Professional Documents
Culture Documents
COMMERCIAL LAW
COMMERCIAL LAW
COMMERCIAL LAW
LETTERS OF CREDIT
Commercial Law
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U.P. LAW BOC LETTERS OF CREDIT COMMERCIAL LAW
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2. As to revocability
a. Revocable L/C - One which can be
revoked by the issuing bank without the
consent of the buyer and seller
b. Irrevocable L/C - One which the issuing
bank cannot revoke without the consent of
the buyer and seller [FEATI Bank and Trust
Co. v. CA, G.R. No. 94209 (1991)]
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RIGHTS AND OBLIGATIONS OF THE The bank may suggest to the seller its willingness
PARTIES to negotiate, but this fact alone does not imply
that the notifying bank promises to accept the
There would be at least three parties to a letter of draft drawn under the documentary credit
credit [Lee v. CA, G.R. No. 117913 (2002)]: [FEATI Bank and Trust Co. v. CA, G.R. No.
94209 (1991)].
1. Buyer/Importer/Account Party – one who
procures the letter of credit and obliges himself The services of the notifying bank must always
to reimburse the issuing bank upon receipt of be utilized if the letter of credit is to be advised
documents of title. to the beneficiary through cable [Lee v. CA, G.R.
No. 117913 (2002)].
2. Issuing/Opening Bank – the bank which is
usually the buyer’s bank and actually issues the 2. Confirming Bank – lends credence to the letter
letter of credit [Lee v. CA, G.R. No. 117913 of credit issued by a lesser known issuing bank
(2002)]. [Bank of America v. CA, G.R. No. 105395 (1993)].
3. Seller/Exporter/Beneficiary – one who ships 4. Paying Bank – the bank which buys or
the goods to the buyer in compliance with a discounts the drafts contemplated by the letter of
contract of sale and delivers the documents of credit, if such draft is to be drawn on the opening
title and draft to the issuing bank to recover bank or on another designated bank not in the
payment. city of the beneficiary [Lee v. CA, G.R. No.
117913 (2002)].
Depending on the transaction, the number of parties
to the letter of credit may be increased. Thus, the It undertakes to encash the drafts drawn by the
different types of correspondent banks: exporter [Bank of America v. CA, G.R. No. 105395
(1993)].
1. Advising/Notifying Bank – the bank which
conveys to the seller the existence of the credit.
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PARTIES TO A TRUST RECEIPT secures an indebtedness. [Lee v. CA, G.R. No. 117913
AGREEMENT [Sec. 3, PD 115] (2002)]
Entruster Entrustee
Person having or taking A trust receipt is a security agreement pursuant to
possession of goods, which a bank acquires a “security interest” in the
Person holding title documents or goods. It secures an indebtedness and there can be no
over the goods, instruments under a such thing as security interest that secures no
documents, or trust receipt obligation [Sps. Vintola v. Insular Bank, GR No. 73271
instruments subject of a transaction, (1987)]
trust receipt and any successor in
transaction, and any interest of such person 2. Ownership of the Goods,
successor in interest of for the purpose or
such person purposes specified in Documents and Instruments
the trust
agreement
receipt Under a Trust Receipt
To secure that the banker (entruster) shall be repaid
at the critical point — that is, when the imported
OBJECTS OF A TRUST RECEIPT goods finally reach the hands of the intended vendee
AGREEMENT [Sec. 3, PD 115] — the banker takes the full title to the goods at the
Documents very beginning, and he continues to hold that title as
Goods Instruments
of title his indispensable security until the goods are sold.
Any negotiable
instrument; The ownership of the merchandise continues to be
any certificate of vested in the owner thereof or in the person who has
stock, bond, Written or advanced payment (entruster), until he has been paid
debenture for printed in full, or if the merchandise has already been sold,
payment of money evidence of until the proceeds of the sale should be turned over
issued by a title to to him by the importer or by his representative or
Chattels and
corporation, or any goods successor in interest. [Prudential Bank v. National Labor
personal
certificate of Relations Commission, G.R. No. 112592 (1995), citing
property
deposit, National Bank v. Viuda e Hijos de Angel Jose, G.R. No.
other than:
participation L-43117 (1936)]
1. Money,
certificate or
2. Things in
receipt, any credit On the other hand, the importer (entrustee) becomes
action, or
or investment absolute owner of the imported merchandise as soon
3. Things so
instrument of a sort as he has paid its price.
affixed to
marketed in the
land as to
ordinary course of In the case of goods delivered under trust receipt for
become a
business whereby the purpose of manufacturing or processing before its
part
the entrustee after ultimate sale, the entruster shall retain its title over
thereof
issuance of a trust the goods whether in its original or processed
receipt appears to form until the entrustee has fully complied with his
be the owner. obligation under the trust receipt. [Sec. 4(1), PD 115]
Does not include a
document as
defined under PD
115
1. Loan/Security Feature
In a letter of credit-trust receipt arrangement, a bank
extends a loan covered by the letter of credit, and the
trust receipt acts as the security for the loan. In other
words, the transaction involves a loan feature
represented by the letter of credit, and a security
feature which is in the covering trust receipt that
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F. Obligation and Liability delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a
of the Entrustee bond; or by denying having received such money,
goods, or other property.
The entrustee shall have the following obligations:
1. Hold the goods, documents or instruments in 2. Return of Goods,
trust for the entruster and shall dispose of them
strictly in accordance with the terms and Documents or Instruments
conditions of the trust receipt; in Case of Non-Sale
2. Receive the proceeds in trust for the entruster
and turn over the same to the entruster to the The failure to return the goods, documents or
extent of the amount owing to the entruster or as instruments if they were not sold or disposed of in
appears on the trust receipt; accordance with the terms of the trust receipt shall
3. Insure the goods for their total value against loss constitute estafa, punishable under RPC 315, par. 1
from fire, theft, pilferage or other casualties; (b). [Sec. 13, PD 115]
4. Keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of Intent to defraud is presumed when:
identification as property of the entruster; a. The entrustee fails to turn over the proceeds of
5. Return the goods, documents or instruments in the sale of goods covered by the trust receipt to
the event of non-sale or upon demand of the the entruster; or
entruster; and b. When the entrustee fails to return the goods
6. Observe terms and conditions of the trust under trust, if they are not disposed of in
receipt not contrary to PD 115. [Sec. 9, PD 115] accordance with the terms of the trust receipts.
[Land Bank of the Philippines v. Perez, G.R. No.
Note: When both parties enter into an agreement 166884 (2012)]
knowing that the return of the goods is not possible
then it is not a true trust receipt transaction. If the PENAL SANCTION IF OFFENDER IS A
only obligation is the return of the proceeds then it CORPORATION
becomes a mere loan [Land Bank of the Philippines v. If the violation or offense is committed by a
Perez, G.R. No. 166884 (2012)]. corporation, partnership, association or other juridical
entities, the penalty shall be imposed upon the
1. Payment/Delivery of directors, officers, employees or other officials or
persons therein responsible for the offense,
Proceeds of Sale or without prejudice to the civil liabilities arising
Disposition of Goods, from the criminal offense. [Sec. 13, PD 115]
Documents or Instruments
3. Risk of Loss of Goods,
The failure of an entrustee to turn over the Documents or Instruments
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of The risk of loss shall be borne by the entrustee.
the amount owing to the entruster or as appears in the
trust receipt shall constitute the crime of estafa, Loss of goods, documents or instruments which are
punishable under RPC 315, par. 1 (b) [Sec. 13, PD the subject of a trust receipt, pending their
115]. disposition, irrespective of whether or not it was due
to the fault or negligence of the entrustee, shall not
Art 315, Revised Penal Code. Swindling extinguish his obligation to the entruster for the
(Estafa). value thereof. [Sec. 10, PD 115]
With unfaithfulness or abuse of confidence,
namely:
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NEGOTIABLE
INSTRUMENTS LAW
Commercial Law
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the instrument that it is not clear in what capacity When conditional: An instrument is conditional
the person making the same intended to sign, he when reference to the fund clearly indicates an
is to be deemed an indorser [Sec. 17(f), NIL]. intention that such fund alone should be the source
of payment.
b. Containing an Unconditional
Thus, “The indication of Fund 501 as the source of
Promise to Pay or Order to Pay a the payment to be made on the treasury warrants
Sum Certain in Money makes the order or promise to pay "not
unconditional" and the warrants themselves non-
Sec. 3, NIL. When promise is unconditional. negotiable. There should be no question that the
- An unqualified order or promise to pay is exception on Section 3 of the Negotiable Instruments
unconditional within the meaning of this Act though Law is applicable in the case at bar” [Metropolitan Bank
coupled with: vs. CA, G.R. No. 88866 (1991)].
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular ORDER OR PROMISE TO PAY
account to be debited with the amount; or ● As to promissory note: The promise to pay
(b) A statement of the transaction which gives rise should be expressed on the face of the
to the instrument. instrument [CAMPOS].
o The word "promise" is not absolutely
But an order or promise to pay out of a particular necessary. Any expression equivalent to a
fund is not unconditional. promise is sufficient [CAMPOS].
o Mere acknowledgment of a debt is
UNCONDITIONAL insufficient [CAMPOS].
The promise or order to pay, to be unconditional, ● As to bill of exchange: Order – command made
must be unqualified [CAMPOS]. by the drawer addressed to the drawee ordering
the latter to pay the payee or the holder a sum
Must not be dependent upon an event that is not certain in money; the instrument is, by its nature,
certain to happen [ABAD]. demanding a right.
o Words which are equivalent to an order are
The fact that the condition appearing on the sufficient.
instrument has been fulfilled will not convert it into a o A mere request or authority to pay does not
negotiable one. constitute an order. Although the mere use
● An instrument payable upon a contingency is not of polite words like "please" does not of
negotiable, and the happening of the event does itself deprive the instrument of its
not cure the defect [Sec. 4, NIL]. characteristics as an order, its language must
clearly indicate a demand upon the drawee to
An instrument where the maker or the person pay.
primarily liable has the option to require something to
be done in lieu of payment of money is not negotiable. SUM PAYABLE MUST BE CERTAIN
But it is negotiable if the option to require Sec. 2, NIL. What constitutes certainty as to
something to be done in lieu of payment of sum. – The sum payable is a sum certain within the
money is with the holder [CAMPOS]. meaning of this Act, although it is to be paid:
(a) With interest; or
Fund for (b) By stated installments; or
Particular Fund (c) By stated installments, with a provision that,
Reimbursement
(Conditional) upon default in payment of any installment or of
(Unconditional)
The drawee pays the interest, the whole shall become due; or
payee from his own The drawee pays directly (d) With exchange, whether at a fixed rate or at the
funds. Afterwards, the from the particular fund current rate; or
drawee pays himself indicated. (e) With costs of collection or an attorney's fee, in
from the indicated fund. case payment shall not be made at maturity.
Particular fund indicated
Indicated fund is not the Note: A sum is certain if from the face of the
is the direct source of
direct source of instrument it can be determined even if it requires
payment [SUNDIANG
payment. mathematical computation [SUNDIANG and
and AQUINO].
AQUINO].
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C. Completion and Delivery that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill
it up as such for any amount. In order, however, that
STEPS IN THE EXECUTION OF any such instrument when completed may be
NEGOTIABLE INSTRUMENTS: enforced against any person who became a party
1. Writing of the instrument completely in thereto prior to its completion, it must be filled up
accordance with the requisites of negotiability strictly in accordance with the authority given and
under Sec. 1. within a reasonable time. But if any such instrument,
2. Delivery of the instrument by the maker or the after completion, is negotiated to a holder in due
drawer to the payee in order to give legal effect course, it is valid and effectual for all purposes in his
thereto [ABAD]. hands, and he may enforce it as if it had been filled
up strictly in accordance with the authority given and
Note: It may sometimes be difficult to locate the within a reasonable time.
boundary line between a complete and an incomplete
instrument. It would seem that if an instrument
Incomplete instrument which is delivered raises a
contains all the requisites for making it a negotiable
personal defense [CAMPOS at 485].
one, it should be considered as complete though it in
fact may have blanks as to non-essentials [CAMPOS].
The authority to fill in the blanks or to complete the
instrument is limited as to time such that it must be
1. Insertion of Date filled up within a reasonable time [Sec. 14, NIL].
• Such reasonable time must be reckoned from the
[Note: 2012 Bar Question] time of issuance of the instrument and not from
the time of each successive negotiation, because
Any holder may insert the true date of issue or the interest involved is that of the issuer
acceptance of an instrument where: [CAMPOS at 488].
a. The instrument is expressed to be payable at a • No rigid rule on what is reasonable time but Sec.
fixed period after date is issued undated; or 193 of NIL provides that “regard must be had to
b. The acceptance of an instrument payable at a the nature of the instrument, the usage of
fixed period after sight is undated. trade/business with respect to such instrument,
and the facts of the particular case” [CAMPOS].
Effect: The instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due 3. Incomplete and Undelivered
course; but as to him, the date so inserted is to be Instruments
regarded as the true date.
[Note: 2018 Bar Question]
EFFECT OF ANTE-DATING AND POST-
DATING
Sec. 15, NIL. Incomplete instrument not
The instrument is not invalid for the reason only that
delivered. – Where an incomplete instrument has
it is ante-dated or post-dated, provided this is not
not been delivered, it will not, if completed and
done for an illegal or fraudulent purpose. negotiated without authority, be a valid contract in
the hands of any holder, as against any person whose
The person to whom an instrument so dated is signature was placed thereon before delivery.
delivered acquires the title thereto as of the date of
delivery [Sec. 12, NIL].
In this case a real defense exists, and not even a holder
in due course can recover on the instrument, for the
2. Incomplete but Delivered law is specific that it is not a valid contract in the
Instruments hands of any holder [CAMPOS].
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F. Accommodation Party
2. Accommodation Party as
Sec. 29, NIL. Liability of accommodation party. Surety
– An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or An accommodation party is generally regarded as a
indorser, without receiving value therefor, and for surety for the party accommodated [Cañeda v. CA,
the purpose of lending his name to some other G.R. No. 81322 (1990)].
person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at When the accommodation party makes payment to
the time of taking the instrument, knew him to be the holder of the note, he has the right to sue the
only an accommodation party. accommodated party for reimbursement [Cañeda v.
CA, G.R. No. 81322 (1990)].
Accommodation Party
1. Must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser;
3. Corporation as
2. Must not have received value therefor; and Accommodation Party
3. Signed for the purpose of lending his name to
some other person. As a general rule, a corporation cannot act as an
accommodation party. The issue or endorsement of
Note: “Without receiving value therefor” does not negotiable instruments by a corporation without
mean that a person ceases to be an accommodation consideration and for the accommodation of another
party merely because he receives some consideration is ultra vires [Crisologo-Jose v. CA, G.R. No. 80599
for lending his name or credit. An accommodation (1989)].
party loses his status only when he receives value not
for lending his name, but for the instrument itself By way of exception, an officer or agent of a
[CAMPOS at 659]. corporation shall have the power to execute or
indorse a negotiable paper in the name of the
1. Liability of an corporation for the accommodation of a third person
only if specifically authorized to do so [Crisologo-Jose v.
Accommodation Party CA, G.R. No. 80599 (1989)].
[Note: 2018 Bar Question] Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for
Whether the liability is primary or secondary will mere accommodation a negotiable instrument of the
depend on whether he signs as a maker, acceptor, corporation for their individual debts or transactions
drawer or indorser. arising from or in relation to matters in which the
corporation has no legitimate concern. The
The holder for value to whom the instrument thus signatories thereof shall be personally liable therefor
executed is subsequently negotiated has a right of [Crisologo-Jose v. CA, G.R. No. 80599 (1989)].
recourse against the accommodation party in spite of
the former’s knowledge that no consideration passed Accommodation Party v. Regular Party
between the accommodation and accommodated Accommodation Party Regular Party
parties [Sec. 28, NIL]. Purpose
Note: Where a party accommodates the payee by Signs instrument for the
signing alone as a maker of a note, the note suffers Does not sign the
purpose of lending his
from absence of consideration. But, if the instrument for the same
name or credit to some
accommodation party signs as a co-maker, there is purpose
other person
consideration for the note [CAMPOS at 658].
Value Received
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Negotiation Assignment
The transferee does not
become a holder, nor
The transfer of the can he become a holder
instrument from one in due course; and he
person to another so as merely steps into the
to constitute the shoes of the transferor.
transferee the holder As such, any defense
thereof [Sec.30, NIL]. available against the
transferor is available
against the transferee.
2. Modes of Negotiation
a. By Delivery – If Payable to
Bearer
Sec. 191, NIL. Definition and meaning of terms.
In this Act, unless the contract otherwise requires
xxx
xxx
Requisites
1. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Section 1 of the NIL; and
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Prima facie - Where the instrument is no longer in Sec. 32, NIL. Indorsement must be of the entire
the possession of a party whose signature appears instrument. – The indorsement must be an
thereon, a valid and intentional delivery by him is indorsement of the entire instrument. An
presumed until the contrary is proved [Sec. 16, NIL]. indorsement which purports to transfer to the
indorsee a part only of the amount payable, or which
Conclusive - If it is in the hands of a holder in due purports to transfer the instrument to two or more
course, the presumption of a valid delivery is indorsees severally, does not operate as a negotiation
conclusive [Sec. 16, NIL]. of the instrument. But where the instrument has
been paid in part, it may be indorsed as to the
PRESUMPTION AS TO DATE residue.
Date is not an essential element of negotiability; it is ● CANNOT indorse a part only of the amount
not included in the requirements for an instrument to payable; BUT if the instrument has been paid in
be negotiable under Sec. 1 of the NIL. part, then the instrument may be indorsed as to
the residue [Sec. 32, NIL]. [Note: 2012 Bar
An undated instrument is considered to be dated as Question]
of the time it was issued [Sec. 17 (c), NIL]. ● CANNOT transfer the instrument to two or
more indorsees severally [Sec. 32, NIL].
b. By Indorsement Completed by ● If not an indorsement of the entire instrument,
Delivery – If Payable to Order the transfer remains valid, but as a mere
assignment which subjects the holder to all
defenses on the instrument [CAMPOS].
Sec. 191, NIL. Definition and meaning of terms.
In this Act, unless the contract otherwise requires
4. If name misspelled in indorsement,
xxx
indorsement will be prima facie deemed not
valid.
“Indorsement” means an indorsement completed by
delivery;
Sec. 43, NIL. Indorsement where name is
xxx misspelled, and so forth. – Where the name of the
payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein
HOW INDORSEMENT IS DONE
described adding, if he things fit, his proper
Sec. 31, NIL. Indorsement; how made. – The signature.
indorsement must be written on the instrument itself
or upon a paper attached thereto. The signature of
The indorsement should be made by the holder in the
the indorser, without additional words, is a sufficient
manner he was designated, otherwise the signature
indorsement.
will prima facie not be a valid indorsement of the
instrument. After such indorsement, he may sign his
1. Where placed – The indorsement must be correct name [CAMPOS at 73].
written [Sec. 31, NIL]:
a. On the instrument itself [Sec. 31, NIL] , or 5. Indorsement where there are joint payees
b. On a separate piece of paper attached to the
instrument called “allonge” [Sec. 31, NIL]. Where the instrument is payable or indorsed to “A and
B,” they are joint payees and an indorsement by either
Note: Although the law makes no distinction, the A or B only will not constitute a valid negotiation,
prevailing view follows the common law rule that an UNLESS the one indorsing is authorized by the other
allonge can be validly used when there is no longer [CAMPOS].
any room on the instrument for further indorsements
[CAMPOS].
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3. Restrictive 2. Non-Qualified
d. As to Presence/Absence of
c. As to Kind of Liability Assumed Express Limitations
by Indorser
1. Conditional
1. Qualified
Sec. 39, NIL. Conditional indorsement. – Where
Sec. 38, NIL. Qualified indorsement. – A an indorsement is conditional, the party required to
qualified indorsement constitutes the indorser a pay the instrument may disregard the condition and
mere assignor of the title to the instrument. It may make payment to the indorsee or his transferee
be made by adding to the indorser's signature the whether the condition has been fulfilled or not. But
words "without recourse" or any words of similar any person to whom an instrument so indorsed is
import. Such an indorsement does not impair the negotiated will hold the same, or the proceeds
negotiable character of the instrument. thereof, subject to the rights of the person indorsing
conditionally.
● Constitutes indorser as mere assignor of title
● Made by adding the words “without recourse”, ● A conditional indorsement is one where an
“sans recourse,” “indorser not holder,” “at the additional condition is annexed to indorser’s
indorser’s own risk,” and other terms of similar liability; such condition must be expressed.
import [Sec. 38, NIL]. ● Where an indorsement is conditional, a party
● But this does not mean that the transferee only required to pay the instrument may disregard the
has the rights of an assignee; transfer remains a condition, and make payment to the indorsee or
negotiation and transferee can still be a holder his transferee, whether condition has been
capable of acquiring a title free from defenses of fulfilled or not.
prior parties. ● But any person to whom an instrument so
indorsed is negotiated, will hold the same, or the
proceeds thereof, subject to the rights of the
Effects: person indorsing conditionally [Sec. 39, NIL].
a. Relieves the qualified indorser of his liability to
pay the instrument should the maker be unable 2. Unconditional
to pay
b. The qualified indorser does not guarantee the ● An indorser is liable to pay the instrument on two
solvency of the maker, but merely his legal title to conditions: that due demand or presentment is
the instrument made on the party primarily liable on the date of
c. A qualified indorsement does not impair the maturity, and that should the latter fail to pay, a
negotiable character of the instrument notice of dishonor be promptly sent to the
inroderser. These conditions are implied in every
contract of indorsement.
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● An indorsement without any other condition The majority view is that, the transferee has a right to
upon which liability is based is referred to as an unqualified and not merely a qualified indorsement
UNCONDITIONAL or ABSOLUTE [CAMPOS].
[CAMPOS].
Note: This section applies only to an instrument
e. Other Kinds of Indorsement payable to the order of the transferor. This cannot
apply to bearer instruments [CAMPOS].
1. Joint
4. Cancelled Indorsement
All must indorse when an instrument is payable to the
order of two or more payees or indorsees who are not Sec. 48, NIL. Striking out indorsement. – The
partners [Sec. 41, NIL]. holder may at any time strike out any indorsement
which is not necessary to his title. The indorser
Exceptions: whose indorsement is struck out, and all indorsers
● Where the payee or indorsee are partners subsequent to him, are thereby relieved from liability
[CAMPOS]; and on the instrument.
● Where the payee or indorsee indorsing has
authority to indorse for the others. 5. Indorsement by agent
3. Unindorsed Instrument
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5. May enforce payment of instrument for full ● An overdue instrument is still negotiable, but it is
amount, against all parties liable [Sec. 57, NIL] subject to the defenses (real and personal)
existing at the time of the transfer.
In the hands of any holder other than a holder in due ● As to what constitutes a reasonable time, regard
course, a negotiable instrument is subject to the same is to be had to the nature of the instrument, the
defenses as if it were non-negotiable. But a holder usage of trade or business with respect to such
who derives his title through a holder in due course, instrument, and the facts of the particular case
and who is not himself a party to any fraud or illegality [Sec. 193, NIL].
affecting the instrument, has all the rights of such ● An instrument is not invalid for the reason only
former holder in respect of all parties prior to the that it is ante-dated or postdated provided it is
latter [Sec. 58, NIL]. not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is
d. Requisites of a Holder in Due delivered acquires the title thereto as of the date
Course of delivery [Sec. 12, NIL].
● Instruments with fixed maturity but subject
See Sec. 52, NIL, quoted above. to acceleration: ultimate date of maturity is the
These four requisites must concur. If any one of them date of maturity for the purpose of determining
is absent, the holder cannot be considered a holder in whether a purchaser is a HDC
due course [CAMPOS]. ● Undated instruments: Prima facie presumption
that it was negotiated before it was overdue [Sec.
45, NIL].
1. Complete and regular upon its face
An instrument is incomplete when it is wanting in any 3. That he took it in good faith and for
material particular or particular proper to be inserted value
in a negotiable instrument without which the same
will not be complete [DE LEON]. “Good Faith”
Holder must have taken the instrument in good faith
2. Became the holder before overdue and and that at the time it was negotiated to him he had
no notice of any infirmity in the instrument or defect
without notice of previous dishonor
in the title of the person negotiating it [CAMPOS].
