MERCANTILE LAW LAST MINUTE TIPS 2018

NEGOTIABLE INSTRUMENTS LAW

Electronic messages or instructions in standard forms known as SWIFT, or “Society for

Worldwide Interbank Financial Telecommunication”, are NOT bills of exchange as they do not
comply with the requisites of negotiability under Sec. 1 of the NIL. The electronic messages are not
signed by the investor-clients as supposed drawers of a bill of exchange; these do not contain an
unconditional order to pay a sum certain in money as the payment is supposed to come from a
specific fund or account of the investor-clients; and, these are not payable to order or bearer but to
a specifically designated third party. [HSBC Limited-Philippine Branches v. CIR (2014)]

Bearer Instrument

A check made payable to cash is payable to the bearer. [People v. Wagas (2013)]

A check payable to the order of an actual and living person may be considered a bearer
instrument as long as the drawer did not intend him to be the actual recipient of its proceeds.
Being a bearer instrument, it can be negotiated by mere delivery. However, the fictitious payee
rule is subject to the commercial bad faith exception, or the showing of commercial bad faith on
the part of the drawee bank or any transferee of the check. Such instrument shall then be
considered an order instrument which cannot be negotiated without endorsement and delivery of
the payee. (PNB vs Spouses Rodriguez; 2008)

Delivery

It is the transfer of possession, actual or constructive, from one person to another (NIL, Sec. 191),
with the intent to transfer title to payee and recognize him as holder thereof. If the post-dated check
(PDC) was given to the payee in payment of an obligation, the purpose of giving effect to the
instrument is evident. Thus, title or ownership the check was transferred to the payee. However, if
the PDC was not given as payment, then there was no intent to give effect to the instrument and
ownership was not transferred. [San Miguel Corporation vs. Puzon, Jr. (2010)]

Forgery

As between a bank and its depositor, where the bank’s negligence is the proximate cause of the loss
and the depositor is guilty of contributory negligence, the greater proportion of the loss shall be
borne by the bank (60-40 ratio). The bank was negligent because it did not properly verify the
genuineness of the signatures in the applications for manager’s checks while the depositor was
negligent because it clothed its accountant/bookkeeper with apparent authority to transact
business with the Bank and it did not examine its monthly statement of account and report the
discrepancy to the Bank. [PNB vs. FF Cruz and Company 2011)]

Accommodation Party

An accommodation party who acted as a co-maker of a promissory note issued in favor of a bank
cannot validly set up the defense that he did not receive any consideration therefor as the fact that
the loan was granted to the principal debtor already constitutes sufficient consideration. [Ang v.
Associated Bank (2007)]

Rights of the Holder

The weight of authority sustains the view that a “payee” may be a holder in due course. Hence,
the rebuttable presumption that he is a prima facie holder in due course applies in his favor. [Cely
Yang v. CA (2003)]

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Manager’s check

As a general rule, the drawee bank is not liable until it accepts. However, a manager's check is
accepted by the bank upon its issuance. Notably, the mere issuance of a manager's check creates a
privity of contract between the holder and the drawee bank, the latter primarily binding itself to
pay according to the tenor of its acceptance irrespective of any available personal defenses.
However, a holder other than a holder in due course is still subject to personal defenses. [RCBC
Savings Bank v. Odrada (2016)]

Checks

While indeed, it cannot be said that manager’s and cashier’s checks are pre-cleared, clearing should
not be confused with acceptance. Manager’s and cashier’s checks are still the subject of clearing to
ensure that the same have not been materially altered or otherwise completely counterfeited.
[Metropolitan Bank v. Chiok (2014)]

Stale v. Prescribed Check

A stale check is a worthless check because it was not enchased after 6 months from issuance, but
does not discharge the debtor from his obligation. However a check which has prescribed after 10
years from issuance discharges the debtor from the its obligation.

A check is subject to prescription of actions upon a written contract, that is, the action must be
brought from the time the right of action accrues. Barring any extrajudicial or judicial demand that
may toll the 10-year prescription period and any evidence which may indicate any other time when
the obligation to pay is due, the cause of action based on a check is reckoned from the date
indicated on the check.

If the check is undated, however, the cause of action is reckoned from the date of the
issuance of the check. This is pursuant to Sec. 17 of the NIL which provides that an undated
check is presumed dated as of the time of its issuance. [Benjamin Evangelista v. Screenex, Inc.
(2017)]

Legal consequences when a bank honors a forged check

1. When drawer's signature is forged - Drawee bank is liable because the bank is bound to know
the signature of its customers
2. When the payee’s signature is forged - Drawee bank is liable because it owes to the drawer-
depositor an absolute and contractual duty to pay the check only to the person to whom it is
made payable.
3. When the indorser’s signature is forged - Drawee bank bears the loss as it is under strict
liability to pay the check to the order of the payee. Payment under forged indorsement is not to
the drawer’s order. Ensuingly, if the drawee bank pays a check bearing forged signature of
indorser, it does so at its own peril. However, the drawee bank may pass the liability to the
collecting bank who cannot interpose the defense of forgery. Under Sec. 16 of NIL the collecting
bank is an indorser who warrants that the instrument is genuine and in all respect what it
purports to be. The collecting bank had no right to be paid by the drawee bank since the forged
indorsement is inoperative. The collecting bank my ultimately recover from the forger.

