceedings,
and for three months thereafter;
(7) Fines and civil indemnification arising from a
criminal offense;
(8) Legal expenses, and expenses incurred in
the administration of the insolvent's estate for
the common interest of the creditors, when
properly authorized and approved by the court;
(9) Taxes and assessments due the national
government, other than those mentioned in
Articles 2241, No. 1, and 2242, No. 1;
(10) Taxes and assessments due any province,
other than those referred to in Articles 2241,
No. 1, and 2242, No. 1;
(11) Taxes and assessments due any city or
municipality, other than those indicated in
Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries
caused by a quasi-delict;
(13) Gifts due to public and private institutions
of charity or beneficence;
(14) Credits which, without special privilege,
appear in (a) a public instrument; or (b) in a
final judgment, if they have been the subject of
litigation. These credits shall have preference
among themselves in the order of priority of the
dates of the instruments and of the judgments,
respectively. (1924a)
Art. 2245. Credits of any other kind or class, or
by any other right or title not comprised in the
four preceding articles, shall enjoy no
preference.
(1925)
CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Art. 2246. Those credits which enjoy preference
with respect to specific movables, exclude all

others to the extent of the value of the personal


property to which the preference refers.
Art. 2247. If there are two or more credits with
respect to the same specific movable property,
they shall be satisfied pro rata, after the
payment of duties, taxes and fees due the State
or any subdivision thereof. (1926a)
Art. 2248. Those credits which enjoy preference
in relation to specific real property or real
rights, exclude all others to the extent of the
value of the immovable or real right to which
the preference refers.
Art. 2249. If there are two or more credits with
respect to the same specific real property or
real rights, they shall be satisfied pro rata, after
the payment of the taxes and assessments
upon the immovable property or real right.
(1927a)
Art. 2250. The excess, if any, after the payment
of the credits which enjoy preference with
respect to specific property, real or personal,
shall be added to the free property which the
debtor may have, for the payment of the other
credits. (1928a)
Art. 2251. Those credits which do not enjoy any
preference with respect to specific property,
and those which enjoy preference, as to the
amount not paid, shall be satisfied according to
the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2245
shall be paid pro rata regardless of dates.
(1929a)

14.8 Cases
Application of Civil Code provisions
concurrence and preference of credits

on

De Barreto vs. Villanueva G.R. L-14938


Facts:
Cruzado sold land (which was foreclosed
by RFC but later resold to Cruzado) to
Villanueva with a stipulation that Villanueva will
continue payment to RFC (for the reselling
price). Villanueva mortgaged the land to De
Barreto when it obtained a loan from the latter.
Villanueva failed to pay both Cruzado and De
Barreto. On the one hand, De Barreto sued for
foreclosure and won. On the other hand,
Cruzado filed a motion in that foreclosure
proceeding for the recognition of his vendors
lien.
RTC: granted Cruzados motion that his
lien be satisfied by the foreclosure proceeds.
SC: affirmed RTC. But on MFR, reversed
RTC ruling.
Held:

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The question as to whether the Civil


Code and the Insolvency Law can be
harmonized is settled by Article 2243, Civil
Code. The preferences named in Articles 2241
and 2242 are to be enforced in accordance with
the Involvency Law.
Thus, it becomes evident that one
preferred creditor's third-party claim to
the proceeds of a foreclosure sale (as in
the case now before us) is not the
proceeding contemplated by law for the
enforcement of preferences under Article
2242, unless the claimant were enforcing
a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes,
a dispute between two creditors will not
enable the Court to ascertain the pro rata
dividend corresponding to each, because
the rights of the other creditors likewise
enjoying preference under Article 2242
can not be ascertained. Wherefore, the order
of the Court of First Instance of Manila now
appealed from decreeing that the proceeds of
the foreclosure sale be apportioned only
between appellant and appellee, is incorrect
and must be reversed.
In the absence of insolvency proceedings
(or other equivalent general liquidation of the
debtor's estate), the conflict between the
parties now before us must be decided
pursuant to the well established principle
concerning register lands; that a purchaser in
good faith and for value (as the appellant
concededly is) takes registered property free
from liens and encumbrances other than
statutory liens and those recorded in the
certificate of title. There being no insolvency
or liquidation, the claim of the appellee,
as unpaid vendor, did not acquire the
character and rank of a statutory lien coequal
to
the
mortgagee's
recorded
encumbrance,
and
must
remain
subordinate to the latter.

No lien on specific property created by Art. 110


of the Labor Code
DBP vs. Secretary of Labor G.R. 79351
Facts:
Difontorum and other co-employees
obtained a favorable judgment against RMC for
illegal dismissal, ULP, etc. A writ of execution
was not satisfied (in 1984). In 1983, DBP
foreclosed RMCs premises. Thus, Difontorum et
al. filed with the Minister of Labor and
Employment a motion for delivery of
properties of RMC in possession of DBP to MOLE
for proper disposition pursuant to Art. 110 of
the Labor Code which gives employees 1st
preference over properties of the employer.

Held:

SC: Difontorum et al. are fools!!! It is


clear from the wording of the law that the
preferential right accorded to employees
and workers under Article 110 may be
invoked only during bankruptcy or judicial
liquidation
proceedings
against
the
employer. The law is unequivocal and
admits of no other construction.
There is no first automatic lien. What
Article 110 of the Labor Code establishes
is not a lien, but a preference of credit in
favor of employees. This simply means
that during bankruptcy, insolvency or
liquidation proceedings involving the
existing properties of the employer, the
employees have the advantage of having
their unpaid wages satisfied ahead of
certain claims which may be proved
therein.

Contractors claim not entitled to preference in


the absence of insolvency proceeding
J.L. Bernardo Construction, et al. vs. CA
G.R. 105827
Facts:
The Municipality of San Antonio failed to
pay petitioners for the latters construction of
the public market of San Antonio. Petitioners
then sued the municipality for breach of
contract, specific performance, etc. with a
prayer for the enforcement of contractors lien
(based on Art. 2242 of the Civil Code).
RTC granted petitioners motion and
awarded possession and use of the building to
them. CA reversed RTC.
SC: affirmed CA
Held:

Article 2242 only finds application


when there is a concurrence of credits, i.e.
when the same specific property of the
debtor is subjected to the claims of
several creditors and the value of such
property of the debtor is insufficient to
pay in full all the creditors. In such a
situation, the question of preference will arise,
that is, there will be a need to determine which
of the creditors will be paid ahead of the others.
Fundamental tenets of due process will dictate
that this statutory lien should then only be
enforced in the context of some kind of a
proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as
insolvency proceedings.
This is made explicit by Article 2243
which states that the claims and liens
enumerated in articles 2241 and 2242 shall be

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considered as mortgages or pledges of real or


personal property, or liens within the purview of
legal provisions governing insolvency.
The action filed by petitioners in the
trial court does not partake of the nature
of an insolvency proceeding. It is basically
for specific performance and damages.
Thus, even if it is finally adjudicated that
petitioners herein actually stand in the
position of unpaid contractors and are
entitled to invoke the contractor's lien
granted under Article 2242, such lien
cannot be enforced in the present action
for there is no way of determining
whether or not there exist other preferred
creditors with claims over the San Antonio
Public Market. The records do not contain any
allegation that petitioners are the only creditors
with respect to such property. The fact that no
third party claims have been filed in the trial
court will not bar other creditors from
subsequently bringing actions and claiming that
they also have preferred liens against the
property involved.
Transfers made within a month after date of
cleavage
Union Bank of the Philippines vs. Spouses
Ong G.R. 152347
Facts:
BMC (a corporation 70% of which is
owned by Spouses Ong) obtained a Php 40M
credit line facility from Union Bank wherein the
Ongs assumed a solidary liability undertaking.
On Oct. 22, 1991, Spouses Ong sold to Lee their
house and lot in Greenhills. On Nov. 22, 1991,
BMC filed a petition for rehabilitation with the
SEC.
Petitioner avers that the Ong-Lee sales
contract partakes of a fraudulent transfer and
is
null and void in contemplation of the
aforequoted
provision,
the
sale
having
occurred on October 22, 1991 or within thirty
(30) days before BMC filed a petition for
suspension of payments on November 22, 1991.
Held:
Petitioner's reliance on the afore-quoted
provision is misplaced for the following reasons:
First, SEC 70 of the Insolvency Law
specifically
makes
reference
to
conveyance of properties made by a
debtor or by an insolvent who filed a
petition, or against whom a petition for
insolvency has been filed. Respondent
spouses Ong have doubtlessly not filed a
petition for a declaration of their own
insolvency. Neither has one been filed against
them. It was never proven that respondent
spouses are likewise insolvent.

It may be that BMC had filed a petition


for rehabilitation and suspension of payments
with the SEC. The nagging fact, however is that
BMC is a different juridical person from the
respondent spouses. Accordingly, the alleged
insolvency of BMC cannot, as petitioner
postulates, extend to the respondent spouses
such that transaction of the latter comes within
the purview of SEC 70 of the Insolvency Law.
Second, the real debtor of petitioner
bank in this case is BMC. The fact that the
respondent spouses bound themselves to
answer for BMCs indebtedness under the
surety agreement referred to at the outset is
not reason enough to conclude that the spouses
are themselves debtors of petitioner bank.
Third, SEC 70 of the Insolvency Law
considers transfers made within a month
after the date of cleavage void, except
those made in good faith and for valuable
pecuniary
consideration.
The
twin
elements of good faith and valuable and
sufficient consideration have been duly
established. Given the validity and the
basic legitimacy of the sale in question,
there is simply no occasion to apply SEC
70 of the Insolvency Law to nullify the
transaction subject of the instant case.

Additional materials
Articles 29-33 RA 7653
SEC 29. Appointment of Conservator.
Whenever, on the basis of a report submitted
by the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors, the
Monetary Board may appoint a conservator
with such powers as the Monetary Board shall
deem necessary to take charge of the assets,
liabilities, and the management thereof,
reorganize the management, collect all monies
and debts due said institution, and exercise all
powers necessary to restore its viability. The
conservator shall report and be responsible to
the Monetary Board and shall have the power to
overrule or revoke the actions of the previous
management and board of directors of the bank
or quasi-bank.
The conservator should be competent and
knowledgeable
in
bank
operations
and
management. The conservatorship shall not
exceed one (1) year.
The conservator shall receive remuneration to
be fixed by the Monetary Board in an amount
not to exceed two-thirds (2/3) of the salary of

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the president of the institution in one (1) year,


payable in twelve (12) equal monthly
payments: Provided, That, if at any time within
one-year period, the conservatorship is
terminated on the ground that the institution
can operate on its own, the conservator shall
receive the balance of the remuneration which
he would have received up to the end of the
year; but if the conservatorship is terminated
on other grounds, the conservator shall not be
entitled to such remaining balance. The
Monetary Board may appoint a conservator
connected with the Bangko Sentral, in which
case he shall not be entitled to receive any
remuneration or emolument from the Bangko
Sentral during the conservatorship. The
expenses attendant to the conservatorship shall
be borne by the bank or quasi-bank concerned.
The Monetary Board shall terminate the
conservatorship when it is satisfied that the
institution can continue to operate on its own
and the conservatorship is no longer necessary.
The
conservatorship
shall
likewise
be
terminated should the Monetary Board, on the
basis of the report of the conservator or of its
own findings, determine that the continuance in
business of the institution would involve
probable loss to its depositors or creditors, in
which case the provisions of SEC 30 shall apply.
SEC 30. Proceedings in Receivership and
Liquidation. Whenever, upon report of the
head of the supervising or examining
department, the Monetary Board finds that a
bank or quasi-bank:
(a) is unable to pay its liabilities as they
become due in the ordinary course of business:
Provided, That this shall not include inability to
pay caused by extraordinary demands induced
by financial panic in the banking community;
(b)
has insufficient realizable assets, as
determined by the Bangko Sentral, to meet its
liabilities; or
(c)
cannot continue in business without
involving probable losses to its depositors or
creditors; or
(d) has willfully violated a cease and desist
order under SEC 37 that has become final,
involving acts or transactions which amount to
fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board
may summarily and without need for prior
hearing forbid the institution from doing
business in the Philippines and designate the
Philippine Deposit Insurance Corporation as
receiver of the banking institution.
For a quasi-bank, any person of recognized
competence in banking or finance may be
designed as receiver.
The receiver shall immediately gather and take
charge of all the assets and liabilities of the
institution, administer the same for the benefit

of its creditors, and exercise the general powers


of a receiver under the Revised Rules of Court
but shall not, with the exception of
administrative expenditures, pay or commit any
act that will involve the transfer or disposition of
any asset of the institution: Provided, That the
receiver may deposit or place the funds of the
institution in non-speculative investments. The
receiver shall determine as soon as possible,
but not later than ninety (90) days from take
over,
whether
the
institution
may
be
rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public: Provided, That
any determination for the resumption of
business of the institution shall be subject to
prior approval of the Monetary Board.
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding
paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and
direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial
court, and without requirement of prior notice
or any other action, a petition for assistance in
the liquidation of the institution pursuant to a
liquidation plan adopted by the Philippine
Deposit Insurance Corporation for general
application to all closed banks. In case of quasibanks, the liquidation plan shall be adopted by
the Monetary Board. Upon acquiring jurisdiction,
the court shall, upon motion by the receiver
after due notice, adjudicate disputed claims
against the institution, assist the enforcement
of individual liabilities of the stockholders,
directors and officers, and decide on other
issues as may be material to implement the
liquidation plan adopted. The receiver shall pay
the cost of the proceedings from the assets of
the institution.
(2) convert the assets of the institutions to
money, dispose of the same to creditors and
other parties, for the purpose of paying the
debts of such institution in accordance with the
rules on concurrence and preference of credit
under the Civil Code of the Philippines and he
may, in the name of the institution, and with
the assistance of counsel as he may retain,
institute such actions as may be necessary to
collect and recover accounts and assets of, or
defend any action against, the institution. The
assets of an institution under receivership or
liquidation shall be deemed in custodia legis in
the hands of the receiver and shall, from the
moment the institution was placed under such
receivership or liquidation, be exempt from any
order of garnishment, levy, attachment, or
execution.

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The actions of the Monetary Board taken under


this SEC or under SEC 29 of this Act shall be
final and executory, and may not be restrained
or set aside by the court except on petition for
certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or
excess of jurisdiction. The petition for certiorari
may only be filed by the stockholders of record
representing the majority of the capital stock
within ten (10) days from receipt by the board
of directors of the institution of the order
directing
receivership,
liquidation
or
conservatorship.
The designation of a conservator under SEC 29
of this Act or the appointment of a receiver
under this SEC shall be vested exclusively with
the
Monetary
Board.
Furthermore,
the
designation of a conservator is not a
precondition to the designation of a receiver.
SEC 31. Distribution of Assets. In case of
liquidation of a bank or quasi-bank, after
payment of the cost of proceedings, including
reasonable expenses and fees of the receiver to
be allowed by the court, the receiver shall pay
the debts of such institution, under order of the
court, in accordance with the rules on
concurrence and preference of credit as
provided in the Civil Code.
SEC 32. Disposition of Revenues and Earnings.
All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or quasibank within the purview of this Act shall be
used to pay the costs, fees and expenses
mentioned in the preceding SEC, salaries of
such personnel whose employment is rendered
necessary in the discharge of the liquidation
together with other additional expenses caused
thereby. The balance of revenues and earnings,
after the payment of all said expenses, shall
form part of the assets available for payment to
creditors.
SEC 33. Disposition of Banking Franchise. The
Bangko Sentral may, if public interest so
requires, award to an institution, upon such
terms and conditions as the Monetary Board
may approve, the banking franchise of a bank
under liquidation to operate in the area where
said bank or its branches were previously
operating: Provided, That whatever proceeds
may be realized from such award shall be
subject to the appropriate exclusive disposition
of the Monetary Board.

Insurance Code

Title
13
SUSPENSION OR REVOCATION OF AUTHORITY
Sec. 247. If the Commissioner is of the opinion
upon examination of other evidence that any
domestic or foreign insurance company is in an
unsound condition, or that it has failed to
comply with the provisions of law or regulations
obligatory upon it, or that its condition or
method of business is such as to render its
proceedings hazardous to the public or to its
policyholders, or that its paid-up capital stock,
in the case of a domestic stock company, or its
available cash assets, in the case of a domestic
mutual company, or its security deposits, in the
case of a foreign company, is impaired or
deficient, or that the margin of solvency
required of such company is deficient, the
Commissioner is authorized to suspend or
revoke all certificates of authority granted to
such insurance company, its officers and
agents, and no new business shall thereafter be
done by such company or for such company by
its agent in the Philippines while such
suspension, revocation or disability continues or
until its authority to do business is restored by
the Commissioner. Before restoring such
authority, the Commissioner shall require the
company concerned to submit to him a
business plan showing the company's estimated
receipts and disbursements, as well as the basis
therefor, for the next succeeding three years.
(As amended by Presidential Decree No. 1455).
Title
14
APPOINTMENT OF CONSERVATOR
Sec. 248. If at any time before, or after, the
suspension or revocation of the certificate of
authority of an insurance company as provided
in the preceding title, the Commissioner finds
that such company is in a state of continuing
inability or unwillingness to maintain a condition
of solvency or liquidity deemed adequate to
protect the interest of policy holders and
creditors, he may appoint a conservator to take
charge
the
assets, liabilities, and the
management of such company, collect all
moneys and debts due said company and
exercise all powers necessary to preserve the
assets of said company, reorganize the
management thereof, and restore its viability.
The said conservator shall have the power to
overrule or revoke the actions of the previous
management and board of directors of the said
company, any provision of law, or of the articles
of incorporation or by-laws of the company, to
the contrary notwithstanding, and such other
powers as the Commissioner shall deem
necessary.
The conservator may be another
insurance company doing business in the
Philippines, by officer or officers of such
company, or any other competent and qualified

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person, firm or corporation. The remuneration


of the conservator and other expenses
attendant to the conservation shall be borne by
the insurance company concerned.
The conservator shall not be subject to
any action, claim or demand by, or liability to,
any person in respect of anything done or
omitted to be done in good faith in the exercise,
or in connection with the exercise, of the
powers conferred on the conservator.
The conservator appointed shall report
and be responsible to the Commissioner until
such time as the Commissioner is satisfied that
the insurance company can continue to operate
on its own and the conservatorship shall
likewise
be
terminated
should
be
Commissioner, on the basis of the report of the
conservator or of his own findings, determine
that the continuance in business of the
insurance company would be hazardous to
policy holders and creditors, in which case the
provisions of Title 15 shall apply.
Title
15
PROCEEDINGS UPON INSOLVENCY
Sec. 249. Whenever, upon examination or
other evidence, it shall be disclosed that the
condition of any insurance company doing
business in the Philippines is one of insolvency,
or that its continuance in business would be
hazardous to its policyholders and creditors, the
Commissioner
shall
forthwith
order
the
company to cease and desist from transacting
business in the Philippines and shall designate a
receiver to immediately take charge of its
assets and liabilities, as expeditiously as
possible collect and gather all the assets and
administer the same for the benefit of its
policyholders and creditors, and exercise all the
powers necessary for these purposes including,
but not limited to, bringing suits and foreclosing
mortgages in the name of the insurance
company.
The Commissioner shall thereupon
determine within thirty days whether the
insurance company may be reorganized or
otherwise placed in such condition so that it
may be permitted to resume business with
safety to its policyholders and creditors and
shall prescribe the conditions under which such
resumption of business shall take place as well
as the time for fulfillment of such conditions. In
such case, the expenses and fees in the
collection and administration of the insurance
company
shall
be
determined
by the
Commissioner and shall be paid out of the
assets of such company.
If the Commissioner shall determine and
confirm within the said period that the
insurance company is solvent, as defined
hereunder, or cannot resume business with
safety to its policyholders and creditors, he

shall, if the public interest requires, order its


liquidation, indicate the manner of its
liquidation and approve a liquidation plan and
implement it immediately. The Commissioner
shall designate a competent and qualified
person as liquidator who shall take over the
functions of the receiver previously designated
and, with all convenient speed, reinsure all its
outstanding policies, convert the assets of the
insurance company to cash, or sell, assign or
otherwise dispose of the same to the
policyholders, creditors and other parties for the
purpose of settling the liabilities or paying the
debts of such company and he may, in the
name of the company, institute such actions as
may be necessary in the appropriate Court to
collect and recover accounts and assets of the
insurance company, and to do such other acts
as may be necessary to complete the
liquidation as ordered by the Commissioner.
The provisions of any law to the contrary
notwithstanding,
the
actions
of
the
Commissioner under this SEC shall be final and
executory, and can be set aside by the Court
upon petition by the company and only if there
is convincing proof that the action is plainly
arbitrary and made in bad faith. The
Commissioner, through the Solicitor General,
shall then file the corresponding answer reciting
the proceeding taken and praying the
assistance of the Court in the liquidation of the
company. No restraining order or injunction
shall be issued by the Court enjoining the
Commissioner from implementing his actions
under this SEC, unless there is convincing proof
that the action of the Commissioner is plainly
arbitrary and made in bad faith and the
petitioner or plaintiff files with the Clerk or
Judge of the Court in which the action is
pending a bond executed in favor of the
Commissioner in an amount to be fixed by the
Court. The restraining order or injunction shall
be refused or, if granted, shall be dissolved
upon filing by the Commissioner, if he so
desires, of a bond in an amount twice the
amount of the bond of the petitioner or plaintiff
conditioned that it will pay the damages which
the petition or plaintiff may suffer by the refusal
or the dissolution of the injunction. The
provisions of Rule 58 of the New Rules of Court
insofar as they are applicable shall govern the
issuance and dissolution of the restraining order
or injunction contemplated in this SEC.
All proceedings under this Title shall be
given
preference
in
the
Courts.
The
Commissioner shall not be required to pay any
fee to any public officer for filing, recording, or
in any manner authenticating any paper or
instrument relating to the proceedings.
As used in this Title, the term
"Insolvency" shall mean the inability of an
insurance company to pay its lawful obligations

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as they fall due in the usual and ordinary course


of business as may be shown by its failure to
maintain the margin of solvency required under
SEC 194 of this Code. (As amended by
Presidential Decree No. 1141 and further
amended by Presidential Decree No. 1455).
Sec. 250. In case of liquidation of an insurance
company, after payment of the cost of the
proceedings, including reasonable expenses
and fees incurred in the liquidation to be
allowed by the Court, the Commissioner shall
pay all allowed claims against such company,
under order of the Court, in accordance with
their legal priority.

CORPORATE REHABILITATION
SC Rules Procedure on Corporate Rehabilitation
(AM No. 00-8-10-SC)

Sec. 251. The receiver or the liquidator, as the


case may be, designated under the provisions
of this title shall not be subject to any action,
claim or demand by, or liability to, any person
in respect of anything done or omitted to be
done in good faith in the exercise, or in
connection with the exercise, of the powers
conferred on such receiver or liquidator.

Definitions of
(Rule 2)

P.D. 1529
SEC 83. Notice of insolvency. Whenever
proceeding in bankruptcy or insolvency, or
analogous proceedings, are instituted against a
debtor who owns registered land, it shall be the
duty of the officer serving the notice of the
institution of such proceedings on the debtor to
file a copy thereof with the office of the Register
of Deeds for the province or city where the land
of the debtor lies. The assignee or trustee
appointed by the court in such proceedings
shall be entitled to the entry of a new certificate
of the registered land of the debtor or bankrupt,
upon presenting and filing a certified copy of
the assignment in insolvency or order or
adjudication in bankruptcy with the insolvent's
or bankrupt's duplicate certificate of title; but
the new certificate shall state that it is entered
to him as assignee in insolvency or trustee in
bankruptcy or other proceedings, as the case
may be.
SEC 84. Judgment or order vacating
insolvency proceedings. Whenever any of
the proceedings of the character named in the
preceding SEC against a registered owner, of
which notice has been registered, is vacated by
judgment, a certified copy of the judgment or
order may be registered. Where a new
certificate has been entered in the name of the
assignee or trustee, such certificate shall be
surrendered for cancellation and forthwith the
debtor shall be entitled to the entry of a new
certificate to him.

Coverage (Rule 1)
These Rules shall apply to petitions for
rehabilitation of corporations, partnerships and
associations pursuant to Presidential Decree No.
902-A.
terms

and

construction

Administrative Expenses
(a) Reasonable and necessary expenses
that are incurred in connection with the filing of
the petition;
(b) Expenses incurred in the ordinary
course of business after the issuance of the
stay order
- excluding interest payable to the creditors for
loans and credit accommodations existing at
the time of the issuance of the stay order; and
(c) Other expenses that are authorized under
this Rules.
"Claim"
Include all claims or demands of whatever
nature or charter against a debtor or its
property, whether for money or otherwise
"Control"
Power of a parent corporation to direct or
govern the financial and operating policies of an
enterprise so as to obtain benefits from its
activities.
Control is presumed to exit when:
a. parent owns, directly or indirectly though
subsidiaries, more than one - half () of the
voting power of the voting power of an
enterprise unless, such ownership does not
constitute control.
b. parents owns one-half (1/2) or less of the
voting power of an enterprise when there is
power.
a. Over more than one-half () of agreement
with investors;
b. To direct or govern the financial and
operating policies of the enterprise under a
statute or agreement;

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c. To appoint or remove the majority of the


member of the board of directors or equivalent
governing body; or
d. To cast the majority votes at meeting of the
board of directors or equivalent governing body.
"Foreign proceeding"
Collective
judicial
or
administrative
proceeding in a foreign State, pursuant to a
law regarding solvency where the assets and
affairs of the debtor are subject to control or
supervision by a foreign court, for the purpose
of rehabilitation or re-organization.
"Group of companies"
Can cover only, corporations that are
financially related to one another as parent
corporation, subsidiaries and affiliates.
"Parent"
A corporation directly or indirectly in control
over another company. (authors own meeting)
"Rehabilitation"
Restoration of the debtor to a position of
successful operation and solvency, if it is shown
that
its
continuance
of
operation
is
economically feasible and its creditors can
recover more if the corporation continues
operation.
"Secured claim"
Any clan whose payment or fulfillment is
secured by contract or by law, including any
clam or credit enumerated under Articles 2241
and 2242 of the civil Code and Article 110, as
amended, of the Labor code of the Philippines.