“Overdue” – The Following Cannot Be Holders
“Value”
in Due Course:
a. Any consideration sufficient to support a simple
a. A holder who became such after the date of
contract [Sec. 25, NIL]
maturity of the instrument such as when the
b. An antecedent or pre-existing debt constitutes
instrument is overdue [Sec. 53, NIL].
value, whether the instrument is payable on
b. In case of demand instruments: a holder who
demand or at a future time [Sec. 25, NIL]
negotiates it after an unreasonable length of time
after its issue [Sec. 53, NIL].
“Holder For Value” (HCV)
a. Where value has at any time been given for the
The fact that the instrument is overdue is a strong
instrument, the holder is deemed a holder for
indication that it was dishonored and the law puts the
value in respect to all parties who become such
potential holder on inquiry as to whether it was
prior to that time [Sec. 26, NIL]; and
dishonored and the reason therefor [CAMPOS].
b. Where the holder has a lien on the instrument, he
is deemed a HFV to the extent of his lien [Sec.
An instrument may be dishonored either by non-
.27, NIL].
acceptance or by non-payment.
a. Dishonor by non-acceptance – takes place
The holder is a holder for value only to the extent that
when the drawee refuses to accept the order of
the consideration agreed upon has been paid,
the drawer as stated in the bill. Can refer only to
delivered, or performed [SUNDIANG and
a bill of exchange.
AQUINO].
b. Dishonor by non-payment – takes place when
the party primarily liable fails to pay the
A negotiable instrument may be given as a gift to the
instrument at the date of maturity [CAMPOS].
indorsee or transferee. In such cases, whatever
defenses can be set up against the transferor can also
Notes:
be set up against the transferee, but where the holder
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gave valuable consideration for the note and the other Gross negligence in itself would not constitute notice
requisites of Sec. 52 are present, he will be free from since it is not the equivalent of actual knowledge nor
such defenses. of bad faith.
Value need not be full and a holder will be one for “Suspicious circumstances”
value even if he gave less than the face value of the General rule: A purchaser of an instrument is not
instrument, provided that intention of the transferor required to investigate every suspicious circumstance;
is to transfer the full amount represented by the failure to investigate such circumstances does not
instrument [CAMPOS]. constitute him as being in bad faith or having a notice
of defect [CAMPOS].
Presumption: Every negotiable instrument is
deemed prima facie issued for valuable consideration; Rationale: The general principle that a purchaser who
and every person whose signature appears thereon is has knowledge of certain facts is put on inquiry does
deemed to have become a party thereto for value [Sec. not operate to its full extent in the law of negotiable
24, NIL]. instruments. Negotiable instruments are usually
issued in pursuance of commercial transactions where
Such presumption cannot be overcome by the time is of the essence. To require investigation of
petitioner’s bare denial of receipt of the consideration every suspicious circumstance would hamper their
[Bayani v. People, G.R. No. 154947 (2004)]. function of facilitating exchange; thus negligence in
tracking down a suspicious circumstance which
would put a prudent man on inquiry is not of itself
4. No notice of infirmity in the sufficient to prevent recovery [CAMPOS].
instrument or defect in the title of the
person negotiating it Exceptions:
a. Suspicious circumstances together with other
“Defective title” circumstances, may be admitted as evidence of
Title is defective when: [Sec. 55, NIL] bad faith.
a. instrument/signature obtained by fraud, duress, b. Where the suspicious circumstances are so
force or fear or other unlawful means OR for an cogent and obvious
illegal consideration; or
b. instrument is negotiated in breach of faith, or A check with 2 parallel lines in the upper left hand
fraudulent circumstances corner means that it could only be deposited and may
not be converted to cash. Consequently, such
Title is not defective when at the time it was negotiated circumstance should put the payee on inquiry and upon him
to him, he had no notice of: devolves the duty to ascertain the holders’ title to the
a. any infirmity in instrument check or the nature of his possession. Failing in this
b. any defect in title of person negotiating respect, the payee is declared guilty of gross negligence
amounting to legal absence of good faith and as such
Note: Due course holding is not affected by the the consensus of authority is to the effect that the
holder’s acquisition of knowledge after he has taken holder of the check is not a holder in good faith [State
the instrument. Investment House vs. IAC, G.R. No. 72764 (1989)].
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instrument prior to the acquisition of such Available against all Can be raised only
defective title. holders, including against holders not in
holders in due course due course
2. Holder Not in Due Course Those mentioned in Sec.
55 (fraud, duress, force
a. One who became a holder of an instrument and fear, other unlawful
without any, some or all of the requisites under means, illegal
Forgery, incapacity,
Sec. 52 of the NIL consideration,
fraud in the execution,
b. With respect to demand instruments, if it is negotiating in breach of
some types of duress,
negotiated an unreasonable length of time after faith), want of
and lack of delivery of an
its issue, the holder is deemed not a holder in due consideration,
incomplete instrument
course [Sec. 53, NIL]. incompleteness of the
instrument, lack of
Rights of a holder not in due course [Sec. 51, NIL. delivery of a completed
See “IN GENERAL” ] instrument
a. To sue on the instrument in his own name
b. To receive payment and enforce the instrument.
Payment in due course to the holder discharges
instrument.
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I. Liabilities of Parties payee and his then capacity to indorse; and engages
that on due presentment the instrument will be
accepted or paid, or both, according to its tenor, and
Primary liability: The unconditional promise that if it be dishonored, and the necessary
attaches the moment the maker makes the instrument proceedings on dishonor be duly taken, he will pay
while the acceptor’s assent to the unconditional order the amount thereof to the holder, or to any
attaches the moment he accepts the instrument. No subsequent indorser who may be compelled to pay
further act is necessary in order for the liability to it. but the drawer ay insert in the instrument an
accrue. Presentment for payment is all that is express stipulation negativing or limiting his own
necessary. liability to the holder.
All other parties are “secondarily” liable [Sec. 192
The liability of a drawer is conditional. He agrees to
NIL].
pay the bill only in the event certain conditions are
complied with:
When a party is secondarily liable, the liability is
a. Presentment;
contingent on presentment and notice of dishonor,
b. Dishonor of the instrument
without which they are not liable at all [CAMPOS at
c. Necessary proceedings for dishonor, such
603].
proceedings are:
Primarily Secondarily ● Protest – in case of foreign bills; or
Liable Liable ● Notice of dishonor to the drawer
[CAMPOS].
Promissory Maker Prior Indorsers
Note
The drawer warrants the existence of the payee and
None (unless Drawer and the latter’s capacity to indorse the instrument at the
Bill of there is already prior indorsers time of its issuance [CAMPOS].
Exchange an
ACCEPTOR)
3. Acceptor
1. Maker Sec. 62, NIL. Liability of acceptor. – The acceptor
by accepting the instrument engages that he will pay
Sec. 60, NIL. Liability of maker. – The maker of it according to the tenor of his acceptance; and
a negotiable instrument by making it, engages that he admits:
will pay it according to its tenor, and admits the a. The existence of the drawer, the genuineness of
existence of the payee and his then capacity to his signature and his capacity and authority to
indorse. draw the instrument, and
b. The existence of the payee and his then capacity
The term “maker” applies only to the promissory note to indorse.
[CAMPOS].
A drawee has no liability on the bill until and unless
The maker is undoubtedly a part PRIMARILY liable he accepts the same.
[CAMPOS].
Once he accepts, he becomes primarily liable on the
By signing the note, the maker also represents to the instrument, subject to no condition whatever. He
world that the payee named has the capacity to cannot refuse to pay the holder:
indorse at the time of the making of such note and a. On the ground of forgery of the drawer’s
thus represents that the named payee can transfer a signature since he admits its genuineness;
good and valid title to the note by indorsement. The b. Absence of consideration; or
maker is therefore precluded from setting up such c. Other personal defense existing between the
defenses as minority or insanity of the payee or ultra acceptor and the drawer [CAMPOS].
vires act of a payee-corporation [CAMPOS].
Requisites for a valid acceptance
2. Drawer a. It must be in writing;
b. It must be signed by the drawee; and
Sec. 61, NIL. Liability of drawer. – The drawer by c. It must not change the implied promise of the
drawing the instrument admits the existence of the acceptor to pay only in money [Sec. 132, NIL].
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Note: A bill may be accepted even after it is overdue But when the negotiation is by delivery only, the
or dishonored, since an instrument does not lose its warranty extends in favor of no holder other than the
negotiability by the mere fact that its maturity date has immediate transferee.
passed or that the drawee has refused to accept or pay
it [CAMPOS]. The provisions of subdivision (c) of this section do
not apply to a person negotiating public or
The bank had the last clear chance to stop the corporation securities other than bills and notes.
fraudulent encashment of the subject checks had it
exercised due diligence and followed the proper and A qualified indorser and one who negotiates by mere
regular banking procedures in clearing checks. The delivery, do not undertake to pay the instrument in
one who had the last clear opportunity to avoid the the event of its dishonor [CAMPOS].
impending harm but failed to do so is chargeable with
the consequences thereof. To reiterate, petitioners He is in fact merely assigning the credit and is not a
own operations manager admitted that they could party secondarily liable. His liability is like that of a
have called up the client for verification or seller. Thus, although he does not engage to pay the
confirmation before honoring the dubious checks. instrument, he makes certain implied warranties
Verily, petitioner had the final opportunity to avert pertaining to the instrument, as enumerated in Sec. 65
the injury that befell the respondent [Bank of America [CAMPOS].
v. Philippine Racing Club, G.R. No. 150228 (2009), citing
Westmont Bank v. Ong, G.R. No. 132560 (2002)]. Sec. 65(a) covers real defenses, and thus a qualified
indorser cannot plead any of these defenses because
4. Indorser they are covered by the warranties implied from his
sale of the negotiable instrument [CAMPOS].
The following indorsers assume the liability to pay the
instrument: WHO IS A GENERAL OR UNQUALIFIED
a. General or Unqualified Indorser; and INDORSER?
b. Irregular Indorser Every person who indorses without qualification [Sec.
66, NIL].
a. General or Unqualified Indorser A person placing his signature upon an instrument
other than as a maker, drawer, or acceptor unless he
[Note: 2011 Bar Question] indicates by appropriate words his intention to be
bound in some other capacity [Sec. 63, NIL].
WHO IS A QUALIFIED INDORSER?
One who is constituted as a mere assignor of the title A person, who places his signature on an instrument
to the instrument by adding to his signature the words negotiable by delivery, incurs all the liabilities of an
"without recourse" or any words of similar import. indorser [Sec. 67, NIL].
A qualified indorser does not assume the liability to
Sec. 66, NIL. Liability of general indorser. –
pay the instrument since he is merely an assignor of
Every indorser who indorses without qualification,
the title to the instrument. However, he becomes
warrants to all subsequent holders in due course:
liable once he breaches a warranty.
(a) The matters and things mentioned in
subdivisions (a), (b), and (c) of the next
Sec. 65, NIL. Warranty where negotiation by preceding section; and
delivery and so forth. – Every person negotiating (b) That the instrument is, at the time of his
an instrument by delivery or by a qualified indorsement, valid and subsisting;
indorsement warrants:
(a) That the instrument is genuine and in all And, in addition, he engages that, on due
respects what it purports to be; presentment, it shall be accepted or paid, or both, as
(b) That he has a good title to it; the case may be, according to its tenor, and that if it
(c) That all prior parties had capacity to be dishonored and the necessary proceedings on
contract; dishonor be duly taken, he will pay the amount
(d) That he has no knowledge of any fact which thereof to the holder, or to any subsequent indorser
would impair the validity of the instrument who may be compelled to pay it.
or render it valueless.
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Sec. 67, NIL. Liability of indorser where paper regardless of the order of their indorsement
negotiable by delivery. — Where a person places [CAMPOS].
his indorsement on an instrument negotiable by
delivery, he incurs all the liability of an indorser. Promissory Note Bill of Exchange
No person primarily
Sec. 68, NIL. Order in which indorsers are liable to pay until and
liable. – As respect one another, indorsers are liable unless the drawee
prima facie in the order in which they indorse; but accepts the order of the
evidence is admissible to show that, as between or Maker is the person drawer to pay; when the
among themselves, they have agreed otherwise. primarily liable. drawee accepts, he
Joint payees or joint indorsees who indorse are becomes the acceptor.
deemed to indorse jointly and severally.
Acceptor is primarily
The general indorser makes two contracts: liable.
1. An assignment or sale of the instrument; and Indorsers are Drawer and indorsers
2. A special contract of indorsement secondarily liable. are secondarily liable.
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2. Parties to Whom
Presentment for Payment
Should Be Made
General rule: Presentment for payment must be made
to the person primarily liable on the instrument or if
he is absent or inaccessible, to any person found at
the place where presentment is made [Sec. 72(d),
NIL].
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and if with the exercise of reasonable diligence he In case of waiver of protest, whether in the case
can be found [Sec. 76, NIL]. of a foreign bill of exchange or other negotiable
b. Partners – presentment for payment may be instruments – deemed to be a waiver not only of a
made to any one of them, even though there has formal protest but also of presentment and notice of
been a dissolution of the firm [Sec. 77, NIL]. dishonor [Sec. 111, NIL].
c. Several persons, not partners (joint debtors)
– presentment for payment must be made to
them all [Sec. 78, NIL].
4. Dishonor by Non-Payment
The instrument is dishonored by non-payment when:
a. It is duly presented for payment and payment is
refused or cannot be obtained; or
b. Presentment is excused and the instrument is
overdue and unpaid [Sec. 83, NIL].
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Sec. 51, NIL. Right of holder to sue; payment. – If the bank credits the amount of the check to the
The holder of a negotiable instrument may to sue depositor’s account, it is equivalent to payment in
thereon in his own name; and payment to him in due money and the check will be deemed discharged.
course discharges the instrument.
To Whom Made
Sec. 88, NIL. What constitutes payment in due It must be made to the holder, whether he is the
course. – Payment is made in due course when it is beneficial owner or merely a beneficial owner under a
made at or after the maturity of the payment to the restrictive indorsement [CAMPOS].
holder thereof in good faith and without notice that
his title is defective. Payment to a prior holder will not discharge the
instrument unless he is authorized by the present
holder [CAMPOS].
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In good faith and without notice of defect Other causes of extinguishment of obligations, such
If the payor at the time he pays knows that the as annulment, rescission, fulfillment of a resolutory
holder’s title is defective, payment by him even at or condition, and prescription, are governed elsewhere
after maturity will not be payment in due course under in this Code.
Sec. 88, and will not discharge the instrument
[CAMPOS].
d. By Reacquisition of Principal
However, if the payor did not know or did not have Debtor in His Own Right
notice of the defect, his payment will operate as a
discharge. As far as the maker or acceptor is Principal debtor becomes holder of instrument at or
concerned, the instrument has been discharged after maturity in his own right and not as an agent or
[CAMPOS]. for and in behalf of another.
The burden of proving that a cancellation was made Sec. 124. Alteration of instrument; effect of.
unintentionally or by mistake or through fraud, is on Where a negotiable instrument is materially altered
the person claiming its effectiveness. Cancellation is without the assent of all parties liable thereon, it is
presumed to be intentional [CAMPOS]. avoided, except as against a party who has himself
made, authorized, or assented to the alteration and
Cancellation need not be supported by consideration subsequent indorsers.
and is effective even without notice to the primary
party. But when an instrument has been materially altered
and is in the hands of a holder in due course not a
c. By Other Acts That Discharge a party to the alteration, he may enforce payment
thereof according to its original tenor.
Simple Contract
Any other act which discharges a simple contract for Sec. 125, NIL. What constitutes a material
payment of money. alteration. - Any alteration which changes:
(a) Date
Examples of how an instrument may be discharged: (b) Sum payable, either for principal or interest
1. Rendition of services; (c) Time or place of payment
2. Transfer of property; (d) Number or relations of the parties
3. Foreclosure of mortgaged of property where the (e) Medium or currency in which payment is to be
proceeds are equal to the amount of the made
instrument; or (f) Or which adds a place of payment where no
4. Acceptance of a part as full settlement of the note place of payment is specified or any other change
[CAMPOS]. or addition which alters the effect of the
instrument in any respect
Sec. 1231, NCC. Obligations are extinguished by:
(1) Payment or performance; Material alteration without assent of all parties liable
xxx avoids instrument except as against party to alteration
(3) By condonation or remission of the debt; and subsequent indorsers [Sec. 124, NIL].
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and has been paid by drawer or where it’s A renunciation by the holder has the effect of
made/accepted for accommodation and has discharging the instrument or any party.
been paid by party accommodated [Sec. 121].
Two forms of renunciation
f. The holder may refuse to take a qualified a. A written declaration to that effect; or
acceptance and if he does not obtain an b. By surrender of the instrument to the primary
unqualified acceptance, he may treat the bill as party.
dishonored by non-acceptance. Where a qualified
acceptance is taken, the drawer and indorsers are Need not be supported by consideration.
discharged from liability on the bill unless they
have expressly or impliedly authorized the holder To Whom Made Effect
to take a qualified acceptance, or subsequently At or after maturity in Discharges the
assent thereto. When the drawer or an indorser favor of principal debtor instrument
receives notice of a qualified acceptance, he must, Discharge only such
within a reasonable time, express his dissent to At or after maturity in
party and the parties
the holder or he will be deemed to have assented favor of any party
subsequent to him
thereto [Sec. 142].
4. Renunciation by Holder
Sec. 122, NIL. Renunciation by Holder. – The
holder may expressly renounce his rights against any
party to the instrument before, at, or after its
maturity. An absolute and unconditional
renunciation of his rights against the principal debtor
made at or after the maturity of the instrument
discharges the instrument. But a renunciation does
not affect the rights of a holder in due course without
notice. A renunciation must be in writing, unless the
instrument is delivered up to the person primarily
liable thereon.
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But when an instrument has been materially altered 2. Effect of Material Alteration
and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment a. Alteration by a party – Avoids the instrument
thereof according to its original tenor. except as against the party who made, authorized,
or assented to the alteration and subsequent
Sec. 125, NIL. What constitutes a material indorsers. However, if an altered instrument is
alteration. - Any alteration which changes: negotiated to a HDC, he may enforce payment
(a) Date thereof according to its original tenor regardless of
(b) Sum payable, either for principal or interest whether the alteration was innocent or
(c) Time or place of payment fraudulent.
(d) Number or relations of the parties
(e) Medium or currency in which payment is to be b. Alteration by a stranger (spoliation) - The
made effect is the same as where the alteration was
(f) Or which adds a place of payment where no made by a party wherein a HDC can recover on
place of payment is specified or any other change the original tenor of the instrument [Sec. 124,
or addition which alters the effect of the NIL].
instrument in any respect
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N. Acceptance
2. Manner
1. Definition
a. Express Acceptance
It is the signification by the drawee of his assent to
the order of the drawer [Sec. 132, NIL]. “Acceptance” Must be in writing and signed by the drawee and must
as used in the NIL means acceptance completed by not express that the drawee will perform his promise
delivery or notification [Sec. 191, NIL]. by any other means than the payment of money [Sec.
132, NIL].
a. Requisites If request for a written acceptance is refused, the
holder may treat the bill as dishonored [Sec. 133,
1. In writing NIL].
2. Signed by the drawee
3. Does not express that the drawee will perform
his promise by and other means that the payment
b. Implied Acceptance
of money [Sec. 132, NIL]
1. If the drawee refuses to return the instrument
within 24 hours after it was delivered for
b. Kinds of Acceptance acceptance [Sec. 137, NIL].
2. If the drawee destroys the same [Sec. 137, NIL].
1. General – assents without qualification to the 3. If the drawee makes an unconditional promise in
order of the drawer [Sec. 139, NIL]. writing before the instrument is drawn, with respect to
2. Qualified – which in express terms varies the every person who, upon the faith thereof,
effect of the bill as drawn [Secs. 141 & 142, NIL]: receives the bill for value [Sec. 135, NIL].
a. Conditional – makes payment by the
acceptor dependent on the fulfillment of a
condition therein stated 3. Time for Acceptance
b. Partial – an acceptance to pay part only of
the amount for which the bill is drawn. The drawee is allowed twenty-four hours after
c. Local – an acceptance to pay only at a presentment in which to decide whether or not he will
particular place. accept the bill.
d. Qualified as to time
e. As to drawee – The acceptance of some, The acceptance, if given, dates as of the day of
one or more of the drawees but not of all presentation [Sec. 136, NIL].
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The holder of a bill that is required under Sec. 143, d. When Excused
NIL must present it for acceptance within a
reasonable time [Sec. 144]. Sec. 147, NIL. Presentment where time is
insufficient. – Where the holder of a bill drawn
Note: Reasonable time depends on the nature of the payable elsewhere than at the place of business or the
instrument, the usage of trade or business, and the residence of the drawee has no time, with the
facts of each particular case [Sec. 193]. exercise of reasonable diligence, to present the bill
for acceptance before presenting it for payment on
A bill may be presented for acceptance on any day on the day it falls due, the delay caused by presenting the
which negotiable instruments may be presented for bill for acceptance before presenting it for payment
payment under the provisions of Sections 72 and 85 is excused and does not discharge the drawers and
of this Act. When Saturday is not otherwise a holiday, indorsers.
presentment for acceptance may be made before
twelve o'clock noon on that day [Sec. 146, NIL]. Sec. 148, NIL. Where presentment is excused. –
Presentment for acceptance is excused and a bill may
b. What Constitutes Sufficient be treated as dishonored by non-acceptance in either
Presentment of the following cases:
(a) Where the drawee is dead, or has absconded, or
Presentment for payment, to be sufficient, must be is a fictitious person or a person not having
made: capacity to contract by bill.
1. By the holder, or by some person authorized to (b) Where, after the exercise of reasonable diligence,
receive payment on his behalf; presentment can not be made.
2. At a reasonable hour on a business day; (c) Where, although presentment has been irregular,
3. At the proper place as herein defined [Sec. 73, acceptance has been refused on some other
NIL]; ground.
4. To the person primarily liable on the instrument
or if he is absent or inaccessible, to any person Sec. 147 excuses delay in making presentment and
found at the place where presentment is made. Sec. 148 excuses non-presentment for acceptance.
[Sec. 72, NIL].
2. Effect of Failure to Make
c. How Made Presentment
In general:
Failure to make presentment discharges the drawer
1. By or on behalf of the holder
and all indorsers [Sec. 144, NIL].
2. At a reasonable hour
3. On a business day
4. Before the bill is overdue 3. Dishonor by Non-
5. To the drawee or his agent [Sec. 145, NIL]. Acceptance
Where a bill is addressed to 2 or more drawees
who are not partners – WHEN DISHONORED BY NON-
ACCEPTANCE
General rule: presentment must be made to them all
A bill is dishonored by non-acceptance:
Exception: One has authority to accept/refuse for all
a. When it is duly presented for acceptance and
such an acceptance as is prescribed by this
Where the drawee is dead –
Presentment may be made to his personal Act is refused or cannot be obtained; or
representative. But this merely permissive, since Sec. b. When presentment for acceptance is excused and
148(a) excuses presentment [CAMPOS]. the bill is not accepted [Sec. 149, NIL].
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a. Time Effects:
1. Equivalent to acceptance [Sec. 187, NIL] and is
the operative act that makes banks liable.
Sec. 186, NIL. Within what time a check must be
2. Assignment of the funds of the drawer in the
presented. – A check must be presented for
hands of the drawee [Sec. 189, NIL].
payment within a reasonable time after its issue or
3. If obtained by the holder, discharges the persons
the drawer will be discharged from liability thereon
secondarily liable thereon [Sec. 188, NIL]. But
to the extent of the loss caused by the delay.
this applies only to indorsers at the time of
certification and not to those who indorse
Sec. 193, NIL. Reasonable time, what subsequent to such certification [CAMPOS].
constitutes. – In determining what is a "reasonable
time" regard is to be had to the nature of the Refusal of drawee bank to certify
instrument, the usage of trade or business with Unlike refusal to accept a bill, however, refusal to
respect to such instruments, and the facts of the certify a check does not constitute a dishonor, and
particular case. thus the holder has no action against the bank but he
has a right of action against the drawer [CAMPOS].
A check is intended for immediate use. Hence, a
special rule with respect to presentment for payment The drawer in turn has right of action against the bank
applies to check, wherein presentment for payment of based on the original contact of deposit between
a check must be made within a reasonable time after them.
its issue [CAMPOS].
Certification of checks
An agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future time
when presented for payment. Certification is
equivalent to an acceptance in that it imposes primary
liability upon the certifying bank [CAMPOS].