INSURANCE CODE

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind
the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and convincing evidence rests upon
the insurer. [Manulife Philippines v. Ybanez (2016)]

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Cash and Carry Rule

GR: No insurance contract or policy is valid and binding unless and until the premium thereof has
been paid. Any agreement to the contrary is void.
XPNS: LIA-S-ICE

1. Life and industrial life policy

2. Installments
3. Acknowledgment of receipt of premium
4. Surety
5. Public Interest
6. Credit extension
7. Estoppel

Perfection of Insurance Contract

The notice of the availability of the check, by itself, does not produce the effect of payment of the
premium. [Gaisano v. Development Insurance and Surety Corporation (2017)]

Incontestability Clause

The date of last reinstatement mentioned in Sec. 48 of the IC pertains to the date that the insurer
approved the application for reinstatement. However, in light of ambiguity in insurance documents,
the Court adopts the interpretation favorable to the insured in determining the date when the
reinstatement was approved. [The Insular Life Assurance Company, Ltd., v. Khu, et al. (2016)]

After the two-year period from the effectivity of a life insurance contract lapses, or when the
insured dies within said period, the insurer must make good on the policy, even though the policy
was obtained by fraud, concealment, or misrepresentation. [Sun Life of Canada (Philippines), Inc.
v. Sibya, et al. (2016)]

Claims Settlement and Subrogation

Given the provisions of the IC, which is a special law, the applicable rate of interest shall be
that imposed in a loan or forbearance of money as imposed by the BSP, even irrespective of
the nature of insurer's liability. In light of Circular No. 799 issued by the BSP on June 21, 2013
decreasing interest on loans or forbearance of money, the CA's declared rate of 12% per
annum shall be reduced to 6% per annum from the time of the circular's effectivity on July 1,
2013. [Stronghold Insurance Co., Inc. v. Pamana Island Resort Hotel and Marina Club, Inc.
(2016)]

Presentation of policy is not necessary for subrogation because subrogation takes effect the
moment the insurance company pays for the insured property.

If there is no stipulation or the stipulation is void, the insured may bring the action within 10 years
in case the contract is written. Parties may validly agree that an action on the policy should be
brought within a limited period of time, provided such period is not less than 1 year from the time
the cause of action accrues. If the period agreed upon is less than 1 year from the time the cause of
action accrues, such agreement is void. (IC, Sec. 63)

TRANSPORTATION LAWS

Shipper’s Load and Count Arrangement

The shipper was solely responsible for the loading of the container, while the carrier was oblivious
to the contents of the shipment. Protection against pilferage of the shipment was the consignee's
lookout. [Marina Port Services, Inc. v. American Home Assurance Corporation (2015)]

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Doctrine of Inscrutable Fault

In collision of vessel, where fault is established but it cannot be determined which of the two vessels
were at fault, both shall be deemed to have been at fault.

Doctrine of Limited Liability

Also called as the “no vessel, no liability doctrine,” it provides that the liability of the ship owner is
limited to ship owner’s interest over the vessel. In case of loss, the ship owner’s liability is also
extinguished. Limited liability likewise extends to ship’s appurtenances, equipment, freightage, and
insurance proceeds. This can be availed only by the shipowner and the shipping agent.

Nonetheless, the limited liability rule is not absolute and is without exceptions. It DOES NOT apply
in cases: (1) where the injury or death to a passenger is due either to the fault of the shipowner, or
to the concurring negligence of the shipowner and the captain; (2) where the vessel is insured; and
(3) in workmen's compensation claims. [Phil-Nippon Kyoei v. Gudelosao (2016)]

Claims that can be recovered despite loss of the vessel

1. Claims of the crew members

2. Repairs
3. Insurance proceeds
4. Any loss damages brought about by negligence of the shipowner
5. Not abandoned
6. Not a maritime commerce
7. Not a common carrier

Bill of Lading

It was categorically stated in the Bill of Lading that the carrier shall in any event be discharged from
all liability whatsoever in respect of the goods, unless suit is brought in the proper forum within
nine (9) months after delivery of the goods or the date when they should have been delivered.

Strictly applying the terms of the Bill of Lading, the one-year prescriptive period under the COGSA
should govern because the present case involves loss of goods or cargo. [Pioneer Insurance and
Surety Corporation v. Apl Co., Pte. Ltd. (2017)]

NOTE: One year period under COGSA NOT applicable to arrastre operators.

CORPORATION CODE

Nationality of the Corporation

For purposes of determining compliance [with the constitutional or statutory ownership], the
required percentage of Filipino ownership shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote. [Roy III v. Herbosa, G.R.
(2017)]

NOTE: In case of mixed shares issued by the corporation, it need not be 60% or more ALL THE WAY
or in EVERY CLASS OF SHARES issued, as long as the two requirements mentioned above is complied
with.

If Filipino equity in the investing-corporation is less than 60%, it cannot be considered as Philippine
national. Hence, you apply the grandfather rule, where only the shares that correspond to the
percentage owned by the Filipinos must be registered as such, and the rest are foreign owned.

