Commercial Law CORPORATE REHABILITATION

Special Lecture (NB: FRIA)

Justice Japar B. Dimaampao
November 15, 2017 Powers of Rehabilitation Receivers:
(WERPA)
Tip: Bulk Corpo, Nego, Insurance
W with approval of the court to sue and
Insider Trading recover properties
(LODI) E evaluate the existing assets and
L learns material information liabilities
O not generally open to the public R recommend the appointment of
D director management committee
I Insurer P prohibit the sale or transfer of property
(preserve)
Other manipulative trading devices: A accept and incorporate amendments
(DOMS)

D Done - through transaction ( Rehabilitation restoration of the debtor to

a condition of a successful operation
O Over the counter transaction (outside
the stock trading)
Application:
M market jiggling/rigging (matching) (SPC)
recall wash sale transactions (not a dealer Sole Proprietorship
in securities) Partnership
Corporation
S- Short sale transactions (no transfer of
beneficial ownership) Purpose:
(REM)

AMLA R restore

Notable Predicate Crimes: E economically feasible status

(PETMALU)
M so creditors can claim more if it
P- Piracy on the high seas continues as a going concern
E extortion and robbery
T Terrorism Rehabilitation applies to SPC
M murder
A Arson Liquidation applies to IPC (individual,
L laws of other countries that penalize the partnership, corporation)
same offenses
U unlawful possession, manufacture, of Suspension of Payment applies to the
explosives and firearms individual

Nature of rehabilitation, liquidation, and

suspension of payments in rem;
summary; non-adversarial

Only affidavits are presented.

Only clarificatory hearings are conducted.
Other purposes:
Equitable purpose to effectively
distribute the assets among creditors
Rehabilitative purpose fresh start for the
debtor corporation
__________
Purposes of Liquidation:
(CoPaDi)
Co convert assets to cash
Pa pay creditors
Di distribute surplus
Purpose of Suspension of payments
to discharge the debtor
Common attribute of rehabilitation,
liquidation, and suspension of payments
INSVOLVENCY
Expanded definition of insolvency: The
debtor has more assets than liabilities, yet
he foresees the impossibility of paying his
obligations
Equality is equity all creditors shall
stand on equal footing.
Principle of pari passu (equal footing)
no creditor is given an advantage or
preference. No one can be paid ahead of
others.
Q: In case rehabilitation fails, may a petition
for liquidation be filed?
A: YES.
Q: If the liquidation fails, can he file for
dissolution?
A: YES.
See: Viva Shipping vs. Keppel
Commencement Order it embodies the
so called stay or suspension order.
(General Rule: All proceedings are
suspended)
Exceptions to the suspension order:
(SSS MB FC)
S Supreme Court
S subject to the discretion of the rehab
court (specialized court or quasi judi
agency)
S surety, persons solidarily liable, party or
accommodation mortgagors, issuer of LoC
M claim of client of market securities
participant
B claim of license brokers
F settlement of financial transactions
through the facilities of a clearing agency
C (Panlilio case) criminal actions
When rehabilitation may be converted to
liquidation proceedings:
(MR FB INN)
M motion of the debtor
R recommendation of the receiver that
the proceedings be converted
F failure of rehabilitation
B bad faith on the part of the creditor or
debtor
I insolvent debtor
N rehabilitatoin plan is not confirmed (1-
year period)
N no substantial likelihood that the debtor
will be successfully rehabilitated.
Three modes of rehabilitation:
(COP)
Court supervised to seek court approval
(2/3; requirement 50%)
Pre-negotiation
Out of court rehabilitation agreement
(OCRA) 67% (secured creditors) 75%
85%
PRIVATE CORPORATIONS
Narra Nickel Mining Case control test;
grandfather rule
60% Filipino ownership
Control Test atleast 60% of the ownership
is owned by Filipinos. This is the liberal test.
You need not test the ownership further.
GFR it is strict. There is a need to trace
the ownership. If the Filipino ownership is
less than 60%, apply the GFR.
Apply the GFR in corporate layering.
*Gamboa vs. Teves capital = voting
rights (common shares)
NB: The full beneficial ownership of 60% of
the OCS.
Concepts and Principles:
(LUMMP)
L - liability of DOT (BAG) bad faith; if
they assent; gross negligence; (PILA)
personal interest over the transaction;
issuance of watered shares of stock; when
there is law holding them liable; agreement
A apparent authority (CBA)
corporation is bound by a contract, entered
into by the director with apparent authority.
B business judgement rule (NAB)
shall not be liable for acts, decisions,
made in the exercise of their business
judgments.
C corporate opportunity self
dealing director takes advantage of a
business resulting in prejudice to the
corporation.
U Ultra vires act outside the express,
implied, or incidental powers
What are the requisites for the
ratification of UVAs? (WARNS)
W act must be wholly executed
A approved by all stockholders
R rights of third persons must not
be prejudiced
N not illegal, immoral
S State rights must not be involved
Trust Fund Doctrine capital assets of the
corp shall be regarded as equity in trust in
favor the creditors.
What does it require? Since it
intends to protect creditors, it requires
UREs. (Sec. 41 corp. can only acquire its
own shares of stock if there are UREs; Sec.
43 before declaration of dividends; Sec.
82 Payment of fair value of shares to the
dissenting stockholders) these all involve
disbursements of corporate funds.
M merger
M moral damages
The corporation is not entitled to
moral damages, except in cases of libel or
slander.
P piercing the veil of corporate fiction
(DDFA CFI)
D defeat public convenience
D defend a crime
F protect fraud
A alter ego
Control to commit fraud resulting in
injury (CFI)
 Instances when AR may be exercised:
(MISA)
What requires majority vote of the
stockholders: M merger or consolidation
(CAMFENA)
I investment
C grant of compensation
A adoption of by-laws S sale of all assets
M management contract (if the contract
does not involve interlocking directors, only A amendment in the AoI that
a majority vote) authorize restrictions or preferences.
F filling of vacancies in the Board
(stockholders or remaining members of the
board. DERIVATIVE SUIT
(CRIES)
Stockholders - (removal, expiration,
increase not constituting a quorum). C cause of action
R refusal of the Board
Board - (death, incapacity, I the refusal results in injury
abandonment, legal disqualification) E exhaustion of intracorporate remedies,
except if the directors control the
E election of directors corporation
S stockholder on record must file the suit
N fixing of value of no-par value (one stockholder) will suffice