(I) Any pleading or motion which is similar to or


of like effect as any of the foregoing.
Service of pleadings and documents (Sec
3)
-Any pleading and/or document required by
these Rules may be filed with the court
and/or served upon the other parties by fax or
e-mail.
-Date of transmission shall be deemed to
be the date of service.
-Where
the
pleading
or
document
is
voluminous, the court may, upon motion,
waive the requirement of service; provided that
a copy thereof together with all its attachments
is duly filed with the court and is made available
for examination and reproduction by any party,
and provided, further, that a notice of such
filing and availability is duly served on the
parties.
Executory nature of orders (Sec 5)
-Any order issued by the court under these
Rules is immediately executory.
-A petition to review the order shall not
stay the execution of the order unless
restrained or enjoined by the appellate court.
Nullification of Illegal Transfers and
Preferences (Sec 6)
Upon motion the court may nullify any
transfer of property or any
other
conveyance, sale, payment or agreement
made in violation of its stay order or in
violation of these Rules.
Stay Order (Sec 7)

"Subsidiary"
A corporation where more than fifty percent
(50%) of its voting stock is owned or controlled
directly or indirectly by another corporation.

If the court finds the petition to be sufficient in


form and substance, it shall; not later than five
(5) working days from the filing of the petition,
issue an order:

General Provision (Rule 3)

Stay of enforcement of claims (Sec 7.b)


-staying enforcement of all claims, whether
for money or otherwise and whether such
enforcement is by court action or otherwise,
against the debtor, its guarantors and persons
not solidarily liable with the debtor;
-stay order shall not cover claims against letters
of credit and similar security arrangements
issued by a third party to secure the payment of
the debtor's obligations;
-stay order shall not cover foreclosure by a
creditor of property not belonging to a debtor
under corporate rehabilitation;
-where the owner of such property sought to be
foreclosed is also a guarantor or one who is not
solidarily liable, said owner shall be entitled to
the benefit of excussion as such guarantor;

Nature of Proceeding (Sec 1)


- In Rem.
- Jurisdiction over all persons considered as
acquired upon publication of the notice of the
commencement of the proceedings in any
newspaper or general circulation.
-The proceedings shall also be summary and
non-adversarial in nature.
- The following pleading are prohibited:
(a) Motion to dismiss;
(b) Motion for a bill of particulars:
(c) Petition for relief;
(d) Motion for extension;
(e) Motion for postponement
(f) Third-party complaint;
(g) Intervention;
(h) Motion to hear affirmative defenses; and

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Prohibition
against
disposition
and
encumbrances of property (Sec 7.c)
-the debtor cannot sell, encumber, transfer, or
dispose in any manner any of its properties
except in the ordinary course of business;
Prohibition against payment of prepetition liabilities (Sec 7.d)
-the debtor cannot make any payment on its
liabilities except as provided in items (e), (f) and
(g) of this SEC or when ordered by the court
pursuant to SEC 10 of Rule 3;
Prohibition against withholding of goods
and services (Sec 7.e)
-the debtor's suppliers of goods or services
cannot withhold supply of goods and services in
the ordinary course of business for as long as
the debtor makes payments for the services
and goods supplied after the issuance of the
stay order;
Payment of post-petition administrative
expenses (Sec 7.f)
-payment in full of all administrative expenses
incurred after the issuance of the stay order;
Payment of post-petition credits (Sec 7.g)
direct the payment of new loans or other forms
of credit accommodations obtained for the
rehabilitation of the debtor with prior court
approval;
Preservation of claims against debtor (Sec
7 last par)
The issuance of a stay order does not affect the
right to commence actions or proceedings
insofar as it is necessary to preserve a claim
against the debtor.
Concept
of
Adequate
Protection
of
Property (Sec 10)
the creditor lacks adequate protection if it can
be shown that:
(1) The debtor fails or refuses to honor a preexisting agreement with the to keep the
property insured;
(2) The debtor fails or refuses to take
commercially reasonable steps to maintain the
property; or
(3) The property has depreciated to an extent
that the creditor is undersecured
Qualifications
and
Disqualification
of
Rehabilitation Receiver (Sec 11)
Qualifications:
(1) Expertise and acumen to manage and
operate a business similar in size and
complexity to that of the debtor;
(2) Knowledge in management, finance and
rehabilitation of distressed companies;

(3) General familiarity with the rights of


creditors in suspension of payments or
rehabilitation and general understanding of the
duties and obligations of a rehabilitation
receiver;
(4) Good moral character, independence and
integrity;
(5) Lack of conflict of interest as defined in this
SEC; and
(6) Willingness and ability to file a bond in such
amount as may be determined by the court.
Disqualifications:
(1) He is creditor or stockholder of the debtor;
(2) He is engaged in a line of business which
competes with the debtor;
(3) He is, or was within two (2) years from the
filing of the petition, a director, officer, or
employee or the auditor or accountant of the
debtor;
(4) He is or was within two (2) years from the
filing of the petition, an underwriter of the
outstanding securities of the debtor;
(5) He is related by consanguinity or affinity
within the fourth civil degree to any creditor,
stockholder, director, officer, employee, or
underwriter of the debtor; or
(6) He has any other direct or indirect material
interest in the debtor or any creditor.
Powers and Functions of Rehabilitation
Receiver (Sec 12)
- Not take over the management and
control of the debtor but shall closely
oversee and monitor the operations of
the debtor during the pendency of the
proceedings.
For this purpose, the rehabilitation receiver
shall have the powers, duties and functions of a
receiver under Presidential Decree No. 902-A
1. considered as an officer of the court.
2. He shall be primarily tasked to study the best
way to rehabilitate the debtor and to ensure
that the value of the debtor's property is
reasonably
maintained
pending
the
determination of whether or not the debtor
should be rehabilitated, as well as
3.implement the rehabilitation plan after its
approval.
Accordingly, he shall have the following powers
and functions:
(a) To verify the accuracy of the petition,
including its annexes such as the Schedule of
Debts and Liabilities and the Inventory of Assets
submitted in support to the petition;
(b) To accept and incorporate, when justified,
amendments to the Schedule of Debts and
Liabilities;

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(c) To recommend to the court the disallowance


of claims and rejection of amendments t the
Schedule of Debts and Liabilities that lack
sufficient proof and justification;
(d) To submit to the court and make available
for review by the creditors, a revised Schedule
of Debts and Liabilities;
(e) To investigate the acts, conduct, properties,
liabilities and financial condition of the debtor,
the operation of its business and the desirability
of the continuance thereof; and, any other
matter relevant to the proceeding or to the
formulation of a rehabilitation plan;
(f) To examine under oath the directors and
officers of the debtor and any other witnesses
that he may deem appropriate;
(g) To make available to the creditors
documents and notices necessary for them to
follow and participate in the proceedings;
(h) To report to the court any fact ascertained
by him pertaining to the causes of the debtor's
problems, fraud, preferences, dispositions,
encumbrances, misconduct, mismanagement
and
irregularities
committed
by
the
stockholders, directors, management,, or any
other person against the debtor;
(i) To employ such person or persons such as
lawyers, accountants, appraisers and staff are
necessary in performing his functions and
duties as rehabilitation receiver;
(j) To monitor the operations of the debtor and
to immediately report to the court any material
adverse change in the debtor's business;
(k) To evaluate the existing assets and
liabilities, earnings and operations of the
debtor;
(l) To determine and recommend to the court
the best way to salvage and protect the
interests of the creditors, stockholders and the
general public;
(m) To study the rehabilitation plan proposed by
the debtor or any rehabilitation plan submitted
during the proceedings, together with any
comments made thereon;
(n) To prohibit and report to the court any
encumbrance, transfer or disposition of the
debtor's property outside of the ordinary course
of business or what is allowed by the court;
(o) To prohibit and report to the court any
payments outside of the ordinary course of
business;
(p) To have unlimited access to the debtor's
employees, premises, books, records and
financial documents during business hours;
(q) To inspect, copy, photocopy or photograph
any document, paper, book, account or letter,
whether in the possession of the debtor or other
persons;
(r) To gain entry into any property for the
purpose of inspecting, measuring, surveying or
photographing it or any designated relevant
object or operation thereon;

(s) To take possession, control and custody of


the debtor's assets;
(t) To notify counterparties and the court as to
contracts that the debtor has decided to
continue to perform the breach;
(u) To be notified of and to attend all meetings
of the board of directors and stockholder of the
debtor;
(v) To recommend any modification of an
approved rehabilitation plan as he may deem
appropriate;
(w) To bring to the attention of the court any
material change affecting the debtor's ability to
meet the obligations under the rehabilitation
plan;
(x) To recommend the appointment of a
management committee in the cases provided
for under Presidential Decree No. 902-A, as
amended;
(y) To recommend the termination of the
proceedings and the dissolution of the debtor if
he determines that the continuance in business
of such entity is no longer feasible or profitable
or no longer works to the best interest of the
stockholders, parties-litigants, creditors or the
general public;
(z) To apply to the court for any order or
directive that he may deem necessary or
desirable to aid him in the exercise of his
powers and performance of his duties and
functions; and
(aa) To exercise such other powers as may from
time to time be conferred upon him by the
court.
Contents of Rehabilitation Plan (Sec 18)
(a) desired business targets or goals and
the
duration
and
coverage
of
the
rehabilitation;
(b)
terms
and
conditions
of
such
rehabilitation which shall include the manner
of its implementation, giving due regard to
the interests of secured creditors such as, but
not limited, to the non-impairment of their
security liens or interests;
(c) material financial commitments to
support the rehabilitation plan;
(d) means for the execution of the
rehabilitation plan;
(e) a liquidation analysis; and
(f) such other relevant information to enable
a reasonable investor to make an informed
decision on the feasibility of the rehabilitation
plan.
Effects of Rehabilitation (Sec 20)
(a) The plan and its provisions shall be binding
upon the debtor and all persons who may
be
affected
thereby,
including
the
creditors, whether or not such persons
have participated in the proceedings or

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opposed the plan or whether or not their claims


have been scheduled;
(b) The debtor shall comply with the
provisions of the plan and shall take all
actions necessary to carry out the plan;
(c) Payments shall be made to the
creditors in accordance with the provisions of
the plan;
(d) Contracts and other arrangements
between the debtor and its creditors shall be
interpreted as continuing to apply to the extent
that they do not conflict with the provisions of
the plan; and
(e) Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors
regardless of whether or not the plan is
successfully implemented.
Termination of Rehabilitation Proceeding
(Sec 21)
-Upon motion, within ninety (90) days from the
approval of the rehabilitation plan, and after
notice and hearing, the court may revoke the
approval thereof on the ground that the
same was secured through fraud.
Sec 23 (not in outline)
(a) Dismissal of the petition;
(b) Failure of the debtor to submit the
rehabilitation plan;
(c) Disapproval of the rehabilitation plan by the
court;
(d) Failure to achieve the desired targets or
goals as set forth in the rehabilitation plan;
(e) Failure of the debtor to perform its
obligations under the plan;
(f) Determination that the rehabilitation plan
may no longer be implemented in accordance
with its terms, conditions, restrictions or
assumptions; or
(g)
Successful
implementation
of
the
rehabilitation plan.
Debtor-Initiated Rehabilitation (Rule 4)
Who may petition (Sec 1)
-Any debtor who foresees the impossibility of
meeting its debts when they respectively fall
due, may petition the proper regional trial court
for rehabilitation.
- A group of companies may jointly file a
petition for rehabilitation when one or more of
its constituent corporations foresee the
impossibility of meeting debts when they
respectively fall due, and the financial distress
would likely adversely affect the financial
condition and/or operations of the other
member companies of the group is essential
under the terms and conditions of the proposed
rehabilitation plan.

Opposition to or Comment on the Petition


(Sec 4)
-Every creditor of the debtor or any interested
party shall file his verified opposition to or
comment on the petition not later than
fifteen (15) days before the date of the
initial hearing fixed in the stay order. -After
such time, no creditor or interested party
shall be allowed to file any comment thereon
or opposition thereto without leave of court.
-If the Schedule of Debts and Liabilities omits a
claim or liability, the creditor concerned shall
attach to its comment or opposition a verified
statement of the obligations allegedly due it.
Approval of Rehabilitation Plan
By Court (Sec 7.b)
The court shall approve the new rehabilitation
plan not later than ninety (90) days from
the date of the last initial hearing.
By Creditors (Sec 7.b.1)
Approval or endorsement of creditors
holding at least two-thirds (2/3) of the total
liabilities of the debtor including secured
creditors holding more than fifty percent
(50%) of the total secured claims of the debtor
and unsecured creditors holding more than
fifty percent (50%) of the total unsecured
claims of the debtor;
Cram Down (Sec 11)
The court may approve a rehabilitation
plan even over the opposition of creditors of
the debtor, if, in its judgment, the
rehabilitation of the debtor is feasible and
the
opposition
of
the
creditors
is
manifestly unreasonable if the following are
present:
(a) The rehabilitation plan complies with
the requirements specified in SEC 18 of Rule
3;
(b) The rehabilitation plan would provide
the objecting class of creditors with
payments whose present value projected
in the plan would be greater than that
which they would have received if the
assets of the debtor were sold by a liquidator
within a six (6)-month period from the date of
filing of the petition; and
(c) The rehabilitation receiver has
recommended approval of the plan.
In approving the rehabilitation plan, the court
shall ensure that the rights of the secured
creditors are not impaired.
Creditor-initiated rehabilitation (Rule 5)
Who May Petition (Sec 1)
Any creditor or creditors holding at least
twenty percent (20%) of the debtor's total

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liabilities may file a petition with the proper


regional trial court for rehabilitation of a debtor
that cannot meet its debts as they respectively
fall due.
Requirements (Sec 2)
The petition is accompanied by:
1. rehabilitation plan
2. list of at least three (3) nominees to the
position of rehabilitation receiver and
3. verified by a sworn statement that the affiant
has read the petition and that its contents are
true and correct of his personal knowledge or
based on authentic records and that the
petition is being filed to protect the interests of
the debtor, the stockholders, the investors and
the creditors of the debtor.
Pre-negotiated rehabilitation (Rule 6)
Requirements (Sec 1)
1. A debtor that foresees the impossibility
of meeting its debts as they fall due may, by
itself or jointly with any of its creditors,
2. file a verified petition for the approval of
a pre-negotiated rehabilitation plan.
3. The petition shall comply with SEC 2 of
Rule 4 and be supported by an affidavit
showing
the
written
approval
or
endorsement of creditors holding at least
two-thirds (2/3) of the total liabilities of the
debtor, including secured creditors holding
more than fifty percent (50%) of the total
secured claims of the debtor and unsecured
creditors holding more than fifty percent (50%)
of the total unsecured claims of the debtor.
Recognition of Foreign Proceedings (Rule
7)
Scope (Sec 1)
This Rule applies where:
(a) assistance is sought in a Philippine
court by a foreign court or a foreign
representative in connection with a foreign
proceeding;
(b) assistance is sought in a foreign State
in connection with a domestic proceeding
governed by these Rules; or
(c) a foreign proceeding and a domestic
proceeding are concurrently taking place.
The sole fact that a petition is filed
pursuant to this Rule does not subject the
foreign representative or the foreign
assets and affairs of the debtor to the
jurisdiction of the local courts for any purpose
other than the petition.
Period for Recognition (Sec 5)

-Petition for recognition of a foreign proceeding


shall be decided within thirty (30) days
from the filing thereof.
Effect of recognition of foreign procedure
(Sec 8)
Upon recognition of a foreign proceeding:
(a) Commencement or continuation of
individual
actions
or
individual
proceedings concerning the debtor's assets,
rights, obligations or liabilities is stayed;
provided, that such stay does not affect the
right to commence individual actions or
proceedings to the extent necessary to
preserve a claim against the debtor.
(b) Execution against the debtor's assets
is stayed; and
(c) The right to transfer, encumber or
otherwise dispose of any assets of the debtor is
suspended.
Procedural remedies (Rule 8)
Motion for recognition (Sec 1)
a.
Prior
to
the
approval
of
the
rehabilitation plan.
-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. Such
order can only be elevated to the Court of
Appeals as an assigned error in the petition for
review of the decision or order approving or
disapproving the rehabilitation plan.
b. After the approval of rehabilitation
plan.
-An order issued after the approval of the
rehabilitation plan can be reviewed only
through a special civil action for certiorari
under Rule 65 of the Rules of Court.
Review
of
decision
or
order
on
rehabilitation plan (Sec 2)
-an order approving or disapproving a
rehabilitation plan can only be reviewed
through a petition for review to the Court
of Appeals under Rule 43 of the Rules of
Court within fifteen (15) days from notice of the
decision or order.
Concept of debtor-in-place
-The rehabilitation receiver does not take over
the management and control of the debtor but
simply oversees and monitors closely the
operations of the debtor during the pendency of
the proceedings
Appointment of management committee
(Rule 9, Sec 1, SC Interim Rules of
Procedure
for
Intra-corporate
Controversies)

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The appointment of a management committee


for a corporation, partnership or association
may be applied for as incident to any of the
cases that may be filed under the Rules or the
Interim Rules on Corporate Rehabilitation when
there is imminent danger of:
a. dissipation, loss, wastage or destruction of
assets or other properties; and
b. paralyzation of its business operations which
may be prejudicial to the interest of the
minority stockholders, parties-litigants or the
general public.

MWSS vs. Hon. Daway


Except when a letter of credit specifically
stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of
the person or entity requesting for its issuance,
the same being a direct, primary, absolute and
definite undertaking to pay the beneficiary upon
the presentation of the set of documents
required therein. Being a solidary obligation,
the letter of credit here is excluded from the
jurisdiction of the rehabilitation court.

Cases:
Equality is Equity
Alemars Sibal & Sons, Inc. vs. Elbinias,
et.al.,

Purpose of Suspension of actions for claims


against the corporation

During rehabilitation, assets are held in trust for


the equal benefit of all creditors. As between
creditors, equality is equity. All creditors should
stand on equal footing.

Sobrejuanite, et.al., vs. ASB Development


Corp

Suspension of money claim


PAL vs. Spouses Kurangkang, et.al.,
The stay order is effective from the date
of its issuance until the dismissal of the
petition or the termination of the
rehabilitation proceedings. The interim rules
must likewise be read and applied along with
SEC 6(c) of P.D. 902-A, as so amended,
directing that upon the appointment of a
management committee, rehabilitation
receiver, board or body pursuant to the
decree, all actions for claims against the
distressed corporation pending before
any court, tribunal, board or body shall be
suspended accordingly. A claim is said to
be a right to payment, whether or not It is
reduced
to
judgment,
liquidated
or
unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or
equitable, and secured or unsecured. In Finasia
Investments and Finance Corporation this Court
has defined the word claim, contemplated in
SEC 6(c) of P.D. 902-A, as referring to debts or
demands of a pecuniary nature and the
assertion of a right to have money paid as well.
Verily, the claim of private respondents
against petitioner PAL is a money claim
for the missing luggages, a financial
demand, that the law requires to be
suspended pending the rehabilitation
proceedings.
Non-suspension of claims against guarantors
and sureties solidarily liable with debtor

The purpose for the suspension of the


proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the rights
of party litigants as well as the interest of the
investing public or creditors. Such suspension is
intended to give enough breathing space for the
management
committee
or
rehabilitation
receiver to make the business viable again,
without having to divert attention and resources
to litigations in various fora. The suspension
would enable the management committee or
rehabilitation receiver to effectively exercise
its/his powers free from any judicial or extrajudicial interference that might unduly hinder or
prevent the rescue of the debtor company.

Serious Situation Test


Pryce Corporation vs. CA.
Receivers will be appointed whenever:
1. necessary in order to preserve the rights of
the litigants; and/or
2. necessary in order to protect the interest of
the public
- clear and imminent danger of losing
corporation assets if a receiver is not appointed.

XV. SEC REORGANIZATION DECREE


PD 902-A AS AMENDED
Organization
Sec 4, RA 8799

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Administrative
Agency.
4.1.
- This Code is administered by SEC as collegial
body composed of Chairperson and 4
Commissioners
- appointed by Pres for term of 7y ea
- who serve as such until successor is appointed
& qualified
- Commissioner appointed to fill vacancy prior
to expiration of term for w/c his / her
predecessor was appointed, serves only for
unexpired portion of term.
Unless
context
indicates
otherwise,
Commissioner incl Chairperson.
4.2.
- Commissioners must be
- natural-born citizens
- at least 40y for Chairperson and at least 35y
for Commissioners
- of good moral character
- of unquestionable integrity
- of known probity & patriotism
- w/ recognized competence in social &
economic disciplines
- Majority of Commissioners, incl Chairperson,
shall be members of Phil Bar.
4.3.
- Chairperson is CEO of the Commission.
- Chairperson shall
- execute & administer policies, decisions,
orders, resolutions approved by Commission
AND
- have gen executive direction & supervision of
work & operation of Commission and its
members, bodies, boards, offices, personnel,
and all admin biz
4.4.
- Salary of Chairperson & Commissioners shall
be
- fixed by Pres
- based on objective classification system
- at a sum comparable to members of Monetary
Board and commensurate to importance
attached to position
4.5.
- Commission holds mtgs at least once a wk OR
as often as necessary upon call of Chairperson
or upon request of 3 Commissioners.
- Notice of mtg is given to all Commissioners
and presence of 3 Commissioners constitutes
quorum. In absence of Chairperson, the most
senior Commissioner acts as presiding officer.
4.6.
- Commission may delegate any of its fcns to
any dept / ofc of the Commission, an individual
Commissioner or staff member of Commission
except its
- rvw / appellate authority AND
- power to adopt, alter, supplement any rule
- Commission may rvw upon own initiative or
upon petition of party any action of dept / ofc,

individual Commissioner, or staff member of


Commission.
Sec 6, RA 8799
Indemnification
and
Responsibilities
of
Commissioners.
6.1.
- Commission shall indemnify ea Commissioner
and officials of Commission, incl personnel
performing supervision & exam fcns for all costs
& expenses reasonably incurred in connection
w/ any civil / criminal actions, suits, proceedings
to w/c they may be or made party by reason of
their fcns / duties, unless theyre finally
adjudged to be liable for gross negligence /
misconduct.
- In settlement / compromise, indemnification is
provided only in connection w/ such matters
covered by settlement as to w/c Commission is
advised by external counsel that persons to be
indemnified didnt commit any gross negligence
/ misconduct.
- Costs & expenses in defending action, suit,
proceeding may be pd by Commission in
advance of final disposition upon receipt of
undertaking by or on behalf of Commissioner,
officer, employee to repay amt advanced shld it
be determined by Commission that he / she
isnt entitled.
6.2.
- Commissioners, officers, employees of
Commission who willfully violate this Code OR
are guilty of negligence, abuse, malfeasance or
fail to exercise extraordinary diligence in
performance of duties shall be held liable.
Similar
responsibility
applies
to
Commissioners,
officers,
employees
of
Commission for
1. disclosure of info, discussion, resolution of
Commission of confidential nature OR abt
confidential operations of Commission, unless
disclosure is
- in connection w/ official fcns w/ Commission
OR
- w/ prior authorization of Commissioners
2. use of such info for personal gain or to
detriment of govt, the Commission, 3rd parties
- Data / info required to be submitted to Pres
and / or Congress or its committee OR to be
published shall not be confidential.
Sec 7, RA 8799
Reorganization.
7.1.
- Commission is authorized to provide for its
reorganization, to streamline structure &
operations, upgrade HR component and enable
it to more efficiently & effectively perform fcns
& exercise powers.
7.2.
- All positions of Commission are governed by
compensation & position classification systems