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In the case of Narra Nickel Mining v. Redmont (2014), the Filipino subscriptions were not paid by
them but allegedly financed by foreign nationals. Hence the Supreme Court applied in this case the
grandfather rule, since there is doubt as to the ownership of the shares owned by Filipinos.

Control test

It is the prevailing mode of determining the nationality of a corporation engaged in nationalized

areas of activities provided for under the Constitution and other laws, where corporate
shareholders with alien shareholdings are present, which is done by ascertaining the nationality of
the controlling stockholder of the corporation. If the capital of the investing corporation is at least
60% owned by Filipinos, then the entire shareholdings of the investing corporation shall be
recorded as Filipino-owned thus making both the investing and investee -corporations a Philippine
national.

Grandfather Rule

The method by which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities is accurately computed, where corporate shareholders
with alien shareholdings are present, by attributing the nationality of the second or even subsequent
tier of ownership to determine the nationality of the corporate shareholder. Thus, to arrive at the
actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in
the corporation are determined.

Doctrine of Separate Juridical Personality

Stockholders are not themselves the real parties in interest to claim and recover compensation for
the damages arising from the wrongful attachment of its assets. Their stockholdings represented
only their proportionate or aliquot interest in the properties of the corporation, but did not vest in
them any legal right or title to any specific properties of the corporation. [Stronghold v. Cuenca
(2013)]

A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of
its corporate fiction. Resultantly, any proceedings taken against the corporation and its properties
would infringe on its right to due process. [Mayor v. Tiu (2016)]

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation or resorted to
fraud, bad faith, or malice in evading their obligation. [Dutch Movers v. Lequin (2017)]

Where companies engaged in a work-pooling scheme for the purpose of determining the
appropriate bargaining unit in a certification election, it is only proper that, in order to safeguard
the right of the workers and Unions A, B, and C to engage in collective bargaining, the corporate veil
of Express Lamination and Express Coat must be pierced. The separate existence of Super
Lamination, Express Lamination, and Express Coat must be disregarded. [Ang Lee v. Samahang
Manggagawa Ng Super Lamination (2016)]

Liability of Corporate Officers

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarity liable with the corporation; or

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4. He is made, by a specific provision of law, to personally answer for his corporate action.
[Pioneer Insurance v. Morning Star Travel & Tours, Inc., Et. Al. (2015)]

Corporate Name — Limitations on Use of Corporate Name

The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years
after the approval of the dissolution of the corporation by the Commission, unless allowed by the
last stockholders representing at least majority of the outstanding capital stock of the dissolved
firm. [Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of Commerce in The
Philippines, Inc. (2016)]

Board of Directors and Officers

The following officials or employees of the company can sign the verification and certification
without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the
President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel
Officer, and (5) an Employment Specialist in a labor case. The rationale behind the rule is that these
officers are "in a position to verify the truthfulness and correctness of the allegations in the
petition." [Yap v. Siao (2016)]

Doctrine of Apparent Authority

A corporation is estopped from denying the agent’s authority if it knowingly permits one of its
officers or any other agent to act within the scope of an apparent authority, and it holds him out to
the public as possessing the power to do those acts. The doctrine of apparent authority does not
apply if the principal did not commit any acts or conduct which a third party knew and relied upon
in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts or
conduct must have produced a change of position to the third party’s detriment. [Advance Paper
Corporation and George Haw v. Arma Traders Corporation, Manuel Ting, Et Al (2013)]

Nell Doctrine

Where one corporation sells or otherwise transfers all of its assets to another corporation, is
the latter liable for the debts and liabilities of the transferor?

GR: NO.

XPNs:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently to escape liability for such debts. [Edward J.
Nell Co. vs. Pacific Farms, Inc. (1965)]

Business- Enterprise Transfer

The transferee corporation’s interest goes beyond the assets of the transferor’s assets and its
desires to acquire the latter’s business enterprise, including its goodwill.

Sec. 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation necessarily continued the business of the selling
or transferor corporation. Given that the transferee corporation acquired not only the assets but
also the business of the transferor corporation, then the liabilities of the latter are inevitably
assigned to the former. Section 40 refers to the sale, lease, exchange or disposition of all or
substantially all of the corporation's assets, including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree
that the transferor corporation is rendered incapable of continuing its business or its corporate
purpose.

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Fraud is certainly not an element of the business enterprise doctrine. Indeed, the transferee
corporation may inherit the liabilities of the transferor despite the lack of fraud due to the
continuity of the latter’s business. [Y-I Leisure Philippines, Inc. v. Yu (2015)]

Penal Sanction under the Corporation Code

The Corporation Code was intended as a regulatory measure, not primarily as a penal statute. Sec.
31 to 34 in particular were intended to impose exacting standards of fidelity on corporate officers
and directors but without unduly impeding them in the discharge of their work with concerns of
litigation. Considering the object and policy of the Corporation Code to encourage the use of the
corporate entity as a vehicle for economic growth, a strict construction of Sec. 31 and 34 as penal
offenses in relation to Sec. 144 in the absence of unambiguous statutory language and legislative
intent cannot be espoused. [James Ient And V. Tullett Prebon Philippines, Inc. (2017)]