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INSURANCE CODE
Commercial Law
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contingency, but it is not a contract of chance for If these are the principal objectives, the business is
profit. that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is
In a wagering contract, the parties contemplate gain not insurance.
through mere chance; in a contract of insurance, the
parties seek to distribute possible loss by reason of The court said that although risk is a primary element
mischance [CARALE] of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it because almost
2. Doing or Transacting anyone who undertakes a contractual obligation
always bears a certain degree of financial risk
Insurance Business [CARALE].
Sec. 2(b). The term “doing an insurance Thus, the Court clarified that:
business or transacting an insurance business” a. Contracts that a law firm enters into with clients
includes: whereby in consideration of periodical payments,
(1) Making or proposing to make, as insurer, any the law firm promises to represent such clients in
insurance contract; all suits for or against them are not insurance
(2) Making or proposing to make, as surety, any contracts but are contracts for personal services;
contract of suretyship as a vocation and not as b. But, a contract by which a corporation, in
merely incidental to any other legitimate consideration of a stipulated amount, agrees at its
business or activity of the surety; own expense to defend a physician against all
(3) Doing any kind of business, including a suits for damages for malpractice is one of
reinsurance business, specifically recognized insurance, and the corporation will be deemed as
as constituting the doing of an insurance engaged in the business of insurance since the
business within the meaning of the Insurance purpose of the contract is to indemnify against
Code; loss and damage [Philippine Health Care Providers
(4) Doing or proposing to do any business in Inc. v. CIR, G.R. No. 167330 (2009)].
substance equivalent to any of the foregoing
in a manner designed to evade the provisions A Protection and Indemnity Agreement is a form
of the Insurance Code. of insurance against third party liability where an
association of ship owners in general band together
In the application of the provisions of this Code, for the specific purpose of providing insurance cover
the fact that no profit is derived from the making on a mutual basis against liabilities incidental to ship
of insurance contracts, agreements or transactions owning that the members incur against third parties.
or that no separate or direct consideration is In Pandiman Philippines v. Marine Manning Management
received therefor, shall not be deemed conclusive [G.R. No. 143313 (2005)], the Court considered a
to show that the making thereof does not Protection and Indemnity agreement as an insurance
constitute the doing or transacting of an insurance contract.
business.
3. Governing Law
General rule: An insurance business consists in
undertaking, for a consideration, to indemnify another General Rule: The Insurance Code primarily governs
against loss, damage or liability arising from an insurance contracts.
unknown or contingent event.
Exception: When there is a special law which
Exception: Those not formally designated as insurance specifically governs (e.g., insurance contract under
businesses but are deemed “doing or transacting an R.A. 1161 or the Social Security Act), in which case, the
insurance business” as listed in Sec. 2(b). Insurance Code governs subsidiarily.
The court applied the “principal object and Matters not expressly provided for in the Insurance
purpose test,” based on American case law, when it Code and special laws are regulated by the Civil
ruled that Philippine Health Care is not engaged in the Code.
business of insurance. The test determines whether
the assumption of risk and indemnification of loss are
the principal object and purpose of the organization
or whether they are merely incidental to its business.
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3. Consideration C. Characteristics of an
An insurance premium is the agreed price for Insurance Contract
assuming and carrying the risk. It is the consideration
paid to the insurer for undertaking to indemnify the 1. In General
insured against a designated peril. It is based on
probability of loss and extent of liability [43 Am. Jur. An insurance contract is:
2d 326]. a. Consensual;
b. Voluntary;
Premiums are different from assessments. An c. Aleatory;
assessment, in insurance law, is a sum specifically d. Executory and unilateral, but synallagmatic;
levied by mutual insurance companies or associations, e. Conditional;
upon a fixed and definite plan, to pay losses and f. Contract of adhesion;
expenses [Sec. 403]. While premiums are levied and g. Personal contract;
paid to meet anticipated loss, assessments are h. Uberrimae fides contract (i.e. a contract of the
collected to meet actual loss [VANCE (1951)]. highest degree of good faith).
The unknown event may be past or future. Even if General rule: Contracts of Insurance are not
the proximate cause of the loss is a fortuitous event, compulsory and the parties are free to incorporate
the insurer may still be liable if it is the event or peril such terms and conditions they may deem convenient
insured against [DE LEON at 67]. provided they are not contrary to law, morals, good
customs, public order, or public policy [DE LEON].
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uncertain, or though certain, is to occur at an unfounded [Cebu Shipyard and Engineering Works v.
indeterminate time [Art. 2010, NCC]. William Lines, G.R. No. 132607 (1999)].
Being an aleatory contract does not necessarily mean Exception: Where the terms of the insurance contract
that it is a “contract of change” because in a contract are ambiguous and susceptible to various
of insurance, the parties seek to distribute possible interpretations, the issue is to be resolved against the
loss by reason of mischance, unlike a wagering insurer, being the party that prepared the contract
contract [CARALE]. [Art 1377, NCC].
d. Executory and Unilateral but The “Other Insurance Clause” is not free from
ambiguity, thus the provisions, conditions, or
Synallagmatic exceptions in policies which tend to work a forfeiture
of insurance policies should be construed most
Once the insured pays the premium, the contract strictly against those for whose benefit they are
already takes effect. After the payment of premiums, inserted, and most favorably towards those whom
the insurance imposes a unilateral obligation on the they are intended to operate [Geagonia v. CA, G.R. No.
insurer who promises to indemnify in case of loss. 114427 (1995)].
It is also synallagmatic and reciprocal such that
even if the contingent event or designated peril does g. Personal Contract
not occur, the insurer has still provided protection
against the risk for the period covered by the The contract of insurance is basically between the
insurance contract. insurer and the insured.
General Rule: When the terms of the contract are clear 2. For Specific Kinds of
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its Insurance Contracts
stipulations shall control [Art. 1370, NCC].
For specific kinds of insurance contracts:
There was no manifestation of any intention to a. Contract of Indemnity (for non-life insurance)
constitute CSEW as co-assured. It is axiomatic when b. Property (for life insurance)
the terms of a contract are clear, its stipulations
control. Thus, when the insurance policy involved
named only William Lines as the assured thereunder,
the claim of CSEW that it is a co-assured is
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Perils of the Sea Perils of the Ship An actual loss may be presumed from the
Covers those casualties Covers losses resulting continued absence of a ship without being
due to unusual violence from ordinary wear and heard of. The length of time which is
or extraordinary action tear, or other damage sufficient to raise this presumption depends
of wind and wave, or to incident to the voyage on the circumstances of the case [Sec. 134].
other extraordinary
causes connected with Covers losses which 2. Constructive total loss or “technical total loss”
navigation. result from the is one in which the loss, although not actually
negligent failure of the total, is of such character that the insured is
Covers losses that are of ship’s owner to provide entitled, if he thinks fit, to treat it as total by
an extraordinary nature, the vessel with proper abandonment [45 CJS 1150].
or arise from some equipment to convey
overwhelming power, the cargo under Sec. 133. A constructive total loss is one which
which cannot be ordinary conditions. gives to a person insured a right to abandon, under
guarded against by the [Roque v. IAC, G.R. No. Sec. 141.
ordinary exertion of L-66935, (1985)]
human skill and As to when a constructive total loss exists, three
prudence. rules exist:
1. English rule: there is constructive total loss when
the subject matter of the insurance, while still
RULE ON ALL RISKS COVERED existent in specie, is so damaged as not to be
worth, when repaired, the cost of the repairs
General Rule: In the absence of stipulation, the risks 2. American rule: there is constructive total loss
insured against are only perils of the sea [Go Tiaco y when it is so damaged that the costs of repairs
Hermanos v. Union Ins. Society of Canton, G.R. No. 13983 would exceed one-half of the value of the thing
(1919)]. as acquired; also known as the “fifty percent
rule;”
Exception: However, in an all risk policy, all risks are 3. Philippine rule: the insured may not abandon the
covered unless expressly excepted. The burden rests thing insured unless the loss or damage is more
on the insurer to prove that the loss is caused by a risk than ¾ of its value [DE LEON].
that is excluded [Filipino Merchants Ins. Co. v. CA, G.R.
No. 85141(1989)]. A person insured by a contract of marine insurance
may abandon the thing insured and recover for a total
e. Loss loss thereof, when the cause of the loss is a peril
insured against:
Loss may be total or partial. 1. If more than ¾ thereof in value is actually lost, or
would have to be expended to recover it from the
Total loss may be actual or constructive. peril;
2. If it is injured to such an extent as to reduce its
TOTAL LOSS value more than ¾;
1. Actual loss exists when the subject matter of the 3. If the thing insured is a ship, and the
insurance is wholly destroyed or lost or when it is contemplated voyage cannot be lawfully
so damaged as no longer to exist in its original performed without incurring either an expense to
character [VANCE at 935-937]. the insured of more than ¾ the value of the thing
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abandoned or a risk which a prudent man would 3. The abandonment be neither partial nor
not take under the circumstances; or conditional [Sec. 142];
4. If the thing insured (cargo or freightage) and the 4. It must be made within a reasonable time after
voyage cannot be performed, nor another ship receipt of reliable information of the loss [Sec.
procured by the master, within a reasonable time 143];
and with reasonable diligence, to forward the 5. It must be factual [Sec. 144];
cargo, without incurring either an expense to the 6. It must be made by giving notice thereof to the
insured of more than ¾ the value of the thing insurer which may be done orally or in writing
abandoned or a risk which a prudent man would [Sec. 145]; and
not take under the circumstances [Sec. 141]. 7. The notice of abandonment must be explicit and
must specify the particular cause of the
Note: Freightage cannot in any case be abandoned abandonment [Sec. 146].
unless the ship is also abandoned.
EFFECTS
f. Abandonment 1. An abandonment is equivalent to a transfer by
the insured of his interest to the insurer, with all
DEFINITION the chances of recovery and indemnity [Sec. 148];
2. If a marine insurer pays for a loss as if it were an
Sec. 140. Abandonment, in marine insurance, is
actual total loss, he is entitled to whatever may
the act of the insured by which, after a constructive
remain of the thing insured, or its proceeds or
total loss, he declares the relinquishment to the
salvage, as if there had been a formal
insurer of his interest in the thing insured.
abandonment [Sec. 149];
3. Upon an abandonment, acts done in good faith
CONDITIONS by those who were agents of the insured in
Aside from the requirement under Sec. 141 already respect to the thing insured, subsequent to the
mentioned: loss, are at the risk of the insurer, and for his
1. An abandonment must be neither partial nor benefit [Sec. 150].
conditional [Sec. 142];
2. An abandonment must be made within a
reasonable time after receipt of reliable g. Average
information of the loss, but where the
information is of a doubtful character, the Sec. 138. Where it has been agreed that an
insured is entitled to a reasonable time to make insurance upon a particular thing, or class of
inquiry [Sec. 143]; things, shall be free from particular average, a
3. Abandonment is made by giving notice thereof marine insurer is not liable for any particular
to the insurer, which may be done orally, or in average loss not depriving the insured of the
writing: Provided, That if the notice be done orally, possession, at the port of destination, of the whole
a written notice of such abandonment shall be of such thing, or class of things, even though it
submitted within seven days from such oral becomes entirely worthless; but such insurer is
notice [Sec. 145]; liable for his proportion of all general average loss
4. Abandonment must be absolute and total. assessed upon the thing insured.
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both at the same time from a real and known risk [Art.
811, Code of Commerce]. Marine Insurance is unique in that it has certain
implied warranties:
The loss is borne not by the owner of the vessel alone, 1. Implied Warranty of Seaworthiness
but by all the owners of the interests involved, who 2. Implied Warranty of Against Improper
are pro tanto obliged to give proportionate or “general Deviation
average” contributions to make up for such loss 3. Implied Warranty of proper Documentation
[CARALE].
Implied Warranty of Seaworthiness. In every
The reason for this distribution of loss is that the marine insurance upon a ship or freight, or freightage,
sacrifice was made for the common benefit of all who or upon anything which is the subject of marine
have an interest in the venture [Art 812, Code of insurance, a warranty is implied that the ship is
Commerce]. seaworthy [Sec. 115].
Vance, however, includes as part of the requisites: A vessel should be seaworthy at the time
1. Sacrifice was made by the master or upon his commencement of the risk or start of the voyage,
authority; and except:
2. That it was not caused by any fault of the party 1. When the insurance is made for a specified length
asking for the contribution [CARALE] of time, the implied warranty is not complied
with unless the ship be seaworthy at the
PARTICULAR AVERAGES commencement of every voyage it
undertakes during that time (Time Policy);
Include damages and expenses caused to the vessel or 2. When the insurance is upon the cargo which, by
her cargo, which have not inured to the common the terms of the policy, description of the voyage,
benefit and profit of all the persons interested in the or established custom of the trade, is to be
vessel and her cargo [Art. 809, Code of Commerce]. transhipped at an intermediate port, the implied
warranty is not complied with unless each vessel
A particular average loss is suffered by and borne upon which the cargo is shipped, or transhipped,
alone by the owner of the cargo or of the vessel, as be seaworthy at the commencement of each
the case must be [DE LEON]. particular voyage (Cargo Policy) [Sec. 117].
Simply put, particular average losses are merely those Where different portions of the voyage contemplated
losses suffered by and borne alone by particular by a policy differ in respect to the things requisite to
interests in a venture, and not by all persons make the ship seaworthy therefor, a warranty of
contributing ratably [CARALE]. seaworthiness is complied with if, at the
commencement of each portion, the ship is seaworthy
An example of particular average loss would be the with reference to that portion [Sec. 119].
wages of the crew when the vessel is detained by
reason of force majeure. In such a case, the loss is only The insurer is not liable despite breach of
partial and must be borne by the owner of the vessel warranty when the ship becomes unseaworthy
alone [CARALE]. during the voyage to which an insurance relates, but
there is an unreasonable delay in repairing the defect
h. Warranties [Sec. 120].
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Implied Warranty Against Improper deviation Woolen Mills Co. v. Northern Assurance Co., 139 Fed 637
A deviation is a departure from the course of the (1905)].
voyage insured, or an unreasonable delay in pursuing
the voyage or the commencement of an entirely The presence of heat, steam, or even smoke is
different voyage [Sec.125] evidence of fire, but taken by itself will not prove the
existence of fire.
Deviation is proper (Insurer remains liable):
1. When caused by circumstances over which Fire cannot be considered a natural disaster or
neither the master nor the owner of the ship has calamity since it almost always arises from some acts
any control; of man or by human means. It cannot be an act of
2. When necessary to comply with a warranty, or to God unless caused by lightning or a natural disaster
avoid a peril, whether or not the peril is insured or casualty not attributable to human agency [Phil.
against; Home Assurance Corp. v. CA, G.R. No. 106999 (1996)].
3. When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; b. Risks
od) When made in good faith, for the purpose of
saving human life or relieving another vessel in Rule: The risk assumed by the insurer is the loss and
distress [Sec. 126]. damage caused by hostile fire and not friendly fire.
Every deviation not specified in the last section is Hostile Fire Friendly Fire
improper [Sec. 127]. Effect of any loss subsequent to an A hostile fire is one
improper deviation: Insurer is not liable [Sec. 128]. that escapes from the A friendly fire is one
place where it was that burns in a place
Implied Warranty of Proper documentation intended to burn and where it is intended to
Where the nationality or neutrality of a ship or cargo ought to be, or one burn and ought to be
is expressly warranted, it is implied that the ship will which remains like fire burning in a
carry the requisite documents to show such completely within its stove or a lamp [DE
nationality or neutrality and that it will not carry any proper place but LEON].
documents which cast reasonable suspicion thereon because of the
[Sec. 122]. unsuitable materials Friendly fire may
used to light it, becomes become hostile fire by
2. Fire inherently dangerous escaping from the place
and uncontrollable. where it ought to be to
a. Definition This kind of fire will some place in which it
make the insurer liable ought to be [CARALE].
[DE LEON].
Sec. 169. Fire insurance includes insurance against
loss by fire, lightning, windstorm, tornado or
The principle underling this distinction is that the
earthquake and other allied risks, when such risks
policy shall not be construed to protect the insured
are covered by extension to fire insurance policies
from injury consequent upon his negligent use or
or under separate policies.
management of fire, so long as it burns in the place
where it ought to be [CARALE].
A fire insurance is a contract of indemnity by which
the insurer, for a stipulated premium, agrees to
indemnify the insured against loss of, or damage to, a c. Alterations in Use or Condition
property caused by hostile fire.
Sec. 170. An alteration in the use or condition of a
Fire or other so-called “allied risks” enumerated in thing insured from that to which it is limited by the
Sec. 169 must be the proximate cause of the damage policy made without the consent of the insurer, by
or loss. means within the control of the insured, and
increasing the risks, entitles an insurer to rescind a
Fire is oxidation which is so rapid as to produce either contract of fire insurance.
a flame or a glow. Spontaneous combustion is usually
rapid oxidation. Fire is always caused by combustion, Sec. 171. An alteration in the use or condition of a
but combustion does not always cause fire [Western thing insured from that to which it is limited by the
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policy, which does not increase the risk, does not In the absence of express valuation in a fire insurance
affect a contract of fire insurance. policy, the insured is only entitled to recover the
amount of actual loss sustained and the burden of
Sec. 172. A contract of fire insurance is not proof is upon him to establish the amount of such
affected by any act of the insured subsequent to loss by preponderance of evidence.
the execution of the policy, which does not violate
its provisions, even though it increases the risk and The contract of fire insurance is a contract of
is the cause of the loss. indemnity, and thus the plaintiff only entitled
therefore to recover the amount of the actual loss
sustained by him, there being no express valuation in
Thus, in order that the insurer may rescind a
the policy [Tan Chuco v. Yorkshire Fire & Life Ins. Co.,
contract of fire insurance for any alteration made in
G.R. No. L-5069 (1909)].
the use or condition of the thing insured, the
following requisites must be present:
In an open policy, the actual loss, as determined, will
1. The use or condition of the thing is specifically
represent the total indemnity due the insured except
limited or stipulated in the policy;
only that the total indemnity shall not exceed the total
2. Such use or condition as limited by the policy is
value of the policy [Development. Ins. Corp. v. IAC, G.R.
altered;
No. 71360 (1986)].
3. The alteration is made without the consent of the
insurer;
OPEN TO REBUILD CLAUSE
4. The alteration is made by means within the
control of the insured; and
Whenever the insured desires to have a valuation
5. The alteration increased the risk [DE LEON at
named in his policy, insuring any building or structure
406].
against fire, he may require such building or structure
to be examined by an independent appraiser and the
The rule on alteration was strictly applied in the case
value of the insured’s interest therein may then be
of Malayan Insurance Co, Ltd v. PAP Co., Ltd. [G.R. No.
fixed as between the insurer and the insured. The cost
200784 (2013)]: The court held that transferring
of such examination shall be paid for by the insured.
machinery to another location, despite a provision in
A clause shall be inserted in such policy stating
the policy stating that the machine cannot be
substantially that the value of the insured’s interest in
transferred without the consent of the insurer, is
such building or structure has been thus fixed [Sec.
considered an alteration in the condition and location
174].
of the thing insured. Hence, Malayan was not liable to
PAP Co.
3. Casualty
d. Measure of Indemnity
a. Definition
1. In an open policy, only the expense necessary to
replace the thing lost or injured in the condition Sec. 176. Casualty insurance is insurance covering
it was at the time of the injury will be paid; loss or liability arising from accident or mishap,
2. In a valued policy, the parties are bound by the excluding certain types of loss which by law or
valuation, in the absence of fraud or mistake, custom are considered as falling exclusively within
similar to marine insurance [Sec. 173]. the scope of other types of insurance such as fire
3. The parties may provide for an option-to- or marine. It includes, but is not limited to,
rebuild clause concerning the repairing, employer’s liability insurance, motor vehicle
rebuilding, or replacing of buildings or structures liability insurance, plate glass insurance, burglary
wholly or partially damages [Sec. 174]. and theft insurance, personal accident and health
insurance as written by non-life insurance
VALUED POLICY companies, and other substantially similar kinds of
If there is a valuation, the effect shall be similar to a insurance.
marine insurance policy wherein the valuation is
conclusive between the parties in adjusting the loss Casualty insurance includes all forms of insurance
[Sec. 158]. against loss or liability arising from accident or mishap
excluding certain types of loss or liability which are
OPEN POLICY not within the scope of other types of insurance such
as fire, marine, suretyship and life. It includes, but is
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contract is merely incidental to any other legitimate insurance contract for purposes of the Insurance
business or activity of the surety. Code.
The contract of a surety is evidenced by a document Life insurance is an insurance policy the proceeds of
called surety bond which is essentially a promise to which are payable either upon:
guarantee the obligation of the obligor. In turn, the 1. Death of the person;
obligor executes an indemnity agreement in favor 2. Having survived a specified period; or
of the insurer [DE LEON]. 3. On the continuance of cessation of life [Sec. 182]
It is an accessory contract unlike a contract of PARTIES [CARALE]
insurance which is the principal contract itself. With the power to name
the beneficiary, assign
The liability of the surety or sureties under a bond is It, cash it in or use as
joint and several, or solidary [Sec. 178]. This means Owner of the policy
collateral, with the
that upon the default of the principal obligor, the obligation to pay the
surety becomes primarily liable. Unlike a guarantor, a premiums
surety is not entitled to the benefit of exhaustion of One on whose life
the principal obligor’s assets and assumes a regular Cestui que vie
insurance is obtained
party to the undertaking. One to whom the
Beneficiary
proceeds may be paid
It is limited or fixed to the amount of the bond.
There are also cases wherein there may be one person
What is unique to a contract of suretyship is that when only for all three parties.
the obligee accepts the bond, the bond becomes valid
and enforceable whether or not the premium has
been paid by the obligor unlike in an insurance b. Types
contract where payment of premium is necessary for
the contract to be valid. If the obligee has not yet There are 4 types of Life Insurance
accepted, then payment of premium is still necessary 1. Individual Life
for the contract of suretyship to be valid. 2. Group Life
3. Industrial Life; and
4. Microinsurance
5. Life
INDIVIDUAL LIFE
a. Definition Insurance on human lives and insurance appertaining
thereto or connected therewith. It may be made
Sec. 181. Life insurance is insurance on human payable on the death of the person, or after his
lives and insurance appertaining thereto or surviving a specified period (as an annuity or
connected therewith. endowment), or otherwise contingently on the
continuation or cessation of life.
Every contract or undertaking for the payment of
annuities including contracts for the payment of GROUP LIFE
lump sums under a retirement program where a It is a blanket policy covering a number of individuals
life insurance company manages or acts as a trustee who are usually a cohesive group (e.g., employees of a
for such retirement program shall be considered a company) and subjected to a common risk. No
life insurance contract for purposes of the medical examination is usually required of each
Insurance Code. person insured (in contrast to individual life
insurance).
Sec. 182. An insurance upon life may be made
Group insurance is a single insurance contract that
payable on the death of the person, or on his
provides coverage for many individuals. The
surviving a specified period, or otherwise
employer-policy holder is the agent of the insurer in
contingently on the continuance or cessation of
collecting the premium [Pineda v. CA, G.R. No.
life.
105562 (1993)].
Every contract or pledge for the payment of
Typically, the policy owner is an employer and the
endowments or annuities shall be considered a life
policy covers the employees or members of the
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within the time period designated in the policy, beneficiary is the principal accomplice or accessory in
usually for periods of one to five years. willfully bringing about the death of the insured. In
such event, the other beneficiaries so named shall
3. Modified Life Insurance, which is a policy that receive their share and divide among them the
combines terms and whole life insurance into a forfeited share of the “guilty” beneficiary. In the
single insurance policy. Premiums paid by the absence of other beneficiaries, proceeds shall be paid
insured are substantially less during the first few according to the policy contract, and if silent, it shall
years then later on increases during the remaining be paid to the estate of the insured [Sec. 12].
term of the policy [CARALE].
Exceptions:
d. Risks 1. Accidental killing;
2. Self-defense;
Five important risks: 3. Insanity of the beneficiary at the time he killed
1. Death or Survival; the insured;
2. Suicide 4. Negligence.
3. Death at the hands of the law;
4. Killing by the beneficiary; and Note: Conviction of the beneficiary is necessary before
5. Accidental Death his interest in the insurance policy is forfeited in favor
of the others indicated in Sec. 12.