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&
qualification
standards
approved
by
Commission based on comprehensive job
analysis
&
audit
of
actual
duties
&
responsibilities.
- Compensation plan shall be
- comparable w/ prevailing plan in Bangko
Sentral and other govt financial institutions
AND
- subject to periodic rvw by Commission no
more than once every 2y w/o prejudice to
yearly merit rvws / increases based on
productivity & efficiency.
- Commission shall be exempt fr laws, rules,
regulations
on
compensation,
position
classification, qualification standards.
- Commission shall endeavor to make its system
conform as closely as possible w/ Compensation
& Position Classification Act of 1989.
Sec 76, RA 8799
Repealing Clause.
- Revised Securities Act (BP 178) in its entirety
AND Sec 2, 4, 8 of PD 902A as amended, are
repealed.
- All other laws, orders, rules, regulations, or
parts thereof, inconsistent w/ this Code are
repealed or modified.
Powers and Functions
Sec 3.
Commission
has
absolute
jurisdiction,
supervision, control over all corps, partnerships,
assns, who are grantees of primary franchise
and / or license or permit issued by govt to
operate in Phils
- It has power to enlist aid of any and all
enforcement agencies of govt, civil or military.
Sec 6.
- Commission has ff powers:
a.
issue prelim / permanent injunctions,
prohibitory / mandatory, where it has
jurisdiction
(RoC
shall
apply)
b. punish for contempt of Commission, direct &
indirect,
in
accordance
w/
RoC
c. compel officers of corp / assn registered by it
to call mtgs of stockholders / members under its
supervision
d. pass upon validity of issuance & use of
proxies & voting trust agreements for absent
stockholders
/
members
e. issue subpoena duces tecum and summon
witnesses to appear in proceedings of
Commission; in appropriate cases order search
& seizure or cause search & seizure of docs,
papers, files, records, books of accts of entity
under
investigation
f. impose fines and / or penalties for violation of
this Decree, laws implemented by Commission,
rules,
etc
g. authorize establishment of stock exchanges,

commodity exchanges, other similar orgs AND


supervise & regulate the same; incl authority to
determine their number, size, location
h. pass upon, refuse, deny, after consultation
w/ BoI, Dept of Industry, NEDA or other govt
agency, the application for registration of corp,
partnership, assn, org w/in its jurisdiction, if not
consistent
w/
natl
economic
policies
i. suspend, revoke, after notice & hearing, the
franchise / cert of registration of corp,
partnership, assn, upon any of grounds
provided by law, incl:
1. fraud in procuring cert of registration
2. serious misrepresentation as to what corp
can
do
or
is
doing
3. refusal to comply / defiance of lawful order
of Commission restraining commission of acts
w/c would amt to grave violation of franchise
4. continuous inoperation for at least 5y
5. failure to file by-laws w/in required period
6. failure to file reports in forms determined by
Commission w/in period
j. exercise other powers as implied, necessary,
incidental to express powers
- Hearings are conducted by Commission OR by
Commissioner OR other bodies, boards,
committees and / or officer created / designated
by Commission for the purpose.
Decision,
ruling, order may be appealed to Commission
en banc w/in 30d after receipt by appellant of
notice of decision, ruling, order.
- Commission shall promulgate rules of
procedures to govern proceedings, hearings,
appeals.
- Aggrieved party may appeal order, decision,
ruling of Commission en banc to SC by petition
for rvw.
Sec 5, RA 8799
Powers and Functions of the Commission.
5.1.
- Commission shall act w/ transparency and
have powers & fcns provided by this Code, PD
902A, Corp Code, Investment Houses Law,
Financing Company Act, other laws.
- Commission, powers & fcns:
a. have jurisdiction & supervision over corp,
partnership, assn who are grantees of primary
franchises and / or license / permit issued by
govt
b. formulate policies & recommendations on
issues re securities market, advise Congress &
govt agencies on securities market, propose
legislation and amendments
c. approve, reject, suspend, revoke, require
amendments
to
registration
statements,
registration & licensing applications
d. regulate, investigate, supervise activities of
persons to ensure compliance
e.
supervise, monitor, suspend, take over
activities of exchanges, clearing agencies, other
SROs

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f. impose sanctions
g.
prepare, approve, amend, repeal rules,
regulations, orders; issue opinions, provide
guidance on and supervise compliance w/ such
rules
h. enlist aid of and / or deputize enforcement
agencies of govt, civil or military as well as pvt
institution, corp, firm, assn or person in
implementation
i. issue cease & desist orders
j. punish for contempt of Commission, direct &
indirect, in accordance w/ RoC
k. compel officers of corp or assn to call mtgs
of stockholders / members under its supervision
l.
issue subpoena duces tecum, summon
witnesses to appear in proceedings of
Commission, order exam, search, seizure of
docs, papers, files, records, tax returns, books
of accts of entity under investigation
m. suspend, revoke, after notice & hearing the
franchise / cert of registration of corp,
partnership, assn, upon grounds provided by
law
n. exercise other powers provided by law as
well as those implied fr, or w/c are necessary /
incidental to express powers
XXX
Jurisdiction
Sec 5, RA 8799
Powers and Functions of the Commission.
XXX
5.2.
- Commissions jurisdiction over cases under
Sec 5 PD 902A is transferred to Courts of gen
jurisdiction OR RTC.
- SC may designate RTC branches that exercise
jurisdiction over these cases.
Cases
Prof Catindig:
Read Espino and Easycall cases together. Read
Cualoping and Provident cases together.
Compare and contrast.
REMOVAL
FROM
EMPLOYMENT
OF
CORPORATE
OFFICERS
NOT
WITHIN
JURISDICTION OF NLRC
Espino v. NLRC
- A corporate officer's dismissal is always
corporate act and / or intra-corporate
controversy.
That nature isnt altered by
reason / wisdom w/c Board may have in taking
such action.
- That Espino sought payment of backwages,
other benefits, moral & exemplary damages,
atty's fees in complaint for illegal dismissal will

not prevent SEC fr exercising jurisdiction under


PD 902A.
NLRC HAS JURISDICTION OVER CASE
INVOLVING OFFICER WHOSE POSITION
IS NOT PROVIDED FOR IN THE BY-LAWS
AND WHO WAS NOT ELECTED BY THE
BOARD OF DIRECTORS
Easycall Communications Phils Inc v. King
- It had to be first established that the person
removed / dismissed was a corporate officer
before removal / dismissal could properly fall
w/in jurisdiction of SEC and not NLRC.
- Corporate officers in context of PD 902A are
those officers of corp who are given that
character either by Corp Code or by by-laws.
Under Sec 25 of Corp Code, the corporate
officers are the pres, sec, treas and such other
officers as provided for in by-laws.
- An office is created by charter of the corp;
the officer is elected by directors / stockholders.
On the other hand, an employee occupies no
ofc and generally is employed not by action of
directors / stockholders but by managing officer
who also determines compensation to be pd.
REGULATORY
AND
ADJUDICATORY
FUNCTIONS OF SEC DISTINGUISHED
SEC v. CA, Cualoping Securities and
Fidelity Transfers
- SEC has both regulatory AND adjudicative
functions.
- Under its regulatory responsibilities, SEC may
- pass upon applications for, suspend, revoke
(after notice & hearing), certificates of
registration of corps, partnerships, assn (excl
cooperatives, homeowners' assn, labor unions)
- compel legal & regulatory compliances
- conduct inspections
- impose fines / penalties for violations of
Revised Securities Act, implementing rules &
directives of SEC
- Justiciable controversy such as can occasion
exercise of SEC's exclusive jurisdiction would
require assertion of right by proper party
against another who, in turn, contests it. It is
one instituted by & against parties having
interest in subject matter appropriate for
judicial determination predicated on given state
of facts. That controversy must be raised by
party entitled to maintain action. Hes the
person to whom right to seek judicial redress /
relief belongs w/c can be enforced against party
charged w/ having been responsible for, or to
have given rise to, the cause of action. A
person / entity tasked w/ power to adjudicate
stands neutral & impartial and acts on basis of
admissible representations of parties.

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- In this case, the proper parties that can bring


the controversy & can cause exercise by SEC of
its orig & exclusive jurisdiction would be all or
any of those who are adversely affected by
transfer of pilfered certificates of stock. Any
peremptory judgment by SEC, w/o such
proceedings having first been initiated, would
be precipitate.
DETERMINATION OF WHICH OF TWO
STOCK AND TRANSFER BOOKS IS VALID
NOT AN INTRA-CORPORATE DISPUTE
Provident International Resources Corp v.
Joaquin T. Venus
- SECs regulatory authority over pvt corps
encompasses a wide margin of areas, touching
nearly all of corps concerns.
- Under its regulatory responsibilities, SEC may
- pass upon applications for, suspend, revoke
(after notice & hearing), certificates of
registration of corps, partnerships, assn (excl
cooperatives, homeowners' assn, labor unions)
- compel legal & regulatory compliances
- conduct inspections
- impose fines / penalties for violations of
Revised Securities Act, implementing rules &
directives of SEC
- Considering that the SEC, after notice &
hearing, has regulatory power to revoke
corporate franchise fr w/c a corp owes its
legal existence, SEC must likewise have lesser
power of merely recalling and canceling STB
that was erroneously registered.
- As regulatory body, it is SECs duty to ensure
that theres only one set of STB for ea corp.
NLRC HAS NO JURISDICTION OVER CASE
INVOLVING
NON-REELECTION
OF
DIRECTOR ETC.
Pearson and George (SE Asia) Inc v. NLRC
- Any question relating or incident to election of
new Board of Directors, non-reelection of
Llorente as Director, his loss of position of
Managing Director, or abolition of said ofc are
intra-corporate matters.
Disputes arising
therefrom are intra-corporate disputes w/c, if
unresolved w/in corporate structure, may be
resolved in appropriate action only by SEC
pursuant to its authority under Sec 5 of PD
902A.
- This isnt a case of dismissal. The matter of
whom to elect is a prerogative that belongs to
Board, and involves exercise of deliberate
choice and faculty of discriminative selection.
Generally, the relationship of person to a corp,
whether as officer or as agent or employee,
isnt determined by nature of the svcs
performed, but by incidents of relationship as
they actually exist.

INTRA-CORPORATE CONTROVERSIES (AM


NO. 01-2-04-SC)
Cases Covered (Rule 1)
Sec 1.
a. Cases covered.
- These Rules govern in civil cases involving:
1. devices / schemes employed by OR act of
board of directors, biz associates, officers,
partners,
amounting
to
fraud
/
misrepresentation w/c may be detrimental to
public and / or stockholders, partners, members
of corp, partnership, assn
2. controversies
- out of intra-corporate, partnership, assn
relations
- between & among stockholders, members,
associates
- between any or all of them and the corp,
partnership, assn of w/c theyre stockholders,
members, associates
3. controversies in election / appointment of
directors, trustees, officers, managers of corp,
partnership, assn
4. derivative suits
5. inspection of corp books
b. Prohibition against nuisance and harassment
suits.
- Nuisance & harassment suits are prohibited.
In determining whether suit is nuisance /
harassment suit, court considers:
1. extent of shareholding / interest of initiating
stockholder / member
2. subject matter of suit
3. legal & factual basis
4. availability of appraisal rights
5.
prejudice to corp, partnership, assn in
relation to relief sought
- In case of nuisance / harassment suits, court
may, motu proprio or upon motion, dismiss the
case.
Distinguish from SC Interim Rules of Procedure
on Corporate Rehabilitation
Modes of Discovery (Rule 3)
Sec 1. In general.
- A party can only avail of any of modes of
discovery not later than 15d fr joinder of issues.
Sec 2. Objections.
- Any mode of discovery may be objected to

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- w/in 10d fr receipt of discovery device AND


- only on ground that the matter requested is
patently incompetent, immaterial, irrelevant,
privileged
- Court shall rule on objections not later than
15d fr filing.
Sec 3. Compliance.
- Compliance w/ mode of discovery shall be
made w/in 10d fr receipt of discovery device OR
if there are objections, fr receipt of ruling of
court.
Sec 4. Sanctions.
- Sanctions in RoC for failure to avail of, or
refusal to comply w/ modes of discovery apply.
- In addition, court may upon motion, declare
party non-suited or as in default, as case may
be, if refusal to comply w/ mode of discovery is
patently unjustified.
Pre-trial (Rule 4)
Sec 1. Pre-trial conference; mandatory nature.
- W/in 5d after period for availment of, and
compliance w/ modes of discovery, whichever
comes later, court issues & serves order
- setting the case for pre-trial conference AND
- directing parties to submit pre-trial briefs
- Parties shall file w/ court and furnish ea other
copies of pre-trial brief to ensure receipt by
court & other party at least 5d before date set
for pre-trial.
- Parties set forth in pre-trial briefs ff:
1. brief statement of nature of case; summarize
theory of party in clear & concise language
2. allegations expressly admitted by either /
both parties
3. allegations deemed admitted by either /
both parties
4. docs not specifically denied under oath by
either / both parties
5. amendments to pleadings
6.
statement of issues, w/c separately
summarizes factual & legal issues
7.
names of witnesses to be presented;
summary of their testimony as contained in
affidavits
8. other pcs of evidence
9. specific proposals for amicable settlement
10. possibility of referral to mediation or other
alternative modes of dispute resolution
11. proposed schedule of hearings
12. other matters
Sec 2.
Nature and purpose of pre-trial
conference.
- During pre-trial conference, court shall ensure
that parties consider ff:
1. possibility of amicable settlement
2. referral to mediation / other forms of dispute
resolution

3. facts that need not be proven, bec theyre of


judicial notice or expressly / deemed admitted
4. amendments to pleadings
5.
possibility of obtaining stipulations &
admission of facts & docs
6. objections to admissibility of testimonial,
documentary, other evidence
7. objections to form / substance of affidavit, or
part thereof
8. simplification of issues
9. possibility of submitting case for decision on
basis
of
position
papers,
affidavits,
documentary & real evidence
10. schedule of hearing dates
11. other matters
Sec 3. Termination.
- Prelim conference is terminated not later than
10d after commencement, WON parties agreed
to settle amicably.
Sec 4. Judgment before pre-trial.
- If, after submission of pre-trial briefs, court
determines
that
upon
consideration
of
pleadings, affidavits, other evidence submitted,
a judgment may be rendered, court may order
parties to file simultaneously respective
memoranda w/in non-extendible 20d fr receipt
of order.
- Court renders judgment, full or otherwise, not
later than 90d fr expiration of period to file
memoranda.
Sec 5. Pre-trial order; judgment after pre-trial.
- Proceedings in pre-trial are recorded.
- W/in 10d after termination of pre-trial, court
issues order w/c recites
- matters taken up in conference
- actions taken
- amendments allowed in pleadings
- agreements / admissions made by parties
- Court shall rule on objections to or comments
on admissibility of documentary / other
evidence, incl affidavit or part thereof.
- Shld action proceed to trial, order defines &
limits issues and shall strictly follow form in
Annex "A".
- Contents of order control subsequent course
of action, unless modified before trial to prevent
manifest injustice.
- After pre-trial, court may render judgment, full
or partial, as evidence presented during pretrial may warrant.
Election Contests (Rule 6)
Sec 2. Definition.
- Election contests any controversy / dispute
involving title / claim to any elective ofc in stock
/ non-stock corp, validation of proxies, manner
& validity of elections, qualifications of
candidates, incl proclamation of winners to ofc

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of director, trustee, other officer directly elected


by stockholders in close corp or by members of
non-stock corp where article of incorporation or
by-laws so provide.
Inspection of Corporate Books and Records
(Rule 7)
Sec 1. Cases covered.
- This Rule applies to disputes exclusively
involving rights of stockholders / members to
inspect books & records and / or to be furnished
w/ financial statements of corp under Corp
Code.
Sec 2. Complaint.
- In addition to requirements in Sec 4 Rule 2,
complaint must state ff:
1. case is for enforcement of plaintiff's right of
inspection of corporate orders / records and / or
to be furnished w/ financial statements
2. demand for inspection & copying of books &
records and / or to be furnished w/ financial
statements
3. refusal of defendant to grant demands of
plaintiff and reasons given
4. reasons why refusal to grant demands of
plaintiff is unjustified & illegal, stating law &
jurisprudence
Sec 7. Decision.
- Court renders decision based on pleadings,
affidavits, documentary & other evidence
attached w/in 15d fr receipt of last pleading.
- Decision ordering defendants to allow
inspection and / or to furnish copies shall also
- order plaintiff to deposit estimated cost of
manpower necessary to produce books &
records and cost of copying AND
- state limitations & conditions to exercise of
right
Derivative Suits (Rule 8)
Sec 1. Derivative action.
- Stockholder / member may bring action in the
name of corp / assn provided that:
1. he was stockholder / member at time the
acts / transactions occurred and the time the
action was filed
2. he exerted all reasonable efforts, and alleges
the same w/ particularity in complaint, to
exhaust all remedies available under articles of
incorporation, by-laws, laws / rules governing
the corp / partnership to obtain relief he desires
3. no appraisal rights are available for acts
complained of
4. suit isnt nuisance or harassment suit
- in nuisance / harassment suit, court shall
dismiss case.
Sec 2. Discontinuance.

- Derivative action shall not be discontinued,


compromised, settled w/o approval of court.
- During pendency of action, any sale of shares
of complaining stockholders shall be approved
by court.
- If court determines that interest of
stockholders / members are substantially
affected
by
discontinuance,
compromise,
settlement, the court may direct that notice, by
publication
or
otherwise,
be
given
to
stockholders / members whose interest will be
affected.
Management Committee (Rule 9)
Sec 1. Creation of a management committee.
- As incident to cases filed under these Rules
OR Interim Rules Corporate Rehabilitation, party
may apply for appointment of mgmt committee
for corp, partnership, assn, when theres
imminent danger of:
1. dissipation, loss, wastage, destruction of
assets / props
2. paralyzation of biz w/c may be prejudicial to
minority stockholders, parties-litigants, public
Sec 2. Receiver.
- If court finds application to be sufficient in
form & substance, court issues order
a. appointing rcver of known probity, integrity,
competence and w/o conflict of interest to take
over corp, partnership, assn, specifying such
powers it deems appropriate
b. fixing bond of rcver
c. directing rcver to make report w/in 60d fr
time he assumes ofc
d.
prohibiting incumbent mgmt fr selling,
encumbering, transferring, disposing any of its
props except in ordinary course of biz
e. directing payment in full of admin expenses
incurred after issuance of order
Sec 4.
Composition of the management
committee.
- After notice & hearing, court may appoint
mgmt committee composed of 3 members
chosen by court.
- In appointment, ff qualifications are
considered
1. expertise & acumen to manage biz similar in
size & complexity as the corp, assn, partnership
to be put under mgmt committee
2. knowledge in mgmt & finance
3.
good moral character, independence,
integrity
4. lack of conflict of interest
5. willingness & ability to file bond in amt
determined by court
- W/o limiting generality of ff, member of mgmt
committee may be deemed to have conflict of
interest if he is

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1. engaged in line of biz w/c competes w/ corp,


assn, partnership sought to be placed under
mgmt
2.
director, officer, stockholder charged w/
mismgmt, dissipation, wastage of prop of entity
under mgmt
3. related by consanguinity / affinity w/in 4th
civil degree to director, officer, stockholder
charged w/ mismgmt, dissipation, wastage of
props
Sec 5.
Powers and functions of the
management committee.
- Upon assumption to ofc of mgmt committee,
rcver renders report AND turns over mgmt &
control of entity to mgmt committee.
- Mgmt committee has power to take custody of
& control assets & properties owned /
possessed by entity.
- It shall take place of mgmt and board of
directors, assume their rights & responsibilities,
and preserve assets & properties in possession.
- W/o limiting generality of foregoing, mgmt
committee exercises powers & fcns:
1. investigate acts, conduct, props, liabilities,
financial condition of corp, assn, partnership
2. examine under oath the directors & officers,
other witnesses
3. report to court any fact ascertained by it
pertaining to causes of problems, fraud,
misconduct, mismgmt, irregularities
4.
employ person/s such as lawyers,
accountants, auditors, appraisers, staff as
necessary
5. report to court material adverse change in
biz
6.
evaluate existing assets & liabilities,
earnings, operations of corp, assn, partnership
7. determine & recommend to court the best
way to salvage & protect interest of creditors,
stockholders, public, incl rehab of the corp,
assn, partnership
8. prohibit & report to court encumbrance,
transfer, disposition of debtor's prop outside of
ordinary course of biz or whats allowed by
court
9. prohibit & report to court payments made
outside of ordinary course of biz
10. have unltd access to employees, premises,
books, records, financial docs during biz hrs
11. inspect, copy, photocopy, photograph any
doc, paper, book, acct, letter, whether in
possession of corp, assn, partnership, other
persons
12.
gain entry into prop for purposes of
inspecting,
measuring,
surveying,
photographing it or any relevant object /
operation thereon
13. bring to attn of court any material change
affecting entity's ability to meet obligations
14. revoke resolutions passed by Executive
Committee or Board of Directors / Trustees or

governing body of entity under mgmt and pass


resolution in substitution of the same
15. modify, nullify, revoke transactions w/c it
deems detrimental / prejudicial
16. recommend termination of proceedings &
dissolution of entity if continuance in biz is no
longer feasible / profitable or no longer works to
best interest of stockholders, parties-litigants,
creditors, public
17. apply to court for order / directive to aid it
in exercise of powers & performance of duties
18. exercise other powers conferred upon it by
court
Sec 7. Transactions deemed to be in bad faith.
- Transactions made by previous mgmt and
directors are deemed fraudulent & rescissible if
made
- w/in 30d prior to appointment of rcver / mgmt
committee OR
- during their incumbency as rcver / mgmt
committee
Sec 9. Immunity from suit.
- Rcver & members of mgmt committee and
persons employed by them shall not be subject
to action, claim, demand in connection w/ act
done / omitted by them in good faith in exercise
of their fcns & powers.
- Official acts & transactions of rcver / mgmt
committee approved / ratified by court render
them immune fr suit in connection w/ such act /
transaction.
Sec 12.
Discharge of the management
committee.
- Mgmt committee is discharged & dissolved
under ff:
1.
court, on motion or motu proprio,
determined that necessity for mgmt committee
no longer exists
2. by agreement of parties
3. upon termination of proceedings
- Upon discharge & dissolution, mgmt
committee submits final report & renders acctg.
Cases
PURPOSE AND NATURE OF DERIVATIVE
SUITS
Chua v. CA
- Under Sec 36 of Corp Code in relation to Sec
23, where corp is injured party, its power to sue
is lodged w/ board of directors / trustees. An
individual stockholder is permitted to institute
derivative suit on behalf of corp where he holds
stocks to protect / vindicate corporate rights,
when officials refuse to sue, or are the ones to
be sued, or hold control of the corp. In such
actions, suing stockholder is nominal party, w/
the corp as real party in interest.

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- Derivative action is suit by shareholder to


enforce corporate cause of action. The corp is
necessary party to the suit. The relief granted
is judgment against 3rd person in favor of corp.
Similarly, if corp has defense to action against it
and isnt asserting it, stockholder may
intervene & defend on behalf of corp.
- Not every suit filed in behalf of corp is
derivative suit. For derivative suit to prosper,
its required that minority stockholder suing for
and on behalf of corp must allege in his
complaint that hes suing on derivative cause of
action on behalf of corp and other stockholders
similarly situated who may wish to join him.
- Its condition sine qua non that the corp be
impleaded as party bec not only is the corp an
indispensable party, but its also the present
rule that it must be served w/ process.
Judgment must be made binding upon corp in
order that the corp may get the benefit of suit
and may not bring subsequent suit against
same defendants for same cause of action. The
corp must be joined as party bec it is its cause
of action thats being litigated and bec
judgment must be a res judicata against it.
NOT ALL STOCKHOLDERS / MEMBERS ARE
INDISPENSABLE PARTIES IN DERIVATIVE
SUIT
Symaco Trading Corp v. Santos
- One of the requisites of derivative suit is that
the party bringing suit shld be stockholder /
member at the time of action / transaction
complained of.
- The right to sue derivatively is an attribute of
corporate ownership w/c requires that the injury
alleged be indirect as far as stockholders /
members are concerned, and direct only insofar
as corp is concerned.
- The whole purpose of law authorizing
derivative suit is to allow stockholder / member
to enforce rights w/c are derivative (secondary)
in nature.
A derivative action is suit by
shareholder / member to enforce corporate
cause of action.
- Not all MFBAI members are indispensable
parties in derivative suit. Its enough that a
member or minority of members file derivative
suit for and in behalf of corp.
After all,
members / stockholders who filed derivative
suit are merely nominal parties, the real partyin-interest being the corp for and in whose
behalf the suit is filed. Any monetary benefits
under the decision shall pertain to the corp.
APPOINTMENT
COMMITTEE VALID

OF

MANAGEMENT

Jacinto v. First Womens Credit Corp

For
minority
stockholder
to
obtain
appointment of interim mgmt committee, he
must do more than merely make prima facie
showing of denial of his right to share in
concerns of the corp. He must show that the
corporate prop is in danger of being wasted &
destroyed and the biz of the corp is being
diverted fr the purpose for w/c it has been
organized and there is serious paralization of
operations all to his detriment.
- Its only in strong case where theres showing
that the majority are clearly violating chartered
rights of minority and putting their interests in
imminent danger that mgmt committee may be
created.
Mere
disagreement
among
stockholders as to affairs of corp wouldnt in
itself suffice as ground for appointment of
mgmt committee.
- At least where theres no imminent danger of
loss of corporate prop or of any other injury to
stockholders, mgmt of corporate biz shldnt be
wrested away fr duly elected officers, who are
prima facie entitled to administer affairs of corp
and placed in the hands of mgmt committee.
However,
where
dissension
among
stockholders is such that the corp cant
successfully carry on corporate fcns the
appointment of mgmt committee becomes
imperative.
APPOINTMENT
OF
COMMITTEE NOT VALID

MANAGEMENT

Sy Chim v. Sy Siy Ho & Sons Inc


For
minority
stockholder
to
obtain
appointment of interim mgmt committee, he
must do more than merely make prima facie
showing of denial of his right to share in
concerns of the corp. He must show that the
corporate prop is in danger of being wasted &
destroyed and the biz of the corp is being
diverted fr the purpose for w/c it has been
organized and there is serious paralization of
operations all to his detriment.
- The rationale for the need to establish
confluence of the 2 requisites under Sec 1 Rule
9 by applicant for appointment of mgmt
committee is primarily based upon fact that
such committee & rcver appointed by court will
immediately take over mgmt of the corp,
partnership,
assn
incl
such
power
as
appropriate, and any of powers in Sec 5 of the
Rule.
- Upon appointment of rcver, the elected /
appointed officers of corp are divested of mgmt
of corp in favor of mgmt committee / rcver.
Such transference of mgmt will certainly have
negative, if not crippling effect, on operations /
affairs of corp not only w/ banks & other biz
institutions including those abroad w/c it deals
with. A wall of uncertainty is erected; the short
& long-term plans are disrupted, if not derailed.