Right to Inspect

The revocation of a corporation's Certificate of Registration does not automatically warrant the
extinction of the corporation itself such that its rights and liabilities are likewise altogether
extinguished. The termination of the life of a juridical entity does not, by itself, cause the extinction
or diminution of the rights and liabilities of such entity nor those of its owners and creditors. The
rights and remedies against, or liabilities of, the officers shall not be removed or impaired by reason
of the dissolution of the corporation. Corollarily then, a stockholder's right to inspect corporate
records subsists during the period of liquidation. [[Alejandro· D.C. Roque v. People (2017); Alfredo
L. Chua v. People [2016)]

Derivative Suit

Requisites for filing: C-SENA

(1) The cause of action belongs to the corporation (corporate right);
(2) He was a stockholder or member at the time the acts or transactions
subject of the action occurred AND at the time the action was filed;
(3) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(4) The suit is not a nuisance or harassment suit; and
(5) No appraisal rights are available for the act or acts complained of.

Meetings

The provisions only require the sending/mailing of the notice of a stockholders' meeting to the
stockholders of the corporation. It is not required that the notice of stockholder’s meeting be
actually received by the stockholder within the period allowed in the Corporation Code or the By-
laws. [Simny G. Guy, As Minority Stockholder and For and in Behalf Of Goodland Company,
Inc., v. Gilbert G. Guy (2017)]

Requirements for Valid Transfer of Stocks

Upon the death of the stockholder, his heirs do not automatically become the stockholders of the
corporation. The heirs acquire standing in the corporation only upon registration of the transfer of
the ownership of the shares in the books of the corporation. [Puno v. Puno Enterprises (2009)]

The transferee of shares of stock is the real party-in-interest having a cause of action for mandamus
to compel the registration of the transfer and the corresponding issuance of stock certificates.
Abidance to the prior ruling that the transferee acquires standing only upon registration of transfer
is a palpable error since the subject matter of the mandamus suit is precisely the registration
sought by him. [Joseph Omar O. Andaya v. Rural Bank of Cabadbaran, Inc. (2016)]

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Merger and Consolidation

There are two types of corporate acquisitions: asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of its assets to another entity. In stock sales, the
individual or corporate shareholders sell a controlling block of stock to new or existing
shareholders.

ASSET SALE STOCK SALE

The rule is that the seller in good faith is
authorized to dismiss the affected employees,
but is liable for the payment of separation pay
under the law. The buyer in good faith, on the
other hand, is not obliged to absorb the
employees affected by the sale, nor is it liable for
the payment of their claims. The most that it
may do, for reasons of public policy and social
justice, is to give preference to the qualified
separated personnel of the selling firm. [SME
Bank Inc. vs. Peregrin T. De Guzman (2013)]
The assets of the selling corporation are
transferred to another entity, the transaction in
stock sales takes place at the shareholder level.
Because the corporation possesses a personality
separate and distinct from that of its
shareholders, a shift in the composition of its
shareholders will not affect its existence and
continuity. [SME Bank Inc. vs. Peregrin T. De
Guzman (2013)]

No merger took place between Bank of Commerce and TRB as the requirements and procedures for
a merger were absent. A merger does not become effective upon the mere agreement of the
constituent corporations. All the requirements specified in the law must be complied with in
order for merger to take effect. Sec. 79 of the Corporation Code further provides that the merger
shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of a
certificate of merger. [Bank of Commerce v. Radio Philippines Network, Inc. (2014)]

Effects of Merger

The merger of a corporation with another does not operate to dismiss the employees of the
corporation absorbed by the surviving corporation. This is in keeping with the nature and effects of
a merger as provided under law and the constitutional policy protecting the rights of labor. The
employment of the absorbed employees subsists. Necessarily, these absorbed employees are not
entitled to separation pay on account of such merger in the absence of any other ground for its
award. [The Philippine Geothermal, Geothermal, Inc. Employees Union v. Unocal Philippines,
Inc. (2016)]

Non-Stock Corporation

For stock corporations, the quorum is based on the number of outstanding voting stocks, while for
non-stock corporations, only those who are actual, living members with voting rights shall be
counted in determining the existence of a quorum.

The basis in determining the presence of quorum in non-stock corporations is the numerical
equivalent of all members who are entitled to vote, unless some other basis is provided by the
By-Laws of the corporation. The qualification "with voting rights" simply recognizes the power of a
non-stock corporation to limit or deny the right to vote of any of its members. When the by-laws
declare that quorum shall constitute majority of the “members in good standing”, it is a mere
qualification as to which members shall be counted for quorum purposes. Delinquent members are
stripped of voting rights.