DEATH OR SURVIVAL
Life insurance may be made payable on the death of ACCIDENTAL DEATH
the person, or on his surviving a specified period, or The terms accident and accidental means have yet
otherwise contingently on the continuation or to acquire a technical meaning. In general they have
cessation of life [CAMPOS]. been taken to mean that they happen by chance or
fortuitously, without intention and design and are
Death of the insured must be proven by the unexpected, unusual, and unforeseen. Where the
beneficiary before the insurer can be made to pay. death or injury is not the natural or probable result of
the insured’s voluntary act, or if something
SUICIDE unforeseen occurs in the doing of the act which
Insurer is liable in any of the following cases: produces the injury, the resulting death is within the
1. If committed after 2 years from the date of the protection of the policies insuring against death or
policy’s issue or its last reinstatement unless the injury from accident [CARALE at 176].
policy provides for a shorter period.
In the case of Calanoc v. CA [G.R. No. L-8151 (1955)],
Note: Any stipulation extending the 2-year period the Court held that an event is not an accident if it is
is void. due to a voluntary and intentional act on the part of
anyone, including third parties. The court noted that
2. If committed in a state of insanity regardless of there was no proof that the incident was intentional,
the date of the commission unless suicide is an that the robber had aimed for the watchman, because
excepted peril [Sec. 183]. there was nothing on record that showed how the
fatal shot was fired. The house being robbed was not
Since suicide is contrary to the laws of nature and the event and that the house guarded by the murdered
ordinary rules of conduct, it is never presumed. The watchman. Thus, the insurer was ordered to pay the
burden of proving lies with the insurer who seeks to watchman’s widow the value of the supplemental
avoid liability under a life policy excepting it from policy covering death by accident.
coverage [CAMPOS].
However, in the case of Biagtan v. Insular [G.R. No. L-
DEATH AT THE HANDS OF THE LAW 25579 (1972)], the Court held that the victim was
Death at the hands of the law (e.g., legal execution) is killed intentionally, thus not covered by the
one of the risks assumed by the insurer under a life supplemental insurance on death by accident. There
insurance policy in the absence of a valid policy were nine wounds in all and cannot be considered
exception [CAMPOS at 168]. accidental.
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exclusively to the proper interest if the person in Evidence that the insurance is regarded as a wager
whose name or for whose benefit it is made. policy:
7. An express prohibition against alienation in the 1. The original proposal to take out insurance was
policy [Art. 1306, NCC], in which case alienation that of the beneficiary.
will not merely suspend the contract but avoid it 2. The premiums are paid by the beneficiary
entirely. 3. The beneficiary has no interest, economic or
emotional, in the continued life of the insured.
1. In Life/Health [DE LEON]
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a. Time of Existence
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(b) Where the policy under which the insured A reinsurance treaty is an agreement between two
claims is a valued policy, any sum received by insurance companies whereby one agrees to cede and
him under any other policy shall be deducted the other to accept reinsurance business pursuant to
from the value of the policy without regard to provisions specified in the treaty [DE LEON].
the actual value of the subject matter insured;
(c) Where the policy under which the insured A reinsurance policy is a contract of indemnity one
claims is an unvalued policy, any sum received insurer makes with another to protect the first insurer
by him under any policy shall be deducted from a risk it has already assumed.
against the full insurable value, for any sum
received by him under any policy; Reinsurance treaties and reinsurance policies are not
(d) Where the insured receives any sum in excess synonymous. Treaties are contracts for insurance;
of the valuation in the case of valued policies, policies are contracts of insurance [Philamlife v. Auditor
or of the insurable value in the case of General, G.R. No. 19255 (1968)].
unvalued policies, he must hold such sum in
trust for the insurers, according to their right Double Insurance and Reinsurance
of contribution among themselves; Distinguished
(e) Each insurer is bound, as between himself and Double Insurance Reinsurance
the other insurers, to contribute ratably to the Same interest Different interest
loss in proportion to the amount for which he Insurer becomes the
Insurer remains as the
is liable under his contract. insured in relation to
insurer
the insurer
Sec. 96 enunciates the principle of contribution which Insured is a party in The original insured is
requires each insurer to contribute ratably to the loss interest in the insurance not a party in the
or damage considering that the several insurances contracts reinsurance contract
cover the same subject matter and interest against the Property is the subject The original insurer’s
same peril. If the loss is greater than the sum total of matter risk is the subject matter
all the policies issued, each insurer is liable for the Insured has to give his Insured’s consent is not
amount of his policy. consent necessary
Sec. 100. The original insured has no interest in a Thus, a mortgagor has an insurable interest equal to
contract of reinsurance. the value of the mortgaged property and a mortgagee,
only to the extent of the debt Secured by the mortgage
Reinsurance has been referred to as “an insurance of [Geagonia v. CA, G.R. No. 114427(1995)].
an insurance.”
Mortgagor Mortgagee
Original Insurance Contract and Reinsurance As owner, the interest is
Contract Distinguished to the extent of the
The original insurance contract is separate and value of the property, Only to the extent of
distinct from the reinsurance contract. An original regardless of whether it the debt secured.
insurance contract covers indemnity against damages, equals to the mortgage
while reinsurance covers indemnity against liability. debt or not
His interest lies in that What is insured is not
Reinsurance Treaty and Policy Distinguished the loss or destruction the property, but his
of the property will not interest as mortgagee,
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An insurance contract is consensual. It is therefore When there is delay in acceptance due to the
perfected by mere consent. Consent is manifested by negligence of the insurance company which takes
the meeting of the offer and the acceptance upon the unreasonably long time before the application is
object or the cause which are to constitute the processed and the applicant dies, the contract is not
contract. perfected. In this case, the insurer can be liable for
damages in accordance with the “tort theory.” The
There is an offer when the insured submits an insurance business is imbued with public interest, thus
application to the insurer. There is acceptance when the it is the duty of the insurer to act with reasonable
insurer approves the application. The insurance promptness in acting on applications submitted to it
contract becomes effective upon payment of first [Wallace v. Hartford Fire Insurance Co, 31 Idaho 48r,
premium, provided there has been an approval of the (1918)]
application.
b. Delivery of Policy
A contract of insurance must be assented to by both
parties, either in person or through their agents and Delivery is the act of placing the insurance policy (i.e.
so long as an application for insurance has not been the physical document) into the possession of the
either accepted or rejected, it is merely a proposal or insured. The delivery can be a proof of the acceptance
an offer to make a contract [Perez v. CA, G.R. No. of the insurer of the offer of the insured. It is not,
112329 (2000)]. however, a pre-requisite of a valid contract of
insurance. Actual manual delivery is not necessary for
The court applied the Cognition Theory in the case of the validity of the contract. Constructive delivery may
Enriquez v. Sun Life Assurance Co. [G.R. No. L-15895 be sufficient.
(1920)] when it ruled that an acceptance made by
letter shall not bind the person making the offer Actual delivery to the insured is not essential to give
except from the time it came to his knowledge. The the policy binding effect as long as the insured has
court held that: complied with every condition required of him [New
a. The submission of an application, even with York Life Ins. Co. v. Babcock, 30 S. E. 273 (1898)].
premium payment is a mere offer on the part of
the applicant, and does not bind the insurer; In Bradley v. New York Life Ins., [275 F. 657 (1921)], the
b. An insurance contract is also not perfected where agent of the insurance company is not the agent of the
the applicant dies before the approval of his insured. Thus, delivery to the agent cannot be
application or it does not appear that the considered delivery to the insured.
acceptance of the application ever came to the
knowledge of the applicant;
c. An acceptance made by letter shall not bind the 2. Premium Payment
person making the offer except from the time it
came to his knowledge. An insurance premium is the agreed price for
assuming and carrying the risk, that is, the
The parties may impose additional conditions consideration paid an insurer for undertaking to
precedent to the validity of the policy as a contract as indemnify the insured against the specified peril.
they see fit. Usually, it is stipulated in the application
that contract shall not become binding until the policy General rule: No insurance policy issued or renewal is
is delivered and the first premium is paid [DE LEON valid and binding until actual payment of the premium
(2014)]. [Sec. 77]. Any agreement to the contrary is void.
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unless and until the premium thereof has been would retroact to the date of the instrument and its
paid, except in the case of a life or an industrial life acceptance by the creditor [Vitug, Commercial Laws
policy whenever the grace period provision applies and Jurisprudence (2006)]
or whenever under the broker and agency
agreements with duly licensed intermediaries, a 90 c. Non-Payment of Premium
day credit extension is given. No credit extension
to a duly licensed intermediary should exceed 90 Non-payment of first premium, unless waived,
days from the date of issuance of the policy. prevents the contract from becoming binding
notwithstanding the acceptance of the application nor
Sec. 79. An acknowledgment in a policy or the issuance of the policy [Philippine Phoenix Surety and
contract of insurance or the receipt of premium is Insurance v. Woodworks, G.R. No. L-25317 (1979)].
conclusive evidence of its payment, so far as to Non-payment of subsequent premiums does not
make the policy binding, notwithstanding nay affect the validity of the contracts unless, by express
stipulation therein that it shall not be binding until stipulation, it is provided that the policy shall in that
the premium is actually paid. event be suspended or shall lapse.
Note: The exceptions provided by law are as follows: In case of individual life insurance, the policy holder
a. Life and industrial life policy [Sec. 77] is entitled a grace period of either 30 days or one
b. 90-day credit extensions covered by broker or month within which payment of any premium after
agency agreements with licensed intermediaries the first may be made [Sec. 233].
[Sec. 77]
c. Acknowledgment in the contract that the In cases of industrial life insurance, the grace period
premium has been paid [Sec. 79] is four weeks, and where premiums are paid monthly,
either 30 days or one month [Sec. 236].
Jurisprudence decided before RA 10607 provides two
further exceptions: Excuses for Non-Payment
a. Agreement to grant payment of premium in 1. Fortuitous events which render payment by the
installment basis and partial payment has been insured wholly impossible will not prevent
made [Makati Tuscany v. CA, G.R. No. 95546, forfeiture of the policy when the premium
(1992)] remains unpaid. In other words, it is not an
b. When parties are barred by Estoppel [UCPB v. excuse.
Masagana Telemart, G.R. No. 137172 (2001)] 2. Non-payment of premiums occasioned by war
causes an insurance to be not merely suspended,
a. Authority of Agent to Receive but completely abrogated. It would be unjust to
allow the insurer to retain the reserve value of the
Premium policy, which is the excess of the premiums paid
over the actual risk carried during the years when
Where an insurer authorizes an insurance agent or the policy had been in force in time of war
broker to deliver a policy to the insured, it is deemed [Constantino v. Asia Life Ins. Co. G.R. No. L-1669
to have authorized said agent to receive the premium (1950)].
in its behalf.
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6. Refund of Premiums
Return of premiums can be made in the following
cases:
a. If the thing insured was never exposed to the
risks insured against, the whole premium should
be refunded [Sec. 80(a)]
b. When the contract is voidable due to the fraud or
misrepresentation of insurer or his agent, the
whole premium should be refunded [Sec. 82]
c. When by any default of the insured other than
actual fraud, the insurer never incurred any
liability under the policy, the whole premium
should be refunded [Sec. 82]
d. When the contract is voidable because of the
existence of facts of which the insured was
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But, Sec. 27, uses the phrase “injured party”, thus the
G.Rescission of Insurance insured may also rescind the contract.
Contracts Concealment may be committed by either the insurer
Rationale: The contract of insurance is one of perfect or the insured [Qua Chee Gan v. Law Union & Rock Ins.
good faith (uberrimae fides) not for the insured alone, Co. G.R. No. L-4611(1955)].
but equally for the insurer; in fact it is more so for the
latter, since its dominant bargaining position carries a. Proof of Fraud in Concealment
with it the stricter responsibility [Qua Chee Gan v. Law
Union & Rock Insurance, G.R. No. L-4611(1955)]. General rule: Fraud need not be proven in order to
prove concealment. Good faith is not a defense
[Saturnino v. Phil. American Life Insurance, G.R. No. L-
1. Concealment 16163 (1963)].
Concealment is the failure to disclose facts which the Exception: When the concealment is made by the
applicant at the time of application, knows or ought insured in relation to the falsity of a warranty, the non-
to know and are material to the insurance applied for disclosure must be intentional and fraudulent in order
[CARALE]. that the contract may be rescinded [Sec. 29]
Sec. 26. A neglect to communicate that which a Rationale: The insured is under no obligation to reveal
party knows and ought to communicate, is called a things of which he makes a warrant because it would
concealment. constitute a superfluity of disclosure. Thus, the reason
for the requirement of intent is that the insurer needs
Sec. 27. A concealment whether intentional or to rely not so much on the fact that a warrant was
unintentional entitles the injured party to rescind a made, but rather on the truth of what was warranted
contract of insurance. [CARALE].
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misstated, the amount payable for the policy shall Injured party is entitled to rescind a contract of
be as if the policy was purchased at the correct insurance on ground of concealment or false
age [Sec. 233(d)] [CARALE]. representation, whether intentional or not.
There is fraud and misrepresentation when another Statements or promises agreed upon by both parties
person takes the place of the insured in the medical to the insurance contract which are contained in the
examination [Eguaras v. Great Eastern, G.R. No. L- contract or properly incorporated constitute
10436 (1916)]. warranties [CARALE].
The insurer is not entitled to rescission for A warranty may also be made by the insurer
misrepresentation of age if the birth date on the policy [CARALE].
leads to the conclusion that the insured is beyond the
age covered and yet the insurer continued to accept Sec. 68. A warranty may relate to the past, the
payment and issued the policy. Insurer is deemed present, the future, or to all of these.
estopped [Edillon v. Manila Bankers Life, G.R. No. L-
34200 (1982)]. Sec. 69. No particular form of words is necessary
to create a warranty.
Despite not answering the questions and keeping
blank certain questions in the application regarding a. Warranties, Riders, and
ailments he has suffered, when the insured signed the
pension plan application, he adopted the written Endorsements
representations and declarations embodied in as his
own. Therefore, it is clear from these representations Sec. 50. The policy shall be in printed form which
that he concealed his chronic heart ailment and may contain blank spaces; and any word, phrase,
diabetes [Florendo v. Philam Plans, G.R. No. 186983 clause, mark, sign, symbol, signature, number, or
(2012)]. word necessary to complete the contract of
insurance shall be written on the blank spaces
Concealment Misrepresentation provided therein.
Who may commit
May be committed by Any rider, clause, warranty or endorsement
Committed only by purporting to be part of the contract of insurance
either insured or
insured and which is pasted or attached to said policy is not
insurer
Act involved binding on the insured, unless the descriptive title
Passive form Active form or name of the rider, clause, warranty or
Insured makes endorsement is also mentioned and written on the
Insured withholds blank spaces provided in the policy.
erroneous statements of
information of material
facts with the intent of
facts from the insurer; Unless applied for by the insured or owner, any
inducing the insurer to
he maintains silence rider, clause, warranty or endorsement issued after
enter into the insurance
when he ought to speak the original policy shall be countersigned by the
contract
Materiality insured or owner, which countersignature shall be
Determined by the same rules taken as his agreement to the contents of such
rider, clause, warranty or endorsement.
Effects
Same effects on the part of the insured; insurer has
Notwithstanding the foregoing, the policy may be
right to rescind
in electronic form subject to the pertinent
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A rider is a printed or typed stipulation contained in Sec. 74. The violation of a material warranty, or
a slip of paper attached to the policy and forming an other material provision of the policy, on the part
integral part thereof. Thus, it does not need to be of either the insured or insurer, entitles the other
signed by the insured. to rescind.
Deemed included in the contract although not Sec. 75. A policy may declare that a violation of
expressly mentioned (e.g., implied warranty of specified provisions thereof shall avoid it,
seaworthiness of the vessel in marine insurance and otherwise the breach of an immaterial provision
implied warranty not to alter the circumstances of the does not avoid the policy.
thing insured). This is only available for marine
insurance. General rule: Breach of an immaterial provision does
not avoid the policy [Sec. 75].
3. Affirmative Warranty
Exception: Breach of an immaterial provision avoids
Asserts the existence of a fact or condition at the time the policy when the parties stipulate that violation of
it is made a particular provision, though immaterial, shall avoid
the policy. In effect, the parties converted the
4. Promissory Warranty or Executory immaterial provision into a material one
Warranty [SUNDIANG and AQUINO]
The insured stipulates that certain facts or conditions A condition in the policy which requires insured to
pertaining to the risk shall exist or that certain things disclose to the insurer of any insurance that, if
with reference thereto shall be done or omitted. It is violated by the insured, would ipso facto avoid the
in the nature of a condition subsequent [Sec. 72 and contract [Pioneer v. Yap, G.R. No. L-36232 (1974)].
73].
Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty when,
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2. Proximate Cause
3. Immediate Cause
The cause, not the proximate cause, which
immediately precedes the loss.
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Loss for which the Loss for which the information as distinguished from a formal claim
insurer is liable insurer is not liable which contains the full details of the loss,
Loss through computations of the amounts claimed, and
negligence of insured supporting evidence, together with a demand or
Loss where the request for payment [DE LEON].
except where there was
excepted peril is the
gross negligence
proximate cause Time for Giving Notice
amounting to willful
acts Notice of loss must be given within reasonable time
Loss caused by efforts [Bachrach v. Britain American Assurance, G.R. No. L-
to rescue the thing from 5715 (1910)].
peril insured against if,
during the course of the For compulsory motor vehicle insurance, the notice
rescue, the thing is must be given within six months from the date of the
exposed to a peril not accident [Sec. 397].
insured against, which For other non-life insurance, the Commissioner may
permanently deprives specify the period for the submission of the notice of
the insured of its loss [Sec. 90].
possession in whole or
in part [Sec. 87] b. Proof of Loss
2. Notice and Proof of Loss It is the formal evidence given to the insurance
company by the insured or claimant, under a policy,
of: the occurrence of the loss, the particulars thereof,
a. Notice of Loss and the data necessary to enable the company to
determine its liability and the amount [DE LEON].
This refers to the formal notice given the insurer by
the insured or claimant under a policy of the Purpose
occurrence of the loss insured against. Its purpose is to give the insurer information by which
he may determine the extent of his liability but also;
Purpose to afford him a means of detecting any fraud that may
Its purpose is to apprise the insurance company so have been practiced upon him, and to operate as a
that it may make proper investigation and take such check upon extravagant claims.
action as may be necessary to protect its interest.
Like a notice of loss, in the absence of any stipulation
In fire insurance, an insurer is exonerated, if notice in the policy, proof may be given orally or in writing.
thereof be not given to him by an insured, or some
person entitled to the benefit of the insurance, The insured is not bound to give such proof as would
without unnecessary delay [Sec. 90]. be necessary in a court of justice; but it is sufficient
for him to give the best evidence which he has in his
In other types of insurance, failure to give notice will power at the time [Sec. 91].
not exonerate the insurer, unless there is a stipulation
in the policy requiring the insured to do so. RULES FOR RECOVERY
However, it has been held that formal notice of loss Sec. 90. In case of loss upon an insurance against
is not necessary if insurer has actual notice of loss fire, an insurer is exonerated, if notice thereof be
[Fidelity Phoenix Insurance v. Friedman, 174 SW 215 not given to him by an insured, or some person
(1987)] but there is a ruling to the contrary [Col. Sav. entitled to the benefit of the insurance, without
Bank v. American Surety, 87 P 118]. unnecessary delay.
Form
In case of loss as regards fire insurance, there must be General Rule: Timely compliance with the notice and
a written notice thereof [Sec. 90]. But as to other non- proof of loss is a condition precedent to the right to
life insurance policies, the law does not provide for a recover if the policy is fire insurance, or when the
necessity of written notice [DE LEON]. same is stipulated in the policy [Sec. 90].
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Failing to adopt and implement reasonable In compulsory motor vehicle insurance, the action
standards for the prompt investigation of claims prescribes in one year from the denial of the claim
arising under its policies; [Sec. 397].
Not attempting in good faith to effectuate prompt, Note: The period of commencing an action under a
fair and equitable settlement of claims submitted policy of insurance under Sec. 63 is to be computed
in which liability has become reasonably clear; or not from the time when the loss actually occurs but
from the time when the insured has a right to bring
Compelling policyholders to institute suits to an action against the insurer.
recover amounts due under its policies by offering
without justifiable reason substantially less than The right of the insured to the payment of his loss
the amounts ultimately recovered in suits brought accrues from the happening of the loss. However, the
by them. cause of action in an insurance contract does not
accrue until the insured's claim is finally rejected by
Evidence as to numbers and types of valid and the insurer. This is because before such final rejection,
justifiable complaints to the Commissioner against there is no real necessity for bringing suit [Eagle Star
an insurance company, and the Commissioner’s Insurance vs Chia Yu, G.R. No. L-5915 (1955)].
complaint experience with other insurance
companies writing similar lines of insurance shall c. Subrogation
be admissible in evidence in an administrative or
judicial proceeding for the purpose of determining The right of subrogation is provided in the Civil
whether unfair claim settlement practices have Code. :
been committed. Art. 2207. If the plaintiff’s property has been
insured, and he has received indemnity from the
If it is found, after notice and an opportunity to be insurance company for the injury or loss arising
heard, that an insurance company has violated this out of the wrong or breach of contract complained
section, each instance of noncompliance may be of, the insurance company shall be subrogated to
treated as a separate violation and shall be the rights of the insured against the wrongdoer or
considered sufficient cause for the suspension or the person who has violated the contact. If the
revocation of the company’s certificate of amount paid by the insurance company does not
authority fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the
Sec. 247 lists the grounds which are sufficient cause person causing the loss or injury.
for the suspension or revocation of the insurer’s
certificate of authority [Sec. 247(c)]. Subrogation is a process of legal substitution. The
insurer, after paying the amount covered by the
b. Prescription of Action insurance policy, steps into the shoes of the insured
and avails himself of the latter's rights that exist
Should the insurer reject the claim of the insured, the against the wrongdoer at the time of loss.
remedy of the latter would be to file an action against
the insurer with the proper tribunal [CARALE]. The insurer becomes entitled to recover from the
wrongdoer the amount of the loss it may have paid to
An “action” or “suit” is an act by which one sues the insured.
another in a court of justice for the enforcement or
protection of a right, or the prevention or redress of Note: Subrogation applies only to property insurance
a wrong [Lopez v. Filipinas Compania de Seguros, G.R. and non-life insurance.
No. L-19613 (1966)].
Rights Transferred
In the absence of an express stipulation in the policy, The subrogee-insurer cannot acquire any claim,
it being based on a written contract, the action Security, or remedy the subrogor did not have (or a
prescribes in ten years [Art. 1144, NCC]. greater claim than the original insured). In other
words, a subrogee cannot succeed to a right not
However, the parties may validly agree on a shorter possessed by the subrogor. A subrogee can recover
period provided it is not less than one year from the only if the insured likewise could have recovered
time the cause of action accrues [Sec. 63]. [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins. Corp., G.R.
No. 140349 (2005)].
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2. Revocation of Certificate of
Authority
The Certificate of Authority issued to the domestic or
foreign company by the Commission may be revoked
or suspended by the Insurance Commissioner for any
of the following grounds:
a. The company is in an unsound condition
b. That it has failed to comply with the provisions
of law or regulations obligatory upon it
c. That its condition or method of business is such
as to render its proceedings hazardous to the
public or its policyholders
d. That its paid-up capital stock, in the case of a
domestic stock corporation, or its available cash
assets, in the case of a domestic mutual company,
or its security deposits, in the case of a foreign
company, is impaired or deficient
e. That the margin of solvency required of such
company is deficient [Sec. 254]
3. Liquidation of Insurance
Company
If the company is determined by the Commissioner
to be insolvent or cannot resume business, he shall, if
public interest requires, order its liquidation [Sec.
256].
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TRANSPORTATION
LAWS
Commercial Law
b. Carrier (may sometimes be referred to as
IV. TRANSPORTATION conductor) - one who binds himself to
LAWS transport person, things, or news, as the case
may be, or one employed in or engaged in the
business of carrying good for others for hire.
