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9
UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW
DEFINITION NATURE
Letters of credit are those issued by one (1) Financial device L/Cs are developed by
merchant to another, or for the purpose of merchants as a convenient and relatively
attending to a commercial transaction. [Art. safe mode of dealing with sales of goods to
567, Code of Commerce] satisfy the seemingly irreconcilable interests
A letter of credit is one whereby one person of a seller, who refuses to part with his goods
requests some other person to advance before he is paid, and a buyer, who wants to
money or give credit to a third person, and have control of the goods before paying.
promises that he will repay the same to the [Bank of America, NT&SA v. Court of Appeals,
person making the advancement, or accept 1993]
the bills drawn upon himself for the like A letter of credit is one of the modes of
amount. [Campos, Notes and Selected Cases payment, set out in Sec. 8, Central Bank
on Negotiable Instruments Law] Circular No. 1389, "Consolidated Foreign
A written instrument whereby the writer Exchange Rules and Regulations," dated
requests or authorizes the addressee to pay 13 April 1993, by which commercial banks
money or deliver goods to a third person and sell foreign exchange to service payments
assumes responsibility for payment of debt for, e.g., commodity imports [Reliance
therefor to the addressee [Transfield Commodities v. Daewoo, 1993].
Philippines v. Luzon Hydro, 2004].
An engagement by a bank or other person (2) Composite of three distinct contracts An
made at the request of a customer that the L/C transaction involves three distinct but
issuer shall honor drafts or other demands of intertwined relationships:
payment upon compliance with the conditions (a) First Contract between the party applying
specified in the credit [Prudential Bank v. for the L/C (buyer/importer/account
Intermediate Appellate Court, 1992]. party) and the party for whose benefit the
L/C is issued (seller/exporter/beneficiary).
PURPOSE (b) Second Contract between the buyer and
Its purpose is to substitute for, and support, the the issuing bank. This contract is
agreement of the buyer-importer to pay money sometimes called the "Application and
under a contract or other arrangement, but Agreement" or the "Reimbursement
does not necessarily constitute as a condition Agreement".
for the perfection of such arrangement [Reliance (c) Third Contract between the issuing bank
Commodities, Inc. v. Daewoo Industrial Co., Ltd., and the seller, in order to support the
1993] contract, under (a) above [Reliance
Commodities v. Daewoo, 1993].
ESSENTIAL REQUISITES OF
LETTERS OF CREDIT: DURATION OF LETTERS OF
(1) Issued in favor of a definite person and not to CREDIT
order. (1) Period stipulated by the parties; or
(2) Limited to a fixed and specified amount, or (2) If no period is fixed;
to one or more undetermined amounts, but (a) 6 months from date if used in the
within a maximum the limits of which has to Philippines
be stated exactly. (b) 12 months if abroad
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UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW
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UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW
(5) Confirming Bank the bank which lends The concept of guarantee vis-a-vis the
credence to the letter of credit issued by a concept of an irrevocable credit are
lesser known issuing bank. inconsistent with each other.
The bank assumes a direct obligation to
the seller and its liability is a primary one In the first place, the guarantee theory
as if the bank itself had issued the letter of destroys the independence of the bank's
credit [Feati Bank and Trust Co. v. CA, 1991]. responsibility from the contract upon which it
was opened. In the second place, the nature
(6) Negotiating Bank the bank which discounts of both contracts is mutually in conflict with
the draft presented by the seller. each other. In contracts of guarantee, the
The bank buys or discounts a draft under guarantor's obligation is merely collateral and
the letter of credit. Its liability is dependent it arises only upon the default of the person
upon the stage of the negotiation. If before primarily liable. On the other hand, in an
negotiation, it has no liability with respect irrevocable credit the bank undertakes a
to the seller but after negotiation, a primary obligation. [Feati v. Court of Appeals,
contractual relationship will then prevail 1991]
between the negotiating bank and the
seller [Feati Bank and Trust Co. v. CA, 1991]. The independent nature of the letter of credit
may be
(7) Paying Bank the bank which undertakes to (a) Independent in toto - the credit is
encash the drafts drawn by the seller. independent from the justification aspect
and is a separate obligation from the
underlying agreement;
(b) Only as to the justification aspect like in a
Basic Principles of Letter of commercial letter of credit or repayment
Credit standby, which is identical with the same
obligations under the underlying
agreement. [Transfield Philippines v. Luzon
DOCTRINE OF INDEPENDENCE Hydro, 2004; Bank of America, NT&SA v.
The principle of independence assures the Court of Appeals, 1993].
seller or the beneficiary of prompt payment
independent of any breach of the main
contract and precludes the issuing bank from FRAUD EXCEPTION PRINCIPLE
determining whether the main contract is The principle that limits the application of the
actually accomplished or not. independence principle only to instances
Under this principle, banks assume no liability where it would serve the commercial function
or responsibility for the form, sufficiency, of the credit and not when fraud attends the
accuracy, genuineness, falsification or legal transaction.
effect of any documents, or for the general
and/or particular conditions stipulated in the In the case of Transfield Philippines v. Luzon
documents or superimposed thereon, nor do Hydro, 2004, the petitioner alleged
they assume any liability or responsibility for misrepresentation as constituting fraud. The
the description, quantity, weight, quality, Court, however, made no ruling as to whether
condition, packing, delivery, value or existence the same indeed constitutes fraud.
of the goods represented by any documents,
or for the good faith or acts and/or omissions, It asserts that the "fraud exception" exists
solvency, performance or standing of the when the beneficiary, for the purpose of
consignor, the carriers, or the insurers of the drawing on the credit, fraudulently presents to
goods, or any other person whomsoever the confirming bank, documents that contain,
[Transfield Philippines v. Luzon Hydro, 2004; expressly or by implication, material
Bank of America, NT&SA v. Court of Appeals, representations of fact that to his knowledge
1993]. are untrue. In such a situation, petitioner
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UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW
DOCTRINE OF STRICT
COMPLIANCE
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must
strictly conform to the terms of the letter of
credit.
Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform
its undertaking under the contract.
The tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated under
the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the
money thus paid to the beneficiary. [Feati v.
Court of Appeals, 199])
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UP LAW BOC TRUST RECEIPTS LAW MERCANTILE LAW
LOAN/SECURITY FEATURE
Rights of the Entruster
(1) In case of sale: Right to the proceeds from
In a letter of credit-trust receipt arrangement, the sale of the goods, documents or
a bank extends a loan covered by the letter of instruments released under a trust receipt to
credit, and the trust receipt acts as the the entrustee to the extent of the amount
security for the loan. In other words, the owing to the entruster or as appears in the
transaction involves a loan feature trust receipt
represented by the letter of credit, and a (2) In case of non-sale: Right to the return of the
security feature which is in the covering trust
goods, documents or instruments
receipt. [Vintola v. Insular Bank of Asia and
(3) Right to the enforcement of all other rights
America (1987)] conferred on him in the trust receipt (which
The security feature is what provides the much are not contrary to the provisions of PD 115)
needed financial assistance to our traders in (4) Right to cancel the trust and take possession
the importation or purchase of goods or of the goods, documents or instruments
merchandise through the use of those goods subject of the trust or of the proceeds
or merchandise as collateral for the realized therefrom at any time upon default
advancements made by a bank. The title of or failure of the entrustee to comply with any
the bank to the security is the one sought to of the terms and conditions of the trust
be protected and not the loan which is a receipt or any other agreement between the
separate and distinct agreement. [People v. entruster and the entrustee
Nitafan (1992)] (5) Right to sell the goods, documents or
instruments at public or private sale, not less
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UP LAW BOC TRUST RECEIPTS LAW MERCANTILE LAW
than five days after serving or sending of (3) Insure the goods for their total value against
notice to the entrustee of the intention to sell loss from fire, theft, pilferage or other
(6) Right to purchase at a public sale the goods, casualties;
documents, or instruments (4) Keep said goods or proceeds thereof whether
(7) Right to recover deficiency from the entrustee in money or whatever form, separate and
should the proceeds be insufficient [PD 115, capable of identification as property of the
Sec. 7] entruster;
(5) Return the goods, documents or instruments
The entruster holding a security interest shall in the event of non-sale or upon demand of
not, merely by virtue of such interest or having the entruster; and
given the entrustee liberty of sale or other (6) Observe terms and conditions of the trust
disposition of the goods, documents or receipt not contrary to PD 115. [PD 115, Sec. 9]
instruments under the terms of the trust receipt
transaction be responsible as principal or as PAYMENT/DELIVERY OF
vendor under any sale or contract to sell made by
the entrustee. [PD 115, Sec. 8] PROCEEDS OF SALE OR
DISPOSITION OF GOODS,
VALIDITY OF THE SECURITY DOCUMENTS OR
INTEREST AS AGAINST THE INSTRUMENTS
CREDITORS OF THE The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
ENTRUSTEE/INNOCENT instruments covered by a trust receipt to the
PURCHASERS FOR VALUE extent of the amount owing to the entruster or
The entruster's security interest in goods, as appears in the trust receipt shall constitute
documents, or instruments pursuant to the the crime of estafa, punishable under RPC 315,
terms of a trust receipt shall be valid as par. 1 (b). [PD 115, Sec. 13]
against all creditors of the entrustee for the
duration of the trust receipt agreement. [PD
115, Sec. 12]
RETURN OF GOODS,
A purchaser of goods from an entrustee with DOCUMENTS OR
right to sell, or of documents or instruments INSTRUMENTS IN CASE OF
through their customary form of transfer, who NON-SALE
buys the goods, documents, or instruments
The failure to return the goods, documents or
for value and in good faith from the entrustee,
instruments if they were not sold or disposed of
acquires said goods, documents or
in accordance with the terms of the trust receipt
instruments free from the entruster's security
shall constitute estafa, punishable under RPC
interest. [PD 115, Sec. 11]
315, par. 1 (b). [PD 115, Sec. 13]
OBLIGATION AND LIABILITY OF
LIABILITY FOR LOSS OF GOODS,
THE ENTRUSTEE
(1) Hold the goods, documents or instruments in DOCUMENTS OR
trust for the entruster and shall dispose of INSTRUMENTS
them strictly in accordance with the terms The risk of loss shall be borne by the entrustee.
and conditions of the trust receipt; Loss of goods, documents or instruments which
(2) Receive the proceeds in trust for the are the subject of a trust receipt, pending their
entruster and turn over the same to the disposition, irrespective of whether or not it was
entruster to the extent of the amount owing due to the fault or negligence of the entrustee,
to the entruster or as appears on the trust shall not extinguish his obligation to the
receipt; entruster for the value thereof. [PD 115, Sec. 10]
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UP LAW BOC TRUST RECEIPTS LAW MERCANTILE LAW
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UP LAW BOC TRUST RECEIPTS LAW MERCANTILE LAW
same by him at the time of the deposit to one Exception: Any person claiming a right of
who took the goods in good faith for value property or possession may pay the
would have been valid. [Act No. 2137, Sec. 28] warehouseman the amount necessary to satisfy
his lien and to pay the reasonable expenses and
SATISFACTION OF LIEN BY SALE liabilities incurred. The warehouseman shall
A warehouseman's lien for a claim, which has deliver the goods to the person making
become due, may be satisfied as follows: payment. [Act No. 2137, Sec. 33]
(a) An itemized statement of the
warehouseman's claim, showing the sum EFFECT OF SALE
due at the time of the notice and the date or The warehouseman shall not be liable for failure
dates when it becomes due, to deliver the goods to the depositor or owner of
(b) A brief description of the goods against the goods or to a holder of the receipt given for
which the lien exists, the goods when they were deposited, even if
(c) A demand that the amount of the claim as such receipt be negotiable. [Act No. 2137, Sec.
stated in the notice of such further claim as 36]
shall accrue, shall be paid on or before a day
mentioned, not less than ten days from the
delivery of the notice if it is personally
OTHER METHODS OF
delivered, or from the time when the notice ENFORCING LIEN
shall reach its destination, according to the Other remedies allowed by law for the
due course of post, if the notice is sent by enforcement of a lien against personal property
mail, are not precluded. The right to recover so much
(d) A statement that unless the claim is paid of the warehouseman's claim as shall not be
within the time specified, the goods will be paid by the proceeds of the sale is not barred as
advertised for sale and sold by auction at a well. [Act No. 2137, Sec. 35]
specified time and place. [Act No. 2137, Sec.
33] HOW LIEN MAY BE LOST
(1) By surrendering possession of the goods
In accordance with the terms of a notice so (2) By refusing to deliver the goods when a
given, a sale of the goods by auction may be demand is made with which he is bound to
had to satisfy any valid claim of the comply [Act No. 2137, Sec. 29]
warehouseman for which he has a lien on the
goods. [Act No. 2137, Sec. 33]
LIEN DOES NOT PRECLUDE
From the proceeds of such sale, the OTHER REMEDIES
warehouseman shall satisfy his lien including Whether or not a warehouseman has a lien
the reasonable charges of notice, upon the goods, he is entitled to all remedies
advertisement and sale. The balance, if any, allowed by law to a creditor against a debtor for
shall be held by the warehouseman and the collection of all charges and advances which
delivered on demand to the person to whom the depositor has contracted to pay. (Act No.
he would have been bound to deliver or 2137, Sec. 32)
justified in delivering goods. [Act No. 2137, Sec.
33]
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
an intention to conform to the legal intend to pay the specified persons. [PNB v.
requirements is sufficient. Rodriguez, 2008]
NEGOTIABILITY DETERMINED FROM THE A check drawn payable to the order of cash is a
FACE OF THE INSTRUMENT check payable to bearer, and the bank may pay
The negotiability or non-negotiability of an it to the person presenting it for payment
instrument is determined from the face of the without the drawer's indorsement. [Ang Tek Lian
instrument itself. Where words "or bearer" vs. CA, 1950]
printed on a check are cancelled by the drawer,
instrument becomes not negotiable. [Caltex vs. PAYABLE TO ORDER
CA, 1992] Section 8, NIL. When payable to order. - The
instrument is payable to order where it is drawn
PAYABLE TO BEARER payable to the order of a specified person or to
Section 9, NIL. When payable to bearer. - The him or his order. It may be drawn payable to the
instrument is payable to bearer: order of:
(a) When it is expressed to be so payable; or (a) A payee who is not maker, drawer, or
(b) When it is payable to a person named drawee; or
therein or bearer; or
(b) The drawer or maker; or
(c) When it is payable to the order of a fictitious
(c) The drawee; or
or non-existing person, and such fact was (d) Two or more payees jointly; or
known to the person making it so payable; (e) One or some of several payees; or
or
(f) The holder of an office for the time being.
(d) When the name of the payee does not
purport to be the name of any person; or Where the instrument is payable to order, the
(e) When the only or last indorsement is an payee must be named or otherwise indicated
indorsement in blank. therein with reasonable certainty.
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
Examples:
(1) To Juan Cruz and Jose Reyes negotiable Kinds of Negotiable
(2) To Juan Cruz or Jose Reyes not
negotiable; no certainty as to drawee
Instrument
DETERMINATION OF NEGOTIABILITY PROMISSORY NOTE
In determining the negotiability of an Section 184, NIL. Promissory note, defined. - A
instrument, the instrument in its entirety and negotiable promissory note within the meaning
by what appears on its face must be of this Act is an unconditional promise in
considered. It must comply with the writing made by one person to another, signed
requirements of Sec. 1 of the Negotiable by the maker, engaging to pay on demand, or at
Instruments Law. [Caltex Phils. v. CA, 1992] a fixed or determinable future time, a sum
The acceptance of a bill of exchange is not certain in money to order or to bearer. Where a
important in the determination of its note is drawn to the maker's own order, it is not
negotiability. The nature of acceptance is complete until indorsed by him.
important only on the determination of the
kind of liabilities of the parties involved. KINDS OF PROMISSORY NOTES
[PBCOM vs. Aruego, 1993] (1) Certificate of deposit a form of promissory
note which is a written acknowledgment of a
Omissions and Additional Provisions bank of its receipt of a certain sum with a
Provisions That Do Not That Do Not Affect promise to repay the same.
Affect Negotiability Negotiability (2) Bonds a certificate or evidence of a debt on
(1) Non-dating of the (1) Authorizes the sale which the issuing company or governmental
instrument of collateral body promises to pay the bondholders a
(2) Non-specification of securities on specified amount of interest for a specified
value given, or that default; length of time, and to repay the loan on the
any value had been (2) Authorizes expiration date.
given confession of (3) Debenture a promissory note or bond
(3) Non-specification of judgment on backed by the general credit of a corporation
place where it is default; and usually not secured by a mortgage or
drawn or place (3) Waives the benefit lien on any specific property. (Sundiang and
where it is payable of law intended to Aquino)
(4) Bears a seal protect the debtor;
or BILL OF EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A
bill of exchange is an unconditional order in
(5) Designation of (4) Allows the creditor
writing addressed by one person to another,
particular kind of the option to require
signed by the person giving it, requiring the
currency in which something in lieu of
person to whom it is addressed to pay on
payment is to be money. (Sec. 5)
demand or at a fixed or determinable future
made. (Sec. 6)
time a sum certain in money to order or to
Note: Negotiability is
bearer. (Sec. 126)
affected when
instrument contains a
promise or order to do KINDS OF BILLS OF EXCHANGE
any act in addition to (1) Draft used synonymously with bill of
the payment of money. exchange although it normally refers to a bill
of exchange used in documentary exchange
like letters of credit transactions.
(2) Inland and foreign bill an Inland bill is a bill
which is, or on its face purports to be, both
PAGE 16
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
drawn and payable within the Philippines. holder may treat it as either at his election
Any other bill is a foreign bill. [Sec. 17[e], NIL]
(3) Time draft draft that is payable at a fixed
date. Promissory Note Bill of Exchange
(4) Sight or demand draft payable when the
holder presents it for payment. Unconditional promise Unconditional order
(5) Trade acceptance used in contracts of sale Involves 2 parties Involves 3 parties
where the seller as drawer orders the buyer
(as drawee) to pay a sum certain to the same Maker is primarily Drawer is only
seller (payee). liable secondarily liable
(6) Bankers acceptance a time draft across the Only one presentment: Two presentments: for
face which the drawee has written the word for payment acceptance and for
accepted. [Sundiang and Aquino] payment
(7) Check - A bill of exchange drawn on a bank
payable on demand [Sec. 185]. It is the most
common form of bill of exchange. Bill of Exchange Check
Not necessarily It is necessary that a
INSTANCES WHEN A BILL OF drawn on a deposit. check be drawn on a
EXCHANGE MAY BE TREATED AS A The drawee need not bank deposit.
PROMISSORY NOTE: be a bank Otherwise, there would
be fraud.
Section 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer Death of a drawer of a Death of the drawer of
and drawee are the same person or where the BOE, with the a check, with the
drawee is a fictitious person or a person not knowledge of the bank, knowledge of the bank,
having capacity to contract, the holder may does not revoke the revokes the authority of
treat the instrument at his option either as a bill authority of the drawee the banker to pay.
of exchange or as a promissory note. to pay.
Section 17, NIL. Construction where instrument May be presented for Must be presented for
is ambiguous. - Where the language of the payment within payment within a
instrument is ambiguous or there are reasonable time after reasonable time after
omissions therein, the following rules of its last negotiation. its issue.
construction apply: May be payable on Always payable on
x---x demand or at a fixed or demand
determinable future
(e) Where the instrument is so ambiguous that time
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
x---x Completion and Delivery
(1) The drawer and the drawee are the same TWO STEPS INVOLVED IN THE
person;
(2) Drawee is a fictitious person; EXECUTION OF NEGOTIABLE
(3) Drawee does NOT have the capacity to INSTRUMENTS
contract (Sec. 130, NIL] (1) Writing of the instrument completely in
(4) Where the bill is drawn on a person who is accordance with the requisites of
legally absent; negotiability under Sec. 1.
(5) Where the instrument is so ambiguous that (2) Delivery of the instrument by the maker or
there is doubt whether it is a bill or note, the the drawer to the payee in order to give legal
effect thereto. [Abad]
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
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UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
PAGE 19
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
General rule: One whose signature does not within the actual limits of his authority (Sec.
appear on the instrument shall not be liable 21, NIL)
thereon. According to the majority rule, the words per
proc or procuration must appear on the
Exceptions: note for this rule in Section 21 to be applicable
(1) The principal who signs through an agent [Campos]
(2) The forger
(3) One who indorses in a separate instrument LIABILITY OF AN AGENT
(allonge) OR where an acceptance is written
General rule: Where a person adds to his
on a separate paper
signature words indicating that he signs on
(4) One who signs his assumed or trade name
behalf of a principal, then he is not liable if he
(5) A person negotiating by delivery (as in the
was duly authorized.
case of a bearer instrument) is liable only to
his immediate indorsee.
Exceptions:
(1) Mere addition of words describing him as an
SIGNING IN TRADE NAME agent WITHOUT disclosing his principal (Sec.
One who signs in a trade or assumed name will 20, NIL)
be liable to the same extent as if he had signed (2) Where a broker or agent negotiates an
in his own name [Sec. 18, NIL] instrument without indorsement, he incurs
all liabilities in Sec. 65 of the NIL, unless he
SIGNATURE OF AGENT discloses name of principal and the fact that
he is only acting as an agent. [Sec. 69, NIL]
Sec. 19. Signature by agent; authority; how
shown. - The signature of any party may be
Requisites to negative personal liablity of agent:
made by a duly authorized agent. No particular
(1) He must be duly authorized;
form of appointment is necessary for this
(2) He must act within the scope of his authority
purpose; and the authority of the agent may be
(3) He must indicate in the instrument that he is
established as in other cases of agency.
signing merely as agent; and
(4) He must disclose his principal.
Sec. 20. Liability of person signing as agent, and
so forth. - Where the instrument contains or a
person adds to his signature words indicating INDORSEMENT BY MINOR OR
that he signs for or on behalf of a principal or in CORPORATION
a representative capacity, he is not liable on the The indorsement or assignment of the
instrument if he was duly authorized; but the instrument by a corporation or by an infant
mere addition of words describing him as an (minor) passes the property therein,
agent, or as filling a representative character, notwithstanding that from want of capacity,
without disclosing his principal, does not the corporation or infant may incur no liability
exempt him from personal liability. thereon [Sec. 22, NIL].
The above provision does not change the rule
Signature of any party may be made by duly in civil law on minor's contracts, which
authorized agent, established as in ordinary provides that a contract enetered into by a
agency. minor is voidable, and the minor cannot be
held liable thereon unless he ratifies it upon
SIGNATURE PER reaching majority.
PROCURATION However, under Section 22 of the NIL, should
A signature per procuration operates as notice the minor indorse a negotiable instrument,
to the holder that the agent has a limited although he cannot be held liable on his
authority to sign, and the principal is bound contract of indorsement, title to the
only in case the agent in so signing acted instrument passes to his indorsee and the
PAGE 20
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW
latter can rightfully recover from the maker, (2) Those who, by their acts, silence, or
free from the defense of minority [Campos]. negligence, are estopped from setting up the
REAL defense but available only to the defense of forgery.
incapacitated party (i.e. the minor or the
corporation). RULES ON FORGERY
FORGERY PROMISSORY NOTE
Sec. 23. Forged signature; effect of. - When a Makers signature forged
signature is forged or made without the (1) Maker is not liable because he never became
authority of the person whose signature it a party to the instrument.
purports to be, it is wholly inoperative, and no (2) Indorsers subsequent to forgery are liable
right to retain the instrument, or to give a because of their warranties.
discharge therefor, or to enforce payment (3) Party who made the forgery is liable.
thereof against any party thereto, can be
Payees signature forged
acquired through or under such signature,
(1) Payee is not liable.
unless the party against whom it is sought to
(2) Maker is still liable. (REASON: Indorsement
enforce such right is precluded from setting up
is not necessary to title and the maker
the forgery or want of authority.
engages to pay holder)
(3) Indorsers subsequent to forgery are liable.
Counterfeit making or fraudulent alteration of
(4) Party who made the forgery is liable.
any writing, which may consist of:
(1) Signing of anothers name with intent to Indorsers signature forged
defraud; or (1) Maker, payee, indorser whose signature/s
(2) Alteration of an instrument in the name, was/were forged, and all indorsers preceding
amount, name of payee, etc. with intent to the forgery are not liable.
defraud. (2) Indorsers subsequent to forgery are liable.
(3) Party who made the forgery is liable.
General rule: When a signature is forged or
made without the authority of the person, only
the forged signature (not the instrument itself
BILL OF EXCHANGE
Drawers signature forged
and the other genuine signatures) is wholly
(1) Drawer is not liable because he was never a
inoperative
party to the instrument.
Effects:
(2) Drawee is liable if it paid or accepted the
(1) No right to retain the instrument
instrument (no recourse to drawer) because
(2) No right to give a discharge therefor
he admitted the genuineness of the drawers
(3) No right to enforce payment thereof against
signature [Sec. 62, NIL; Price v. Neal]. Drawee
any party thereto can be acquired through or
cannot recover from the collecting bank
under such signature
because there is no privity between the
Exception: The party against whom it is sought collecting bank and the drawer. The
to be enforced is precluded from setting up the collecting bank does not give any warranty
forgery or want of authority as a defense [Sec. re: the drawers signature.[(Associated Bank
23, NIL]. vs. CA]
(3) Indorsers subsequent to forgery are liable
PERSONS PRECLUDED FROM (such as collecting bank or last endorser)
SETTING UP DEFENSE OF FORGERY (4) Party who made the forgery is liable
[CAMPOS] Payees signature forged
(1) Those who warrant or admit the genuineness (1) Payee is not liable
of the signature in question. This includes (2) Drawer is still secondarily liable
indorsers, persons negotiating by delivery (3) Drawee is liable if it paid or accepted the
and acceptors. instrument [Sec. 62, NIL; Price v. Neal], but it
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may pass liability back through the collection check or draft, is extended to overdrafts
chain and stop payment orders.
(4) Indorsers subsequent to forgery are liable
(such as collecting bank) (a) Overdraft occurs when a check is issued
(5) Party who made the forgery is liable for an amount more than what the drawer
has in deposit with the drawee bank. Rule:
Indorsers signature forged The drawee who pays the holder of the
(1) Drawer, payee, indorser whose signature/s bill cannot recover from the holder what
was/were forged and all indorsers preceding he paid under mistake [Campos]
the forgery are not liable. (b) Stop Payment Order is one issued by the
(2) Drawee is liable if it paid or accepted the drawer of a check countermanding his
instrument [Sec. 62, NIL; Price v. Neal]. first order to the drawee bank to pay the
(3) Indorsers subsequent to forgery are liable. check. Rule: The drawee bank is bound to
(such as collecting bank) follow the order, provided it is received
(4) Party who made the forgery is liable. prior to its certification or payment of the
check [Campos].
ACCEPTANCE AND PAYMENT UNDER
MISTAKE (3) Effects of Negligence of Depositor
Sec. 62. Liability of acceptor. - The acceptor, by If such negligence of the depositor was the
accepting the instrument, engages that he will proximate cause of the loss, the drawee-
pay it according to the tenor of his acceptance bank would NOT be liable
and admits: The negligence of the depositor/drawer
(a) The existence of the drawer, the genuineness would consist of the failure to to carefully
of his signature, and his capacity and examine bank statements, cancelled
authority to draw the instrument; and checks, his check stubs, and other
(b) The existence of the payee and his then pertinent records within a reasonable time
capacity to indorse. and to report any errors without
unreasonable delay to the drawee bank.
(1) When the drawee accepts or pays a forged If a drawer/depositors negligence and
instrument delay should cause a bank to honor a
Price v. Neal doctrine: As between equally forged check, the drawer cannot later
innocent persons, the drawee who pays complain should bank refuse to recredit his
money on, or accepts, a check or draft the account [Campos].
signature on which was forged CANNOT
(4) Effect of Payment under Forged
recover the money from the one who
Indorsements
received it. The drawee is bound to know
In the case of a drawee's acceptance or payment
the signature of its depositor.
of a bill on which only an INDORSEMENT has
A bank is bound to know the signatures of been forged, the drawee can recover the
its depositors. If a bank pays a forged amount paid out by him. RATIONALE: The
check it must be considered as making the drawee makes no warranty as to the
payment out of its own funds and cannot genuineness of any indorsement [Campos].
charge the account of the depositor whose
signature was forged. [PNB vs. Quimpo, (5) Effect of negligence of drawee in informing
1988] recipient of forgery
A bank is liable, irrespective of its good The rule is that a drawee's acceptance or
faith, in paying a forged check. [Samsung payment of a bill on which only an
vs. Far East Bank, 2004] INDORSEMENT has been forged is not a
bar to his right to recover the amount paid
(2) Extensions of Price v. Neal doctrine out by him; however, there is an exception
Notes: The bar to recovery on the part of a to this rule.
drawee who pays money on, or accepts, a
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If it is shown that the drawee on learning of indorsement, the drawee bank may be held
the forgery did not give prompt notice of it liable to the collecting bank.
to the holder and that damage resulted to Furthermore, when both the collecting bank
said holder, recovery by the drawee is and the drawee bank are guilty of negligence,
barred [Clearfield Trust Co. v. US, 1943] the degree of negligence of each will be
weighed in considering the amount of loss
(6) Effect of negligence of drawer in case of which each should bear [BPI v CA, 1992]
forged indorsement on checks
The drawer, as soon as he comes to know of a
forged indorsement should promptly notify the
drawee bank. Otherwise, should his negligent
Consideration
delay be the proximate cause of any subsequent Section 25, NIL. Value, what constitutes. Value
loss to the bank, the latter may properly charge is any consideration sufficient to support a
it to the drawer's account. simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
(7) Comparing the liability of a collecting bank whether the instrument is payable on demand
and a drawee bank or at a future time.
A collecting bank is only liable for forged
indorsements and not forgeries of the drawer or Section 191, NIL. Definition and meaning of
makers signature [PNB v CA, 1968]. terms. - In this Act, unless the contract
otherwise requires:
Rationale: In presenting the checks for clearing, x---x
the collecting agent made an express guarantee "Value" means valuable consideration;
on the validity of all the prior endorsements. x---x
The collecting bank or last indorser generally Value and consideration are generally
suffers the loss because it has the duty to convertible terms. However, they may have
ascertain the genuineness of all prior different implications. When the payee of a
indorsements considering that the act of noet sues the maker, or the payee of a bill
presenting the check for payment to the sues the drawer, or an indorsee sues his
drawee is an assertion that the party making immediate indorser, the word consideration
the presentment had done its duty to is the more proper term to use. But where a
ascertain the genuineness of the holder sues any party to the instrumetn with
indorsements [BPI v CA, 1992]. whom he himself has not dealt, the term
A drawee bank is not liable for forged value is more appropriate.
indorsements. An antecedent or pre-existing debt
constitutes value; and is deemed such
Rationale: The drawee bank is not similarly whether the instrument is payable on demand
situated as the collecting bank because the or at a future time. [Sec. 25, NIL]
former makes no warranty as to the
Value need not be full and a holder will be
genuineness of any indorsement. The drawee
one for value even if he gave less than the
banks duty is but to verify the genuineness of
face value of the instrument, provided the
the drawers signature and not of the
intention of the transferor is to transfer the
indorsement because only the drawer is its
full amount represented by the instrument.
client.
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(2) Signature of the indorser, without additional (b) But where the instrument is payable to A
words, is a sufficient indorsement [Sec. 31, or B, they payees are merely in the
NIL] alternative, and either one may valdily
negotiate the same [Campos].
(3) Must be of the ENTIRE instrument
Section 32, NIL. Indorsement must be of entire KINDS OF INDORSEMENT
instrument. - The indorsement must be an Section 33, NIL. Kinds of indorsement. - An
indorsement of the entire instrument. An indorsement may be either special or in blank;
indorsement which purports to transfer to the and it may also be either restrictive or qualified
indorsee a part only of the amount payable, or or conditional.
which purports to transfer the instrument to two
or more indorsees severally, does not operate as There are four bases of classification of
a negotiation of the instrument. But where the indorsements under the NIL:
instrument has been paid in part, it may be (1) Special or in blank
indorsed as to the residue. (2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(a) CANNOT indorse a part only of the amount (4) Conditional or unconditional
payable; BUT if the instrument has been
paid in part, then the instrument may be All of the four bases of classification coexist with
indorsed as to the residue [Sec. 32] NIL each other; thus, an indorsement may be
(b) CANNOT transfer the instrument to two or special and qualified at the same time. It may
more indorsees severally [Sec. 32, NIL] also be special and unqualified, special and
(c) If not an indorsement of the entire restrictive, special, unrestrictive and unqualified
instrument, the transfer remains valid, but and so on [Campos].
as a mere assignment which subjects the
holder to all defenses on the instrument AS TO MANNER OF FUTURE
[Campos] METHOD OF NEGOTIATION
Section 34, NIL. Special indorsement;
(4) If name misspelled in indorsement, indorsement in blank. - A special indorsement
indorsement will be prima facie deemed not specifies the person to whom, or to whose order,
valid. the instrument is to be payable, and the
Section 43, NIL. Indorsement where name is indorsement of such indorsee is necessary to
misspelled, and so forth. - Where the name of a the further negotiation of the instrument. An
payee or indorsee is wrongly designated or indorsement in blank specifies no indorsee, and
misspelled, he may indorse the instrument as an instrument so indorsed is payable to bearer,
therein described adding, if he thinks fit, his and may be negotiated by delivery.
proper signature.
Section 40, NIL. Indorsement of instrument
(a) The indorsement should be made by the
payable to bearer. - Where an instrument,
holder in the manner he was designated,
payable to bearer, is indorsed specially, it may
otherwise the signature will prima facie
nevertheless be further negotiated by delivery;
not be a valid indorsement of the
but the person indorsing specially is liable as
instrument [Sec 43, NIL]
indorser to only such holders as make title
(5) Indorsement where there are joint payees through his indorsement.
(a)Where the instrument is payable or
indorsed to A and B, they are joint Section 35, NIL. Blank indorsement; how
payees and an indorsement by either A or changed to special indorsement. - The holder
B only will not constitute a valid may convert a blank indorsement into a special
negotiation, UNLESS the one indorsing is indorsement by writing over the signature of the
authorized by the other [Campos]. indorser in blank any contract consistent with
the character of the indorsement.
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(1) Special (b) to bring any action thereon that the indorser
(a) Specifies the person to whom/to whose could bring;
order the instrument is to be payable; (c) to transfer his rights as such indorsee, where
indorsement of such indorsee is necessary the form of the indorsement authorizes him
to further negotiation. to do so.
(b) A special indorser is liable to all But all subsequent indorsees acquire only the
subsequent holders, unless the title of the first indorsee under the restrictive
instrument is an originally bearer indorsement.
instrument, in which case he is liable only
to those who take title through his (1) Restrictive Such indorsement either:
indorsement [Sec. 40, NIL]. (a) Prohibits further negotiation of
(c) An instrument, payable to bearer, and instrument
indorsed specially, may nevertheless be (b) Constitutes indorsee as agent of indorser
further negotiated by delivery. [Sec 40, (c) Vests title in indorsee in trust for another
NIL] [Sec 36, NIL]
Originally bearer instrument always
remains a bearer instrument [Sundiang RIGHTS OF RESTRICTIVE INDORSEE
and Aquino] (a) Receive payment
(2) Blank (b) Bring any action thereon that the indorser
(a) Specifies no indorsee, instrument so could bring.
indorsed is payable to bearer, and may be (c) Transfer his rights as such indorsee, but
negotiated by delivery all subsequent indorsees acquire only the
(b) The holder may convert a blank title of first indorsee under restrictive
indorsement into a special indorsement indorsement. [Sec 37, NIL]
by writing over the signature of the
indorser in blank any contract consistent (2) Non-restrictive
with the character of the indorsement.
[Sec 35, NIL] AS TO KIND OF LIABILITY ASSUMED
(c) An order instrument may be converted BY INDORSER
into a bearer instrument by means of a Section 38, NIL. Qualified indorsement. - A
blank indorsement, and may be later
qualified indorsement constitutes the indorser a
reconverted into an order instrument by a
mere assignor of the title to the instrument. It
subsequent special indorsement may be made by adding to the indorser's
signature the words "without recourse" or any
AS TO TITLE TRANSFERRED words of similar import. Such an indorsement
Section 36, NIL. When indorsement restrictive. - does not impair the negotiable character of the
An indorsement is restrictive which either: instrument.
(a) Prohibits the further negotiation of the
instrument; or (1) Qualified
(b) Constitutes the indorsee the agent of the (a) Constitutes indorser as mere assignor of
indorser; or title
(c) Vests the title in the indorsee in trust for or to (b) Made by adding the words without
the use of some other persons. recourse [Sec. 38, NIL].
But the mere absence of words implying power (c) But this does not mean that the
to negotiate does not make an indorsement transferee only has the rights of an
restrictive. assignee; transfer remains a negotiation
and transferee can still be a holder
Section 37, NIL. Effect of restrictive indorsement; capable of acquiring a title free from
rights of indorsee. - A restrictive indorsement defenses of prior parties.
confers upon the indorsee the right: (d) Effects:
(a) to receive payment of the instrument;
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(i) Relieves the qualified indorser of his (3) Irregular Where a person, not otherwise a
liability to pay the instrument should party to the instrument, places thereon his
the maker be unable to pay signature in blank before delivery, he is liable
(ii) The qualified indorser does not as indorser
guarantee the solvency of the maker,
but merely his legal title to the
instrument
Rights of the Holder
(iii)The instrument may still be further DEFINITION OF A HOLDER
negotiated; no effect on its Section 191, NIL. Definition and meaning of
negotiability terms. - In this Act, unless the contract
(2) Non-qualified otherwise requires:
x---x
AS TO PRESENCE/ABSENCE OF "Holder" means the payee or indorsee of a bill
EXPRESS LIMITATIONS or note who is in possession of it, or the bearer
Section 39, NIL. Conditional indorsement. - thereof;
Where an indorsement is conditional, the party
required to pay the instrument may disregard A holder is a payee or indorsee of a bill or note
the condition and make payment to the who is in possession of it, or the bearer thereof
indorsee or his transferee whether the condition [Sec. 191, NIL). He has the following rights [Sec.
has been fulfilled or not. But any person to 51, NIL]:
whom an instrument so indorsed is negotiated (1) To sue on the instrument in his own name
will hold the same, or the proceeds thereof,
Unindorsed intruments: Section. 49, NIL.
subject to the rights of the person indorsing
Transfer without indorsement; effect of.
conditionally.
Where the holder of an instrument payable
(1) Conditional to his order transfers it for value without
(a) Additional condition annexed to indorsers indorsing it, the transfer vests in the
liability; such condition must be expressed transferee such title as the transferor had
(b) Where an indorsement is conditional, a therein, and the transferee acquires in
party required to pay the instrument may addition, the right to have the indorsement
disregard the condition, and make of the transferor. But for the purpose of
payment to the indorsee or his transferee, determining whether the transferee is a
whether condition has been fulfilled or holder in due course, the negotiation takes
not. effect as of the time when the indorsement
(c) But any person to whom an instrument so is actually made.
indorsed is negotiated, will hold the same,
Note: This section applies only to an
or the proceeds thereof, subject to the
instrument payable to the order of the
rights of the person indorsing
transferor. This cannot apply to bearer
conditionally. [Sec. 39, NIL]
instruments.
(2) Unconditional
Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
OTHER KINDS OF INDORSEMENT may at any time strike out any indorsement
(1) Absolute One by which the indorser binds which is not necessary to his title. The
himself to pay, upon no other condition than indorser whose indorsement is struck out,
the failure of prior parties to do so, and of due and all indorsers subsequent to him, are
notice to him of such failure thereby relieved from liability on the
(2) Joint Where instrument payable to the instrument.
order of two or more payees or indorsees not
Indorsement by agent: Section 20, NIL.
partners, all must indorse, unless the one
Liability of person signing as agent, and so
indorsing has authority to endorse for the
forth. Where the instrument contains or a
others [Sec. 41, NIL]
person adds to his signature words
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Section 57, NIL. Rights of holder in due course. - inserted in a negotiable instrument without
A holder in due course holds the instrument free which the same will not be complete.
from any defect of title of prior parties, and free
from defenses available to prior parties among MATERIAL PARTICULARS
themselves, and may enforce payment of the Section 125, NIL. What constitutes a material
instrument for the full amount thereof against alteration. - Any alteration which changes:
all parties liable thereon. (a) Date
(b) Sum payable, either for principal or interest
Section 58, NIL. When subject to original defense. (c) Time or place of payment
- In the hands of any holder other than a holder (d) Number or relations of the parties
in due course, a negotiable instrument is subject (e) Medium or currency in which payment is to
to the same defenses as if it were non- be made
negotiable. But a holder who derives his title (f) Or which adds a place of payment where no
through a holder in due course, and who is not place of payment is specified
himself a party to any fraud or illegality (g) Or any other change or addition which alters
affecting the instrument, has all the rights of the effect of the instrument in any respect
such former holder in respect of all parties prior
to the latter. The items enumerated under Sec. 125 of the NIL
are material particulars.