Likewise, quorum may be different from voting rights depending on the by-laws of the non-stock
corporation. For example, if there are 100 members in a non-stock corporation, 60 of which are
members in good standing, then the presence of 50% plus 1 of those members in good standing will
constitute a quorum. Thus, 31 members in good standing will suffice in order to consider a meeting
valid as regards the presence of quorum. The 31 members will naturally have to exercise their
voting rights. It is in this instance when the number of voting rights each member is entitled to
becomes significant. If 29 out of the 31 members are entitled to 1 vote each, another member

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(known as A) is entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes,
then the total number of voting rights of all 31 members is 64. Thus, majority of the 64 total voting
rights, which is 33 (50% plus 1), is necessary to pass a valid act. Assuming that only A and B
concurred in approving a specific undertaking, then their 35 combined votes are more than
sufficient to authorize such act. [Lim v. Moldex Land Inc. (2017)]

SECURITIES REGULATION CODE (R.A. NO. 8799)

Educational plans are securities and as such, cannot be sold or distributed within the Philippines
without prior approval of the SEC. [Primanila Plans v. SEC (2014)]

SHORT SWING PROFIT RULE

Any profit realized by insiders of an issuer from the combined purchase and sale, or any sale and
purchase, of any equity security of the issuer within any period of less than six months, unless such
security was acquired in good faith in connection with a debt previously contracted, shall inure to and
be recoverable by the issuer (Section 23.2, SRC). It is for the purpose of preventing the unfair use of
information which may have been obtained by such beneficial owner, director, or officer by reason of
his relationship to the issuer. The short-swing profits rule is separate and distinct from the insider
trading rule, which is governed by a different provision under Sec. 27 of the SRC.

BURIED FACTS DOCTRINE IN SECURITIES REGULATION

A disclosure is insufficient if it is presented in a way that conceals or obscures the information sought
to be disclosed. The doctrine applies when the fact in question is buried in a voluminous document or
disclosed in a piecemeal fashion, preventing a reasonable investor from realizing the correlation and
impact of the various facts interspersed throughout the document

FRAUD-ON-THE-MARKET DOCTRINE
This theory is based on the hypothesis that the share price of a company in the stock market is
determined by the available material information about the company and its business. Under this
theory, there is a causal link between any misstatement and any stock purchase, because the
misstatements defraud the entire market and thus affect the price of the stock.

CROWDFUNDING
Crowdfunding is the means of raising funds from a large number of people or “crowd” typically via
the Internet to finance a project or venture.

Kinds:
1. Rewards-based crowdfunding, where, in return for the money given to a project, a business or
non-profit venture typically gives some type of incentive or reward to the participating crowd.
2. Equity-based crowdfunding, investors fund small businesses in return for equity.
3. Credit-based crowdfunding, individuals or businesses lend money to support an idea or project
in return for interest payments. Borrowers must demonstrate the capability to repay the debt,
making it unattractive to startups since crowdfunding necessarily involves fundraising from the
public, our Securities Regulation Code (SRC) requires approval from our Securities and Exchange
Commission (SEC), unless it is so declared as an exempt transaction

BANKING LAWS

Nothing in Section 30 of RA 7653 requires the BSP, through the Monetary Board, to make an
independent determination of whether a bank may still be rehabilitated or not. Once the receiver
determines that rehabilitation is no longer feasible, the MB is simply obligated to: (a) notify in
writing the bank's board of directors of the same; and (b) direct the PDIC to proceed with
liquidation. [Apex Bancrights Holdings Inc. v. BSP (2017]

Monetary Board Powers

Nothing in the law requires the BSP, through the Monetary Board, to make an independent
determination of whether a bank may still be rehabilitated or not. [Apex Bancrights v. BSP (2017)]

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The BSP may rely on the determination of the:

1. Head of the Supervision and Examination Department (SED);
2. Conservator; and
3. Receiver.

How the BSP handles banks in distress?

1. Conservatorship
2. Closure
3. Receivership
4. Liquidation

Closure

The period during which the bank cannot do business due to insolvency is not a fortuitous event,
unless it is shown that the government's action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the regulatory body has acted without jurisdiction.
[(Spouses Jaime and Matilde Poon vs. Prime Savings Bank Represented By The Philippine
Deposit Insurance Corporation As Statutory Liquidator (2016)]

NOTE: The court has no authority to appoint a conservator or receiver for a bank in financial
distress or place it under a management committee. Such authority is lodged with the BSP.

Is the resolution of the BSP subject to declaratory relief?

NO. Resolution of the BSP issued in the exercise of its quasi-judicial functions like imposing
sanctions for violations of banking laws or regulations or appointing a receiver or conservator or
closing a bank is not subject to declaratory relief (Monetary Board v. PH Veterans Bank, 2015)

Remedy of corporation in case of closure

The corporation may file a petition for certiorari before the Court of Appeals (CA), subject to the
following requisites:
1. It must be filed by stockholders representing atleast majority of the OCS;
2. Within 10 days from the receipt by the Board of Directors of the order of closure;
3. That the act of the BSP was taken in excess of jurisdiction of with grave abuse of discretion
as to amount to lack of jurisdiction.

NOTE: The petition for certitorari may no longer be filed before the RTC, acting as a liquidation
court. The liquidation court may not dwell on the issue of the validity of the closure. (Yuseco vs
PDIC, as the statutory liquidator of the Unitrust Development Bank; GR No. 217899,
September 28, 2016.)

GENERAL BANKING ACT

Can foreign banks participate in the foreclosure of real estate?