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- The creation & appointment of mgmt


committee & rcver is an extraordinary & drastic
remedy to be exercised w/ care; and only when
requirements under Interim Rules are shown.
Its a drastic course for benefit of minority
stockholders, the parties-litigants or gen public
are allowed only under pressing circumstances
and, when theres inadequate / ineffectual legal
or other remedies or when they have been
exhausted.
- Neither PD 902A and RA 8799 nor the Interim
Rules of Procedure define "imminent danger."
"Danger" is a gen term, incl peril, jeopardy,
hazard, risk; as used in the Rule, it refers to
exposure / liability to injury. "Imminent" refers
to something w/c is threatening to happen at
once, something close at hand, something to
happen upon the instant, close although not yet
happening, and on the verge of happening.
- In the absence of strong showing of imminent
danger of dissipation, loss, wastage, destruction
of assets / props of corp and paralysis of biz
operations, the mere apprehension of future
misconduct based upon prior mismanagement
will not authorize appointment of mgmt
committee / rcver.

Punongbayan v. Punongbayan
- A mgmt committee is tasked to manage, take
custody of and control existing assets, funds,
records of corp AND to determine the best way
to protect interest of stockholders & creditors.
- Having the power to create mgmt committee,
it follows that RTC can order reorganization of
existing mgmt committee. Such appointment
of new members doesnt mean creation of new
mgmt committee. Existing mgmt committee
wasnt abolished.

XVI. THE SECURITIES REGULATION


CODE
RA 8799 (2000)
LICENSING

OF

BROKERS

NICOLAS vs. CA
G.R. No. 122857
27 March 1998
RTC granted. CA dismissed.

Ao-As v. CA
- Appointment of mgmt committee inevitably
results in drastic summary removal of all
directors & officers.
- Where the corp is solvent, rcver will not be
appointed bec of past misconduct and
subsequent mere apprehension of future
misdoing,
where
present
situation
and
prospects for the future are not such as to
warrant receivership.
- Gen rule: Rcver or mgmt committee will not
be appointed unless necessary either to
prevent fraud, or to save prop fr fraud /
threatened destruction, or at least in case of
solvent corporation. The burden of proof is
heavy one w/c requires clear showing that
emergency exists.
Similarly, rcver / mgmt
committee shldnt be appointed in action by
minority stockholder against corporate officers
for accounting where corp is solvent and going
concern and rcver isnt necessary to preserve
corporate prop pending accounting.
- Mgmt committee shldnt be created when
there was adequate remedy available to pvt
respondents for liquidation of unaccounted
funds. Appointment of rcver for going corp is
last resort remedy, and shldnt be employed
when another remedy is available.
POWER
TO
CREATE
COMMITTEE
INCLUDES
REORGANIZE THE SAME

MANAGEMENT
POWER
TO

February 19, 1987 Nicolas and Buan entered


into a Portfolio Management Agreement g
Nicolas will manage Buans stock transactions
for 3 months, with an automatic renewal clause.
August 19, 1987 Buan sought termination of the
Agreement and requested an accounting from
Nicolas.
Three
weeks
after,
Nicolas
demanded
management fees of P68,263.67 for June 30,
July 31 and August 19, 1987 as stated in the
Agreement. g Ignored.
Nicolas filed in RTC a complaint for collection of
sum of money.
Buans answer: Not entitled Nicolas
mismanaged his transactions resulting in
losses.
RTC: Granted Buan should pay Nicolas
management fees.
CA
reversed
and
dismissed:
Sweeping
statement [that profits were generated by
Nicolas transactions] were unsubstantiated
[Nicolas profit and loss statements were
relevant and admissible, but they are not
credible because self-serving].
Anchor Hocking Glass Corp. vs. White Cap.: The
statements simply tabulate the number of
shares acquired from each company, a column
for profit and the last column for loss. The
statements were not authenticated by an
auditor, nor by the person who caused the
preparation of the same.

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Sample Statement submitted by Nicolas:


Profit & Loss Statement of Atty. Blesilo Buan
for the Period Ended June 30, 1987
Shares Issue
Profit
Loss
1,500 PLDT
P 7,265.62
The ledger of accounts as proof of the
transactions entered into only shows the
following data:
(1) dates in which the stocks were acquired;
(2) classified the acquired stocks to be in long
or short term trading;
(3) the price of each stock;
(4) which company's stocks were acquired; and,
(5) the total amount paid for each stock.
It does not show how much profit was realized
from each transaction."
SC: CA affirmed.
Portfolio Management Agreement states that
Buan would pay Nicolas 20% of all realized
profits every end of the month as his
management fees.
"Profits" = "excess of return over expenditure in
a transaction or series of transactions" or
"series of an amount received over the amount
paid for goods and services."
Nicolas bears burden of proving that the
transaction realized gains or profits.
Yes, stock brokers are entitled to commercial
fees or compensation:
"Revised Securities Act Rule 19-13. Charges for
Services Performed.
Charges by brokers or dealersshall be
reasonable and not unfairly discriminatory
between customers."
Bauer & Cie vs. O'Donnel: Any fee or
commission must be with due regard to
relevant circumstances.
But here, the statements are incomplete,
yielding easily to the inclusion or deletion of
certain matters.. There are no concrete bases or
specifics as to the method of arriving at the
amounts indicated. It does not state when the
stocks were purchased, the type of stocks
(whether Class "A" or "B" or common or
preferred) bought, when the stocks were sold,
the acquisition and selling price of each stock,
when the profits, if any, were delivered to the
private respondent, the cost of safekeeping or
custody of the stocks, as well as the taxes paid
for each transaction.
Bauer & Cie vs. O'Donne: Where a profit or loss
statement shows a loss, the statement must
show income and items of expense to explain
the method of determining such loss.
There were no credible documentary evidence
(e.g. receipts of the transactions, order ticket,

certificate of deposit; whether the stock


certificates were deposited in a bank or
professional custodian, and others) to support
his claim that profits were indeed realized.
Nicolas's complaint is similar to an action for
damages. The recoverable damage not only be
capable of proof but must actually be proved
with a reasonable degree of certainty. The
awarding court must posit specific facts as
sufficient basis for measuring compensatory or
actual damages.
Lastly, Nicolas cant recover because he traded
securities for the account of others without the
necessary license from the Securities and
Exchange Commission (SEC), violating SEC 19
of the Revised Securities Act.
Agbayani: Purpose = protect the public and
strengthen the securities mechanism.
Am Jur: ". . ., an unlicensed person may not
recover compensation for services as a broker
where a statute or ordinance requiring a license
is applicable and such statute or ordinance is of
a regulatory nature, was enacted in the
exercise of the police power for the purpose of
protecting the public, requires a license as
evidence of qualification and fitness, and
expressly precludes an unlicensed person from
recovering compensation by suit, or at least
manifests an intent to prohibit and render
unlawful the transaction of business by an
unlicensed person."
WHERE BOTH PARTIES ARE EQUALLY AT FAULT, NEITHER
ONE COULD HAVE RECOURSE AGAINST THE OTHER

ABACUS SECURITIES
AMPIL
G.R. No. 160016
27 February 2006

CORPORATION

vs.

Facts:
Abacus is engaged in business as a broker and
dealer of securities of listed companies at the
Philippine Stock Exchange Center.
On April 8, 1997, Ampil opened a cash account
with Abacus for his transactions in securities;
Ampils purchases were consistently unpaid
from April 10 to 30, 1997;
Ampil failed to pay in full, or even just his
deficiency, for the transactions on April 10 and
11, 1997;
Despite Ampils failure to cover his initial
deficiency, Abacus subsequently purchased and
sold securities for Ampils account on April 25
and 29;
Abacus did not cancel or liquidate a substantial
amount of Ampils stock transactions until May
6, 1997.

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RTC RULING: RTC held that Abacus violated


SECs 23 and 25 of the Revised Securities Act
(RSA) and Rule 25-1 of the Rules Implementing
the Act (RSA Rules) when it failed to: 1) require
the Ampil to pay for his stock purchases within
three or four days from trading; and 2) request
from the appropriate authority an extension of
time for the payment of Ampils cash
purchases. RTC noted that despite Ampils nonpayment within the required period, Abacus did
not cancel the purchases of Ampil. Neither did
it require him to deposit cash payments before
it executed the buy and/or sell orders
subsequent to the first unsettled transaction.
According to the RTC, by allowing Ampil to
trade his account actively without cash, Abacus
effectively induced him to purchase securities
thereby incurring excessive credits.
RTC also found Ampil to be equally at fault, by
incurring excessive credits and waiting to see
how his investments turned out before deciding
to invoke the RSA. Thus, the RTC concluded
that Abacus and Ampil were in pari delicto and
therefore without recourse against each other.
CA RULING: CA upheld the lower courts
finding that the parties were in pari delicto. It
castigated Abacus for allowing Ampil to keep on
trading despite the latters failure to pay his
outstanding obligations. It explained that the
reason [behind Abacuss act] is elemental in its
simplicity.
And it is not exactly altruistic.
Because whether [Ampils] trading transaction
would result in a surplus or deficit, he would still
be liable to pay Abacus its commission.
[Abacuss] cash register will keep on ringing to
the sound of incoming money, no matter what
happened to Ampil.
Hence, this Petition.
Issue: WON the pari delicto rule is applicable in
the present case.
Held: In Pari Delicto rule applies only to
transactions entered into AFTER the initial
trades made on April 10 and 11, 1997.
Ratio:
The
provisions
governing
the
above
transactions are SECs 23 and 25 of the RSA and
Rule 25-1 of the RSA Rules, which state as
follows:
SEC. 23. Margin Requirements.
xxx
(b)
It shall be unlawful for any member of an
exchange or any broker or dealer, directly or
indirectly, to extend or maintain credit or
arrange for the extension or maintenance of
credit to or for any customer
(1)
On any security other than an exempted
security, in contravention of the rules and
regulations which the Commission shall
prescribe under subSEC (a) of this SEC;
(2)
Without collateral or on any collateral
other than securities, except (i) to maintain a

credit initially extended in conformity with the


rules and regulations of the Commission and (ii)
in cases where the extension or maintenance of
credit is not for the purpose of purchasing or
carrying
securities
or
of
evading
or
circumventing the provisions of subparagraph
(1) of this subSEC.
xxx
SEC. 25. Enforcement of margin requirements
and restrictions on borrowings. To prevent
indirect violations of the margin requirements
under SEC 23 hereof, the broker or dealer shall
require the customer in nonmargin transactions
to pay the price of the security purchased for
his account within such period as the
Commission may prescribe, which shall in no
case exceed three trading days; otherwise, the
broker shall sell the security purchased starting
on the next trading day but not beyond ten
trading days following the last day for the
customer to pay such purchase price, unless
such sale cannot be effected within said period
for justifiable reasons. The sale shall be without
prejudice to the right of the broker or dealer to
recover any deficiency from the customer. x x
x.
RSA RULE 25-1
Purchases and Sales in Cash Account
(a)
Purchases by a customer in a cash
account shall be paid in full within three (3)
business days after the trade date.
(b)
If full payment is not received within the
required time period, the broker or dealer shall
cancel or otherwise liquidate the transaction, or
the unsettled portion thereof, starting on the
next business day but not beyond ten (10)
business days following the last day for the
customer to pay, unless such sale cannot be
effected within said period for justifiable
reasons.
(c)
If a transaction is cancelled or otherwise
liquidated as a result of non-payment by the
customer, prior to any subsequent purchase
during the next ninety (90) days, the customer
shall be required to deposit sufficient funds in
the account to cover each purchase transaction
prior to execution.
xxx
xxx
xxx
(f)
Written application for an extension of
the period of time required for payment under
paragraph (a) be made by the broker or dealer
to the Philippine Stock Exchange, in the case of
a member of the Exchange, or to the
Commission, in the case of a non-member of
the Exchange. Applications for the extension
must be based upon exceptional circumstances
and must be filed and acted upon before the
expiration of the original payment period or the
expiration of any subsequent extension.

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SEC 23(b) above -- the alleged violation of


Abacus which provides the basis for Ampils
defense -- makes it unlawful for a broker to
extend or maintain credit on any securities
other than in conformity with the rules and
regulations issued by Securities and Exchange
Commission (SEC). SEC 25 lays down the rules
to prevent indirect violations of SEC 23 by
brokers or dealers. RSA Rule 25-1 prescribes in
detail the regulations governing cash accounts.
The margin requirements set out in the RSA are
primarily intended to achieve a macroeconomic
purpose -- the protection of the overall
economy from excessive speculation in
securities. Their recognized secondary purpose
is to protect small investors.
The law places the burden of compliance with
margin requirements primarily upon the brokers
and dealers. SECs 23 and 25 and Rule 25-1,
otherwise known as the mandatory close-out
rule, clearly vest upon Abacus the obligation,
not just the right, to cancel or otherwise
liquidate a customers order, if payment is not
received within three days from the date of
purchase.
Ampil is liable for the first, but not for the
subsequent trades
Nonetheless, these margin requirements are
applicable only to transactions entered into by
the present parties subsequent to the initial
trades of April 10 and 11, 1997. Thus, we hold
that Abacus can still collect from Ampil to the
extent of the difference between the latters
outstanding obligation as of April 11, 1997 less
the proceeds from the mandatory sell out of the
shares pursuant to the RSA Rules. Abacuss
right to collect is justified under the general law
on obligations and contracts.
The right to collect cannot be denied to Abacus
as the initial transactions were entered
pursuant to the instructions of Ampil.
The
obligation of Ampil for stock transactions made
and entered into on April 10 and 11, 1997
remains outstanding.
These transactions
were valid and the obligations incurred by
Ampil concerning his stock purchases on
these dates subsist. At that time, there was
no violation of the RSA yet. Abacuss fault
arose only when it failed to: 1) liquidate the
transactions on the fourth day following the
stock purchases, or on April 14 and 15, 1997;
and 2) complete its liquidation no later than ten
days thereafter, applying the proceeds thereof
as payment for Ampils outstanding obligation.
Elucidating further, since the buyer was not
able to pay for the transactions that took place
on April 10 and 11,, the broker was duty-bound
to advance the payment to the settlement
banks without prejudice to the right of the
broker to collect later from the client.
In securities trading, the brokers are essentially
the counterparties to the stock transactions at

the Exchange. Since the principals of the broker


are generally undisclosed, the broker is
personally liable for the contracts thus made.
Hence, Abacus had to advance the payments
for Ampils trades. Brokers have a right to be
reimbursed for sums advanced by them with
the express or implied authorization of the
principal (in this case, Ampil).
In the present case, Abacus obviously failed to
enforce the terms and conditions of its
Agreement with Ampil, purportedly acting on
the plea of Ampil to give him time to raise funds
therefor. By failing to ensure Ampils payment
of his first purchase transaction within the
period prescribed by law, thereby allowing him
to make subsequent purchases, Abacus
effectively converted Ampils cash account into
a credit account.
However, extension or
maintenance
of
credits
on
nonmargin
transactions, are specifically prohibited under
SEC 23(b). Thus, Abacus was remiss in its duty
and cannot be said to have come to court with
clean hands insofar as it intended to collect
on transactions subsequent to the initial trades
of April 10 and 11, 1997.
Ampil is equally guilty for subsequent
trades
On the other hand, we find Ampil equally guilty
in entering into the transactions in violation of
the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an
innocent victim in all the transactions. Rather,
he is an experienced and knowledgeable trader
who is well versed in the securities market and
who made his own investment decisions.
We note that it was Ampil who repeatedly asked
for some time to pay his obligations for his
stock transactions.
Abacus acceded to his
requests.
It is only when sued upon his
indebtedness that Ampil raised as a defense the
invalidity of the transactions due to alleged
violations of the RSA. It was Ampils privilege to
gamble or speculate, as he apparently did so by
asking for extensions of time and refraining
from giving orders to his broker to sell, in the
hope that the prices would rise. Sustaining his
argument now would amount to relieving him of
the risk and consequences of his own
speculation and saddling them on the Abacus
after the result was known to be unfavorable.
In the final analysis, both parties acted in
violation of the law and did not come to court
with clean hands with regard to transactions
subsequent to the initial trades made on April
10 and 11, 1997. Thus, the peculiar facts of
the present case bar the application of the
pari delicto rule -- expressed in the maxims
Ex dolo malo non oritur action and In pari
delicto potior est conditio defendentis -- to all
the transactions entered into by the parties.
The pari delecto rule refuses legal remedy to

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either party to an illegal agreement and leaves


them where they were.
In this case, the pari delicto rule applies
only to transactions entered into AFTER
the initial trades made on April 10 and 11,
1997.
Since the INITIAL trades are valid and
subsisting obligations, Ampil is liable for
them.
Dispositive: WHEREFORE, CA Decision and
Resolution are MODIFIED. Ampil is ordered to
pay Abacus the difference between the formers
outstanding obligation as of April 11, 1997 less
the proceeds from the mandatory sell out of
shares pursuant to the RSA Rules, with interest
thereon at the legal rate until fully paid.
TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION
OF SHARES

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE


INSURANCE COMPANY
G.R. 171815
7 August 2007
Facts:
Union Cement or UCC (publicly listed) has 2
principal SH (stockholders) UCHC (non-listed)
owning 60.51% and Cemco owning 17.03%.
Majority of UCHCs stocks were owned by BCI
(21.31%) and ACC (29.69%). Cemco owned 9%
of UCHCs stocks.
5 July 2004: BCI informed the Philippine Stock
Exchange (PSE) that it and its subsidiary ACC
had passed resolutions to sell to Cemco all of
the stocks of BCI and ACC in UCHC.
8 July 2004: In PSE Circular for Brokers No.
3146-2004 it was stated that as a result of
Cemcos acquisition of BCI and ACCs shares in
UCHC, its total beneficial ownership, direct and
indirect, in UCC has increased by 36% and
amounted to at least 53% of the shares of UCC.
15 July 2004: As a consequence of this
disclosure, the PSE, in a letter to the SEC
inquired as to whether the Tender Offer Rule
under Rule 19 of the Implementing Rules of the
Securities Regulation Code is not applicable to
Cemcos purchase of the majority of shares of
UCC.
16 July 2004: Director Justina Callangan of the
SECs Corporate Finance Department replied
that it was the stance of the department that
the tender offer rule was not applicable.
However, the matter must still have to be
confirmed by the SEC en banc.
27 July 2004: In a subsequent letter, Director
Callangan confirmed that the SEC en banc had
resolved that the Cemco transaction was not
covered by the tender offer rule.
28 July 2004, feeling aggrieved by the
transaction, respondent National Life Insurance

Company of the Philippines, Inc., a minority


stockholder of UCC, sent a letter to Cemco
demanding the latter to comply with the rule on
mandatory tender offer.
Cemco, however, refused.
5 August 2004: a Share Purchase Agreement
was executed by ACC and BCI, as sellers, and
Cemco, as buyer.
19 August 2004: Respondent National Life filed
a complaint with the SEC asking it to reverse its
27 July 2004 Resolution and to declare the
purchase agreement of Cemco void and praying
that the mandatory tender offer rule be applied
to its UCC shares.
Cemco, UCC, UCHC, BCI and ACC (all
impleaded) filed their comments:
COMMON POINT: the tender offer rule applied
only to a direct acquisition of the shares of the
listed company and did not extend to an
indirect acquisition arising from the purchase of
the shares of a holding company of the listed
firm.
CEMCO: while the SEC can take cognizance of
respondents complaint on the alleged violation
by petitioner Cemco of the mandatory tender
offer requirement under SEC 19 of Republic Act
No. 8799, the same statute does not vest the
SEC with jurisdiction to adjudicate and
determine the rights and obligations of the
parties since, under the same statute, the SECs
authority is purely administrative.
Having been vested with purely administrative
authority,
the
SEC
can
only
impose
administrative sanctions such as the imposition
of administrative fines, the suspension or
revocation of registrations with the SEC, and
the like.
Nothing in the statute authorizes the SEC to
issue orders granting affirmative reliefs.
Since the SECs order commanding it to make a
tender offer is an affirmative relief fixing the
respective rights and obligations of parties,
such order is void.
In the absence of any specific grant of
jurisdiction by Congress, the SEC cannot, by
mere administrative regulation, confer on itself
that jurisdiction.
ALSO, the ruling on mandatory tender offer rule
by the SEC and the Court of Appeals should not
have retroactive effect or be made to apply to
its purchase of the UCHC shares as it relied in
good faith on the letter dated 27 July 2004 of
the SEC which opined that the proposed
acquisition of the UCHC shares was not covered
by the mandatory offer rule.
14 Feb 2005: SEC ruled in favor of the
respondent reversed and set aside its 27 July
2004 Resolution and directed petitioner Cemco
to make a tender offer for UCC shares to
respondent and other holders of UCC shares
similar to the class held by UCHC in accordance

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with SEC 9(E), Rule 19 of the Securities


Regulation Code.
The CA affirmed: It ruled that the SEC has
jurisdiction to render the questioned decision
and, in any event, Cemco was barred by
estoppel
from
questioning
the
SECs
jurisdiction. It, likewise, held that the tender
offer
requirement
under
the
Securities
Regulation Code and its Implementing Rules
applies to Cemcos purchase of UCHC stocks.
Issue/s & Held:
WON the SEC has jurisdiction over respondents
complaint and to require Cemco to make a
tender offer for respondents UCC shares - YES
WON the rule on mandatory tender offer applies
to the indirect acquisition of shares in a listed
company, in this case, the indirect acquisition
by Cemco of 36% of UCC, a publicly-listed
company, through its purchase of the shares in
UCHC, a non-listed company - YES
WON the questioned ruling of the SEC can be
applied retroactively to Cemcos transaction
which was consummated under the authority of
the SECs prior resolution - YES
Ratio:
First Issue - Jurisdiction
SEC was acting pursuant to Rule 19(13) of the
Amended Implementing Rules and Regulations
of the Securities Regulation Code, to wit:
13. Violation: If there shall be violation of this
Rule by pursuing a purchase of equity shares of
a public company at threshold amounts without
the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and
direct the holding of a tender offer. This shall
be without prejudice to the imposition of other
sanctions under the Code.
The foregoing rule emanates from the SECs
power and authority to regulate, investigate or
supervise the activities of persons to ensure
compliance with the Securities Regulation Code,
more specifically the provision on mandatory
tender offer under SEC 19 thereof.
Another provision of the statute, which provides
the basis of Rule 19(13) of the Amended
Implementing Rules and Regulations of the
Securities Regulation Code, is SEC 5.1(n):
The Commission shall have, among others, the
following powers and functions:
(n) Exercise such other powers as may be
provided by law as well as those which may be
implied from, or which are necessary or
incidental to the carrying out of, the express
powers granted the Commission to achieve the
objectives and purposes of these laws
The foregoing provision bestows upon the SEC
the general adjudicative power which is implied
from the express powers of the Commission or
which is incidental to, or reasonably necessary

to carry out, the performance of the


administrative duties entrusted to it.
As a regulatory agency, it has the incidental
power to conduct hearings and render decisions
fixing the rights and obligations of the parties.
In fact, to deprive the SEC of this power would
render the agency inutile, because it would
become powerless to regulate and implement
the law.
Moreover, petitioner is barred from questioning
the jurisdiction of the SEC. It must be pointed
out that petitioner had participated in all the
proceedings before the SEC and had prayed for
affirmative relief.
In fact, petitioner defended the jurisdiction of
the SEC in its Comment dated 15 September
2004. Petitioner did not question the jurisdiction
of the SEC when it rendered an opinion
favorable to it, such as the 27 July 2004
Resolution, where the SEC opined that the
Cemco transaction was not covered by the
mandatory tender offer rule.
Second Issue applicability of the mandatory
tender offer rule
Tender offer is a publicly announced intention
by a person acting alone or in concert with
other persons to acquire equity securities of a
public company. A public company is defined
as a corporation which is listed on an exchange,
or a corporation with assets exceeding
P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not
less than 100 shares of such company.
Stated differently, a tender offer is an offer by
the acquiring person to stockholders of a public
company for them to tender their shares
therein on the terms specified in the offer.
Tender offer is in place to protect minority
shareholders against any scheme that dilutes
the share value of their investments. It gives
the minority shareholders the chance to exit the
company under reasonable terms, giving them
the opportunity to sell their shares at the same
price as those of the majority shareholders.
See text of Sec 19.1, SRC:
(a) Any person or group of persons acting in
concert who intends to acquire at least fifteen
percent (15%) of any class of any equity
security of a listed corporation or of any class of
any equity security of a corporation with assets
of at least Fifty million pesos (P50,000,000.00)
and having two hundred (200) or more
stockholders with at least one hundred (100)
shares each or who intends to acquire at least
thirty percent (30%) of such equity over a
period of twelve (12) months shall make a
tender offer to stockholders by filing with the
Commission a declaration to that effect; and
furnish the issuer, a statement containing such
of the information required in SEC 17 of this
Code as the Commission may prescribe.