(1) To sue on the instrument in his own name
[Sec. 51, NIL] (2) That he became the holder of it before it was
(2) To receive payment on the instrument [Sec. overdue and without notice that it had been
51, NIL] previously dishonored, if such was the fact
(3) Holds instrument free of any defect of title of
prior parties [Sec. 57, NIL] Section 53, NIL. When person not deemed holder
(4) Free from defenses available to prior parties in due course. - Where an instrument payable on
among themselves [Sec. 57, NIL] demand is negotiated on an unreasonable
(5) May enforce payment of instrument for full length of time after its issue, the holder is not
amount, against all parties liable [Sec. 57, deemed a holder in due course.
NIL]
OVERDUE THE FOLLOWING CANNOT BE
REQUISITES OF A HOLDER IN HDCS:
(a) A holder who became such after the date of
DUE COURSE [SEC. 52, NIL] maturity of the instrument [instrument is
Sec. 52, NIL. What constitutes a holder in due overdue; Sec. 53, NIL];
course. A holder in due course is a holder who (b) In case of demand instruments: a holder who
has taken the instrument under the following negotiates it after an unreasonable length of
conditions: time after its issue [Sec. 53, NIL]
(a) That it is complete and regular upon its face; (c) Instruments with fixed maturity but subject
(b) That he became the holder of it before it was to acceleration: ultimate date of maturity is
overdue, and without notice that it has been the date of maturity for the purpose of
previously dishonored, if such was the fact; determining whether a purchaser is a HDC
(c) That he took it in good faith and for value; (d) Undated instruments: Prima facie
(d) That at the time it was negotiated to him, he presumption that it was negotiated before it
had no notice of any infirmity in the was overdue [Sec. 45, NIL]
instrument or defect in the title of the person
negotiating it. Notes:
(1) An overdue instrument is still negotiable, but
That the instrument is complete and regular it is subject to the defenses (real and
upon its face personal) existing at the time of the transfer.
(1) It is incomplete when it is wanting in any (2) As to what constitutes a reasonable time,
material particular or particular proper to be regard is to be had to the nature of the
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Liabilities of Parties (2) Engages that he will pay the amount of the
instrument to the holder or to any
subsequent indorser who may be compelled
Primary liability: The unconditional promise to pay the same if the instrument be
attaches the moment the maker makes the dishonored upon due presentment and
instrument while the acceptors assent to the proceedings on dishonor be taken,
unconditional order attaches the moment he
accepts the instrument. No further act is Limiting liability: Drawer may insert in the
necessary in order for the liability to accrue. instrument an express stipulation
Presentment for payment is all that is negativing/limiting his own liability to the
necessary. holder.
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on the next succeeding business day [Sec. (2) Partners presentment for payment may be
85] made to any one of them, even though there
(2) Payable on demand within a reasonable has been a dissolution of the firm
time after its issue, iv at the option of the (3) Several persons, not partners (joint debtors)
holder, may be presented for payment before presentment for payment must be made to
twelve o'clock noon on Saturday when that them all
entire day is not a holiday [Sec. 85]
(3) Demand bill of exchange within a DISPENSATION WITH
reasonable time after the last negotiation.
[Sec. 71]
PRESENTMENT FOR PAYMENT
When Excused:
Note: Although presentment was made within a (1) Where, after the exercise of reasonable
reasonable time from last negotiation, it may diligence, presentment cannot be made;
have been made within an unreasonable time (2) Where the drawee is a fictitious person;
from issuance. Thus holder may still not be a (3) By waiver of presentment, express or implied.
holder in due course under Sec. 71. [Sec. 82]
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BY REACQUISITION OF (b) and he may strike out his own and all
subsequent indorsements, and again
PRINCIPAL DEBTOR IN HIS OWN negotiate instrument, except: where it is
RIGHT payable to order of 3rd party and has been
Principal debtor becomes holder of instrument paid by drawer or where its
at or after maturity in his own right made/accepted for accommodation and
has been paid by party accommodated
BY MATERIAL ALTERATION (7) By taking a qualified acceptance
Material alteration without assent of all parties
liable avoids instrument except as against party RIGHT OF PARTY WHO
to alteration and subsequent indorsers [Sec. DISCHARGED INSTRUMENT
124] Where the instrument is paid by a party
secondarily liable thereon, it is not discharged;
DISCHARGE OF PARTIES but the party so paying it is remitted to his
SECONDARILY LIABLE former rights as regards to all prior parties, and
GROUNDS UNDER SEC. 120 he may strike out his own and all subsequent
indorsements, and again negotiate the
A person secondarily liable on the instrument is
instrument, except:
discharged:
(1) Where it is payable to the order of a third
(1) By any act which discharges the instrument;
person, and has been paid by the drawer;
(2) By the intentional cancellation of his
(2) Where it was made or accepted for
signature by the holder;
accommodation, and has been paid by the
(3) By the discharge of a prior party;
party accommodated. [Sec. 121]
(4) By a valid tender or payment made by a prior
party;
(5) By a release of the principal debtor unless RENUNCIATION BY HOLDER
the holder's right of recourse against the [SEC. 122]
party secondarily liable is expressly reserved; The holder may expressly renounce his rights
(6) By any agreement binding upon the holder against any party to the instrument before, at,
to extend the time of payment or to or after its maturity. An absolute and
postpone the holder's right to enforce the unconditional renunciation of his rights
instrument unless made with the assent of against the principal debtor made at or after
the party secondarily liable or unless the the maturity of the instrument discharges the
right of recourse against such party is instrument.
expressly reserved. [Sec. 120] Renunciation must be in writing unless the
instrument is delivered up to the person
OTHER GROUNDS primarily liable thereon
(1) Failure to make due presentment [Secs. 70, Renunciation does not affect the rights of an
144] HDC without notice
(2) Failure to give notice of dishonor
(3) Certification of check at instance of holder
(4) Reacquisition by prior party
(5) Where instrument negotiated back to a prior
Material Alteration
party, such party may reissue and further CONCEPT
negotiate, but not entitled to enforce Any change in the instrument which affects or
payment against any intervening party to changes the liability of the parties in any way.
whom he was personally liable Any alteration which changes the date, sum
(6) Where instrument is paid by party payable, time or place of payment, number of
secondarily liable, it is not discharged, but relation of the parties, or medium of currency
(a) the party so paying it is remitted to his of payment where none is specified or which
former rights as regard to all prior parties alters the effect of the instrument in any
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respect [PNB v. CA, GR No. L-26001, Oct. 21, (3) Must not express that the drawee will
1968] perform his promise by and other means
An alteration is said to be material if it alters than the payment of money
the effect of the instrument. In other words, a
material alteration is one which changes the
items which are required to be stated under KINDS OF ACCEPTANCE
Sec. 1 of the NIL [ibid.] (1) General assents without qualification to the
order of the drawer
(2) Qualified which in express terms varies the
CHANGES IN THE FOLLOWING effect of the bill as drawn:
CONSTITUTE MATERIAL (a) Conditional makes payment by the
ALTERATIONS [SEC. 125] acceptor dependent on the fulfillment of
(1) Date a condition therein stated
(2) Sum payable, either for principal or interest (b) Partial an acceptance to pay part only of
(3) Time or place of payment the amount for which the bill is drawn.
(4) Number or relations of the parties (c) Local an acceptance to pay only at a
(5) Medium or currency in which payment is to particular place.
be made (d) Qualified as to time
(6) That which adds a place of payment where (e) The acceptance of some one or more of
no place of payment is specified the drawees but not of all. [Sec. 141]
(7) Any other change or addition which alters
the effect of the instrument in any respect. PROOF OF ACCEPTANCE
[SUNDIANG AND AQUINO]
EFFECT OF MATERIAL The written acceptance may be in the
instrument itself or in a separate instrument.
ALTERATION However, under Sec. 133, the holder of a bill
(1) Alteration by a party Avoids the instrument presenting the same for acceptance may require
except as against the party who made, the acceptance be written on the bill, and, if
authorized, or assented to the alteration and such request is refused, may treat the bill as
subsequent indorsers. However, if an altered dishonored
instrument is negotiated to a HDC, he may
enforce payment thereof according to its Effects: When an acceptance is written on a
original tenor regardless of whether the paper than the bill itself, it does not bind the
alteration was innocent or fraudulent. acceptor except in favor of a person to whom it
(2) Alteration by a stranger (spoliation) the is shown and who, on the faith thereof, receives
effect is the same as where the alteration the bill for value.
was made by a party wherein a HDC can
recover on the original tenor of the MANNER
instrument [Sec. 124].
EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee
Acceptance and must not express that the drawee will
perform his promise by any other means than
DEFINITION the payment of money. [Sec. 132] If request for a
The signification by the drawee of his assent to written acceptance is refused, the holder may
the order of the drawer [Sec. 132] treat the bill as dishonored [Sec. 133]
IMPLIED ACCEPTANCE
REQUISITES [SEC. 132]: (1) If the drawee refuses to return the instrument
(1) Must be in writing within 24 hours after it was delivered for
(2) Signed by the drawee acceptance.
(2) If the drawee destroys the same.
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(3) If the drawee makes an unconditional promise holder or he will be deemed to have assented
in writing before the instrument is drawn, with thereto.
respect to every person who, upon the faith However, acceptance is presumed to be
thereof, receives the bill for value. unqualified or absolute. [Sundiang and
Aquino]
TIME FOR ACCEPTANCE [SEC. 136]
The drawee is allowed twenty-four hours after
presentment in which to decide whether or
not he will accept the bill.
Presentment for
The acceptance, if given, dates as of the day of Acceptance
presentation.
Requisites:
RULES GOVERNING (1) By the holder, or by some person authorized
to receive payment on his behalf;
ACCEPTANCE (2) At a reasonable hour on a business day;
Q: What is the implication of payment without (3) At a proper place as herein defined;
acceptance by a drawee? (4) To the person primarily liable on the
A: Act No. 2031, or the Negotiable Instruments instrument, or if he is absent or inaccessible,
Law (NIL), explicitly provides that the
to any person found at the place where the
acceptor, by accepting the instrument,
presentment is made.
engages that he will pay it according to the
tenor of his acceptance. This provision applies
General rule: Presentment for acceptance is not
with equal force in case the drawee pays a bill
necessary in order to render any party to the bill
without having previously accepted it. His liable. [Sec. 143, last par.]
actual payment of the amount in the check
implies not only his assent to the order of the
drawer and a recognition of his WHEN PRESENTMENT FOR
corresponding obligation to pay the ACCEPTANCE NECESSARY
aforementioned sum, but also, his clear Presentment for acceptance must be made:
compliance with that obligation. Actual (1) Where the bill is payable after sight, or in any
payment by the drawee is greater than his other case, where presentment for
acceptance, which is merely a promise in acceptance is necessary in order to fix the
writing to pay. The payment of a check maturity of the instrument; or
includes its acceptance. [FEBTC vs. Gold (2) Where the bill expressly stipulates that it shall
Palace Jewellery Co,, Nachura, 2008] be presented for acceptance; or
(3) Where the bill is drawn payable elsewhere
RIGHT TO UNQUALIFIED than at the residence or place of business of
ACCEPTANCE the drawee. [Sec. 143]
The holder may refuse to take a qualified
acceptance and if he does not obtain an Note: It is not necessary to present a check for
unqualified acceptance, he may treat the bill acceptance because it is not one of those
as dishonored by non-acceptance. required under Sec. 143.
Where a qualified acceptance is taken, the
drawers and indorsers are discharged from WHEN PRESENTMENT FOR
liability on the bill unless they have expressly ACCEPTANCE EXCUSED
or impliedly authorized the holder to take a Presentment for acceptance is excused and a
qualified acceptance, or subsequently assent bill may be treated as dishonored by non-
thereto. acceptance in either of the following cases:
When the drawer or indorser receives notice of (1) Where the drawee is dead, or has absconded,
a qualified acceptance, he must, within a or is a fictitious person or a person not having
reasonable time, express his dissent to the capacity to contract by bill.
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(2) Where, after the exercise of reasonable (4) Before the bill is overdue
diligence, presentment cannot be made. (5) To the drawee or his agent
(3) Where, although presentment has been
irregular, acceptance has been refused on Where a bill is addressed to 2 or more drawees
some other ground. [Sec. 148] who are not partners presentment must be
made to them all XPT. One has authority to
TIME/PLACE/MANNER OF accept/refuse for all
Where the drawee is dead presentment may
PRESENTMENT be made to his personal representative
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(4) Engaging to pay on demand, or at a fixed or undertakes to pay it at any future time when
determinable future time presented for payment [Sec. 187]
(5) A sum certain in money to order or to bearer (a) Certification is equivalent to acceptance.
(6) Where a note is drawn to the maker's own [Sec. 187]
order, it is not complete until indorsed by (b) Where the holder of a check procures it to
him. [Sec. 184] be accepted or certified, the drawer and
all indorsers are discharged from liability.
There are originally 2 parties in a promissory [Sec. 188]
note: (c) A check of itself does not operate as an
(1) Maker party who executes the written assignment of any part of the funds to the
promise to pay. credit of the drawer with the bank, and
(2) Payee party in whose favor the promissory the bank is not liable to the holder unless
note is made payable. and until it accepts or certifies the check.
[Sec. 189]
(5) Crossed Check The NIL is silent with
Checks respect to crossed checks, although the Code
of Commerce makes reference to such
DEFINITION instruments.
A check is a bill of exchange drawn on a bank Article 541 of the Code of Commerce states: The
payable on demand. Except as herein otherwise maker or any legal holder of a check shall be
provided, the provisions of this Act applicable to entitled to indicate therein that it be paid to a
a bill of exchange payable on demand apply to certain banker or institution, which he shall do
a check. [Sec. 185] by writing across the face the name of said
banker or institution, or only the words and
KINDS company.
(1) Cashiers Check One drawn by the cashier
of a bank, in the name of the bank against Under usual practice, crossing a check is done
the bank itself payable to a third person. It is by placing two parallel lines diagonally on the
a primary obligation of the issuing bank and left top portion of the check [State Investment
accepted in advance upon issuance [Tan vs. House vs. IAC, 1989].
CA 1994].
(2) Managers Check A check drawn by the TYPES: SPECIAL AND GENERAL
manager of a bank in the name of the bank The crossing may be special wherein between
itself payable to a third person. It is similar to the two parallel lines is written the name of a
the cashiers check as to the effect and use. bank or a business institution, in which case the
drawee should pay only with the intervention of
In issuing a managers check, the bank that bank or company, or crossing may be
assumed the liabilities of the acceptor under general wherein between two parallel diagonal
Sec. 62, NIL [Equitable PCI Bank v. Ong lines are written the words "and Co." or none at
(2006)] all as in the case at bar, in which case the
(3) Memorandum Check A check given by a drawee should not encash the same but merely
borrower to a lender for the amount of a accept the same for deposit (supra).
short loan, with the understanding that it is
not to be presented at the bank, but will be EFFECTS
redeemed by the maker himself when the (1) The check may not be encashed; it may only
loan falls due and which understanding is be deposited with the bank;
evidenced by writing the word (2) The check may be negotiated only once to a
memorandum, memo or mem on the person who has an account with the bank;
check. and
(4) Certified Check An agreement whereby the
bank against whom a check is drawn
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TIME
When to present? A check must be presented for
payment within reasonable time after its issue.
EFFECT OF DELAY
The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay. [Sec. 186]
Effects:
(1) Equivalent to acceptance [Sec. 187] and is the
operative act that makes banks liable
(2) Assignment of the funds of the drawer in the
hands of the drawee [Sec. 189]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec. 188]
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thereof does not constitute the doing or Bangko Sentral ng Pilipinas or any of its
transacting of an insurance business (Section branches under such rules and regulations
2(b)). which the Commissioner and the Bangko
Sentral ng Pilipinas may promulgate. To
General rule: An insurance business consists in engage in bancassurance arrangement, a
undertaking, for a consideration, to indemnify bank is not required to have equity ownership
another against loss, damage or liability arising of the insurance company. No insurance
from an unknown or contingent event. company shall enter into a bancassurance
arrangement unless it possesses all the
Exception: Although the business is not formally requirements as may be prescribed by the
designated as one of insurance and no profit is Commissioner and the Bangko Sentral ng
derived or no separate or direct consideration is Pilipinas.
received, it is deemed to be doing an insurance No insurance product, whether life or non-life,
business if it undertakes any of the activities shall be issued or delivered pursuant to a
included in the term doing an insurance Bancassurance arrangement, unless in the
business or transacting an insurance business. form previously approved by the
Commissioner (Section 375).
Philippine Health Care Providers Inc. v. CIR Personnel tasked to present and sell
(2009) has stated that: insurance products within the bank premises
(1) Contracts of law firm with clients whereby in shall be duly licensed by the Commissioner
consideration of periodical payments, the law and shall be subject to the rules and
firm promises to represent such clients in all regulations of this Act (Section 376).
suits for or against them are not insurance This is introduced in RA 10607 amending the
contracts; Insurance Code.
(2) A contract by which a corporation, in
consideration of a stipulated amount, agrees
at its own expense to defend a physician PRE-NEED PLANS
against all suits for damages for malpractice Pre-need plans are contracts, agreements,
is one of insurance, and the corporation will deeds or plans for the benefit of the
be deemed as engaged in the business of planholders which provide for the
insurance. performance of future services, payment of
monetary considerations or delivery of other
benefits at the time of actual need or agreed
GOVERNING LAW maturity date, as specified therein, in
The Insurance Code primarily governs exchange for cash or installment amounts
insurance contracts, unless there is a special with or without interest or insurance coverage
law which specifically govern (e.g., insurance and includes life, pension, education,
contract under the RA 1161 or Social Security interment and other plans, instruments,
Act), in which case, the Insurance Code contracts or deeds [Section 4(b), RA 9829
governs subsidiarily. (Pre-Need Code)].
Matters not expressly provided for in the Pre-need plans are not governed by the
Insurance Code and special laws are regulated Insurance Code but by the Pre-Need Code of
by the Civil Code. the Philippines. They are not considered as
insurance contracts because even pre-need
BANCASSURANCE plans can be insured, thereby implying that
RA 10607 introduced provisions governing the two are not the same.
bancassurance. Pre-need plans are considered as securities
The term bancassurance shall mean the and used to be governed by the Securities
presentation and sale to bank customers by Regulation Code. They are not considered as
an insurance company of its insurance insurance contracts because it is not an
products within the premises of the head insurance for an unknown or contingent event
office of such bank duly licensed by the
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(1) The insurer or the party who assumes or Exceptions: Insurance contracts particularly
accepts the risk of loss and undertakes for liability insurance, may be required by law in
consideration to indemnify the insured or to certain instances:
pay hum a certain sum on the happening of For motor vehicles [Sections 373-389];
the event or peril insured against, and For employees [Articles 168-184, Labor
(2) The insured or the person in whose favor the Code];
contract is operative and whose loss is the As a condition to granting a license to conduct
occasion for the payment of the insurance business or calling affecting the public safety or
proceeds by the insurer welfare [De Leon (2010)].
The insured is not always the person whom Also, there are insurance which may arise by
the proceeds are paid. Such person is the operation of law. Social insurance for members
beneficiary. of the Government Service Insurance System
(GSIS) and for the employees of the private
sector covered by the Social Security System
Characteristics of an (SSS) is established by law.
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including liability for loss of or damage transportation. It also covers risks of lake,
arising out of or in connection with the river or other inland waterway transportation
construction, repair, operation, and other waterborne perils outside those
maintenance or use of the subject matter covered by ocean marine insurance.
of such insurance (but not including life
insurance or surety bonds nor insurance BOTTOMRY AND RESPONDENTIA
against loss by reason of bodily injury to DISTINGUISHED
any person arising out of ownership, Bottomry loan is a loan that is obtained for the
maintenance, or use of automobiles);
value of the vessel on a voyage and the lender
(c) Precious stones, jewels, jewelry, precious
is repaid only if the vessel subject of the loan
metals, whether in course of
arrives safely at its destination. The insurable
transportation or otherwise; and
interest of a ship owner on its bottomed boat
(d) Bridges, tunnels and other
is the difference between the amount of the
instrumentalities of transportation and
loan and the value of the boat. Thus, if the
communication (excluding buildings, their
amount of the loan does not cover the total
furniture and furnishings, fixed contents
value of the boat, the owner can still insured
and supplies held in storage); piers,
the boat.
wharves, docks and slips, and other aids
Respondentia loan is a loan that is obtained
to navigation and transportation,
as security for the value of the cargo to be
including dry docks and marine railways,
transported and the lender is repaid only if
dams and appurtenant facilities for the
the cargo arrives safely at its destination.
control of waterways.
(2) Marine protection and indemnity insurance,
meaning insurance against, or against legal RISKS
liability of the insured for loss, damage, or PERILS OF THE SEA
expense incident to ownership, operation, Ocean marine insurance protects ships at sea
chartering, maintenance, use, repair, or and the cargo or freight on such ships from
construction of any vessel, craft or standard perils of the sea or perils of
instrumentality in use of ocean or inland navigation which includes casualties arising
waterways, including liability of the insured from the violent action of the elements and
for personal injury, illness or death or for loss does not cover ordinary wear and tear or other
of or damage to the property of another damage usually incident to the voyage. The
person [Section 101]. mere fact that an injury is due to violence of
some marine force does not necessarily bring
DIVISIONS it within the protection of the policy if such
Marine insurance has two major divisions: violence was not unusual or unexpected.
(1) Ocean marine insurance insures against risk Perils of the sea or perils of navigation include
connected with navigation, to which a ship, only those casualties due to the unusual
cargo, freightage, profits or other insurable violence or extraordinary causes connected
interest in movable property, may be with navigation. It has been said to include
exposed during a certain voyage or a fixed only such losses as are of extraordinary nature
period of time. Its scope includes: or arise from some overwhelming power
(a) Ships or hulls; which cannot be guarded against by the
(b) Goods or cargoes; ordinary exertion of human skill or prudence,
(c) Earnings such as freight, passage money, as distinguished from the ordinary wear and
commissions, or profits; and tear of the voyage and from injuries suffered
(d) Liability (protection and indemnity by the vessel in consequence of her not being
insurance). unseaworthy [Sundiang and Aquino, Reviewer
(2) Inland marine insurance covers the land or on Commercial Law (2013)].
over the land transportation perils of The phrase also extends to barratry which
property shipped by railroads, motor trucks, refers to the willful and intentional act on the
airplanes, and other means of part of the master or the crew, in pursuance of
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(2) In a valued policy, the parties are bound by kinds of insurance (e.g., robbery and theft
the valuation, in the absence of fraud or insurance).
mistake, similar to marine insurance. It is governed by the general provisions
applicable to all types of insurance plus
In the absence of express valuation in a fire stipulations in the insurance contract
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained INTENTIONAL AND ACCIDENTAL
and the burden of proof is upon him to INJURY DISTINGUISHED
establish the amount of such loss by Intentional implies the exercise of the
preponderance of evidence.
reasoning faculties, consciousness and
Where the face value of the policy is less than volition. Where a provision of the policy
the agreed valuation, then even in case of excludes intentional injury, it is the intention
total loss, the insured can only recover up to of the person inflicting the injury that is
the policys face value, which is always the controlling. If the injuries suffered by the
maximum limit of the insurers liability [Tan insured clearly resulted from the intentional
Chuco v. Yorkshire Fire & Life Ins. Co. (1909)]. act of the third person, the insurer is relieved
In an open policy, the actual loss, as from liability as stipulated.
determined, will represent the total indemnity Accidental means that which happens by
due the insured except only that the total chance or fortuitously, without intention or
indemnity shall not exceed the total value of design, which is unexpected, unusual and
the policy [Devt. Ins. Corp. v. IAC (1986)]. unforeseen. The terms do not, without
qualification, exclude events resulting in
CASUALTY INSURANCE damage due to fault, recklessness or
DEFINITION negligence of third parties. The concept is not
Casualty insurance is insurance covering loss necessarily synonymous with no fault. It
or liability arising from accident or mishap, may be utilized simply to distinguish
excluding certain types of loss which by law or intentional or malicious acts from negligent or
custom are considered as falling exclusively careless acts of man.
within the scope of other types of insurance
such as fire or marine. It includes, but is not DIVISIONS
limited to, employers liability insurance, Casualty insurance has two general divisions:
motor vehicle liability insurance, plate glass liability and indemnity insurance.
insurance, burglary and theft insurance,
personal accident and health insurance as LIABILITY INSURANCE
written by non-life insurance companies, and Under policies of this type, the insurer assumes
other substantially similar kinds of insurance the obligation to pay the third party in whose
[Section 176]. favor the liability of the insured arises. The
Casualty insurance includes all forms of liability of the insurer attaches as soon as the
insurance against loss or liability arising from liability of the insured to the third party is
accident or mishap excluding certain types of established. It covers liability incurred from
loss or liability which are not within the scope quasi-delict or criminal negligence but cannot
of other types of insurance such as fire, cover deliberate criminal acts.
marine, suretyship and life. It includes, but is
not limited to, employers liability insurance, INDEMNITY INSURANCE
workmens compensation insurance, public Under this kind of insurance, no action will lie
liability insurance, motor vehicle liability against the insurer unless brought by the
insurance, plate glass insurance, burglary and insured for loss actually sustained and paid by
theft insurance, personal accident and health him. Liability of the insurer attaches only after
insurance as written by non-life insurance the insured has paid his liability to the third
companies, and other substantially similar party.
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usually required of each person insured (in the contract terminates and the insurer is not
contrast to individual life insurance). Group liable;
insurance covers a number of persons in a (4) Pure endowment policy, where the insurer
single contract. pays the insured if the insured survives a
specified period. If the insured dies within the
INDUSTRIAL LIFE period, the insurer is released from liability
Industrial life insurance is that form of life and unless the contract otherwise provides,
insurance under which the premiums are need not reimburse any part of the
payable either monthly or oftener, if the face premiums paid;
amount of insurance provided in any policy is (5) Endowment policy, where the insured is paid
not more than 500 times that of the current the face value of the policy if he outlives the
statutory minimum daily wage in the City of designated period. If he dies within said
Manila, and if the words industrial policy are period, the insurer pays the proceeds to the
printed upon the policy as part of the descriptive beneficiary. This is a combination of term
matter [Section 235]. policy and pure endowment policy.
MICROINSURANCE RISKS
Microinsurance is a financial product or service DEATH OR SURVIVAL
that meets the risk protection needs of the poor, It may be made payable on the death of the
where: person, or on his surviving a specified period,
(1) The amount of contributions, premiums, fees or otherwise contingently on the continuation
or charges, computed on a daily basis, does or cessation of life [Campos (1983)].
not exceed 7.5% of the current daily Death of the insured must be proven by the
minimum wage rate for nonagricultural beneficiary before the insurer can be made to
workers in Metro Manila; and pay.
(2) The maximum sum of guaranteed benefits is
not more than 1,000 times of the said SUICIDE
current daily minimum wage rate [Section Insurer is liable in the following cases:
187]. (1) If committed after two years from the date of
the policys issue or its last reinstatement.
No insurance company or mutual benefit Any stipulation extending the 2-year period is
association shall engage in the business of void;
Microinsurance unless it possesses all the (2) If committed in a state of insanity regardless
requirements as may be prescribed by the of the date of the commission unless suicide
Commissioner, who shall issue such rules and is an excepted peril;
regulations governing microinsurance [Section (3) If committed after a shorter period provided
188]. in the policy.
EXAMPLES OF LIFE INSURANCE Since suicide is contrary to the laws of nature
POLICIES and the ordinary rules of conduct, it is never
(1) Ordinary or whole life policy, where the presumed. The burden of proving lies with the
insurer agrees to pay the face value of the insurer who seeks to avoid liability under a life
policy upon the death of the insured; policy excepting it from coverage [Campos
(2) Limited payment plan, where the insured (1983)].
agrees to pay premiums only for a specified
number of years. If he survives such period, DEATH AT THE HANDS OF THE LAW
he stops paying any further premium, and Death at the hands of the law (e.g., legal
when he dies, the insurer pays the proceeds execution) is one of the risks assumed by the
to his beneficiary; insurer under a life insurance policy in the
(3) Term plan, where the insurers liability arises absence of a valid policy exception [Vance on
only upon the death of the insured within the Insurance (1951)].
agreed term or period. If the insured survives,
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of insurance [Lalican v. Insular Life Ins. not exist during the intervening period or from
(2009)]. the time between it the policy takes effect and
An insurable interest is one of the most basic the loss occurs. The alienation of insured
and essential requirements in an insurance property will not defeat a recovery if the insured
contract. As such, it may NOT be waived by has subsequently reacquired the property and
stipulation. Absence of insurable interest possesses an insurable interest at the time of
renders the insurance contract void. loss [Womble v. Dubuque Fire &Marine Ins. Co.].
The insurable interest need not always be
pecuniary in nature. CHANGE OF INTEREST
Change of interest means the absolute transfer
Ratio: of the property insured.
(1) As a deterrence to the insured. A policy issued
to a person without interest is a mere wager General rule: A change of interest in the thing
policy or contract and is void for illegality. A insured does not transfer the policy, but
wager policy is obviously contrary to public suspends the insurance to an equivalent extent
interest. There is a moral hazard in removing until the interest in the thing and the interest in
insurable interest as a requirement for the the insurance policy are vested in the same
validity of an insurance policy in that: person. Thus, the contract is not rendered void
(a) It allows the insured to have an interest in but is merely suspended.
the destruction of the subject matter
rather than in its preservation. [Myer v. Exceptions:
Grand Lodge] (1) Life, health, and accident insurance;
(b) It affords a temptation or an inducement (2) A change of interest in the thing insured
to the insured, having nothing to lose and after the occurrence of an injury which
everything to gain, to bring to pass the results in a loss does not affect the policy;
event upon happening of which the (3) A change in the interest in one or more of
insurance becomes payable. [White v. several things, separately insured by one
Equitable Nuptial Benefit Union] policy, such as a conveyance of one or more
(2) As a measure of limit of recovery. The things, does not affect the policy with respect
insurable interest is the measure of the to the others not so conveyed;
upper limit of his provable loss under the (4) A change of interest by will or succession on
contract. Sound public policy requires that the death of the insured. The death of the
insurance should not provide the insured insured does not avoid insurance policy. It
means of making a net profit from the does not affect the policy except his interest
happening of the event insured against. passes to his heir or legal representative who
may continue the insurance policy on the
WHEN INSURABLE INTEREST property by continuing paying premiums;
SHOULD EXIST (5) A transfer of interest by one of several
partners, joint owners, or owners in common,
Policy Insurable interest required
who are jointly insured, to the others. This
Effectivity does not avoid the insurance. It will avoid the
Intervening Occurrence
of policy only as to the selling partners or co-
period of loss
insurance owners but not as to others. The rule applies
Life or even though it has been agreed that the
insurance cease upon alienation of the thing.
health
(6) Automatic transfers of interest in cases in
Property which the policy is so framed that it will inure
to the benefit of whosoever may become the
Insurable interest over life/health may be lost owner of the interest insured during the
after the insurance takes effect as long as it circumstance of the risk. It is an exception to
exists at the time the insurance takes effect. On the general rule that upon maturity, the
the other hand insurable interest property need proceeds of a policy shall be given exclusively
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to the proper interest if the person in whose life of the cestui que vie. Mere relationship is a
name or for whose benefit it is made. sufficient interest to be insured.
(7) An express prohibition against alienation in The insurable interest must be based on
the policy [Article 1306, Civil Code], in which moral and legal grounds. Such interest exists
case alienation will not merely suspend the whenever the insured has a responsible
contract but avoid it entirely. expectation of deriving benefit from the
continuation of the life of the other person or
IN LIFE/HEALTH INSURANCE of suffering detriment through its termination.
Every person has an insurable interest in the life There is no insurable interest in the life of an
and health: illegitimate spouse.
(1) Of himself, of his spouse and of his children; A creditor may take out insurance on the life
(2) Of any person on whom he depends wholly of his debtor but his insurable interest is only
or in part for education or support, or in up to the amount of the debt.
whom he has a pecuniary interest; An assignee of the insurance contract is not
(3) Of any person under a legal obligation to required to have insurable interest in the life
him for the payment of money, or respecting of the insured, for to require such interest in
property or services, of which death or illness him is to diminish the investment value of the
might delay or prevent the performance; and contract to the owner. Note, however, that
(4) Of any person upon whose life any estate or assignment is different from a change in the
interest vested in him depends [Section 10]. designated beneficiary.
Unless the interest of a person insured is When the beneficiary is the principal,
susceptible of exact pecuniary measurement, accomplice or accessory in willfully bringing
the measure of indemnity under a policy of about the death of the insured, interest of
insurance upon life or health is the sum fixed in beneficiary in life insurance policy is forfeited.
the policy.
BENEFICIARY
Life insurance policies may be divided into two A beneficiary is the person who is named or
general classes: designated in a contract of life, health, or
(1) Insurance upon ones life; accident insurance as the one who is to receive
(2) Insurance upon life of another. the proceeds or benefits which become payable,
according to the terms of the contract, if the
IN LIFE INSURANCE insured risk occurs.
INTEREST IN ONES OWN LIFE
Cestui que vie is the insured himself. The General rule: A person may designate a
insured can designate anyone to be the beneficiary, irrespective of the beneficiarys lack
beneficiary of the policy. of insurable interest, provided he acts in good
Each has unlimited interest in his own life, faith and without intent to make the transaction
whether the insurance is for the benefit of merely a cover for a forbidden wagering
himself or another. contract [De Leon (2010)].
The beneficiary designated need not have any
interest in the life of the insured when person Exceptions: Any person who is forbidden from
takes out policy on his own life. But if a person receiving any donation under Article 739, Civil
obtains a policy on the life of another and Code cannot be named beneficiary of a life
insurance policy by the person who cannot
names himself as the beneficiary, he must
make any donation to him [Article 2012, Civil
have insurable interest therein.
Code]. Article 739 provides that the following
donations are void:
INTEREST IN LIFE OF ANOTHER
(1) Those made between persons who were
In life insurance, unless based on commercial
guilty of adultery or concubinage at the time
relationship, the policy owner does not
of the donation;
necessarily have pecuniary interest on the
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(2) Those made between persons found guilty of (2) An inchoate interest founded on an existing
the same criminal offense, in consideration interest; or
thereof; (3) An expectancy, coupled with an existing
(3) Those made to a public officer or his wife, interest in that out of which the expectancy
descendants and ascendants, by reason of arises [Section 14].
his office.
The insurable interest may be in the property
The insured shall have the right to change the itself (e.g., ownership), or any relation thereto
beneficiary he designated in the policy, unless (e.g., interest of a trustee or a commission
he has expressly waived this right in said agent), or liability in respect thereof (e.g.,
policy. interest of a carrier or depository of goods).
In general, the policy owner can change the The relation of the insured to the property is
beneficiary without the consent of such such that he will be benefited by its continued
beneficiary. However, when this right to existence or will suffer a direct pecuniary loss
change is expressly waived, the consent of the by its destruction.
beneficiary is necessary. This means that An existing interest may be a legal title or
despite the waiver, he can still change the equitable title. Examples of those having
beneficiary provided he obtained the existing interest are owners as regards their
beneficiarys consent. properties, trustees in the case of the seller of
property not yet delivered, mortgagors over
INTEREST IN HEALTH INSURANCE the property mortgaged, and lessor, lessee
General rule: Interest in the life or health of a and sub-lessee over the property leased.
person must exist when the insurance takes An inchoate interest must be founded on
effect (at inception), but need not exist existing interests. It exists but is incomplete or
thereafter or when the loss occurs. unripe until the happening of an event.
Examples of inchoate interests are the
Exceptions: interest of stockholders with respect to
(1) In the case of a creditors insurance taken on dividends in case of profits and shares in the
the life of the debtor, insurable interest assets, and the interest of a partner in the
disappears once the debt has been paid. At properties belonging to the partnership.
this point, the creditor/insured can no longer An expectancy must be coupled with an
recover on the policy; existing interest out of which the expectancy
(2) In the case of a companys insurance taken arises. For example, a farmer who planted
on the life of an employee, insurable interest crops has insurable interest over his harvest
disappears once the employee leaves the which can be expected.
company, in which case, the company can no A mere contingent or expectant interest in
longer recover on the policy. anything, not founded on an actual right to
the thing, nor upon any valid contract for it, is
TRANSFER OF POLICY not insurable.
Interest can be transferred even without the A mere hope or expectation of benefit which
notice to the insurer of such transfer or may be frustrated by the happening of some
bequest, unless there is a stipulation to the event uncoupled with any present legal right
contrary. will not support a contract of insurance. A son
There is no right of subrogation in life has no insurable interest over the property of
insurance, because it is not a contract of his father because such is just a mere
indemnity. expectancy and has no legal basis before he
inherits such property.
IN PROPERTY INSURANCE Insurable interest in property may be based
An insurable interest in property may consist in: on a perfected contract of sale, vesting an
(1) An existing interest; equitable title even before delivery of the
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DOUBLE AND OVER sum total of all the policies issued, each insurer
is liable for the amount of his policy.
INSURANCE; REINSURANCE
DOUBLE AND OVER INSURANCE
DOUBLE INSURANCE DISTINGUISHED
Double insurance exists where the same person
is insured by several insurers separately in Double insurance Over insurance
respect to the same subject and interest Amount of insurance Amount of insurance
[Section 95]. may or may not exceed exceeds the value of the
the value of the insureds insurable
Requisites: insureds insurable interest
(1) The same person is insured; interest
(2) Two or more insurers insuring separately;
There are always There may be one or
(3) The same subject matter;
several insurers more insurers
(4) The same interest insured; and
(5) The same risk or peril insured against
REINSURANCE
Double insurance is not prohibited under the A contract of reinsurance is one by which an
law, unless the policy contains a stipulation to insurer procures a third person to insure him
the contrary. Usually, insurance policy against loss or liability by reason of such
contains other insurance clause which original insurance [Section 97].
requires disclosure of other existing insurance Reinsurance is a contract of indemnity. It has
policy. In such case, non-disclosure will avoid been referred to as an insurance of an
the policy. Such clause is intended to prevent insurance. There is no relationship between
over insurance and thus avert the perpetration the reinsurer of the reinsurance contract and
of fraud. the insured under the original insurance
If over-insured, then the insurers will pay pro- contract.
rata (or whatever is stated in contract) in case
of loss. ORIGINAL INSURANCE CONTRACT AND
Nonetheless, under Section 64(f), an insurer REINSURANCE CONTRACT DISTINGUISHED
may cancel an insurance policy, other than The original insurance contract is separate and
life, based on a [d]iscovery of other insurance distinct from the reinsurance contract.
coverage that makes the total insurance in Insurance contract is independent from the
excess of the value of the property insured reinsurance contract. Insurance contract covers
subject to the requirement of prior notice. indemnity against damages. Reinsurance covers
Also, under Section 83, [i]n case of an over indemnity against liability.
insurance by several insurers other than life,
the insured is entitled to a ratable return of REINSURANCE TREATY AND POLICY
the premium, proportioned to the amount by DISTINGUISHED
which the aggregate sum insured in all the A reinsurance treaty is an agreement between
policies exceeds the insurable value of the two insurance companies whereby one agrees
thing at risk. to cede and the other to accept reinsurance
business pursuant to provisions specified in
RULES FOR PAYMENT the treaty [De Leon (2010)].
Section 96 enunciates the principle of A reinsurance policy is a contract of indemnity
contribution which requires each insurer to one insurer makes with another to protect the
contribute RATABLY to the loss or damage first insurer from a risk it has already
considering that the several insurances cover assumed.
the same subject matter and interest against Reinsurance treaties and reinsurance policies
the same peril. If the loss is greater than the are not synonymous. Treaties are contracts for
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insurance; policies are contracts of insurance (2) If the proceeds are less than the credit,
[Philamlife v. Auditor General (1958)]. then the mortgagee may recover from the
mortgagor the deficiency. Upon payment,
DOUBLE INSURANCE AND the insurer is subrogated to the rights of
REINSURANCE DISTINGUISHED the mortgagee against the mortgagor to
the extent of the amount paid.
Double insurance Reinsurance When a mortgagor takes out an insurance for
Same interest Different interest his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the
Insurer remains as the Insurer becomes the
proceeds by virtue of the mortgage. A
insurer insured in relation to
mortgagor can make the proceeds payable to
the reinsurer
or assigned to the mortgagee.
Insured is a party in The original insured is
interest in the not a party in the OPEN LOSS PAYABLE MORTGAGE
insurance contracts reinsurance contract CLAUSE
Property is the subject The original insurer's An open loss payable clause simply states
matter risk is the subject that the proceeds of the insurance contract is
matter payable to the mortgagee as beneficiary.
Insured has to give his Insureds consent is not The contract, however, is procured by the
consent necessary mortgagor for his interest in the property. He
is the party to the contract, not the
mortgagee.