A amendment or repeal of by-laws

NB: Liabilities and properties may be
transferred in cases of mergers or
Preemptive Right vs. Appraisal Right consolidations.

Preemptive Right increase in ACS,

subsequent issuance; disposition of Close Corporations (Going Private
treasury shares of stock. Corporation)
(PASS)
Instances when PR may be denied:
(EPAL) P preemptive right shall extend to all
stocks to be issues, and can only be
E in exchange of property needed restricted through the AoI (S102)
for corporate business
A AoI may provide that stockholders may
P in payment of previously manage the corporation
contracted debt
S shares are held by not more than 20
A denied by the AoI persons

L law S shares of stock not listed through the

local stock exchange
Appraisal Right the right to dissent and
demand the fair value of the shares. It is also called a de facto partnership with
a corporate shell
 NEGOTIABLE INSTRUMENTS LAW
corporate shell corporate structure
(SHARP)

CORPORATE DISSOLUTION S - Samsung Construction vs. Far East

Bank - re: forgery - the one who forged the
Modes: Voluntary and Involuntary check was an EE of the bank.

Voluntary - file for extension; shorten the The general rule is that the DWEE bank is
corporate term liable on a forged check because the
DWEE bank has the specific signatures,
Involuntary: unless the DWR is negligent.
(LIFE)
In this case, the DWEE is liable as there
L - legislative dissolution was no showing of Samsungs negligence.

I - illegal act SC: ERs (Samsung) do not possess the gift

of cognition as to the evil that work in the
F - failure to organize; inoperation hearts and minds of the EE.
E - expiration of corporate term

H HSBC vs. CIR - re: electronic

Acts constituting doing of business messages - these are not negotiable
(ABCD) instruments.

A - actual performance of specific

commercial acts or transactions A - Ariza vs. Express Savings Bank the
(Mere importations or exportations will not 24-hr clearing period does not apply to
suffice. There must be ACTUAL materially altered checks.
transactions involved.)