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Such person or group of persons shall publish


all requests or invitations for tender, or
materials making a tender offer or requesting or
inviting letters of such a security. Copies of any
additional material soliciting or requesting such
tender offers subsequent to the initial
solicitation or request shall contain such
information as the Commission may prescribe,
and shall be filed with the Commission and sent
to the issuer not later than the time copies of
such materials are first published or sent or
given to security holders.
Under existing SEC Rules, the 15% and 30%
threshold acquisition of shares under the
foregoing provision was increased to thirty-five
percent (35%). It is further provided therein
that mandatory tender offer is still applicable
even if the acquisition is less than 35% when
the purchase would result in ownership of over
51% of the total outstanding equity securities of
the public company.
The SEC and the Court of Appeals ruled that the
indirect acquisition by petitioner of 36% of UCC
shares through the acquisition of the non-listed
UCHC shares is covered by the mandatory
tender offer rule. This interpretation given by
the SEC and the Court of Appeals must be
sustained.
The rule in this jurisdiction is that the
construction given to a statute by an
administrative agency charged with the
interpretation and application of that statute is
entitled to great weight by the courts, unless
such construction is clearly shown to be in
sharp contrast with the governing law or
statute.
The rationale for this rule relates not only to the
emergence of the multifarious needs of a
modern or modernizing society and the
establishment
of
diverse
administrative
agencies for addressing and satisfying those
needs; it also relates to accumulation of
experience
and
growth
of
specialized
capabilities by the administrative agency
charged with implementing a particular statute.
The SEC and the Court of Appeals accurately
pointed out that the coverage of the mandatory
tender offer rule covers not only direct
acquisition but also indirect acquisition or "any
type of acquisition." This is clear from the
discussions of the Bicameral Conference
Committee on the Securities Act of 2000, on 17
July 2000:
SEN. S. OSMEA. Eto ang mangyayari diyan,
eh. Somebody controls 67% of the Company. Of
course, he will pay a premium for the first 67%.
Control yan, eh. Eh, kawawa yung mga
maiiwan, ang 33% because the value of the
stock market could go down, could go down
after that, because there will be no more
market. Wala nang gustong bumenta. Wala
nang... I mean maraming gustong bumenta,

walang gustong bumili kung hindi yung majority


owner. And they will not buy. They already have
67%. They already have control. And this
protects the minority. And we have had a case
in Cebu wherein Ayala A who already owned
40% of Ayala B made an offer for another 40%
of Ayala B without offering the 20%. Kawawa
naman yung nakahawak ngayon ng 20%. Ang
baba ng share sa market. But we did not have a
law protecting them at that time.
CHAIRMAN ROCO. So what is it that you want to
achieve?
SEN. S. OSMEA. That if a certain group
achieves a certain amount of ownership in a
corporation, yeah, he is obligated to buy
anybody who wants to sell.
CHAIRMAN ROCO. Pro-rata lang.
REP. TEODORO. As long as it reaches 30, ayan
na. Any type of acquisition just as long as it will
result in 30... (p.50)... reaches 30, ayan na. Any
type of acquisition just as long as it will result in
30, general tender, pro-rata.
Petitioner
counters
that
the
legislator's
reference to "any type of acquisition" during the
deliberations on the Securities Regulation Code
does not indicate that congress meant to
include the "indirect" acquisition of shares of a
public corporation to be covered by the tender
offer rule.
Petitioner also avers that it did not directly
acquire the shares in UCC and the incidental
benefit of having acquired the control of the
said public company must not be taken against
it.
These arguments are not convincing. The
legislative intent of SEC 19 of the Code is to
regulate activities relating to acquisition of
control of the listed company and for the
purpose of protecting the minority stockholders
of a listed corporation. Whatever may be the
method by which control of a public company is
obtained, either through the direct purchase of
its stocks or through an indirect means,
mandatory tender offer applies.
The petitioner posits that what it acquired were
stocks of UCHC and not UCC. By happenstance,
as a result of the transaction, it became an
indirect owner of UCC. We are constrained,
however, to construe ownership acquisition to
mean both direct and indirect. What is decisive
is the determination of the power of control.
The legislative intent behind the tender offer
rule makes clear that the type of activity
intended to be regulated is the acquisition of
control of the listed company through the
purchase of shares. Control may [be] effected
through a direct and indirect acquisition of
stock, and when this takes place, irrespective of
the means, a tender offer must occur.
The bottomline of the law is to give the
shareholder of the listed company the

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opportunity to decide whether or not to sell in


connection with a transfer of control.
Third Issue retroactive application of SEC
ruling
The action of the SEC on the PSE request for
opinion on the Cemco transaction cannot be
construed as passing merits or giving approval
to the questioned transaction.
The letter dated 27 July 2004 of the SEC was
nothing but an approval of the draft letter
prepared by Director Callanga. There was no
public hearing where interested parties could
have been heard. Hence, it was not issued upon
a definite and concrete controversy affecting
the legal relations of parties thereby making it a
judgment conclusive on all the parties. Said
letter was merely advisory.
Jurisprudence has it that an advisory opinion of
an agency may be stricken down if it deviates
from the provision of the statute. Since the
letter dated 27 July 2004 runs counter to the
Securities Regulation Code, the same may be
disregarded as what the SEC has done in its
decision dated 14 February 2005.
Moreover,
the
implementing
rules
and
regulations of the Code are sufficient to inform
and guide the parties on how to proceed with
the mandatory tender offer.

XVII.
INTELLECTUAL PROPERTY
CODE
RA 8923 (1997), AS AMENDED BY RA
9150 (2001)
THE TRIPS AGREEMENT
17.1 Topics
International Agreements on Intellectual
Property
a. Paris Convention (1883) Protection of
Industrial Property
b. Berne Convention (1896) Protection of
Literary and Artistic Works
c. Madrid Agreement (1891) Repression
of False or Deceptive Indications of
Source of Goods
d. Madrid Agreement (1891) International
Registration of Marks
e. Hague Agreement (1925) International
Deposit of Industrial Designs
f. Nice Agreement (1957) International
Classification of Goods and Services for
the Purposes of the Registration of Marks
g. Lisbon Agreement (1958) Protection of
Appellations
of
Origin
and
their
International Registration

h. Rome Convention (1961) Protection of


Performers, Producers of Phonograms
and Broadcasting Organizations
i. Locarno
Agreement
(1968)

International Classifications of Industrial


Designs
j. Patent Cooperation Treaty (1970)
simultaneous filing of international
patent application
k. Geneva Convention (1971) Protection
of Producers of Phonograms against
Unauthorized
Duplication
of
their
Phonograms
l. Strasbourg
Agreement
(1971)

International Patent Application


m.
Vienna
Agreement
(1973)

International
Classification
of
the
Figurative Elements of Marks
n. Brussels
Convention
(1974)

Distribution
of
Programme-Carrying
Signals Transmitted by Satellite
o. Budapest Treaty (1977) deposit of
microorganisms for purposes of patent
procedure
p. Nairobi Treaty (1981) Protection of
Olympic Symbol
q. Washington Treaty (1989) Intellectual
Property in Respect of Integrated
Circuits
r. Protocol on Madrid Agreement (1989)
International Registration of Marks
s. Trademark Law Treaty (1994) make
registration systems
t. WIPO
Copyright
Treaty
(1996)

computer program and databases,


u. WIPO Performances and Phonogram
Treaty (1996)
The WTO and TRIPS Agreements
Trade-Related Aspects of Intellectual Property
Rights (TRIPS) Agreement
- binding on all
members of WTO
a) National Treatment each WTO member
shall accord to the nationals of other members
treatment no less favorable than that which it
accords to its own nationals with regard to the
protection of intellectual property (subject to
certain exceptions provided in the Paris, Berne
and Rome conventions and in the Treaty on
Intellectual Property in respect of Integrated
Circuits)
b) Most-Favored Nation Treatment with
regard to the protection of intellectual property,
any advantage, favor, privilege or immunity
granted by a member to the nationals of any
other country shall be accorded immediately
and unconditionally to the nationals of all other
members
17.2 Case

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WTO Agreement not unconstitutional


TAADA vs. ANGARA
272 SCRA 18
1997
Facts:
After WWII, the GATT (General Agreement on
Tariffs and Trade) was born. Later, the WTO
(World Trade Organization) was constituted to
be the treatys administering body.
The WTO was signed in Morocco by its founding
members, one of which was the Philippines.
The President of the Philippines (Ramos) ratified
the WTO. The Senate concurred in this
ratification.
The senate ratification is the subject of this
petition
for
certiorari,
mandamus,
and
prohibition,
which
questions
the
constitutionality of the WTO.
The WTO Final Act signed by the Philippines
includes various agreements and associated
legal instruments, among which is the TRIPS
(Agreement on Trade-Related Aspects of
Intellectual Property Rights)
The petition questions the constitutionality of
certain provisions in the WTO Agreement.
Among those questioned are provisions of the
TRIPS on evidence
Issue:
WON certain provisions of the
Agreement impair the exercise of judicial power
by this Honorable Court in promulgating the
rules of evidence.
Held: No
Ratio:
Petitioners aver that paragraph 1, Article 34 of
the General Provisions and Basic Principles of
the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) intrudes on
the power of the Supreme Court to promulgate
rules concerning pleading, practice and
procedures.
Article 34
Process Patents: Burden of Proof
1. For the purposes of civil proceedings in
respect of the infringement of the rights of the
owner referred to in paragraph 1(b) of Article
28, if the subject matter of a patent is a process
for obtaining a product, the judicial authorities
shall have the authority to order the defendant
to prove that the process to obtain an identical
product is different from the patented process.
Therefore, Members shall provide, in at least
one of the following circumstances, that any
identical product when produced without the
consent of the patent owner shall, in the
absence of proof to the contrary, be deemed to
have been obtained by the patented process:
(a) if the product obtained by the patented
process is new;

(b) if there is a substantial likelihood that the


identical product was made by the process and
the owner of the patent has been unable
through reasonable efforts to determine the
process actually used.
2. Any Member shall be free to provide that the
burden of proof indicated in paragraph 1 shall
be on the alleged infringer only if the condition
referred to in subparagraph (a) is fulfilled or
only if the condition referred to in subparagraph
(b) is fulfilled.
3. In the adduction of proof to the contrary, the
legitimate interests of defendants in protecting
their manufacturing and business secrets shall
be taken into account.
From the above, a WTO Member is required to
provide a rule of disputable (note the words in
the absence of proof to the contrary)
presumption that a product shown to be
identical to one produced with the use of a
patented process shall be deemed to have been
obtained by the (illegal) use of the said
patented process, (1) where such product
obtained by the patented product is new, or (2)
where there is substantial likelihood that the
identical product was made with the use of the
said patented process but the owner of the
patent could not determine the exact process
used in obtaining such identical product.
Hence, the burden of proof contemplated by
Article 34 should actually be understood as the
duty of the alleged patent infringer to
overthrow such presumption.
Such burden,
properly understood, actually refers to the
burden of evidence (burden of going forward)
placed on the producer of the identical (or fake)
product to show that his product was produced
without the use of the patented process.
The foregoing notwithstanding, the patent
owner still has the burden of proof since,
regardless of the presumption provided under
paragraph 1 of Article 34, such owner still has
to introduce evidence of the existence of the
alleged identical product, the fact that it is
identical to the genuine one produced by the
patented process and the fact of newness of
the genuine product or the fact of substantial
likelihood that the identical product was made
by the patented process.
The foregoing should really present no problem
in changing the rules of evidence as the present
law on the subject, Republic Act No. 165, as
amended, otherwise known as the Patent Law,
provides a similar presumption in cases of
infringement of patented design or utility
model, thus:
SEC. 60. Infringement. - Infringement of a
design patent or of a patent for utility model
shall consist in unauthorized copying of the
patented design or utility model for the purpose
of trade or industry in the article or product and
in the making, using or selling of the article or

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product copying the patented design or utility


model. Identity or substantial identity with the
patented design or utility model shall constitute
evidence of copying.
Moreover, it should be noted that the
requirement of Article 34 to provide a
disputable presumption applies only if (1) the
product obtained by the patented process is
NEW or (2) there is a substantial likelihood that
the identical product was made by the process
and the process owner has not been able
through reasonable effort to determine the
process used.
Where either of these two
provisos does not obtain, members shall be free
to determine the appropriate method of
implementing the provisions of TRIPS within
their own internal systems and processes.
Suffice it to say that the reciprocity clause more
than justifies such intrusion, if any actually
exists. Besides, Article 34 does not contain an
unreasonable burden, consistent as it is with
due process and the concept of adversarial
dispute settlement inherent in our judicial
system.
So too, since the Philippine is a signatory to
most international conventions on patents,
trademarks and copyrights, the adjustment in
legislation and rules of procedure will not be
substantial.

INTELLECTUAL PROPERTY OFFICE


17.3 Topics
Structure and Functions
SEC 5. Functions of the Intellectual Property
Office (IPO). - 5.1. To administer and implement
the State policies declared in this Act, there is
hereby created the Intellectual Property Office
(IPO) which shall have the following functions:
a) Examine applications for grant of letters
patent for inventions and register utility models
and industrial designs;
b) Examine applications for the registration of
marks,
geographic
indication,
integrated
circuits;
c) Register technology transfer arrangements
and settle disputes involving technology
transfer payments covered by the provisions of
Part II, Chapter IX on Voluntary Licensing and
develop and implement strategies to promote
and facilitate technology transfer;
d) Promote the use of patent information as a
tool for technology development;
e) Publish regularly in its own publication the
patents, marks, utility models and industrial
designs, issued and approved, and the
technology transfer arrangements registered;
f)
Administratively
adjudicate
contested
proceedings affecting intellectual property
rights; and

g) Coordinate with other government agencies


and the private sector efforts to formulate and
implement plans and policies to strengthen the
protection of intellectual property rights in the
country.
5.2. The Office shall have custody of all records,
books, drawings, specifications, documents, and
other papers and things relating to intellectual
property rights applications filed with the Office.
(n)
SEC 6. The Organizational Structure of the IPO.
- 6.1. The Office shall be headed by a Director
General who shall be assisted by two (2)
Deputies Director General.
6.2. The Office shall be divided into six (6)
Bureaus, each of which shall be headed by a
Director and assisted by an Assistant Director.
These Bureaus are:
a) The Bureau of Patents;
b) The Bureau of Trademarks;
c) The Bureau of Legal Affairs;
d) The Documentation, Information and
Technology Transfer Bureau;
e) The Management Information System and
EDP Bureau; and
f) The Administrative, Financial and Personnel
Services Bureau.
6.3. The Director General, Deputies Director
General, Directors and Assistant Directors shall
be appointed by the President, and the other
officers and employees of the Office by the
Secretary of Trade and Industry, conformably
with and under the Civil Service Law. (n)
SEC 7. The Director General and Deputies
Director General. - 7.1. Functions. - The Director
General shall exercise the following powers and
functions:
a) Manage and direct all functions and activities
of the Office, including the promulgation of
rules and regulations to implement the
objectives, policies, plans, programs and
projects of the Office: Provided, That in the
exercise of the authority to propose policies and
standards in relation to the following: (1) the
effective, efficient, and economical operations
of the Office requiring statutory enactment; (2)
coordination with other agencies of government
in relation to the enforcement of intellectual
property rights; (3) the recognition of attorneys,
agents,
or
other
persons
representing
applicants or other parties before the Office;
and (4) the establishment of fees for the filing
and processing of an application for a patent,
utility model or industrial design or mark or a
collective mark, geographic indication and other
marks of ownership, and for all other services
performed and materials furnished by the
Office, the Director General shall be subject to
the supervision of the Secretary of Trade and
Industry;
b) Exercise exclusive appellate jurisdiction over
all decisions rendered by the Director of Legal

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Affairs, the Director of Patents, the Director of


Trademarks,
and
the
Director
of
the
Documentation, Information and Technology
Transfer Bureau. The decisions of the Director
General in the exercise of his appellate
jurisdiction in respect of the decisions of the
Director of Patents, and the Director of
Trademarks shall be appealable to the Court of
Appeals in accordance with the Rules of Court;
and those in respect of the decisions of the
Director of Documentation, Information and
Technology Transfer Bureau shall be appealable
to the Secretary of Trade and Industry; and
c) Exercise original jurisdiction to resolve
disputes relating to the terms of a license
involving
the
author's
right
to
public
performance or other communication of his
work. The decisions of the Director General in
these cases shall be appealable to the
Secretary of Trade and Industry.
7.2. Qualifications. - The Director General and
the Deputies Director General must be natural
born citizens of the Philippines, at least thirtyfive (35) years of age on the day of their
appointment, holders of a college degree, and
of proven competence, integrity, probity and
independence: Provided, That the Director
General and at least one (1) Deputy Director
General shall be members of the Philippine Bar
who have engaged in the practice of law for at
least ten (10) years: Provided further, That in
the selection of the Director General and the
Deputies Director General, consideration shall
be given to such qualifications as would result,
as far as practicable, in the balanced
representation in the Directorate General of the
various fields of intellectual property.
7.3. Term of Office. - The Director General and
the Deputies Director General shall be
appointed by the President for a term of five (5)
years and shall be eligible for reappointment
only once: Provided, That the first Director
General shall have a first term of seven (7)
years. Appointment to any vacancy shall be
only for the unexpired term of the predecessor.
7.4. The Office of the Director General. - The
Office of the Director General shall consist of
the Director General and the Deputies Director
General, their immediate staff and such Offices
and Services that the Director General will set
up to support directly the Office of the Director
General. (n)
SEC 8. The Bureau of Patents. - The Bureau of
Patents shall have the following functions:
8.1. Search and examination of patent
applications and the grant of patents;
8.2. Registration of utility models, industrial
designs, and integrated circuits; and
8.3. Conduct studies and researches in the field
of patents in order to assist the Director
General in formulating policies on the
administration and examination of patents. (n)

SEC 9. The Bureau of Trademarks. - The Bureau


of Trademarks shall have the following
functions:
9.1. Search and examination of the applications
for the registration of marks, geographic
indications and other marks of ownership and
the issuance of the certificates of registration;
and
9.2. Conduct studies and researches in the field
of trademarks in order to assist the Director
General in formulating policies on the
administration and examination of trademarks.
(n)
SEC 10. The Bureau of Legal Affairs. - The
Bureau of Legal Affairs shall have the following
functions:
10.1. Hear and decide opposition to the
application
for
registration
of
marks;
cancellation of trademarks; subject to the
provisions of SEC 64, cancellation of patents,
utility models, and industrial designs; and
petitions for compulsory licensing of patents;
10.2. (a) Exercise original jurisdiction in
administrative complaints for violations of laws
involving intellectual property rights: Provided,
That its jurisdiction is limited to complaints
where the total damages claimed are not less
than Two hundred thousand pesos (P200,000):
Provided further, That availment of the
provisional remedies may be granted in
accordance with the Rules of Court. The
Director of Legal Affairs shall have the power to
hold and punish for contempt all those who
disregard orders or writs issued in the course of
the proceedings. (n)
(b) After formal investigation, the Director for
Legal Affairs may impose one (1) or more of the
following administrative penalties:
(i) The issuance of a cease and desist order
which shall specify the acts that the respondent
shall cease and desist from and shall require
him to submit a compliance report within a
reasonable time which shall be fixed in the
order;
(ii) The acceptance of a voluntary assurance of
compliance or discontinuance as may be
imposed. Such voluntary assurance may include
one or more of the following:
(1) An assurance to comply with the provisions
of the intellectual property law violated;
(2) An assurance to refrain from engaging in
unlawful and unfair acts and practices subject
of the formal investigation;
(3) An assurance to recall, replace, repair, or
refund the money value of defective goods
distributed in commerce; and
(4) An assurance to reimburse the complainant
the expenses and costs incurred in prosecuting
the case in the Bureau of Legal Affairs.
The Director of Legal Affairs may also require
the respondent to submit periodic compliance

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reports and file a bond to guarantee compliance


of his undertaking;
(iii) The condemnation or seizure of products
which are subject of the offense. The goods
seized hereunder shall be disposed of in such
manner as may be deemed appropriate by the
Director of Legal Affairs, such as by sale,
donation to distressed local governments or to
charitable or relief institutions, exportation,
recycling into other goods, or any combination
thereof, under such guidelines as he may
provide;
(iv) The forfeiture of paraphernalia and all real
and personal properties which have been used
in the commission of the offense;
(v) The imposition of administrative fines in
such amount as deemed reasonable by the
Director of Legal Affairs, which shall in no case
be less than Five thousand pesos (P5,000) nor
more than One hundred fifty thousand pesos
(P150,000). In addition, an additional fine of not
more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license,
authority, or registration which may have been
granted by the Office, or the suspension of the
validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable
which shall not exceed one (1) year;
(vii) The withholding of any permit, license,
authority, or registration which is being secured
by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and
(x) Other analogous penalties or sanctions.
(Secs. 6, 7, 8, and 9, Executive Order No. 913
[1983]a)
10.3. The Director General may by Regulations
establish the procedure to govern the
implementation of this SEC. (n)
SEC 11. The Documentation, Information and
Technology
Transfer
Bureau.
The
Documentation, Information and Technology
Transfer Bureau shall have the following
functions:
11.1. Support the search and examination
activities of the Office through the following
activities:
(a) Maintain and upkeep classification systems
whether they be national or international such
as the International Patent Classification (IPC)
system;
(b)
Provide
advisory
services
for
the
determination of search patterns;
(c) Maintain search files and search rooms and
reference libraries; and
(d) Adapt and package industrial property
information.
11.2. Establish networks or intermediaries or
regional representatives;
11.3. Educate the public and build awareness
on intellectual property through the conduct of

seminars and lectures, and other similar


activities;
11.4. Establish working relations with research
and development institutions as well as with
local and international intellectual property
professional groups and the like;
11.5. Perform state-of-the-art searches;
11.6. Promote the use of patent information as
an effective tool to facilitate the development of
technology in the country;
11.7. Provide technical, advisory, and other
services relating to the licensing and promotion
of technology, and carry out an efficient and
effective program for technology transfer; and
11.8.
Register
technology
transfer
arrangements, and settle disputes involving
technology transfer payments. (n)
SEC 12. The Management Information Services
and EDP Bureau. - The Management Information
Services and EDP Bureau shall:
12.1. Conduct automation planning, research
and development, testing of systems, contracts
with
firms,
contracting,
purchase
and
maintenance of equipment, design and
maintenance of systems, user consultation, and
the like; and
12.2. Provide management information support
and service to the Office. (n)
SEC 13. The Administrative, Financial and
Human Resource Development Service Bureau.
- 13.1. The Administrative Service shall: (a)
Provide services relative to procurement and
allocation
of
supplies
and
equipment,
transportation, messengerial work, cashiering,
payment of salaries and other Office's
obligations, office maintenance, proper safety
and security, and other utility services; and
comply
with
government
regulatory
requirements in the areas of performance
appraisal,
compensation
and
benefits,
employment records and reports;
(b) Receive all applications filed with the Office
and collect fees therefor, and
(c) Publish patent applications and grants,
trademark applications, and registration of
marks, industrial designs, utility models,
geographic indication, and lay-out-designs of
integrated circuits registrations.
13.2. The Patent and Trademark Administration
Services shall perform the following functions
among others:
(a) Maintain registers of assignments, mergings,
licenses, and bibliographic on patents and
trademarks;
(b) Collect maintenance fees, issue certified
copies of documents in its custody and perform
similar other activities; and
(c) Hold in custody all the applications filed with
the office, and all patent grants, certificate of
registrations issued by the office, and the like.
13.3. The Financial Service shall formulate and
manage a financial program to ensure

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availability and proper utilization of funds;


provide for an effective monitoring system of
the financial operations of the Office; and
13.4. The Human Resource Development
Service shall design and implement human
resource development plans and programs for
the personnel of the Office; provide for present
and future manpower needs of the organization;
maintain high morale and favorable employee
attitudes towards the organization through the
continuing design and implementation of
employee development programs. (n)
SEC 14. Use of Intellectual Property Rights
Fees by the IPO. - 14.1. For a more effective and
expeditious implementation of this Act, the
Director General shall be authorized to retain,
without need of a separate approval from any
government agency, and subject only to the
existing accounting and auditing rules and
regulations, all the fees, fines, royalties and
other charges, collected by the Office under this
Act and the other laws that the Office will be
mandated to administer, for use in its
operations, like upgrading of its facilities,
equipment
outlay,
human
resource
development, and the acquisition of the
appropriate office space, among others, to
improve the delivery of its services to the
public. This amount, which shall be in addition
to the Office's annual budget, shall be
deposited and maintained in a separate account
or fund, which may be used or disbursed
directly by the Director General.
14.2. After five (5) years from the coming into
force of this Act, the Director General shall,
subject to the approval of the Secretary of
Trade and Industry, determine if the fees and
charges mentioned in SubSEC 14.1 hereof that
the Office shall collect are sufficient to meet its
budgetary requirements. If so, it shall retain all
the fees and charges it shall collect under the
same conditions indicated in said SubSEC 14.1
but shall forthwith, cease to receive any funds
from the annual budget of the National
Government; if not, the provisions of said
SubSEC 14.1 shall continue to apply until such
time when the Director General, subject to the
approval of the Secretary of Trade and Industry,
certifies that the above-stated fees and charges
the Office shall collect are enough to fund its
operations. (n)
SEC 15. Special Technical and Scientific
Assistance.
The
Director
General
is
empowered to obtain the assistance of
technical, scientific or other qualified officers
and employees of other departments, bureaus,
offices, agencies and instrumentalities of the
Government, including corporations owned,
controlled or operated by the Government,
when deemed necessary in the consideration of
any matter submitted to the Office relative to

the enforcement of the provisions of this Act.