MULTIPLE OR SEVERAL The acts of the mortgagor prior to the loss,
INTERESTS ON SAME which would otherwise avoid the insurance,
affects the mortgagee, even if the property is
PROPERTY in the hands of said mortgagee.
The Insurance Code recognizes that both the
mortgagor and mortgagee have each
separate and distinct insurable interest in the
UNION MORTGAGE OR STANDARD
mortgaged property and that they may take MORTGAGE CLAUSE
out separate policies with the same or This clause is similar to an open loss payable
different insurance companies. Consequently, clause, except that it is stipulated that the
insurance taken by one on his own name only acts of the mortgagor cannot invalidate the
does not inure to the benefit of the other. insurance, provided that if the mortgagor fails
The mortgagor may insure the mortgaged to pay the premiums due, the mortgagee
property in its full value but the mortgagee shall, on demand, pay said premiums.
can insure it only in the extent of the debt When a mortgagee insured his own interest
secured. and a loss occurs, he is entitled to recover on
When a mortgagee insures his own interest in the insurance. However, he may no longer
the mortgaged property without reference to claim against the mortgagor, for his claim is
the right of the mortgagor, mortgagee is discharged up to the amount the insurer has
entitled to the proceeds of the policy in case paid him [Palileo v. Cosio (1955)].
of loss to the extent of his credit.
(1) If the proceeds are more than the total
amount of credit, then mortgagor has no
right to the balance. If the proceeds are
equal to the credit, then insurer is
subrogated to the mortgagees rights and
mortgagee can no longer recover the
mortgagors indebtedness.
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The cash value or cash surrender value is an insured because it continues the contract and all
amount which the insurance company holds its features with full force and effect.
in trust for the insured to be delivered to him
upon demand. When the companys credit for REINSTATEMENT OF A LAPSED
advances is paid out of the cash value or cash LIFE INSURANCE POLICY
surrender value, that value and the companys
Reinstatement of a lapsed life insurance policy
liability is diminished [Manufacturers Life Ins.
is not a non-default option. It does not create a
v. Meer (1951)]. new contract, but merely revives the original
Ratio: The premium is uniform throughout a policy so insurer cannot require a higher
lifetime, but the risk is varied (i.e., higher risk when premium than the amount stipulated in the
older, lower when young). Thus, the cost of contract. It does not apply to group/industrial
protection is more expensive during the early years life insurance.
of the policy. Requisites:
(1) It must be exercised within three years from
ALTERNATIVE TO CSV date of default;
(1) Extended insurance/term insurance, where the
(2) The insured must present evidence of
insured, after having paid three full annual
insurability satisfactory to the insurer;
premiums, is given the right to have the policy
(3) He must pay all back premiums and all
continued in force from date of default for a time
indebtedness to the insurer
either stated or equal to the amount of the CSV,
(4) The CSV must not have been duly paid to the
taken as a single premium. The face value of the insured nor the extension period expired;
policy remains the same but only within the (5) The application must be filed during the
term. It is also called term insurance where
insureds lifetime [Andres v. Crown Life Ins.
CSV is taken as a single premium (no further
(1958)].
payments) to extend the policy for a fixed period
of time. Reinstatement is allowed if made within
the term purchased; no reinstatement after the REFUND OF PREMIUMS
lapse of the term purchased Return of premiums can be made in the following
(2) Paid-up insurance, where, after the insurance is cases:
paid-up, the insured who has paid three full (1) If the thing insured was never exposed to the
annual premiums is given the right, upon risks insured against, the whole premium
default, to have the policy continued from the should be refunded;
date of default for the whole period of insurance (2) When the contract is voidable due to the
without further payment of premiums. It is also fraud or misrepresentation of insurer or his
called reduced paid-up because in effect the agent, the whole premium should be
policy, terms and conditions are the same but refunded
the face value is reduced to the paid-up value. (3) When by any default of the insured other
(3) Automatic premium loan (APL), where, upon than actual fraud, the insurer never incurred
default, the insurer lends/advances to the any liability under the policy, the whole
insured without any need of application on his premium should be refunded;
part, amount necessary to pay overdue (4) When the contract is voidable because of the
premium, but not to exceed the CSV of the existence of facts of which the insured was
policy. It only applies if requested in writing by ignorant without his fault, the whole
the insured either in the application or at any premium should be refunded;
time before expiration of the grace period. In (5) Where the insurance is for a definite period
effect, the insurance policy continues in force for and the insured surrenders his policy, the
a period covered by the payment. After the portion of the premium that corresponds to
period, if insured still does not resume paying the unexpired time at a pro rata rate, unless a
his premiums, policy lapses, unless CSV still short period rate has been agreed upon and
remains. If there is still CSV, APL continues until appears on the face of the policy should be
CSV is exhausted. This is beneficial for the return;
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(6) When there is over-insurance by several influence of the fact upon the party to whom
insurers, the return premiums should be the communication is due, in forming his
proportioned to the amount by which the estimate of the disadvantages of the
aggregate sum insured in all the policies proposed contract, or in making his inquiries
exceeds the insurable value of the thing at [Section 31].
risk; The test is in the effect which the knowledge
(7) When rescission is granted due to the of the fact in question would have on the
insurers breach of contract. contract. It need not increase the risk or
contribute to any loss or damage suffered. It is
sufficient if the knowledge of it would
Rescission of Insurance influence the party in making the contract (De
Leon (2010)).
Contracts
EFFECTS
CONCEALMENT General rule: Concealment vitiates the contract
and entitles the insurer to rescind, even if the
A neglect to communicate that which a party
death or loss is due to a cause not related to the
knows and ought to communicate, is called a
concealed matter.
concealment [Section 26].
A concealment whether intentional or Exceptions:
unintentional entitles the injured party to (1) Incontestability clause, which clause
rescind a contract of insurance [Section 27]. stipulates that the policy shall be
incontestable after a stated period. The
Requisites:
incontestability clause is a mandatory
(1) A party knows a fact which he neglects to
provision in life policies. The policy must be
communicate or disclose to the other;
payable on the death of the insured and has
(2) Such party concealing is duty bound to been in force during the lifetime of the
disclose such fact to the other; insured for at least two years from its date of
(3) Such party concealing makes no warranty of issue or of its last reinstatement;
the fact concealed;
(2) Concealment after the contract has become
(4) The other party has not the means of
effective, because concealment must take
ascertaining the fact concealed;
place at the time the contract is entered into
(5) The fact concealed is material.
in order that the policy may be avoided.
Concealment may be committed by either the Information obtained after the perfection of
insurer or the insured [Qua Chee Gan v. Law the contract is no longer necessary to be
Union & Rock Ins. Co. (1955); Fieldmens Ins. Co. disclosed by the insured, even if the policy
v. Vda. de Songco (1968)]. has not been issued.
(3) Waiver or estoppel;
PROOF OF FRAUD IN CONCEALMENT (4) Marine insurance, where concealment of the
General rule: Fraud need not be proven in order following matters does not vitiate the entire
to prove concealment. Good faith is not a contract, but merely exonerates the insurer
defense. from a loss resulting from the risk concealed:
(a) The national character of the insured;
Exception: When the concealment is made by (b) The liability of the thing insured to
the insured in relation to the falsity of a capture and detention;
warranty, the non-disclosure must be (c) The liability to seizure from breach of
intentional and fraudulent in order that the foreign laws of trade;
contract may be rescinded. (d) The want of necessary documents; and
(e) The use of false and simulated papers
TEST OF MATERIALITY [Section 112].
Materiality is determined not by the event, but
solely by the probable and reasonable
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NOTICE AND PROOF OF LOSS detecting any fraud that may have been
practiced upon him, and to operate as a check
NOTICE OF LOSS upon extravagant claims.
This refers to the formal notice given the insurer
Like a notice of loss, in the absence of any
by the insured or claimant under a policy of the
stipulation in the policy, proof may be given
occurrence of the loss insured against.
orally or in writing.
PURPOSE The insured is not bound to give such proof as
Its purpose is to apprise the insurance would be necessary in a court of justice; but it
is sufficient for him to give the best evidence
company so that it may make proper
which he has in his power at the time [Section
investigation and take such action as may be
necessary to protect its interest. 91].
In fire insurance, an insurer is exonerated, if
RULES FOR RECOVERY
notice thereof be not given to him by an
General rule: Timely compliance with the notice
insured, or some person entitled to the benefit
and proof of loss is a condition precedent to the
of the insurance, without unnecessary delay
right to recover if the policy is fire insurance, or
[Section 90].
when the same is stipulated in the policy.
In other types of insurance, failure to give
notice will not exonerate the insurer, unless Exceptions:
there is a stipulation in the policy requiring (1) For both notice and proof of loss, waiver:
the insured to do so. (a) Defects in a notice or proof of loss may be
However, it has been held that formal notice waived when such defects, which the
of loss is not necessary if insurer has actual insured might remedy, are not specified,
notice of loss. without unnecessary delay, to him as
ground of objection by the insurer (Section
FORM 92);
In the absence of any stipulation in the policy, (b) Delay in presentation to an insurer of
notice may be given orally or in writing. notice or proof of loss is waived if caused
The notice of loss may be in the form of an by any act of his, or if he omits to take
informal or provisional claim containing a objection promptly and specifically upon
minimum of information as distinguished that ground;
from a formal claim which contains the full (2) For notice of loss, a formal notice of loss is
details of the loss, computations of the not necessary if insurer has actual notice of
amounts claimed, and supporting evidence, loss.
together with a demand or request for
payment [De Leon (2010)]. GUIDELINES ON CLAIMS
PROOF OF LOSS SETTLEMENT
It is the formal evidence given to the insurance Claims settlement is the indemnification of
company by the insured or claimant, under a the loss suffered by the insured. The claimant
policy, of: the occurrence of the loss, the may be the insured or reinsured, the insurer
particulars thereof, and the data necessary to who is entitled to subrogation, or a third party
enable the company to determine its liability who has a claim against the insured
and the amount. Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
PURPOSE insurer nevertheless is required to observe a
Its purpose is to give the insurer information certain measure of consideration for the
by which he may determine the extent of his interest of the insured.
liability but also; to afford him a means of
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other insurance companies writing similar Note: Subrogation applies only to property
lines of insurance shall be admissible in insurance and non-life insurance.
evidence in an administrative or judicial RIGHTS TRANSFERRED
proceeding for the purpose of determining The rights to which the subrogee succeeds are
whether unfair claim settlement practices the same as, but not greater than, those of
have been committed. the person for whom he is substituted.
If it is found, after notice and an opportunity The subrogee-insurer cannot acquire any
to be heard, that an insurance company has claim, security, or remedy the subrogor did
violated this section, each instance of not have. In other words, a subrogee cannot
noncompliance may be treated as a separate succeed to a right not possessed by the
violation and shall be considered sufficient subrogor. A subrogee can recover only if the
cause for the suspension or revocation of the insured likewise could have recovered
companys certificate of authority [Section [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
247]. Corp. (2005); Lorenzo Shipping Corp. v. Chubb
and Sons, Inc. (2004)].
PRESCRIPTION OF ACTION The insured can no longer recover from the
In the absence of an express stipulation in the offended party what was paid to him by the
policy, it being based on a written contract, insurer but he can recover any deficiency if the
the action prescribes in ten years [Article 1144, damages suffered are more than what was
Civil Code]. paid. The deficiency is not covered by the right
However, the parties may validly agree on a of subrogation.
shorter period provided it is not less than one The insurer must present the policy as
year from the time the cause of action accrues evidence to determine the extent of its
[Section 63]. coverage [Wallen Phil. Shipping v. Prudential
In motor vehicle insurance, action prescribes Guarantee (2003)].
in one year.
The cause of action accrues from the rejection WHEN THERE IS NO RIGHT OF
of the claim of the insured and not from the SUBROGATION
time of loss. A stipulation stating that the (1) Where the insured by his own act releases the
prescriptive period for filing an action is one wrongdoer or third party liable for the loss or
year from the happening of loss is void. In damage;
such cases, since the stipulation is void and it (2) Where the insurer pays the insured the value of
is upon a written contract, the time limit is ten the loss without notifying the carrier who has in
years from the time the cause of action good faith settled the insureds claim for loss;
accrues. (3) Where the insurer pays the insured for a loss or
Prescription is essential for the prompt risk not covered by the policy [Pan Malayan Ins.
settlement of claims as it demands for suits to Co. v. CA (1997)];
be brought while the evidence as to the origin (4) In life insurance;
and cause of the loss or destruction has not (5) For recovery of loss in excess of insurance
yet disappeared. coverage [De Leon (2010)].
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Any stipulation whereby the responsibility of Based on jurisprudence, the duty that the carrier
the common carrier as set forth in Articles of passengers owes to its patrons extends to
1998-2001 is suppressed or diminished shall persons boarding the cars as well as those
be void [Article 2003]. alighting therefrom [Del Prado v. Manila
Railroad (1929)].
The reduction of fare does not justify any If the delay should exceed ten days:
limitation of the common carriers liability Passengers requesting the same shall be
[Article 1758]. entitled to the return of the fare; and
If it is due exclusively to the fault of the
DURATION OF LIABILITY captain or ship agent, they may also demand
As in the contract of carriage for goods, the indemnity for losses and damages.
perfection of the contract of carriage of
passengers does not necessarily coincide with A vessel exclusively devoted to the
the commencement of the duty of extraordinary transportation of passengers must take them
diligence. It may occur at the same time or later. directly to the port or ports of destination, no
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matter what the number of passengers may be, without intent of engaging in the difficulty,
making all the stops indicated in its itinerary. returns to relieve his brother, is deemed
reasonably and necessarily delayed and thus
WAITING FOR CARRIER OR continues to be a passenger entitled as such
BOARDING OF CARRIER to the protection of the railroad and company
As to the commencement of the duty of the and its agents [La Mallorca v. CA (1966)].
common carrier, in Del Prado v. Manila The reasonableness of time should be made
Railroad (1929), it was held that the duty to depend on the attending circumstances of
extends to persons boarding the cars as well the case, such as the kind of common carrier,
as those alighting therefrom. the nature of its business, the customs of the
Thus, it is the duty of common carriers of place, and so forth, and therefore precludes a
consideration of the time element per se
passengers to stop their conveyances at a
without taking into account such other
reasonable length of time in order to afford
factors. The primary factor to be considered is
passengers an opportunity to board and
the existence of a reasonable cause as will
enter, and they are liable for injuries suffered
justify the presence of the victim on or near
by boarding passengers resulting from the
the petitioners vessel.
sudden starting up or jerking of their
conveyances while they are doing so [Dangwa In the case of a shipper, the passengers of
Transportation v. CA (1991)]. vessels are allotted a longer period of time to
In this connection, however, a person disembark from the ship than other common
carriers such as a passenger bus, since such
boarding a moving car must be taken to
vessels are capable of accommodating a
assume the risk of injury from boarding the
bigger volume of both passenger and
car under the conditions open to his view, but
baggage as compared to the capacity of a
he cannot fairly be held to assume the risk
regular commuter bus. Consequently, a ship
that the motorman, having the situation in
passenger will need at least an hour as is the
view, will increase the peril by accelerating the
usual practice, to disembark from the vessel
speed of the car before he is planted safely on
and claim his baggage whereas a bus
the platform [Del Prado v. Manila Railroad
passenger can easily get off the bus and
(1929)].
retrieve his luggage in a very short period of
time [Aboitiz Shipping v. CA (1989)].
ARRIVAL AT DESTINATION The relation of carrier and passenger
As to the termination of the duty of the common
continues until the latter has been landed at
carrier, it has been held that the relation of
the port of destination and has left the
carrier and passenger does not cease at the
carriers premises. Hence, the carrier
moment the passenger alights from the carriers
necessarily would still have to exercise
vehicle at a place selected by the carrier at the extraordinary diligence in safeguarding the
point of destination, but continues until the
comfort, convenience and safety of its
passenger has had a reasonable time or a
stranded passengers until they have reached
reasonable opportunity to leave the carriers
their final destination [PAL v. CA (1993)].
premises. What is a reasonable time or a
reasonable delay within this rule is to be
determined from all the circumstances: LIABILITY FOR ACTS OF
A person who, after alighting from a train, OTHERS
walks along the station platform is considered
still a passenger; EMPLOYEES
A passenger, who has alighted at his Common carriers are liable for the death of or
destination and is proceeding by the usual
injuries to passengers through the negligence
way to leave the companys premises, but
or willful acts of the formers employees,
before actually doing so is halted by the although such employees may have acted
report that his brother, a fellow passenger,
has been shot, and he in good faith and
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protrude his arm, hand, elbow, or any other The natural and probable consequence of the
part of his body through the window of a breach of the obligation; and
moving car beyond the outer edge of the Those which the parties have foreseen or
window or outer surface of the car, so as to could have reasonably foreseen at the time
come in contact with objects or obstacles near the obligation was constituted;
the track; no recovery can be had for an injury In case of fraud, bad faith, malice or wanton
which but for such negligence would not have attitude, all damages which may be
been sustained [Isaac v. A. L. Ammen reasonably attributed to the non-performance
Transportation (1975)]. In this case, the of the obligation.
negligence of the passenger was not In the absence of a showing that common
contributory, but was the proximate cause of carriers attention was called to the special
the injury. circumstances requiring prompt delivery of a
passengers luggage, the common carrier
EXTENT OF LIABILITY FOR cannot be held liable for the cancellation of
DAMAGES passengers contracts [for exhibition of films] as
Damages recoverable from common carriers, it could not have foreseen such an eventuality
both in cases of carriage of passengers and when it accepted the luggage for transit [Pan-
goods, shall be awarded in accordance with Title Am World Airways v. IAC (1988)].
XVIII concerning Damages.
MORAL DAMAGES
Article 2206, on liability, in case of death, for Moral damages, though incapable of pecuniary
loss of earning capacity, support, and moral computation, if they are the proximate result of
damages for mental anguish, shall also apply to the common carriers wrongful act or omission,
the death of a passenger caused by the breach may be recovered [Article 2217].
of contract by a common carrier [Article 1764].
In cases of breach of contract of carriage, moral
Thus, the damages recoverable are: damages may be recovered where:
Actual or compensatory damages; The common carrier acted fraudulently;
Moral damages; The common carrier acted in bad faith [Article
Exemplary damages; 2220];
Nominal, temperate, and liquidated damages; Death of a passenger resulted [Article 2206].
Attorneys fees.
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
ACTUAL OR COMPENSATORY with some motive of self-interest or will or for
DAMAGES ulterior purpose [Air France v. Carrascoso
Actual or compensatory damages refer to (1966)].
adequate compensation for such pecuniary loss
suffered as duly proved [Article 2199]. When it comes to contracts of common
carriage, inattention and lack of care on the part
Actual damages are recoverable, including, in of the carrier resulting in the failure of the
case of death, liability for: passenger to be accommodated in the class
Loss of earning capacity; and contracted for amounts to bad faith or fraud
Support for a period not exceeding five years which entitles the passenger to the award of
[Article 2206]. moral damages in accordance with Article 2220
[Ortigas v. Lufthansa (1975)].
Under Article 2201, the liability for damages
include: Willful and deliberate overbooking on the part
In case the common carrier acted in good of the airline carrier constitutes bad faith. Under
faith: Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
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Thus, Article 366 is limited to cases of claims for The period for filing the claim is one year, in
damage to goods actually turned over by the accordance with the Carriage of Goods by Sea
carrier and received by the consignee. It does Act. The Carriage of Goods by Sea Act, as
not apply to misdelivery of goods. adopted and embodied in Commonwealth Act
No. 65, applies because it is a special law, and,
Failure to file a claim bars recovery [Aquino as such, prevails over the general provisions of
(2011)]. the Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA (1990)].
Ratio: The rule protects the carrier by affording
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily
investigated so as to safeguard itself from false Maritime Commerce
and fraudulent claims [UCPB General Ins. Co.,
Inc. v. Aboitiz Shipping (2009)]. CHARTER PARTIES
A charter party is a contract by virtue of which
However, the periods prescribed may be subject the owner or agent of a vessel binds himself to
to modification by agreement of the parties. transport merchandise or persons for a fixed
[PHILAMGEN v. Sweet Lines, Inc. (1992)]. price.
It is a contract by which the owner or agent of
PERIOD FOR FILING ACTIONS the vessel leases for a certain price the whole or
portion of a vessel for the transportation of the
goods or persons from one port to another.
OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING It is a contract whereby the whole or part of the
The general rules under the Civil Code on ship is let by the owner to a merchant or other
extinctive prescription apply. Thus, action for person for a specified time or use for the
damages must be filed in court: conveyance of goods, in consideration of the
Within 6 years, if a bill of lading was not payment of freight [Caltex v. Sulpicio Lines
issued [Article 1145, Civil Code]. (1999)].
Within 10 years, if a bill of lading was issued
[Article 1146, Civil Code]. Towage is not a charter party. It is a contract for
the hire of services by which a vessel is engaged
INTERNATIONAL CARRIAGE OF to tow another vessel from one port to another
GOODS BY SEA for consideration.
Suit must be brought within one year:
After delivery of the goods; or In modern maritime law and usage, there are
three distinguishable types of charter parties:
From the date when the goods should have
Bareboat or demise charter;
been delivered.
Time charter; and
Otherwise, the carrier and the ship shall be Voyage or trip charter [Litonjua Shipping, Inc.
discharged from all liability in respect of loss or v. National Seamen Board (1989)].
damage.
Note: Both time and voyage charters are said to
The absence of notice shall not affect or be contracts of affreightment, where a common
prejudice the right of the shipper to bring suit or public carrier is not converted into a private
within one year after the delivery of the goods or carrier.
the date when the goods should have been
delivered [Section 3(6), Carriage of Goods by Sea A contract of affreightment is one in which the
Act]. owner of the vessel leases part or all of its space
to haul goods for others. It is a contract for
special service to be rendered by the owner of
the vessel and under such contract the general
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owner retains the possession, command and is the right to utilize the carrying capacity and
navigation of the ship, the charterer or freighter facilities of the vessel and to designate her
merely having use of the space in the vessel in destinations during the term of the charter
return for his payment of the charter hire [Litonjua Shipping Co., Inc. v. National Seamen
[Puromines, Inc. v. CA (1993)]. Board (1989)].
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and regulations of customs, police, health, hypothecated for such obligations or which
and navigation; stands as the guaranty for their settlement.
For the losses and damages caused by
mutinies on board the vessel, or by reason of It has its origin by reason of the conditions and
faults committed by the crew in the service risks attending maritime trade in its earliest
and defense of the same, if he does not prove years when such trade was replete with
that he made full use of his authority to innumerable and unknown hazards since
prevent or avoid them; vessels had to go through largely uncharted
For those arising by reason of an undue use of waters to ply their trade. It was designed to
powers and non-fulfillment of the obligations offset such adverse conditions and to encourage
which are his; people and entities to venture into maritime
For those arising by reason of his going out of commerce despite the risks and the prohibitive
his course or taking a course which he should cost of shipbuilding.
not have taken without sufficient cause, in the
opinion of the officers of the vessel at a Thus, the liability of the vessel owner and agent
meeting with the shippers or supercargoes arising from the operation of such vessel were
who may be on board; confined to the vessel itself, its equipment,
For those arising by reason of his voluntarily freight, and insurance, if any, which limitation
entering a port other than that of his served to induce capitalists into effectively
destination; wagering their resources against the
consideration of the large profits attainable in
For those arising by reason of non-observance
the trade [Aboitiz Shipping Corp. v. General
of the provisions contained in the regulations
Accident Fire and Life Assurance Corp. (1993)].
on situation of lights and maneuvers for the
purpose of preventing collisions [Article 618].
Thus, under the doctrine of abandonment:
The agent shall also be civilly liable for the The agent shall be civilly liable for the
indemnities in favor of third persons which arise indemnities in favor of third persons which
from the conduct of the captain in the care of arise from the conduct of the captain in the
the goods which the vessel carried; but he may care of the goods which the vessel carried, but
exempt himself therefrom by abandoning the he may exempt himself therefrom by
vessel with all her equipment and the freight he abandoning the vessel with all her equipment
may have earned during the voyage [Article 587, and the freight he may have earned during
Code of Commerce]. the voyage [Article 587, Code of Commerce];
The owners of a vessel shall be civilly liable in
Note: The owner or agent shall not be liable for the proportion of their contribution to the
the obligations contracted by the captain if the common fund, for the results of the acts of the
latter exceeds his powers and privileges. captain, referred to in Article 587. Each part
However, if the amounts claimed were made owner may exempt himself from this liability
use of for the benefit of the vessel, the owner or by the abandonment before a notary of the
agent shall be liable [Article 588, Code of part of the vessel belonging to him [Article
Commerce]. 590, Code of Commerce].
In case of collision, the liability of the ship
DOCTRINE OF LIMITED LIABILITY owner shall be understood as limited to the
value of the vessel with all her appurtenances
(HYPOTHECARY RULE) and all the freight earned during the voyage
[Article 837, Code of Commerce].
STATEMENT OF THE RULE
If the vessel and her freight should be totally
The real and hypothecary nature of maritime
lost, by reason of capture or wreck, all rights
law simply means that the liability of the carrier
of the crew to demand any wages whatsoever
in connection with losses related to maritime
shall be extinguished, as well as the agent for
contracts is confined to the vessel, which is
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The third zone covers the time between the sea disabling it to navigate [Article 819, Code of
moment when the collision has become a Commerce].
practical certainty and the moment of actual
contact [A. Urrutia & Co. v. Baco River It is unlawful when:
Plantation Co. (1913)]. The lack of provisions should arise from the
failure to take the necessary provisions for the
Note: Liability in collision cases is negligence- voyage, according to usage and custom, or if
based. The person who caused the injury is both they should have been rendered useless or
civilly and criminally liable [Aquino (2011)]. lost through bad stowage or negligence in
their care;
SPECIFIC RULES The risk of enemies, privateers, or pirates
When only one vessel is at fault, the owner of should not have been well known or manifest,
the vessel at fault shall indemnify the losses and based on positive and justifiable facts;
and damages suffered, after an expert The injury to the vessel should have been
appraisal [Article 826, Code of Commerce]; caused by reason of her not being repaired,
When both vessels are at fault, each shall rigged, equipped, and arranged in a
suffer its own damages, and both shall be convenient manner for the voyage, or by
solidarily responsible for the losses and reason of some erroneous order of the
damages occasioned to their cargoes [Article captain; or
826, Code of Commerce]; Malice, negligence, want of foresight, or lack
In case of inscrutable fault, that is, if it cannot of skill on the part of the captain is the reason
be decided which of the two vessels was the for the act causing the damage [Article 820,
cause of the collision, each shall bear his own Code of Commerce].
damage and both shall be jointly responsible
for the losses and damages suffered by their SHIPWRECKS
cargoes [Article 828, Code of Commerce]; Shipwreck denotes loss or wreck of a vessel at
When it is due to a fortuitous event, each sea as a consequence of running against
vessel and its cargo shall bear its own another vessel or thing at sea or on coast
damages [Article 830, Code of Commerce]; where the vessel is rendered incapable of
When, by reason of fortuitous event, a vessel navigation.
properly anchored and moored collides with If the wreck was due to malice, negligence or
another, the injury occasioned shall be looked lack of skill of the captain, the owner of the
upon as particular average to the vessel run vessel may demand indemnity from said
into [Article 832, Code of Commerce]; captain. [Article 841, Code of Commerce].
When a third vessel at fault, the owner of the
third vessel shall indemnify the losses and SALVAGE
damages caused, the captain thereof being Salvage is defined as the service which one
civilly liable to said owner [Article 831, Code of person renders to the owner of a ship or goods,
Commerce]. by his own labor, preserving the goods or the
ship which the owner or those entrusted with
ARRIVAL UNDER STRESS the care of them have either abandoned in
Arrival under stress is the arrival of a vessel at distress at sea, or are unable to protect and
the nearest and most convenient port instead of secure.
the port of destination, if during the voyage the
vessel cannot continue the trip to the port of It is founded on equity and is compensation for
destination. actual services rendered.
It is lawful when the inability to continue voyage Three elements are necessary to a valid salvage
is due to lack of provisions, well-founded fear of claim:
seizure, privateers, pirates, or accidents of the A marine peril;
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the COGSA, which is suppletory to the The carrier is liable for damages for:
provisions of the Civil Code, supplements the Death or injury of a passenger if the accident
latter by establishing a statutory provision causing it took place:
limiting the carriers liability in the absence of On board the aircraft;
a shippers declaration of a higher value in the In the course of the operations of embarking
bill of lading. [Belgian Overseas v. Philippine or disembarking; or
First Ins. Co. (2002)]. When there was delay [Article 17 and 19,
Warsaw Convention];
Destruction, loss, or damage to any baggage
The Warsaw Convention or goods that are checked in, if damage
occurred:
During the transportation by air; or
APPLICABILITY When there was delay [Section 18 and 19,
The Warsaw Convention applies to:
Warsaw Convention];
All international carriage of persons,
Delay in the transport by air of passengers,
baggage, or cargo performed by aircraft for
baggage or goods.
reward;
Gratuitous carriage by aircraft performed by The carriage by air contemplated comprises the
an air transport undertaking [Article 1(1),
period in which the baggage or goods are in
Warsaw Convention]. charge of the carrier, whether in an airport or on
board an aircraft, or, in the case of a landing
International air carriage or international air outside an airport, in any place whatsoever
transport means transportation by air between [Article 18, Warsaw Convention].
points of contact of two high contracting
parties, or those countries that have acceded to
the Warsaw Convention, wherein the place of LIMITATION OF LIABILITY
departure and the place of destination are With respect to the following limitations of
situated: liability, Article 23, Warsaw Convention provides
Within the territories of two high contracting that any provision tending to relieve the carrier
parties, regardless of whether or not there be of liability or to fix a lower limit than that which
a break in the transportation or a is laid down shall be null and void, but the
transshipment; or nullity of any such provision does not involve the
Within the territory of a single high nullity of the whole contract.
contracting party, if there is an agreed
stopping place within a territory subject to the Also, under Article 25, Warsaw Convention:
sovereignty, mandate or authority of another The carrier shall not be entitled to avail
power, even though the power is not a party himself of the provisions which exclude or
to the Convention [Article 1(2), Warsaw limit his liability, if the damage is caused by
Convention]. his wilful misconduct or by such default on his
part as is considered to be equivalent to wilful
A carriage to be performed by several misconduct;
successive air carriers is deemed, for the Similarly the carrier shall not be entitled to
purposes of the Convention, to be one undivided avail himself of the said provisions, if the
carriage, if it has been regarded by the parties damage is caused as aforesaid by any agent
as a single operation, whether it had been of the carrier acting within the scope of his
agreed upon under the form of a single contract employment.
or of a series of contracts [Article 1(3), Warsaw
Convention]. Under Article 29, Warsaw Convention, the right
to damages under the WC is extinguished after
two years from the date of arrival at the
destination or from the date on which the
aircraft ought to have arrived, or from the date
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on which the carriage stopped. The method of otherwise no special or extraordinary form of
calculating the period of limitation shall be resulting injury [Alitalia Airways v. CA (1990)].
determined by the law of the court seized of the
case.
WILLFUL MISCONDUCT
LIABILITY TO PASSENGERS A common carrier may not avail of the limitation
in the following cases:
General rule: In the carriage of passengers, the
liability of the carrier for each passenger is Willful misconduct;
limited to 250,000 francs passenger. Default amounting to willful misconduct
[Article 25, Warsaw Convention];
Exception: By special contract, the carrier and Accepting passengers without ticket [Article
the passenger may agree to a higher limit 3(2), Warsaw Convention];
[Article 22(1), Warsaw Convention]. Accepting goods without airway bill or
baggage without baggage check.
LIABILITY FOR CHECKED BAGGAGE
Receipt by the person entitled to the delivery of
General rule: In the carriage of baggage and
goods, the liability of the carrier is limited to baggage or cargo without complaint is prima
250 francs per kilogram. facie evidence that the same have been
delivered in good condition and in accordance
Exception: The limit does not apply when the with the document of carriage [Article 26,
Warsaw Convention].
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires. In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless he proves that that sum is greater than
the actual value to the consignor at delivery
[Article 22(2), Warsaw Convention].
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Notwithstanding the foregoing, a corporation (i) Corporation created by special laws or charter
shall not be deemed a close corporation - Corporations which are governed primarily
when at least two-thirds (2/3) of its voting by the provisions of the special law or charter
stock or voting rights is owned or controlled creating them. Corporation Code has
by another corporation which is not a close suppletory application. [Sec. 4]
corporation within the meaning of this Code.
[Sec. 96] (j) Subsidiary corporation One in which
control, usually in the form of ownership of
(d) Educational corporation One organized for majority of its shares, is in another
educational purposes [Sec. 106]. corporation (the parent corporation).
(e) Religious corporations (k) Parent corporation Its control lies in its
power, directly or indirectly, to elect the
Corporation sole is one formed for the subsidiarys directors thus controlling its
purpose of administering and managing, as management policies.
trustee, the affairs, property and Holding company a parent company
temporalities of any religious denomination, which has no other business aside from the
sect, or church, by the chief archbishop, holding of the shares of its subsidiaries
bishop, priest, rabbi, or other presiding elder which it controls
of such religious denomination, sect or Investment company a parent company
church [Sec.110] which holds shares in other corporations not
for the purpose of controlling them but
Roman Catholic Apostolic, etc v. Register of merely to invest therein
Deeds of Davao City (1957): A corporation
sole has no nationality but for the purpose (l) Corporation De Jure A corporation
of applying nationalization laws, nationality organized in accordance with the
is determined not by the nationality of its requirements of the law.
presiding elder but by the nationality of its
members constituting the sect in the (m) De facto corporation A corporation where
there exists a flaw in its incorporation.
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Therefore, its shareholdings in another Individuals or juridical entities not meeting the
corporation shall be considered to be of Filipino aforementioned qualifications are considered as
nationality when computing the percentage of non-Philippine nationals.
Filipino equity of that second corporation [SEC
Opinion dated 23 November 1993].
Gamboa v. Teves, (G.R. No. 176579, October 9,
Control test is applied in the following: 2012): (The SC reversed the previous 2011 ruling)
Exploitation of natural resources - Only Since the constitutional requirement of at least
Filipino citizens or corporations whose 60 percent Filipino ownership applies not only
capital stock are at least 60% owned by to voting control of the corporation but also to
Filipinos can qualify to exploit natural the beneficial ownership of the corporation, it is
resources. [Sec. 2, Art. XII, Consti.] therefore imperative that such requirement
Public Utilities - xxx no franchise, apply uniformly and across the board to all
certificate or any other form of authorization classes of shares, regardless of nomenclature
for the operation of a public utility shall be and category, comprising the capital of a
granted except to citizens of the Philippines corporation. Under the Corporation Code,
or to corporations or associations organized capital stock consists of all classes of shares
under the laws of the Philippines at least issued to stockholders, that is, common shares
60% of whose capital is owned by such as well as preferred shares, which may have
citizens. [Sec. 11, Art. XII, Consti.] different rights, privileges or restrictions as
stated in the articles of incorporation.
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rest of the shares in a corporation, the 60-40 (a) the total number of outstanding shares of
ownership requirement in favor of Filipino stock entitled to vote in the election of
citizens in Section 11, Article XII of the directors; AND
Constitution must apply not only to shares with (b) the total number of outstanding shares of
voting rights but also to shares without voting stock, whether or not entitled to vote in the
rights. Preferred shares, denied the right to vote election of directors.
in the election of directors, are anyway still
entitled to vote on the eight specific corporate GRANDFATHER RULE
matters mentioned above under Section 6 of Method used to determine the nationality of a
the Corporation Code. Thus, if a corporation, corporation, in cases where corporate
engaged in a partially nationalized industry, shareholders are present in the situation, by
issues a mixture of common and preferred non- which the percentage of Filipino equity in a
voting shares, at least 60 percent of the common corporation engaged in nationalized and/or
shares and at least 60 percent of the preferred partly nationalized areas of activities, is
non-voting shares must be owned by Filipinos. computed by attributing the nationality of
Of course, if a corporation issues only a single second or even subsequent tier ownership to
class of shares, at least 60 percent of such determine the nationality of the corporate
shares must necessarily be owned by Filipinos. shareholder [Villanueva].
In short, the 60-40 ownership requirement in
SEC Opinion re: Silahis Intl Hotel (May 4, 1987): It
favor of Filipino citizens must apply separately to
involves the computation of Filipino ownership
each class of shares, whether common, preferred
of a corporation in which another corporation of
non-voting, preferred voting or any other class of
partly Filipino and partly foreign equity owns
shares. This uniform application of the 60-40
capital stock. The percentage of shares held by
ownership requirement in favor of Filipino
the second corporation in the first is multiplied
citizens clearly breathes life to the constitutional
by the latters own Filipino equity, and the
command that the ownership and operation of
product of these percentages is determined to
public utilities shall be reserved exclusively to
be the ultimate Filipino ownership of the
corporations at least 60 percent of whose
subsidiary corporation.
capital is Filipino-owned. Applying uniformly
the 60-40 ownership requirement in favor of The Grandfather Rule must be applied to
Filipino citizens to each class of shares, accurately determine the actual participation,
regardless of differences in voting rights, both direct and indirect, of foreigners in a
privileges and restrictions, guarantees effective corporation engaged in a nationalized activity or
Filipino control of public utilities, as mandated business.
by the Constitution.
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liabilities. The mere fact that a stockholder A: It is settled that a corporation has a
owns majority of the stock of a corporation is personality separate and distinct from its
not a ground to conclude that said stockholder individual stockholders or members, and is not
and corporation are one and the same. affected by the personal rights, obligations and
transactions of the latter. The corporation may
Suldao v. Cimech System Construction, Inc. not be held liable for the obligations of the
(2006): The veil of corporate fiction treats as persons composing it, and neither can its
separate and distinct the affairs of a corporation stockholders be held liable for its obligation.
and its officers and stockholders. As a general Of course, this Court has recognized
rule, a corporation will be looked upon as a instances when the corporations separate
legal entity, unless and until sufficient reason to personality may be disregarded. However, we
the contrary appears. When the notion of legal have also held that the same may only be done
entity is used to defeat public convenience, in cases where the corporate vehicle is being
justify wrong, protect fraud, or defend crime, the used to defeat public convenience, justify
law will regard the corporation as an association wrong, protect fraud, or defend crime. Moreover,
of persons. Also, the corporate entity may be the wrongdoing must be clearly and
disregarded in the interest of justice in such convincingly established. It cannot be
cases as fraud that may work inequities among presumed.
members of the corporation internally, involving
no rights of the public or third persons. In both TEST IN DETERMINING
instances, there must have been fraud and APPLICABILITY
proof of it. General Rule: The mere fact that a corporation
owns all or substantially all of the stocks of
GROUNDS FOR APPLICATION OF another corporation is NOT sufficient to justify
DOCTRINE their being treated as one entity.
The corporate fiction may be pierced if used:
Exception: The subsidiary is a mere
To defraud the government of taxes due it.
instrumentality of the parent corporation.
To evade payment of civil liability.
By a corporation which is merely a conduit or
alter ego of another corporation. PNB v. Ritratto Group (2001):
Circumstances rendering subsidiary an
To evade compliance with contractual
instrumentality:
obligations.
The parent corporation owns all or most of
To evade financial obligation to its employees.
the subsidiarys capital stock.
The parent and subsidiary corporations have
PNB v. Andrada Electric & Engineering Co. common directors or officers.
(2002): Only in these and similar instances may
The parent corporation finances the
the veil be pierced and disregarded: to ward off
subsidiary.
a judgment credit, to avoid inclusion of
The parent corporation subscribes to all the
corporate assets as part of the estate of the
capital stock of the subsidiary or otherwise
decedent, to escape liability arising from a debt,
causes its incorporation.
or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield The subsidiary has grossly inadequate capital.
unfair objectives to cover up an otherwise The parent corporation pays the salaries and
blatant violation of the prohibition against other expenses or losses of the subsidiary.
forum shopping. The subsidiary has substantially no business
except with the parent corporation or no
assets except those conveyed to or by the
Seaoil vs Autocorp Group [2008, Nachura]: parent corporation.
Q: Is a corporation liable for the individual acts
In the papers of the parent corporation or in
of its stockholders or members? Is there an
the statements of its officers, the subsidiary is
exception to the general rule?
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(2) Not patently deceptive, confusing or contrary MINIMUM CAPITAL STOCK AND
to existing laws
SUBSCRIPTION
Required by law to include the word REQUIREMENTS [SEC. 12]
Corporation or Inc. [Campos, 1990]
NONEstock corporations incorporated under
Change of corporate name requires the the Corporation Code shall not be required to
amendment of the AOI: majority vote of the have a minimum authorized capital stock
board and the vote or written assent of
stockholders holding 2/3 of the outstanding EXCEPT as provided for by special law and
capital stock [Sec. 16]. subject to the provisions of Sec. 13
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SEC Memo Circ. No. 12, s. 2008: Business or (3) PRINCIPAL OFFICE
trade name which is different from the Must be within the Philippines [Sec. 14 (3)]
corporate name shall be indicated in the articles AOI must specify both province or city or
of incorporation. A company may have more town where it is located
than one business or trade name.