R PNB vs. Rodriguez - fictitious payee

B - business test - it must have the intention rule - who will bear the loss? The DWR or
to continue its business here DWEE?

Generally, the DWR bears the loss.

C - contract test - contracts must be By way of an exception, the DWEE is liable

perfected here in the PH if it is guilty of commercial fraud.

D - continuity of commercial dealings and P - ________ S14 - incomplete, delivered

arrangements instruments - knowledge of defect does not
make one a HDIC

Frequently Asked Questions in the Bar

Exams

Sec. 2 - NB: maturity date; amount

Sec. 3 - reimburse out of my account - the S47 rel. to S36 - the indorsement that may
instrument is still negotiable. restrict further indorsement

That particular fund or account is just a

source of reimbursement. Not a primary
source of payment. Sec. 52 HOLDER IN DUE COURSE

Sec. 4 (C) - after - it must be certain to (8 requisites)

happen
Sec. 5 (D) - or (alternative obligation) it
is not negotiable because it gives the holder
the right to elect, or he is given an option.
1. Holder of a complete instrument
2. Regular on its face
3. Became the holder before it became
overdue.

4. No notice of previous or prior dishonor

Order Instrument (OI) vs. Bearer
Instrument (BI) 5. Good faith

Order Instrument - words of negotiability 6. For value

are or order, to the order of.
7. No notice of defective title
May be converted to a BI (Sec 9e), when
8. No notice of any infirmity
the only or last indorsement is in blank.

NB:
Bearer Instrument
Payee may be a HIDC
bearer
Acceptor can never be a HIDC.
Possessor

Holder
Rights of a HIDC (S51, S57)
(SCED)
A bearer instrument is always a bearer Sue
instrument even if it is specially indorsed.
Collect
Sec. 40
Enforce payment of the full amount
Q: Promissory note payable to Bearer BR
Hold the instrument free from personal
specifically indorsed it to A
defenses
Can A negotiate it to B by delivery?

A: YES. A bearer instrument is always a

Only a HIDC can exercise these rights.
bearer instrument, even if it is specially
Except S58 (the Shelter Rule)
indorsed.
The holder in S58 is a HIDC by
In case the instrument was not originally
subrogation.
payable to bearer, not apply the above
answer.
CROSSED CHECKS
The effects of crossing a check:
(WON)
W - serves as a warning to the holder that
the check has been issued for a definite
purpose
O - it may ne negotiated only ONCE to a
person with an account in the bank.
N - not for encashment, but for deposit.
Q: Is a holder of a CC, considered a HIDC?
A: Inquiry must be made into the title of the
indorser of the check. Failure to make an
inquiry amounts to bad faith, and therefore
negates being a HIDC.
If the check is an ordinary check, the
above case will not apply. In this case, the
holder will be presumed to be a HIDC.
Inquiry is not necessary.
LIABILITIES
Primary - maker of a PN; DWEE
Secondary - DWR; indorser
Accommodation Party - liable as surety,
therefore, it insures the payment of an
obligation.
A DWEE becomes liable upon acceptance.
DEFENSES
PERSONAL (it cannot be interposed
against a HIDC)
(FIDILA)
Failure of consideration
Insertion of wrong date
Defective title
Incomplete, delivered (S14)
Lack of delivery (S16)
Absence of consideration
REAL (can be interposed against the whole
world)
(FILIAM or FAMILI)
Forged signature
Incomplete AND undelivered
Lack of authority on the part of an agent
Insanity
Alteration (must be material)
Minority
Q: DWR signature was forged. The forger
deposited the check with collecting bank,
and there was encashment
Discuss the liabilites of the CB and the
DWEE.
A: The DWEE bank is liable. The CB does
not warrant the genuineness of the
signture. The DWEE must know the
signature of its depositors.
Q: The payees signature was forged. The
forger deposited the check with the
collecting bank, and there was encashment.
Discuss the liabilities.
A: The CB is liable. When the CB cleared it,
it became an indorser (S66). It warrants the
genuineness of the instrument. When it
clears a check, the CB warrants that all IED; no notice to the IED of the payment;
prior indorsements are genuine. excepted risk)