A. Common Carriers c. Consignee - the party to whom the carrier is to
deliver the things being transported; to whom
the carrier may lawfully make delivery in
1. Concept accordance with its contract of carriage. The
shipper and the consignee may be the same
A contract of transportation is one whereby a certain person.
person or association of persons obligate themselves
to transport persons, things, or news from one to Carriers are persons or corporations who undertake
another for a fixed price [Crisostomo v CA, G.R. No. to transport or convey goods, property or persons,
138334 (2003)]. from one place to another, gratuitously or for hire,
and are classified as:
Parties to the contract: a. Private or special carriers, who transport or
a. Shipper - one who gives rise to the contract of undertake to transport in a particular instance for
transportation by agreeing to deliver the things hire or reward [AGBAYANI, Commercial Laws
or news to be transported, or to present his own of the Philippines (1987)]; and
person or those of other or others in the case of b. Common or public carriers [Art. 1732, NCC]
transportation of passengers
Common carriers are:
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a. Persons, corporations, firms or associations; does not exclude it from the definition of a common
b. Engaged in the business of carrying or carrier [First Phil. Industrial v. CA, G.R. No. 125948
transporting; (1998)].
c. Passengers or goods or both;
d. By land, water, or air; A customs broker may be regarded as a common
e. For compensation; carrier. As long as a person holds itself to the public
f. Offering their services to the public [Art. 1732, for the purpose of transporting goods as a business,
NCC]. it is already considered a common carrier regardless
if it owns the vehicle used or has to hire one [Schmitz
Art. 1732 makes no distinction: Transport v. CA, G.R. No. 150255. (2005)]
a. Between one whose principal business activity is
the carrying of persons or goods or both, and A travel agency is not a common carrier. It is not
one who does such carrying only as an ancillary an entity engaged in the business of transporting
activity [Fabre v. CA, G.R. No. 111127 (1996)]; either passengers or goods and is therefore neither a
b. Between a person or enterprise offering private nor a common carrier. Its covenant with its
transportation service on a regular or scheduled basis customers is simply to make travel arrangements on
and one offering such service on an occasional, their behalf [Crisostomo v. CA, G.R. No. 138334
episodic, or unscheduled basis [Loadstar Shipping Co., (2003)].
Inc. v. CA, G.R. No. 131621 (1999)];
c. Between a carrier offering its services to the DIFFERENCE BETWEEN COMMON
general public and one who offers services or CARRIER AND PRIVATE CARRIER
solicits business only from a narrow segment of the Common Carrier Private Carrier
general population [De Guzman v. CA, G.R. No. L- Availability
47822 (1988)]. Holds himself out in
Agrees in some special
common, that is, to all
The true test for a common carrier is not the quantity case with some private
persons who choose to
or extent of the business actually transacted, or the individual to carry for
employ him, as ready to
number and character of the conveyances used in the hire
carry for hire
activity, but whether the undertaking is a part of the Binding Effect
activity engaged in by the carrier that he has held out Not bound to carry for
to the general public as his business or occupation. If Bound to carry all who
any reason, such goods
the undertaking is a single transaction, not a part of offer and tender
as it is accustomed to
the general business or occupation engaged in, as reasonable
carry, unless it enters
advertised and held out to the general public, the compensation for
into a special agreement
individual or the entity rendering such service is a carrying them
to do so
private, not a common, carrier. The question must be Diligence Required
determined by the character of the business actually Extraordinary diligence Ordinary diligence
carried on by the carrier, not by any secret intention Governing Law
or mental reservation it may entertain or assert when Civil Code; Code of
charged with the duties and obligations that the law Commerce and special
imposes [Perena v. Nicolas, G.R. No. 157917 (2012)]. laws, if not regulated by
the Civil Code (Art.
A common carrier need not have fixed and 1766); law of the
publicly known routes. Neither does it have to country to which the Law on obligations and
maintain terminals or issue tickets [Asia Lighterage and goods are to be contracts
Shipping v. CA, G.R. No. 147246 (2003)]. transported, if
regarding liability for
One engaged in the business of transporting loss, destruction, or
petroleum products from refineries via pipeline is deterioration of goods
a common carrier. It is engaged in the business of (Art. 1753)
transporting or carrying goods, i.e., petroleum Regulation
products, for hire as a public employment. It
A public service,
undertakes to carry for all persons indifferently, that
therefore subject to Not subject to
is, to all persons who choose to employ its services,
provisions governing regulation as a common
and transports the goods by land and for
common carriers and carrier
compensation. The fact that it has a limited clientele
public utilities
Kabit system:
It is not necessary that the carrier be issued a a. It is an arrangement whereby a person who has
certificate of public convenience [Loadstar Shipping been granted a certificate of convenience allows
Co., Inc. v. CA, G.R. No. 131621 (1999)]. another person who owns motor vehicles to
operate under such franchise for a fee [Lita
REGISTERED OWNER RULE: Enterprises, Inc. v. IAC, G.R. No. L-64693 (1984)].
The person who is the registered owner of a vehicle b. It is invariably recognized as being contrary to
is liable for any damage caused by the negligent public policy and therefore void and inexistent
operation of the vehicle although the same was under Art. 1409. Thus, for the safety of
already sold. [Filcar Transport v. Espinas, G.R. No. passengers and the public, the registered owner
174156 (2012)] of the vehicle is not allowed to prove that
another person has become the owner so that he
may be thereby relieved of responsibility [Lim v.
CA, G.R. No. 125817 (2002)].
c. One of the primary factors considered in the
granting of a certificate of public convenience
for the business of public transportation is the
financial capacity of the holder of the license, so
that liabilities arising from accidents may be duly
compensated. The kabit system renders illusory
such purpose and, worse, may still be availed of
by the grantee to escape civil liability caused by a
negligent use of a vehicle owned by another and
operated under his license. [Dizon v. Octavio
(1955)]
d. However, one who has availed of the kabit
system is not precluded from filing for damages
against another who caused the injury, as the
policy against the kabit system will not be
defeated by giving such person standing to sue
[Lim v. CA, G.R. No. 125817 (2002)].
to a CPC and will not make said holder a common presumption of negligence because the goods are not
carrier. If the Partner is a holder of a CPC, said lost, deteriorated, or destroyed [Art. 1735, NCC].
Partner is a common carrier. However, if the Partner
is not a holder of a CPC, said Partner is merely a land In case of death of or injuries to passengers, common
transportation service contractor [BIR RMC 70- carriers are presumed to have been at fault or to have
2015]. acted negligently, unless they prove that they
observed extraordinary diligence as prescribed in Arts
Note: Please be guided by the requirements under Art. 1733 and 1755 [Art. 1756, NCC].
1732.
Art. 1733, NCC. Common carriers, from the
2. Diligence Required of nature of their business and for reasons of public
policy, are bound to observe extraordinary
Common Carriers diligence in the vigilance over the goods and for
the safety of the passengers transported by them,
a. Standard of Diligence according to all the circumstances of each case.
Common carriers, from the nature of their business Such extraordinary diligence in the vigilance over
and for reasons of public policy, are bound to the goods is further expressed in Articles 1734,
observe extraordinary diligence, according to all the 1735, and 1745, Nos. 5, 6, and 7, while the
circumstances of each case: extraordinary diligence for the safety of the
1. In the vigilance over the goods, and passengers is further set forth in Articles 1755 and
2. For the safety of the passengers transported by 1756.
them [Art. 1733, NCC]
Art. 1755, NCC. A common carrier is bound to
Extraordinary diligence in the vigilance over the carry the passengers safely as far as human care
goods is expressed in Arts 1734, 1735, and 1745, Nos. and foresight can provide, using the utmost
5, 6, and 7, while the extraordinary diligence for the diligence of very cautious persons, with a due
safety of the passengers is further set forth in Arts. regard for all the circumstances.
1755 and 1756 [Art. 1733, NCC].
Note: Mere failure to reach one’s destination, without
Extraordinary diligence injury or death, does not raise the presumption of
Requires carrying passengers safely as far as human negligence because it does not involve safety of the
care and foresight can provide, using the utmost passengers.
diligence of very cautious persons, with a due regard
for all the circumstances [Art. 1755, NCC];
3. Liabilities of Common
Note: A common carrier is not an insurer of the safety Carriers
of its passengers and is not bound absolutely and at
all events to carry them safely and without injury The obligation of the common carrier consists in the
[Yobido v. CA, G.R. No. 113003 (1997)]. transportation of passengers or goods or both [Art.
1732, NCC].
b. Presumption of Negligence
Principles governing the liability of common
The mere proof of delivery of goods in good order carriers:
to a carrier, and of their arrival at the place of a. The liability of a carrier is contractual and arises
destination in bad order, makes out a prima facie case upon breach of its obligation. There is breach if
against the carrier, so that if no explanation is given it fails to exert extraordinary diligence according
as to how the injury occurred, the carrier must be held to all circumstances of each case;
responsible. It is incumbent upon the carrier to prove b. A carrier is obliged to carry its passenger with the
that the loss was due to accident or some other utmost diligence of a very cautious person,
circumstance inconsistent with its liability [Ynchausti having due regard for all the circumstances;
Steamship v. Dexter and Unson, G.R. No. L-15652 c. A carrier is presumed to be at fault or to have
(1920)]. acted negligently in case of death of, or injury to,
passengers, it being its duty to prove that it
Note: While delay in the delivery of goods is a breach exercised extraordinary diligence; and
of contract of carriage, it does not raise the
Requisites:
a. The loss, destruction, or deterioration of the
goods is due to the character of the goods or
defects in the packing or in the containers [Art.
1734 (4), NCC]; and
b. The common carrier must exercise due diligence
to forestall or lessen the loss [Art. 1742, NCC].
Requisites:
a. There must be an order or act of competent
public authority through which the goods are
seized or destroyed [Art. 1734 (5), NCC]; and
b. The said public authority must have had the
power to issue the order [Art. 1743, NCC].
Thus, if the common carrier received the goods not custody of the carrier [Asian Terminals, Inc. v. Philam
for transportation but only for safekeeping, then the Insurance Co., G.R. No. 181163 (2013)]
duty of extraordinary diligence has not yet started.
c. Temporary Unloading or Storage
Unconditionally placing the goods in the possession
of the carrier means the shipper cannot get them back General rule: Extraordinary diligence over the goods
from the common carrier at will. remains even when the goods are temporarily
unloaded or stored in transit.
The liability of the carrier as common carrier begins
with the actual delivery of the goods for Exception: The duty to observe such diligence ceases
transportation and not merely with the formal when shipper or owner made use of the right of
execution of a receipt or bill of lading; the issuance of stoppage in transitu [Art 1737, NCC] .
a bill of lading is not necessary to complete delivery
and acceptance. Even where it is provided by statute Stoppage in transitu is the act by which the unpaid
that liability commences with the issuance of the bill vendor of goods stops their progress and resumes
of lading actual delivery and acceptance are sufficient possession of them constructively, while they are in
to bind the carrier [Compania Maritima v Insurance Co., the course of transit from him to the purchaser and
G.R. No. L-18965 (1964)]. not yet actually delivered to the latter [AGBAYANI].
b. Actual or Constructive Delivery Basis: Under Art. 1530, when the buyer of the goods
becomes insolvent, the unpaid seller who has parted
The extraordinary responsibility of the common with the possession of the goods at any time while
carrier ends when, subject to Art. 1738, the goods are they are in transit, may resume the possession of the
delivered actually or constructively by the carrier to: goods as he would have had if he had never parted
1. The consignee; or with the possession.
2. The person who has a right to receive them, such
as agents, brokers, and the like. When the right of stoppage in transitu is exercised, the
common carrier holds the goods in the capacity of an
Art. 1738 provides that the extraordinary liability of ordinary bailee or warehouseman upon the theory
the common carrier continues to be operative even that the exercise of the right of stoppage in transitu
during the time the goods are stored in a warehouse terminates the contract of carriage. Hence, only
of the carrier at the place of destination, until the ordinary diligence is required [AGBAYANI].
consignee has:
1. Been advised of the arrival of the goods; and 5. Stipulation for Limitation of
2. Had reasonable opportunity thereafter to
remove them or otherwise dispose of them. Liability
Delivery of the cargo to the customs authorities is not There are two possible stipulations limiting the
delivery to the consignee or “to the person who has liability of the common carrier:
a right to receive them” as contemplated in Art. 1736 a. Stipulation limiting the common carrier’s liability
because in such case the goods are still in the hands as to the diligence required;
of the government and the owner cannot exercise b. Stipulation limiting the common carrier’s liability
dominion over them. However, the parties may agree as to the amount of liability.
to limit the liability of the carrier considering that the
goods still have to go through the inspection of the An agreement limiting the common carrier’s liability
customs authorities before they are actually turned for delay on account of strikes or riots is also valid
over to the consignee. This stipulation is not contrary [Art. 1748, NCC].
to morals or public policy. This is a situation where it
may be said that the carrier loses control of the goods a. As to Diligence Required
because of a custom regulation and it is unfair that it
be made responsible for what may happen during the A stipulation between the common carrier and the
interregnum [Lu Do v. Binamira, G.R. No. L-9840 shipper or owner limiting the liability of the former
(1957)]. for the loss, destruction, or deterioration of the goods
to a degree less than extraordinary diligence shall be
It is settled in maritime law jurisprudence that cargoes valid, provided it be:
while being unloaded generally remain under the 1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other than While a passenger may not have signed the plane
the service rendered by the common carrier; and ticket, he is nevertheless bound by the provision
3. Reasonable, just and not contrary to public thereof; such provisions have been held to be part of
policy [Art. 1744, NCC]. the contract of carriage and valid and binding upon
the passenger regardless of the latter’s lack of
Any of the following or similar stipulations shall be knowledge or assent to the regulation. It is what is
considered unreasonable, unjust and contrary to known as a contract of adhesion wherein one party
public policy: imposes a ready-made form of contract on the other.
1. That the goods are transported at the risk of the The one who adheres to the contract is in reality free
owner or shipper; to reject it entirely. A contract limiting liability upon
2. That the common carrier will not be liable for an agreed valuation does not offend against the policy
any loss, destruction, or deterioration of the of the law forbidding one from contracting against
goods; his own negligence [Ong Yiu v. CA, G.R. No. l-40597
3. That the common carrier need not observe any (1979)].
diligence in the custody of the goods;
4. That the common carrier shall exercise a degree [However], the fact that the conditions are printed at
of diligence less than that of a good father of a the back of the ticket stub in letters so small that they
family, or of a man of ordinary prudence in the are hard to read would not warrant the presumption
vigilance over the movables transported; that the [shipper] was aware of those conditions such
5. That the common carrier shall not be responsible that he had “fairly and freely agreed” to those
for the acts or omission of his or its employees; conditions [Shewaram v. PAL, G.R. No. L-20099
6. That the common carrier’s liability for acts (1966)].
committed by thieves, or of robbers who do not
act with grave or irresistible threat, violence or Factors Affecting Agreement
force, is dispensed with or diminished; The effect of these stipulations is subject to the
7. That the common carrier is not responsible for following provisions:
the loss, destruction, or deterioration of goods 1. An agreement limiting the common carrier’s
on account of the defective condition of the car, liability may be annulled by the shipper or owner
vehicle, ship, airplane or other equipment used if the common carrier refused to carry the goods
in the contract of carriage [Art. 1745, NCC]. unless the former agreed to such stipulation [Art.
1746, NCC].
The following stipulations are also void: 2. If the common carrier, without just cause, delays
1. Stipulation exempting the common carrier from the transportation of the goods or changes the
any and all liability for loss or damage occasioned stipulated or usual route, the contract limiting the
by its own negligence; common carrier’s liability cannot be availed of in
2. Stipulation providing for an unqualified case of the loss, destruction, or deterioration of
limitation of such liability to an agreed the goods [Art. 1747, NCC]. The limitation may
stipulation [Heacock v. Macondray, G.R. No. L- be availed of if the delay or change of route was
16598 (1921)] due to a just cause.
3. The fact that the common carrier has no
b. Limitation of Liability to Fixed competitor along the line or route, or a part
thereof, to which the contract refers shall be
Amount taken into consideration on the question of
whether or not a stipulation limiting the
A stipulation that the common carrier’s liability is common carrier’s liability is reasonable, just and
limited to the value of the goods appearing in the bill in consonance with public policy [Art. 1751,
of lading, unless the shipper or owner declares a NCC].
greater value, is binding [Art. 1749, NCC]. 4. Even when there is an agreement limiting the
liability of the common carrier in the vigilance
A contract fixing the sum that may be recovered by over the goods, the common carrier is disputably
the owner or shipper for the loss, destruction or presumed to have been negligent in case of their
deterioration of the goods is valid if: loss, destruction or deterioration [Art. 1752,
1. It is reasonable and just under the circumstances; NCC].
and
2. It has been fairly and freely agreed upon [Art.
1750, NCC].
A stipulation that the common carrier’s liability is Art. 1998, as applied by analogy, the baggage of
limited to the value of the goods appearing in the bill passengers in their personal custody or in that of their
of lading, unless the shipper or owner declares a employees, while being transported, are regarded as
greater value, is binding [Art. 1749, NCC]. necessary deposits. The common carriers are
responsible as depositaries, provided that:
6. Liability for Baggage of 1. Notice was given to them, or to their employees,
of the effects brought by the passengers; and
Passengers 2. The passengers take the precautions which the
common carrier advised relative to the care and
Baggage are things that a passenger will bring with vigilance of their baggage.
him consistent with a temporary absence from where
he lives. Passenger’s baggage must have a direct In case of loss or injury to the baggage of passengers
relationship with the passenger who is traveling. in their personal custody, or in that of their
employees, while being transported, the carrier is
For instance, a balikbayan box or suitcase is liable if the loss or injury is caused by:
passenger’s baggage. However, 10,000 cans of corned 1. His servants;
beef is not considered as passenger baggage. They are 2. His employees;
considered as goods. They are not part of the 3. Strangers [Art. 2000, NCC]; or
contract of carriage [of passenger]. A separate 4. A thief or robber done without the use of arms
contract of carriage [or bill of lading] must be entered or irresistible force [Art. 2001, NCC].
into in order to transport them. These goods will then
be transported whether or not a person is physically The carrier is not liable if loss or injury is caused by:
traveling with them [AGBAYANI]. 1. Force majeure [Art 2000, NCC];
2. Theft or robbery with the use of arms or
There are two kinds of passenger’s baggage, which irresistible force[Art 2001, NCC];
are governed differently: 3. The acts of the passenger, his family, servants, or
a. Passenger baggage in the custody of the visitors;
passenger (or carry-on luggage); and 4. The character of the baggage [Art 2002, NCC].
b. Passenger baggage not in the custody of the
passenger (or checked-in luggage). The following provisions also figure in determining
the liability of the common carrier:
The liability is greater for baggage that is in the 1. The fact that passengers are constrained to rely
custody of the carrier, or checked-in baggage, as on the vigilance of the common carrier shall be
compared to those in the possession of the considered in determining the degree of care
passenger. required of him [Art 2000, NCC].
2. The common carrier cannot free himself from
a. Checked-In baggage responsibility by posting notices to the effect
that he is not liable for the articles brought by the
The provisions of Arts 1733-1753 shall apply to passenger.
passenger’s baggage which is not in his personal 3. Any stipulation whereby the responsibility of the
custody or in that of his employee [Art. 1754, NCC]. common carrier as set forth in Articles 1998-2001
is suppressed or diminished shall be void [Art.
In other words, the rules governing the responsibility 2003, NCC].
of a common carrier in the transportation of goods
just discussed apply. Thus, extraordinary diligence is
required.
b. Baggage in Possession of
Passengers
passengers may be, making all the stops indicated in delay within this rule is to be determined from all the
its itinerary. circumstances:
1. A person who, after alighting from a train, walks
a. Waiting for Carrier or Boarding along the station platform is considered still a
passenger;
of Carrier 2. A passenger, who has alighted at his destination
and is proceeding by the usual way to leave the
As to the commencement of the duty of the common company’s premises, but before actually doing so
carrier, it was held that the duty that the carrier of is halted by the report that his brother, a fellow
passengers owes to its patrons extends to persons passenger, has been shot, and he in good faith
boarding the cars as well as to those alighting and without intent of engaging in the difficulty,
therefrom. In this connection, however, a person returns to relieve his brother, is deemed
boarding a moving car must be taken to assume the risk reasonably and necessarily delayed and thus
of injury from boarding the car under the conditions continues to be a passenger entitled as such to
open to his view, but he cannot fairly be held to the protection of the railroad and company and
assume the risk that the motorman, having the its agents [La Mallorca v. CA, G.R. No. L-20761
situation in view, will increase the peril by accelerating (1966)].
the speed of the car before he is planted safely on the
platform [Del Prado v. Manila Electric Company, G.R. The reasonableness of time should be made to
No. L-29462 (1929)]. depend on the attending circumstances of the case,
such as the kind of common carrier, the nature of its
Thus, it is the duty of common carriers of passengers business, the customs of the place, and so forth, and
to stop their conveyances at a reasonable length of therefore precludes a consideration of the time
time in order to afford passengers an opportunity to element per se without taking into account such other
board and enter, and they are liable for injuries factors. The primary factor to be considered is the
suffered by boarding passengers resulting from the existence of a reasonable cause as will justify the
sudden starting up or jerking of their conveyances presence of the victim on or near the petitioner’s
while they are doing so [Dangwa Transportation v. CA, vessel.
G.R. No. 95582 (1991)].
In the case of a shipper, the passengers of vessels are
With respect to carriage of passengers by trains, the allotted a longer period of time to disembark from
extraordinary responsibility of common carriers the ship than other common carriers such as a
commences the moment the person who purchases passenger bus, since such vessels are capable of
the ticket from the carrier presents himself at the accommodating a bigger volume of both passenger
proper place and in a proper manner to be and baggage as compared to the capacity of a regular
transported with a bona fide intent to ride the coach commuter bus. Consequently, a ship passenger will
[AQUINO citing Vda. de Nueca, et al. vs. Manila Railroad need at least an hour as is the usual practice, to
Company]. disembark from the vessel and claim his baggage
whereas a bus passenger can easily get off the bus and
Similarly, with respect to carriage of passengers by retrieve his luggage in a very short period of time
sea, the duty of the carrier commences as soon as the [Aboitiz Shipping v. CA, G.R. No. 84458 (1989)].
person with bona fide intention of taking passage
places himself in the care of the carrier or its The relation of carrier and passenger continues until
employees and is accepted as passenger. [AQUINO] the latter has been landed at the port of destination
and has left the carrier’s premises. Hence, the carrier
b. Arrival at Destination necessarily would still have to exercise extraordinary
diligence in safeguarding the comfort, convenience
As to the termination of the duty of the common and safety of its stranded passengers until they have
carrier, it has been held that the relation of carrier and reached their final destination [PAL v. CA, G.R. No.
passenger does not cease at the moment the passenger L-82619 (1993)].
alights from the carrier’s vehicle at a place selected by
the carrier at the point of destination, but continues Note: Despite the Court’s pronouncement in PAL v.
until the passenger has had a reasonable time or a CA, note that common carriers are bound to observe
reasonable opportunity to leave the carrier’s extraordinary diligence in the ‘safety’ of its
premises. What is a reasonable time or a reasonable passengers. The law does not mention the words
‘comfort’ and ‘convenience.’
General rule: Common carriers are liable for the death b. Other Passengers and Strangers
of or injuries to passengers through the negligence or
willful acts of the former’s employees, although such
General Rule: A common carrier is not liable for
employees may have acted beyond the scope of their
injuries inflicted by strangers or co-passengers.
authority or in violation of the orders of the common
carriers.
Exception: A common carrier is responsible for
injuries suffered by a passenger on account of the
This liability does not cease even upon proof that
willful acts or negligence of other passengers or of
they exercised all the diligence of a good father of a
strangers, if the common carrier's employees,
family in the selection and supervision of their
through the exercise of the diligence of a good
employees [Art. 1759, NCC].
father of a family, could have prevented or stopped
the act or omission [Art. 1763, NCC].
This liability cannot be eliminated or limited by
stipulation, by the posting of notices, by statements
Note: The law speaks of injuries suffered by the
on the tickets or otherwise [Art. 1760, NCC].
passenger but not death. However, there appears to
be no reason why the common carrier should not be
Ratio: The servant is clothed with delegated authority
held liable under such circumstances. The word
and charged with the duty to execute the carrier’s
“injuries” should be interpreted to include death
undertaking to carry the passenger safely
[Agbayani (1987)].
[AGBAYANI]. Also, the defense of diligence in the
selection and supervision of employees does not
Under Art. 1763, a tort committed by a stranger
obtain because the liability is not based on quasi-
which causes injury to a passenger does not accord
delict, but on culpa contractual. However, there must be
the latter a cause of action against the carrier. The
a reasonable connection between the act and the
negligence for which a common carrier is held
contract of carriage.
responsible is the negligent omission by the carrier’s
employees to prevent the tort from being committed
Note: The employee must be on duty at the time of
when the same could have been foreseen and
the act.
prevented by them. Further, when the violation of
the contract is due to the willful acts of strangers, the
It is enough that the assault happens within the
degree of care essential to be exercised by the
course of the employee’s duty. It is no defense for
common carrier for the protection of its passenger is
the carrier that the act was done in excess of authority
only that of a good father of a family [Pilapil v. CA,
or in disobedience of the carrier’s orders. The
G.R. No. 52159 (1989)].
carrier’s liability here is absolute in the sense that it
practically secures the passengers from assaults
committed by its own employees [Maranan v. Perez, c. Manufacturers of Equipment
G.R. No. L-22272 (1967)].