Sundiang and Aquino citing SEC Circular No. 3-
Change of corporate name requires the 2006: A specific address is now required; Metro
amendment of the AOI: majority vote of the Manila is no longer allowed.
board and the vote or written assent of
stockholders holding 2/3 of the outstanding
Chua Gan vs. Samahang Magsasaka (1935):
capital stock [Sec. 16].
Important for (1) determining venue in an action
by or against the corporation, and (2)
Republic Planters Bank v. CA (1992): determining the province where a chattel
Amendment of a corporations AOI changing its mortgage of shares should be registered.
corporate name does not extinguish the
personality of the original corporation. It is the
same corporation with a different name, and its Hyatt Elevators v. Goldstar Elevators (2005):
character is not changed. Consequently, the The residence of a corporation is the place where
new corporation is still liable for the debts and its principal office is located, as stated in its
obligations of the old corporation. Articles of Incorporation. To insist that the
proper venue is the actual principal office and
not that stated in its Articles of Incorporation
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would indeed create confusion and work untold If with par value shares, the par value of each
inconvenience. Enterprising litigants may, out share [Sec. 14(8), Sec. 15(7)].
of some ulterior motives, easily circumvent the names, citizenship and residences of original
rules on venue by the simple expedient of subscribers
closing old offices and opening new ones in amount subscribed and paid on each
another place that they may find well to suit subscription
their needs. fact that some or all shares are without par
value
(4) CORPORATE TERM
Maximum life of 50 years. (8) IF NON-STOCK:
Extendible for a period not exceeding 50 amount of capital
years at any one instance. No extension, names, nationalities & residences of
however, can be made earlier than 5 years contributors
before the end of the term. [Sec. 11]
amount contributed by each
Extension requires an amendment of the AOI
(9) AMOUNT PAID BY EACH SUBSCRIBER
subject to the exercise of appraisal right by the
ON THEIR SUBSCRIPTION, WHICH SHALL
dissenting stockholder [Sec. 37].
NOT BE LESS THAN 25% OF SUBSCRIBED
CAPITAL AND SHALL NOT BE LESS THAN
(5) NAMES, CITIZENSHIP AND RESIDENCES
P5,000 [SEC. 15 (8 & 9)]
OF INCORPORATORS
(10) NAME OF TREASURER ELECTED BY THE
(6) NUMBER, NAMES, CITIZENSHIP AND
SUBSCRIBERS [SEC. 15 (10)]
RESIDENCES OF DIRECTORS/TRUSTEES.
(ASKED IN 05 AND 08)
(11) OTHER MATTERS
Stock corporations: DIRECTORS
Non-stock corporations: TRUSTEES Classes of shares, as well as preferences or
restrictions on any such class [Sec. 6].
General Rule: Not less than 5 but not more than Denial or restriction of pre-emptive right
15 directors/trustees [Sec.39].
Prohibition against transfer of stock which
Exception: Non-stock corporations whose would reduce stock ownership to less than the
articles or by-laws may provide for more than 15 required minimum in the case of a
trustees [Sec. 92] nationalized business or activity [Sec. 15(11)].
No transfer clause
Educational non-stock corporations: J.G. Summit Holdings, Inc. v. CA (2005): If the
trustees may NOT be less than 5 NOR exceed foreign shareholdings of a landholding
15 corporation exceeds 40%, it is not the foreign
number of trustees shall be in multiples of 5 stockholders ownership of the shares which is
[Sec. 108] adversely affected but the capacity of the
corporation to own land that is, the
Nationalized or partially-nationalized industries: corporation becomes disqualified to own
Aliens may be directors but only in such number land. No law disqualifies a person from
as may be proportional to their allowable purchasing shares in a landholding corporation
ownership of shares even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the
(7) IF STOCK CORPORATION: corporation from owning land.
authorized capital stock in lawful money of
the Philippines
the number of shares into which the ACS is
divided
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charitable, cultural, scientific, civic, or similar (d) Appraisal right may be exercised by the
purposes: Provided, no corporation, domestic dissenting stockholder for BOTH extension
or foreign, shall give donations in aid of any and shortening of corporate term (See also
political party or candidate or for purposes of Sec. 81)
partisan political activity;
(10) Establish pension, retirement, and other INCREASE OR DECREASE CAPITAL STOCK
plans for the benefit of its directors, trustees, [SEC. 38]
officers and employees; and
(11) Exercise such other powers as may be INCUR, CREATE OR INCREASE BONDED
essential or necessary to carry out its INDEBTEDNESS [SEC. 38]
purposes (a) Same requirements above from a-c
(b) A certificate in duplicate must be signed by a
Note: majority of the directors of the corporation
The Corporation has implied powers which are (countersigned by the chairman and the
deemed to exist because of the following secretary of the SH meeting), setting forth:
provisions: (1) That requirements of this section have
Except such as are necessary or incidental to been complied with
the exercise of the powers so conferred [Sec. (2) The amount of the increase or diminution
45] of the capital stock
Such powers as are essential or necessary to (3) In case of increase,
carry out its purpose or purposes as stated in (a) the amount of capital stock or number
the AOI catch-all phrase [Sec. 36(11)]. of shares of no-par stock actually
subscribed
SPECIFIC POWERS, THEORY OF (b) names, nationalities and residences of
the persons subscribing
SPECIFIC CAPACITY [SEC. 37-44] (c) the amount of no-par stock subscribed
(a) Power to Extend or Shorten Corporate Term by each
(b) Power to Increase or Decrease Capital Stock
(d) the amount paid by each on his
or Incur, Create, Increase Bonded
subscription, or the amount of capital
Indebtedness
stock or number of shares of no-par
(c) Power to Deny Pre-Emptive Rights
stock allotted to each stockholder if
(d) Power to Sell or Dispose of Corporate Assets such increase is for the purpose of
(e) Power to Acquire Own Shares
making effective stock dividend
(f) Power to Invest Corporate Funds in Another
(4) any bonded indebtedness to be incurred,
Corporation or Business created or increased
(g) Power to Declare Dividends (5) the actual indebtedness of the
(h) Power to Enter Into Management Contract
corporation on the day of the meeting
(6) the amount of stock represented at the
EXTEND OR SHORTEN THE CORPORATE
meeting
TERM [SEC. 37] (7) the vote authorizing the increase or
(a) Must be approved by majority vote of the diminution of the capital stock, or the
Board of Directors/ Board of Trustees incurring, creating or increasing of any
(BOD/BOT) bonded indebtedness
(b) Ratified at a meeting by SH representing 2/3 (c) prior approval of SEC is required
of the outstanding capital stock/ 2/3 of
(d) duplicate certificates shall be kept on file in
members of non-stock corporations
the office of the corporation and the other
(c) Written notice of meeting (includes proposed
shall be filed with the SEC, attached in the
action, time and place of meeting) shall be original articles of incorporation.
addressed to each SH/member at his place
(i) From and after approval of the SEC of its
of residence and deposited to the addressee certificate of filing, the capital stock shall
in the post office, or served personally stand increased or decreased and the
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incurring, creating or increasing of any without further action or approval by the SH/
bonded indebtedness authorized members
(ii) SEC shall not accept for filing any (e) Corporation is not restricted in its power to
certificate of increase unless accompanied sell or dispose of its assets without the
by the sworn statement of the treasurer of authorization of SH or members:
the corporation showing: (i) if the same is necessary in the usual and
(a) That at least 25% of such increased regular course of business of the
capital stock have been subscribed and corporation or
(b) that at least 25% of the amount (ii) if the proceeds of the sale will be
subscribed has been paid or that there appropriated for the conduct of its
has been transferred to the corporation remaining business
property the value of which is
equivalent to 25% of the subscription Caltex (Phils.) Inc. v. PNOC Shipping and
(c) SEC shall not approve any decrease in Transport Corp. (2006): While the Corporation
the capital stock if its effect shall Code allows the transfer of all or substantially
prejudice the rights of corporate all the properties and assets of a corporation,
creditors the transfer should not prejudice the creditors of
(e) Bonds issued by a corporation shall be the assignor. The only way the transfer can
registered with the SEC proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of
DENY PREEMPTIVE RIGHT [SEC. 39] the assignor. The acquisition by the assignee of
All SH of a Stock Corporation have all or substantially all of the assets of the
preemptive right to subscribe to all issues or assignor necessarily includes the assumption of
disposition of shares of any class, in the assignors liabilities, unless the creditors
proportion to their respective shareholdings who did not consent to the transfer choose to
Except if such right is denied by the AOI or an rescind the transfer on the ground of fraud. To
amendment thereto allow an assignor to transfer all its business,
Pre-emptive right shall not extend to: properties and assets without the consent of its
(a) shares to be issued in compliance with laws creditors and without requiring the assignee to
requiring stock offerings or minimum stock assume the assignors obligations will defraud
ownership by the public the creditors. The assignment will place the
(b) shares to be issued in good faith with the assignors assets beyond the reach of its
approval of 2/3 of the stockholders creditors.
representing outstanding capital stock, in
exchange for property needed for corporate ACQUIRE ITS OWN SHARES [SEC. 41]
purposes or in payment of a previously (a) For a legitimate corporate purpose/s,
contracted debt including but not limited to the following:
(i) To eliminate fractional shares arising out
SELL OR DISPOSE OF SUBSTANTIALLY ALL of stock dividends
ITS ASSETS [SEC. 40] (ii) To collect or compromise an
(a) Same requirements from a-c as Sec. 37 indebtedness to the corporation, arising
above out of unpaid subscription, in a
(b) Any dissenting SH may exercise his appraisal delinquency sale, and to purchase
right delinquent shares sold during said sale;
(c) Deemed to cover substantially all the and
corporate property and assets (iii) To pay dissenting or withdrawing
(d) After authorization by the SH/members, the stockholders
BOD/BOT may abandon such sale, lease, (b) Provided there are unrestricted retained
exchange, mortgage, pledge or other earnings (URE) in the corporate books to
disposition, subject to the rights of third cover the shares purchased or acquired
parties under any contract relating thereto,
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INVEST IN ANOTHER CORPORATION OR (c) Any cash dividend due on delinquent stock
BUSINESS [SEC. 42] shall first be applied to the unpaid balance
(a) Same requirements from a-c as Sec. 37 on the subscription plus costs and expenses
above (d) Stock dividends shall be withheld from the
(b) Any dissenting SH shall have appraisal right delinquent stockholder until his unpaid
(c) Where the investment is reasonably subscription is fully paid
necessary to accomplish the corporations (e) Should be approved by 2/3 of SH
primary purpose, the approval of the SH/ representing the outstanding capital stock at
members is not necessary a regular/special meeting called for that
purpose
Notes: (f) Stock corporations- prohibited from retaining
If it is for the same purpose, or incidental, or surplus profits in excess of 100% of their
related to its PRIMARY purpose, the board paid-in capital stock, except:
can invest the corporate fund WITHOUT the (i) When justified by definite corporate
consent of the stockholders. No appraisal expansion projects or programs approved
right. by the BOD
If the investment is in another corporation of (ii) When the corporation is prohibited under
different business or purpose BUT in any loan agreement with any financial
pursuance of the SECONDARY purpose, the institution or creditor from declaring
affirmative vote of majority of the board dividends without its consent, and such
consented by stockholders/ members is consent has not yet been secured
required. (iii) When it can be clearly shown that such
If the investment is OUTSIDE the purpose/s retention is necessary under special
for which the corporation was organized, AOI circumstances obtaining in the
must be amended first, otherwise it will be an corporation
Ultra Vires act.
Nielson & Co. v. Lepanto Consolidated Mining
De La Rama v. Ma-ao Sugar Central Co. (1969): A (1968): Under Section 16 of the Corporation Law
private corporation, in order to accomplish its stock dividends cannot be issued to a person
purpose as stated in its articles of incorporation, who is not a stockholder in payment of services
and subject to the limitations imposed by the rendered.
Corporation Law, has the power to acquire,
hold, mortgage, pledge or dispose of shares, A corporation may legally issue shares of stock
bonds, securities, and other evidences of in consideration of services rendered to it by a
indebtedness of any domestic or foreign person not a stockholder, or in payment of its
corporation. Such an act, if done in pursuance of indebtedness. A share of stock issued to pay for
the corporate purpose, does not need the services rendered is equivalent to a stock issued
approval of the stockholders; but when the in exchange of property, because services is
purchase of shares of another corporation is equivalent to property. However, it is the shares
done solely for investment and not to of stock that are originally issued by the
accomplish the purpose of its incorporation, the corporation and forming part of the capital that
vote of approval of the stockholders is can be exchanged for cash or services rendered,
necessary. or property. A share of stock coming from stock
dividends declared cannot be issued to one who
DECLARE DIVIDENDS [SEC. 43] is not a stockholder of a corporation.
(a) Out of URE
(b) Payable in cash, in property, or in stock to all ENTER INTO MANAGEMENT CONTRACTS
SH on the basis of outstanding stock held by [SEC. 44]
them (a) Should be approved by the BOD and by SH
owning at least the majority of the
outstanding capital stock or at least a
majority of the members of both the
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corporate officers could be considered only as prejudiced if he had the right to presume under
employees or subordinate officials. the circumstances the authority of the acting
officers.
A different interpretation can easily leave the
way open for the Board of Directors to Associated Bank v. Pronstroller [2008, Nachura]:
circumvent the constitutionally guaranteed Q: What is the Doctrine of Apparent Authority?
security of tenure of the employee by the A: If a corporation knowingly permits one of its
expedient inclusion in the By-Laws of an officers, or any other agent, to act within the
enabling clause on the creation of just any scope of an apparent authority, it holds him out
corporate officer position. to the public as possessing the power to do
those acts; the corporation will, as against
Real v. Sangu Philippines (2011): anyone who has in good faith dealt with it
An office is created by the charter of the through such agent, be estopped from denying
corporation and the officer is elected (or the agents authority.
appointed) by the directors or stockholders
(Easycall Communications Phils., Inc. v. King, TRUST FUND DOCTRINE
2005). Philippine Trust Co. v. Rivera (1923): Under Sec.
Corporate officers in the context of PD No. 43 of Code, the corporation can declare
902-A are those officers of the corporation dividends only out of "unrestricted retained
who are given that character by the earnings;" and that under Sec. 122, no
Corporation Code or by the corporations by- corporation shall distribute any of its assets or
laws. There are three specific officers whom a property except upon lawful dissolution and
corporation must have under Section 25 of after payment of all its debts and liabilities.
the Corporation Code. These are the These provisions in essence provide for the
president, secretary and the treasurer. The "trust fund doctrine" where the "subscription to
number of officers is not limited to these the capital of a corporation constitute a fund to
three. A corporation may have such other which creditors have a right to look for
officers as may be provided for by its by-laws satisfaction of their claims."
like, but not limited to, the vice-president,
cashier, auditor or general manager. The
Ong Yong v. Tiu (2003): "The Trust Fund
number of corporate officers is thus limited by
Doctrine, first enunciated by this Court in the
law and by the corporations by-laws [Garcia
1923 case of Philippine Trust Co. v. Rivera'
v. Eastern Telecommunications Philippines,
provides that subscriptions to the capital stock
Inc., 2009].
of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction
Disqualifications [Sec. 27] of their claims.
Convicted by final judgment of an offense
punishable by imprisonment for a period This doctrine is the underlying principle in the
exceeding 6 years procedure for the distribution of capital assets,
Convicted by final judgment of a violation of embodied in Corporation Code, which allows
the Corporation Code committed within 5 the distribution of corporate capital only in three
years prior to the date of his election or instances:
appointment. This includes violations of rules (1) amendment of the Articles of Incorporation
and regulations issued by the SEC to to reduce the authorized capital stock,
implement the provisions of the Corporation (2) purchase of redeemable shares by the
Code. corporation, regardless of the existence of
unrestricted retained earnings, and
Authority of Corporate Officers (3) dissolution and eventual liquidation of the
A person dealing with a corporate officer is put corporation.
on inquiry as to the scope of the latters
authority but an innocent person cannot be
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Furthermore, the doctrine is articulated in Sec. the doctrine when the corporation is insolvent
41 on the power of a corporation to acquire its encompasses not only the capital stock, but also
own shares and in Sec. 122 on the prohibition other property and assets generally regarded in
against the distribution of corporate assets and equity as a trust fund for the payment of
property unless the stringent requirements corporate debts. All assets and property
therefore are complied with. belonging to the corporation held in trust for
the benefit of creditors that were distributed or
Boman Environmental Development Corporation in the possession of the stockholders, regardless
of full payment of their subscriptions, may be
v. CA (1988):
reached by the creditor in satisfaction of its
Trust Fund Doctrine means that the capital
claim.
stock, properties and other assets of a
corporation are regarded as equity in trust for
Also, under the trust fund doctrine, a corporation
the payment of corporate creditors. Stated
has no legal capacity to release an original
simply, the trust fund doctrine states that all
subscriber to its capital stock from the
funds received by the corporation in payment of
obligation of paying for his shares, in whole or in
the shares of stock shall be held in trust for the
part, without a valuable consideration, or
corporate creditors and other stockholders of
fraudulently, to the prejudice of creditors. The
the corporation. Under such doctrine no fund
creditor is allowed to maintain an action upon
shall be used to buy back the issued shares of
any unpaid subscriptions and thereby steps into
stock except only in instances specifically
the shoes of the corporation for the satisfaction
allowed by the Corporation Code.
of its debt.
Steinberg v. Velasco (1929): To make out a prima facie case in a suit against
The creditors of a corporation have the right to stockholders of an insolvent corporation to
assume that so long as there are debts and compel them to contribute to the payment of its
liabilities, the Board of Directors will not use debts by making good unpaid balances upon
corporate assets to purchase its own shares of their subscriptions, it is only necessary to
stock or to declare dividends to its stockholders establish that the stockholders have not in good
when the corporation is insolvent. faith paid the par value of the stocks of the
corporation.
NTC v. CA (1999): The subscribed capital is the
same amount that can loosely be termed as the
trust fund of the corporation. The Trust
Fund doctrine considers this subscribed capital
Board of Directors and
as a trust fund for the payment of the debts of
the corporation, to which the creditors may look
Trustees
for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital DOCTRINE OF CENTRALIZED
may be returned or released to the stockholder MANAGEMENT
(except in the redemption of redeemable
shares) without violating this principle. Thus, BOARD IS SEAT OF CORPORATE
dividends must never impair the subscribed POWERS
capital; subscription commitments cannot be
General Rule: Unless otherwise provided in this
condoned or remitted; nor can the corporation
Code, the corporate powers of all corporations
buy its own shares using the subscribed capital
formed under this Code shall be exercised, all
as the consideration therefor.
business conducted and all property of such
corporations controlled and held by the board of
Donnina Halley v. Printwell, Inc. (2011): The trust directors or trustees to be elected from among
fund doctrine is not limited to reaching the the holders of stocks, or where there is no stock,
stockholders unpaid subscriptions. The scope of from among the members of the corporation,
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who shall hold office for one (1) year until their lodged in the board, subject to the articles of
successors are elected and qualified. [Sec. 23] incorporation, by-laws, or relevant provisions of
law. In the absence of authority from the board
Exceptions of directors, no person, not even its officers, can
In case of an Executive Committee duly validly bind a corporation.
authorized in the by-laws; [Sec. 35]
In case of a contracted manager which may However, just as a natural person may authorize
be an individual, a partnership, or another another to do certain acts for and on his behalf,
corporation the board of directors may validly delegate
Note: In case the contracted manager is another some of its functions and powers to its officers,
corporation, the special rule in Sec. 44 applies. committees or agents. The authority of these
individuals to bind the corporation is generally
In case of close corporations, the stockholders derived from law, corporate by-laws or
may manage the business of the corporation authorization from the board, either expressly or
rather than by a board of directors, if the AOI impliedly by habit, custom or acquiescence in
so provide. [Sec. 97] the general course of business.
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Valle Verde Country Club v. Africa, 2009: Lee v. CA (1992): With the omission of the phrase
In several cases, we have defined "term" as "in his own right" the election of trustees and
the time during which the officer may claim to other persons who in fact are not beneficial
hold the office as of right, and fixes the owners of the shares registered in their names
interval after which the several incumbents on the books of the corporation becomes
shall succeed one another. The term of office formally legalized. Hence, this is a clear
is not affected by the holdover. The term is indication that in order to be eligible as a
fixed by statute and it does not change simply director, what is material is the legal title to, not
because the office may have become vacant, beneficial ownership of, the stock as appearing
nor because the incumbent holds over in on the books of the corporation.
office beyond the end of the term due to the
fact that a successor has not been elected and DISQUALIFICATIONS [SEC. 27]
has failed to qualify. Convicted by final judgment of an offense
Term is distinguished from tenure in that an punishable by imprisonment for a period
officers "tenure" represents the term during exceeding 6 years; or
which the incumbent actually holds office. A violation of the Corporation Code,
The tenure may be shorter (or, in case of committed within five years from the date of
holdover, longer) than the term for reasons his election. This includes violations of rules
within or beyond the power of the incumbent. and regulations issued by the SEC to
Based on the above discussion, when Section implement the provisions of the Corporation
23 of the Corporation Code declares that "the Code.
board of directorsshall hold office for one (1)
year until their successors are elected and Gokongwei, Jr. v. SEC (1979): An amendment to
qualified," we construe the provision to mean
the corporations by-laws which renders a
that the term of the members of the board of
stockholder ineligible to be a director, if he be
directors shall be only for one year; their term
also a director in a corporation whose business
expires one year after election to the office.
is in competition with that of the other
The holdover period that time from the
corporation, has been sustained as valid. This is
lapse of one year from a members election to based upon the principle that where the director
the Board and until his successors election is so employed in the service of a rival company,
and qualification is not part of the directors he cannot serve both, but must betray one or
original term of office, nor is it a new term; the
the other. Such an amendment "advances the
holdover period, however, constitutes part of
benefit of the corporation and is good."
his tenure.
QUALIFICATIONS ELECTIONS
If STOCK, director must own at least 1 share of
the capital stock, which stock shall stand in CUMULATIVE VOTING
his own name [Sec. 23].
o Exception: Trustee in a voting trust may be CUMULATIVE VOTING FOR ONE
elected director/trustee. CANDIDATE
If NON-STOCK, trustee must be a member. A stockholder is allowed to concentrate his
(a) Majority of the directors/trustees must be votes and give one candidate as many votes as
residents of the Philippines. the number of directors to be elected multiplied
(b) Natural person by the number of his shares shall equal.
(c) Of Legal Age
(d) Other qualifications as may be prescribed Illustration: If there are 5 directors to be elected
in the by-laws of the corporation. and Pedro, as shareholder, has 100 shares,
Pedro can give 500 (5 x 100 shares) votes to
just one candidate.
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one in which the corporation has an interest or forthwith express his objection in writing and
a reasonable expectancy. file the same with the corporate secretary
shall be solidarily liable with the stockholder
The rule shall be applied notwithstanding the concerned to the corporation and its creditors
fact that the director risked his own funds in the for the difference in value [Sec. 65].
venture. [Sec. 34]
PERSONAL LIABILITIES
By embracing the opportunity, the self-interest General Rule:
of the officer or director will be brought into Price v. Innodata Phils., Inc. (2008): Members of
conflict with that of his corporation. Hence, the the Board, who purport to act in good faith for
law does not permit him to seize the and in behalf of the corporation within the
opportunity even if he will use his own funds in lawful scope of their authority, are not liable for
the venture. [Sundiang and Aquino] the consequences of their acts. When the acts
are of such nature and done under those
NOTE: circumstances, they are attributed to the
Differences between Section 31 and Section 34: corporation alone and no personal liability is
First, while both involve the same subject incurred.
matter (business opportunity) they concern
different personalities; Sec. 34 is applicable The provisions on seizing corporate opportunity
only to directors and not to officers, whereas and disloyalty [Secs. 31 and 34] shall also apply
Sec. 31 applies to directors, trustees and to corporate officers.
officers.
Second, Sec. 34 allows a ratification of a Note: Members of the BOD who are also officers
transaction by a self-dealing director by vote are held to a more stringent liability because
of stockholders representing at least 2/3 of they are in-charge of day-to-day activities
the outstanding capital stock. [Villanueva] [Campos]
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the corporation, its stockholders or other West Coast Life Ins. Co. v. Hurd (1914); Time Inc.
persons; v. Reyes (1971): Criminal action is limited to the
He consents to the issuance of watered corporate agents guilty of an act amounting to a
stocks or who, having knowledge thereof, crime and never against the corporation itself.
does not forthwith file with the corporate
secretary his written objection thereto; Since the BOD is the repository of corporate
He agrees to hold himself personally and powers and acts as the agent of the corporation,
solidarily liable with the corporation; or the directors may be held criminally liable.
He is made, by a specific provision of law, to
personally answer for his corporate action Ong v. CA (2003): The Trust Receipts Law
recognizes the impossibility of imposing the
SPECIAL FACTS DOCTRINE penalty of imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law
Strong v. Repide (1909): Even though a director
makes the officers or employees or other
may not be under the obligation of a fiduciary
persons responsible for the offense liable to
nature to disclose to a shareholder his
suffer the penalty of imprisonment. The reason
knowledge affecting the value of the shares,
is obvious: corporations, partnerships,
that duty may exist in special cases.
associations and other juridical entities cannot
be put to jail. Hence, the criminal liability falls
General Rule: on the human agent responsible for the
Majority view: Directors only owe its duty to the violation of the Trust Receipts Law.
corporation. They owe no fiduciary duty to
stockholders but they may deal with each other
at fair and reasonable terms, as if they were INSIDE INFORMATION
unrelated. No duty to disclose facts known to The fiduciary position of insiders1, directors,
the director or officer. [Taylor v. Wright, 1945] and officers prohibits them from using
confidential information relating to the
Note: Minority View (Realistic View) recognizes business of the corporation to benefit
the directors obligation to the stockholders themselves or any competitor corporation in
individually as well as collectively, and refuses which they may have a mere substantial
to permit him to profit at the latters expense by interest.
the use of information obtained as a result of Since loss and prejudice to the corporation is
official position and duties. not a requirement for liability, the corporation
has a cause of action as long as there is unfair
Exception: use of inside information
Special Facts Doctrine: Conceding the absence It is inside information if it is not generally
of a fiduciary relationship in the ordinary case, available to others and is acquired because of
courts nevertheless hold that where special the close relationship of the director or officer
circumstances or facts are present which make to the corporation
it inequitable for the director to withhold
information from the stockholder, the duty to
disclose arises and concealment is fraud.
[Strong v. Repide, 1909]
RESPONSIBILITY FOR CRIMES 1 Insider means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling the issuer;
Since a corporation as a person is a mere legal (c) a person whose relationship or former relationship to the issuer
fiction, it cannot be proceeded against gives or gave him access to material information about the issuer
criminally because it cannot commit a crime in or the security that is not generally available to the public; (d) a
government employee, or director, or officer of an exchange,
which personal violence or malicious intent is clearing agency and/or self-regulatory organization who has
required. access to material information about an issuer or a security that is
not generally available to the public; or (e) a person who learns
such information by a communication from any of the foregoing
insiders (3.8, Sec Regulations Code)
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insuring compliance with constitutional or Requisites for a Valid and Enforceable Proxy:
legal requirements; but such terms and (a) It must be in writing
conditions shall be effective upon filing of a (b) Signed by the stockholder or member of
certificate thereof with the SEC. Thus, a record; and
preference or restriction on shares may be (c) Filed with the corporation before the
valid and effective only if the same has scheduled meeting with the Corporate
formally been registered with the SEC and Secretary
thereby becomes public records binding on
the public. [Villanueva] Procedural Matters Relating to Proxies:
(a) Proxy solicitation involves the securing and
Nature of the Rights of Members submission of proxies, while proxy
The eleemosynary nature of every non-stock validation concerns the validation of such
corporation defines the characteristic of secured and submitted proxies;
membership therein as being essentially (b) The SECs power to pass upon the validity of
personal in character and therefore proxies in relation to election controversies
essentially non-transferable in nature. has effectively been withdrawn, tied as it is to
Section 89 of the Corporation Code specifically its abrogated quasi-judicial powers, and has
provides that in a non-stock corporation, the been transferred to the RTC Special
right of members of any class or classes to Commercial Courts pursuant to the terms of
vote may be limited, broadened or denied to Section 5.2 of the Securities Regulation
the extent specified in the articles of Code;
incorporation or the by-laws. (c) Nevertheless, although an intra-corporate
controversy may animate a disgruntled
SEC Opinion, 4 September 1995: The SEC has shareholder to complain to the SEC a
opined that the rule in Section 6 allowing non- corporations violations of SEC rules and
voting shares to vote on specified fundamental regulations, but that motive alone should not
matters does not apply to non-voting members be sufficient to deprive the SEC of its
of a non-stock corporation; that insofar as investigatory and regulatory powers,
members of a non-stock corporation, the especially so since such powers are
applicable provision is Section 89, which exercisable on a motu proprio basis.
specifically provides that members may be
denied entirely their voting rights in the articles GSIS v. CA (2009): The fact that the jurisdiction
of incorporation or by-laws of the corporation. of the RTC Special Commercial Courts is
confined to the voting on election of officers,
and not all matter which may be voted upon by
PARTICIPATION IN stockholders, elucidates that the power of the
MANAGEMENT SEC to regulate proxies remains extant and
could very well be exercised when stockholders
PROXY vote on matters other than the election of
Stockholders and members may vote in directors.
person or by proxy in all meetings of
stockholders or members [Sec. 58]. VOTING TRUST
The right to issue a proxy is vested with public An arrangement created by one or more
interest when it comes to stock corporations; stockholders for the purpose of conferring
although it may be regulated under the by- upon a trustee or trustees the right to vote
laws, it cannot be denied, since it is an aspect and other rights pertaining to the shares for a
of ownership interest of stockholders. period not exceeding five (5) years at any time
However, the right of members to vote by [Sec. 59].
proxy may be denied under the articles of Under a voting trust arrangement, a
incorporation or by-laws of a non-stock stockholder of a stock corporation parts with
corporation [Sec. 89] the naked or legal title, including the power to
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vote, of the shares and only retains the CASES WHEN STOCKHOLDERS
beneficial ownership of the stock. A voting ACTION IS REQUIRED
trustee is a share owner vested with colorable
and naked title of the shares covered for the Tan v. Sycip (2006): Under Section 6 of the
primary purpose of voting upon stocks that he Corporation Code, each share of stock is entitled
does not own. to vote, unless otherwise provided in the articles
of incorporation or declared delinquent under
A voting trust agreement shall be ineffective
Section 67 of the Code.
and unreasonable unless:
(a) It is in writing and notarized;
In non-stock corporations, the voting rights
(b) Specify the terms and conditions thereof;
attach to membership. Members vote as
and
persons, in accordance with the law and the by-
(c) A certified copy of such agreement shall
laws of the corporation. Each member shall be
be filed with the corporation and with the
entitled to one vote unless so limited,
SEC.
broadened, or denied in the articles of
incorporation or by-laws. When the principle for
Proxy Trustee determining the quorum for stock corporations
Principalagent Trustee-beneficiary is applied by analogy to non-stock corporations,
Proxy cannot exceed The only limit to only those who are actual members with voting
delegated authority. authority is that the act rights should be counted.
must be for the benefit
of trustee. (fiduciary BY A MAJORITY VOTE
obligation) (a) Power to enter into management
contracts [Sec. 44]
Must be in writing Must be in writing and
notarized General Rule: Requires approval by majority of
Copy must be filed with Copy must be filed with the BOD/BOT and approval by stockholders
the corporation. SEC and the owning at least the majority of the outstanding
corporation. capital stock/majority of members of both the
No transfer. Transfer of legal title to managing and the managed corporation
trustee.
Exceptions:
Proxy exercises voting Trustee exercises Where a stockholder/s representing the same
rights only for a specific absolute voting rights interest of both the managing and the
meeting (unless continuously, subject managed corporations own or control more
otherwise provided) only to fiduciary duty. than one-third (1/3) of the total outstanding
Proxy cannot be Trustee can be director capital stock entitled to vote of the managing
director because he holds legal corporation; or
title over the shares Where a majority of the members of the
Revocable at will in any Irrevocable, as long as managing corporations BOD also constitute a
manner, EXCEPT if no misconduct or majority of the managed corporations BOD
coupled with an fraud.
interest. Requires at least 2/3 votes of the outstanding
capital stock/membership of the managed
Max of 5 yrs at a time Max of 5 yrs at a time corporation.
(unless the voting trust
is specifically required BUT only majority vote is required for the
as a condition in a loan managing corporation.
agreement)
SEC can pass on validity
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(b) Amendments to by-laws [Sec. 48] Amendment of AOI of close corporations [Sec
Requires approval by majority of the 103]
BOD/BOT and approval by stockholders Amendment to the AOI which seeks to delete or
owning at least the majority of the remove any provision required to be contained
outstanding capital stock/majority of in the AOI of Close Corporations or to reduce a
members quorum or voting requirement stated in said
Includes all stockholders with or without AOI requires the affirmative vote of at least 2/3
voting rights of the outstanding capital stock, whether with or
without voting rights, or of such greater
(c) Revocation of delegation to the BOD of proportion of shares as may be specifically
the power to amend or repeal or adopt by- provided in the AOI at a meeting duly called.
laws [Sec. 48]
Requires approval by stockholders owning at (b) Delegating the power to amend or repeal
least the majority of the outstanding capital by-laws or adopt new by-laws [Sec. 48]
stock/majority of members Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-
(d) Calling a meeting to remove directors laws requires approval by at least two-thirds
[Sec. 28] (2/3) of the outstanding capital
Meeting for the removal of directors or trustees, stock/membership.
or any of them, must be called by the secretary Revocation of the delegation requires only
on order of the president or on the written majority vote of the outstanding capital
demand of the stockholders representing or stock/membership.
holding at least a majority of the outstanding
capital stock/majority of members (c) Extending/shortening corporate term
[Sec. 37]
(e) Granting compensation other than per Requires approval by a majority vote of the
diems to directors [Sec. 30] BOD/BOT and approval by at least two-thirds
Compensation other than per diems may be (2/3) of the outstanding capital
granted to directors by the vote of the stock/membership.
stockholders representing at least a majority of Includes all stockholders with or without
the outstanding capital stock voting rights
(f) Consideration for no-par shares [Sec. 62] (d) Increasing/decreasing capital stock [Sec.
When the AOI or the BOD does not provide for 38]
the value of no-par shares, the value of such Requires approval by a majority vote of the
shares shall be determined by the stockholders BOD and approval by at least two-thirds (2/3)
representing at least a majority of the of the outstanding capital stock.
outstanding capital stock Includes all stockholders with or without
voting rights
BY A TWO-THIRDS VOTE
(a) Amendment of Articles of Incorporation (e) Incurring, creating, increasing bonded
[Sec. 16] indebtedness [Sec. 38]
Amendment of the AOI may be made by a Requires approval by a majority vote of the
majority vote of the BOD/BOT and the vote or BOD and approval by at least two-thirds (2/3)
written assent of the stockholders of the outstanding capital stock.
representing at least two-thirds 2/3 of the
Includes all stockholders with or without
outstanding capital stock, without prejudice to
voting rights
the appraisal right of dissenting stockholders.
Includes all stockholders with or without
voting rights
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(f) Issuance of shares not subject to pre- (l) Ratifying contracts with respect to
emptive right [Sec. 39] dealings with directors/ trustees [Sec. 32]
Shares issued in good faith in exchange for A contract of the corporation with one or more
property or previously incurred indebtedness of its directors is voidable, at the option of such
with the approval of the stockholders corporation, unless all the following conditions
representing two-thirds (2/3) of the outstanding are present:
capital stock are not subject to pre-emptive The directors presence in the BOD meeting in
rights. which the contract was approved was not
necessary to constitute a quorum
(g) Sale/disposition of all or substantially all The vote of such director was not necessary
of corporate assets (Sec. 40) for the approval of the contract
Requires approval by a majority vote of the The contract is fair and reasonable under the
BOD/BOT and approval by at least two-thirds circumstances
(2/3) of the outstanding capital In case of an officer, the contract has been
stock/membership. previously authorized by the BOD.
Includes all stockholders with or without
voting rights Where any of the first two conditions is absent,
Note: In non-stock corporations where there in the case of a contract with a director, such
are NO members with voting rights, the vote contract may be ratified by the vote of the
of at least the majority of the BOT will be stockholders representing at least two-thirds
sufficient authorization for any sale or (2/3) of the outstanding capital stock provided
disposition of all or substantially all of that the contract is fair and reasonable under
corporate assets. (Sec. 40) the circumstances.
(h) Investment of funds in another business (m) Ratifying acts of disloyalty of a director
[Sec. 42] [Sec. 34]
Requires approval by a majority vote of the General Rule: Where a director, by virtue of his
BOD/BOT and approval by at least two-thirds office, acquires for himself a business
(2/3) of the outstanding capital opportunity which should belong to the
stock/membership. corporation, thereby obtaining profits, he must
Includes all stockholders with or without account to the corporation for all such profits by
voting rights refunding it.
(i) Dividend declaration [Sec. 43] Exception: His act may be ratified by a vote of
No stock dividend shall be issued without the the stockholders owning or representing at least
approval of stockholders representing not less two-thirds (2/3) of the outstanding capital
than two-thirds (2/3) of the outstanding capital stock.
stock.
(n) Stockholders approval of the plan of
(j) Power to enter into management contracts merger or consolidation (Sec. 77)
[Sec. 44] Requires approval by majority of each of the
Please see discussion under By a Majority Vote BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
(k) Removal of directors or trustees [Sec. 28] approval by at least two-thirds (2/3) of the
Any director or trustee may be removed from outstanding capital stock/membership of
office by a vote of the stockholders holding or each corporation at separate corporate
representing at least two-thirds (2/3) of the meetings duly called.
outstanding capital stock/membership. Amendments to the plan of merger or
consolidation also requires approval by
majority vote of each of the BOD and two-
thirds (2/3) vote of the outstanding capital
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(2) The stockholder has not improperly used any cannot, without an order of a court, be
information he secured through any previous permitted to take books from the office of the
examination. corporation. However, a director or stockholder
(3) Demand is made in good faith or for a does not have any absolute right to secure
legitimate purpose. If the corporation or its certified copies of the minutes of the
officers contest such purpose or contend that corporation until these minutes have been
there is evil motive behind the inspection, the written up and approved by the directors.
burden of proof is with the corporation or
such officer to show the same. Africa v. PCGG (1992): A stockholder of a
sequestered company has the right to inspect
Gokongwei v. SEC (1979): TEST to determine and/or examine the records of the corporation
whether the purpose is legitimate A legitimate pursuant to Sec. 74 of the Corporation Code.
purpose is one which is germane to the interests
of the stockholder as such and not contrary to REMEDIES WHEN INSPECTION IS REFUSED
the interests of the corporation Mandamus
Injunction
Gonzales v. PNB (1983): Among the changes Action for damages
introduced in the new Code with respect to the File an action under Sec. 144 to impose a
right of inspection granted to a stockholder are penal offense by fine and/or imprisonment
the following:
(1) The records must be kept at the principal PRE-EMPTIVE RIGHT
office of the corporation; DEFINITION AND DISTINGUISHED FROM
(2) The inspection must be made on business RIGHT OF FIRST REFUSAL
days;
Pre-emptive right is an option privilege of an
(3) The stockholder may demand a copy of the
existing stockholder to subscribe to a
excerpts of the records or minutes;
proportionate part of shares subsequently
(4) The refusal to allow such inspection shall
issued by the corporation before the same can
subject the erring officer or agent of the
be disposed of in favor of others; this right
corporation to civil and criminal liabilities.
includes all issues and disposition of shares of
However, while seemingly enlarging the right of
any class. It is a common law right and may
inspection, the new Code has prescribed
be exercised by stockholders even without
limitations to the same. It is now expressly
legal provision. On the other hand, a right of
required as a condition for such examination
first refusal arises only by virtue of contract
that the one requesting it must not have been
stipulations, by which the right is strictly
guilty of using improperly any information
construed against the right of person to
through a prior examination, and that the
dispose or deal with their property.
person asking for such examination must be
"acting in good faith and for a legitimate Stockholders of a corporation shall enjoy pre-
purpose in making his demand." emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS,
in proportion to their respective
Veraguth v. Isabela Sugar (1932): Directors of a shareholdings. The purpose is to enable the
corporation have the unqualified right to inspect shareholder to retain his proportionate
the books and records of the corporation at all control in the corporation and to retain his
reasonable times. The right of inspection is not equity in the surplus.
to be denied on the ground that the director or
shareholder is on unfriendly terms with the Note:
officers of the corporation whose records are The broad phrase all issues or disposition of
sought to be inspected. A director or shares of any class is construed to include not
stockholder can make copies, abstracts, and only new shares issued in pursuance of an
memoranda of documents, books, and papers increase in capital stock or from the unissued
as an incident to the right of inspection, but shares which form part of the ACS, but also
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covers treasury shares. Treasury shares would WAIVER/ DENIAL OF PREEMPTIVE RIGHT
come under the term disposition. Likewise Allowed by the Code provided that it is made
considering that it is not included among the in the AOI
exceptions enumerated therein, where pre- - Waiver made through AOI would bind
emptive right shall not extend, the intention is present and subsequent SH
to include it in its application. [SEC Opinion, 14 - 2/3 vote of the outstanding capital stock is
January 1993]. necessary before waiver is binding
- Result of Non-placement of waiver clause in
A pre-emptive right is a right claimed against AOI: waiver shall not bind future
the corporation on unissued shares of its capital stockholders but only those who agreed to it
stock, and likewise on treasury shares held by The SH must be given reasonable time within
the corporation; while the right of first refusal is which to exercise their pre-emptive rights.
a right exercisable against another stockholder Upon expiration of such period, any SH who
on his shares of stock. [Villanueva] did not exercise such will be deemed to have
waived it. This is necessary so as to not hinder
Basis of Preemptive Right: to preserve the future financing plans of the corporation.
existing proportional rights of the stockholders Some new investors may be willing to invest
[Campos] only if all the new shares will be issued to
them (Campos).