M - Heirs of Maramag vs Maramag

Likewise, if the check is materially altered, The claimant is an illegitimate child.

liability falls on the CB. As its indorser, it
SC: IC qualifies as a beneficiary.
warrants the genuineness of the instrument.
An IC is entitled to such proceeds. The
Code applies. (S53)
INSURANCE

Premiums
Sec. 48 - Sunlife of Canada vs. Sibya
CASH AND CARRY RULE - pay the
As IER, the company can assail the policy, premiums, claim the funds
provided the IED is still alive.
Exceptions (ALICE) - S77
NB: During the lifetime.
Acknowledgement

Life insurance
Here, the IED did not disclose her kidney
Industrial life
problems, and died 3 days thereafter.
Credit extension of not more than 90d

Estoppel
SC: There is fraud. But the IER cannot
assail the policy because it must be made
during the lifetime of the IED.
Insurable Interest
(Sir has a slightly different opinion about
this, but this is the rule we follow) Insurable interest in life - must exist at the
time of effectivity of the life insurance.

Insurance Business (IB)

Insurable interest in property - must exist at
If it principally renders service, it is not the time of effectivity and when the loss
engaged in an IB. occurs.

Cases: (ALM) NB: NEW PROVISIONS S11 and S12

A Fortune Medicare vs. Amorin health

care agreements, like insurance contracts,
must be liberally construed in favor of the BENEFICIARIES
subscriber, and against the provider. GR: designation - revocable
L - Loadstar Shipping vs. Malayan - the rule If the IED dies without changing the
on subrogation under Art 2207 of NCC designation, it becomes irrevocable.
applies. (Exceptions to the rule of
subrogation - life insurance; omission of the
Q: If the IED was willfully killed by the BEN, O - other insurance clause
who shall be entitled to the proceeds?
N - no fault clause
A: (OPE or POE)
A - authorized drivers clause
O - other BEN
A - all-risk clause
P - based on the policy

E - estate
CASE:

Ordinary negligence is an insurable risk.

MATERIALITY (S31) This is impliedly included.

Not determined by the event. It is Q: What is considered as an implied

determined from the probable and excluded risk?
reasonable influence of the facts upon
whom the communication is made. A: Gross negligence

Double Insurance vs. Reinsurance SUICIDE CLAUSE (S183)

DI - different IERS, same risk insured, GR: If there is a SC, in all cases, there must
same IED be recovery.

REI - IER becomes the reinsured Exceptions:

No insurance clause
Sane
MARINE INSURANCE Contested

S126 - proper deviation

S141 - constructive loss

BANKING

(PLACARDD)
Proper deviation (SWAN)
P - powers of the BSP (exercised through
S - to save human lives or a vessel in the MB. It has the power to appt a
distress conservator (1 year) or a receiver (90
days)).
W - comply with warranty

A - avoid peril
L - legal relationship (debtor-creditor) -
N - neither the master or owner has control safety deposit box (bailor-bailee)
over such deviation

Constructive Loss
A - apparent authority
More than 3/4 of the value has been lost
C - close now, hear later scheme (applies in
There has to be an abandonment that is receivership) - cannot be interfered with by
unconditional. courts, unless there is grave abuse
(ONAA) A - account (DOSRI)
R - redemption Instances when the common carrier is not
liable:
D - deposit substitutes
(PONDO)
BDO vs. RP - public - borrowing of funds
from 20 or more individual or corporate P - public enemy
lenders
O - act of the owner
D - highest degree of diligence
N - natural calamity

D - defect in the packing

BANK SECRECY
O - order of competent authority
(BALIWAG-RTC)

B - bribery
Extraordinary Diligence; when observed.
A - anti graft
Beginning: reasonable opportunity to
L - subject of litigation board

I - impeachment End: reasonable opportunity to alight.