(Sec. 3, R.A. No. 165a)
SEC 16. Seal of Office. - The Office shall have a
seal, the form and design of which shall be
approved by the Director General. (Sec. 4, R.A.
No. 165a)
SEC 17. Publication of Laws and Regulations. The Director General shall cause to be printed
and make available for distribution, pamphlet
copies of this Act, other pertinent laws,
executive orders and information circulars
relating to matters within the jurisdiction of the
Office. (Sec. 5, R.A. No. 165a)
SEC 18. The IPO Gazette. - All matters required
to be published under this Act shall be
published in the Office's own publication to be
known as the IPO Gazette. (n)
SEC 19. Disqualification of Officers and
Employees of the Office. - All officers and
employees of the Office shall not apply or act as
an attorney or patent agent of an application for
a grant of patent, for the registration of a utility
model, industrial design or mark nor acquire,
except by hereditary succession, any patent or
utility model, design registration, or mark or
any right, title or interest therein during their
employment and for one (1) year thereafter.
(Sec. 77, R.A. No. 165a)
Jurisdiction over IP disputes and Appeals
SEC 7. The Director General and Deputies
Director General. - 7.1. Functions. - The Director
General shall exercise the following powers and
functions:
b) Exercise exclusive appellate jurisdiction over
all decisions rendered by the Director of Legal
Affairs, the Director of Patents, the Director of
Trademarks,
and
the
Director
of
the
Documentation, Information and Technology
Transfer Bureau. The decisions of the Director
General in the exercise of his appellate
jurisdiction in respect of the decisions of the
Director of Patents, and the Director of
Trademarks shall be appealable to the Court of
Appeals in accordance with the Rules of Court;
and those in respect of the decisions of the
Director of Documentation, Information and
Technology Transfer Bureau shall be appealable
to the Secretary of Trade and Industry; and
c) Exercise original jurisdiction to resolve
disputes relating to the terms of a license
involving
the
author's
right
to
public
performance or other communication of his
work. The decisions of the Director General in
these cases shall be appealable to the
Secretary of Trade and Industry.
SEC 10. The Bureau of Legal Affairs. - The
Bureau of Legal Affairs shall have the following
functions:
10.1. Hear and decide opposition to the
application
for
registration
of
marks;

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cancellation of trademarks; subject to the


provisions of SEC 64, cancellation of patents,
utility models, and industrial designs; and
petitions for compulsory licensing of patents;
10.2. (a) Exercise original jurisdiction in
administrative complaints for violations of laws
involving intellectual property rights: Provided,
That its jurisdiction is limited to complaints
where the total damages claimed are not less
than Two hundred thousand pesos (P200,000):
Provided further, That availment of the
provisional remedies may be granted in
accordance with the Rules of Court. The
Director of Legal Affairs shall have the power to
hold and punish for contempt all those who
disregard orders or writs issued in the course of
the proceedings. (n)
(b) After formal investigation, the Director for
Legal Affairs may impose one (1) or more of the
following administrative penalties:
(i) The issuance of a cease and desist order
which shall specify the acts that the respondent
shall cease and desist from and shall require
him to submit a compliance report within a
reasonable time which shall be fixed in the
order;
(ii) The acceptance of a voluntary assurance of
compliance or discontinuance as may be
imposed. Such voluntary assurance may include
one or more of the following:
(1) An assurance to comply with the provisions
of the intellectual property law violated;
(2) An assurance to refrain from engaging in
unlawful and unfair acts and practices subject
of the formal investigation;
(3) An assurance to recall, replace, repair, or
refund the money value of defective goods
distributed in commerce; and
(4) An assurance to reimburse the complainant
the expenses and costs incurred in prosecuting
the case in the Bureau of Legal Affairs.
The Director of Legal Affairs may also require
the respondent to submit periodic compliance
reports and file a bond to guarantee compliance
of his undertaking;
(iii) The condemnation or seizure of products
which are subject of the offense. The goods
seized hereunder shall be disposed of in such
manner as may be deemed appropriate by the
Director of Legal Affairs, such as by sale,
donation to distressed local governments or to
charitable or relief institutions, exportation,
recycling into other goods, or any combination
thereof, under such guidelines as he may
provide;
(iv) The forfeiture of paraphernalia and all real
and personal properties which have been used
in the commission of the offense;
(v) The imposition of administrative fines in
such amount as deemed reasonable by the
Director of Legal Affairs, which shall in no case
be less than Five thousand pesos (P5,000) nor

more than One hundred fifty thousand pesos


(P150,000). In addition, an additional fine of not
more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license,
authority, or registration which may have been
granted by the Office, or the suspension of the
validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable
which shall not exceed one (1) year;
(vii) The withholding of any permit, license,
authority, or registration which is being secured
by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and
(x) Other analogous penalties or sanctions.
(Secs. 6, 7, 8, and 9, Executive Order No. 913
[1983]a)
10.3. The Director General may by Regulations
establish the procedure to govern the
implementation of this SEC. (n)
SEC 11. The Documentation, Information and
Technology
Transfer
Bureau.
The
Documentation, Information and Technology
Transfer Bureau shall have the following
functions:
11.1. Support the search and examination
activities of the Office through the following
activities:
(a) Maintain and upkeep classification systems
whether they be national or international such
as the International Patent Classification (IPC)
system;
(b)
Provide
advisory
services
for
the
determination of search patterns;
(c) Maintain search files and search rooms and
reference libraries; and
(d) Adapt and package industrial property
information.
11.2. Establish networks or intermediaries or
regional representatives;
11.3. Educate the public and build awareness
on intellectual property through the conduct of
seminars and lectures, and other similar
activities;
11.4. Establish working relations with research
and development institutions as well as with
local and international intellectual property
professional groups and the like;
11.5. Perform state-of-the-art searches;
11.6. Promote the use of patent information as
an effective tool to facilitate the development of
technology in the country;
11.7. Provide technical, advisory, and other
services relating to the licensing and promotion
of technology, and carry out an efficient and
effective program for technology transfer; and
11.8.
Register
technology
transfer
arrangements, and settle disputes involving
technology transfer payments. (n)
Administrative Penalties

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SEC 10.2 (b) After formal investigation, the


Director for Legal Affairs may impose one (1) or
more of the following administrative penalties:
(i) The issuance of a cease and desist order
which shall specify the acts that the respondent
shall cease and desist from and shall require
him to submit a compliance report within a
reasonable time which shall be fixed in the
order;
(ii) The acceptance of a voluntary assurance of
compliance or discontinuance as may be
imposed. Such voluntary assurance may include
one or more of the following:
(1) An assurance to comply with the provisions
of the intellectual property law violated;
(2) An assurance to refrain from engaging in
unlawful and unfair acts and practices subject
of the formal investigation;
(3) An assurance to recall, replace, repair, or
refund the money value of defective goods
distributed in commerce; and
(4) An assurance to reimburse the complainant
the expenses and costs incurred in prosecuting
the case in the Bureau of Legal Affairs.
The Director of Legal Affairs may also require
the respondent to submit periodic compliance
reports and file a bond to guarantee compliance
of his undertaking;
(iii) The condemnation or seizure of products
which are subject of the offense. The goods
seized hereunder shall be disposed of in such
manner as may be deemed appropriate by the
Director of Legal Affairs, such as by sale,
donation to distressed local governments or to
charitable or relief institutions, exportation,
recycling into other goods, or any combination
thereof, under such guidelines as he may
provide;
(iv) The forfeiture of paraphernalia and all real
and personal properties which have been used
in the commission of the offense;
(v) The imposition of administrative fines in
such amount as deemed reasonable by the
Director of Legal Affairs, which shall in no case
be less than Five thousand pesos (P5,000) nor
more than One hundred fifty thousand pesos
(P150,000). In addition, an additional fine of not
more than One thousand pesos (P1,000) shall
be imposed for each day of continuing violation;
(vi) The cancellation of any permit, license,
authority, or registration which may have been
granted by the Office, or the suspension of the
validity thereof for such period of time as the
Director of Legal Affairs may deem reasonable
which shall not exceed one (1) year;
(vii) The withholding of any permit, license,
authority, or registration which is being secured
by the respondent from the Office;
(viii) The assessment of damages;
(ix) Censure; and

(x) Other analogous penalties or sanctions.


(Secs. 6, 7, 8, and 9, Executive Order No. 913
[1983]a)
Prescriptive Period of Actions for Damages
SEC 79. Limitation of Action for Damages. damages can be recovered for acts
infringement committed more than four
years before the institution of the action
infringement.

No
of
(4)
for

SEC 226. Damages. - No damages may be


recovered under this Act after four (4) years
from the time the cause of action arose.

INTELLECTUAL
GENERAL

PROPERTY

RIGHTS

IN

PATENTS
17.5 Topics
Patentable Inventions
SEC 21. Patentable Inventions. - Any technical
solution of a problem in any field of human
activity which is new, involves an inventive step
and is industrially applicable shall be
Patentable. It may be, or may relate to, a
product, or process, or an improvement of any
of the foregoing. (Sec. 7, R.A. No. 165a)
Novelty
SEC 23. Novelty. . - An invention shall not be
considered new if it forms part of a prior art.
(Sec. 9, R.A. No. 165a)
Prior Art
SEC 24. Prior Art. - Prior art shall consist of:
24.1. Everything which has been made
available to the public anywhere in the world,
before the filing date or the priority date of the
application claiming the invention; and
24.2. The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with this
Act, filed or effective in the Philippines, with a
filing or priority date that is earlier than the
filing or priority date of the application:
Provided, That the application which has validly
claimed the filing date of an earlier application
under SEC 31 of this Act, shall be prior art with
effect as of the filing date of such earlier
application: Provided further, That the applicant
or the inventor identified in both applications

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are not one and the same. (Sec. 9, R.A. No.


165a)
Inventive Step or Non-Obviousness
SEC 26. Inventive Step. - An invention involves
an inventive step if, having regard to prior art, it
is not obvious to a person skilled in the art at
the time of the filing date or priority date of the
application claiming the invention. (n)
Industrial Applicability
SEC 27. Industrial Applicability. - An invention
that can be produced and used in any industry
shall be industrially applicable. (n)
Non-Patentable Inventions
SEC 22. Non-Patentable Inventions. - The
following shall be excluded from patent
protection:
[DMTPAP]
22.1. Discoveries, scientific theories and
mathematical methods;
22.2. Schemes, rules and methods of
performing mental acts, playing games or doing
business, and programs for computers;
22.3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human or
animal body. This provision shall not apply to
products and composition for use in any of
these methods;
22.4. Plant varieties or animal breeds or
essentially biological process for the production
of plants or animals. This provision shall not
apply to micro-organisms and non-biological
and microbiological processes.
Provisions under this subSEC shall not preclude
Congress to consider the enactment of a law
providing sui generis protection of plant
varieties and animal breeds and a system of
community intellectual rights protection:
22.5. Aesthetic creations; and
22.6. Anything which is contrary to public order
or morality. (Sec. 8, R.A. No. 165a)
Right to a Patent
[IHA]
SEC 28. Right to a Patent. - The right to a
patent belongs to the inventor, his heirs, or
assigns. When two (2) or more persons have
jointly made an invention, the right to a patent
shall belong to them jointly. (Sec. 10, R.A. No.
165a)
First-to-File Rule

SEC 29. First to File Rule. - If two (2) or more


persons have made the invention separately
and independently of each other, the right to
the patent shall belong to the person who filed
an application for such invention, or where two
or more applications are filed for the same
invention, to the applicant who has the earliest
filing date or, the earliest priority date. (3rd
sentence, Sec. 10, R.A. No. 165a.)
Right of Priority
[CTS]
SEC 31. Right of Priority. . - An application for
patent filed by any person who has previously
applied for the same invention in another
country which by treaty, convention, or law
affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of
filing the foreign application: Provided, That: (a)
the local application expressly claims priority;
(b) it is filed within twelve (12) months from the
date the earliest foreign application was filed;
and (c) a certified copy of the foreign
application together with an English translation
is filed within six (6) months from the date of
filing in the Philippines. (Sec. 15, R.A. No. 165a)
Contents of Application
[RRDCA]
SEC
33.
Appointment
of
Agent
or
Representative. - An applicant who is not a
resident of the Philippines must appoint and
maintain a resident agent or representative in
the Philippines upon whom notice or process for
judicial or administrative procedure relating to
the application for patent or the patent may be
served. (Sec. 11, R.A. No. 165a)
SEC 34. The Request. - The request shall
contain a petition for the grant of the patent,
the name and other data of the applicant, the
inventor and the agent and the title of the
invention. (n) [PNT]
SEC 35. Disclosure and Description of the
Invention. - 35.1. Disclosure. - The application
shall disclose the invention in a manner
sufficiently clear and complete for it to be
carried out by a person skilled in the art. Where
the application concerns a microbiological
process or the product thereof and involves the
use of a micro-organism which cannot be
sufficiently disclosed in the application in such a
way as to enable the invention to be carried out
by a person skilled in the art, and such material
is not available to the public, the application
shall be supplemented by a deposit of such
material with an international depository
institution. [SCC-PSA-MDM]
35.2. Description. - The Regulations shall
prescribe the contents of the description and

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the order of presentation. (Sec. 14, R.A. No.


165a)
SEC 36. The Claims. - 36.1. The application
shall contain one (1) or more claims which shall
define the matter for which protection is
sought. Each claim shall be clear and concise,
and shall be supported by the description.
[ODCC]
36.2. The Regulations shall prescribe the
manner of the presentation of claims. (n)
SEC 37. The Abstract. - The abstract shall
consist of a concise summary of the disclosure
of the invention as contained in the description,
claims and drawings in preferably not more
than one hundred fifty (150) words. It must be
drafted in a way which allows the clear
understanding of the technical problem, the gist
of the solution of that problem through the
invention, and the principal use or uses of the
invention. The abstract shall merely serve for
technical information. (n) [CCD]
Procedure of Grant of Patent
SEC 40. Filing Date Requirements. - 40.1. The
filing date of a patent application shall be the
date of receipt by the Office of at least the
following elements: [EID]
(a) An express or implicit indication that a
Philippine patent is sought;
(b) Information identifying the applicant; and
(c) Description of the invention and one (1) or
more claims in Filipino or English.
40.2. If any of these elements is not submitted
within the period set by the Regulations, the
application shall be considered withdrawn. (n)
SEC 41. According a Filing Date. - The Office
shall examine whether the patent application
satisfies the requirements for the grant of date
of filing as provided in SEC 40 hereof. If the
date of filing cannot be accorded, the applicant
shall be given an opportunity to correct the
deficiencies
in
accordance
with
the
implementing Regulations. If the application
does not contain all the elements indicated in
SEC 40, the filing date should be that date when
all the elements are received. If the deficiencies
are not remedied within the prescribed time
limit, the application shall be considered
withdrawn. (n)
SEC 42. Formality Examination. - 42.1. After
the patent application has been accorded a
filing date and the required fees have been paid
on time in accordance with the Regulations, the
applicant shall comply with the formal
requirements specified by SEC 32 and the
Regulations within the prescribed period,
otherwise the application shall be considered
withdrawn.

42.2. The Regulations shall determine the


procedure for the re-examination and revival of
an application as well as the appeal to the
Director of Patents from any final action by the
examiner. (Sec. 16, R.A. No. 165a)
SEC 43. Classification and Search. - An
application that has complied with the formal
requirements shall be classified and a search
conducted to determine the prior art. (n)
SEC 44. Publication of Patent Application. 44.1. The patent application shall be published
in the IPO Gazette together with a search
document established by or on behalf of the
Office citing any documents that reflect prior
art, after the expiration of eighteen (18) months
from the filing date or priority date.
44.2. After publication of a patent application,
any interested party may inspect the
application documents filed with the Office.
44.3. The Director General subject to the
approval of the Secretary of Trade and Industry,
may prohibit or restrict the publication of an
application, if in his opinion, to do so would be
prejudicial to the national security and interests
of the Republic of the Philippines. (n)
SEC 45. Confidentiality Before Publication. - A
patent application, which has not yet been
published, and all related documents, shall not
be made available for inspection without the
consent of the applicant. (n)
SEC 46. Rights Conferred by a Patent
Application After Publication. - The applicant
shall have all the rights of a patentee under SEC
76 against any person who, without his
authorization, exercised any of the rights
conferred under SEC 71 of this Act in relation to
the invention claimed in the published patent
application, as if a patent had been granted for
that invention: Provided, That the said person
had: [AK-RWN]
46.1. Actual knowledge that the invention that
he was using was the subject matter of a
published application; or
46.2. Received written notice that the invention
that he was using was the subject matter of a
published application being identified in the
said notice by its serial number: Provided, That
the action may not be filed until after the grant
of a patent on the published application and
within four (4) years from the commission of the
acts complained of. (n)
SEC 47. Observation by Third Parties. Following the publication of the patent
application,
any
person
may
present
observations
in
writing
concerning
the
patentability
of
the
invention.
Such
observations shall be communicated to the

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applicant who may comment on them. The


Office shall acknowledge and put such
observations and comment in the file of the
application to which it relates. (n)
SEC 48. Request for Substantive Examination. 48.1. The application shall be deemed
withdrawn unless within six (6) months from the
date of publication under SEC 41, a written
request to determine whether a patent
application meets the requirements of SECs 21
to 27 and SECs 32 to 39 and the fees have been
paid on time.
48.2. Withdrawal of the request for examination
shall be irrevocable and shall not authorize the
refund of any fee. (n)
SEC 49. Amendment of Application. - An
applicant may amend the patent application
during examination: Provided, That such
amendment shall not include new matter
outside the scope of the disclosure contained in
the application as filed. (n)
SEC 50. Grant of Patent. - 50.1. If the
application meets the requirements of this Act,
the Office shall grant the patent: Provided, That
all the fees are paid on time.
50.2. If the required fees for grant and printing
are not paid in due time, the application shall
be deemed to be withdrawn.
50.3. A patent shall take effect on the date of
the publication of the grant of the patent in the
IPO Gazette. (Sec. 18, R.A. No. 165a)
SEC 51. Refusal of the Application. - 51.1. The
final order of refusal of the examiner to grant
the patent shall be appealable to the Director in
accordance with this Act.
51.2. The Regulations shall provide for the
procedure by which an appeal from the order of
refusal from the Director shall be undertaken.
(n)
SEC 52. Publication Upon Grant of Patent. 52.1. The grant of the patent together with
other related information shall be published in
the IPO Gazette within the time prescribed by
the Regulations.
52.2. Any interested party may inspect the
complete description, claims, and drawings of
the patent on file with the Office. (Sec. 18, R.A.
No. 165a)
SEC 53. Contents of Patent. - The patent shall
be issued in the name of the Republic of the
Philippines under the seal of the Office and shall
be signed by the Director, and registered
together with the description, claims, and
drawings, if any, in books and records of the
Office. (Secs. 19 and 20, R.A. No. 165a)

SEC 54. Term of Patent. - The term of a patent


shall be twenty (20) years from the filing date of
the application. (Sec. 21, R.A. No. 165a)
SEC 55. Annual Fees. - 55.1. To maintain the
patent application or patent, an annual fee shall
be paid upon the expiration of four (4) years
from the date the application was published
pursuant to SEC 44 hereof, and on each
subsequent anniversary of such date. Payment
may be made within three (3) months before
the due date. The obligation to pay the annual
fees shall terminate should the application be
withdrawn, refused, or cancelled.
55.2. If the annual fee is not paid, the patent
application shall be deemed withdrawn or the
patent considered as lapsed from the day
following the expiration of the period within
which the annual fees were due. A notice that
the application is deemed withdrawn or the
lapse of a patent for non-payment of any annual
fee shall be published in the IPO Gazette and
the lapse shall be recorded in the Register of
the Office.
55.3. A grace period of six (6) months shall be
granted for the payment of the annual fee,
upon payment of the prescribed surcharge for
delayed payment. (Sec. 22, R.A. No. 165a)
SEC 56. Surrender of Patent. - 56.1. The owner
of the patent, with the consent of all persons
having grants or licenses or other right, title or
interest in and to the patent and the invention
covered thereby, which have been recorded in
the Office, may surrender his patent or any
claim or claims forming part thereof to the
Office for cancellation.
56.2. A person may give notice to the Office of
his opposition to the surrender of a patent
under this SEC, and if he does so, the Bureau
shall notify the proprietor of the patent and
determine the question.
56.3. If the Office is satisfied that the patent
may properly be surrendered, he may accept
the offer and, as from the day when notice of
his acceptance is published in the IPO Gazette,
the patent shall cease to have effect, but no
action for infringement shall lie and no right
compensation shall accrue for any use of the
patented invention before that day for the
services of the government. (Sec. 24, R.A. No.
165a)
SEC 57. Correction of Mistakes of the Office. The Director shall have the power to correct,
without fee, any mistake in a patent incurred
through the fault of the Office when clearly
disclosed in the records thereof, to make the
patent conform to the records. (Sec. 25, R.A.
No. 165)

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SEC 58. Correction of Mistake in the


Application. - On request of any interested
person and payment of the prescribed fee, the
Director is authorized to correct any mistake in
a patent of a formal and clerical nature, not
incurred through the fault of the Office. (Sec.
26, R.A. No. 165a)

using, selling or offering for sale, or importing


any product obtained directly or indirectly from
such process.
71.2. Patent owners shall also have the right to
assign, or transfer by succession the patent,
and to conclude licensing contracts for the
same. (Sec. 37, R.A. No. 165a)

SEC 59. Changes in Patents. - 59.1. The owner


of a patent shall have the right to request the
Bureau to make the changes in the patent in
order to:
(a) Limit the extent of the protection conferred
by it;
(b) Correct obvious mistakes or to correct
clerical errors; and
(c) Correct mistakes or errors, other than those
referred to in letter (b), made in good faith:
Provided, That where the change would result in
a broadening of the extent of protection
conferred by the patent, no request may be
made after the expiration of two (2) years from
the grant of a patent and the change shall not
affect the rights of any third party which has
relied on the patent, as published.
59.2. No change in the patent shall be
permitted under this SEC, where the change
would result in the disclosure contained in the
patent going beyond the disclosure contained in
the application filed.
59.3. If, and to the extent to which the Office
changes the patent according to this SEC, it
shall publish the same. (n)

Term

SEC 60. Form and Publication of Amendment. An amendment or correction of a patent shall
be accomplished by a certificate of such
amendment or correction, authenticated by the
seal of the Office and signed by the Director,
which certificate shall be attached to the
patent. Notice of such amendment or correction
shall be published in the IPO Gazette and copies
of the patent kept or furnished by the Office
shall include a copy of the certificate of
amendment or correction. (Sec. 27, R.A. No.
165)
Rights Conferred by a Patent
SEC 71. Rights Conferred by Patent. - 71.1. A
patent shall confer on its owner the following
exclusive rights:
[RPP-MUSI-MDUSOSI-ATL]
(a) Where the subject matter of a patent is a
product, to restrain, prohibit and prevent any
unauthorized person or entity from making,
using, offering for sale, selling or importing that
product;
(b) Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any
unauthorized person or entity from using the
process, and from manufacturing, dealing in,

SEC 54. Term of Patent. - The term of a patent


shall be twenty (20) years from the filing date of
the application. (Sec. 21, R.A. No. 165a)
Cancellation of Patents
SEC 61. Cancellation of Patents. - 61.1. Any
interested person may, upon payment of the
required fee, petition to cancel the patent or
any claim thereof, or parts of the claim, on any
of the following grounds:
[NN-ND-CP]
(a) That what is claimed as the invention is not
new or Patentable;
(b) That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any person
skilled in the art; or
(c) That the patent is contrary to public order or
morality.
61.2. Where the grounds for cancellation relate
to some of the claims or parts of the claim,
cancellation may be effected to such extent
only. (Secs. 28 and 29, R.A. No. 165a)
Remedies of True and Actual Inventor
SEC 68. Remedies of the True and Actual
Inventor. - If a person, who was deprived of the
patent without his consent or through fraud is
declared by final court order or decision to be
the true and actual inventor, the court shall
order for his substitution as patentee, or at the
option of the true inventor, cancel the patent,
and award actual and other damages in his
favor if warranted by the circumstances. (Sec.
33, R.A. No. 165a)
Limitations on the Rights of Patentees
SEC 72. Limitations of Patent Rights. - The
owner of a patent has no right to prevent third
parties
from
performing,
without
his
authorization, the acts referred to in SEC 71
hereof in the following circumstances:
[APEIS]
72.1. Using a patented product which has been
put on the market in the Philippines by the
owner of the product, or with his express
consent, insofar as such use is performed after