LIMITATIONS TO EXERCISE OF PRE-
EMPTIVE RIGHT [SEC. 39] RIGHT TO VOTE
Such pre-emptive right shall NOT extend to Non-voting shares are not entitled to vote
shares to be issued in compliance with laws except as provided for in the last paragraph of
requiring stock offerings or minimum stock Sec. 6.
ownership by the public;
Preferred or redeemable shares may be
It shall also NOT extend to shares to be issued deprived of the right to vote
in good faith with the approval of the
Fractional shares of stock cannot be voted
stockholders representing two-thirds (2/3) of
Treasury shares have no voting rights as long
the outstanding capital stock, in exchange for
property needed for corporate purposes or in as they remain in the treasury.
payment of a previously contracted debt No delinquent stock shall be voted [Sec. 71]
It shall not take effect if denied in the AOI or A transferee of stock cannot vote if his
an amendment thereto. transfer is not registered in the stock and
If one shareholder does not want to exercise transfer book of the corporation.
his pre-emptive right, the other shareholders
are not entitled to purchase the RIGHT OF FIRST REFUSAL
corresponding shares of the shareholder who The right of first refusal provides that a
declined. But if nobody purchased the same stockholder who may wish to sell or assign his
and later on the board re-issued the shares, shares must first offer the shares to the
the pre-emptive right applies. [Sundiang and corporation or to the other existing stockholders
Aquino] under terms and conditions which are
reasonable; and that only when the corporation
REMEDIES IN CASE OF UNWARRANTED or the other stockholders do not or fail to
DENIAL exercise their option, is the offering stockholder
Injunction at liberty to dispose of his shares to third
Mandamus parties.
The suit should be individual and not
derivative because the wrong done is to the Lambert v. Fox (1914): An agreement entered
stockholders individually into between the two majority stockholders of a
SEC can cancel shares if the third party is not corporation whereby they mutually agreed not
innocent to sell, transfer, or otherwise dispose of any part
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of their shareholdings till after one year from with particularity in the complaint, to
the date of the agreement. exhaust all remedies available under the
Articles of Incorporation, by-laws, laws or
PCGG v. SEC, unreported (1988): The right of first rules governing the corporation or
refusal is primarily an attribute of ownership, partnership to obtain the relief he desires.
and consequently can be effected only through (3) That there is no appraisal right available for
a contractual commitment by the owner of the the act(s) complained of; and
shares; consequently, the waiver of a right of (4) That the suit is not a nuisance or harassment
first refusal when duly constituted can be suit. [Rule 8, Interim Rules of Procedure for
effected only by the registered owner. Intra-Corporate Controversies]
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(2) Symaco Trading Corp. v. Santos (2005): The contingency) and indivisible (as to the amount
reliefs sought pertain to the corporation. and transferability [Fua Cun v. Summers,
1923]. Hence, if the subscriber paid 20% of his
Recent rulings on the matter subscription, he is not entitled to the issuance of
Reyes v. RTC of Makati (2008): Status of heirs as certificates corresponding to 20% of the shares.
co-owners of shares before partition of estate
does not make them shareholders until there is China Banking Corp. v. CA (1997): Unpaid claim
compliance with Sec. 63 on the manner of refers to any unpaid subscription and not to any
transferring shares, thus the heirs are not indebtedness which a subscriber may owe the
automatically registered shareholders of the corporation rising from any other transaction.
corporation.
LIABILITY TO THE CORPORATION
Yu v. Yukayguan (2009): Stockholder may FOR INTEREST ON UNPAID
commence a derivative suit for
mismanagement, waste or dissipation of
SUBSCRIPTION IF SO REQUIRED BY
corporate assets because of a special injury to THE BY-LAWS [SEC. 66]
him for which he is otherwise without redress. In General Rule: Subscribers for stock are NOT
effect, the suit is an action for specific liable to pay interest on his unpaid subscription
performance of an obligation owed by the
corporation to the stockholders to assist its right Exception: If so required in the by-laws at the
of action when the corporation is put on default rate fixed in the by-laws. If no rate is fixed in the
by the wrongful refusal of the directors or by-laws, such rate shall be deemed to be the
management to make suitable measures for its legal rate [Sec. 66]
protection.
Notes:
Transfer for consideration of treasury shares is
Bitong v. CA (1998): a sale (or disposition) by the corporation (not
The power to sue and be sued in any court by a subscription). A transfer of previously issued
corporation even as a stockholder is lodged in shares by a stockholder to a third person is a
the BOD that exercises its corporate powers and sale (or disposition). Transfer of unissued
not in the president or officer thereof. But shares is subscription.
where corporate directors are guilty of a breach
Shareholders are not creditors of the
of trust, not of mere error of judgment or abuse
corporation with respect to their
of discretion, and intra-corporate remedy is
shareholdings thereto and the principle of
futile or useless, a SH may institute a derivative
compensation or set-off has no application.
suit in behalf of himself and other stockholders
Subscription contract is NOT required to be in
and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly writing.
upon the corporation and indirectly upon the
stockholders. LIABILITY FOR WATERED STOCKS
[SEC. 65]
Jurisdiction over derivative suits lies with the
RTC [Sec. 5.2, Securities Regulation Code] DEFINITION
These are shares issued as fully paid when in
OBLIGATION OF A truth no consideration is paid, or the
consideration received is known to be less than
STOCKHOLDER the par value or issued value of the shares. (Sec.
65)
LIABILITY TO THE CORPORATION
FOR UNPAID SUBSCRIPTION [SEC. 67] These include the following:
A subscription contract is unconditional (i.e., Issued without consideration (bonus share)
obligation to pay is not be subject to any
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Issued as fully paid when the corporation has LIABILITY FOR ASSUMING TO ACT AS
received less sum of money than its par or A CORPORATION KNOWING IT TO BE
issued value (discounted share) WITHOUT AUTHORITY
Issued for consideration other than actual cash
All persons who assume to act as a
(i.e., property or services), the fair valuation of corporation knowing it to be without authority
which is less than its par or issued value
to do so shall be liable as general partners for
Issue stock dividend when there are no all debts, liabilities and damages incurred or
sufficient retained earnings or surplus profit to arising as a result thereof.
justify it. When any such ostensible corporation is sued
on any transaction entered or on any tort
Note: Subsequent increase in the value of the
committed by it as a corporation, it shall not
property used in paying the stock does not do
be allowed to use as a defense its lack of
away with the watered stocks. Subsequent
corporate personality.
increase in the value of the property used in
One who assumes an obligation to an
paying the stock does not cure the defect in
ostensible corporation cannot resist
issuance. The existence of watered stocks is
performance thereof on the ground that there
determined at the time of issuance of the stock.
was in fact no corporation [Sec. 21].
LIABILITY OF DIRECTORS OR OFFICERS
Any director or officer of a corporation MEETINGS
consenting to the issuance of watered stocks or General Rule: Stockholders or members
who, having knowledge thereof, does not approval is expressed in a meeting duly called
forthwith express his objection in writing and file and held for the purpose.
the same with the corporate secretary shall be
SOLIDARILY liable with the stockholder Exception: In case of amendment of AOI,
concerned to the corporation and its creditors approval may be expressed by referendum or
for the difference in value [Sec. 65]. written assent of the stockholders or members
[Sec. 16]
LIABILITY FOR DIVIDENDS
UNLAWFULLY PAID Who May Attend and Vote?
When a director, trustee or officer attempts to Stockholders, either in person or by proxy
acquire or acquires, in violation of his duty, any Pledgors or mortgagors [Sec. 55]
interest adverse to the corporation in respect of Pledgee or mortgagee, IF expressly given such
any matter which has been reposed in him in right by the pledgor or mortgagor in writing
confidence, as to which equity imposes a which is recorded on the corporate books [Sec.
disability upon him to deal in his own behalf, he 55]
shall be liable as a trustee for the corporation Executors, administrators, receivers, and other
and must account for the profits which legal representatives duly appointed by the
otherwise would have accrued to the court, without need of any written proxy [Sec.
corporation [Sec. 31]. 55]
ALL joint owners of stocks, or any one of them
Violations of any of the provisions of the with the consent of ALL the co-owners,
Corporation Code not otherwise specifically unless there is a written proxy, signed by all
penalized therein shall be punished by a fine of the co-owners [Sec. 56]
not less than one thousand (P1,000.00) pesos Any one of the joint owners of shares owned in
but not more than ten thousand (P10,000.00) an "and/or" capacity or a proxy thereof [Sec.
pesos or by imprisonment for not less than 56]
thirty (30) days but not more than five (5) years,
or both, in the discretion of the court [Sec. 144].
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proceeds to that extent when distributed the same with the corporate secretary shall be
according to law and equity, but its holder is not solidarily liable with the stockholder concerned
the owner of any part of the capital of the to the corporation and its creditors for the
corporation. Nor is the shareholder entitled to difference in value [Sec. 65].
the possession of any definite portion of its
property or assets. The stockholder is not a co- TRUST FUND DOCTRINE FOR LIABILITY FOR
owner or tenant in common of the corporate WATERED STOCKS
property. Where the corporation issues watered stock
and thereby assumes an ostensible
SUBSCRIPTION AGREEMENTS (SEE capitalization in excess of its real assets, the
ABOVE) transaction necessarily involves the
misleading of subsequent creditors, and
CONSIDERATION FOR SHARES OF whether done with that purpose actually in
mind or not, is at least a constructive fraud
STOCK (SEE ABOVE) upon creditors. Hence, it is held that recovery
may be had by a creditor in such case, even
WATERED STOCK though the corporation itself has no cause of
DEFINITION action against the stockholders. Some of the
These are shares issued as fully paid when in earlier decisions put the right of recovery in
truth no consideration is paid in any form, or the such a case upon the so-called trust fund
consideration received is known to be less than doctrine. In any view of the matter, however,
the par value or issued value of the shares. [Sec. the creditors right of action to compel the
65] making good of the representation as to the
corporations capital is based on fraud, and
These include the following: the trust fund doctrine is only another way of
Issued without consideration (bonus share) expressing the same underlying idea. [De
Issued as fully paid when the corporation has Leon]
received less sum of money than its par or Despite the view of foreign authors that the
issued value (discounted share) fraud theory is the prevailing view, it would
Issued for consideration other than actual seem that in the Philippine jurisdiction, the
cash (i.e., property or services), the fair trust fund doctrine on watered stock prevails.
valuation of which is less than its par or issued
value Philippine Trust Corp. v. Rivera (1923): It is
Issue stock dividend when there are no established doctrine that subscription to the
sufficient retained earnings or surplus profit to capital of a corporation constitute a fund to
justify it. which creditors have a right to look for
satisfaction of their claims and that the
Note: Subsequent increase in the value of the assignee in insolvency can maintain an action
property used in paying the stock does not do upon any unpaid stock subscription in order to
away with the watered stocks. Subsequent realize assets for the payment of its debts (citing
increase in the value of the property used in Velasco v. Poizat, 1918). A corporation has no
paying the stock does not cure the defect in power to release an original subscriber to its
issuance. The existence of watered stocks is capital stock from the obligation of paying for
determined at the time of issuance of the stock. his shares, without a valuable consideration for
such release; and as against creditors a
LIABILITY OF DIRECTORS FOR WATERED reduction of the capital stock can take place
STOCKS only in the manner and under the conditions
Any director or officer of a corporation prescribed by the statute or the charter or the
consenting to the issuance of watered stocks or articles of incorporation. Moreover, strict
who, having knowledge thereof, does not compliance with the statutory regulations is
forthwith express his objection in writing and file necessary.
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AOI must state the fact that the corporation Redemption cannot be made if such
issues no-par shares and the number of redemption will result in insolvency or
shares. inability of the corporation to meet its
Banks, insurance companies, trust companies, obligations [SEC Opinion, 24 Aug 1987].
building and loan associations, and public
utilities cannot issue no-par value shares [Sec. Note: Redeemable shares reacquired shall be
6]. considered retired and no longer issuable,
The issued price may be fixed in the AOI, or by unless otherwise provided in the Articles of the
the BOD pursuant to authority conferred upon redeeming corporation [SEC Rules Governing
it by the AOI, or, in the absence thereof, by Redeemable and Treasury Shares, 26 April 1982].
majority vote of the outstanding shares in a
meeting called for the purpose [Sec. 62]. TREASURY SHARES [SEC. 9]
These are shares which have been issued and
FOUNDERS SHARES [SEC. 7] fully paid for, but subsequently re-acquired by
These are shares, classified as such in the AOI, the issuing corporation by purchase,
which are given certain rights and privileges redemption, donation or through some other
not enjoyed by the owners of other stocks. lawful means. Such shares may again be
Where exclusive right to vote and be voted for disposed of for a reasonable price fixed by the
in the election of directors is granted, such BOD.
right must be for a limited period not to
exceed 5 years subject to approval by SEC. CIR v. Manning (1975) cited in San Miguel
The 5 year period shall commence from date Corporation v. Sandiganbayan (2000): Treasury
of approval by SEC. shares are issued shares, but being in the
treasury, do not have the status of outstanding
REDEEMABLE SHARES [SEC. 8] shares. Consequently, although a treasury
These are shares which permit the issuing share, not retired by reacquisition, may be re-
corporation to redeem or purchase its shares. issued or resold, such share, as long as it is held
by the corporation as a treasury share,
Limitations: participates neither in the dividends, because
Redeemable shares may be issued only when dividends cannot be declared by the corporation
expressly provided for in the AOI [Sec. 8]. to itself nor in the meetings of the corporation
The terms and conditions affecting said as voting stock, for otherwise equal distribution
shares must be stated both in the AOI and in of voting powers among stockholders will be
the certificate of stock [Sec. 8]. effectively lost and the directors will be able to
Redeemable shares may be deprived of voting perpetuate their control of the corporation,
rights in the AOI. though it still represents a paid for interest in
The corporation is required to maintain a the property of the corporation.
sinking fund to answer for redemption price if
the corporation is required to redeem. Note: Delinquent stocks, which are stocks that
The redeemable shares are deemed retired have not been fully paid, may become treasury
upon redemption unless otherwise provided in stocks upon bid of the corporation in absence of
the AOI (i.e., if the AOI allows for reissuance of other bidders [Sec.68].
such shares).
CONVERTIBLE SHARES
Republic Planters Banks v. Agana (1997): URE A type of preferred stock that the holder can
is NOT necessary before shares can be exchange for a predetermined number of
redeemed but there must be sufficient assets common shares at a specified time
to pay the creditors and to answer for
operations. NON-VOTING SHARES [SEC. 6]
General Rule: Non-Voting Shares are not
entitled to vote.
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Valid as to corporation when the transfer is Republic v. Estate of Hans Menzi (2005): The
recorded in the books of the corporation so as Corporation Code acknowledges that the
to show the names of the parties to the delivery of a duly indorsed stock certificate is
transfer and the number of shares transferred sufficient to transfer ownership of shares of
(Sec. 43, Securities Regulation Code). stock in stock corporations. Such mode of
transfer is valid between the parties. In order to
NEGOTIABILITY bind third persons, however, the transfer must
be recorded in the books of the
Theory of Quasi-Negotiability corporation. Clearly then, the absence of a deed
A stock certificate is regarded as quasi- of assignment is not a fatal flaw which renders
negotiable only in the sense that it may be the transfer invalid.
transferred by endorsement, coupled with
delivery.
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Requisites for a valid transfer per Sec. 63: the alleged transferee. On the other hand, a
(a) Between the parties: person who has purchased stock, and who
(i) Delivery desires to be recognized as a stockholder for the
(ii) Indorsement purpose of voting, must secure such a standing
(b) To be valid as to third persons: by having the transfer recorded on the
(i) Recorded in the books of the corporation corporate books. Until the transfer is registered,
the transferee is not a stockholder but an
Rural Bank of Lipa City v. CA (2001): The outsider.
execution of a deed of sale does not necessarily
make the transfer effective. The delivery of the ISSUANCE
stock certificate duly indorsed by the owner is
the operative act that transfers the shares. The FULL PAYMENT
absence of delivery is a fatal defect which is not General Rule: No certificate of stock shall be
cured by mere execution of a deed of issued to a subscriber until the full amount of
assignment. his subscription together with interest and
expenses (in case of delinquent shares), if any is
Ponce v. Alsons Cement Corp. (2002): The stock due, has been paid [Sec. 64]
and transfer book is the basis for ascertaining
the persons entitled to the rights and subject to Exception:
the liabilities of a stockholder. Where a Baltazar v. Lingayen Gulf Electric Power
transferee is not yet recognized as a Company (1965): Where it was the practice of
stockholder, the corporation is under no specific the corporation since its inception to issue
legal duty to issue stock certificates in the certificates of stock to its individual SHs for
transferees name. unpaid shares of stock and to give full voting
power to shares fully paid.
Citing Hager v. Bryan (1911): A mandamus should
not issue to compel the secretary of a PAYMENT PRO RATA
corporation to make a transfer of the stock on Nava Peers Mktg. Corp. and Fua Cun v. Summers
the books of the company, unless it affirmatively (1923):The entire subscription must be paid first
appears that he has failed or refused so to do, before the certificates of stock can be issued.
upon the demand either of the person in whose Partial payments are to be applied pro rata to
name the stock is registered, or of some person each share of stock subscribed.
holding a power of attorney for that purpose
from the registered owner of the stock. LOST OR DESTROYED CERTIFICATES
Batangas Laguna Tayabas Bus Co. v. Bitangas Procedure for re-issuance in case of loss, stolen
(2001): A transfer of shares is not valid unless or destroyed certificates:
recorded in the books of the corporation. The Registered owner to file an affidavit of loss
purpose of registration is two-fold: (a) to enable with the corporation.
the transferee to exercise all the rights of a Publication of notice of loss in a newspaper of
stockholder, including the right to vote and to general circulation published in the place
be voted for, and (b) to inform the corporation of where the corporation has its principal office,
any change in share ownership so that it can once a week for 3 consecutive weeks at the
ascertain the persons entitled to the rights and expense of the owner of the certificate of stock
subject to the liabilities of a stockholder. Cancellation of the certificate in the books of
the corporation and issuance of new
Until challenged in a proper proceeding, a certificates, after the expiration of 1 year from
stockholder of record has a right to participate the date of the last publication and there is no
in any meeting; his vote can be properly contest. The right to make such contest shall
counted to determine whether a stockholders
resolution was approved, despite the claim of
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be barred after the expiration of the one-year SALE OF PARTIALLY PAID SHARES
period. Under Section 63 of the Corporation Code, no
Issuance of new certificates before 1 year shares of stock against which the corporation
period if the registered owner files a bond and holds any unpaid claim shall be transferable in
there is no pending contest regarding the the books of the corporation. Therefore, a
ownership of said certificates. corporation may refuse to acknowledge and
register a sale or assignment of shares which
Note: Except in cases of fraud, bad faith, or are not fully paid, and may continue to hold the
negligence on the part of the corporation and its original subscriber liable on the payment of the
officers, no action may be brought against the subscription.
corporation which shall have issued certificates
of stock in lieu of those lost, stolen or destroyed However, in China Banking Corp. v. CA (1997),
pursuant to the above procedure. the court said that the above principle in Section
63 cannot be utilized by the corporation to
STOCK AND TRANSFER BOOK refuse to recognize ownership over pledged
shares purchased at public auction. The term
CONTENTS unpaid claims refers to any unpaid claims
arising from unpaid subscription, and not to any
a record of all stocks in the names of the
indebtedness which a subscriber or stockholder
stockholders alphabetically arranged;
may owe the corporation arising from any other
the installments paid and unpaid on all stock
transactions. Obligations arising from unpaid
for which subscription has been made, and
monthly dues do not fall within the coverage of
the date of payment of any installment;
Section 63.
a statement of every alienation, sale or
transfer of stock made, the date thereof, and
by and to whom made; and SALE OF A PORTION OF SHARES
such other entries as the by-laws may NOT FULLY PAID
prescribe. The SEC has opined on several occasions that a
stockholder who has not paid the full amount of
WHO MAY MAKE VALID ENTRIES his subscription cannot transfer part of his
An SEC-licensed stock transfer agent; or subscription in view of the indivisible nature of a
The Corporate Secretary of the stock subscription contract. The reason behind the
corporation provided all rules and regulations principle of disallowing transfer of not fully paid
imposed on stock transfer agents shall be subscription to several transferee is that it
applicable, except payment of license fee. would be difficult to determine whether or not
the partial payments made should be applied
as full payment for the corresponding number
DISPOSITION AND of shares which can only be covered by such
ENCUMBRANCE OF SHARES payment or as proportional payment to each
and all of the entire number of subscribed
ALLOWABLE RESTRICTIONS ON THE shares, and it would be difficult to determine
SALE OF SHARES the unpaid balance to be assumed by each
transferee. [Villanueva]
General Rule: Shares of stock so issued are
personal property and may be transferred [Sec. SALE OF ALL OF SHARES NOT FULLY
63]. (FREE TRANSFERABILITY OF SHARES) PAID
On the other hand, the SEC has opined that the
Exception: In CLOSE corporations, restrictions entire subscription, although not yet fully paid,
on the right to transfer shares may be provided may be transferred to a single transferee, who
in the AOI, by-laws and certificates [Sec. 98]. as a result of the transfer must assume the
unpaid balance. It is necessary, however, to
secure the consent of the corporation since the
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published in the place where the principal office no newspaper in the city or municipality of the
of said corporation is located. If no newspaper principal office, posting for 3 consecutive
is published in such place, then in a newspaper weeks in 3 public places is sufficient.
of general circulation in the Philippines. After the expiration of the time to file
objections, a hearing shall be conducted upon
The resolution to dissolve must be approved by prior 5 day notice to hear the objections.
the majority of the directors/trustees and Judgment shall be rendered dissolving the
approved by the stockholders representing at corporation and directing the disposition of
least 2/3 of the OCS or 2/3 of members. assets. The judgment may include
Non-voting shares are entitled to vote in appointment of a receiver.
this matter [Sec. 6. Par 6(8)] As long as 2/3 vote is obtained, no
member/ stockholder can prevent such
A copy of the resolution shall be certified by the dissolution unless the majority stockholders
majority of the directors or trustees and acted in bad faith. The latter may be held
countersigned by the secretary. liable for damages. (Campos)
The signed and countersigned copy will be filed BY SHORTENING OF CORPORATE TERM
with the SEC and the latter will issue the A voluntary dissolution may be effected by
certificate of dissolution. amending the AOI. Upon approval of the
amended AOI or the expiration of the shortened
Note: term, as the case may be, the corporation shall
Daguhoy Enterprises v. Ponce (1954): Thus, be deemed dissolved without any further
except for the expiration of its term, no proceedings.
dissolution can be effective without some act of A publication of notice of dissolution is required
the State. and cannot be dispensed with by alleging that it
was not required in Section 120 and that no
WHERE CREDITORS ARE AFFECTED [SEC. creditors will be prejudiced by its dissolution.
119] [SEC Opinion, August 30, 1988]
A petition shall be signed by a majority of its
board of directors or trustees or other officers SEC Opinion No. 06-20, March 13, 2006:
having management of its affairs. If the shortened term expires before the SEC
The petition must be verified by its president, approval- the corporation will be dissolved
or secretary or one of its director or trustees. upon the SEC approval
Approval of the stockholders representing at If the shortened term expires after the SEC
least 2/3 of the OCS or 2/3 of members in a approval - the corporation will be dissolved
meeting called for that purpose. upon the expiration of the shortened term
Filing of a petition with the SEC signed by If SEC fails to act within 6 months from filing
majority of directors or trustees or other of the amended AOI and shortened term
officers having the management of its affairs expires after the 6-month period - the
verified by the President or Secretary or corporation will be dissolved upon the
Director. Claims and demands must be expiration of the shortened term
stated in the petition. If SEC fails to act within 6 months from filing
If the petition is sufficient in form and of the amended AOI and shortened term
substance, the SEC shall issue an order fixing expires before the 6-month period- the
the date on or before which objections to the corporation will be dissolved at the end of the
petition may be filed. Such date shall not be 6-month period. [Campos]
less than 30 days nor more than 60 days after
the entry of the order.
A copy of the order shall be published at least
once a week for 3 consecutive weeks in a
newspaper of general circulation, or if there is
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General Rule: Free transferability of shares - of the transferring stockholder with such
Shares of stock so issued are personal property reasonable terms, conditions or period stated
and may be transferred therein. After expiration of said period and
upon failure of the existing stockholders or
Exception: the corporation to purchase said shares, the
In close corporations: Considering the special transferring stockholder may sell his shares to
circumstances attending a close corporation any third person.
(e.g. formed by persons who know each other
well, thus they would want to choose the Presumptions [Sec. 99]:
persons who will be allowed in their group), it is If the stock certificate CONSPICUOUSLY
justifiable and even imperative for its shows the restriction, the purchaser or
stockholders to protect themselves from future transferee is CONCLUSIVELY presumed to
conflicts by placing restrictions on the right of have notice of the restriction, provided this
each one of them to transfer his shares to an appears in the AOI.
outsider. Where a conclusive presumption of notice
arises, the corporation may, at its option,
Restriction on the transfer must NOT be more refuse to register the transfer, unless
onerous than granting the existing SH or - all the stockholders have consented to the
corporation the option to purchase the shares transfer, or
(Right of First Refusal). - the AOI has been properly amended to
remove the restriction.
The stocks cannot be listed in the stock If it appears in the certificate, but NOT
exchange nor be publicly offered. CONSPICUOUSLY, then although he may be
presumed to have notice of the restriction, he
CHARACTERISTICS OF A CLOSE can prove the contrary.
CORPORATION
The stockholders themselves can directly ISSUANCE OR TRANSFER OF STOCK
manage the corporation and perform the IN BREACH OF QUALIFYING
functions of directors without need of election CONDITIONS
[Sec. 97]:
If stock of a close corporation is issued or
When they manage, stockholders are liable as
transferred to any person who is not entitled
directors;
under any provision of the articles of
There is no need to call a meeting to elect incorporation to be a holder of record of its
directors; stock, and if the certificate for such stock
The stockholders active in the management of conspicuously shows the qualifications of the
the close corporation are personally liable for persons entitled to be holders of record
corporate torts unless the corporation has thereof, such person is conclusively presumed
obtained reasonably adequate liability to have notice of the fact of his ineligibility to
insurance [Sec. 100(5)]. be a stockholder.
If the articles of incorporation of a close
VALIDITY OF RESTRICTIONS ON corporation states the number of persons, not
TRANSFER OF SHARES exceeding twenty (20), who are entitled to be
Validity of Restrictions [Sec. 98] holders of record of its stock, and if the
Restrictions must appear in the articles of certificate for such stock conspicuously states
incorporation and in the by-laws as well as in such number, and if the issuance or transfer of
the certificate of stock; otherwise, the same stock to any person would cause the stock to
shall not be binding on any purchaser thereof be held by more than such number of
in good faith. persons, the person to whom such stock is
Restrictions shall not be more onerous than issued or transferred is conclusively presumed
granting the existing stockholders or the to have notice of this fact.
corporation the option to purchase the shares
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If a stock certificate of any close corporation The directors are accustomed to take informal
conspicuously shows a restriction on transfer action with the express or implied
of stock of the corporation, the transferee of acquiescence of all the stockholders; or
the stock is conclusively presumed to have All the directors have express or implied
notice of the fact that he has acquired stock in knowledge of the action in question and none
violation of the restriction, if such acquisition of them makes prompt objection thereto in
violates the restriction. writing [Sec. 101]
Whenever any person to whom stock of a
close corporation has been issued or Manuel R. Dulay Enterprises v. CA (1993):
transferred has, or is conclusively presumed In a close corporation, a board resolution
under this section to have, notice either (a) authorizing the sale or mortgage of the
that he is a person not eligible to be a holder subject property is not necessary to bind the
of stock of the corporation, or (b) that transfer corporation for the action of its president. At
of stock to him would cause the stock of the any rate, corporate action taken at a board
corporation to be held by more than the meeting without proper call or notice in a
number of persons permitted by its articles of close corporation is deemed ratified by the
incorporation to hold stock of the corporation, absent director unless the latter promptly files
or (c) that the transfer of stock is in violation of his written objection with the secretary of the
a restriction on transfer of stock, the corporation after having knowledge of the
corporation may, at its option, refuse to meeting.
register the transfer of stock in the name of the Dulay's protestations of complete innocence
transferee. to the effect that he never participated nor
The provisions of subsection (4) shall not be was even aware of any meeting or resolution
applicable if the transfer of stock, though authorizing the mortgage or sale of the
contrary to subsections (1), (2) of (3), has been subject premises is difficult to believe. On the
consented to by all the stockholders of the contrary, he is very much privy to the
close corporation, or if the close corporation transactions involved. To begin with, he is an
has amended its articles of incorporation in incorporator and one of the board of directors
accordance with this Title. designated at the time of the organization of
The term "transfer", as used in this section, is the corporation. In ordinary parlance, the said
not limited to a transfer for value. entity is loosely referred to as a "family
The provisions of this section shall not impair corporation."
any right which the transferee may have to Here, the sale of real property was contracted
rescind the transfer or to recover under any by the president of a close corporation with
applicable warranty, express or implied [Sec. the knowledge and acquiescence of its board
99] of directors.
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AMENDMENT OF ARTICLES OF
INCORPORATION
Amendment to the AOI which seeks to:
delete or remove any provision required to be
contained in the AOI of Close Corporations
(under the Title on Close Corporations); or
to reduce a quorum or voting requirement
stated in said AOI
DEADLOCKS
Requisites
(1) The directors or stockholders are so divided
respecting the management of the
corporation's business and affairs
(2) The votes required for any corporate action
cannot be obtained that the business and
affairs of the corporation can no longer be
conducted to the advantage of the
stockholders generally
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two-thirds of their votes for the approval of such principle, however, does not prevent a
an amendment. So how will this requirement corporation from acting in another State or
apply to a corporation sole that has technically country with the latters express or implied
but one member (the head of the religious consent. This is the consent doctrine which is
organization) who holds in his hands its broad provided in Sections 125 and 126. But every
corporate powers over the properties, rights, power which a corporation exercises as such in
and interests of his religious organization? another State depends for its validity upon the
laws of the sovereignty in which it is exercised. A
Although a non-stock corporation has a corporation can exercise none of the functions
personality that is distinct from those of its and privileges conferred by its charter in
members who established it, its AOI cannot be another State or country except by the comity
amended solely through the action of its and consent of such State or country. (De Leon)
BOT. The amendment needs the concurrence
of at least two-thirds of its membership. If such DOCTRINE OF DOING BUSINESS (RELATE
approval mechanism is made to operate in a TO DEFINITION UNDER THE FOREIGN
corporation sole, its one member in whom all the INVESTMENTS ACT, R.A. NO. 7042)
powers of the corporation technically belongs,
needs to get the concurrence of two-thirds of its Tests of Doing Business in the Philippines
membership. The one member is but a trustee (Asked in 98 and 02)
of its membership. Twin Characterization Test - Mentholatum v.
Mangaliman (1941)
There is no point to dissolving the corporation Under the Continuity Test, doing business
sole of one member to enable the corporation implies a continuity of commercial dealings
aggregate to emerge from it. The one member, and arrangements, or performance of acts
with the concurrence of two-thirds of the normally incidental to the purpose and object
membership of the organization for whom he of the organization.
acts as trustee, can self-will the Under the Substance Test, a foreign
amendment. He can, with membership corporation is doing business in the country if
concurrence, increase the technical number of it is continuing the body or substance of the
the members of the corporation from sole or enterprise of business for which it was
one to the greater number authorized by its organized
amended articles.
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ARTICLES OF MERGER OR
DEFINITION AND CONCEPT CONSOLIDATION
Merger a corporation absorbs the other and Each of the constituent corporation shall
remains in existence while the others are execute Articles of Merger or Consolidation
dissolved. [Sec.76] signed by the president/vice-president, and
One of the constituent corporations remains certified by the secretary/assistant secretary
as an existing juridical person, whereas the setting forth:
other corporation shall cease to exist. Merger Plan of merger or consolidation;
is the disappearance of one of the
For stock corporation, the number of shares
corporations [generally by amending the
outstanding; for non-stock, the number of
articles of incorporation and shortening its
members;
term of existence (Sec.40)] with the other
As to each corporation, number of shares or
corporation acquiring all the assets, rights of
members voting for and against such plan
action, and assuming all the liabilities of the
disappearing corporation. respectively.
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fide debt, a security pledged in good faith delivered in exchange, if sold at the
as security for such debt. conversion price, would at the time of
Rationale: This is not a voluntary sale such conversion fall within the class of
contemplated by the SRC. securities entitled to registration under
(c) An isolated transaction in which any this Code. Upon such conversion the par
security is sold, offered for sale, value of the security surrendered in such
subscription or delivery by the owner exchange shall be deemed the price at
thereof, or by his representative for the which the securities issued and delivered
owners account, such sale or offer for in such exchange are sold.
sale, subscription or delivery not being Rationale: The SEC has already
made in the course of repeated and registered the convertible security and
successive transaction of a like character presumably also passed upon the
by such owner, or on his account by such security to be issued upon conversion.
representative and such owner or (h) Brokers transaction, executed upon
representative not being the underwriter customers orders, on any registered
of such security. Exchange or other trading market.
Rationale: Isolated and not meant to be Rationale: If brokers transactions are
an ongoing public offering. registered each time, the transactions on
(d) The distribution by a corporation actively the exchange will be unduly hampered.
engaged in the business authorized by its Besides, the brokers are subject to a
articles of incorporation, of securities to its code of conduct protective of the
stockholders or other security holders as a interest of the investors.
stock dividend or other distribution out of (i) Subscriptions for shares of the capitals
surplus. stocks of a corporation prior to the
Rationale: The offerees are not the incorporation thereof or in pursuance of
public but shareholders already familiar an increase in its authorized capital stocks
with their company. under the Corporation Code, when no
(e) The sale of capital stock of a corporation expense is incurred, or no commission,
to its own stockholders exclusively, where compensation or remuneration is paid or
no commission or other remuneration is given in connection with the sale or
paid or given directly or indirectly in disposition of such securities, and only
connection with the sale of such capital when the purpose for soliciting, giving or
stock. taking of such subscription is to comply
Rationale: Same as (d) above. with the requirements of such law as to
(f) The issuance of bonds or notes secured by the percentage of the capital stock of a
mortgage upon real estate or tangible corporation which should be subscribed
personal property, when the entire before it can be registered and duly
mortgage together with all the bonds or incorporated, or its authorized capital
notes secured thereby are sold to a single increased.
purchaser at a single sale. Rationale: This is not a public offering.
Rationale: This is not a public sale. Besides, the SEC is involved in the
(g) The issue and delivery of any security in subscription process, as a regulator.
exchange for any other security of the (j) The exchange of securities by the issuer
same issuer pursuant to a right of with the existing security holders
conversion entitling the holder of the exclusively, where no commission or other
security surrendered in exchange to make remuneration is paid or given directly or
such conversion: Provided, That the indirectly for soliciting such exchange.
security so surrendered has been Rationale: This is not a public offering.
registered under this Code or was, when (k) The sale of securities by an issuer to fewer
sold, exempt from the provision of this than twenty (20) persons in the
Code, and that the security issued and
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Philippines during any twelve-month securities that have to be registered with the
period. SEC before they can be distributed and sold. An
Rationale: This is not a public offering investment contract is a contract, transaction, or
but a private placement. scheme where a person invests his money in a
(l) The sale of securities to any number of the common enterprise and is led to expect profits
following qualified buyers: primarily from the efforts of others.
(i) Bank;
(ii) Registered investment house; Apart from the definition which the IRR
(iii) Insurance company; provides, Philippine jurisprudence has so far not
(iv) Pension fund or retirement plan done more to add to the same. Of course, the
maintained by the Government of the United States Supreme Court, grappling with
Philippines or any political subdivision the problem, has on several occasions discussed
thereof or managed by a bank or other the nature of investment contracts. That courts
persons authorized by the Bangko rulings, while not binding in the Philippines,
Sentral to engage in trust functions; enjoy some degree of persuasiveness insofar as
(v) Investment company or; they are logical and consistent with the
(vi) Such other person as the Commission countrys best interests.
may by rule determine as qualified
buyers, on the basis of such factors as The US SC held in Securities and Exchange
financial sophistication, net worth, Commission v. W.J. Howey Co. (1946) that, for an
knowledge, and experience in financial investment contract to exist, the following
and business matters, or amount of elements, referred to as the HOWEY TEST must
assets under management. [Sec. 10.1] concur:
Rationale: These are sophisticated (1) a contract, transaction, or scheme;
investors that could fend for themselves. (2) an investment of money;
(m) Any transaction with respect to which the (3) investment is made in a common enterprise;
SEC finds that registration is not (4) expectation of profits; and
necessary in the public interest and (5) profits arising primarily from the efforts of
protection of investors such as by the others.
reason of the small amount involved or Thus, to sustain the SEC position in this case,
the limited character of the public offering PCIs scheme or contract with its buyers must
[Sec. 10.2] have all these elements.
NOTE: Application for exemption under Section Power Homes Unlimited Corporation v. Sec and
10 must be accompanied by: Manero (2008):
(1) A notice identifying the exemption relied An investment contract is defined in the
upon; Amended IRR of R.A. No. 8799 (SRC) as a
(2) Payment of fee equivalent to 1/10 of 1% of contract, transaction or scheme (collectively
the maximum value aggregate price or contract) whereby a person invests his money
issued value of the securities. in a common enterprise and is led to expect
profits primarily from the efforts of others.
Sec v. Prosperity.com, Inc. (2012):
[This case involves the application of Although the proponents must establish all four
the Howey test in order to determine if a elements, the US Supreme Court stressed that
particular transaction is an investment the Howey Test embodies a flexible rather than
contract.] The sole issue is whether or not a static principle, one that is capable of
Prosperity.com Inc.s (PCI) scheme constitutes adaptation to meet the countless and variable
an investment contract that requires schemes devised by those who seek the use of
registration under the SRC. the money of others on the promise of profits.
The SRC treats investment contracts as After Howey came the 1973 US case of SEC v.
Glenn W. Turner Enterprises, Inc. et al. In this
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case, the 9th Circuit of the US Court of Appeals Such register and all documents or information
ruled that the element that profits must come with respect to the securities registered therein
solely from the efforts of others should not be shall be open to public inspection at reasonable
given a strict interpretation. It held that a literal hours on business days.
reading of the requirement solely would lead
to unrealistic results. It reasoned out that its Shall include the effect of the securities
flexible reading is in accord with the statutory issue on ownership, on the mix of
policy of affording broad protection to the ownership, especially foreign and local
public. Our RA 8799 (SRC) appears to follow this ownership [Sec. 12.3]
flexible concept for it defines an investment Shall be signed by the issuers executive
contract as a contract, transaction or scheme officer, its principal operating officer, its
whereby a person invests his money in a principal financial officer, its comptroller,
common enterprise and is led to expect profits its principal accounting officer, its
not solely but primarily from the efforts of corporate secretary, or persons performing
others. similar functions accompanied by a duly
verified resolution of the board of directors
Thus, to be a security subject to regulation by of the issuer corporation [Sec. 12.4]
the SEC, an investment contract in our Shall be accompanied by:
jurisdiction must be proved to be: (1) an (a) Written consent of the expert named as
investment of money, (2) in a common having certified any part of the
enterprise, (3) with expectation of profits, registration statement or any document
(4) primarily from efforts of others. used in connection therewith; and
(b) Where the registration statement
includes shares to be sold by selling
Procedure for registration shareholders - a written certification by
such selling shareholders as to the
of securities accuracy of any part of the registration
statement contributed to by such
(1) Filing of a sworn registration statement with selling shareholders [Sec. 12.4].
the SEC [Sec. 12.1] (2) Payment to the SEC of a fee of not more than
Shall include any prospectus required or one-tenth (1/10) of one per centum (1%) of the
permitted to be delivered under maximum aggregate price at which such
Subsections 8.2, 8.3, and 8.4 [Sec. 12.1] securities are proposed to be offered [Sec.