In case of mechanical defects, it was held that while a
Exception: A common carrier is not responsible for carrier is not an insurer of the safety of the
acts falling under force majeure. passengers, it should nevertheless be held to answer
for the flaws of its equipment if such flaws were at all
When a party is unable to fulfill his obligation because discoverable. In this connection, the manufacturer of
of force majeure, the general rule is that he cannot be the defective appliance is considered in law the agent
held liable for damages for non-performance [Japan of the carrier, and the good repute of the
Airlines vs. CA, G.R. No. 118664 (1998)]. manufacturer will not relieve the carrier from liability.
The rationale of the carrier’s liability is the fact that
Note: In order to be exempted from liability due to a the passenger has no privity with the manufacturer of
fortuitous event, a common carrier must still prove the defective equipment; hence, he has no remedy
that it was not negligent in causing the death or injury against him, while the carrier usually has [Necesito vs.
resulting from an accident. In other words, there Paras, G.R. No. L-10605 (1958)].
must be a complete exclusion of human agency from
Art. 2206, on liability, in case of death, for loss of In cases of breach of contract of carriage, moral
earning capacity, support, and moral damages for damages may be recovered where:
mental anguish, shall also apply to the death of a 1. The common carrier acted fraudulently;
passenger caused by the breach of contract by a 2. The common carrier acted in bad faith [Art.
common carrier [Art. 1764, NCC]. 2220, NCC];
3. Death of a passenger resulted even in the
Thus, the damages recoverable are: absence of bad faith or fraud [Art. 2206, NCC].
a. Actual or compensatory damages;
b. Moral damages; Bad faith contemplates a state of mind affirmatively
c. Exemplary damages; operating with furtive design or with some motive of
d. Nominal, temperate, and liquidated damages; self-interest or will or for ulterior purpose [Air France
e. Attorney’s fees. v. Carrascoso, G.R. No. L-21438 (1966)].
Willful and deliberate overbooking on the part of the surgeries and rehabilitative therapy. As the records
airline carrier constitutes bad faith. Under Section 3, indicated, Paras was first rushed for emergency
Economic Regulations No. 7 of the Civil Aeronautics treatment to the San Pablo Medical Center in San
Board, overbooking, which does not exceed ten Pablo City, Laguna, and was later brought to the
percent, is not considered as deliberate and therefore National Orthopedic Hospital in Quezon City where
does not amount to bad faith [United Airlines v. CA, he was diagnosed to have suffered a dislocated hip,
G.R. No. 124110 (2001)]. fracture of the fibula on the right leg, fracture of the
small bone of the right leg, and closed fracture on the
c. Exemplary Damages tibial plateau of the left leg. He underwent surgeries
on March 4, 1987 and April 15, 1987 to repair the
In a contract of carriage, exemplary damages may be fractures. Thus, the CA awarded to him temperate
awarded if the common carrier acted in wanton, damages of P50,000.00 in the absence of definite
fraudulent, reckless, oppressive, or malevolent proof of his actual expenses towards that end.
manner [Art. 2232, NCC].
Liquidated damages are those damages agreed
Exemplary damages serves as an instrument to serve upon by the parties to a contract, to be paid in case
the ends of law and public policy by reshaping of breach thereof [Art. 2226, NCC].
socially deleterious behaviors, specifically, in the case,
to compel the common carrier to control their e. Attorney’s Fees
employees, to tame their reckless instincts, and to
force them to take adequate care of human beings Under Art. 2208, as applicable to a contract of
and their property [Mecenas v. CA, G.R. No. 88052 carriage, attorney’s fees and expenses of litigation
(1989)]. may be recovered in the following cases:
1. When exemplary damages are awarded;
d. Nominal, Temperate, and 2. When the common carrier’s act or omission has
compelled the plaintiff to litigate with third
Liquidated Damages persons or to incur expenses to protect his
interest;
Nominal damages are adjudicated in order that a 3. Where the common carrier acted in gross and
right of the plaintiff, which has been violated by the evident bad faith in refusing to satisfy the
defendant, may be vindicated or recognized, not for plaintiff’s valid, just and demandable claim;
the purpose of indemnifying the plaintiff for any loss 4. In any other case where the court deems it just
suffered by him [Art. 2221, NCC]. It may be awarded and equitable that attorney’s fees and expenses
in case of breach of contract of carriage and in every of litigation should be recovered.
case where any property right has been invaded [Art.
2222, NCC].
b. Delivery Without Surrender of If the persons interested should not agree with the
report, said judicial authority shall order the deposits
Bill of Lading of the merchandise in a safe warehouse, and the
parties interested shall make use of their rights in the
After the contract has been complied with, the bill of proper manner [Art. 367, COC].
lading which the carrier has issued shall be returned
to him, and by virtue of the exchange of this title with
the thing transported, the respective obligations and 3. Period for Filing Claims
actions shall be considered cancelled, unless in the
same act the claim which the parties may wish to Pursuant to Art. 366, Code of Commerce, a claim, on
reserve be reduced to writing, exception being made account of damage found upon opening the
of the provisions of Art. 366, on period for filing packages, must be made against the carrier:
claims [Art. 353, par. 2, COC]. a. Within 24 hours, if the indications of the damage
cannot be ascertained from the exterior of the
If, in case of loss or for any other reason whatsoever, packages (i.e., latent damage); or
the consignee cannot return, upon receiving the b. At the time of receipt, if the indications damage
merchandise, the bill of lading subscribed by the can be so ascertained (i.e., patent damage).
carrier, he shall give said carrier a receipt for the
goods delivered. This receipt produces the same But the Court in [Aboitiz v Insurance Company of North
effects as the return of the bill of lading [Art. 353, par. America, GR No. 168402 (2008)] made a pro hac vice
3, COC]. ruling, in that even if the notice was given more than
24 hrs after the receipt of the goods, the notice
The surrender of the original bill of lading is not a requirement was held nevertheless to have been
condition precedent for a common carrier to be complied with, due to the peculiar circumstances:
discharged of its contractual obligation. If surrender “Provisions specifying a time to give notice of
of the original bill of lading is not possible, damage to common carriers are ordinarily to be given
acknowledgment of the delivery by signing the a reasonable and practical, rather than a strict
delivery receipt suffices [National Trucking and construction. We give due consideration to the fact
Forwarding Corp v Lorenzo Shipping Corp, G.R. No. that the final destination of the damaged cargo was a
153563 (2005)]. school institution where authorities are bound by
rules and regulations governing their actions.
c. Refusal of Consignee to Take Understandably, when the goods were delivered, the
necessary clearance had to be made before the
Delivery package was opened. Upon opening and discovery of
the damaged condition of the goods, a report to this
The consignee may refuse to take delivery in the effect had to pass through the proper channels before
following cases: it could be finalized and endorsed by the institution
1. If only part of the goods transported should be to the claims department of the shipping company.”
delivered, when he proves that he cannot make
use thereof without the others [Art. 363, COC]. No claim whatsoever shall be admitted against the
2. When the goods are rendered useless for carrier with regard to the condition in which the
purposes of sale or consumption in the use for goods transported were delivered:
which they are properly destined, in which case a. After the periods mentioned have elapsed; or
the consignee may demand payment of the b. After the transportation charges have been paid.
goods at current market prices [Art. 365, COC];
3. In case part of the goods is in good condition The periods mentioned commence upon delivery of
and separation is possible, the consignee may cargo to the consignee at the place of destination.
refuse to receive only the damaged goods [Art.
365, COC]. Thus, Art. 366 is limited to cases of claims for
4. Where the delay is through the fault of the carrier damage to goods actually turned over by the carrier
[Art. 371, COC]. and received by the consignee. It does not apply to
misdelivery of goods.
In case of dispute as to the condition of the goods,
the same shall be examined by experts appointed by Failure to file a claim bars recovery [Aquino (2011)].
the parties, and the third one, in case of disagreement,
appointed by the judicial authority.
VESSEL
Vessels are those engaged in navigation, whether
coastwise or on the high seas destined for the services
of the industry or maritime commerce.
1. Charter Parties
Charter party – a contract by virtue of which the
owner or agent of a vessel binds himself to transport
merchandise or persons for a fixed price.
Liabilities arising from breach is identical to overland Persons who make a charter
transport. a. Owner or owners of the vessel, either in whole
or in part, who have legal control and possession
Towage is not a charter party. It is a contract for the of the vessel;
hire of services by which a vessel is engaged to tow b. Charterer may subcharter entire vessel to 3rd
another vessel from one port to another for person only if not prohibited in original charter
consideration. [Art 679, COC];
c. Ship agent if authorized by the owner/s or given
In modern maritime law and usage, there are three such power in the certificate of appointment [Art
distinguishable types of charter parties: 598, COC]; or
a. Bareboat or demise charter; d. Captain in the absence of the ship agent or
b. Time charter; and consignee and only if he acts in accordance with
c. Voyage or trip charter [Litonjua Shipping, Inc. v. the instructions of the agent or owner and
National Seamen Board, G.R. No. L-51910 (1989)]. protects the latter’s interest [Art 609, COC].
Note: Both time and voyage charters are said to be Requisites for a valid charter party
contracts of affreightment, where a common or a. Consent of the contracting parties;
public carrier is not converted into a private carrier. b. Existing vessel which should be placed at the
disposition of the shipper;
Contract of affreightment – one in which the c. Freight; and
owner of the vessel leases part or all of its space to d. Compliance with the formal requisites under
haul goods for others. It is a contract for special Article 652 of the Code of Commerce which
service to be rendered by the owner of the vessel and include the requirement that the charter party
under such contract the general owner retains the must be in (a) writing, (b) drawn in duplicate, and
possession, command and navigation of the ship, the (c) signed by the parties [AQUINO (2016)].
charterer or freighter merely having use of the space
in the vessel in return for his payment of the charter a. Bareboat or Demise Charter
hire. If the charter is a contract of affreightment,
which leaves the general owner in possession of the
In a bareboat or demise charter, the ship owner leases
ship as owner for the voyage, the rights,
to the charterer the whole vessel, transferring to the
responsibilities of ownership rest on the owner and
latter the entire command, possession and
the charterer is usually free from liability to third
consequent control over the vessel’s navigation,
persons in respect of the ship [Puromines Inc. v. CA,
including the master and the crew, who thereby
G.R. No. 91228 (1993)].
become the charterer’s “servants” [AQUINO
(2011)].
BAREBOAT DISTINGUISHED FROM
CONTRACT OF AFFREIGHTMENT
To create a demise, the owner of a vessel must
Contract of completely and exclusively relinquish possession,
Demise or Bareboat
Affreightment command and navigation thereof to the charterer,
Charterer becomes Owner remains liable as anything short of such a complete transfer is a
liable to others caused carrier and must answer contract of affreightment (time or voyage charter
by its negligence for any breach of duty party) or not a charter party at all.
Charterer regarded as
Charterer is not regarded
owner pro hac vice for Although a charter party may transform a common
as owner
the voyage carrier into a private one, the same, however, is not
true in a contract of affreightment on account of the
distinctions between a contract of affreightment and person who is primarily liable for damages sustained
a demise or bareboat charter [Puromines Inc. v. CA, in the operation of the vessel, based on the provisions
G.R. No. 91228 (1993)]. of the Code of Commerce.
Note: In a bareboat or demise charter, the common Ship Agent - the person entrusted with the
carrier is converted to private carrier. provisioning of a vessel, or who represents her in the
port in which she happens to be [Art. 586, COC].
The charterer, to whom the owner of the vessel
relinquishes, completely and exclusively, the Based on the definition of the ship agent in the Code
possession, command and navigation of the vessel, of Commerce, it is evident that the ship agent is
by virtue of a demise charter, is considered the owner jointly and severally liable with the owner. The joint
pro hac vice. He mans and equips the vessel and and several liability applies both for breach of
assumes all responsibility for navigation, contract and extra-contractual obligation such as tort.
management and operation. He thus acts as the The ship agent, even though he is not the owner, is
owner of the vessel in all important aspects during liable in every way to the creditor for losses and
the duration of the charter [Puromines Inc. v. CA, G.R. damages, without prejudice to the right of the owner,
No. 91228 (1993)]. the vessel and its equipment and freight [AQUINO
(2016)].
b. Time Charter
Captains - those who govern vessels that navigate
Time charter – a contract for the use of a vessel for the high seas or ships of large dimensions and
a specified period of time or for the duration of one importance, although they may be engaged in
or more specified voyages. coastwise trade.
In this case, the owner of a time-chartered vessel Masters - those who command smaller ships
retains possession and control through the master engaged exclusively in coastwise trade. In maritime
and crew, who remain his employees. What the time commerce, masters and captains are the same.
charterer acquires is the right to utilize the carrying
capacity and facilities of the vessel and to designate Crew - a person on board who is involved in highly
her destinations during the term of the charter technical tasks and in the manning of the vessel (e.g.
[Litonjua Shipping Co., Inc. v. National Seamen Board, master, mate).
G.R. No. L-51910(1989)].
Complement - a person, not a crew, who is not
directly involved in the manning of the vessel (e.g.
c. Voyage or Trip Charter cook).
In a voyage charter, the vessel is leased for a single or Supercargo - a person on board the vessel, who
particular voyage. The master and crew remain the functions as an agent of the owner of the goods
employ of the owner of the vessel [Litonjua Shipping shipped as cargo on a vessel, who has charge of the
Co., Inc. v. National Seamen Board, G.R. No. L- cargo on board, sells the same to the best advantage
51910(1989)]. in the foreign markets, buys cargo to be brought back
on the return voyage of the ship, and comes home
2. Liability of Ship Owners and with it.
Shipping Agents The powers and liabilities of the captain shall cease,
when there is a supercargo, with regard to that part
The persons participating in maritime commerce are of the administration legitimately conferred upon the
the following: latter, but shall continue in force for all acts which are
a. Ship owners or ship agents inseparable from his authority and office [Art. 649,
b. Captains and masters COC].
c. Other officers and crew
d. Supercargoes The ship owner or ship agent is liable:
a. For the acts of the captain, unless the latter
Ship Owner - has possession, control and exceeds his authority [Art. 586, COC].
management of the vessel and the consequent right b. For contracts entered into by the captain to
to direct her navigation and receive freight earned repair, equip and provision the vessel, provided
and paid, while his possession continues; he is the
Common danger means both the ship and the order of the Government, or in order to repair
cargo, after it has been loaded, are subject to the same the damage caused for the common good;
danger, whether during the voyage, or in the port of 11. The loss suffered in the value of the goods sold
loading or unloading, that the danger arises from the at arrivals under stress in order to repair the
accidents of the sea, dispositions of the authority, or vessel because of gross average;
faults of men, provided that the circumstances 12. The expenses of the liquidation of the average
producing the peril should be ascertained and [Art. 811];
imminent or may rationally be said to be certain and 13. If in lightening a vessel on account of a storm, in
imminent. This last requirement excludes measures order to facilitate her entry into a port or
undertaken against a distant peril [Magsaysay, Inc. v. roadstead, part of her cargo should be
Agan, G.R. No. L-6393 (1955)]. transferred to lighters or barges and be lost, the
owner of said part shall be entitled to indemnity,
Note: When a vessel is stranded unintentionally, the as if the loss has originated from a gross average
damages incurred cannot constitute general averages. [Art. 817];
14. If, as a necessary measure to extinguish a fire in
Cases of general average a port; roadstead; creek, or bay, it should be
1. The goods or cash invested in the redemption of decided to sink any vessel, this loss shall be
the vessel or cargo captured by enemies, considered gross average, to which the vessels
privateers, or pirates, and the provisions, wages, saved shall contribute.
and expenses of the vessel detained during the
time the arrangement or redemption is taking Jettison
place; The captain shall direct the jettison, and shall order
2. The goods jettisoned to lighten the vessel, the goods cast overboard in the following order:
whether they belong to the vessel, to the cargo, 1. Goods on deck - beginning with those which
or to the crew, and the damage suffered through embarrass the maneuver or damage the vessel,
said act by the goods kept; preferring if possible, the heaviest ones with the
3. The cables and masts which are cut or rendered least utility and value;
useless, the anchors and the chains which are 2. Goods below the upper deck - always beginning
abandoned in order to save the cargo, the vessel, with those of the greatest weight and smallest
or both; value to the amount and number absolutely
4. The expenses of removing or transferring a indispensable [Art. 815].
portion of the cargo in order to lighten the vessel
and place her in condition to enter a port or To include the goods jettisoned in the general or
roadstead, and the damage resulting therefrom to gross average, the existence of the cargo or goods
the goods removed or transferred; must be proved:
5. The damage suffered by the goods of the cargo 1. For cargo – by means of bill of lading;
through the opening made in the vessel in order 2. For good belonging to the vessel – by means the
to drain her and prevent her sinking; inventory prepared prior to departure [Art. 816].
6. The expenses caused through floating a vessel
intentionally stranded for the purpose of saving Jason clause
her; Jason clause is a provision in the contract of carriage
7. The damage caused to the vessel which it is that requires the cargo owners to contribute in
necessary to break open, scuttle, or smash in general average though the event which gave rise to
order to save the cargo; the sacrifice or expenditure may have been due to the
8. The expenses of curing and maintaining the fault of one of the parties to the adventure [Rule D,
members of the crew who may have been York Antwerp Rules].
wounded or crippled in defending or saving the Although the Code of Commerce provisions on
vessel; averages are still in force, the parties may, by
9. The wages of any member of the crew detained stipulation in the charter party or any written
as hostage by enemies, privateers, or pirates, and agreement, agree that the York-Antwerp Rules shall
the necessary expenses which he may incur in his be applied. In addition, the York-Antwerp Rules may
imprisonment, until he is returned to the vessel also be used to solve controversies where no
or to his domicile, should he prefer it; provision in the Code of Commerce is in point
10. The wages and victuals of the crew of a vessel because said rules embody the custom of maritime
chartered by the month during the time it should states [AQUINO (2016)].
be embargoed or detained by force majeure or by
d. Shipwrecks
Shipwreck denotes loss or wreck of a vessel at sea as
a consequence of running against another vessel or
thing at sea or on coast where the vessel is rendered
incapable of navigation.
If damage is not patent or cannot be ascertained from The Civil Code does not limit the liability of the
the package, the shipper should file the claim with the common carrier to a fixed amount per package. In all
carrier within three days from delivery. matters not regulated by the Civil Code, the right and
the obligations of common carriers shall be governed
Under Section 3(6), COGSA, a failure to file a notice by the Code of Commerce and special laws. Thus, the
of claim within three (3) days will not bar recovery if COGSA, which is suppletory to the provisions of the
it is nonetheless filed within one year. This one-year Civil Code, supplements the latter by establishing a
prescriptive period also applies to the shipper, the statutory provision limiting the carrier’s liability in the
consignee, the insurer of the goods or any legal absence of a shipper’s declaration of a higher value in
holder of the bill of lading. Inasmuch as the neither the bill of lading. [Belgian Overseas Chartering and
the Civil Code nor the Code of Commerce states a specific Shipping v. Philippine First Ins. Co, G.R. No. 143133
prescriptive period on the matter, the COGSA may (2002)]
be applied [Belgian Overseas Chartering and Shipping v.
Philippine First Ins. Co, G.R. No. 143133 (2002)]. 5. Special Contracts of
Note: In the Warsaw Convention, as well as the Code Maritime Commerce
of Commerce, the notice requirement is a condition
precedent for the right of action against the a. Loans on Bottomry and
shipowner to accrue. Respondentia
c. Period of Prescription Loan on bottomry is a contract in the nature of a
mortgage, by which the owner of the ship borrows
The carrier and the ship shall be discharged from all money for the use, equipment and repair of the vessel
liability in respect of loss or damage unless suit is and for a definite term, and pledges the ship as a
brought within one year after delivery of the goods security for its repayment, with maritime or
or the date when the goods should have been extraordinary interest on account of the maritime
delivered. risks to be borne by the lender, it being stipulated that
if the ship be lost in the course of the specific voyage
The absence of a notice shall not affect or prejudice or during the limited time, by any of the perils
the right of the shipper to bring suit within one year enumerated in the contract, the lender shall also lose
after the delivery of the goods or the date when the his money.
goods should have been delivered [Section 3 (6),
COGSA]. Loan on respondentia is one made on the goods
laden on board the ship, and which are to be sold or
COGSA, as a special law, prevails over the general exchanged in the course of the voyage, the
provisions of the Civil Code on prescription of actions borrower’s personal responsibility being deemed the
[Maritime Agencies & Services, Inc. v. CA, G.R. No. principal security for the performance of the
77638 (1990)]. contract, which is therefore called respondentia. The
lender must be paid his principal and interest, though
d. Limitation of Liability the ship perishes, provided that the goods are saved.
3. Willful Misconduct
A common carrier may not avail of the limitation in
the following cases:
a. Willful misconduct;
b. Default amounting to willful misconduct [Art.
25, WC];
c. Accepting passengers without ticket [Art. 3(2),
WC];
d. Accepting goods without airway bill or baggage
without baggage check.
CORPORATION CODE
Commercial Law
1
Under the Revised Corporation Code (RCC), when so authorized in the members may also vote through remote communication or in absentia.
bylaws or by a majority of the board of directors, the stockholders or [Sec. 23, RCC]
total outstanding capital stock [common and non- rights must rest in the hands of Filipino nationals.
voting preferred shares]. Thus, for purposes of determining compliance
with the constitutional or statutory ownership,
Compliance with the required Filipino ownership of the required percentage of Filipino ownership
a corporation shall be determined on the basis of shall be applied to both the (a) total number of
outstanding capital stock whether fully paid or not, outstanding shares of stock entitled to vote in the
but only such stocks which are generally entitled to election of directors; and (b) the total number of
vote are considered. outstanding shares of stock, whether or not
entitled to vote. [Jose M. Roy III v. Chairperson Teresita
For stocks to be deemed owned and held by Herbosa, G.R. No. 207246 (2017)]
Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino SEC Memorandum Circular No. 8 dated 20 May
equity. Full beneficial ownership of the stocks, 2013
coupled with appropriate voting rights is essential. Sec. 1. Covered corporations: All corporations
Thus, stocks, the voting rights of which have been engaged in identified areas of activities or
assigned or transferred to aliens cannot be considered enterprises specifically reserved, wholly or partly,
held by Philippine citizens or Philippine nationals. to Philippine Nationals by the Constitution, the
[Gamboa v. Teves, G.R. No. 176579 (2011)] FIA and other existing laws, amendments thereto
and IRRs of said laws except as may otherwise be
2012 Gamboa Ruling provided therein.
In 2012, the Supreme Court reversed its ruling,
stating now that: Sec. 2. All covered corporations shall, at all times,
observe the constitutional or statutory ownership
The term “capital” is not limited to voting shares requirement. For purposes of determining
since the constitutional requirement of at least 60 % compliance therewith, the required percentage
Filipino ownership applies not only to voting control of Filipino ownership shall be applied to both
of the corporation, but also to the beneficial 1. the total number of outstanding shares of
ownership of the corporation. It is therefore stock entitled to vote in the election of
imperative that such requirement apply uniformly directors; AND
and across the board to all classes of shares, 2. the total number of outstanding shares of
regardless of nomenclature and category, comprising stock, whether or not entitled to vote in the
the capital of a corporation. election of directors.