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that product has been so put on the said


market;
72.2. Where the act is done privately and on a
non-commercial scale or for a non-commercial
purpose: Provided, That it does not significantly
prejudice the economic interests of the owner
of the patent;
72.3. Where the act consists of making or using
exclusively for the purpose of experiments that
relate to the subject matter of the patented
invention;
72.4. Where the act consists of the preparation
for individual cases, in a pharmacy or by a
medical professional, of a medicine in
accordance with a medical prescription or acts
concerning the medicine so prepared;
72.5. Where the invention is used in any ship,
vessel, aircraft, or land vehicle of any other
country entering the territory of the Philippines
temporarily or accidentally: Provided, That such
invention is used exclusively for the needs of
the ship, vessel, aircraft, or land vehicle and not
used for the manufacturing of anything to be
sold within the Philippines. (Secs. 38 and 39,
R.A. No. 165a)
SEC 73. Prior User. - 73.1. Notwithstanding SEC
72 hereof, any prior user, who, in good faith
was using the invention or has undertaken
serious preparations to use the invention in his
enterprise or business, before the filing date or
priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in such
preparations within the territory where the
patent produces its effect.
73.2. The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which the use or
preparations for use have been made. (Sec. 40,
R.A. No. 165a)
SEC 74. Use of Invention by Government. 74.1. A Government agency or third person
authorized by the Government may exploit the
invention even without agreement of the patent
owner where:
[PI-JAAC]
(a) The public interest, in particular, national
security, nutrition, health or the development of
other sectors, as determined by the appropriate
agency of the government, so requires; or
(b) A judicial or administrative body has
determined that the manner of exploitation, by
the owner of the patent or his licensee is anticompetitive.
74.2. The use by the Government, or third
person authorized by the Government shall be
subject, mutatis mutandis, to the conditions set
forth in SECs 95 to 97 and 100 to 102. (Sec. 41,
R.A. No. 165a)

Patent Infringement
SEC 76. Civil Action for Infringement. - 76.1.
The making, using, offering for sale, selling, or
importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process
without the authorization of the patentee
constitutes patent infringement. [MUOSIUWA]
Civil Action
SEC 76. Civil Action for Infringement. - 76.1.
The making, using, offering for sale, selling, or
importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process
without the authorization of the patentee
constitutes patent infringement.
[DAIDC]
76.2. Any patentee, or anyone possessing any
right, title or interest in and to the patented
invention, whose rights have been infringed,
may bring a civil action before a court of
competent jurisdiction, to recover from the
infringer such damages sustained thereby, plus
attorney's fees and other expenses of litigation,
and to secure an injunction for the protection of
his rights.
76.3. If the damages are inadequate or cannot
be
readily
ascertained
with
reasonable
certainty, the court may award by way of
damages a sum equivalent to reasonable
royalty.
76.4. The court may, according to the
circumstances of the case, award damages in a
sum above the amount found as actual
damages sustained: Provided, That the award
does not exceed three (3) times the amount of
such actual damages.
76.5. The court may, in its discretion, order that
the infringing goods, materials and implements
predominantly used in the infringement be
disposed of outside the channels of commerce
or destroyed, without compensation.
76.6. Anyone who actively induces the
infringement of a patent or provides the
infringer with a component of a patented
product or of a product produced because of a
patented process knowing it to be especially
adopted for infringing the patented invention
and not suitable for substantial non-infringing
use shall be liable as a contributory infringer
and shall be jointly and severally liable with the
infringer. (Sec. 42, R.A. No. 165a)
Defenses
[FKI]
SEC 79. Limitation of Action for Damages. - No
damages can be recovered for acts of

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infringement committed more than four (4)


years before the institution of the action for
infringement. (Sec. 43, R.A. No. 165)
SEC 80. Damages, Requirement of Notice. Damages cannot be recovered for acts of
infringement committed before the infringer
had known, or had reasonable grounds to know
of the patent. It is presumed that the infringer
had known of the patent if on the patented
product, or on the container or package in
which the article is supplied to the public, or on
the advertising material relating to the
patented product or process, are placed the
words "Philippine Patent" with the number of
the patent. (Sec. 44, R.A. No. 165a)
SEC 81. Defenses in Action for Infringement. In an action for infringement, the defendant, in
addition to other defenses available to him,
may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which a
petition of cancellation can be brought under
SEC 61 hereof. (Sec. 45, R.A. No. 165)
Burden of Proof in Infringement Process
SEC 78. Process Patents; Burden of Proof . - If
the subject matter of a patent is a process for
obtaining a product, any identical product shall
be presumed to have been obtained through
the use of the patented process if the product is
new or there is substantial likelihood that the
identical product was made by the process and
the owner of the patent has been unable
despite reasonable efforts, to determine the
process actually used. In ordering the
defendant to prove that the process to obtain
the identical product is different from the
patented process, the court shall adopt
measures to protect, as far as practicable, his
manufacturing and business secrets. (n)
Criminal Action
IMP 6MOS-3 YRS
FINE 100K-300K
3 YRS
SEC 84. Criminal Action for Repetition of
Infringement. - If infringement is repeated by
the infringer or by anyone in connivance with
him after finality of the judgment of the court
against the infringer, the offenders shall,
without prejudice to the institution of a civil
action for damages, be criminally liable therefor
and, upon conviction, shall suffer imprisonment
for the period of not less than six (6) months
but not more than three (3) years and/or a fine
of not less than One hundred thousand pesos
(P100,000) but not more than Three hundred
thousand pesos (P300,000), at the discretion of
the court. The criminal action herein provided
shall prescribe in three (3) years from date of

the commission of the crime. (Sec. 48, R.A. No.


165a)
Voluntary Licensing
Prohibited Clauses
SEC 87. Prohibited Clauses. - Except in cases
under SEC 91, the following provisions shall be
deemed prima facie to have an adverse effect
on competition and trade:
[SPVCP TREUP CRALE]
87.1. Those which impose upon the licensee the
obligation to acquire from a specific source
capital goods, intermediate products, raw
materials, and other technologies, or of
permanently employing personnel indicated by
the licensor;
87.2. Those pursuant to which the licensor
reserves the right to fix the sale or resale prices
of the products manufactured on the basis of
the license;
87.3. Those that contain restrictions regarding
the volume and structure of production;
87.4. Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement;
87.5. Those that establish a full or partial
purchase option in favor of the licensor;
87.6. Those that obligate the licensee to
transfer for free to the licensor the inventions or
improvements that may be obtained through
the use of the licensed technology;
87.7. Those that require payment of royalties to
the owners of patents for patents which are not
used;
87.8. Those that prohibit the licensee to export
the licensed product unless justified for the
protection of the legitimate interest of the
licensor such as exports to countries where
exclusive licenses to manufacture and/or
distribute the licensed product(s) have already
been granted;
87.9. Those which restrict the use of the
technology supplied after the expiration of the
technology transfer arrangement, except in
cases of early termination of the technology
transfer
arrangement
due
to
reason(s)
attributable to the licensee;
87.10. Those which require payments for
patents and other industrial property rights
after their expiration, termination arrangement;
87.11. Those which require that the technology
recipient shall not contest the validity of any of
the patents of the technology supplier;
87.12. Those which restrict the research and
development activities of the licensee designed
to absorb and adapt the transferred technology
to local conditions or to initiate research and
development programs in connection with new
products, processes or equipment;

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87.13. Those which prevent the licensee from


adapting the imported technology to local
conditions, or introducing innovation to it, as
long as it does not impair the quality standards
prescribed by the licensor;
87.14. Those which exempt the licensor for
liability for non-fulfilment of his responsibilities
under the technology transfer arrangement
and/or liability arising from third party suits
brought about by the use of the licensed
product or the licensed technology; and
87.15. Other clauses with equivalent effects.
(Sec. 33-C (2), R.A 165a)
Mandatory Provisions
SEC 88. Mandatory Provisions. - The following
provisions shall be included in voluntary license
contracts:
[PCAT]
88.1. That the laws of the Philippines shall
govern the interpretation of the same and in
the event of litigation, the venue shall be the
proper court in the place where the licensee has
its principal office;
88.2. Continued access to improvements in
techniques and processes related to the
technology shall be made available during the
period of the technology transfer arrangement;
88.3. In the event the technology transfer
arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration Law
of the Philippines or the Arbitration Rules of the
United Nations Commission on International
Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the
venue of arbitration shall be the Philippines or
any neutral country; and
88.4. The Philippine taxes on all payments
relating to the technology transfer arrangement
shall be borne by the licensor. (n)
Unenforceability
of
Non-Complying
Technology Transfer Agreement
SEC
92.
Non-Registration
with
the
Documentation, Information and Technology
Transfer
Bureau.
Technology
transfer
arrangements that conform with the provisions
of SECs 86 and 87 need not be registered with
the
Documentation,
Information
and
Technology Transfer Bureau. Non-conformance
with any of the provisions of SECs 87 and 88,
however, shall automatically render the
technology
transfer
arrangement
unenforceable, unless said technology transfer
arrangement is approved and registered with
the
Documentation,
Information
and
Technology
Transfer
Bureau
under
the
provisions of SEC 91 on exceptional cases. (n)

Compulsory Licensing
Ground for Grant of Compulsory License
SEC 93. Grounds for Compulsory Licensing. The Director of Legal Affairs may grant a license
to exploit a patented invention, even without
the agreement of the patent owner, in favor of
any person who has shown his capability to
exploit the invention, under any of the following
circumstances:
[NPJPN]
93.1.
National
emergency
or
other
circumstances of extreme urgency;
93.2. Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government, so
requires; or
93.3. Where a judicial or administrative body
has determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive; or
93.4. In case of public non-commercial use of
the patent by the patentee, without satisfactory
reason;
93.5. If the patented invention is not being
worked in the Philippines on a commercial
scale, although capable of being worked,
without satisfactory reason: Provided, That the
importation of the patented article shall
constitute working or using the patent. (Secs.
34, 34-A, 34-B, R.A. No. 165a)
Terms and Conditions of Grant
SEC 100. Terms and Conditions of Compulsory
License. - The basic terms and conditions
including the rate of royalties of a compulsory
license shall be fixed by the Director of Legal
Affairs subject to the following conditions:
[SNNPTP]
100.1. The scope and duration of such license
shall be limited to the purpose for which it was
authorized;
100.2. The license shall be non-exclusive;
100.3. The license shall be non-assignable,
except with that part of the enterprise or
business with which the invention is being
exploited;
100.4. Use of the subject matter of the license
shall be devoted predominantly for the supply
of the Philippine market: Provided, That this
limitation shall not apply where the grant of the
license is based on the ground that the
patentee's manner of exploiting the patent is
determined by judicial or administrative
process, to be anti-competitive.
100.5. The license may be terminated upon
proper showing that circumstances which led to
its grant have ceased to exist and are unlikely
to recur: Provided, That adequate protection

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shall be afforded to the legitimate interest of


the licensee; and
100.6. The patentee shall be paid adequate
remuneration taking into account the economic
value of the grant or authorization, except that
in cases where the license was granted to
remedy a practice which was determined after
judicial or administrative process, to be anticompetitive, the need to correct the anticompetitive practice may be taken into account
in fixing the amount of remuneration. (Sec. 35B, R.A. No. 165a)
Licensees Exemption from Liability
SEC 102. Licensee's Exemption from Liability. Any person who works a patented product,
substance and/or process under a license
granted under this Chapter, shall be free from
any liability for infringement: Provided however,
That in the case of voluntary licensing, no
collusion with the licensor is proven. This is
without prejudice to the right of the rightful
owner of the patent to recover from the licensor
whatever he may have received as royalties
under the license. (Sec. 35-E, R.A. No. 165a)
Assignment or Transfer of Patent
Form
SEC 105. Form of Assignment. - The
assignment must be in writing, acknowledged
before a notary public or other officer
authorized to administer oath or perform
notarial acts, and certified under the hand and
official seal of the notary or such other officer.
(Sec. 52, R.A. No. 165) [WAC]
Need for Recording to Bind Third Parties
SEC 106. Recording. - 106.1. The Office shall
record assignments, licenses and other
instruments relating to the transmission of any
right, title or interest in and to inventions, and
patents or application for patents or inventions
to which they relate, which are presented in
due form to the Office for registration, in books
and records kept for the purpose. The original
documents together with a signed duplicate
thereof shall be filed, and the contents thereof
should be kept confidential. If the original is not
available, an authenticated copy thereof in
duplicate may be filed. Upon recording, the
Office shall retain the duplicate, return the
original or the authenticated copy to the party
who filed the same and notice of the recording
shall be published in the IPO Gazette.
106.2. Such instruments shall be void as
against
any
subsequent
purchaser
or
mortgagee for valuable consideration and

without notice, unless, it is so recorded in the


Office, within three (3) months from the date of
said instrument, or prior to the subsequent
purchase or mortgage. (Sec. 53, R.A. No. 165a)
Utility Models
SEC 109. Special Provisions Relating to Utility
Models. - 109.1. (a) An invention qualifies for
registration as a utility model if it is new and
industrially applicable.
Term
109.3. A utility model registration shall expire,
without any possibility of renewal, at the end of
the seventh year after the date of the filing of
the application.
17.6 Cases
Test of Infringement
GODINES V CA
Facts:
The patent involved in this case is Letters
Patent No. UM-2236 issued by the Philippine
Patent Office to one Magdalena S. Villaruz on
July 15, 1976. It covers a utility model for a
hand tractor or power tiller. The above
mentioned patent was acquired by SV-Agro
Industries Enterprises, Inc., herein private
respondent, from Magdalena Villaruz, its
chairman and president, by virtue of a Deed of
Assignment executed by the latter in its favor.
On October 31, 1979. In 1979, SV-Agro
Industries suffered a decline of more than 50%
in sales in its Molave, Zamboanga del Sur
branch. Upon investigation, it discovered that
power tillers similar to those patented by
private respondent were being manufactured
and sold by petitioner herein. Consequently,
private respondent notified Pascual Godines
about the existing patent and demanded that
the latter stop selling and manufacturing similar
power tillers. Upon petitioner's failure to comply
with the demand, SV-Agro Industries filed
before the Regional Trial Court a complaint for
infringement of patent and unfair competition.
RTC:
held
Pascual
Godines
liable
for
infringement of patent and unfair competition.
CA: decision was affirmed by the appellate
court.
Issue: WON Petitioner is guilty of Patent
Infringement.
Held: Yes
Ratio:
We find no merit in his arguments. The question
of whether petitioner was manufacturing and
selling power tillers is a question of fact better

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addressed to the lower courts. In dismissing the


first argument of petitioner herein, the Court of
Appeals quoted the findings of the court, to wit:
It is the contention of defendant that he did not
manufacture or make imitations or copies of
plaintiff's turtle power tiller as what he merely
did was to fabricate his floating power tiller
upon specifications and designs of those who
ordered them. However, this contention
appears untenable in the light of the following
circumstances:
he admits in his Answer that he has been
manufacturing power tillers or hand tractors,
selling and distributing them long before
plaintiff started selling its turtle power tiller in
Zamboanga del Sur and Misamis Occidental,
meaning that defendant is principally a
manufacturer of power tillers, not upon
specification and design of buyers, but upon
his own specification and design;
it would be unbelievable that defendant would
fabricate power tillers similar to the turtle
power tillers of plaintiff upon specifications of
buyers without requiring a job order where the
specification and designs of those ordered are
specified.
No document was (sic) ever been presented
showing such job orders, and it is rather
unusual
for
defendant
to
manufacture
something without the specification and
designs, considering that he is an engineer by
profession and proprietor of the Ozamis
Engineering shop.
On the other hand, it is also highly unusual for
buyers to order the fabrication of a power tiller
or hand tractor and allow defendant to
manufacture them merely based on their verbal
instructions.
This is contrary to the usual business and
manufacturing practice. This is not only time
consuming, but costly because it involves a trial
and error method, repeat jobs and material
wastage. Defendant judicially admitted two (2)
units of the turtle power tiller sold by him to
Policarpio Berondo.
Tests used in the case:
- Tests have been established to determine
infringement.
These are :
LITERAL INFRINGEMENT: in using literal
infringement as a test, ". . . resort must be had,
in the first instance, to the words of the claim. If
accused matter clearly falls within the claim,
infringement is made out and that is the end of
it."
To determine whether the particular item falls
within the literal meaning of the patent claims,
the court must juxtapose the claims of the
patent and the accused product within the
overall context of the claims and specifications,
to determine whether there is exact identity of
all material elements.

In appearance and form, both the floating


power tillers of the defendant and the turtle
power tiller of the plaintiff are virtually the
same.
Viewed from any perspective or angle, the
power tiller of the defendant is identical and
similar to that of the turtle power tiller of
plaintiff in form, configuration, design and
appearance. The parts or components thereof
are virtually the same.
Moreover, it is also observed that petitioner also
called his power tiller as a floating power tiller.
(b) the DOCTRINE OF EQUIVALENTS:
according to this doctrine, (a)n infringement
also occurs when a device appropriates a prior
invention by incorporating its innovative
concept and, albeit with some modification and
change, performs substantially the same
function in substantially the same way to
achieve substantially the same result.
The reason for the doctrine of equivalents is
that to permit the imitation of a patented
invention which does not copy any literal detail
would be to convert the protection of the patent
grant into a hollow and useless thing.
A careful examination between the two power
tillers will show that they will operate on the
same fundamental principles.
More specifically, it is necessary and sufficient
to constitute equivalency that the same
function can be performed in substantially the
same way or manner, or by the same or
substantially the same, principle or mode of
operation; but where these tests are satisfied,
mere differences of form or name are
immaterial.
Compulsory Licensing
SMITH KLINE & FRENCH LABORATORIES V CA
Facts:
Petitioner is a foreign corporation with principal
office at Welwyn Garden City, England. It owns
Philippine Letters Patent No. 12207 issued by
the Bureau of Patents, Trademarks and
Technology Transfer (BPTTT) for the patent of
the drug Cimetidine.
Private respondent is a domestic corporation
engaged in the business of manufacturing and
distributing pharmaceutical products. On 30
March 1987, it filed a petition for compulsory
licensing[3] with the BPTTT for authorization to
manufacture its own brand of medicine from
the drug Cimetidine and to market the resulting
product in the Philippines. The petition was
filed pursuant to the provisions of SEC 34 of
Republic Act No. 165 (An Act Creating a Patent
Office Prescribing Its Powers and Duties,
Regulating the Issuance of Patents, and
Appropriating Funds Therefor), which provides
for the compulsory licensing of a particular
patent after the expiration of two years from

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the grant of the latter if the patented invention


relates to, inter alia, medicine or that which is
necessary for public health or public safety.
Private respondent alleged that the grant of
Philippine Letters Patent No. 12207 was issued
on 29 November 1978; that the petition was
filed beyond the two-year protective period
provided in SEC 34 of R.A. No. 165; and that it
had the capability to work the patented product
or make use of it in its manufacture of
medicine.
Petitioner opposed, arguing that private
respondent had no cause of action and lacked
the capability to work the patented product; the
petition failed to specifically divulge how private
respondent would use or improve the patented
product; and that private respondent was
motivated by the pecuniary gain attendant to
the grant of a compulsory license. Petitioner
also maintained that it was capable of satisfying
the demand of the local market in the
manufacture and marketing of the medicines
covered by the patented product.
BPTTT decided for the Private Respondent
approving the application for a license. This was
affirmed by the CA.
Issue: WON the grant of the license was
proper
Held: Yes
Ratio:
Article 5 of the Paris Convention for the
Protection of Industrial Property,[8] or Paris
Convention, for short, of which the Philippines
became a party thereto only in 1965.[9]
Pertinent portions of said Article 5, SEC A,
provide:
A.
xxx
(2)
Each country of the union shall have
the right to take legislative measures providing
for the grant of compulsory licenses to prevent
the abuses which might result from the exercise
of the exclusive rights conferred by the patent,
for example, failure to work.
xxx
(4)
A compulsory license may not be
applied for on the ground of failure to work or
insufficient working before the expiration of a
period of four years from the date of filing of the
patent application or three years from the date
of the grant of the patent, whichever period
expires last; it shall be refused if the patentee
justifies his inaction by legitimate reasons.
Such a compulsory license shall be nonexclusive and shall not be transferable, even in
the form of the grant of a sub-license, except
with that part of the enterprise or goodwill
which exploits such license.
It is thus clear that SEC A(2) of Article 5 above
unequivocally and explicitly respects the right
of member countries to adopt legislative
measures to provide for the grant of

compulsory licenses to prevent abuses which


might result from the exercise of the exclusive
rights conferred by the patent. An example
provided of possible abuses is "failure to work;"
however, as such is merely supplied by way of
an example, it is plain that the treaty does not
preclude the inclusion of other forms or
categories of abuses.
Also Article 34 of R.A. No. 165 states:
EC. 34. Grounds for Compulsory Licensing. -(1) Any person may apply to the Director for
the grant of a license under a particular patent
at any time after the expiration of two years
from the date of the grant of the patent, under
any of the following circumstances:
(e)
If the patented invention or article
relates to food or medicine or manufactured
products or substances which can be used as
food or medicine, or is necessary for public
health or public safety.
Parenthetically, it must be noted that paragraph
(4) of SEC A, Article 5 of the Paris Convention
setting time limitations in the application for a
compulsory license refers only to an instance
where the ground therefor is "failure to work or
insufficient working," and not to any ground or
circumstance as the treaty signatories may
reasonably determine.
Neither may petitioner validly invoke what it
designates as the GATT Treaty, Uruguay Round.
This act is better known as the Uruguay Final
Act signed for the Philippines on 15 April 1994
by Trade and Industry Secretary Rizalino
Navarro. Forming integral parts thereof are the
Agreement Establishing the World Trade
Organization, the Ministerial Declarations and
Decisions,
and
the
Understanding
on
Commitments in Financial Services. The
Agreement establishing the World Trade
Organization includes various agreements and
associated legal instruments. It was only on 14
December 1994 that the Philippine Senate, in
the exercise of its power under SEC 21 of Article
VII of the Constitution, adopted Senate
Resolution No. 97 concurring in the ratification
by the President of the Agreement.
The
President signed the instrument of ratification
on 16 December 1994. But plainly, this treaty
has no retroactive effect. Accordingly, since the
challenged BPTTT decision was rendered on 14
February 1994, petitioner cannot avail of the
provisions of the GATT treaty.
It cannot likewise be claimed that petitioner
was unduly deprived of its property rights, as
R.A. No. 165 not only grants the patent holder a
protective period of two years to enjoy his
exclusive rights thereto; but subsequently, the
law recognizes just compensation in the form of
royalties.
In
Parke,
Davies
&
Co.
v.
Doctors'
Pharmaceuticals, Inc., we held:

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The right to exclude others from the


manufacturing, using, or vending an invention
relating to, food or medicine should be
conditioned to allowing any person to
manufacture, use, or vend the same after a
period of three [now two] years from the date of
the grant of the letters patent. After all, the
patentee is not entirely deprived of any
proprietary right. In fact, he has been given the
period of three years [now two years] of
complete
monopoly
over
the
patent.
Compulsory licensing of a patent on food or
medicine without regard to the other conditions
imposed in SEC 34 [now SEC 35] is not an
undue deprivation of proprietary interests over
a patent right because the law sees to it that
even after three years of complete monopoly
something is awarded to the inventor in the
form of bilateral and workable licensing
agreement and a reasonable royalty to be
agreed upon by the parties and in default of
such an agreement, the Director of Patents may
fix the terms and conditions of the license.
Patent Infringement
CRESER PRECISION SYSTEMS V CA
Facts:
Floro International Corp. (Floro) is a domestic
corporation engaged in the manufacture,
production, distribution and sale of military
armaments, munitions, airmunitions and other
similar materials.
January 23, 1990 Floro granted a Patent by
Bureau of Patents, Trademarks and Technology
Transfer (BPTTT) covering an aerial fuze, duly
published in the September-October-1990 issue
of the Bureau of Patent's Official Gazette.
November 1993 Floros president, Mr. Gregory
Floro, Jr., discovered that Creser Precision
Systems, Inc. (Creser):
submitted samples Floros patented aerial fuze
to the AFP for testing.
was claiming the aerial fuze as its own
was planning to bid and commercially
manufacture it without license or authority from
Floro.
December 3, 1993 Floro sent a letter to Creser
advising it of its existing patent and its rights
thereunder, warning Creser of a possible court
action and/or application for injunction, should it
proceed with the scheduled testing by the
military on December 7, 1993.
December 8, 1993 Creser filed in the RTC a
complaint for injunction and damages arising
from the alleged infringement, alleging that:
Creser is the first, true and actual inventor of an
aerial fuze denominated as "Fuze, PDR 77 CB4"
developed as early as December 1981 under
the Self-Reliance Defense Posture Program
(SRDP) of the AFP;

sometime in 1986, Creser began supplying the


AFP with the said aerial fuze;
Floro's aerial fuze is identical in every respect to
the Creser's fuze;
only difference: are miniscule and merely
cosmetic in nature.
Creser prays for the issuance of TRO/injunction
be issued enjoining Floro from manufacturing,
marketing and/or profiting therefrom, and/or
from performing any other act in connection
therewith or tending to prejudice and deprive it
of any rights, privileges and benefits to which it
is duly entitled as the first, true and actual
inventor of the aerial fuze. g TRO granted.
Floros defense: Creser has no patent g no
cause of action for infringement; Creser's
available remedy = petition for cancellation.
RTC: Granted. Floro enjoined.
RTC MFR: Affirmed.
Creser developed its aerial fuze way back in
1981 while Floro began manufacturing only in
1987. g Creser's aerial fuze was PRESUMABLY
copied or imitated.
Floro's assertion that an action for infringement
may only be brought by "anyone possessing
right, title or interest to the patented invention,"
(SEC 42, RA 165) qualified by Sec. 10, RA 165 to
include only "the first true and actual inventor,
his heirs, legal representatives or assignees, "
g untenable.
Sec. 10 merely enumerates the persons who
may have an invention patented BUT does not
necessarily limit to these persons the right to
institute an action for infringement.
Floro will not suffer irreparable injury. Floro's
claim is primarily hinged on its patent the
validity of which is being questioned in this
case.
Floros grounds before CA:
Creser has no patent;
In an action for cancellation or invalidation of
Floro's Letters Patent g proper venue = Office
of the Director of Patents;
CA: Granted, RTC Reversed.
Creser: I can file, under SEC 42 of the Patent
Law (R.A. 165), an action for infringement, not
as a patentee BUT as an entity in possession of
a right, title or interest in and to the patented
invention.
Absence of a patent DOES NOT:
prevent one from lawfully suing another for
infringement of said patent,
bar the first true and actual inventor of the
patented invention from suing another who was
granted a patent in a suit for declaratory or
injunctive relief g a remedy likened to a civil
action for infringement under SEC 42.
Issue: Can a non-patentee as the true inventor
sue for patent infringement?
Held: No, CA affirmed
Ratio:

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R.A. 165 SEC. 42. Civil action for infringement.