12.5a]
(3) Publication of the notice of the filing of
Chapter III, Section 8. Requirement of registration statement. [Sec. 12.5b]
Registration of Securities The publication must be in two (2)
x x x newspapers of general circulation in the
8.2 The Commission may conditionally approve Philippines, once a week for two (2)
the registration statement under such terms as consecutive weeks, or in such other
it may deem necessary. manner as the Commission by the rule
shall prescribe [Sec. 12.5b]
8.3 The Commission may specify the terms and (4) Declaration by the SEC whether the
conditions under which any written registration statement is effective or rejected.
communication, including any summary
Declaration is made within 45 days from
prospectus, shall be deemed not to constitute
filing of the registration statement or on
an offer for sale under this Section.
such later date to which the issuer has
consented unless applicant has been
8.4. A record of the registration of securities
allowed to amend the registration
shall be kept in Register of Securities in which
statement under Sec. 14 [Sec. 12.6].
shall be recorded orders entered by the
Commission with respect to such securities.
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NOTE: Grounds for: (1) rejection/revocation of (5) Statement under oath by the issuer in all
registration statement and (2) refusal of prospectus that:
registration/revocation of securities thereunder: (a) registration requirements have been met
(a) The issuer: and
(i) Has been judicially declared (b) all information are true and correct as
insolvent; represented by the issuer or the one
(ii) Has violated any of the provision of making the statement.
this Code, the rules promulgated Statement under oath must be made upon
pursuant thereto, or any order of effectivity of the registration statement.
the Commission of which the issuer [Sec. 12.7]
has notice in connection with the
offering for which a registration
statement has been filed Prohibitions on fraud,
(iii) Has been or is engaged or is about
to engage in fraudulent
manipulation and insider
transactions;
(iv) Has made any false or misleading
trading
representation of material facts in
any prospectus concerning the MANIPULATION OF SECURITY
issuer or its securities; PRICES
(v) Has failed to comply with any
requirements that the Commission It shall be unlawful for any person acting for
may impose as a condition for himself or through a dealer or broker, directly or
registration of the security for which indirectly:
the registration statement has been (a) To create a false or misleading appearance
filed; or of active trading in any listed security traded
(b) The registration statement is on its face in an Exchange of any other trading market
incomplete or inaccurate in any ("Exchange"):
material respect or includes any untrue (i) By effecting any transaction in such
statements of a material fact required security which involves no change in the
to be stated therein or necessary to beneficial ownership thereof;
make the statement therein not (ii) By entering an order or orders for the
misleading; or purchase or sale of such security with
(c) The issuer, any officer, director or the knowledge that a simultaneous
controlling person performing similar order or orders of substantially the
functions, or any under writer has been same size, time and price, for the sale or
convicted, by a competent judicial or purchase of any such security, has or
administrative body, upon plea of guilty, will be entered by or for the same or
or otherwise, of an offense involving different parties; or
moral turpitude and /or fraud or is (iii) By performing similar act where there is
enjoined or restrained by the no change in beneficial ownership.
Commission or other competent or (b) To affect, alone or with others, securities or
administrative body for violations of transactions in securities that:
securities, commodities, and other (i) Raises their price to induce the
related laws [Sec. 13.1] purchase of a security, whether of the
(d) If any issuer shall refuse to permit an same or a different class of the same
examination to be made by the issuer or of controlling, controlled, or
Commission [Sec. 13.3] commonly controlled company by
others; or
NOTE: A registration statement may be (ii) Creates active trading to induce such a
withdrawn by the issuer only with the purchase or sale through manipulative
consent of the Commission [Sec. 13.6]. devices such as marking the close,
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Material non-public information means: person will likely buy or sell a security of
(a) It has not been generally disclosed to the the issuer while in possession of such
public and would likely affect the market information [Sec. 27.3]
price of the security after being disseminated
to the public and the lapse of a reasonable
time for the market to absorb the Protection of investors
information; or
(b) Would be considered by a reasonable person
important under the circumstances in TENDER OFFER RULE
determining his course of action whether to This protects the minority shareholders.
buy, sell or hold a security [Sec. 27.2] If a person or a group of persons (acting in
concert) intends and is in discussion with
It shall be unlawful for an insider: certain shareholders of a public company
(a) To sell or buy a security of the issuer, while (normally, the controlling shareholders) to
in possession of material information with acquire a substantial stake in such company
respect to the issuer or the security that is (now, the threshold is 35% of the outstanding
not generally available to the public, class of shares in a public company), the
unless: acquirer must make an offer to all the
(i) The insider proves that the information shareholders of the company to tender their
was not gained from such relationship; shares at the price being offered to the
or controlling shareholders.
(ii) If the other party selling to or buying o Before, the minority shareholders are left
from the insider (or his agent) is out; so, the acquirer only dealt with the
identified, the insider proves: controlling shareholders and disregarded
(1) That he disclosed the information to the minority.
the other party, or
(2) That he had reason to believe that When a tender offer has commenced or is about
the other party otherwise is also in to commence, It shall be unlawful for:
possession of the information [Sec. (a) Any person (except the tender offeror) who is
27.1] in possession of material nonpublic
information relating to such tender offer, to
NOTE: Presumption that purchase or sale is buy or sell the securities of the issuer that are
effected while in possession of material non- sought or to be sought by such tender offer
public information arises: if:
(1) If the purchase or sale is transacted after (i) Such person knows or has reason to
such information came into existence but believe that the information is nonpublic
prior to dissemination of such information and has been acquired directly or
to the public; and indirectly from the tender offeror, those
(2) The lapse of a reasonable time for market acting on its behalf, the issuer of the
to absorb such information. securities sought or to be sought by such
tender offer, or any insider of such issuer
Presumption may be rebutted by showing of (b) Any tender offeror, those acting on its behalf,
purchasers or sellers awareness of the the issuer of the securities sought or to be
material non-public information at the time sought by such tender offer, and any insider
of purchase or sale [Sec. 27.1] of such issuer to communicate material
nonpublic information relating to the tender
(b) To communicate material nonpublic offer to any other person where such
information about the issuer or the security communication is likely to result in a
to any person who, by virtue of the violation of (a) [Sec. 27.4].
communication, becomes an insider where
the insider communicating the information
knows or has reason to believe that such
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RULES ON PROXY
Cemco Holdings, Inc. v. National Life Insurance
Company of the Philippines, Inc. (2007): SOLICITATION
Tender offer is a publicly announced intention (1) Proxies shall be:
by a person acting alone or in concert with other (a) Issued in accordance with SEC rules and
persons to acquire equity securities of a public regulations; Proxy solicitations shall also
company. Stated differently, a tender offer is an be made in accordance with the said rules
offer by the acquiring person to stockholders of and regulations [Sec. 20.1]
a public company for them to tender their (b) In writing [Sec. 20.2]
shares therein on the terms specified in the (c) Signed by the stockholder or his duly
offer. Tender offer is in place to protect minority authorized representatives [Sec. 20.2]
shareholders against any scheme that dilutes (d) Filed before the scheduled meeting with
the share value of their investments. It gives the the corporate secretary [Sec. 20.2]
minority shareholders the chance to exit the (e) Valid only for the meeting for which it is
company under reasonable terms, giving them intended unless otherwise provided in the
the opportunity to sell their shares at the same proxy [Sec. 20.3]
price as those of the majority shareholders.
Note: No proxy shall be valid and effective
The coverage of the mandatory tender offer rule for a period longer than five (5) years at
covers not only direct acquisition but also one time [Sec. 20.3]
indirect acquisition or any type of acquisition.
[Case at bar: The indirect acquisition by CEMCO (2) A broker or dealer shall:
Holdings of 36% of UCC shares through the (a) Not give any proxy, consent or any
acquisition of the non-listed UCHC shares is authorization, in respect of any security
covered by the mandatory tender offer rule.] carried for the account of the customer, to
a person other than the customer, without
The legislative intent of Section 19 of the written authorization of such customer
Securities Regulation Code is to regulate [Sec. 20.4]
activities relating to acquisition of control of the (b) If he holds or acquires the proxy for at
listed company and for the purpose of least ten percent (10%) or such
protecting the minority stockholders of a listed percentage as the Commission may
corporation. Whatever may be the method by prescribe of the outstanding share of such
which control of a public company is obtained, issuer, submit a report identifying the
either through the direct purchase of its stocks or beneficial owner within ten days after
through an INDIRECT means, mandatory tender such acquisition, for its own account or
offer applies. customer, to the issuer of security, to the
exchange where the security is traded and
What is decisive is the determination of the to the Commission [Sec. 20.5]
power of control. The legislative intent behind
the tender offer rule makes clear that the type DISCLOSURE RULE
of activity intended to be regulated is the
Issuers, equity holders, and insiders are required
acquisition of control of the listed company
to disclose certain information to the SEC.
through the purchase of shares. Control may
[be] effected through a direct and indirect
acquisition of stock, and when this takes place, DISCLOSURE BY THE ISSUER
irrespective of the means, a tender offer must (1) To the SEC
occur. The bottom line of the law is to give the Every issuer shall file with the Commission:
shareholder of the listed company the (a) Annual Report within one hundred thirty-
opportunity to decide whether or not to sell in five (135) days, after the end of the issuers
connection with a transfer of control. fiscal year, or such other time as the
Commission may prescribe
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(b) Such other periodical reports for interim listed on an Exchange or with assets in excess of
fiscal periods and current reports on P50,000,000.00 and having 200 or more
significant developments of the issuer as holders, at least 200 of which are holding at
the Commission may prescribe as least 100 shares of a class of its equity
necessary to keep current information on securities.
the operation of the business and
financial condition of the issuer [Sec. 17.1] It is clear that a public company, as
contemplated by the SRC, is not limited to a
NOTE: Under this Section, issuer includes: company whose shares of stock are publicly
(a) An issuer which has sold a class of its listed; even companies like the Bank, whose
securities pursuant to a registration under shares are offered ONLY to a specific group of
section 12 hereof. people, are considered a public company,
o BUT the requirement shall be PROVIDED they meet the requirements
suspended for any fiscal year after the enumerated [under Sections 17.1 and 17.2 of the
year such registration became effective SRC and/or under the Amended IRR of the
if such issuer, as of the first day of any SRC].
such fiscal year, has less than one
hundred (100) holder of such class of (2) To the equity holders
securities or such other number as the An annual report shall be furnished by every
Commission shall prescribe and it issuer which has a class of equity securities
notifies the Commission of such; satisfying any of the requirements in Subsection
(b) An issuer with a class of securities listed 17.2 to each holder of such equity security (Sec.
for trading on an Exchange; and 17.5)
(c) An issuer with assets of at least Fifty
million pesos (50,000,000.00) or such DISCLOSURE BY EQUITY HOLDERS
other amount as the Commission shall Any person who acquires directly or indirectly
prescribe, and having two hundred (200) the beneficial ownership of more than five of per
or more holders each holding at least one centum (5%) of such class or in excess of such
hundred (100) share of a class of its equity lesser per centum as the Commission by rule
securities. may prescribe, shall, within ten (10) days after
o The obligation of such issuer to file such acquisition or such reasonable time as
report shall be terminated ninety (90) fixed by the Commission, submit to: (1) the
days after notification to the issuer of the securities; (2) to the Exchange
Commission by the issuer that the where the security is traded; and (3) to the
number of its holders holding at least Commission, the following information:
one hundred (100) shares is reduced to
less than one hundred (100) (Sec. 17.2) (a)The personal background, identity, residence,
and citizenship of, and the nature of such
Philippine Veterans Bank v. Callangan (2011): beneficial ownership by, such person and all
The ISSUE in this case is whether the Phil. other persons by whom or on whose behalf
Veterans Bank qualifies as a public company the purchases are effected; in the event the
under Section 17.2 of the Securities Regulation beneficial owner is a juridical person, the line
Code (SRC) in relation with Rule 3(1)(m) of the of business of the beneficial owner shall also
Amended Implementing Rules and Regulations be reported;
of the SRC, required to comply with the (b)If the purpose of the purchases or prospective
reportorial requirements set forth in Section 17.1 purchases is to acquire control of the
of the SRC. business of the issuer of the securities, any
plans or proposals which such persons may
Under Rule 3(1)(m) of the Amended have that will effect a major change in its
Implementing Rules and Regulations of the business or corporate structure;
SRC, a public company is defined as any (c) The number of shares of such security which
corporation with a class of equity securities are beneficially owned, and the number of
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(d) Auditor/auditing firm named as having (b) Offeror or seller of a security, whether or not
certified any financial statements used in exempted by the provisions of this Code, by
connection with the registration statement or means of a prospectus or other written or
prospectus; oral communication which includes an:
(e) One who, with his written consent filed with untrue statement of a material fact OR
the registration statement, has been named omits to state a material fact necessary in
as having prepared or certified any part of the order to make the statements, in the light
registration statement/any report or of the circumstances under which they
valuation which is used in connection with were made, not misleading (the purchaser
the registration statement; not knowing of such untruth or omission)
(f) Selling shareholder who contributed to and DEFENSE: No knowledge of untruth or
certified as to the accuracy of a portion of the omission, despite the exercise of reasonable
registration statement; care [Sec. 57.1].
(g) Underwriter with respect to such security
[Sec. 56.1] WHO MAY SUE?
Purchaser of the security may sue to recover:
WHO MAY SUE? (1) Consideration paid for such security with
Any person who acquires the security AND who interest thereon, LESS the amount of any
suffers damage income received thereon, upon the tender of
UNLESS it is proved that at the time of such such security; or
acquisition he knew of such untrue statement (2) For damages if he no longer owns the
or omission [Sec. 56.1] security [Sec. 57.1].
NOTE: When the security is acquired AFTER (2) LIABILITY OF MAKERS OF FALSE
the issuer has made generally available to its MISLEADING STATEMENTS
security holders an INCOME STATEMENT
covering a period of at least twelve (12)
WHO MAY BE LIABLE?
months beginning from the effective date of
Any person who shall make or cause to be made
the registration statement, the right of
any statement in any report, or document filed
recovery under Section 56 shall be
pursuant to this Code or any rule or regulation
conditioned on proof that such person
thereunder, which statement as at the time and
acquired the security RELYING UPON such
in the light of the circumstances under which it
untrue statement in the registration
was made false or misleading with respect to
statement or relying upon the registration
any material fact
statement AND NOT KNOWING of such
DEFENSE: Good faith and lack of knowledge of
income statement [Sec. 56.2].
the false and misleading statement [Sec. 57.2].
CIVIL LIABILITIES ARISING IN WHO MAY SUE?
CONNECTION WITH Purchaser or seller of security who purchased
or sold at a price which was affected by such
PROSPECTUS, statement, NOT KNOWING that such
COMMUNICATIONS AND statement was false or misleading, and
RELYING UPON such statement
REPORTS [SEC. 57] SUE FOR: Damages caused by such reliance
[Sec. 57.2]
(1) LIABILITY OF SELLERS/OFFERORS
WHO MAY BE LIABLE?
(a) Offeror or seller of a security in violation of
Chapter on Registration of Securities;
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61.1 by reason of his purchase or sale of a Commission thereunder, who, without just
security [Sec. 61.2]. cause, hinders, delays or obstructs the making or
filing of any such document, report, or
LIABILITIES OF CONTROLLING information [Sec. 51.3]
PERSONS, AIDER AND (3) LIABILITY OF AIDER/ABETTOR
ABETTOR AND OTHER
SECONDARY LIABILITY WHO MAY BE LIABLE?
Any person who aids, abets, counsels,
(1) LIABILITY OF CONTROLLING commands, induces or procures any violation
of this Code, or any rule, regulation or order of
PERSONS the Commission thereunder [Sec. 51.4]
Every person who substantially assists the act
WHO MAY BE LIABLE?
or omission of any person primarily liable
Every person who controls any person liable
under Sections 57, 58, 59 and 60 of this Code,
under this Code or the rules or regulations of
with knowledge or in reckless disregard that
the Commission thereunder, shall ALSO be
such act or omission is wrongful
liable jointly and severally with and to the same
extent as such controlled persons to any person Jointly and severally liable as an aider and
to whom such controlled person is liable [Sec. abettor for damages resulting from the
51.1] conduct of the person primarily liable [Sec.
51.5]
NOTE: CONTROL may be: NOTE: An aider and abettor shall be LIABLE
(a) By or through stock ownership, agency, or ONLY:
otherwise, or o To the extent of his relative contribution in
(b) In connection with an agreement or causing such damages in comparison to
understanding with one or more other that of the person primarily liable, or
persons [Sec. 51.1] o To the extent to which the aider and abettor
was unjustly enriched thereby
o whichever is GREATER [Sec. 51.5]
DEFENSE: Lack of knowledge of the existence
of facts by reason of which the liability of the NOTE: It shall be unlawful for any person,
controlled person is alleged to exist [Sec. 51.1] DIRECTLY or INDIRECTLY, to do ANY act or
thing which it would be unlawful for such
person to do under the provisions of this Code
(3) LIABILITY OF DIRECTOR/OFFICER or any rule or regulation thereunder [Sec. 51.2]
FOR DELAY IN THE FILING OF
REQUIRED DOCUMENTS
WHO MAY BE LIABLE?
Any director or officer of, or any owner of any
securities issued by, any issuer required to file
any document, report or other information
under this Code or any rule or regulation of the
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When the registration statement (a) Issuer and every person who Any person who acquires the
or any part thereof contains on signed the registration security and who suffers damage
its effectivity: statement; unless it is proved that at the
An untrue statement of a (b) Director of/partner in the time of such acquisition he knew
material fact; or issuer at the time of the filing of such untrue statement or
Omission to state a material of the registration statement omission [Sec. 56.1]
fact required to be stated or any part, supplement or
therein or necessary to make amendment thereof; NOTE: When the security is
such statements not (c) One who is named in the acquired after the issuer has
misleading registration statement as made generally available to its
being or about to become (b); security holders an income
(d) Auditor/auditing firm named statement covering a period of at
as having certified any least twelve (12) months
financial statements used in beginning from the effective date
connection with the of the registration statement, the
registration statement or right of recovery under this
prospectus; subsection shall be conditioned
(e) One who, with his written on proof that such person
consent filed with the acquired the security relying
registration statement, has upon such untrue statement in
been named as having the registration statement or
prepared or certified any part relying upon the registration
of the registration statement and not knowing of
statement/any report or such income statement [Sec.
valuation which is used in 56.2]
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with respect to
such security [Sec. 56.1]
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When the registration statement (a) Issuer and every person who Any person who acquires the
or any part thereof contains on signed the registration security and who suffers damage
its effectivity: statement; unless it is proved that at the
An untrue statement of a (b) Director of/partner in the time of such acquisition he knew
material fact; or issuer at the time of the filing of such untrue statement or
Omission to state a material of the registration statement omission [Sec. 56.1]
fact required to be stated or any part, supplement or
therein or necessary to make amendment thereof; NOTE: When the security is
such statements not (c) One who is named in the acquired after the issuer has
misleading registration statement as made generally available to its
being or about to become (b); security holders an income
(d) Auditor/auditing firm named statement covering a period of at
as having certified any least twelve (12) months
financial statements used in beginning from the effective date
connection with the of the registration statement, the
registration statement or right of recovery under this
prospectus; subsection shall be conditioned
(e) One who, with his written on proof that such person
consent filed with the acquired the security relying
registration statement, has upon such untrue statement in
been named as having the registration statement or
prepared or certified any part relying upon the registration
of the registration statement and not knowing of
statement/any report or such income statement [Sec.
valuation which is used in 56.2]
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with respect to
such security [Sec. 56.1]
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In Connection With Prospectus, (a) Offeror or seller of a security Purchaser of the security may
Communications and Reports in violation of Chapter on sue to recover:
[Sec. 57] Registration of Securities; (1) consideration paid for such
(b) Offeror or seller of a security, security with interest thereon,
(a) Liability of Sellers/Offerors whether or not exempted by less the amount of any
the provisions of this Code, income received thereon,
by means of a prospectus or upon the tender of such
other written or oral security; or
communication which (2) for damages if he no longer
includes an untrue owns the security [Sec. 57.1].
statement of a material fact
or omits to state a material
fact necessary in order to
make the statements, in the
light of the circumstances
under which they were
made, not misleading (the
purchaser not knowing of
such untruth or omission).
Defense: No knowledge of
untruth or omission, despite the
exercise of reasonable care [Sec.
57.1].
In Connection With Prospectus, Any person who shall make or Purchaser or seller of security
Communications and Reports cause to be made any statement who purchased or sold at a price
[Sec. 57] in any report, or document filed which was affected by such
pursuant to this Code or any rule statement knowing that such
(b) Liability of Makers of False or regulation thereunder, which statement was false or
Misleading Statements statement as at the time and in misleading, and relying upon
the light of the circumstances such statement may sue for
under which it was made false or damages caused by such
misleading with respect to any reliance [Sec. 57.2].
material fact
Fraud in Connection with Any person who engages in any Any other person who purchases
Securities Transactions [Sec. 58] act or transaction in violation of or sells any security, grants or
Sections 19.2, 20 or 26, or any refuses to grant any proxy,
rule or regulation of the consent or authorization, or
Commission thereunder accepts or declines an invitation
for tender of a security who
sustained damages as a result of
the transaction.
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Manipulation of Security Prices Any person who willfully Any person who shall purchase
[Sec. 59] participates in any act or or sell any security at a price
transaction in Section 24 which was affected by such act
(Manipulation of Security Prices). or transaction
With Respect to Commodity Any person who engages in any Any person sustaining damages
Futures Contracts and Pre-need act or transactions in willful as a result of such act or
Plans [Sec. 60] violation of any rule or regulation transaction [Sec. 60.1]
promulgated by the Commission
under Section 11 (on Commodity
Future Contracts) or 16 (on Pre-
Need Plans) [Sec. 60.1]
On Account of Insider Trading (a)Any insider who violates Any investor who,
Subsection 27.1; contemporaneously with the
(a) Liability for non-disclosure (b) and any person in the case of purchase or sale of securities
a tender offer who violates that is the subject of the
Subsection 27.4 (a)(I), or any violation, purchased or sold
rule or regulation thereunder, securities of the same class
by purchasing or selling a unless such insider, or such
security while in possession of person in the case of a tender
material information not offer, proves that such investor
generally available to the knew the information or would
public [Sec. 61.1] have purchased or sold at the
same price regardless of
disclosure of the information to
him [Sec. 61.1]
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The New Central Bank Act (3) A government-owned corporation but enjoys
fiscal and administrative autonomy. [Secs. 1 &
[RA No. 7653] 2]
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(4) Adopt an annual budget for and authorize (1) Direct connection with any multilateral
such expenditures by Bangko Sentral as are banking or financial institution; or
in the interest of the effective administration (2) Substantial interest in any private bank in
and operations of Bangko Sentral in the Philippines, within 1 year prior to his
accordance with applicable laws and appointment [Sec. 9]
regulations; and
(5) Indemnify its members and other officials of PROHIBITION ON MEMBERS OF THE
Bangko Sentral, including personnel of the MB
departments performing supervision and (1) To be a director, officer, employee,
examination functions, against all costs and consultant, lawyer, agent or stockholder of
expenses reasonably incurred by such any bank, quasi-bank, or any other institution
persons in connection with any civil or which is subject to supervision or
criminal action, suit or proceeding, to which examination by the BSP;
any of them may be made a party by reason (2) To hold any other public office or public
of the performance of his functions or duties, employment during their tenure; and
unless such members or other officials is (3) To be employed in any multilateral banking
found to be liable for negligence or or financial institution within 2 years after the
misconduct. [Sec. 15] expiration of his term.
COMPOSITION Exception: When he serves as an official
The MB shall be composed of 7 members representative of the government to such
appointed by the President with a 6-year term. institution. [Sec. 9]
[Sec. 6, NCBA]
GROUNDS FOR REMOVAL OF ANY
MEMBERS MEMBER OF THE MB
(1) The BSP Governor or his designated (1) If the member is subsequently disqualified
alternate (a deputy governor); under Sec. 8;
(2) A Cabinet member to be designated by the (2) If he is physically or mentally incapacitated
President or his designated alternate (an that he cannot properly discharge his duties
Undersecretary in his department); and and responsibilities and such incapacity has
(3) 5 members from the private sector [Sec. 6, lasted for more than 6 months;
NCBA] (3) If he is guilty of acts or operations which are
of fraudulent or illegal character or which are
No member of the MB may be reappointed manifestly opposed to the aims and interests
more than once. of the BSP; and
(4) If he no longer possesses the qualifications
QUALIFICATIONS under Sec. 8. [Sec. 10]
(1) Natural-born citizens of the Philippines;
(2) At least 35 years old (the Governor must be VACANCIES, HOW FILLED
at least 40 years old); Cause: death, resignation, or removal of any
(3) Of good moral character; member
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and Effect: a new member will be appointed to
(6) With recognized competence in social and complete the unexpired period of the term of
economic disciplines. [Sec. 8] the member concerned. [Sec. 7]
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(1) They willfully violate the provisions of the (2) When, on the basis of the report of the
NCBA; conservator or of its own findings, the MB
(2) They are guilty of negligence, abuses or acts determines that the continuance in business
of malfeasance or misfeasance; or of the institution would involve probable loss
(3) Fail to exercise extraordinary diligence in the to its depositors or creditors (the bank or
performance of his duties. [Sec. 16] quasi-bank would then be placed under
receivership) [Sec. 29]
HOW THE BSP HANDLES BANKS
IN DISTRESS EFFECTS OF CONSERVATORSHIP
(1) Bank/Quasi-bank retains juridical personality
Liquidity Ability of an asset to be converted
(2) Not a precondition to the designation of a
into cash. An entity is liquid when it is able to
receiver, and;
pay its liabilities when they fall due.
(3) Perfected transactions cannot be repudiated
Solvency When current assets are more than
current liabilities, providing the ability to pay QUALIFICATIONS OF A
debts. An entity is solvent when it is able to CONSERVATOR
meet its long term obligations/liabilities. The conservator should be competent and
knowledgeable in bank operations and
Insolvency When the actual market value of management. [Sec. 29]
assets are insufficient to pay its liabilities, not The appointment of a conservator shall be
considering capital stock and surplus which are vested exclusively in the MB. [Sec. 30]
not liabilities for such purpose. An entity is
insolvent when it is unable to meet current and POWERS AND DUTIES OF A
long-term obligations. CONSERVATOR
(1) To take charge of the assets, liabilities, and
CONSERVATORSHIP the management thereof
(2) To reorganize the management
GROUNDS FOR APPOINTMENT OF A (3) To collect all monies and debts due said
CONSERVATOR institution, and
Whenever, on the basis of a report submitted by (4) To exercise all powers necessary to restore
the appropriate supervising or examining its viability
department, the MB finds that a bank or quasi- (5) To report and be responsible to the MB
bank is: (6) To overrule or revoke the actions of the
(1) In a state of continuing inability; or previous management and board of directors
(2) Unwillingness to maintain a condition of of the bank or quasi-bank. [Sec. 29]
liquidity deemed adequate to protect the
interest of depositors and creditors [Sec. 29] While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the preservation
DURATION of the assets of the bank, the reorganization of
Period: shall not exceed 1 year [Sec. 29] the management and the restoration of
viability. Such powers cannot extend to the
The expenses attendant to the conservatorship post-facto repudiation of perfected
shall be borne by the bank or quasi-bank transactions, otherwise they would infringe
concerned [Sec. 29] against the non-impairment clause of the
Constitution. [First Philippine International Bank
GROUNDS FOR TERMINATION OF v. CA, 1996]
CONSERVATORSHIP BY MB
(1) When it is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary
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(if quasi-bank, liquidation plan adopted by (4) Stay of execution of judgment to prevent
the MB) depletion of bank assets
(2) Upon acquiring jurisdiction, the court shall, (5) Bank is not liable to pay interest on deposits
upon motion by the receiver after due notice, which accrued during the period of
(a) Adjudicate disputed claims against the suspension of operation
institution, (6) Restriction of banks capacity to do new
(b) Assist the enforcement of individual business (new loans, deposits) but with
liabilities of the stockholders, directors, obligation to collect pre-existing debts
and officers, and
(c) Decide on other issues as may be material HOW THE BSP HANDLES
to implement the liquidation plan
(3) The receiver shall convert the assets of the EXCHANGE CRISIS
institutions to money, dispose of the same to
creditors and other parties, for the purpose of LEGAL TENDER POWER
paying the debts of such institution in All notes and coins issued by the BSP shall be
accordance with the rules on concurrence fully guaranteed by the Government of the
and preference of credit under the Civil Code Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both
The assets of the institution under receivership public and private.
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of Limitation: Coins shall be legal tender in
garnishment, levy, attachment, or execution. amounts not exceeding P50 for denominations
of 25 centavos and above, and in amounts not
DISPOSITIONS exceeding P20 for denominations of 10
In case of a liquidation of a bank or quasi- centavos or less unless otherwise fixed by the
bank, after payment of the cost of MB.
proceedings, including reasonable expenses
and fees of the receiver to be allowed by the The maximum amount of coins to be considered
court, the receiver shall pay the debts of such as legal tender is: [BSP Circular 537 (2006)]
institution, under order of the court, in (1) P1,000.00 for denominations of 1-Piso, 5-
accordance with the rules on concurrence and Piso and 10-Piso coins; and
preference of credit in the Civil Code. [Sec. 31] (2) P100.00 for denominations of 1-sentimo, 5-
All revenues and earnings realized by the sentimo, 10-sentimo, and 25-sentimo coins.
receiver in winding up the affairs and [Sec. 52]
administering the assets of any bank or quasi-
bank shall be used to pay the costs of RATES OF EXCHANGE
proceedings, salaries of such personnel whose The MB shall:
employment is rendered necessary in the (1) Determine the exchange rate policy of the
discharge of the liquidation together with country;
other additional expenses caused thereby. (2) Determine the rates at which the Bangko
The balance of revenues and earnings, after Sentral shall buy and sell spot exchange;
the payment of all said expenses, shall form (3) Establish deviation limits from the effective
part of the assets available to creditors. [Sec. exchange rate or rates as it may deem
32] proper.
(4) Determine the rates for other types of
EFFECTS OF APPOINTMENT OF foreign exchange transactions by the BSP,
RECEIVER/LIQUIDATION including purchases and sales of foreign
(1) Retention of juridical personality notes and coins.
(2) Suspension of operations/ Stoppage of
business Limitation: The margins between the effective
(3) Assets are deemed in custodial legis, i.e., exchange rates and the rates established by the
exempt from garnishment, levy or execution MB may not exceed the corresponding margins
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for spot exchange transactions by more than Money-market placement is not covered by
the additional costs or expenses involved in RA 1405 because it is not deposited in the
each type of transactions. [Sec. 74] bank.
Of Whatever Nature
Law on Secrecy of Bank The term deposits as used in RA 1405 is to be
understood broadly and not limited only to
Deposits [RA No. 1405, as accounts which give rise to a creditor-debtor
relationship between the depositor and the
amended] bank.
If the money deposited under an account may
POLICY be used by banks for authorized loans to third
(1) To give encouragement to the people to persons, then such account, regardless of
deposit their money in banking institutions; whether it creates a creditor-debtor
and relationship between the depositor and the
(2) To discourage private hoarding. [Sec. 1] bank, falls under the category of accounts
which the law precisely seeks to protect for
PURPOSE the purpose of boosting the economic
That money may be properly utilized by banks development of the country.
in authorized loans to assist in the economic Considering the use of the phrase of
development of the country. [Sec. 1] whatever nature RA 1405 applies not only to
The absolute confidentiality rule in R.A. No. money which is deposited but also to those
1405 actually aims at protection from which are invested. Thus, the protection
unwarranted inquiry or investigation if the afforded by RA 1405 extends to trust
purpose of such inquiry or investigation is accounts. [Ejercito v. Sandiganbayan [2006],
Special Division]
merely to determine the existence and nature,
as well as the amount of the deposit in any Indeed, by force of statute, all bank deposits
given bank account. [China Banking are absolutely confidential, and that nature is
Corporation v. Ortega, 1973] unaltered even by the legislated
exceptionsThere is disfavor towards
construing these exceptions in such a manner
PROHIBITED ACTS that would authorize unlimited discretion on
(1) No person, government official, bureau or
the part of the government or of any party
office may examine, inquire into or look into
seeking to enforce those exceptions and
such deposits. [Sec. 2]
inquire into bank deposits. If there are doubts
(2) No official or employee of any banking
in upholding the absolutely confidential
institution may disclose to any unauthorized
nature of bank deposits against affirming the
person any information concerning said
authority to inquire into such accounts, then
deposits. [Sec. 3]
such doubts must be resolved in favor of the
former. [Republic v. Eugenio, 2008]
DEPOSITS COVERED
All deposits of whatever nature with banks or ZONES OF PRIVACY
banking institutions in the Philippines are
Under the RA 1405, bank deposits are
considered as of an absolutely confidential
statutorily protected or recognized zones of
nature. [Sec. 2]
privacy. [People v. Estrada, G.R. No. 164368,
Investment in bonds issued by the April 2, 2009; Marquez v. Desierto, G.R. No.
Government of the Philippines, its political 135882, June 27, 2001, 359 SCRA 772; Ople v.
subdivisions and its instrumentalities, are Torres, G.R. No. 107737. October 1, 1999, 316
included. [Sec. 2] SCRA 43]
The confidentiality of foreign-currency It is conceded that while the fundamental law
deposits is governed by the Foreign Currency has not bothered with the triviality of
Deposit Act.
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specifically addressing privacy rights relative (d) In cases where the money deposited or
to banking accounts, there, nevertheless, invested is the subject matter of litigation
exists in our jurisdiction a legitimate By the phrase subject matter of the action
expectation of privacy governing such is meant the physical facts, the things real
accounts. The source of this right of or personal, the money, lands, chattels,
expectation is statutory, and it is found in R.A. and the like, in relation to which the suit is
No. 1405, otherwise known as the Bank prosecuted, and not the delict or wrong
Secrecy Act of 1955. [BSB Group, Inc., v. Go, committed by the defendant. [Mathay v.
2010] Consolidated Bank and Trust Company,
1974]
Exceptions [Sec. 2]: We note with approval the difference
(1) Upon written permission of the depositor between the subject of the action from the
(2) In cases of impeachment cause of action. We also find petitioner's
(3) Upon order of competent court in the definition of the phrase subject matter of
following cases: the action is consistent with the term
(a) Bribery [Sec. 2] subject matter of the litigation, as the
(b) Dereliction of duty of public officials [Sec. latter is used in the Bank Deposits Secrecy
2] Act.
(c) Unexplained wealth under Sec. 8 of RA
Where the plaintiff is fishing for
3019 or the Anti-Graft and Corrupt
information so it can determine the
Practices Act [PNB v. Gancayco, 1965;
culpability of private respondent and the
Banco Filipino v. Purisima, 1988; Marquez
amount of damages it can recover from the
v. Desierto, 2001]
latter. It does not seek recovery of the very
The exception applies to cases of money contained in the deposit. The
concealment of illegally acquired subject matter of the dispute may be the
property in anti-graft cases. The inquiry amount of P999,000.00 that petitioner
into illegally acquired property or seeks from private respondent as a result
property NOT "legitimately acquired" of the latter's alleged failure to inform the
extends to cases where such property is former of the discrepancy; but it is not the
concealed by being held by or recorded P999,000.00 deposited in the drawer's
in the name of other persons. [Banco account. By the terms of R.A. No. 1405, the
Filipino v. Purisima, 1988] money deposited itself should be the
(d) Those under the Anti-Money Laundering subject matter of the litigation. [Union
Act of 2001 [RA 9160, hereinafter AMLA], Bank v. Court of Appeals, 1999]
when there is probable cause that the
The exception even extends to cases of
deposits or investments involved are in
concealment of illegally acquired property
any way related to an unlawful activity or
not involving anti-graft cases as long as
a money laundering offense, except that
money deposited was the subject matter of
no court order is required if:
litigation. [Mellon Bank, N.A. v. Magsino,
(i) Funds or property involved consists of
1990]
investments; or
(ii) Said investments are related to: Other exceptions:
Kidnapping for ransom; (1) When inquiry is conducted under the
Unlawful activities under authority of the Commissioner of Internal
Comprehensive Drugs Act of 2002 Revenue into the bank accounts of the
[RA 9165]; following:
Hijacking and other violations under (a) A decedent in order to determine his
RA 6235; and gross estate
Destructive arson and murder, (b) Any taxpayer who has filed an application
including those perpetrated by for compromise of his tax liability, which
terrorists against non-combatants application shall include a written waiver
and similar targets.
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deposited it or at any time thereafter. b) Shall have the right to demand immediate
[VILLANUEVA, Commercial Law Review] repayment or liquidation of the obligation
4. Negotiable Order of Withdrawal Accounts [Sec. 40]
Interest-bearing deposit accounts that
combine the payable on demand feature of Limit on loans, credit accommodations and
checks and investment feature of savings guarantees
accounts [Sec. X223, Manual of Regulations General rule: Shall not exceed
for Banks] 75% of the appraised value of
the respective real estate
(6) BUYING AND SELLING FOREIGN security, plus 60% of the
EXCHANGE AND GOLD OR SILVER BULLION appraised value of the insured
Against Real
improvements, and such loans
estate
(7) ACQUIRING MARKETABLE BONDS AND may be made to the owner of
OTHER DEBT SECURITIES the real estate or to his
assignees
(8) EXTENDING CREDIT Exception: The Monetary Board
otherwise prescribes [Sec. 37]
Know your customer rule General rule: Shall not exceed
Before granting a loan or other credit On security of
75% of the appraised value of
accommodation, a bank must ascertain that the chattels and
the security, and such loans
debtor is capable of fulfilling its commitments intangible
and other credit
to the bank. [Sec. 40] properties
accommodations may be
(patents,
made to the title-holder of the
The bank may demand from its credit trademarks,
chattels and intangible
applicants a statement of their assets and trade names,
properties or his assignees
liabilities and of their income and expenditure and
Exception: The Monetary Board
and such information as may be prescribed by copyrights)
otherwise prescribes [Sec. 38]
law or by rules and regulations of MB to enable
the bank to properly evaluate the credit Grant of loans
application which includes the corresponding a) Only in amounts and for the periods of time
financial statements submitted for taxation essential for the effective completion of the
purposes to the BIR. [Sec. 40] operations to be financed; and
b) Consistent with safe and sound banking
Credit enhancement practices. [Sec. 39]
If the borrower is less than creditworthy, third Purpose of loans
persons may enhance his credit by providing The purpose shall be stated in the application
guarantees and other security devices in favor of and in the contract between the bank and the
the bank. [Morales, The Philippine General borrower. [Sec. 39]
Banking Law, opinion]
Effect of usage of loan proceeds for purposes
A bank cannot lend pesos to a non-resident other than those agreed upon with the bank
[BSP Circular No. 22; Sec. 22, Manual of The bank shall have the right to terminate the
Regulations on Foreign Exchange Transactions]. loan or other credit accommodation and
[Morales, The Philippine General Banking Law] demand immediate repayment of the
obligation. [Sec. 39]
Material misrepresentation
If there is material misrepresentation, the Amortization on loans and other credit
bank accommodations
a) May terminate any loan or other credit a) In case of loans and other credit
accommodation granted on the basis of accommodations with maturities of more
said statements; and than 5 years, provisions must be made for
periodic amortization payments, but such
payments must be made at least annually:
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Provided, however, That when the borrowed (b) Under Sec. 2, the degree of diligence is high
funds are to be used for purposes which do standards of integrity and performance and
not initially produce revenues adequate for no longer highest degree of diligence as
regular amortization payments therefrom, was decided prior to the effectivity of the
the bank may permit the initial amortization General Banking Law of 2000 but also
payment to be deferred until such time as (mistakenly) even thereafter. In numerous
said revenues are sufficient for such cases, the Supreme Court has held that the
purpose, but in no case shall the initial highest degree of diligence and care is
amortization date be later than 5 years from expected from banks [Simex International v.
the date on which the loan or other credit CA (1990); Philippine Bank of Commerce v. CA
accommodation is granted. (1997); Westmont Bank v. Ong (2002);
b) In case of loans and other credit Solidbank v. Spouses Tan (2003); Samsung
accommodations to microfinance sectors, Construction v. FEBTC (2004); Citibank, N.A.
the schedule of loan amortization shall take v. Spouses Cabamongan (2006); Philippine
into consideration the projected cash flow of Savings Bank v. Chowking Food Corporation
the borrower and adopt this into the terms (2008); Bank of America NT &SA v. Philippine
and conditions formulated by banks. [Sec. Racing Club (2009)].