Preferred shares, denied the right to vote in the Note: This was the SEC Memorandum put in
election of directors, are anyway still entitled to vote question in the Roy III v. Herbosa case, and
on the eight specific corporate matters under Sec. 6. subsequently upheld by the Court as constitutional.
of the Corporation Code.
nationalized activity or business [SEC Opinion re: Filipino-Owned corporation subscribed to 60% of
Silahis Int’l Hotel (1987)]. the capital while the foreign corporation subscribed
to 40% but the subscription of the former is only
The Grandfather Rule applies only when the 60-40 nominally paid-up and such corporation entered into
Filipino foreign equity ownership is in doubt (i.e. in a financial assistance agreement with the foreign-
cases where the joint venture corporation with owned corporation), a further investigation as to the
Filipino and foreign stockholders with less than 60% nationality of the personalities with the beneficial
Filipino stockholdings (or 59%) invests in another ownership and control of the corporate shareholders
joint venture corporation which is either 60-40% in both the investing and investee corporations is
Filipino alien or 59% less Filipino). Stated differently, necessary [Narra Nickel Mining and Dev. Corp v.
where the 60-40 Filipino foreign equity Redmont Consolidated Mines Corp., G.R. No. 195580
ownership is not in doubt, the Grandfather Rule (2015)].
will not apply [Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No. 195580 Fully/Partially Nationalized Areas [10th Foreign
(2014)]. Investment Negative List, E.O. 184 (2015)]
Nationality
Industry
The Control Test can be, as it has been, applied Requirement
jointly with the Grandfather Rule to determine the • Mass media, except
observance of foreign ownership restriction in recording
nationalized economic activities. The Control Test • Practice of profession
and the Grandfather Rule are not, as it were,
• Retail trade
incompatible ownership-determinant methods that
can only be applied alternative to each other. Rather, • Cooperatives
these methods can, if appropriate, be used • Private security agencies
cumulatively in the determination of the ownership • Small-scale mining
and control of corporations engaged in fully or partly • Utilization of marine
nationalized activities. resources in archipelagic
waters, territorial sea,
The Grandfather Rule, standing alone, should not be exclusive economic zone,
used to determine the Filipino ownership and control 100% Filipino as well as rivers, lakes,
in a corporation, as it could result in an otherwise ownership bays, and lagoons
foreign corporation rendered qualified to perform • Ownership, operation
nationalized or partly nationalized activities. Hence, and management of
it is only when the Control Test is first complied cockpits
with that the Grandfather Rule may be applied. • Manufacture, repair,
Put in another manner, if the subject corporation’s stockpiling and/or
Filipino equity falls below the threshold 60%, the distribution of nuclear
corporation is immediately considered foreign- weapons
owned, in which case, the need to resort to the • Manufacture of
Grandfather Rule disappears. firecrackers and other
pyrotechnic devices
On the other hand, a corporation that complies with
the 60-40 Filipino to foreign equity requirement can
80% Filipino • Private radio
be considered a Filipino corporation if there is no
ownership communications network
doubt as to who has the “beneficial ownership” and
“control” of the corporation. In that instance, there • Private recruitment
is no need for a dissection or further inquiry on the • Contracts for
ownership of the corporate shareholders in both the construction and repair of
investing and investee corporation or the application locally-funded public
of the Grandfather Rule. As a corollary rule, even if 75% Filipino works, except: (1) infra
the 60-40 Filipino to foreign equity ratio is ownership projects under RA 7718
apparently met by the subject or investee (BOT Law), and (2)
corporation, a resort to the Grandfather Rule is foreign-funded projects
necessary if doubt exists as to the locus of the • Contracts for
“beneficial ownership” and “control.” In this case construction of defense-
(where based on the incorporation papers, the related structures
Nationality
Requirement
Industry D. Corporate Juridical
70% voting Personality
stock Filipino
ownership [but • Banks [except Rural
It commences from the date the SEC issues a
may be reduced Banks]
certificate of incorporation under its official seal [Sec.
to 60%] 19].
70% Filipino
ownership • Advertising
• Manufacture, repair,
1. Doctrine of Separate
storage and/or Juridical Personality
distribution of products
and/or ingredients
requiring Philippine
a. Concept
National Police (PNP)
A corporation has a personality separate and
clearance (i.e, firearms,
distinct from that of its stockholders and members
ingredients used in
and is not affected by the personal rights, obligations,
making explosives, etc)
and transactions of the latter.
• Manufacture, repair,
storage, and/or A corporation, upon coming into existence, is
distribution of products invested by law with a personality separate and
requiring Department of distinct from the persons comprising it as well as
National Defense (DND) from any other legal entity to which it may be related.
clearance; By this attribute, a stockholder may not, generally, be
• Manufacture and made to answer for acts or liabilities of said
distribution of dangerous corporation, and vice versa [Land Bank of the
drugs Philippines v. CA, G.R. No. 127181 (2001)].
• Sauna and steam
60% capital bathhouses, massage
stock Filipino
b. Property
clinics and other like
ownership activities regulated by law
Stockholders have no claim on corporate property as
because of risks posed to
owners, but mere expectancy or inchoate right to the
public health and morals
same upon dissolution of the corporation after all
• All forms of gambling, corporate creditors have been paid. Such right is
except those covered by limited only to their equity interest (doctrine of
investment agreements limited liability). Although a stockholder’s interest
with PAGCOR in the corporation may be attached by his personal
• Domestic market creditor, corporate property cannot be used to satisfy
enterprises with paid-in his claim [Wise and Co. v. Man Sun Lung, G.R. No.
equity capital of less than 46997 (1940)].
the equivalent of
US$200,000
c. Liability for Tort and Crime
• Domestic market
enterprises which involve Being an entity with a separate juridical personality, a
advanced technology or corporation can be held liable for torts committed by
employ at least fifty (50) its officers for corporate purpose [PNB v. CA G.R.
direct employees with No. L-27155 (1978)].
paid-in equity capital of
less than the equivalent of Since a corporation as a person is a mere legal fiction,
US$100,000 it cannot be proceeded against criminally because it
cannot commit a crime in which personal violence or
malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
amounting to a crime and never against the
corporation itself [Time Inc. v. Reyes, G.R. No. L- a. Grounds for Application of the
28882 (1971)].
Doctrine
d. Recovery of Moral Damages The corporate fiction may be pierced if used:
1. to defraud the government of taxes due it;
A corporation can recover moral damages under Art 2. to evade payment of civil liability;
2219 (7) if it was the victim of defamation [Filipinas 3. by a corporation which is merely a conduit or
Broadcasting Network v. Ago Medical and Educational alter ego of another corporation;
Center, G.R. No. 141994 (2005)]. 4. to evade compliance with contractual
obligations; or
Note: Filipinas Broadcasting pointed out that the 5. to evade financial obligation to its employees.
doctrine in Mambulao Lumber v. PNB (1968), to the
effect that a corporation may recover moral damages Only in these and similar instances may the veil be
for besmirched reputation, is obiter dictum. pierced and disregarded: to ward off a judgment
credit, to avoid inclusion of corporate assets as part
e. Constitutional Rights of the estate of the decedent, to escape liability arising
from a debt, or to perpetuate fraud and/or confuse
Corporate entities are entitled to due process, equal legitimate issues either to promote or to shield unfair
protection, and protection against unreasonable objectives to cover up an otherwise blatant violation
searches and seizures. However, a corporation is not of the prohibition against forum shopping [PNB v.
entitled to the privilege against self-incrimination Andrada Electric and Engineering Co., G.R. No. 142936
[Bataan Shipyard and Eng’g Co. v. PCGG, G.R. No. (2002)].
75885 (1987)].
b. Test in Determining
2. Doctrine of Piercing the Applicability
Corporate Veil
Specifically, it is used in the following specific
Piercing the veil of corporate entity is an equitable contexts:
remedy: The veil of separate corporate personality 1. When the liability belongs to the
may be lifted when such personality is used to defeat corporations but the plaintiff seeks to hold
public convenience, justify wrong, protect fraud or the individual liable. Mere controlling interest
defend crime; or used as a shield to confuse the is not enough. There must be a clear showing
legitimate issues; or when the corporation is merely that the corporate fiction is used to defeat public
an adjunct, a business conduit or an alter ego of convenience, justify wrong, protect fraud or
another corporation or where the corporation is so defend crime [Koppel Phil v. Yatco, G.R. No. L-
organized and controlled and its affairs are so 47673 (1946)]
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation; or Note the following badges of fraud: (1) used as a
when the corporation is used as a cloak or cover for shield to further an end subversive of justice; or
fraud or illegality, or to work injustice, or where (2) for purposes that could not have been
necessary to achieve equity or for the protection of intended by the law that created it; or (3) to
the creditors. In such cases, the corporation will be defeat public convenience; (4) justify wrong; (5)
considered as a mere association of persons. The protect fraud; or (6) defend crime; or (7) to
liability will directly attach to the stockholders or to perpetuate fraud or confuse legitimate issues; or
the other corporation [China Banking v. Dyne-Sem, (8) to circumvent the law or perpetuate
G.R. No. 149237 (2006)]. deception.
If evidence of any such purpose is present, the courts 2. Where the liability is personal to the
will pierce the veil of corporate fiction. Aside from individual and he seeks to evade it by hiding
this general guideline, no hard and fast rule can be behind a corporate vehicle.
laid down to cover all cases where the corporate
entity theory cannot be availed of, and each case will Isabelo Calingasan and defendant Fely
have to be considered on its merits [CAMPOS]. Transportation may be regarded as one and the
same person. It is evident that Isabelo
Calingasan's main purpose in forming the
corporation was to evade his subsidiary civil financial responsibility is referred to as the
liability resulting from the conviction of his parent corporation’s own;
driver, Alfredo Carillo. This conclusion is borne i. the parent corporation uses the property of
out by the fact that the incorporators of the Fely the subsidiary as its own;
Transportation are Isabelo Calingasan, his wife, j. the directors or executives of the subsidiary
his son, Dr. Calingasan, and his two daughters. do not act independently in the interest of
We believe that this is one case where the the subsidiary but take their orders from the
defendant corporation should not be heard to parent corporation in the latter’s interest;
say that it has a personality separate and distinct and
from its members when to allow it to do so k. the formal ledger requirements of the
would be to sanction the use of the fiction of subsidiary are not observed. [PNB v. Ritratto
corporate entity as a shield to further an end Group, G.R. No. 142616 (2001)]
subversive of justice [Palacio v. Fely Transportation,
G.R. No. L-15121 (1962)]. 4. Successor corporation rule. This applies in
instances where a corporation feigns dissolution
3. The instrumentality or alter ego rule. The or cessation but really continues in existence
elements of this modality are: organized under another name. This application
a. Control, not mere majority or complete of the rule figures prominently in labor cases
stock control, but complete domination, not where the prior entity seeks to evade its
only of finances but of policy and business obligations to its laborers. Some telltale signs
practice in respect to the transaction exhibited in Claparols v. CIR [G.R. No. L-30822
attacked so that the corporate entity as to (1975)] include: (1) consecutive date of cessation
this transaction had at the time no separate and commencement of subsequent entity; (2)
mind, will or existence of its own; ownership and control by former controlling
b. Such control must have been used by the stockholder; and (3) turnover of assets. On the
defendant to commit fraud or wrong, to other hand, in Livesey v. Binswanger [G.R. No.
perpetuate the violation of a statutory or 177493 (2014)], the court pointed to the
other positive legal duty, or dishonest and following: (1) same officers; (2) same office; and
unjust act in contravention of plaintiffs’ (3) continuation of the business.
legal rights; and
c. The aforesaid control and breach of duty Note: SME v. De Guzman, G.R. No. 184517
must proximately cause the injury or unjust (2013) allows for the defense of good faith in
loss complained of. case of assets sales between a predecessor and
successor corporation:
Circumstances rendering a subsidiary an
instrumentality “In asset sales, the rule is that the seller in good
a. the parent corporation owns all or most of faith is authorized to dismiss the affected
the subsidiary’s capital stock; employees, but is liable for the payment of
b. the parent and subsidiary corporations have separation pay under the law. The buyer in good
common directors or officers; faith, on the other hand, is not obliged to absorb
c. the parent corporation finances the the employees affected by the sale, nor is it liable
subsidiary; for the payment of their claims. The most that it
d. the parent corporation subscribes to all the may do, for reasons of public policy and social
capital stock of the subsidiary or otherwise justice, is to give preference to the qualified
causes its incorporation; separated personnel of the selling firm.
e. the subsidiary has grossly inadequate capital;
f. the parent corporation pays the salaries and In contrast with asset sales, in which the assets
other expenses or losses of the subsidiary; of the selling corporation are transferred to
g. the subsidiary has substantially no business another entity, the transaction in stock sales
except with the parent corporation or no takes place at the shareholder level. Because the
assets except those conveyed to or by the corporation possesses a personality separate and
parent corporation; distinct from that of its shareholders, a shift in
h. in the papers of the parent corporation or in the composition of its shareholders will not
the statements of its officers, the subsidiary affect its existence and continuity.
is described as a department or division of
the parent corporation or its business or
Thus, notwithstanding the stock sale, the of the individual be levied [Guillermo v. Uson, G.R. No.
corporation continues to be the employer of its 198967 (2016)].
people and continues to be liable for the
payment of their just claims. Furthermore, the
corporation or its new majority shareholders are
not entitled to lawfully dismiss corporate
employees absent a just or authorized cause”
c. Procedural Considerations
The general rule is that both the individual sought to
be held liable and the corporation must be impleaded
at the first instance. This is in consonance with the
tenets of due process and fair play. Hence, one
cannot “pierce the veil in order to acquire
jurisdiction” over a party [Pacific Rehouse Corp. v. CA ,
G.R. No. 199687 (2014)].
2. Steps in Incorporation
Steps Comments
Promoter:
• Brings together persons who become interested in the enterprise
• Aids in procuring subscriptions and sets in motion the machinery which leads to the
Promotional Stage formation of the corporation itself
• Formulates the necessary initial business and financial plan and, if necessary, buys the
rights and property which the business may need, with the understanding that the
corporation, when formed, shall take over the same
Drafting Articles of
Incorporation (see Sec. [See table under Articles of Incorporation under Incorporation and Organization]
14)
• AOI & the treasurer’s affidavit duly signed & acknowledged
• Must be filed w/ the SEC & the corresponding fees paid
Filing of Articles; • Failure to file the AOI will prevent due incorporation of the proposed corporation and
Payment of Fees will not give rise to its juridical personality. It will not even be a de facto corporation
• Under present SEC rules, the AOI once filed , will be published in the SEC Weekly
Bulletin at the expense of the corporation [SEC Circular # 4, 1982].
Process:
Examination of Articles; a. SEC shall examine them in order to determine whether they are in conformity with law
Approval or Rejection by b. If it is not, the SEC must give the incorporators a reasonable time within which to
SEC correct or modify the objectionable portions
Decisions of the SEC disapproving or rejecting the AOI may be appealed to the CA by
petition for review in accordance with the ROC
Certificate of Incorporation will be issued if:
a. SEC is satisfied that all legal requirements have been complied with; AND
b. There are no reasons for rejecting or disapproving the AOI.
Issuance of Certificate of
It is only upon such issuance that the corporation acquires juridical personality [Sec. 19].
Incorporation
Should it be subsequently found that the incorporators were guilty of fraud in procuring the
certificate of incorporation, the same may be revoked by the SEC, after proper notice and
hearing.
To determine whether a given corporate name is Except: If the SEC determines that there are justifiable
"identical" or "confusingly or deceptively similar" reasons for an earlier extension.
with another entity's corporate name, one must
evaluate corporate names in their entirety. Rationale: Corporations are creatures of the law
through the State legislature. The State is therefore
The corporate name shall contain the word concerned that this privilege be enjoyed by
“Corporation” or “Incorporated”, or the corporations only “under the conditions and not
abbreviations “Corp.” or “Inc.” respectively [SEC beyond the period that it sees fit to grant; and
Memo Circ. No.5, s.2008]. particularly, that it not be abused in fraud and to the
detriment of other parties; and for this reason, it has
been ruled that the limitation to a definite period is an
2
Incorporators may now be juridical persons. [Sec. 10, RCC] registered for the use of another corporation, or if such name is already
3
The minimum number of incorporators has been repealed. [Sec. 13, RCC] protected by law, or when its use is contrary to existing law, rules and
4
The residency requirement has been repealed. [Sec. 10, RCC] regulations. [Sec. 17, RCC]
5 6
Under present law, no corporate name shall be allowed by the A corporation shall now have perpetual existence unless its AOI provides
Commission if it is not distinguishable from that already reserved or otherwise. [Sec. 11, RCC]
7
This provision on the required amount of capital to be subscribed and paid
for purposes of incorporation has been repealed by the RCC.
8
The minimum number of directors/trustees has been repealed. [Sec. 13,
RCC]
A corporate name shall be disallowed by the SEC if the proposed name is either:
1. identical or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law; or
2. patently deceptive, confusing or contrary to existing laws [Sec. 18]9
Corporate name The policy underlying the prohibition against the registration of a corporate name
which is “identical or deceptively or confusingly similar” to that of any existing
corporation or which is “patently deceptive or patently confusing” or “contrary to
existing laws is:
1. the avoidance of fraud upon the public which would have occasion to deal with
the entity concerned;
2. the prevention of evasion of legal obligations and duties, and
3. the reduction of difficulties of administration and supervision over corporations.
[Lyceum of the Phils. v. CA (1993)]
A corporation can only have one (1) primary purpose. However, it can have several
secondary purposes.
A corporation has only such powers as are expressly granted to it by law & by its articles
of incorporation, those which may be incidental to such conferred powers , those
Purpose clause
reasonably necessary to accomplish its purposes & those which may be incident to its
existence.
Corporation may not be formed for the purpose of practicing a profession like law,
medicine or accountancy.
• Must be within the Philippines
• Specify city or province
Principal office • Street/number not necessary
• Important in determining venue in an action by or against the corp., or on
determining the province where a chattel mortgage of shares should be registered
• Cannot specify term which is longer than 50 years at a time10
Term of existence • May be renewed for another 50 years, but not earlier than 5 years prior to the
original or subsequent expiry date unless there are justifiable reasons for an earlier
extensioni
• Names, nationalities & residences of the incorporators;
Incorporators and
Directors/Trustees • Names, nationalities & residences of the directors or trustees who will act as such
until the first regular directors or trustees are elected;
9
Under present law, no corporate name shall be allowed by the protected by law, or when its use is contrary to existing law, rules and
Commission if it is not distinguishable from that already reserved or regulations. [Sec. 17, RCC]
10
registered for the use of another corporation, or if such name is already A corporation shall now have perpetual existence unless its AOI provides
otherwise. [Sec. 11. RCC]
11
The provision on minimum subscribed and paid up capital has been repealed.
12
The requirement of adoption of by-laws one (1) month after receipt of the
notice of issuance of certificate of incorporation has been deleted. [Sec. 45,
RCC]
Nature: It is a product of agreement of the Effected by: majority vote of the members of the
stockholders or members [Campos]. board and majority vote of owners of the
Outstanding Capital Stock or members, in a meeting
Function: It establishes the rules for internal duly called for the purpose
government of the corporation [Campos]. It also
regulates the affairs and relationship between and Delegation to BOD of power to amend
among stockholders, BOD and corporation [Lopez]. By vote of stockholders representing 2/3 of the
Outstanding Capital Stock or 2/3 of the members
[Sec. 48]
b. Requisites of Valid By-Laws
Delegation to BOD may be revoked
Approval requirement: Must be approved by the Any power delegated to the BOD or trustees to
affirmative vote of the stockholders representing amend or repeal any by-laws or adopt new by-laws
MAJORITY of the outstanding capital stock or shall be considered as revoked whenever stockholders
majority of members owning or representing a majority of the outstanding
capital stock or a majority of the members in non-
If filed pre-incorporation: must be approved and stock corporations, shall so vote at a regular or special
signed by all incorporators meeting [Sec. 48].
Record-Keeping: Must be kept in the principal
office of the corporation, subject to inspection of
stockholders or members during office hours [Sec.
74]
c. Binding Effect
e. The actual indebtedness of the corporation outstanding capital stock, in exchange for
on the day of the meeting property needed for corporate purposes or in
f. The amount of stock represented at the payment of a previously contracted debt
meeting
g. The vote authorizing the increase or Note: For close corporations, the pre-emptive rights
diminution of the capital stock, or the extends to all stock to be issued, including reissuance
incurring, creating or increasing of any of treasury shares, whether for money, property or
bonded indebtedness personal services, or in payment of corporate debts,
3. Prior approval of SEC is required unless the AOI provides otherwise [Sec. 102].
4. Duplicate certificates shall be kept on file in the
office of the corporation and the other shall be d. Power to Sell or Dispose of
filed with the SEC, attached in the original
articles of incorporation. Substantially All Its Assets [Sec.
a. From and after approval of the SEC of 40]
its certificate of filing, the capital stock
shall stand increased or decreased and 1. Same requirements from 1-3 as Sec. 37 above
the incurring, creating or increasing of 2. Any dissenting shareholders may exercise his
any bonded indebtedness authorized appraisal right
b. SEC shall not accept for filing any 3. Deemed to cover substantially all the corporate
certificate of increase unless property and assets. A sale or other disposition
accompanied by the sworn statement of shall be deemed to cover substantially all the
the treasurer of the corporation corporate property and assets if thereby the
showing: corporation would be rendered incapable of
1. That at least 25% of such increased continuing the business or accomplishing the
capital stock have been subscribed purpose for which it was organized.
and 4. After authorization by the
2. that at least 25% of the amount shareholders/members, the BOD/BOT may
subscribed has been paid or that abandon such sale, lease, exchange, mortgage,
there has been transferred to the pledge or other disposition, subject to the rights
corporation property the value of of third parties under any contract relating
which is equivalent to 25% of the thereto, without further action or approval by the
subscription shareholders/ members
c. SEC shall not approve any decrease in 5. Corporation is not restricted in its power to sell
the capital stock if its effect shall or dispose of its assets without the authorization
prejudice the rights of corporate of shareholders or members:
creditors a. if the same is necessary in the usual and
5. Bonds issued by a corporation shall be registered regular course of business of the corporation
with the SEC or
b. if the proceeds of the sale will be
c. Power to Deny Pre-Emptive appropriated for the conduct of its
remaining business
Rights [Sec. 39]
In enumeration no. 5 above, only the approval of a
General Rule: All shareholders of a stock corporation quorum of the BOD/BOT is required.
have the preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to While the Corporation Code allows the transfer of all
their respective shareholdings or substantially all the properties and assets of a
corporation, the transfer should not prejudice the
Exception: If such right is denied by the Articles of creditors of the assignor. The only way the transfer
Incorporation or an amendment thereto can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the
Pre-emptive right shall not extend to: assignor. The acquisition by the assignee of all or
1. Shares to be issued in compliance with laws substantially all of the assets of the assignor
requiring stock offerings or minimum stock necessarily includes the assumption of the assignor’s
ownership by the public liabilities, unless the creditors who did not consent to
2. Shares to be issued in good faith with the the transfer choose to rescind the transfer on the
approval of 2/3 of the stockholders representing
shares of stock that are originally issued by the 5. Service contracts or operating agreements which
corporation and forming part of the capital that can relate to exploration, development, exploitation
be exchanged for cash or services rendered, or or utilization of natural resources may be entered
property. A share of stock coming from stock into for such periods as may be provided in the
dividends declared cannot be issued to one who is not pertinent laws and regulations
a stockholder of a corporation [Nielson and Co. v.
Lepanto Consolidated Mining, G.R. No. L-21601 (1968)]. Note: 2 general restrictions on the power of the
corporation to acquire and hold properties:
Cash Dividends vs. Stock Dividends 1. The property must be reasonably and necessarily
Cash Stock required by the business
Dividends Dividends 2. That the power shall be subject to the limitations
Voting Board of prescribed by other special laws and the
Board of Constitution (corporation may not acquire more
requirements Directors + 2/3
Directors than 30% of voting stocks of a bank;
for issuance of OCS
Shall be corporations are restricted from acquiring public
Shall be lands except by lease of not more than 1000
applied to the
withheld from hectares)
unpaid
Effect on the delinquent
balance on
delinquent stockholder
stock
the
until his unpaid i. Ultra Vires Acts
subscription
subscription is
plus cost and DEFINITION
paid
expenses Ultra Vires acts are those acts which a corporation is
No, since this not empowered to do or perform because they are not
Can this be
requires conferred by its Articles of Incorporation or by the
issued by
No [Sec. 35] stockholders’ Corporation Code, or not necessary or incidental to
Executive
approval [Sec. the exercise of the powers so conferred [Sec. 45].
Committee?