The new law (R.A. 10641) now allows foreign banks to bid and take part in the foreclosure of real
estate that were mortgaged to them. In case said bank is the winning bidder, it shall, during the five
(5)-year period, transfer its rights to a qualified Philippine national, without prejudice to a borrower’s
rights under applicable laws.

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Redemption period in extra-judicial foreclosure of real estate mortgage

If the following elements are present, the one-year redemption period shall be reduced to three
months from foreclosure sale OR registration of the sale, whichever comes earlier.
A. The mortgagor is a juridical person
B. The mortgagee is a bank, quasi-bank or trust entity
C. The mode of foreclosure is extra-judicial

The shortened period of redemption applies even if the bank assigned its interest to the mortgage
to a non-banking institution because the assignee merely steps into the shoes of the mortgagee
bank and acquires all its rights, interests and benefits under the mortgage-including the shortened
redemption period. Moreover, to extend the redemption period would prejudice the ability of the
banks to quickly dispose of its hard assets to maintain solvency and liquidity. [White Marketing
Development Corporation v. Grandwood Furniture & Woodwork; (2016)]
Limitations on loans granted by a bank

Single Borrower’s Limit. The total amount of loans, credit accomodations and guarantees that the
bank could grant should at no time exceed 25% of the bank’s net worth.
DOSRI. No director or officer of any bank shall directly or indirectly, for himself, or as the
representative or agents of others: (1) borrow from such bank; (2) become a gurantor, indorser or
surety for loans from such banks to others; or (3) in any manner be an obligor or incur any
contractual liability to the bank.

The requirements are:

1. Approval: written approval of the majority of the board of directors excluding the director
concerned
2. Reportorial: entered upon the records of the corporation and copy of the entry be transmitted to
the supervising department of the BSP
3. Ceiling: amount must not exceed the book value of the paid-in capital contribution and
unencumbered deposits

NOTE: A loan transaction that does not comply with the rules on DOSRI and/or Single Borrower’s
limit is valid but without prejudice to criminal prosecution against the parties responsible for the
violation.
ANTI-MONEY LAUNDERING ACT OF 2001
(RA 9160, AS AMENDED BY RA 9194, 10167, 10365)

The court receiving the application for inquiry order cannot simply take the AMLC's word that
probable cause exists that the deposits or investments are related to an unlawful activity. It will
have to exercise its own determinative function in order to be convinced of such fact. For the
trial court to issue a bank inquiry order, it is necessary for the AMLC to be able to show specific
facts and circumstances that provide a link between an unlawful activity or a money laundering
offense, on the one hand, and the account or monetary instrument or property sought to be
examined on the other hand. [Republic v. Bolante (2017)]

The AMLC is required to establish probable cause as basis for its ex-parte application for bank
inquiry order; likewise the CA, independent of the AMLC's demonstration of probable cause, itself
makes a finding of probable cause that the deposits or investments are related to an unlawful
activity under Section 3(i) or a money laundering offense under Section 4 of the AMLA [Subido
Pagente Certeza Mendoza and Binay Law Offices v. CA (2016)]

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FINANCIAL REHABILITATION AND INSOLVENCY ACT

(RA 10142)

Rehabilitation

The characteristics of an economically feasible rehabilitation plan: (a) The debtor has assets that
can generate more cash if used in its daily operations than if sold; (b) Liquidity issues can be
addressed by a practicable business plan that will generate enough cash to sustain daily operations.
(c) The debtor has a definite source of financing for the proper and full implementation of a
Rehabilitation Plan that is anchored on realistic assumptions and goals. [Viva Shipping Lines, Inc.
v. Keppel Philippines Mining, Inc., (2016)]

A corporation that may seek corporate rehabilitation is characterized not by its debt but by its
capacity to pay this debt. The condition that triggers rehabilitation proceedings is not the
maturation of a corporation's debts but the inability of the debtor to pay these. [Metrobank v.
Liberty Corrugated (2017)]

Under Sec. 16 of FRIA, one of the claims suspended upon the issuance of Commencement Order are
“claims of the government, whether national or local, including taxes, tariffs and customs duties”.

The acts of sending a notice of informal conference and a Formal Letter of Demand are part and
parcel of the entire process for the assessment and collection of deficiency taxes from a delinquent
taxpayer an action or proceeding for the enforcement of a claim which should have been suspended
pursuant to the Commencement Order. Unmistakably, foregoing acts of BIR are in clear defiance of
the Commencement Order. [BIR v. Lepanto Ceramics, Inc. (2017)]

NOTE: The issuance of a Commencement Order deems to include a Stay or Suspension Order.

Rationale of Stay Order

Equality Is Equity Principle (Pari Passu Principle)

All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit
of all creditors, precluding one from obtaining an advantage or preference over another by the
expediency of attachment, execution or otherwise. Once the corporation is taken over by a receiver,
all the creditors stand on equal footing and no one may be paid ahead of the others. This is precisely
the reason for suspending all pending claims against the corporation under receivership.

Proceeding NOT Subject to Stay Order

The stay order DOES NOT INCLUDE, among others, (1) cases on appeal with the SC; (2) cases
falling with a specialized court or quasi-judicial agency; (3) enforcement of claims against surety
and other persons solidarily liable with the debtor and third party or accommodation mortgagors
as well as issuers of letter of credit, unless the property subject of third party mortgage is necessary
for the rehabilitation of the debtor as determined by the court; (4) criminal action against the
debtor.