Any patentee, or anyone possessing any right,
title or interest in and to the patented invention,
whose rights have been infringed, may bring a
civil action before the proper CFI (now RTC), to
recover from the infringer damages sustained
by reason of the infringement and to secure an
injunction for the protection of his right...
Only the patentee or his successors-in-interest
may file an action for infringement.
"anyone possessing any right, title or interest in
and to the patented invention" = refers only to
the patentee's successors-in-interest, assignees
or grantees g Moore vs. Marsh: since actions
for infringement of patent may be brought in
the name of the person or persons interested,
whether as patentee, assignees, or as grantees,
of the exclusive right.
no infringement of a patent until a patent has
been issued g Anchor Hocking Glass Corp. vs.
White Cap.: since whatever right one has to the
invention covered by the patent arises alone
from the grant of patent.
Peck vs. Collins: a person or entity who has not
been granted letters patent over an invention
and has not acquired any right or title thereto
either as assignee or as licensee, has no cause
of action for infringement because the right to
maintain an infringement suit depends on the
existence of the patent.
Creser admits it has no patent over its aerial
fuze g no legal basis or cause of action for
injunction and damages arising from Floros
alleged infringement.
While Creser = FIRST INVENTOR g STILL it has
NO RIGHT of property upon which it can
maintain a suit unless it obtains a patent.
Bauer & Cie vs. O'Donnel: An inventor has no
common-law right to a monopoly of his
invention. He has the right to make, use and
vend his own invention, but if he voluntarily
discloses it, such as by offering it for sale, the
world is free to copy and use it with impunity. A
patent, however, gives the inventor the right to
exclude all others. As a patentee, he has the
exclusive right of making, using or selling the
invention.
Remedy of declaratory judgment or injunctive
suit on patent similar to civil action for
infringement under SEC 42 of the Patent Law.
Infringement = available only to the patent
holder or his successors-in-interest.
BUT Creser still has a remedy g he can, under
SEC 28:
file a petition for cancellation of the patent
within three (3) years from the publication of
said patent with the Director of Patents AND
raise as ground that patentee Floro is not the
true and actual inventor.
Creser however failed to do so g cannot now
assail validity of Floro's patent. Floros patent
when issued is presumably valid, and NOW he is

legally and factually the first and true inventor


of the invention.
Aguas vs. De Leon: "The validity of the patent
and the question over the investments, novelty
and usefulness of the improved process therein
specified and described are matters better
determined by the Philippines Patent Office. The
technical Staff of the Philippines Patent Office,
composed of experts in their field, have, by the
issuance of the patent in question, accepted the
thinness of the respondent's new tiles as a
discovery. There is a presumption that the
Philippine
Patent
Office
has
correctly
determined
the
patentability
of
the
improvement by the respondent of the process
in question."

INDUSTRIAL
DESIGNS
AND
DESIGNS
(TOPOGRAPHIES)
INTEGRATED CIRCUITS

LAYOUT
OF

17.7 Topics
Definitions
of
Industrial
Design,
Integrated Circuits and Layout Design
SEC. 112. Definition of Terms:"
"1. An Industrial Design is any composition of
lines or colors or any three-dimensional form,
whether or not associated with lines or colors:
Provided, That such composition or form gives a
special appearance to and can serve as pattern
for an industrial product or handicraft;
"2. Integrated Circuit means a product, in its
final form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the interconnections
are integrally formed in and/or on a piece of
material, and which is intended to perform an
electronic function; and
"3.
Layout-Design
is
synonymous
With
'Topography' and means the three-dimensional
disposition,
however
expressed,
of
the
elements, at least one of which is an active
element, and of some or all of the
interconnections of an integrated circuit, or
such a three-dimensional disposition prepared
for
an
integrated
circuit
intended
for
manufacture.
Substantive Conditions for Protection

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SEC. 113. Substantive Conditions/or Protection.


- 113.1. Only industrial designs that are new or
ornamental shall benefit from protection under
this Act.
"113.2. Industrial designs dictated essentially
by technical or functional considerations to
obtain a technical result or those that are
contrary to public order, health or morals shall
not be protected.
"113.3. Only layout -designs of integrated
circuits that are original shall benefit from
protection under this Act. A layout-design shall
be considered original if it is the result of its
creator's own intellectual effort and is not
commonplace among creators of layout-designs
and manufacturers of integrated circuits at the
time of its creation.
"113.4. A layout-design consisting of a
combination of elements and interconnections
that are commonplace shall be protected only if
the combination, taken as a whole, is original.
Term
SEC. 118. The Term of Industrial Design or
Layout-Design Registration. - 118.1. The
registration of an industrial design shall be for a
period of five (5) years from the filing date of
the application.
" 118.2. The registration of an industrial design
may be renewed for not more than two (2)
consecutive periods of five (5) years each, by
paying the renewal fee.
"118.3. The renewal fee shall be paid within
twelve (12) months preceding the expiration of
the period of registration. However, a grace
period of six (6) months shall be granted for
payment of the fees after such expiration, upon
payment of a surcharge.
"118.4. The Regulations shall fix the amount of
renewal fee, the surcharge and other
requirements regarding the recording of
renewals of registration.
" 118.5. Registration of a layout-design shall be
valid for a period often (10) years, without
renewal, and such validity to be counted from
the date of commencement of the protection
accorded to the layout-design. The protection of
a layout-design under this Act shall commence:
"a) on the date of the first commercial
exploitation, anywhere in the world, of the
layout-design by or with the consent of the right
holder: Provided, That an application for
registration is filed with the Intellectual Property
Office within two (2) years from such date of
first commercial exploitation; or
"b) on the filing date accorded to the
application for the registration of the layoutdesign if the layout-design has not been
previously exploited commercially anywhere in
the world."

Rights Conferred on Registered Owner of


Layout Design
119.4. Rights Conferred to the Owner of a
Layout-Design Registration. - The owner of a
layout-design registration shall enjoy the
following rights:
"(1) to reproduce, whether by incorporation in
an integrated circuit or otherwise, the
registered layout-design in its entirety or any
part thereof, except the act of reproducing any
part that does not comply with the requirement
of originality; and
"(2) to sell or otherwise distribute for
commercial purposes the registered layout
design, an article or an integrated circuit in
which
the
registered
layout-design
is
incorporated.
TRADEMARKS
Definitions of marks, collective marks, and
trade names
SEC. 121. Definitions-As used in Part III, the following terms have
the following meanings:
121.1. "Mark" means any visible sign capable of
distinguishing the goods (trademark) or
services (service mark) of an enterprise and
shall include a stamped or marked container of
goods; (Sec. 38, R.A. No. 166a)
121.2. "Collective mark" means any visible sign
designated as such in the application for
registration and capable of distinguishing the
origin or any other common characteristic,
including the quality of goods or services of
different enterprises which use the sign under
the control of the registered owner of the
collective mark; (Sec. 40, R.A. No. 166a)
121.3. "Trade name" means the name or
designation identifying or distinguishing an
enterprise; (Sec. 38, R.A. No. 166a)
Notes:
- A mark may be a word mark such as a
full name (Pierre Cardin), a first name
(Paloma), a surname (Honda), or a
composite mark (i.e., a combination of a
word or letter and a device such as the
mark Caltex which has the word Caltex
written across the representation of a
star, all of which are enclosed by a circle
device.
- A mark could also be a device mark
which may be a geometrical figure
(Olympic rings), a stylized rendering of
the Alphabet (M of McDonalds), or a
representation of any object (IBM World).

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Acquisition of ownership of mark


SEC. 122. How Marks are AcquiredThe
rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of this law. (Sec. 2-A, R.A. No. 166a)
Notes:
How Ownership Acquired
Mark
Trade name
Acquired
solely Acquired
through
through registration
adoption
and
use.
Registration
is
not
required.
- Any person may apply for registration
who is domiciled or has a real and
effective industrial establishment in a
country
o Which is a party to any
convention, treaty or agreement
relating to IPR or the repression
of unfair competition, to which
the Philippines is also a party; OR
o Extends reciprocal rights to
nationals of the Philippines.
Acquisition of trade names
Sec. 165. Trade Names or Business Names
165.1. A name or designation may not be used
as a trade name if by its nature or the use to
which such name or designation may be put, it
is contrary to public order or morals and if, in
particular, it is liable to deceive trade circles or
the public as to the nature of the enterprise
identified by that name.
165.2. (a) Notwithstanding any laws or
regulations providing for any obligation to
register trade names, such names shall be
protected, even prior to or without registration,
against any unlawful act committed by third
parties.
(b) In particular, any subsequent use of the
trade name by a third party, whether as a trade
name or a mark or collective mark, or any such
use of a similar trade name or mark, likely to
mislead the public, shall be deemed unlawful.
165.3. The remedies provided for in SECs 153 to
156 and SECs 166 and 167 shall apply mutatis
mutandis.
165.4. Any change in the ownership of a trade
name shall be made with the transfer of the
enterprise or part thereof identified by that
name. The provisions of SubSECs 149.2 to
149.4 shall apply mutatis mutandis.
Non-registrable marks

123.1. A mark cannot be registered if it:


(a) Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection with
persons, living or dead, institutions, beliefs, or
national symbols, or bring them into contempt
or
disrepute;
(b) Consists of the flag or coat of arms or other
insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any
simulation
thereof;
(c) Consists of a name, portrait or signature
identifying a particular living individual except
by his written consent, or the name, signature,
or portrait of a deceased President of the
Philippines, during the life of his widow, if any,
except by written consent of the widow;
(d) Is identical with a registered mark belonging
to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
(i) The same goods or services, or
(ii) Closely related goods or services,
or
(iii) If it nearly resembles such a
mark as to be likely to deceive or cause
confusion;
(e) Is identical with, or confusingly similar to, or
constitutes a translation of a mark which is
considered by the competent authority of the
Philippines to be well-known internationally and
in the Philippines, whether or not it is registered
here, as being already the mark of a person
other than the applicant for registration, and
used for identical or similar goods or services:
Provided, That in determining whether a mark is
well-known, account shall be taken of the
knowledge of the relevant sector of the public,
rather than of the public at large, including
knowledge in the Philippines which has been
obtained as a result of the promotion of the
mark;
(f) Is identical with, or confusingly similar to, or
constitutes a translation of a mark considered
well-known in accordance with the preceding
paragraph, which is registered in the Philippines
with respect to goods or services which are not
similar to those with respect to which
registration is applied for: Provided, That use of
the mark in relation to those goods or services
would indicate a connection between those
goods or services, and the owner of the
registered mark: Provided further, That the
interests of the owner of the registered mark
are likely to be damaged by such use;
(g) Is likely to mislead the public, particularly as
to the nature, quality, characteristics or
geographical origin of the goods or services;
(h) Consists exclusively of signs that are generic
for the goods or services that they seek to
identify;
(i) Consists exclusively of signs or of indications
that have become customary or usual to

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designate the goods or services in everyday


language or in bona fide and established trade
practice;
(j) Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services;
(k) Consists of shapes that may be necessitated
by technical factors or by the nature of the
goods themselves or factors that affect their
intrinsic
value;
(l) Consists of color alone, unless defined by a
given
form;
or
(m) Is contrary to public order or morality.
Notes:
- If a component of an otherwise
registrable mark is not registrable, the
applicant
could
disclaim
the
unregistrable component.
Use of mark as a requirement
124.2. The applicant or the registrant shall file a
declaration of actual use of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years from the
filing date of the application. Otherwise, the
application shall be refused or the mark shall be
removed from the Register by the Director.
Notes:
- Prior use is no longer a condition of
filing. However, the applicant shall file a
declaration of actual use of the mark,
with evidence to that effect, within three
years from the filing date of the
application; otherwise, the application
shall be refused or the mark removed
from the register.
- AFTER FILING: The registrant is required
to file a declaration of actual use, and
evidence to that effect, within 1 year
from the 5th anniversary of the date of
registration of the mark; otherwise the
mark shall be removed from the register
(SEC 145)
- AFTER FILING: Non-use of a mark may be
excused if caused by circumstances
arising independently of the will of the
trademark owner. Lack of funds is not an
excuse (SEC 152)
- AFTER FILING; USE OF OTHER ENTITY:
Use of another entity may be considered
use of the owner if
o the company is related to the
registrant; or
o if the use of the mark by such
unrelated person in respect of the

nature and and quality of the


goods or services is controlled by
the registrant (i.e. franchise)
Tests to determine confusing similarity between
marks
123.1 (d) Is identical with a registered mark
belonging to a different proprietor or a mark
with an earlier filing or priority date, in respect
of:
(i) The same goods or services, or
(ii) Closely related goods or

services, or
(iii) If it nearly resembles such a mark as to be
likely to deceive or cause confusion;

Notes:
- How to determine if there is confusing
similarity between the marks
o The
labels,
packages
or
containers are presented for
examination and comparison.
o Where they are not presented,
then the spelling, sound or
pronunciation of the marks may
be resorted to. Similarity of sound
or
pronunciation
may
be
sufficient to make two marks
confusingly similar.
- TEST OF DOMINANCY: Focuses not
simply on similarities in size, form or
color but on the main or essential
features of each mark, taken together.
The test requires that if the competing
trademark contains the main or essential
features of another and confusion and
deception is likely to result, infringement
takes place. Duplication or imitation is
not necessary.
- HOLISTIC TEST: Considers the mark as a
whole and not as dissected. If the buyer
is deceived, it is attributable to the mark
as a totality, not usually to any part of it.
- RELATED GOODS PRINCIPLE: Goods are
related when they belong to the same
class or have the same descriptive
properties or physical attributes, or they
serve the same purpose or flow through
the same channel of trade. It is held that
the use of identical marks on noncompeting and unrelated goods is not
likely to cause confusion.
Cases:
Holistic Test
Del Monte Corporation et. al. vs. CA and
Sunshine Sauce Manufacturing Industry (1990)

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FACTS: Del Monte authorized Philpack to


register with the Patent Office the Del Monte
bottle configuration for which it was granted
trademark registration. It also obtained
registration certificates for its trademark DEL
MONTE and its logo. Respondent Sunshine
Sauce Manufacturing was issued a Certificate of
Registration by the Bureau of Domestic Trade to
engage in manufacturing, packing, distributing
and sale of various kinds of sauce, identified by
the Sushine Fruit Catsup logo. This was
registered in the supplemental registered. The
product was contained in various kinds of bottle
including the Del Monte bottle which it bought
from junk shops.
Philpack, after making a demand upon Sunshine
to desist from using the Del Monte bottles filed
a complaint against the latter for infringement
of trademark and unfair competition.
Sunshine contended that it has ceased to use
the said bottles and that its logo was
substantially different from the Del Monte logo
and would not confuse the buying public to the
detriment of petitioners.
RTC dismissed the complaint holding that there
were substantial differences between the logos
or trademarks of the parties; that the defendant
ceased to use petitioners bottles and that in
any case, it became owner thereof upon
purchase from junk yards. It further held that
complainants failed to establish bad faith which
was an essential element of infringement of
trademark or unfair competition. The said
decision was affirmed by the CA.
HELD: (Note that this case was decided under
SEC 22 and 29 of R.A. No. 166 or the Trademark
Law)
The Supreme Court disagrees with the
conclusion that there was no infringement or
unfair competition.
As correctly held by the lower court, side-byside comparison is not the final test of
similarity.
The question is not whether the two articles are
distinguishable by their label when set side by
side but whether the general confusion made
by the article upon the eye of the casual
purchaser who is unsuspicious and off his
guard, is such as to likely result in his
confounding it with the original.
A number of courts have held that to determine
whether a trademark has been infringed, we
must consider the mark as a whole and not as
dissected. If the buyer is deceived, it is
attributable to the marks as a totality, not
usually to any part of it. The court therefore
should be guided by its first impression, for a
buyer acts quickly and is governed by a casual
glance, the value of which may be dissipated as
soon as the court assumes to analyze carefully
the respective features of the mark.

At that, even if the labels were analyzed


together it is not difficult to see that the
Sunshine label is a colorable imitation of the Del
Monte trademark. The predominant colors used
in the Del Monte label are green and redorange, the same with Sunshine. The word
"catsup" in both bottles is printed in white and
the style of the print/letter is the same.
Although the logo of Sunshine is not a tomato,
the figure nevertheless approximates that of a
tomato.
As previously stated, the person who infringes a
trade mark does not normally copy out but only
makes colorable changes, employing enough
points of similarity to confuse the public with
enough points of differences to confuse the
courts. When as in this case, Sunshine chose,
without a reasonable explanation, to use the
same colors and letters as those used by Del
Monte though the field of its selection was so
broad, the inevitable conclusion is that it was
done deliberately to deceive .
Test of Dominancy
Asia Brewery vs. CA and San Migue (1993)
FACTS: San Miguel Corporation (SMC) filed a
complaint against Asia Brewery Inc. (ABI) for
infringement
of
trademark
and
unfair
competition on account of the latters Beer Pale
Pilsen or Beer na Beer product which has been
competing with SMCs San Miguel Pale Pilsen.
The RTC dismissed the complaint holding that
ABI has not committed trademark infringement
or unfair competition against SMC. The CA
reversed the ruling of the RTC holding that the
bottles used by ABI are substantially identical
with the bottles of SMC and that this is
calculated
to
deceive
purchasers
and
consumers into the belief that the beer is the
product of the plaintiff. ABI was therefore found
guilty of infringement of trademark and unfair
competition.
ISSUE: The lone issue is whether ABI infringes
SMCs trademark: San Miguel Pale Pilsen with
rectangular hops and malt design and thereby
commits unfair competition against the latter.
HELD: ABIs Beer Pale Pilsen Labor or design
does not infringe on SMCs San Miguel Pale
Pilsen design.
Infringement is determined by the "test of
dominancy" rather than by differences or
variations in the details of one trademark and of
another. Similarity in size, form and color, while
relevant, is not conclusive. If the competing
trademark contains the main or essential or
dominant features of another, and confusion
and deception is likely to result, infringement
takes place. Duplication or imitation is not
necessary; nor it is necessary that the infringing
label should suggest an effort to imitate (Co
Tiong Sa vs. Director of Patents).

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There is hardly any dispute that the dominant


feature of SMC's trademark is the name of the
product: SAN MIGUEL PALE PILSEN, written in
white Gothic letters with elaborate serifs at the
beginning and end of the letters "S" and "M" on
an amber background across the upper portion
of the rectangular design.
On the other hand, the dominant feature of
ABI's trademark is the name: BEER PALE
PILSEN, with the word "Beer" written in large
amber letters, larger than any of the letters
found in the SMC label.
The trial court perceptively observed that the
word "BEER" does not appear in SMC's
trademark, just as the words "SAN MIGUEL" do
not appear in ABI's trademark. Hence, there is
absolutely no similarity in the dominant
features of both trademarks.
The use of ABI of the steinie bottle, similar but
not identical to the SAN MIGUEL PALE PILSEN
bottle, is not unlawful. As pointed out by ABI's
counsel, SMC did not invent but merely
borrowed the steinie bottle from abroad and it
claims neither patent nor trademark protection
for that bottle shape and design. SMC's being
the first to use the steinie bottle does not give
SMC a vested right to use it to the exclusion of
everyone else. Being of functional or common
use, and not the exclusive invention of any one,
it is available to all who might need to use it
within the industry. ABI makes its own steinie
bottle which has a fat bulging neck to
differentiate it from SMC's bottle.
Neither in sound, spelling or appearance can
BEER PALE PILSEN be said to be confusingly
similar to SAN MIGUEL PALE PILSEN. No one
who purchases BEER PALE PILSEN can possibly
be deceived that it is SAN MIGUEL PALE PILSEN.
No evidence whatsoever was presented by SMC
proving otherwise.
The Court likewise found several dissimilarities
in the trade dress or appearance of the
competing products.
The fact that the words pale pilsen are part of
ABIs trademark does not constitute an
infringement of SMCs trademark for those
words are generic words descriptive of color
and of the type of beer thus, those words may
not be appropriated by SMC for its exclusive use
even if they are part of their registered
trademark.

McDonalds Corporation vs. Macjoy Fastfood


Corporation (2007)
FACTS: MacJoy Fastfood Corporation filed with
the Bureau of Patents, Trademarks and
Technology Trasfer (now IPO) an application for
registration of the trademark Macjoy & Device
for fried chicken, chicken barbeque, burgers,
fries, spaghetti, palabok, tacos, sandwiches,
halo-halo and steaks. McDonalds corporation

filed a verified Notice of Opposition against


respondents application claiming that the
trademark MacJoy and Device so resembles its
corporate logo otherwise known as the Golden
Arches and its marks (Mc) such that, when
used on identical or related goods, the
trademark applied for would confuse or deceive
purchasers into believing that the goods
originate from the same source or origin. It
further alleged that the use of MacJOy and
device falsely tends to suggest a connection or
affiliation with McDonalds.
The IPO held that the predominance of the
letter M and the prefixes Mac/Mc in both marks
lead to the conclusion that there is confusing
similarity between them especially since both
are used on almost the same products. The CA
reversed the decision finding no confusing
similarity between the two holding that the IPO
unreasonably overlooked the differences in the
device, letters and marks.
HELD: Petition is impressed with merit.
In determining similarity and likelihood of
confusion, jurisprudence has developed two
tests, the dominancy test and the holistic test.
The dominancy test focuses on the similarity of
the prevalent features of the competing
trademarks that might cause confusion or
deception. In contrast, the holistic test requires
the court to consider the entirety of the marks
as applied to the products, including the labels
and packaging, in determining confusing
similarity. Under the latter test, a comparison of
the words is not the only determinant factor.
The IPO used the dominancy test in concluding
that there was confusing similarity between the
two trademarks. In reversing the IPO, the CA
while seemingly applying the dominancy test, in
fact actually applied the holistic test.
The Court finds that the dominancy test is more
suitable. Under the dominancy test, courts give
greater weight to the similarity of the
appearance of the product arising from the
adoption of the dominant features of the
registered
mark,
disregarding
minor
differences. Courts will consider more the aural
and visual impressions created by the marks in
the public mind, giving little weight to factors
like prices, quality, sales outlets and market
segments. The totality or holistic test only relies
on visual comparisons 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.
The court noted the use of the corporate M
design logo and the prefixes Mc/Mac. It also
noted that both trademarks are used in the sale
of fastfood products. The differences and
variations in styles as the device depicting a
head of chicken with cap and bowtie and wings
sprouting on both sides of the chicken head, the

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heart-shaped "M," and the stylistic letters in


"MACJOY & DEVICE;" in contrast to the arch-like
"M" and the one-styled gothic letters in
McDonalds marks are of no moment. These
minuscule variations are overshadowed by the
appearance of the predominant features
mentioned hereinabove.

The interests of the owner of the


registered mark are likely to be
damaged by such use.
Also, an owner of a well-known mark may sue in
the Philippines for acts committed prior to the
date the said mark was registered in the
Philippines (Sec. 131.3)

Well-known marks

147.2. The exclusive right of the owner of a


well-known mark defined in SubSEC 123.1(e)
which is registered in the Philippines, shall
extend to goods and services which are not
similar to those in respect of which the mark is
registered: Provided, That use of that mark in
relation to those goods or services would
indicate a connection between those goods or
services and the owner of the registered mark:
Provided further, That the interests of the owner
of the registered mark are likely to be damaged
by such use. (n)

123.1 (e) Is identical with, or confusingly similar


to, or constitutes a translation of a mark which
is considered by the competent authority of the
Philippines to be well-known internationally and
in the Philippines, whether or not it is registered
here, as being already the mark of a person
other than the applicant for registration, and
used for identical or similar goods or services:
Provided, That in determining whether a mark is
well-known, account shall be taken of the
knowledge of the relevant sector of the public,
rather than of the public at large, including
knowledge in the Philippines which has been
obtained as a result of the promotion of the
mark;
(f) Is identical with, or confusingly
similar to, or constitutes a translation of a mark
considered well-known in accordance with the
preceding paragraph, which is registered in the
Philippines with respect to goods or services
which are not similar to those with respect to
which registration is applied for: Provided, That
use of the mark in relation to those goods or
services would indicate a connection between
those goods or services, and the owner of the
registered mark: Provided further, That the
interests of the owner of the registered mark
are likely to be damaged by such use;
Notes:
- A well known mark is one which a
competent authority of the Philippines
has designated to be well-known
internationally and in the Philippines.
- TEST: Account shall be taken of the
knowledge of the relevant sector of the
public, rather than the public at large,
including knowledge in the Philippines
obtained by promotion of the mark.
- EFFECT: The general rule that the
exclusive right to use a trademark shall
extend only to goods and services
similar to those in respect of which said
trademark is registered does not apply.
When it comes to a well known mark,
the exclusive right shall extend to those
good which are not similar provided that:
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