44]
As a business affected with public interest
All are subject to such rules as the Monetary and because of the nature of its functions, the
Board may promulgate. [Sec. 29, GBL] bank is under obligation to treat the accounts
of its depositors with meticulous care, always
DILIGENCE REQUIRED OF having in mind the fiduciary nature of their
BANKS relationship.
In every case, the depositor expects the bank
Banks assume a degree of diligence higher
than that of a good father of a family. Its to treat his account with the utmost fidelity,
fiduciary duty imposes upon it a higher level whether such account consists only of a few
hundred pesos or of millions. The bank must
of accountability than that expected of a
record every single transaction accurately,
depositor. [Philippine Banking Corporation vs.
down to the last centavo, and as promptly as
CA, G.R. No. 127469, January 15, 2004]
possible. This has to be done if the account is
The General Banking Law of 2000 requires of
to reflect at any given time the amount of
banks the highest standards of integrity and
money the depositor can dispose as he sees
performance. The banking business is
fit, confident that the bank will deliver it as
impressed with public interest. Of paramount
and to whomever he directs. A blunder on the
importance is the trust and confidence of the
part of the bank, such as the failure to duly
public in general in the banking industry.
credit him his deposits as soon as they are
Consequently, the diligence required of banks
made, can cause the depositor not a little
is more than that of a Roman pater familias or
embarrassment if not financial loss and
a good father of a family. The highest degree perhaps even civil and criminal litigation
of diligence is expected. [Philippine
[Simex International v. CA, 1990].
Commercial Bank vs. Balmaceda, G.R. No.
This fiduciary relationship means that the
158143, September 21, 2011]
banks obligation to observe high standards
Notwithstanding the degree of diligence
of integrity and performance is deemed
required, a bank is not expected to be
written into every deposit agreement between
infallible [Prudential Bank vs. CA, 2000].
a bank and its depositor [Philippine Banking
Corporation vs. CA, G.R. No. 127469, January
FIDUCIARY DUTY 15, 2004].
(a) Failure on the part of the bank to satisfy the
Banks are expected to exercise the highest
degree of diligence required of banks may
degree of diligence in the selection and
warrant the award of damages.
supervision of their employees [PCI Bank v.
CA, 2001].
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It cannot be over emphasized that the compensation when one of the debts arises
banking business is impressed with public from depositum, does not apply.
interest. Of paramount importance is the trust Current and savings deposits are loans to a
and confidence of the public in general in the bank because the bank can use the same and
banking industry. Consequently, the diligence they earn interest [BPI vs. CA, G.R. No. 104612,
required of banks is more than that of a May 10, 1994].
Roman pater familias or a good father of a The relationship being contractual in nature,
family. The highest degree of diligence is mandamus is therefore NOT an available
expected [Phil. Savings Bank v. Chowking Food remedy since mandamus does not lie to
Corporation, 2008]. enforce the performance of contractual
The banking business is so impressed with obligations [Maclaring Lucman vs. Alimatar
public interest where the trust and confidence Malawi, G.R. No. 159794, December 19, 2006]
of the public in general is of paramount Money deposited is commingled with other
importance such that the appropriate money constituting a common fund.
standard of diligence must be a high degree
of diligence, if not the utmost diligence [Bank STIPULATION ON INTERESTS
of America NT&SA v. Phil. Racing Club, 2009].
The Monetary Board may prescribe the
Under the doctrine of last clear chance, a
maturities, as well as related terms and
bank may be held liable for loss despite the
conditions for various types of bank loans and
negligence of a depositor. Examples of these
other credit accommodations.
cases are the following:
Any change by the Board in the maximum
(a) For disbursing funds to a dishonest
maturities shall apply only to loans and other
employee despite the employees failure to
credit accommodations made after the date
strictly abide with the banks internal
of such action.
procedure. [PBC v. CA, 1997]
(b) Allowing the execution of a mortgage on The Monetary Board shall regulate the
parcels of land as security for a loan not interest imposed on micro finance borrowers
owned by the prospective borrower. by lending investors and similar lenders such
[Canlas v. Court of Appeals, 2000] as, but not limited to, the unconscionable
(c) Crediting the deposit in favor of another rates of interest collected on salary loans and
depositor, a check where the signature of similar credit accommodations [Sec. 43]
the drawer was forged. [Westmont Bank v.
Ong, 2002] GRANT OF LOANS AND
SECURITY REQUIREMENTS
NATURE OF BANK FUNDS AND (PRUDENTIAL MEASURES)
BANK DEPOSITS
The relationship between a depositor and a RATIO OF NET WORTH TO TOTAL
bank is that of a creditor and debtor in RISK ASSETS
relation to the banks deposit functions [Gullas The minimum ratio which the net worth of a
vs. PNB, G.R. No. L-43191, November 13, 1935] bank must bear to its total risk assets which
and not that of depositor and depositary. may include contingent accounts [i.e. net worth:
The contract between the bank and its total risk assets] [Sec. 34]
depositor is governed by the provisions of the
NCC on simple loan [Consolidated Bank and General Rule: A bank must conform to the risk-
Trust Corporation vs. CA, G.R. No. 138569, based capital ratio prescribed by the MB
September 11, 2003].
Bank deposits are in the nature of irregular Exceptions: The MB may alter or suspend
deposits [Serrano vs. Central Bank, G.R. No. L- compliance with such ratio whenever necessary
30511, February 14, 1980]. Therefore, Art. 1287 for a maximum period of 1 year.
of the Civil Code, which prohibits (1) In case of a bank merger or consolidation; OR
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(2) When a bank is under rehabilitation under a other similar documents transferring or
program approved by the BSP; [Sec. 34] securing title;
(2) Covering readily marketable, non-perishable
PURPOSE goods; and
A bank must not be allowed to expand the (3) Which must be fully covered by insurance
volume of its loans and investments in a [Sec. 35.2]
manner that is disproportionate to its net worth.
[Morales, The Philippine General Banking Law] PURPOSE
To prevent the bank from making excessive
EFFECT OF NON-COMPLIANCE loans and other credit accommodations to a
(1) The MB may limit or prohibit the distribution single borrower or corporate group, including
of net profits by such bank and may require guarantees for the account of such borrower or
that part or all of the net profits be used to group. The bank is prohibited from placing
increase the capital accounts of the bank many eggs in the basket of one client. [It] is a
until the minimum requirement has been damage-control mechanism [and] a device for
met. risk amelioration. [Morales, The Philippine
(2) The MB may restrict or prohibit the General Banking Law]
acquisition of major assets and the making of
new investments by the bank, with the BASIS FOR DETERMINING COMPLIANCE
exception of purchases of readily marketable The basis for determining compliance with the
evidences of indebtedness of the RP and the SBL is the total credit commitment of the bank
BSP and any other evidences of to the borrower. [Sec. 35.1]
indebtedness or obligations the servicing
and repayment of which are fully guaranteed INCLUSIONS IN THE CEILING
by the RP, until the minimum required (1) The direct liability of the maker or acceptor of
capital ratio has been restored. (Sec. 34, GBL) paper discounted with or sold to such bank
and the liability of a general indorser, drawer
SINGLE BORROWERS LIMIT or guarantor who obtains a loan or other
General Rule: The total loans, credit credit accommodation from or discounts
accommodations and guarantees that may be paper with or sells papers to such bank;
extended by a bank to any person, partnership, (2) In the case of an individual who owns or
association, or corporation or other entity shall controls a majority interest in a corporation,
at no time exceed 20% of the net worth of such partnership, association or any other entity,
bank. [Sec. 35.1] the liabilities of said entities to such bank;
(3) In the case of a corporation, all liabilities to
Exceptions: such bank of all subsidiaries in which such
(1) The Monetary Board otherwise prescribes for corporation owns or controls a majority
reasons of national interest. [Sec. 35.1] Now, interest; and
the single borrowers limit is 25% of the net (4) In the case of a partnership, association or
worth of the lending bank. other entity, the liabilities of the members
(2) Wholesale lending activities of government thereof to such bank. [Sec. 35.3]
banks to participating institutions for
relending to end-user borrowers: separate GUIDELINES ON THE WHOLESALE LENDING
limit of 35% net worth. [BSP Circular No. 425 OF GOVERNMENT BANKS
dated March 25, 2004] (1) It shall apply only to loans granted by
participating financial institutions (PFIs) on a
INCREASE OF LIMIT wholesale basis for on-lending to end-user
The Monetary Board may increase the limit borrowers;
prescribed by an additional 10% of the net (2) It shall apply only to loan programs funded
worth, when: by multilateral, international, or local
(1) The additional liabilities of any borrower are development agencies, organizations, or
adequately secured by trust receipts, institutions, especially designed for
shipping documents, warehouse receipts or
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unsafe or unsound manner as may be (2) To promote and safeguard the interests of
determined by the Monetary Board the depositing public by way of providing
(a) Fine not exceeding Thirty thousand pesos permanent and continuing insurance
(P30,000) a day for each violation, taking coverage on all insured deposits [Sec. 1]
into consideration the attendant
circumstances, such as the nature and POWERS OF THE PDIC
gravity of the violation or irregularity and (1) To adopt and use a corporate seal
the size of the bank or quasi-bank; or (2) To have succession until dissolved by Act of
(b) Suspension of rediscounting privileges or Congress
access to Bangko Sentral credit facilities; (3) To make contracts
(c) Suspension of lending or foreign (4) To sue and be sued; no attachment or
exchange operations or authority to execution shall be issued against it before
accept new deposits or make new final judgment
investments; (5) To appoint officers and employees not
(d) Suspension of interbank clearing provided in this Act, define their duties, fix
privileges; and/or their compensation, dismiss them
(e) Revocation of quasi-banking license. (6) Prescribe by-laws regulating the manner in
(2) Suspension or Removal of Director which their general business may be
(a) If the offender is a director or officer of a conducted
bank, quasi-bank or trust entity, the (7) To exercise express and incidental powers
Monetary Board may also suspend or (8) To conduct examination of banks with prior
remove such director or officer [Sec. 66]. approval of the MB
(b) Resignation or termination from office (9) To act as receiver
shall not exempt such director or officer (10) To prescribe rules and regulations
from administrative or criminal sanctions. (11) To establish its own provident fund which
[Sec. 37, NCBA] shall consist of contributions made both by
(3) Dissolution of Bank PDIC and by its officers and employees to a
(a) If the violation is committed by a common fund for the payment of benefits to
corporation, such corporation may be such officers or employees or their heirs
dissolved by quo warranto proceedings (12) To compromise, condone or release, in
instituted by the Solicitor General [Sec. whole or in part, any claim or settled liability
66] to PDIC [Sec. 8]
(b) Whenever a bank or quasi-bank persists
in carrying on its business in an unlawful
or unsafe manner, the Monetary Board FUNCTIONS OF THE PDIC
may commence proceedings in
liquidation. [Sec. 36, NCBA in relation to INSURANCE
Sec. 30, NCBA] The deposit liabilities of any bank or banking
institution, which is engaged in the business
of receiving deposits on the effective date of
Philippine Deposit this Act, or which thereafter may engage in
the business of receiving deposits, shall be
Insurance Corporation Act insured with the PDIC [Sec.5]
Bank and Banking Institution - shall include
[R.A. 3951, as amended] banks, commercial banks, savings bank,
mortgage banks, rural banks, development
PURPOSE OF THE PDIC banks, cooperative banks, stock savings and
(1) To insure the deposits of all banks which are loan associations and branches and agencies
entitled to the benefits of insurance under in the Philippines of foreign banks and all
this Act other corporations authorized to perform
banking functions in the Philippines [Sec. 4(b),
as amended]
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Deposit - the unpaid balance of money or its Whenever an insured bank shall have been
equivalent received by a bank in the usual closed by the Monetary Board pursuant to
course of business and for which it has given Section 30 of R.A. 7653, payment of the
or is obliged to give credit to a commercial, insured deposits on such closed bank shall be
checking, savings, time or thrift account, or made by the PDIC as soon as possible either
issued in accordance with Bangko Sentral (1) by cash or (2) by making available to each
rules and regulations and other applicable depositor a transferred deposit in another
laws, together with such other obligations of a insured bank in an amount equal to insured
bank, which, consistent with banking usage deposit of such depositor [Sec. 14].
and practices, the Board of Directors shall Note: Insured deposit shall not exceed
determine and prescribe by regulations to be 500,000 [Sec. 4(g), as amended].
deposit liabilities of the bank [Sec. 4(f), as
amended]. DETERMINATION OF INSURED DEPOSITS
What is not considered a deposit? Any The determination of insured deposits shall
obligation of a bank which is payable at the commence upon the PDICs actual takeover of
office of the bank located outside of the the closed bank [Sec. 16(a), as amended].
Philippines [Sec. 4(f), as amended]. The amount of the insured deposit shall be
Insured deposit - the amount due to any bona determined according to such regulations as
fide depositor for legitimate deposits in an the Board of Directors may prescribe, In
insured bank net of any obligation of the determining such amount due to any
depositor to the insured bank as of the date of depositor, there shall be added together all
closure, but not to exceed 500,000 or its deposits in the bank maintained in the same
equivalent in foreign currency [Sec. 4(g), as right and capacity for his benefits either in his
amended] own name or in the name of others [Sec. 4(g),
as amended].
EXCLUSIONS Note: The PDIC may require proof of claims to
The PDIC shall not pay deposit insurance for the be filed before paying the insured deposits,
following accounts or transactions, whether and that in any case where the PDIC is not
denominated, documented, recorded or booked satisfied as to the viability of a claim for an
as deposit by the bank: insured deposit, it may require final
(1) Investment products such as bonds and determination of a court of competent
securities, trust accounts, and other similar jurisdiction before paying such claim [Sec. 14]
instruments;
(2) Unfunded, fictitious or fraudulent deposit PER DEPOSITOR, PER CAPACITY RULE
accounts or transactions; In determining the amount due to any
(3) Deposits accounts or transactions depositor, there shall be added together all
constituting, and/or emanating from, unsafe deposits in the bank maintained in the same
and unsound banking practice/s, as right and capacity for his benefits either in his
determined by the PDIC, in consultation with own name or in the name of others [Sec. 4(g), as
the BSP, after due notice and hearing, and amended]
publication of a cease and desist order
issued by the PDIC against such deposit JOINT ACCOUNTS
accounts or transactions; and A joint account regardless of whether the
(4) Deposits that are determined to be the conjunction 'and,' 'or,' 'and/or' is used, shall be
proceeds of an unlawful activity as defined insured separately from any individually-owned
under Republic Act 9160, as amended [Sec. deposit account [Sec. 4(g), as amended].
4(f)]
IF THE ACCOUNT IS HELD BY TWO OR
EXTENT OF LIABILITY MORE NATURAL PERSONS OR TWO OR
The liability of the Corporation is to the extent MORE JURIDICAL PERSONS
of the insured deposit [Sec.14]. General rule: The maximum insured deposit
shall be divided into as many equal shares as
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Exceptions:
(1) Upon written permission of the depositor
[Sec. 8; Intengan vs CA, 2002]
(2) Upon order of a competent court in cases of
violation of the Anti-Money Laundering Act
of 2001 [as in the case of peso deposits, supra]
(3) During Bangko Sentrals periodic or special
examinations [as in the case of peso
deposits, supra], and
(4) Disclosure of the Treasurer of the Philippines
when the unclaimed balances law applies
[Act 3936, as amended by PD 679]
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production of plants or animals. This who has the earliest filing date or, the earliest
provision shall not apply to micro-organisms priority date. [Sec. 29, RA 8293]
and non-biological and microbiological
processes; [Sec. 22.4, RA 8293] INVENTIONS CREATED PURSUANT
(5) Aesthetic creations; [Sec. 22.5, RA 8293] TO A COMMISSION
(6) Anything which is contrary to public order or Commission - Person who commissions the
morality. [Sec. 22.6, RA 8293] work shall own the patent, unless otherwise
provided in the contract [Sec. 30.1, RA 8293)
Cheaper Medicines Act: In addition to
discoveries, scientific theories and mathematical Employment Contract
methods, the IP Code now includes, in case of Patent belongs to the employee if the
drugs and medicines: inventive activity is not a part of his regular
(1) The mere discovery of a new form or new duties even if the employee uses the time,
property of a known substance which does facilities and materials of the employer. [Sec.
not result in the enhancement of the known 30.2 (a), RA 8293]
efficacy of that substance
Patent belongs to the employer if the
(2) the mere discovery of any new property or
invention is the result of the performance of
new use of a known substance
his regularly-assigned duties, unless there is
(3) the mere use of a known process unless such
an agreement, express or implied, to the
known process results in a new product that
contrary. [Sec. 30.2 (b), RA 8293]
employs at least one reactant [Sec. 26.2, RA
8293 as amended by RA 9502]
RIGHT OF PRIORITY
An application for patent filed by any person
OWNERSHIP OF A PATENT who has previously applied for the same
invention in another country which by treaty,
RIGHT TO A PATENT convention, or law affords similar privileges to
General Rule: The right to patent belongs to the Filipino citizens, shall be considered as filed as
inventor, his heirs, or assigns. When two (2) or of the date of filing the foreign application:
more persons have jointly made an invention, Provided, That: (a) the local application
the right to a patent shall belong to them expressly claims priority; (b) it is filed within
jointly. (Sec.28, RA 8293) twelve (12) months from the date the earliest
foreign application was filed; and (c) a certified
Exception: Inventions created pursuant to a copy of the foreign application together with an
commission (Work for Hire Doctrine) English translation is filed within six (6) months
(1) The employer has the right to the patent if from the date of filing in the Philippines. [Sec.
the invention is the result of the performance 31, RA 8293]
of the employees regularly assigned duties
[Sec. 30.2, RA 8293] GROUNDS FOR CANCELLATION
(2) In case of inventions created pursuant to a
commission, the person who commissions OF A PATENT
the work shall own the patent [Sec. 30.1, RA Any interested person may, upon payment of
8293] the required fee, petition to cancel the patent or
any claim thereof, or parts of the claim, on any
FIRST-TO-FILE RULE of the following grounds:
If two (2) or more persons have made the (a) That what is claimed as the invention is not
invention separately and independently of each new or patentable;
other, the right to the patent shall belong to the (b) That the patent does not disclose the
person who filed an application for such invention in a manner sufficiently clear and
invention, or where two or more applications are complete for it to be carried out by any
filed for the same invention, to the applicant person skilled in the art; or
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(c) That the patent is contrary to public order or substitution as patentee, or at the option of the
morality. [Sec. 61.1, RA 8293] true inventor, cancel the patent, and award
actual and other damages in his favor if
Where the grounds for cancellation relate to warranted by the circumstances. [Sec. 68, RA
some of the claims or parts of the claim, 8293]
cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293] TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year from
REQUIREMENT OF THE PETITION the date of publication made in accordance with
The petition for cancellation shall be in writing, Sections 44 and 51, respectively. [Sec. 70, RA
verified by the petitioner or by any person in his 8293]
behalf who knows the facts, specify the grounds
upon which it is based, include a statement of REMEDY OF PERSONS NOT HAVING
the facts to be relied upon, and filed with the THE RIGHT TO A PATENT
Office. Copies of printed publications or of If a person other than the applicant, is declared
patents of other countries, and other supporting by final court order or decision as having the
documents mentioned in the petition shall be right to the patent, such person may, within
attached thereto, together with the translation three (3) months after the decision has become
thereof in English, if not in English language. final:
[Sec. 62, RA 8293] (1) Prosecute the application as his own
application in place of the applicant;
NOTICE OF HEARING (2) File a new patent application in respect of
Upon filing of a petition for cancellation, the the same invention;
Director of Legal Affairs shall forthwith serve (3) Request that the application be refused; or
notice of the filing thereof upon the patentee (4) Seek cancellation of the patent, if one has
and all persons having grants or licenses, or any already been issued. [Sec. 67, RA 8293]
other right, title or interest in and to the patent
and the invention covered thereby, as appears RIGHTS CONFERRED BY A
of record in the Office, and of notice of the date
of hearing thereon on such persons and the PATENT
petitioner. Notice of the filing of the petition A patent shall confer on its owner the following
shall be published in the IPO Gazette. [Sec. 63, exclusive rights:
RA 8293] (1) Where the subject matter of a patent is a
product, to restrain, prohibit and prevent any
EFFECT OF CANCELLATION OF unauthorized person or entity from making,
PATENT OR CLAIM using, offering for sale, selling or importing
The rights conferred by the patent or any that product. [Sec. 71.1(a), RA 8293]
specified claim or claims cancelled shall (2) Where the subject matter of a patent is a
terminate. Notice of the cancellation shall be process, to restrain, prevent or prohibit any
published in the IPO Gazette. Unless restrained unauthorized person or entity from using the
by the Director General, the decision or order to process, and from manufacturing, dealing in,
cancel by Director of Legal Affairs shall be using, selling or offering for sale, or
immediately executory even pending appeal. importing any product obtained directly or
[Sec. 66, RA 8293] indirectly from such process. [Sec. 71.1(b), RA
8293]
(3) Patent owners shall also have the right to
REMEDY OF THE TRUE AND assign, or transfer by succession the patent,
ACTUAL INVENTOR and to conclude licensing contracts for the
If a person, who was deprived of the patent same. [Sec. 71.2, RA 8293]
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
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performs substantially the same function in event of litigation, the venue shall be the
substantially the same way to achieve proper court in the place where the licensee
substantially the same result. The principle or has its principal office; [Sec. 88.1, RA 8293]
mode of operation must be the same or (2) Continued access to improvements in
substantially the same. The doctrine of techniques and processes related to the
equivalents thus requires satisfaction of the technology shall be made available during
function-means-and-result test, the patentee the period of the technology transfer
having the burden to show that all three arrangement; [Sec. 88.2, RA 8293]
components of such equivalency test are met. (3) In the event the technology transfer
[Smith Klein Beckman Corp. v. CA (2003)] arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration
DEFENSES IN ACTION FOR Law of the Philippines or the Arbitration
INFRINGEMENT Rules of the United Nations Commission on
In an action for infringement, the defendant, in International Trade Law (UNCITRAL) or the
addition to other defenses available to him, may Rules of Conciliation and Arbitration of the
show the invalidity of the patent, or any claim International Chamber of Commerce (ICC)
thereof, on any of the grounds on which a shall apply and the venue of arbitration shall
petition of cancellation can be brought under be the Philippines or any neutral country;
Section 61. [Sec 81, RA 8293] [Sec. 88.3, RA 8293]
(4) The Philippine taxes on all payments
PATENT FOUND INVALID MAY BE relating to the technology transfer
CANCELLED: arrangement shall be borne by the licensor.
In an action for infringement, if the court shall [Sec. 88.4, RA 8293]
find the patent or any claim to be invalid, it shall
cancel the same, and the Director of Legal PROHIBITED CLAUSES
Affairs upon receipt of the final judgment of The following provisions shall be deemed prima
cancellation by the court, shall record that fact facie to have an adverse effect on competition
in the register of the Office and shall publish a and trade:
notice to that effect in the IPO Gazette. [Sec 82, (a) Those which impose upon the licensee the
RA 8293] obligation to acquire from a specific source
capital goods, intermediate products, raw
DOCTRINE OF FILE WRAPPER ESTOPPEL materials, and other technologies, or of
Patentee is precluded from claiming as part of permanently employing personnel indicated
patented product that which he had to excise or by the licensor; [Sec. 87.1, RA 8293]
modify in order to avoid patent office rejection, (b) Those pursuant to which the licensor
and he may omit any additions he was reserves the right to fix the sale or resale
compelled to add by patent office regulations. prices of the products manufactured on the
[Advance Transformer Co. v. Levinson 837 F.2d basis of the license; [Sec. 87.2, RA 8293]
1081(1988)] (c) Those that contain restrictions regarding the
volume and structure of production; [Sec.
LICENSING 87.3, RA 8293]
(d) Those that prohibit the use of competitive
technologies in a non-exclusive technology
VOLUNTARY transfer agreement; [Sec. 87.4, RA 8293]
Voluntary Licensing is the grant by the patent
(e) Those that establish a full or partial
owner to a third person of the right to exploit
purchase option in favor of the licensor; [Sec.
the patented invention. [Sec. 85, RA 8293]
87.5, RA 8293]
MANDATORY PROVISIONS (f) Those that obligate the licensee to transfer
The following provisions shall be included in for free to the licensor the inventions or
voluntary license contracts: improvements that may be obtained through
(1) That the laws of the Philippines shall govern the use of the licensed technology; [Sec. 87.6,
the interpretation of the same and in the RA 8293]
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(g) Those that require payment of royalties to Effect of Non-Compliance with Any
the owners of patents for patents which are Provisions of Secs. 87 And 88
not used; [Sec. 87.7, RA 8293] The technology transfer arrangement shall
(h) Those that prohibit the licensee to export the automatically be rendered unenforceable, unless
licensed product unless justified for the said technology transfer arrangement is
protection of the legitimate interest of the approved and registered with the
licensor such as exports to countries where Documentation, Information and Technology
exclusive licenses to manufacture and/or Transfer Bureau under the provisions of Section
distribute the licensed product(s) have 91 on exceptional cases. [Sec. 92, RA 8293]
already been granted; [Sec. 87.8, RA 8293]
(i) Those which restrict the use of the technology Right of Licensor. Unless otherwise provided
supplied after the expiration of the in the technology transfer agreement, the
technology transfer arrangement, except in licensor shall have the right to:
cases of early termination of the technology (a) Grant further licenses to third person
transfer arrangement due to reason(s) (b) Exploit the subject matter of the technology
attributable to the licensee; [Sec. 87.9, RA transfer agreement [Sec. 89, RA 8293]
8293]
(j) Those which require payments for patents Right of the Licensee. To exploit the subject
and other industrial property rights after matter of the technology transfer agreement
their expiration, termination arrangement; during the whole term of the agreement. [Sec.
[Sec. 87.10, RA 8293] 90, RA 8293]
(k) Those which require that the technology
Exceptional cases
recipient shall not contest the validity of any
(a) In exceptional or meritorious cases where
of the patents of the technology supplier;
substantial benefits will accrue to the
[Sec. 87.11, RA 8293]
economy, such as high technology content,
(l) Those which restrict the research and
increase in foreign exchange earnings,
development activities of the licensee
employment generation, regional dispersal
designed to absorb and adapt the
of industries and/or substitution with or use
transferred technology to local conditions or
of local raw materials
to initiate research and development
(b) The case of BOI-registered companies with
programs in connection with new products,
pioneer status [Sec. 91, RA 8293]
processes or equipment; [Sec. 87.12, RA
8293] COMPULSORY
(m) Those which prevent the licensee from
Compulsory Licensing is the grant of the
adapting the imported technology to local
Director of Legal Affairs of a license to exploit a
conditions, or introducing innovation to it, as
patented invention, even without the agreement
long as it does not impair the quality of the patent owner, in favor of any person who
standards prescribed by the licensor; [Sec.
has shown his capability to exploit the
87.13, RA 8293]
invention. [Sec. 93, Ra 8293 as amended by RA
(n) Those which exempt the licensor for liability
9502]
for non-fulfillment of his responsibilities
under the technology transfer arrangement GROUNDS
and/or liability arising from third party suits The Director General of the Intellectual Property
brought about by the use of the licensed Office may grant a license to exploit a patented
product or the licensed technology; ]Sec. invention, even without the agreement of the
87.14, RA 8293] patent owner, in favor of any person who has
(o) Other clauses with equivalent effects. [Sec. shown his capability to exploit the invention,
87.15, RA 8293] under any of the following circumstances:
(a) National emergency or other circumstances
of extreme urgency; [Sec. 93.1, RA 8293 as
amended by RA 9502]
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(b) Where the public interest, in particular, PERIOD OF FILING A PETITION FOR
national security, nutrition, health or the COMPULSORY LICENSE
development of other vital sectors of the At any time after the grant of patent. However, a
national economy as determined by the compulsory license may not be applied for on
appropriate agency of the Government, so the ground stated in Sec. 93.5 before the
requires; [Sec. 93.2, RA 8293 as amended by expiration of a period of four (4) years from the
RA 9502] date of filing of the application or three (3) years
(c) Where a judicial or administrative body has from the date of the patent whichever period
determined that the manner of exploitation expires last. [Sec. 94, RA 8293 as amended by
by the owner of the patent or his licensee is RA 9502]
anti-competitive; [Sec. 93.3, RA 8293 as
amended by RA 9502] REQUIREMENT TO OBTAIN A LICENSE ON
(d) In case of public non-commercial use of the REASONABLE COMMERCIAL TERMS
patent by the patentee, without satisfactory General Rule: The license will only be granted
reason; [Sec. 93.4, RA 8293 as amended by after the petitioner has made efforts to obtain
RA 9502] authorization from the patent owner on
(e) If the patented invention is not being worked reasonable commercial terms and conditions
in the Philippines on a commercial scale, but such efforts have not been successful within
although capable of being worked, without a reasonable period of time. [Sec. 95.1, RA 8293
satisfactory reason: Provided, That the as amended by RA 9502]
importation of the patented article shall
constitute working or using the patent; [Sec. Exceptions: The requirement of authorization
93.5, RA 8293 as amended by RA 9502] shall not apply in the following cases:
(f) Where the demand for patented drugs and (a) Where the petition for compulsory license
medicines is not being met to an adequate seeks to remedy a practice determined after
extent and on reasonable terms, as judicial or administrative process to be anti-
determined by the Secretary of the competitive;
Department of Health. [Sec. 93.6, RA 8293 (b) In situations of national emergency or other
as amended by RA 9502] circumstances of extreme urgency;
(g) If the invention protected by a patent, (c) In cases of public non-commercial use.
hereafter referred to as the "second patent," (d) In cases where the demand for the patented
within the country cannot be worked without drugs and medicines in the Philippines is not
infringing another patent, hereafter referred being met to an adequate extent and on
to as the "first patent," granted on a prior reasonable terms, as determined by the
application or benefiting from an earlier Secretary of the Department of Health. [Sec.
priority, a compulsory license may be 95.2, RA 8293 as amended by RA 9502]
granted to the owner of the second patent to
the extent necessary for the working of his TERMS AND CONDITIONS OF COMPULSORY
invention, subject to certain conditions. [Sec. LICENSE
97, RA 8293] (a) The scope and duration of such license shall
(h) Manufacture and export of drugs and be limited to the purpose for which it was
medicines to any country having insufficient authorized; [Sec. 100.1, RA 8293]
or no manufacturing capacity in the (b) The license shall be non-exclusive; [Sec.
pharmaceutical sector to address public 100.2, RA 8293]
health problems: Provided, That, a (c) The license shall be non-assignable, except
compulsory license has been granted by such with that part of the enterprise or business
country or such country has, by notification or with which the invention is being exploited;
otherwise, allowed importation into its [Sec. 100.3, RA 8293]
jurisdiction of the patented drugs and (d) Use of the subject matter of the license shall
medicines from the Philippines in be devoted predominantly for the supply of
compliance with the TRIPS Agreement. [Sec. the Philippine market: Provided, that this
93-A.2, RA 8293 as amended by RA 9502] limitation shall not apply where the grant of
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the license is based on the ground that the (d) It must identify the letters patent involved by
patentee's manner of exploiting the patent is number and date and give the name of the
determined by judicial or administrative owner of the patent and the title of the
process, to be anti-competitive. [Sec. 100.4, invention. In the case of an application for a
RA 8293] patent, it should state the application
(e) The license may be terminated upon proper number and the filing date of the application
showing that circumstances which led to its and give the name of the applicant and the
grant have ceased to exist and are unlikely to title of the invention. If the assignment was
recur: Provided, That adequate protection executed concurrently with or subsequent to
shall be afforded to the legitimate interest of the execution of the application but before
the licensee; [Sec. 100.5, RA 8293] the application is filed or before its
(f) The patentee shall be paid adequate application number is ascertained, it should
remuneration taking into account the adequately identify the application by its
economic value of the grant or authorization, date of execution, the name of the applicant,
except that in cases where the license was and the title of the invention.
granted to remedy a practice which was (e) It must be accompanied by the required fees.
determined after judicial or administrative [Sec. 105; Rules and Regulations on
process, to be anti-competitive, the need to Inventions, Rule 1200]
correct the anti-competitive practice may be
taken into account in fixing the amount of EFFECT OF NON-RECORDING OF
remuneration. [Sec. 100.6, RA 8293] ASSIGNMENT WITH THE IPO
The non-recording will not affect the binding
ASSIGNMENT AND agreement between the assignor and assignee.
TRANSMISSION OF RIGHTS However, such registration would be necessary
to bind third parties. An assignment would be
ASSIGNMENT OF RIGHTS void as against any subsequent purchaser or
The assignment may be of the entire patent or a mortgagee for valuable consideration and
portion thereof, or be limited to a specified without notice unless recorded in the IPO within
territory. [Sec. 104, RA 8293] 3 months from the date of the assignment or
prior to the subsequent purchase or mortgage.
TRANSMISSION OF RIGHTS: [Sec. 106, RA 8293]
Patents or applications for patents and
invention to which they relate, shall be
protected in the same way as the rights of
other property under the Civil Code. [Sec. Trademarks
103.1, RA 8293]
Inventions and any right, title or interest in DEFINITION OF MARKS,
and to patents and inventions covered
thereby, may be assigned or transmitted by
COLLECTIVE MARKS, TRADE
inheritance or bequest or may be the subject NAMES
of a license contract. [Sec. 103.2, RA 8293]
Marks - Any visible sign capable of
REQUIREMENTS FOR RECORDING distinguishing the goods (trademark) or services
OF ASSIGNMENT (service mark) of an enterprise and shall include
(a) It must be in writing and accompanied by an a stamped or marked container of goods [Sec.
121.1, RA 8293]
English translation, if it is in a language other
than English or Filipino
(b) It must be notarized
(c) It must be accompanied by an appointment
of a resident agent, if the assignee is not
residing in the Philippines
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the life of his widow, except by written continuous and exclusive use for 5 years, as
consent of the widow; [Sec 123.1(c), RA 8293] used in connection with the applicants goods
(4) Is identical with a registered mark of another or services in commerce and in the mind of
or a mark with an earlier filing or priority the public indicates a single source to
date, in respect of: consumers, it may be registered. The Office
(a)The same goods or services, or may accept as prima facie evidence that the
(b) Closely related goods or services, or mark has become distinctive, as used in
(c) If it nearly resembles such a mark as to be connection with the applicant's goods or
likely to deceive or cause confusion; [Sec services in commerce, proof of substantially
123.1(d), RA 8293] exclusive and continuous use thereof by the
(5) Is identical with, or confusingly similar to, or applicant in commerce in the Philippines for
constitutes a translation of a well-known five (5) years before the date on which the
mark, whether or not registered in the claim of distinctiveness is made. [Sec 123.2,
Philippines, and used for identical or similar RA 8293]
goods or services; [Sec 123.1(e), RA 8293] The nature of the goods to which the mark is
(6) Is identical with, or confusingly similar to, or applied will not constitute an obstacle to
constitutes a translation of a well-known registration. [Sec 123.3, RA 8293]
mark which is registered in the Philippines,
and used for goods or services which are not PRIOR USE OF MARK AS A
similar; [Sec 123.1(f), RA 8293]
(7) Likely to mislead the public, particularly as to REQUIREMENT
the nature, quality, characteristics or
geographical origin of the goods or services; USE OF MARK AS A REQUIREMENT
[Sec 123.1(g), RA 8293] The applicant or the registrant shall file a
(8) Consists exclusively of signs that are generic declaration of actual use of the mark with
for the goods or services that they seek to evidence to that effect, as prescribed by the
identify; [Sec 123.1(h), RA 8293] Regulations within three (3) years from the
(9) Consists exclusively of signs or of indications filing date of the application. Otherwise, the
that have become customary or usual to application shall be refused or the mark shall
designate the goods or services in everyday be removed from the Register by the Director.
language or in a bona fide and established [Sec. 124.2, RA 8293]
trade practice; [Sec 123.1(i), RA 8293] For the requirement of actual use in
(10) Consists exclusively of signs or of indications commerce in the Philippines before one may
that may serve in trade to designate the kind, register a trademark, trade name and service
quality, quantity, intended purpose, value, mark under the law pertains to the territorial
geographical origin, time or production of jurisdiction of the Philippines and is not only
the goods or rendering of the services, or confined to a certain region, province, city or
other characteristics of the goods or services; barangay. [McDonalds Corporation v. MacJoy
[Sec 123.1(j), RA 8293] Fastfood (2007)]
(11) Consists of shapes that may be necessitated Trademark is a creation of use and, therefore,
by technical factors or by the nature of the actual use is a pre-requisite to exclusive
goods themselves or factors that affect their ownership; registration is only an
intrinsic value; [Sec 123.1(k), RA 8293] administrative confirmation of the existence of
(12) Consists of color alone, unless defined by a the right of ownership of the mark, but does
given form; [Sec 123.1(l), RA 8293] not perfect such right; actual use thereof is
(13) Is contrary to public order or morality. [Sec the perfecting ingredient. [Shangri-La
123.1(m), RA 8293] International Hotel v. DCC (2006)]
DOCTRINE OF SECONDARY NON-USE OF MARK WHEN EXCUSED
MEANING (1) If caused by circumstances arising
When the marks referred to in nos. 10, 11 and independently of the will of the trademark
12 has become distinctive, because of its long,
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owner. Lack of funds shall not excuse non- features of the mark. [Del Monte Corporation,
use of a mark; [Sec. 152.1, RA 8293] et al. v. CA (1990)]
(2) A use which does not alter its distinctive The dominancy test considers the dominant
character though the use is different from features in the competing marks in
the form in which it is registered. [Sec. 152.2, determining whether they are confusingly
RA 8293] similar. Under the dominancy test, courts give
(3) Use of a mark in connection with one or greater weight to the similarity of the
more of the goods/services belonging to the appearance of the product arising from the
class in which the mark is registered. [Sec. adoption of the dominant features of the
152.3, RA 8293] registered mark, disregarding minor
(4) The use of mark by a company related to the differences. Courts will consider more the
applicant or registrant aural and visual impressions created by the
(5) The use of mark by a person controlled by marks in the public mind, giving little weight
the registrant. [Sec. 152.4, RA 8293] to factors like prices, quality, sales outlets and
market segments. [McDonalds Corporation v.
The use of a mark by a company related with L.C. Big Mak Burger, Inc., et al. (2004)]
the registrant or applicant shall inure to the
latter's benefit, and such use shall not affect the AS TO THE GOODS OR SERVICES IN
validity of such mark or of its registration: CONNECTION WITH WHICH THE
Provided, that such mark is not used in such MARKS ARE USED (DOCTRINE OF
manner as to deceive the public. [Sec.152.4, RA
8293] RELATED GOODS/SERVICES)
(1) Goods are related when they belong to the
same class or have the same descriptive
TESTS TO DETERMINE properties or physical attributes, or they
CONFUSING SIMILARITY serve the same purpose or flow through the
BETWEEN MARKS same channel of trade.
(2) The use of identical marks on non-competing
but related goods may likely cause
DOMINANCY TEST confusion.
Infringement is determined by the test of (3) Corollarily, the use of identical marks on
dominancy rather than by differences or non-competing and unrelated goods is not
variations in the details of one trademark and of likely to cause confusion.
another. Similarity in size, form and color, while
relevant is not conclusive. If the competing WELL-KNOWN MARKS
trademark contains the main or essential or
A well-known mark is a mark which a
dominant features of another, and confusion is
competent authority of the Philippines has
likely to result, infringement takes place. [Asia
designated to be well-known internationally
Brewery v. CA and San Miguel (1993)]
and in the Philippines.
HOLISTIC TEST In determining whether a mark is well-known,
account shall be taken of the knowledge of
To determine whether a trademark has been
the relevant sector of the public, rather than
infringed, we must consider the mark as a
the public at large, including knowledge in
whole and not as dissected. If the buyer is
the Philippines which has been obtained as a
deceived, it is attributable to the marks as a
result of the promotion of the mark. [Sec
totality, not usually to any part of it. The court
123.1(e), RA 8293]
therefore should be guided by its first
impression, for the buyer acts quickly and is DETERMINANTS (NEED NOT
governed by a casual glance, the value of
which may be dissipated as soon as the court CONCUR)
assumed to analyze carefully the respective (a) The duration, extent and geographical area
of any use of the mark;
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(b) The market share in the Philippines and application for registration of the same mark
other countries of the goods/services to in one of those countries, shall be considered
which the mark applies; as filed as of the day the application was first
(c) The degree of the inherent or acquired filed in the foreign country. [Sec. 131.1, RA
distinction of the mark; 8293]
(d) The quality-image or reputation acquired by No registration of a mark in the Philippines by
the mark; a person described in this section shall be
(e) The extent to which the mark has been granted until such mark has been registered
registered in the world; in the country of origin of the applicant. [Sec.