Q: ABC Corporation obtained a Stay Order upon filing a Petition for Rehabilitation. There are
three (3) creditors: CR 1, CR 2, CR 3. CR 1 would like to foreclose the mortgaged property of
the ABC Corporation. CR 2 would like to foreclose the mortgage on the property of the
corporate officers. CR 3 would like to collect on the claim against the president who acted as
surety with the principal debtor ABC Corporation.

a) Can CR 1 foreclose the mortgage?

b) Can CR 2 foreclose the mortgage on the property of the corporate officers?

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c) Can CR 3 collect on the claim against the president who acted as surety?

A:
a) NO. The Stay Order enjoins the enforcement of claims to the foreclosure of mortgage.
b) NO, except if property of the mortgagor is needed for the rehabilitation of the debtor.
c) YES. It is a part of Stay Order.

Cram down Effect

A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal

workout framework (out of court or informal restructuring agreements) shall have the same legal
effect as confirmation of a Plan under Sec. 69 of FRIA. The notice of the Rehabilitation Plan or
restructuring agreement or Plan shall be published once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last
publication of the notice thereof. (FRIA, Sec. 86)

Pre-negotiated Rehabilitation Plan

An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the
court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or
approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total secured claims of the
debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims
of the debtor. The petition shall include the pre-negotiated Rehabilitation Plan, including the names
of at least three (3) qualified nominees for rehabilitation receiver.

Distinguish Petition for Liquidation from Suspension of Payment

PETITION FOR LIQUIDATION PETITION FOR SUSPENSION OF PAYMENT

The liabilities of the debtor are more than his The assets of the debtor are more than his
assets. liabilities, but the debtor foresees the
impossibility of paying his debts as they fall due.
The assets of the debtor are to be converted into The debtor is only asking for time within which
cash for distribution among his creditors. to convert his frozen assets into liquid cash with
which to pay his obligations when the latter fall
due.
There is discharge in voluntary liquidation of But there is no discharge in suspension of
individual debtor. payment.

Foreclosure proceedings shall not be allowed for The court order in petition for suspension of
a period of 180 days from issuance of the payment does not include secured creditors.
liquidation order.

INTELLECTUAL PROPERTY LAW

Doctrine of Primary Jurisdiction

If the petition for cancellation is filed first, it does not preclude the filing of an action for trademark
infringement with the RTC. [Conrad vs. CA (1995)]

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Must-Carry Rule

The local TV broadcast signals of an authorized TV broadcasting station should be carried in full by
the cable antenna television operator, without alteration or deletion. [GMA Network Inc. v. Central
CATV (2014)]
---
Q: Roberto Juan filed a complaint for unfair competition against his brother before the RTC.
He claims that he has been using the mark “Lavandera Ko” since 1994 in his laundry
business and that registered the same as business name from the DTI. The RTC dismissed the
complaint on the ground that neither of the parties had the right to the exclusive use or
appropriation of the mark “Lavandera Ko” because the same was already used as a mark in a
musical composition of another person back in 1942. Is the RTC correct?

A: NO. The RTC erred in denying the parties the proper determination as to who has the ultimate
right to use the said trade name by ruling that neither of them has the right or a cause of action,
since "Lavandera Ko" is protected by a copyright, and not a trade name. By their very definitions,
copyright and trade or service name are different. Copyright is the right of literary property as
recognized and sanctioned by positive law. Trade name, on the other hand, is any designation which
is adopted and used by person to denominate goods which he markets, or services which he
renders, or business which he conducts, or has come to be so used by other, and through its
association with such

goods, services or business, has acquired a special significance as the name thereof.

As such, "Lavandera Ko," being a musical composition with words is protected under the copyright
law and not under the trademarks, service marks and trade names law. [Juan v. Juan (2017)]
---
Trademarks

The word "COFFEE" cannot be exclusively appropriated by either Nestle or Puregold since it is
generic or descriptive of the goods they seek to identify. [Societe Des Produits, Nestle, S.A. V.
Puregold Price Club, Inc. (2017)]

Tests to determine confusing similarity between marks

Dominancy Test

Focuses on the similarity of the prevalent features of the competing marks. If the competing
trademark contains the main, essential or dominant features of another, and confusion and
deception are likely to result, infringement takes place. Duplication or imitation is not necessary;
nor is it necessary that the infringing label should suggest an effort to imitate (C. Neilman Brewing
Co. v. Independent Brewing Co.)

Totality or Holistic Test

Confusing similarity is to be determined on the basis of visual, aural, connotative comparisons and
overall impressions engendered by the marks in controversy as they are encountered in the
marketplace.