W - written waiver

A - AMLA cases Three-fold function of a Bill of Lading

(Hijacking; Kidnapping; Murder; Arson; (PRC)

Drugs)
P - proof
G - gross estate
R - receipt

C - contract
R reporting requirements imposed on
covered institutions as to the suspicious
accounts Affreightment Chartered Party - still a
common carrier. The owner has not
T Ten (10) years dormant
surrendered the management and control.
C - compromise in tax cases

AMLA Requirements of Maritime Protest

Note: (CoMA-24)
Freeze Orders Collision
Covered transactions (amount - more than Must be moving
500k)
Competent authority
Suspicious transactions (no justification, no
corresponding client) Competent authority

TRANSPORTATION
Determination of liability of common
carriers
Limited liability the liability of the owner of
the vessel is co-extensive with the value of
the vessel, equipment, and freight (except
workmens compensation claims, insured
vessel, negligence, death, repairs, and
injury)
Inscrutable fault negligence or fault
cannot be determined with certainty
Error in extremis (NB: zones of collision)
begins; becomes a practical certainty;
actual impact (BPI)
COGSA (Claims)
C - cause of action (loss of goods or
destruction of goods. Conversions or
misdeliveries are not covered)
O - file within 1 year from the delivery or
from the date it should have been delivered
G - must pertain to goods from a foreign
country
S - filed by the shipper or consignee
A - against the shipper
(Notice of loss is necessary only in coast-
wise shipping)
LETTER OF CREDIT
(IFS)
I - independence principle (seller is assured
of payment; banks deal only with the
documents; banks are under no duty to
ascertain the condition or quality of the
goods)
F - fraud exception principle fraud as an
exception to the independence principle
S - strict compliance rule compliance with
documentary requirements
TRUST RECEIPTS
(SHIP)
S - obligation to sell the goods (do not apply
the principle of nemo dat quod non habet
here)
H - hold the goods for and in behalf
I - insured (exemption from the application
of res perit domino)
P - proceeds
INTELLECTUAL PROPERTY LAW
TESTS OF REPUTABILITY (AM No. 10-3-
10) Whether a mark is well-known.
(CRITERIA)
C - commercial value
R - registration
I - image
T - trade share
E - extent of the use
R - record of successful protection
I - inherent distinction of the mark
A - geographical area
TESTS OF RELATEDNESS E - doctrine of equivalence (AIMM -
(CCP-BANK) appropriation of a prior invention; through
the incorporation of innovative mark;
through the same means and functions)
C - class of products to which the goods
belong D Dilution theory trademarks are
infringed in cases where it is confusingly
C - channel of market similar with other marks, it causes damage,
P - purpose and it misleads the public.

B - business SRC

A - attributes (SEC vs Prosperity.Com, Corp, 2012)

N - nature of the goods Provides for the Howey Test in determining

whether a particular transaction is an
K - kind or quality investment contract
(Taiwan Kolin Corporation vs. Kolin (COMES)
Electronics, 2015)
C - common enterprise

O - others efforts as source of profits

Infringement - unauthorized use; similarity
of goods; fraud not necessary; registration M - investment of money
required
E - expectation of profits

S - based on scheme
Unfair competition - passing off of ones
goods as his own; intent to defraud; may
involve different kinds of goods; registration TENDER OFFER RULE
no required
Intent to acquire shares in a public
company
Pre-disclosure doctrine - once you
disclose, the matter becomes accessible
and open to all. Exempt Securities and Exempt
Transactions
Holistic Test - entirety
SECURITIES (GRAB)
Dominance Test - prevalent features
TRANSACTIONS (UBER LEO BPI )

(GRAB)
(FED)
G - those issued by the government
F - fair use principle

News items are not copyrightable, but once

it is captured, it becomes copyrightable. R - issued by receiver in insolvency

Generally, there are no copyrights involved A - issued by any country with which we
in comments, criticisms, and news reports. have diplomatic relations

B - bank securities
(UBER)

U - unpaid subscription

B - brokers transaction

E - exchange of securities with other

securities without consideration

R - right of conversion has been exercised

in the exchange of securities

(Ang driver ng Grab at Uber ay si LEO)

L - sale to less than 20 persons within a 12

month period

E executor at a judicial sale

O - other transactions declared exempt.

(Leo has to secure a loan with BPI to buy

more cars for Grab and Uber)

B - bank transactions

P - Shares issued prior to incorporation

I - isolated transactions

-END-