(f) The exclusivity of the registration attained by 131.2, RA 8293]
the mark in the world;
(g) The extent of use of the mark in the world; SIGNIFICANCE OF PRIORITY RIGHT
(h) The exclusivity of use in the world; A Philippine application filed by another
(i) The commercial value attributed to the mark applicant after the priority date but earlier than
in the world; the foreign applicants actual filing may be
(j) The record of successful protection of the refused registration if it is identical to the mark
rights in the mark; with a priority date. [The Law on Trademark,
(k) The outcome of litigations dealing with the Infringement and Unfair Competition, Agpalo]
issue of whether the mar is well-known; and
(l) The presence or absence of identical or RIGHTS CONFERRED BY A WELL-
similar testmarks validly registered or used KNOWN MARK
on other similar goods [Rule 102, Rule on (1) Right to be protected whether or not it is
Trademarks] registered in the Philippines;
(2) If registered under Sec 123.1(e), extension of
PROTECTION EXTENDED TO WELL- protection to goods and services which are
KNOWN MARKS not similar to those in respect of which the
IF NOT REGISTERED IN THE PHILIPPINES mark is registered, provided that:
A mark cannot be registered if it is identical with (a) The use of the mark in relation to
or confusingly similar to, or constitutes a unrelated or dissimilar goods or services
translation of a mark which is considered by the would indicate a connection between
competent authority of the Philippines to be those goods or services and the owner of
well-known internationally and in the the mark; and
Philippines, whether or not it is registered here, (b) The interests of the owner of the
as being already the mark of a person other registered mark are likely to be damaged
than the applicant for registration and used for by such use. [Sec. 147.2, RA 8293]
identical goods or services. [(Sec 123.1(e), RA
8293] RIGHTS CONFERRED BY
IF REGISTERED IN THE PHILIPPINES REGISTRATION
A mark cannot be registered if it is identical with Except in cases of importation of drugs and
or confusingly similar to, or constitutes a medicines allowed under Section 72.1 of this Act
translation of a mark considered well-known in and of off-patent drugs and medicines, the
accordance with the Sec. 123.1 (e), which is owner of a registered mark shall have the
registered in the Philippines with respect to exclusive right to prevent all third parties not
goods or services which are not similar to those having the owner's consent from using in the
with respect to which registration is applied for. course of trade identical or similar signs or
[Sec 123.1(f), RA 8293] containers for goods or services which are
identical or similar to those in respect of which
PRIORITY RIGHT. the trademark is registered where such use
An application for registration of a mark filed would result in a likelihood of confusion. In case
in the Philippines by a person referred to in of the use of an identical sign for identical
Section 3, and who previously duly filed an goods or services, a likelihood of confusion shall
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be presumed. [Sec. 147.1, RA 8293 as amended (5) Assignments and transfers shall have no
by RA 9502] effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA 8293]
LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the Any license contract concerning the registration
registration of a trademark could be renewed of a mark, or an application therefor, shall
every 10 years, a trademark could provide for effective control by the licensor of
conceivably remain registered forever); the quality of the goods or services of the
(2) Territorial (except well-known marks). licensee in connection with which the mark is
used. If the license contract does not provide for
Registration of the mark shall not confer on the such quality control, or if such quality control is
registered owner the right to preclude third not effectively carried out, the license contract
parties from using bona fide their names, shall not be valid. [Sec. 150.1, RA 8293]
addresses, pseudonyms, a geographical name,
or exact indications concerning the kind, quality, PROTECTION LIMITED TO GOODS
quantity, destination, value, place of origin, or SPECIFIED IN REGISTRATION
time of production or of supply, of their goods or CERTIFICATE
services: Provided, That such use is confined to The certificate of registration can confer upon
the purposes of mere identification or the petitioner the exclusive right to use its own
information and cannot mislead the public as to symbol only to those goods specified in the
the source of the goods or services. [Sec. 148, RA certificate, subject to any conditions a
8293] limitations stated therein. One who has adopted
and used a trademark on his goods does not
ASSIGNMENT AND TRANSFER OF prevent the adoption and use of the same
APPLICATION AND REGISTRATION trademark by others for products which are of a
(1) An application for registration of a mark, or different description. [Faberge, Inc. v. IAC and Co
its registration, may be assigned or Beng Kay (1992)]
transferred with or without the transfer of the
business using the mark. [Sec. 149.1, RA USE BY THIRD PARTIES OF
8293]
(2) Such assignment or transfer shall, however, NAMES, ETC. SIMILAR TO
be null and void if it is liable to mislead the REGISTERED MARK
public, particularly as regards the nature, The IPC deems unlawful any subsequent use of
source, manufacturing process, the trade name by a third party, whether as a
characteristics, or suitability for their trade name or a mark or collective mark, or any
purpose, of the goods or services to which such use of a similar trade name or mark, likely
the mark is applied. [Sec. 149.2, RA 8293] to mislead the public. [Sec. 165.2 (b), RA 8293]
(3) The assignment of the application for
registration of a mark, or of its registration, INFRINGEMENT AND REMEDIES
shall be in writing and require the signatures
of the contracting parties. Transfers by
mergers or other forms of succession may be TRADEMARK INFRINGEMENT
made by any document supporting such Any person who shall, without the consent of
transfer. [Sec. 149.3, RA 8293] the owner of the registered mark:
(4) Assignments and transfers of registrations of (1) Use in commerce any reproduction,
marks shall be recorded at the Office on counterfeit, copy, or colorable imitation of a
payment of the prescribed fee; assignment registered mark or the same container or a
and transfers of applications for registration dominant feature thereof in connection with
shall, on payment of the same fee, be the sale, offering for sale, distribution,
provisionally recorded, and the mark, when advertising of any goods or services including
registered, shall be in the name of the other preparatory steps necessary to carry
assignee or transferee. [Sec. 149.4, RA 8293] out the sale of any goods or services on or in
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A person to be entitled to a copyright must be The provisions of the intellectual property code
the original creator of the work. He must have shall apply to works in which copyright
created it by his own skill, labor and judgment protection obtained prior to the effectivity of the
without directly copying or evasively imitating law is subsisting. provided that the application
the work of another. [Ching Kian Chuan vs. CA of the code shall not result in the diminution of
(2001)] such protection. [Sec. 239.3 IPC]
By originality is meant that the material was
not copied, and evidences at least minimal Ching Kian Chuan vs CA 363 SCRA 142 (2001):
creativity; that it was independently created (Vermicelli Case) A person entitled to copyright
by the author and that it possesses at least must be the original creator of the work. He
some minimal degree of creativity. Copying is must have created it by his own skill, labor, and
shown by proof of access to copyrighted judgment without directly copying or evasively
material and substantial similarity between imitating the work of another.
the two works. The applicant must thus
demonstrate the existence and validity of Sambar vs Levi Strauss 378 SCRA 364 (2002):
copyright because in the absence of copyright To be entitled to copyright, the thing being
protection, even the original creation may be copyrighted must be original, created by the
freely copied. [Ching v. Salinas (2005)] author through his own judgment without
directly copying or evasively imitating the work
of another.
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Justice Mariano Del Castillo, A.M. 10-7-17-SC Copyright in a work of architecture - shall
(2011)] include the right to control the erection of any
building which reproduces the whole or a
WORKS OF THE PUBLIC DOMAIN substantial part of the work either in its original
These include works whose term of copyright form or in any form recognizably derived from
has expired. the original: Provided, That the copyright in any
such work shall not include the right to control
USEFUL ARTICLES the reconstruction or rehabilitation in the same
Useful Article Doctrine - Works whose sole style as the original of a building to which that
purpose is utilitarian have no separate artistic copyright relates. [Sec. 186, RA 8293]
value. This can be distinguished from a work of
applied art, which has utilitarian functions but Communication to the Public of Copyrighted
there is an identifiable artistic work or creation Works - Includes point-to-point transmission of
incorporated thereto. a work, including video on demand, and
providing access to an electronic retrieval
RIGHTS OF COPYRIGHT OWNER system, such as computer databases, servers, or
similar electronic storage devices. Broadcasting,
COPYRIGHT OR ECONOMIC RIGHTS rebroadcasting, retransmission by cable, and
Copyright or economic rights shall consist of the broadcast and retransmission by satellite are all
exclusive right to carry out, authorize or prevent acts of communication to the public within the
the following acts: meaning of the IPC. [Rule 11, Copyright
(a) Reproduction of the work or substantial Safeguards and Regulations]
portion of the work; [Sec. 177.1, RA 8293]
(b) Dramatization, translation, adaptation, First Public Distribution of Work- An exclusive
abridgment, arrangement or other right of first distribution of work includes all acts
transformation of the work; [Sec. 177.2, RA involving distribution, specifically including the
8293] first importation of an original and each copy of
(c) The first public distribution of the original the work into the jurisdiction of the Republic of
and each copy of the work by sale or other the Philippines. [Rule 12, Copyright Safeguards
forms of transfer of ownership; [Sec. 177.3, RA and Regulations]
8293]
(d) Rental of the original or a copy of an CIVIL CODE PROVISIONS ON
audiovisual or cinematographic work, a work OWNERSHIP OF INTELLECTUAL
embodied in a sound recording, a computer CREATION:
program, a compilation of data and other Article 721. By intellectual creation, the following
materials or a musical work in graphic form, persons acquire ownership:
irrespective of the ownership of the original (1) The author with regard to his literary,
or the copy which is the subject of the rental; dramatic, historical, legal, philosophical,
[Sec. 177.4, RA 8293] scientific or other work;
(e) Public display of the original or a copy of the (2) The composer; as to his musical
work; [Sec. 177.5, RA 8293] composition;
(f) Public performance of the work; [Sec. 177.6, (3) The painter, sculptor, or other artist, with
RA 8293] respect to the product of his art;
(g) Other communication to the public of the (4) The scientist or technologist or any other
work [Sec. 177.7, RA 8293] person with regard to his discovery or invention.
Economic rights also give the author the right to
assign or license the copyright and/or the Article 722. The author and the composer,
material object in whole or in part, and they mentioned in Nos. 1 and 2 of the preceding
allow the owner to derive financial reward from article, shall have the ownership of their
the use of his works by others. [Sec. 180.1, RA creations even before the publication of the
8293 as amended by RA 10372]
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same. Once their works are published, their right of making a collection of his works. [Sec.
rights are governed by the Copyright laws. 176.2, RA 8293]
The painter, sculptor or other artist shall have WAIVER OF MORAL RIGHTS
dominion over the product of his art even before General Rule: Moral rights can be waived in
it is copyrighted. The scientist or technologist writing, expressly stating such waiver [Sec. 195,
has the ownership of his discovery or invention RA 8293] or by contribution to a collective work
even before it is patented. unless such is expressly reserved [Sec. 196, RA
8293].
Article 723. Letters and other private
Exceptions:
communications in writing are owned by the
Even if made in writing, waiver is still not valid if:
person to whom they are addressed and
(a) Use of the name of the author, title of his
delivered, but they cannot be published or
work, or his reputation with respect to any
disseminated without the consent of the writer
version or adaptation of his work, which
or his heirs. However, the court may authorize
because of alterations substantially tends to
their publication or dissemination if the public
injure the literary or artistic reputation of
good or the interest of justice so requires.
another author; [Sec. 195.1, RA 8293]
(b) It uses the name of the author in a work that
MORAL RIGHTS [SEC. 193] he did not create. [Sec. 195.1, RA 8293]
The author of a work shall, independently of the
economic rights in Section 177 or the grant of an
Moral rights are not assignable or subject to
assignment or license with respect to such right,
license. [Sec. 198, RA 8293]
have the right:
(1) To require that the authorship of the works The right of an author under Section 193.1.
be attributed to him, in particular, the right shall last during the lifetime of the author and
that his name, as far as practicable, be in perpetuity after his death while the rights
indicated in a prominent way on the copies, under Sections 193.2. 193.3. and 193.4. shall
and in connection with the public use of his be coterminous with the economic rights [Sec.
work; [Sec. 193.1, RA 8293] 198, RA 8293 as amended by RA 10372]
(2) To make any alterations of his work prior to,
or to withhold it from publication; [Sec. 193.2, RIGHTS TO PROCEEDS IN
RA 8293] SUBSEQUENT TRANSFERS (DROIT
(3) To object to any distortion, mutilation or DE SUITE OR FOLLOW UP RIGHTS)
other modification of, or other derogatory In every sale or lease of an original work of
action in relation to, his work which would be painting or sculpture or of the original
prejudicial to his honor or reputation; [Sec. manuscript of a writer or composer, subsequent
193.3, RA 8293] to the first disposition thereof by the author, the
(4) To restrain the use of his name with respect author or his heirs shall have an inalienable
to any work not of his own creation or in a right to participate in the gross proceeds of the
distorted version of his work. [Sec. 193.4, RA sale or lease to the extent of five percent (5%).
8293] This right shall exist during the lifetime of the
author and for fifty (50) years after his death.
In addition to the right to publish granted by [Sec. 200, RA 8293]
the author, his heirs, or assigns, the publisher
shall have a copyright consisting merely of the Works not covered - Prints, etchings, engravings,
right of reproduction of the typographical works of applied art, or works of similar kind
arrangement of the published edition of the wherein the author primarily derives gain from
work. [Sec.174, RA 8293] the proceeds of reproductions. (Sec. 201, RA
The author of speeches, lectures, sermons, 8293)
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive First Sale Doctrine - After the first sale of the
lawfully made copy of the copyrighted work,
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anyone who is the owner of that copy can sell or live aural performances or performances
dispose of that copy in any way without any fixed in sound recordings or audiovisual
liability for copyright infringement. The first sale works or fixations, have the right to claim to
of an authorized copy of the work exhausts the be identified as the performer of his
authors right to control distribution of copies. performances, except where the omission is
dictated by the manner of the use of the
NEIGHBORING RIGHTS performance, and to object to any distortion,
mutilation or other modification of his
PERFORMERS RIGHTS performances that would be prejudicial to his
(1) As regards their performances, the right of reputation. [Sec. 204.1, RA 8293, as amended
authorizing: by RA 10372]
(a) The broadcasting and other
communication to the public of their (8) Unless otherwise provided in the contract, in
performance; and every communication to the public or
(b) The fixation of their unfixed performance. broadcast of a performance subsequent to
[Sec. 203.1, RA 8293] the first communication or broadcast thereof
(2) Such right shall be maintained and exercised by the broadcasting organization, the
fifty (50) years after his death, by his heirs, performer shall be entitled to an additional
and in default of heirs, the government, remuneration equivalent to at least five
where protection is claimed. [Sec. 204.2, RA percent (5%) of the original compensation he
8293] or she received for the first communication or
(3) The right of authorizing the direct or indirect broadcast. [Sec. 206, RA 8293]
reproduction of their performances fixed in
sound recordings, or audiovisual works or RIGHTS OF PRODUCERS OF SOUND
fixations in any manner or form; [Sec. 203.2, RECORDING
RA 8293, as amended by 10372] (1) The right to authorize the direct or indirect
(4) Subject to the provisions of Section 206, the reproduction of their sound recordings, in
right of authorizing the first public any manner or form; the placing of these
distribution of the original and copies of their reproductions in the market and the right of
performance fixed in the sound recording or rental or lending; [Sec. 208.1, RA 8293]
audiovisual works or fixations through sale or (2) The right to authorize the first public
rental or other forms of transfer of distribution of the original and copies of their
ownership; [Sec. 203.3, RA 8293, as amended sound recordings through sale or rental or
by RA 10372] other forms of transferring ownership; [Sec.
(5) The right of authorizing the commercial 208.2, RA 8293]
rental to the public of the original and copies (3) The right to authorize the commercial rental
of their performances fixed in sound to the public of the original and copies of
recordings or audiovisual works or fixations, their sound recordings, even after
even after distribution of them by, or distribution by them by or pursuant to
pursuant to the authorization by the authorization by the producer. [Sec. 208.3,
performer; [Sec. 203.4, RA 8293, as amended RA 8293]
by RA 10372] (4) If a sound recording published for
(6) The right of authorizing the making available commercial purposes, or a reproduction of
to the public of their performances fixed in such sound recording, is used directly for
sound recordings or audiovisual works or broadcasting or for other communication to
fixations, by wire or wireless means, in such a the public, or is publicly performed with the
way that members of the public may access intention of making and enhancing profit, a
them from a place and time individually single equitable remuneration for the
chosen by them. [Sec. 203.5, RA 8293, as performer or performers, and the producer of
amended by RA 10372] the sound recording shall be paid by the user
(7) Independently of a performer's economic to both the performers and the producer,
rights, the performer, shall, as regards his
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who, in the absence of any agreement shall producing in the air sound waves which are
share equally. [Sec. 209, RA 8293] heard as a music and if the instrument he
plays on is a piano plus a broadcasting
RIGHTS OF BROADCASTING apparatus, so that the waves are thrown out,
ORGANIZATIONS not only upon the air but upon others, then he
(1) The rebroadcasting of their broadcasts; [Sec. also performing a musical composition. In
211.1, RA 8293] relation thereto it has been held that the
(2) The recording in any manner, including the playing of music in dine and dance
making of films or the use of video tape, of establishments which was paid for by the public
their broadcasts for the purpose of in purchases of food and drink constitute
communication to the public of television performance for public. The music provided for
broadcasts of the same; [Sec. 211.2, RA 8293] is for the purpose of entertaining and amusing
(3) The use of such records for fresh customers in order to make the establishment
transmissions or for fresh recording. [Sec. more attractive and desirable. The expenses
211.3, RA 8293] entailed thereby are added to the overhead of
the restaurant which are either eventually
Must-Carry Rule: Prevents cable television charged to the price of the food and drink or the
companies from excluding broadcasting overall total of additional income produced by
organization especially in those places not the bigger volume of business which the
reached by signal. Also, the rule prevents cable entertainment was programmed to attract.
television companies from depriving viewers in Nevertheless, the there is no infringement of
far-flung areas the enjoyment of programs copyright law as the composers in this case
available to city viewers. [ABS-CBN waived their right in favour of the public when
Broadcasting vs. Philippine Multi-Media System they allowed their intellectual creations to
(2009)] become property of public domain.
LIMITATIONS ON PROTECTION
TERM OF PROTECTION
Sections 203, 208 and 209 shall not apply
where the acts referred to in those Sections are Works Term
related to: For performances not Fifty (50) years from
(1) The use by a natural person exclusively for incorporated in the end of the year in
his own personal purposes; recordings which the performance
(2) Using short excerpts for reporting current took place [Sec.
events; 215.1(a), RA 8293]
(3) Use solely for the purpose of teaching or for
scientific research; and For sound or image Fifty (50) years from
(4) Fair use of the broadcast subject to certain and sound recordings the end of the year in
conditions. (Sec. 212, RA 8293) and for performances which the recording
incorporated therein took place. [Sec.
Filipino Society of Composers vs Benjamin Tan 215.1(b), RA 8293]
148 SCRA 461 (1987): The issue in this case as
WON the playing and signing of musical Broadcasts Twenty (20) years from
compositions which have been copyrighted the date the broadcast
under the provisions of the copyright law inside took place [Sec. 215.2,
the restaurant constitute a performance for RA 8293]
profit? The court ruled that the word perform
as used in the ACT has been applied to one who
plays a musical composition on a piano, thereby
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DURATION OF COPYRIGHT
Works Term
Original Literary and Artistic Works Lifetime of author and for fifty (50) years after his death (Sec
including Posthumous Works 213.1, RA 8293)
Derivative Works including Posthumous Lifetime of author and for fifty (50) years after his death [Sec
Works 213.1, RA 8293]
Joint Authorship Lifetime of the last surviving author and for fifty (50) years after
his death (Sec 213.2, RA 8293)
Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful publication [Sec. 213.3,
RA 8293]
Applied Art Twenty-five (25) years from date of making [Sec. 213.4, RA
8293]
Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA 8293]
Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA 8293]
Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA 8293]
Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA 8293]
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In the Matter of the Charges of Plagiarism etc Copyright infringement and unfair competition
Against Associate Justice Mariano C. Del Castillo are not limited to the act of selling counterfeit
AM No 10-7-17-SC (2011): An exception is carved goods. They cover a whole range of acts from
out for lawyers and officers of the court against copying, assembling, packaging to marketing,
plagiarism when writing judicial documents that including the mere offering for sale of
will be part of court record. counterfeit goods. [Microsoft Corp vs. Maxicorp
Inc. (2004)]
COPYRIGHT INFRINGEMENT
Infringement of Copyright and Related Rights: Columbia Pictures v. CA (1996): A copy of a
means any violation of the rights under the piracy is an infringement of the original, and it is
Intellectual Property Code and/or the no defense that the pirate, in such cases, did not
applicable Intellectual Property Law, including know what works he was indirectly copying, or
the act of any person who at the time when did not know whether or not he was infringing
copyright subsists in a work has in his any copyright; he at least knew that what he
possession an article which he known, or ought was copying was not his, and he copied at his
to know, to be an infringing copy of the work f or peril. In determining the question of
the purpose of: infringement, the amount of matter copied from
(a) Selling, letting for hire, or by way of trade the copyrighted work is an important
offering or exposing for sale, or hire, the consideration. To constitute infringement, it is
article not necessary that the whole or even a large
(b) Distributing the article for purpose of trade, portion of the work shall have been copied. If so
or for any other purpose to an extent that will much is taken that the value of the original is
prejudice the rights of the copyright owner in sensibly diminished, or the labors of the original
the work; or author are substantially and to an injurious
(c) Trade exhibit of the article in public. [Sec. 1(l), extent appropriated by another, that is sufficient
Rule 1, Rules and Regulations on in point of law to constitute a piracy.
Administrative Complaints for Violation of
Laws involving Intellectual Property Rights]
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THE FOLLOWING SHALL NOT interest compatible with fair use; [Sec.
CONSTITUTE INFRINGEMENT OF 184.1(h), RA 8293]
(i) Public performance or the communication to
COPYRIGHT: the public of a work in a place where no
(a) Recitation or performance of a work once it admission fee is charged by a club on
has been made accessible to the public if (1) institution for charitable or educational
privately done AND free of charge OR (2) purpose only and the aim is not profit-
strictly for a charitable or religious making; [Sec. 184.1(i), RA 8293]
institution; [Sec. 184.1(a), RA 8293] (j) Public display of the original or a copy of the
(b) Making of quotations from a published work: work not made by means of a film, slide,
(i) compatible with fair use, (ii) extent is television, image or otherwise on screen or by
justified by the purpose, (iii) source and name means of any other device or process either
of the author, appearing on work, must be the work has been published, sold, given
mentioned; [Sec. 184.1(b), RA 8293] away, or transferred to another person by the
(c) Reproduction or communication to the author or his successor in title; [Sec. 184.1(j),
public by mass media of articles on current RA 8293]
political, social, economic, scientific or (k) Use made of a work for the purpose of any
religious topic, lectures, addresses and other judicial proceedings or for the giving of
works, delivered in public: (i) for information professional advice by a legal practitioner.
purposes, (ii) not expressly reserved, and (iii) [Sec. 184.1(k), RA 8293]
source is already indicated; [Sec. 184.1(c), RA (l) The reproduction or distribution of published
8293] articles or materials in a specialized format
(d) Reproduction and communication to the exclusively for the use of the blind, visually-
public of literary, scientific or artistic works as and reading-impaired persons: Provided,
part of reports of current events by means of That such copies and distribution shall be
photography, cinematography or made on a nonprofit basis and shall indicate
broadcasting to the extent necessary for the the copyright owner and the date of the
purpose; [Sec. 184.1(d), RA 8293] original publication. [Sec. 184.1(l), RA 8293 as
(e) Inclusion of a work in a publication, amended by RA 10372]
broadcast or other communication to the
public, sound recording or film if made by REPRODUCTION OF PUBLISHED WORK
way of illustration for teaching purposes General Rule: The private reproduction of a
compatible with fair use and the source and published work in a single copy, where the
the name of the author appearing on work, reproduction is made by a natural person
must be mentioned; [Sec. 184.1(e), RA 8293] exclusively for research and private study, shall
(f) Recording made in schools, universities, or be permitted, without the authorization of the
educational institutions of a work included in owner of copyright in the work. [Sec. 187.1, RA
a broadcast for the use of schools, 8293]
universities or educational institutions. Such
recording must be deleted within a Exceptions: Such permission shall not extend to:
reasonable period; such recording may not (a) A work of architecture in the form of building
be made from audio-visual works which are or other construction;
part of the general cinema, repertoire of (b) An entire book, or a substantial part thereof,
feature films except of brief excerpts of the or of a musical work in graphic form by
work; [Sec. 184.1(f), RA 8293] reprographic means;
(g) Making of ephemeral recordings; (i) by a (c) A compilation of data and other materials;
broadcasting organization, (ii) by means of (d) A computer program except as provided in
its work or facilities, (iii) for use in its own Section 189; and
broadcast; [Sec. 184.1(g), RA 8293] (e) Any work in cases where reproduction would
(h) Use made of a work by or under the direction unreasonably conflict with a normal
or control of the government for public exploitation of the work or would otherwise
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unreasonably prejudice the legitimate and to the extent, for which the computer
interests of the author. [187.2, RA 8293] program has been obtained; and
(b) Archival purposes, and, for the replacement
REPROGRAPHIC REPRODUCTION BY of the lawfully owned copy of the computer
LIBRARIES program in the event that the lawfully
Any library or archive whose activities are not for obtained copy of the computer program is
profit may, without the authorization of the lost, destroyed or rendered unusable. [Sec.
author of copyright owner, make a single copy 189.1, RA 8293]
of the work by reprographic reproduction:
(a) Where the work by reason of its fragile No copy or adaptation mentioned in this Section
character or rarity cannot be lent to user in shall be used for any purpose other than the
its original form; ones determined in this Section, and any such
(b) Where the works are isolated articles copy or adaptation shall be destroyed in the
contained in composite works or brief event that continued possession of the copy of
portions of other published works and the the computer program ceases to be lawful. [Sec.
reproduction is necessary to supply them, 189.2, RA 8293]
when this is considered expedient, to persons
requesting their loan for purposes of IMPORTATION FOR PERSONAL PURPOSES
research or study instead of lending the The importation of a copy of a work by an
volumes or booklets which contain them; individual for his personal purposes shall be
(c) Where the making of such a copy is in order permitted without the authorization of the
to preserve and, if necessary in the event that author of, or other owner of copyright in, the
it is lost, destroyed or rendered unusable, work under the following circumstances:
replace a copy, or to replace, in the (a) When copies of the work are not available in
permanent collection of another similar the Philippines and:
library or archive, a copy which has been lost, (1) Not more than one (1) copy at one time is
destroyed or rendered unusable and copies imported for strictly individual use only; or
are not available with the publisher. [Sec. (2) The importation is by authority of and for
188.1, RA 8293] the use of the Philippine Government; or
(3) The importation, consisting of not more
It shall not be permissible to produce a volume than three (3) such copies or likenesses in
of a work published in several volumes or to any one invoice, is not for sale but for the
produce missing tomes or pages of magazines use only of any religious, charitable, or
or similar works, unless the volume, tome or educational society or institution duly
part is out of stock: Provided, That every library incorporated or registered, or is for the
which, by law, is entitled to receive copies of a encouragement of the fine arts, or for any
printed work, shall be entitled, when special state school, college, university, or free
reasons so require, to reproduce a copy of a public library in the Philippines.
published work which is considered necessary (b) When such copies form parts of libraries and
for the collection of the library but which is out personal baggage belonging to persons or
of stock. [Sec. 188.2, RA 8293)] families arriving from foreign countries and
are not intended for sale: Provided, that such
REPRODUCTION OF COMPUTER PROGRAM copies do not exceed three (3). [Sec. 190.1, RA
The reproduction in one (1) back-up copy or 8293 is repealed by RA 10372]
adaptation of a computer program shall be
permitted, without the authorization of the Copies imported as allowed by this Section may
author of, or other owner of copyright in, a not lawfully be used in any way to violate the
computer program, by the lawful owner of that rights of owner the copyright or annul or limit
computer program: Provided, That the copy or the protection secured by this Act, and such
adaptation is necessary for: unlawful use shall be deemed an infringement
(a) The use of the computer program in and shall be punishable as such without
conjunction with a computer for the purpose,
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Notwithstanding the foregoing, the term and safely stored for at least five (5) years
covered persons shall exclude lawyers and from the dates when they were closed.
accountants acting as independent legal
professionals in relation to information REPORTING OF COVERED AND
concerning their clients or where disclosure of SUSPICIOUS TRANSACTIONS
information would compromise client Covered institutions shall report to the AMLC
confidences or the attorney-client relationship: all covered transactions and suspicious
Provided, That these lawyers and accountants transactions within five (5) working days from
are authorized to practice in the Philippines and occurrence thereof, unless the Supervising
shall continue to be subject to the provisions of Authority prescribes a longer period not
their respective codes of conduct and/or exceeding ten (10) working days.
professional responsibility or any of its Should a transaction be determined to be
amendments. [Sec. 1, RA 10365] both a covered transaction and a suspicious
transaction, the covered institution shall be
OBLIGATIONS OF COVERED required to report the same as a suspicious
INSTITUTIONS transaction.
(1) Customer Identification When reporting covered or suspicious
(2) Record Keeping transactions to the AMLC, covered institutions
(3) Reporting of Covered and Suspicious and their officers and employees
Transactions [Sec. 9] [,representatives, agents, advisors,
consultants or associates not included;
repealed by RA 9194] shall not be deemed to
CUSTOMER IDENTIFICATION have violated Republic Act No. 1405, as
Covered institutions shall establish and record amended, Republic Act No. 6426, as amended,
the true identity of its clients based on official Republic Act No. 8791 and other similar laws,
documents. They shall maintain a system of but are prohibited from communicating,
verifying the true identity of their clients and, directly or indirectly, in any manner or by any
in case of corporate clients, require a system means, to any person, the fact that a covered
of verifying their legal existence and or suspicious transaction report was made,
organizational structure, as well as the the contents thereof, or any other information
authority and identification of all persons in relation thereto. In case of violation
purporting to act on their behalf. thereof, the concerned officer and employee
The provisions of existing laws to the contrary of the covered institution shall be criminally
notwithstanding, anonymous accounts, liable. However, no administrative, criminal or
accounts under fictitious names, and all other civil proceedings, shall lie against any person
similar accounts shall be absolutely for having made a covered or suspicious
prohibited. Peso and foreign currency non- transaction report in the regular performance
checking numbered accounts shall be of his duties in good faith, whether or not such
allowed. The BSP may conduct annual reporting results in any criminal prosecution
testing solely limited to the determination of under this Act or any other law.
the existence and true identity of the owners When reporting covered or suspicious
of such accounts. transactions to the AMLC, covered institutions
and their officers and employees are
RECORD KEEPING prohibited from communicating directly or
All records of all transactions of covered indirectly, in any manner or by any means, to
institutions shall be maintained and safely any person or entity, the media, the fact that a
stored for five (5) years from the dates of covered or suspicious transaction report was
transactions. made, the contents thereof, or any other
With respect to closed accounts, the records information in relation thereto. Neither may
on customer identification, account files and such reporting be published or aired in any
business correspondence, shall be preserved manner or form by the mass media, electronic
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(5) Malversation of Public Funds and Property (19) Violation of Section 4 of Republic Act No.
under Articles 217 and 222 of the Revised 9775, otherwise known as the Anti-Child
Penal Code, as amended; Pornography Act of 2009;
(6) Forgeries and Counterfeiting under Articles (20) Violations of Sections 5, 7, 8, 9, 10(c), (d)
163, 166, 167, 168, 169 and 176 of the Revised and (e), 11, 12 and 14 of Republic Act No.
Penal Code, as amended; 7610, otherwise known as the Special
(7) Violations of Sections 4 to 6 of Republic Act Protection of Children Against Abuse,
No. 9208, otherwise known as the Anti- Exploitation and Discrimination;
Trafficking in Persons Act of 2003;
(8) Violations of Sections 78 to 79 of Chapter IV, ANTI-MONEY LAUNDERING
of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the COUNCIL
Philippines, as amended; The Anti-Money Laundering Council shall be
(9) Violations of Sections 86 to 106 of Chapter composed of the Governor of the Bangko
VI, of Republic Act No. 8550, otherwise Sentral ng Pilipinas as chairman, the
known as the Philippine Fisheries Code of Commissioner of the Insurance Commission and
1998; the Chairman of the Securities and Exchange
(10) Violations of Sections 101 to 107, and 110 of Commission as members. [Sec. 7]
Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995; FUNCTIONS
(11) Violations of Section 27(c), (e), (f), (g) and (i), The AMLC shall act unanimously in the
of Republic Act No. 9147, otherwise known as discharge of its functions as defined hereunder:
the Wildlife Resources Conservation and (1) to require and receive covered or suspicious
Protection Act; transaction reports from covered institutions;
(12) Violation of Section 7(b) of Republic Act No. (2) to issue orders addressed to the appropriate
9072, otherwise known as the National Supervising Authority or the covered
Caves and Cave Resources Management institution to determine the true identity of
Protection Act; the owner of any monetary instrument or
(13) Violation of Republic Act No. 6539, property subject of a covered transaction or
otherwise known as the Anti-Carnapping Act suspicious transaction report or request for
of 2002, as amended; assistance from a foreign State, or believed
(14) Violations of Sections 1, 3 and 5 of by the Council, on the basis of substantial
Presidential Decree No. 1866, as amended, evidence, to be, in whole or in part, wherever
otherwise known as the decree Codifying the located, representing, involving, or related to,
Laws on Illegal/Unlawful Possession, directly or indirectly, in any manner or by any
Manufacture, Dealing In, Acquisition or means, the proceeds of an unlawful activity.
Disposition of Firearms, Ammunition or (3) to institute civil forfeiture proceedings and
Explosives; all other remedial proceedings through the
(15) Violation of Presidential Decree No. 1612, Office of the Solicitor General;
otherwise known as the Anti-Fencing Law; (4) to cause the filing of complaints with the
(16) Violation of Section 6 of Republic Act No. Department of Justice or the Ombudsman
8042, otherwise known as the Migrant for the prosecution of money laundering
Workers and Overseas Filipinos Act of 1995, offenses;
as amended by Republic Act No. 10022; (5) to investigate suspicious transactions and
(17) Violation of Republic Act No. 8293, covered transactions deemed suspicious
otherwise known as the Intellectual Property after an investigation by AMLC, money
Code of the Philippines; laundering activities, and other violations of
(18) Violation of Section 4 of Republic Act No. this Act;
9995, otherwise known as the Anti-Photo (6) to apply before the Court of Appeals, ex
and Video Voyeurism Act of 2009; parte, for the freezing of any monetary
instrument or property alleged to be the
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AUTHORITY TO INQUIRE INTO 3(i)(1), (2), and (12) hereof, and felonies or
offenses of a nature similar to those mentioned
BANK DEPOSITS in Section 3(i)(1), (2), and (12), which are
Notwithstanding the provisions of Republic Act Punishable under the penal laws of other
No. 1405, as amended, Republic Act No. 6426, countries, and terrorism and conspiracy to
as amended, Republic Act No. 8791, and other commit terrorism as defined and penalized
laws, the AMLC may inquire into or examine any under Republic Act No. 9372."
particular deposit or investment with any
banking institution or non-bank financial "The Court of Appeals shall act on the
institution upon order of any competent court in application to inquire into or examine any
cases of violation of this Act when it has been deposit or investment with any banking
established that institution or non-bank financial institution
within twenty-four (24) hours from filing of the
(1) there is probable cause that the deposits
application."
OR
(2) investments involved are related to an
"To ensure compliance with this Act, the
unlawful activity as defined in Section 3(i)
Bangko Sentral ng Pilipinas may, in the course
hereof or a money laundering offense
of a periodic or special examination, check the
under Section 4 hereof;
compliance of a Covered institution with the
requirements of the AMLA and its
except that no court order shall be required in
implementing rules and regulations."
cases involving unlawful activities defined in
Sections 3(i)(1), (2) and (12).
"For purposes of this section, related accounts
shall refer to accounts, the funds and sources of
To ensure compliance with this Act, the Bangko
which originated from and/or are materially
Sentral ng Pilipinas (BSP) may inquire into or
linked to the monetary instrument(s) or
examine any deposit or investment with any
property(ies) subject of the freeze order(s)."
banking institution or non-bank financial
institution when the examination is made in the
"A court order ex parte must first be obtained
course of a periodic or special examination, in
before the AMLC can inquire into these related
accordance with the rules of examination of the
Accounts: Provided, That the procedure for the
BSP. [Sec.11]
ex parte application of the ex parte court order
for the principal account shall be the same with
Sec. 2 of RA 10167 amended Sec. 11 to read as that of the related accounts."
follows:
Notwithstanding the provisions of Republic Act "The authority to inquire into or examine the
No. 1405, as amended; Republic Act No. 6426, main account and the related accounts shall
as amended; Republic Act No. 8791; and other comply with the requirements of Article III,
laws, the AMLC may inquire into or examine any Sections 2 and 3 of the 1987 Constitution, which
particular deposit or investment, including are hereby incorporated by reference."
related accounts, with any banking institution or
non-bank financial institution upon order of any Amendments under RA 9194
competent court based on an ex parte (1) Lowers the threshold amount for single
application in cases of violations of this Act, covered transactions (cash or other
when it has been established that there is equivalent monetary instrument) from P4M
probable cause that the deposits or to P500,000.00 within one (1) banking day.
investments, including related accounts (2) Expands the reporting requirements to
involved, are related to an unlawful activity as include the reporting of suspicious
defined in Section 3(i) hereof or a money transactions regardless of the amount
laundering offense under Section 4 hereof; involved
except that no court order shall be required in (3) Authorizes AMLC to inquire into or examine
cases involving activities defined in Section any particular deposit or investment, with
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effect registration of any enterprise applying (a) which are defense-related activities,
under this Act within fifteen (15) days upon requiring prior clearance and
submission of completed requirements. [Sec. 5] authorization from Department of
National Defense (DND) to engage in
FOREIGN INVESTMENTS IN such activity, such as the manufacture,
repair, storage and/or distribution of
EXPORT ENTERPRISE firearms, ammunition, lethal weapons,
Foreign investment in export enterprises military ordinance, explosives,
whose products and services do not fall within pyrotechnics and similar materials; unless
Lists A and B of the Foreign Investment such manufacturing or repair activity is
Negative List provided under Section 8 hereof specifically authorized, with a substantial
is allowed up to one hundred percent (100%) export component, to a non-Philippine
ownership. national by the Secretary of National
Export enterprises which are non-Philippine Defense; or
nationals shall register with BOI and submit (b) which have implications on public health
the reports that may be required to ensure and morals, such as the manufacture and
continuing compliance of the export distribution of dangerous drugs; all forms
enterprise with its export requirement. BOI of gambling; nightclubs, bars,
shall advise SEC or BTRCP, as the case may beerhouses, dance halls; sauna and
be, of any export enterprise that fails to meet steam bathhouses and massage clinics.
the export ratio requirement. The SEC or
BTRCP shall thereupon order the non- Small and medium-sized domestic market
complying export enterprise to reduce its enterprises, with paid-in equity capital less than
sales to the domestic market to not more than the equivalent two hundred thousand US
forty percent (40%) of its total production; dollars (US$200,000) are reserved to Philippine
failure to comply with such SEC or BTRCP nationals, Provided that if: (1) they involve
order, without justifiable reason, shall subject advanced technology as determined by the
the enterprise to cancellation of SEC or Department of Science and Technology or (2)
BTRCP registration, and/or the penalties they employ at least fifty (50) direct employees,
provided in Section 14 hereof. [Sec. 6] then a minimum paid-in capital of one hundred
thousand US dollars (US$100,000.00) shall be
FOREIGN INVESTMENT IN allowed to non-Philippine nationals.
DOMESTIC MARKET Amendments to List B may be made upon
ENTERPRISE recommendation of the Secretary of National
Non-Philippine nationals may own up to one Defense, or the Secretary of Health, or the
hundred percent (100%) of domestic market Secretary of Education, Culture and Sports,
enterprises unless foreign ownership therein is endorsed by the NEDA, approved by the
prohibited or limited by the Constitution President, and promulgated by a Presidential
existing law or the Foreign Investment Negative Proclamation.
List under Section 8 hereof. [Sec. 7]
Transitory Foreign Investment Negative List
FOREIGN INVESTMENT established in Sec. 15 hereof shall be replaced
at the end of the transitory period by the first
NEGATIVE LIST Regular Negative List to be formulated and
The Foreign Investment Negative List shall have recommended by NEDA, following the process
two (2) components lists; A, and B. and criteria provided in Sections 8 of this Act.
(1) List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate The first Regular Negative List shall be
of the Constitution and specific laws. published not later than sixty (60) days before
(2) List B shall contain the areas of activities and the end of the transitory period provided in said
enterprises regulated pursuant to law: section, and shall become immediately effective
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