The trademarks in their entirety as they appear in their respective labels are considered in relation
to the goods to which they are attached. The discerning eye of the observer must focus not only on
the predominant words but also on the other features appearing in both labels in order that he may
draw his conclusion whether one is confusingly similar to the other. [Fruit of the Loom Inc. vs. CA
(1984)]

Given that the "INASAL" element is, at the same time, the dominant and most distinctive feature of
the Mang Inasal mark, the said element's incorporation in the OK Hotdog Inasal mark, thus, has
the potential to project the deceptive and false impression that the latter mark is somehow linked

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or associated with the former mark. [Mang Inasal Philippines, Inc. v. IFP Manufacturing
Corporation (2017)]

The scope of protection afforded to registered trademark owners is not limited to protection from
infringers with identical goods. The scope of protection extends to protection from infringers with
related goods, and to market areas that are the normal expansion of business of the registered
trademark owners. Section 138 of R.A. No. 8293 states:
Certificates of Registration. — A certificate of registration of a mark shall be prima facie evidence of
validity of the registration, the registrant's ownership of the mark, and of the registrant's exclusive
right to use the same in connection with the goods or services and those that are related thereto
specified in the certificate. [UFC Philippines, Inc. v. Fiesta Barrio Manufacturing Corporation
(2016)]
Doctrine of unrelated goods

Can the registrant of the trademark Kolin for household appliances preclude the adoption of
the same trademark for electronic products?

NO. Emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere fact that
one person has adopted and used a trademark on his goods would not, without more, prevent the
adoption and use of the same trademark by others on unrelated articles of a different kind. [Taiwan
Kolin Corporation, LTD., vs. Kolin Electronics Co. Inc. (2015)]

Copyrightable Works

News or the event itself is not copyrightable. However, an event can be captured and presented in a
specific medium. News as expressed in a video footage is entitled to copyright protection.
[ABS-CBN Corporation V. Felipe Gozon (2015)]

Non-Copyrightable Works

A hatch door, by its nature is an object of utility. It is not primarily an artistic creation but rather
an object of utility designed to have aesthetic appeal. It is intrinsically a useful article, which, as a
whole, is not eligible for copyright.

The only instance when a useful article may be the subject of copyright protection is when it
incorporates a design element that is physically or conceptually separable from the underlying
product. This means that the utilitarian article can function without the design element. In such an
instance, the design element is eligible for copyright protection. [Sison Olaño V. Lim Eng Co,
(2016)]

ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO. 8792) AND

A.M. NO. 01-7-01-SC OR THE RULES ON ELECTRONIC EVIDENCE

No contract shall be denied validity or enforceability on the sole ground that it is in the form of an
electronic data message or electronic document, or that any or all of the elements required under
existing laws for the formation of contracts is expressed, demonstrated and proved by means of
electronic data messages or electronic documents. [Sec 16 (1), RA 8792]

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ADDENDUM:
POWERS OF THE
Board of Directors Outstanding Capital Stock (OCS)
CORPORATION
Sec. 16 – Amendment of
Majority of the board 2/3 of the OCS
AOI
Sec. 24 – Election of At least majority of Outstanding
Directors VOTING Capital Stock (OVCS)
Sec. 25 – Appointment
Majority of the entire board
of Corporate Officers
Removal of Corporate
Majority of the entire board
Officers
Sec. 28 – Removal of the
2/3 of the OVCS
Directors
If the ground is expiration, removal,
If the ground is NOT expiration, increase number of directors; OR If
removal, increase in number of the ground is not expiration,
Sec. 29 – Filling up of
board seats AND the remaining removal, increase number of board
Vacancy in the BOD
directors constitute a quorum – seats BUT the remaining directors
Majority of the board DO NOT constitute a quorum –
Majority of the OVCS
Sec. 30 – Payment of
Compensation to Majority of OVCS
Directors
Sec. 37 – Extension of
Term; Shortening of the Majority of the board 2/3 of the OCS
term
Sec. 38 – Incurring,
creating or increasing
bonded indebtedness; Majority of the board 2/3 of the OCS
and increasing or
decreasing OCS
Incurring debt in the
ordinary course of Majority of the quorum
business

Sec. 40 – Sale or other In the ordinary course –

disposition of assets Majority of the quorum

All or substantially all of corporate

assets – 2/3 of the OCS
Majority of the board
Sec. 42 – Invest funds in
Majority of the quorum
the primary purpose
Invest funds to
incidental purpose for
Majority of the quorum
which corporation is
created
Invest the funds in a
Majority of the entire board 2/3 of the OCS
secondary purpose
Sec. 43 - Declaration of
Majority of the quorum
cash dividends
Sec. 43 - Declaration of
Majority of the quorum 2/3 of the OCS
stock dividends
Majority of the OCS of each
managed and managing
Sec. 44 - Enter into Majority of the quorum for both
corporation;
Management Contract managed and managing corporation
The only time that 2/3 of the OCS is

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Sec. 46 – Adoption of by-
laws
Sec. 48 – Amendment of
the by-laws
Sec. 76 – Merger or
Consolidation
Sec. 117 – Dissolution
required from the managed
corporation is in the case of
interlocking directors and
interlocking stockholders.
Adopted within 1 month after
incorporation –
Majority of OCS
Majority of the OCS
If delegate authority of the
Majority of the entire board
stockholders to the board – 2/3 OCS
If they revoke the delegation –
Majority of the OCS
Majority of the entire board 2/3 of OCS
Majority of the entire board 2/3 of OCS