35]
TYPES OF ULTRA VIRES ACTS
h. Power to Enter into 1. Acts done beyond the powers of the corporation
as provided in the law or its articles of
Management Contracts [Sec. 44] incorporation;
2. Acts or contracts entered into in behalf of a
1. Should be approved by the BOD and by
corporation by persons who have no corporate
shareholders owning at least the majority of the
authority (Note: These are technically Ultra Vires
outstanding capital stock or at least a majority of
acts of officers and not of the corporation);
the members of both the managing and the 3. Acts or contracts, which are per se illegal as being
managed corporation at a meeting duly called for contrary to law. [Villanueva]
that purpose
2. Should be approved by the 2/3 of stockholders
APPLICABILITY OF THE ULTRA VIRES
owning outstanding capital stock/members of
DOCTRINE
the managed corporation when:
It is a question, therefore, in each case of the logical
a. A stockholder or stockholders representing
relation of the act to the corporate purpose expressed
the same interest of both the managing and
in the charter. If that act is one which is lawful in itself,
managed corporations own more than 1/3
and not otherwise prohibited, is done for the purpose
of the total outstanding capital stock entitled
of serving corporate ends, and is reasonably tributary
to vote of the managing corporation; or
to the promotion of those ends, in a substantial, and
b. A majority of the members of the BOD of
not in a remote and fanciful sense, it may fairly be
the managing corporation also constitute a
considered within the charter powers. The test to be
majority of the BOD of the managed
applied is whether the act in question is in direct and
corporation
immediate furtherance of the corporation’s business,
3. No management contract shall be entered into
fairly incident to the express powers and reasonably
for a period longer than 5 years for any one term necessary to their exercise. If so, the corporation has
4. 1-3 above applies to any contract whereby a the power to do it; otherwise, not [Montelibano v.
corporation undertakes to manage or operate all
Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092
or substantially all of the business of another
(1962)].
corporation, whether such are called service
contracts, operating agreements or otherwise
CONSEQUENCES
1. Executed contract – courts will not set aside or Exceptions [Sec. 6]:
interfere with such contracts; Voting and non-voting shares shall be entitled to vote
2. Executory contracts – no enforcement even at in the following cases:
the suit of either party (void and unenforceable); 1. Amendment of Articles of Incorporation
3. Partly executed and partly executory – 2. Adoption, Amendment and Repeal of By-Laws
principle of “no unjust enrichment at expense of [Sec. 48]
another” shall apply; 3. Sale, Lease, Mortgage or Other Disposition of
4. Executory contracts apparently authorized Substantially all corporate assets [Sec. 40]
but Ultra Vires – the principle of estoppel shall 4. Incurring, Creating or Increasing Bonded
apply. Indebtedness [Sec. 38]
5. Increase or Decrease of Capital Stock [Sec. 38]
Ultra Vires vs. Illegal Acts 6. Merger and Consolidation [Sec. 76-80]
(1) Ultra Vires Acts (2) Illegal Acts 7. Investment of funds in another corporation or
(3) Not necessarily (4) Unlawful; against business or for any purpose other than the
unlawful, but outside law, morals, public primary purpose for which it was organized [Sec.
the powers of the policy, and public 42]
corporation order
(5) Can be ratified (6) Cannot be ratified Requisites [Sec. 42] (Asked in 1995 Bar):
(7) Can bind the parties a. Approval of majority of the BOD or trustees
(8) Cannot bind the b. Ratification by the stockholders representing at
if wholly or partly
parties least 2/3 of the Outstanding Capital Stock or the
executed
(9) Voidable, and may be members at a meeting duly called for the purpose
enforced by c. Written notice addressed to each stockholder or
(10) Void and cannot be member at his place of residence as shown on the
performance,
validated books of the corporation
ratification or
estoppel d. Appraisal right available to dissenting
stockholders or members
REMEDIES IN CASE OF ULTRA VIRES 8. Dissolution of the Corporation [Secs. 118-121]
ACTS
1. State CORPORATE ACTS REQUIRING VOTING
a. Dissolution of the corporation thru a quo SHAREHOLDERS’ APPROVAL
warranto proceeding 1. Declaration of Stock Dividends [Sec. 43]
b. Injunction 2. Management Contracts [Sec. 44]
c. Suspension or revocation of the certificate of 3. Fixing the Consideration of No-Par shares [Sec.
registration by the SEC 62]
2. Stockholders 4. Fixing the Compensation of Directors [Sec. 30]
a. Injunction
b. Derivative suit b. By the Board of Directors
c. Ratification (except when a 3rd party is
prejudiced or the act is illegal) See Doctrine of Centralized Management under
3. Creditors Board of Directors and Trustees below.
a. Nullification of contract in fraud of creditors
c. By the Officers
3. How Corporate Powers are
(2) Corporate
Exercised (1) Corporate Officer
Employee
Position is provided for Employed through the
a. By the Shareholders in the by-laws or under action of the managing
the Corporation Code officer of the corporation
CORPORATE ACTS REQUIRING ALL RTC has jurisdiction in NLRC has jurisdiction in
SHAREHOLDERS’ APPROVAL case of labor dispute case of labor disputes
General Rule: Vote necessary to approve a particular
corporate act as provided in this Code shall be Who are the corporate officers
deemed to refer only to stocks with voting rights [Sec. 1. President – must be a director;
6]
2. Treasurer – may or may not be a director; must of the Corporation Code. These are the president,
be a resident secretary and the treasurer. The number of officers
3. Secretary – need not be a director unless required is not limited to these three. A corporation may
by the by-laws; must be a resident and citizen of have such other officers as may be provided for by its
the Philippines; and by-laws like, but not limited to, the vice-president,
4. Other officers as may be provided in the by-laws. cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the
Note: Any 2 or more positions may be held corporation’s by-laws” [Garcia v. Eastern
concurrently by the same person, EXCEPT that no Telecommunications Philippines, Inc., G.R. No. 173115
one shall act as president and secretary or as president (2009)].
and treasurer at the same time.
Disqualifications [Sec. 27]
President Secretary Treasurer 1. Convicted by final judgment of an offense
Director YES NO NO punishable by imprisonment for a period
Filipino NO YES NO exceeding 6 years
Citizen 2. Convicted by final judgment of a violation of the
Residency NO YES YES Corporation Code committed within 5 years
Prohibited Secretary or President President prior to the date of his election or appointment.
concurrent Treasurer This includes violations of rules and regulations
positions issued by the SEC to implement the provisions
of the Corporation Code.
Additional qualifications of officers may be provided
for in the by-laws [Sec. 47(5)] Authority of Corporate Officers
A person dealing with a corporate officer is put on
Conformably with Sec. 25 of the Corporation Code, inquiry as to the scope of the latter’s authority but an
a position must be expressly mentioned in the by- innocent person cannot be prejudiced if he had the
Laws in order to be considered as a corporate office. right to presume under the circumstances the
Thus, the creation of an office pursuant to or under a authority of the acting officers.
by-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama Doctrine of Apparent Authority
(1958), the first ruling on the matter, held that the If a corporation knowingly permits one of its officers,
only officers of a corporation were those given that or any other agent, to act within the scope of an
character either by the Corporation Code or by the apparent authority, it holds him out to the public as
By-Laws; the rest of the corporate officers could be possessing the power to do those acts; the
considered only as employees or subordinate corporation will, as against anyone who has in good
officials [Matling Industrial and Commercial Corp. v. Coros, faith dealt with it through such agent, be estopped
G.R. No. 157802 (2010)]. from denying the agent’s authority [Associated Bank v.
Pronstroller , G.R. No. 148444 (2008)].
A different interpretation can easily leave the way
open for the BOD to circumvent the constitutionally 4. Trust Fund Doctrine
guaranteed security of tenure of the employee by the
expedient inclusion in the By-Laws of an enabling The Trust Fund Doctrine means that the capital
clause on the creation of just any corporate officer stock, properties and other assets of a corporation are
position. regarded as equity in trust for the payment of
corporate creditors. Stated simply, the trust fund
“An ‘office’ is created by the charter of the doctrine states that all funds received by the
corporation and the officer is elected (or appointed) corporation in payment of the shares of stock shall be
by the directors or stockholders” [Real v. Sangu held in trust for the corporate creditors and other
Philippines citing Easycall Communications Phils., Inc. v. stockholders of the corporation. Under such doctrine
King (2005) G.R. No. 168757 (2011)] no fund shall be used to buy back the issued shares of
stock except only in instances specifically allowed by
“Corporate officers’ in the context of PD No. 902-A the Corporation Code [Boman Environmental
are those officers of the corporation who are given Development Corporation v. CA, G.R. No. 77860 (1988)].
that character by the Corporation Code or by the
corporation’s by-laws. There are three specific The subscribed capital is the same amount that can
officers whom a corporation must have under Sec. 25 loosely be termed as the “trust fund” of the
corporation. The “Trust Fund” doctrine considers The trust fund doctrine is not limited to reaching the
this subscribed capital as a trust fund for the payment stockholder’s unpaid subscriptions. The scope of the
of the debts of the corporation, to which the doctrine when the corporation is insolvent
creditors may look for satisfaction. Until the encompasses not only the capital stock, but also other
liquidation of the corporation, no part of the property and assets generally regarded in equity as a
subscribed capital may be returned or released to trust fund for the payment of corporate debts. All
the stockholder (except in the redemption of assets and property belonging to the corporation held
redeemable shares) without violating this in trust for the benefit of creditors that were
principle. Thus, dividends must never impair the distributed or in the possession of the stockholders,
subscribed capital; subscription commitments cannot regardless of full payment of their subscriptions, may
be condoned or remitted; nor can the corporation buy be reached by the creditor in satisfaction of its claim.
its own shares using the subscribed capital as the
consideration therefor [NTC v. CA. G.R. No. 127937 Also, under the trust fund doctrine, a corporation has
(1999)]. no legal capacity to release an original subscriber to its
capital stock from the obligation of paying for his
Under Sec. 43 of Code, the corporation can declare shares, in whole or in part, without a valuable
dividends only out of "unrestricted retained consideration, or fraudulently, to the prejudice of
earnings;" and that under Sec. 122, no corporation creditors. The creditor is allowed to maintain an
shall distribute any of its assets or property except action upon any unpaid subscriptions and thereby
upon lawful dissolution and after payment of all its steps into the shoes of the corporation for the
debts and liabilities. These provisions in essence satisfaction of its debt.
provide for the "trust fund doctrine" where the
"subscription to the capital of a corporation To make out a prima facie case in a suit against
constitute a fund to which creditors have a right stockholders of an insolvent corporation to compel
to look for satisfaction of their claims." [Philippine them to contribute to the payment of its debts by
Trust Co. v. Rivera, G.R. No. L-19761 (1923)] making good unpaid balances upon their
subscriptions, it is only necessary to establish that the
"The Trust Fund Doctrine, first enunciated by this stockholders have not in good faith paid the par value
Court in the 1923 case of Philippine Trust Co. v. Rivera of the stocks of the corporation [Donnina Halley v.
is the underlying principle in the procedure for the Printwell, Inc., G.R. No. 157549 (2011)].
distribution of capital assets, embodied in
Corporation Code, which allows the distribution of
corporate capital only in three instances:
a. Amendment of the Articles of Incorporation to
reduce the authorized capital stock,
b. Purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
c. Dissolution and eventual liquidation of the
corporation.
Cause of
Procedure
5. Removal Removal
special meeting called for that
General Rule: Any Director or Trustee of a corporation purpose.
may be removed from office, with or without cause
[Sec. 28]. 7. Compensation [Sec. 30]
Exception: Directors who have been elected by General Rule: Directors are only entitled to reasonable
minority stockholders exercising cumulative voting per diems. They are not entitled to compensation as
can only be removed for cause. Removal without directors.
cause may not be used to deprive minority
stockholders or members of the right of Exceptions:
representation to which they may be entitled under a. When Articles of Incorporation, by-laws, or an
Sec. 24. advance contract provides for compensation.
b. Compensation other than per diems may also be
Other requisites: granted to directors by the vote of the
a. By a vote of the stockholders holding or stockholders representing at least a majority of
representing 2/3 of the outstanding capital stock, the Outstanding Capital Stock at a regular or
or if the corporation be a non-stock corporation, special stockholders’ meeting.
by a vote of 2/3 of the members entitled to vote
b. At a regular or special meeting after proper notice Note: The total yearly compensation of directors shall
is given not exceed 10% of the net income before income tax
of the corporation during the preceding year.
6. Filling of Vacancies [Sec. 29]
Compensation of Directors as Corporate Officers
Cause of The position of being chairman and Vice-Chairman,
Procedure like that of treasurer and secretary, are not considered
Removal
directorship positions but officership positions that
Vacancy/ies must be filled by
would entitle the occupants to compensation.
the stockholders in a regular
Likewise, the limitation placed under Sec. 30 of the
or special meeting called for
Corporation Code that directors cannot receive
that purpose.
compensation exceeding 10% of the net income of
the corporation would not apply to the compensation
a. Removal For removal, a director or
given to such positions since it is being given in their
under Sec. 28 trustee elected to fill a vacancy
capacity as officers of the corporation and not as
b. Expiration of shall be elected only for the
board members [Western Institute of Technology v. Salas,
term unexpired term of his
G.R. No. 113032 (1997)].
c. Increase in predecessor in office.
the number
of For increase in number of 8. Fiduciary Duties and
BOD/BOT seats, the election may be Liability Rules
made same meeting
authorizing the increase of
directors or trustees if so a. Duties
stated in the notice of the
meeting. In this jurisdiction, the members of the BOD have a
Vacancy/ies may be filled by three-fold duty: duty of obedience, duty of diligence,
the vote of at least a majority and duty of loyalty.
of the remaining directors or 1. Duty of Obedience - shall direct the affairs of
trustees, if still constituting a the corporation only in accordance with the
Other causes quorum. purposes for which it was organized;
2. Duty of Diligence - shall not willfully and
Otherwise, said vacancies knowingly vote for or assent to patently unlawful
must be filled by the acts of the corporation or act in bad faith or with
stockholders in a regular or gross negligence in directing the affairs of the
corporation; and
3. Duty of Loyalty - shall not acquire any personal 2. From its nature, is in line with corporation’s
or pecuniary interest in conflict with their duty as business and is of practical advantage to it; and
such directors or trustees. [Strategic Alliance 3. One in which the corporation has an interest or
Development Corp v. Radstock Securities Ltd., G.R. a reasonable expectancy.
No. 178158 (2009)]
The rule shall be applied notwithstanding the fact that
Duty of Obedience the director risked his own funds in the venture [Sec.
The Directors or Trustees and Officers to be elected 34].
shall perform the duties enjoined on them by law and
by the by-laws of the corporation [Sec. 25]. By embracing the opportunity, the self-interest of the
officer or director will be brought into conflict with
Duty of Diligence that of his corporation. Hence, the law does not
Directors or trustees who (1) willfully and knowingly permit him to seize the opportunity even if he will use
vote for or assent to patently unlawful acts of the his own funds in the venture [SUNDIANG and
corporation or (2) who are guilty of gross negligence AQUINO].
or bad faith in directing the affairs of the corporation
or (3) acquire any personal or pecuniary interest in Note: Differences between Sec. 31 and Sec. 34:
conflict with their duty as such directors or trustees 1. First, while both involve the same subject matter
shall be liable jointly and severally for all damages (business opportunity) they concern different
resulting therefrom suffered by the corporation, its personalities; Sec. 34 is applicable only to
stockholders or members and other persons [Sec. 31]. directors and not to officers, whereas Sec. 31
applies to directors, trustees and officers.
The conditions for the application of Sec. 31 of 2. Second, Sec. 34 allows a ratification of a
the Corporation Code require factual foundations to transaction by a self-dealing director by vote of
be first laid out in appropriate judicial proceedings. stockholders representing at least 2/3 of the
Hence, concluding that a person breached fiduciary outstanding capital stock. [Villanueva]
duties as an officer and member of the BOD of a
corporation without competent evidence b. Liabilities
thereon would be unwarranted and unreasonable
[Republic of the Philippines v. Sandiganbayan (First Division) SOLIDARY LIABILITY FOR DAMAGES
e.t al., G.R. No. 166859 (2011)]. 1. Willfully and knowingly voting for and assenting
to patently unlawful acts of the corporation; [Sec.
Duty of Loyalty 31]
Directors and trustees should not acquire any 2. Gross negligence or bad faith in directing the
personal or pecuniary interest in conflict with their affairs of the corporation; [Sec. 31]
duty as such directors or trustees, otherwise they shall 3. Acquiring any personal or pecuniary interest in
be held liable jointly and severally for all damages conflict of duty; [Sec. 31]
resulting therefrom suffered by the corporation, its 4. Consenting to the issuance of watered stocks, or,
stockholders or members and other persons [Sec. 31]. having knowledge thereof, failing to file
objections with secretary; [Sec. 65]
Where a director, by virtue of his office, acquires for 5. Agreeing or stipulating in a contract to hold
himself a business opportunity which should belong himself liable with the corporation; or
to the corporation, thereby obtaining profits to the 6. By virtue of a specific provision of law
prejudice of such corporation, he must account to the
latter for all such profits by refunding the same, unless LIABILITY FOR WATERED STOCKS
his act has been ratified by a vote of the stockholders Watered Stocks – stocks issued for a consideration
owning or representing at least 2/3 of the outstanding less than its par or issued value or for a consideration
capital stock [Sec. 34]. in any form other than cash, valued in excess of its
fair value.
DOCTRINE OF CORPORATE
OPPORTUNITY Any director or officer of a corporation consenting to
Unless his act is ratified, a director shall refund to the the issuance of watered stocks or who, having
corporation all the profits he realizes on a business knowledge thereof, does not forthwith express his
opportunity which: objection in writing and file the same with the
1. Corporation is financially able to undertake corporate secretary shall be solidarily liable with the
1. Full disclosure of the adverse interest of the which are within the competency of the board to
directors/trustees involved is made on such create at anytime and whose actions require
meeting; ratification and confirmation by the board.
2. The contract is fair and reasonable under the 2. Another reason is that the BOD has the power
circumstances. to create positions not provided for in the by-
laws since the board is the corporation’s
12. Executive Committee [Sec. governing body [Filipinas Port Services Inc. v. Go,
G.R. No. 161886 (2007)].
35]
13. Meetings
a. Creation
a. Regular or Special
The by-laws of a corporation may create an executive
committee, composed of not less than three members
WHO MAY ATTEND
of the board, to be appointed by the board.
The members of the Board themselves; directors or
trustees cannot be represented or voted by proxies at
Said committee may act, by majority vote of all its
board meetings [Sec. 25].
members, on such specific matters within the
competence of the board, as may be delegated to it in
In the Philippines, teleconferencing and
the by-laws or on a majority vote of the board [Sec.
videoconferencing of members of BOD of private
35].
corporations is a reality, in light of Republic Act No.
8792. The Securities and Exchange Commission
b. Limitations on Its Power issued SEC Memorandum Circular No. 15, series of
2001, on November 30, 2001, providing the
It CANNOT be delegated the following: guidelines to be complied with in relation to such
1. Matters needing stockholder approval [Sec. 35]; conferences [Expertravel and Tours, Inc. v. CA, G.R. No.
2. Filling up of board vacancies; 152392 (2005)].
3. Amendment, repeal or adoption of by-laws [Sec.
35]; WHEN AND WHERE
4. Amendment or repeal of any resolution of the When? [Sec.53]
Board which by its express terms is not a. Regular meetings of directors or trustees shall
amendable or repealable [Sec. 35]; be held monthly, unless the by-laws provide
5. Cash dividend distribution [Sec. 35]; and otherwise.
6. Acts which would render the BOD powerless b. Special meetings of the BOD or trustees may
and free from all responsibilities imposed on it by be held at any time upon the call of the president
law [Campos] or as provided in the by-laws.
Under Sec. 35 of the Corporation Code, the creation Where? [Sec. 53]
of an executive committee must be provided for in Meetings of directors or trustees of corporations may
the by-laws of the corporation. Unfortunately, the be held anywhere in or outside of the Philippines,
by-laws of the corporation in this case are silent as to unless the by-laws provide otherwise.
the creation by its BOD of an executive committee.
Notwithstanding the silence of the by-laws on the NOTICE
matter, the SC did not rule that the BOD’s creation Notice of regular or special meetings stating the date,
of the executive committee is illegal or unlawful. time and place of the meeting must be sent to every
1. One reason is the absence of a showing as to the director or trustee at least 1 day prior to the
true nature and functions of said executive scheduled meeting, unless otherwise provided by
committee, considering that the "executive the by-laws.13
committee," referred to in Sec. 35 of the
Corporation Code which is as powerful as the A director or trustee may waive this requirement,
BOD and in effect acting for the board itself, either expressly or impliedly [Sec. 50].
should be distinguished from other committees
13
Notice of regular or special meetings must now be sent 2 days prior to
the schedules meeting, unless a longer time is provided in the bylaws. [Sec.
52, RCC]
b. Who Presides
c. Quorum
The president presides, unless the by-laws provide
otherwise [Sec. 54].14 General Rule: Majority of the number of directors or
trustees as fixed in the articles of incorporation [Sec.
25].
Exceptions:
1. Unless the articles of incorporation or the by-
laws provide for a GREATER majority, or
2. In case of election of officers where a vote of a
majority of all the members of the board is
needed.
d. Rule on Abstention
A vote of abstention is considered to be a vote in
itself. Abstentions will not be counted towards the
14
It is now the chairman, or in his absence, the president who shall preside
at all meetings of the directors or trustees, unless the bylaws provide
otherwise. [Sec. 53, RCC]
Note:
However, when preferences or restrictions are made
to apply to a class of shares, then such preferences on
restrictions shall exist and be valid only when
Sec. 89 of the Corporation Code specifically provides Procedural Matters Relating to Proxies:
that in a non-stock corporation, the right of members 1. “Proxy solicitation” involves the securing and
of any class or classes to vote “may be limited, submission of proxies, while “proxy validation”
broadened or denied to the extent specified in the concerns the validation of such secured and
articles of incorporation or the by-laws.” submitted proxies;
2. The SEC’s power to pass upon the validity of
The SEC has opined that the rule in Sec. 6 allowing proxies in relation to election controversies has
non-voting shares to vote on specified fundamental effectively been withdrawn, tied as it is to its
matters does not apply to non-voting members of a abrogated quasi-judicial powers, and has been
non-stock corporation; that insofar as members of a transferred to the RTC Special Commercial
non-stock corporation, the applicable provision is Courts pursuant to the terms of Sec. 5.2 of the
Sec. 89, which specifically provides that members may Securities Regulation Code;
be denied entirely their voting rights in the articles of 3. Nevertheless, although an intra-corporate
incorporation or by-laws of the corporation [SEC controversy may animate a disgruntled
Opinion, 4 September 1995]. shareholder to complain to the SEC a
corporation’s violations of SEC rules and
2. Participation in regulations, that motive alone should not be
sufficient to deprive the SEC of its investigatory
Management and regulatory powers, especially so since such
powers are exercisable on a motu proprio basis.
a. Proxy
The fact that the jurisdiction of the RTC Special
Stockholders and members may vote in person or by Commercial Courts is confined to the voting on
proxy in all meetings of stockholders or members election of officers, and not all matter which may be
[Sec. 58]. voted upon by stockholders, elucidates that the power
of the SEC to regulate proxies remains extant and
The word “proxy” may be understood in two ways. could very well be exercised when stockholders vote
First, it may refer to the person duly authorized by a on matters other than the election of directors [GSIS
stockholder to vote in his behalf in a stockholder’s v. CA, G.R. No. 183905 (2009)].
meeting. Secondly, it may refer to the document
which evidences this authority [CAMPOS].
Meeting for the removal of directors or trustees, or Delegation to the BOD/BOT of the power to amend
any of them, must be called by the secretary on order or repeal by-laws or adopt new by-laws requires
of the president or on the written demand of the approval by at least 2/3 of the outstanding capital
stockholders representing or holding at least a stock/membership.
majority of the outstanding capital stock/majority of
members. Revocation of the delegation requires only majority
vote of the outstanding capital stock/membership.
5. Granting compensation other than per
diems to directors [Sec. 30] 3. Extending/shortening corporate term
[Sec. 37]
Compensation other than per diems may be granted
to directors by the vote of the stockholders Requires approval by a majority vote of the
representing at least a majority of the outstanding BOD/BOT and approval by at least 2/3 of the
capital stock. outstanding capital stock/membership.
6. Consideration for no-par shares [Sec. Includes all stockholders with or without voting
62] rights.
4. Increasing/decreasing capital stock for any sale or disposition of all or substantially all of
[Sec. 38] corporate assets [Sec. 40].
Requires approval by a majority vote of the BOD and 8. Investment of funds in another
approval by at least 2/3 of the outstanding capital business [Sec. 42]
stock.
Requires approval by a majority vote of the
Includes all stockholders with or without voting BOD/BOT and approval by at least 2/3 of the
rights. outstanding capital stock/membership.
5. Incurring, creating, increasing bonded Includes all stockholders with or without voting
indebtedness [Sec. 38] rights.
Requires approval by a majority vote of the BOD and 9. Dividend declaration [Sec. 43]
approval by at least 2/3 of the outstanding capital
stock. No stock dividend shall be issued without the
approval of stockholders representing not less than
Includes all stockholders with or without voting 2/3 of the outstanding capital stock.
rights.
However, where the investment by the corporation is
6. Issuance of shares not subject to pre- reasonably necessary to accomplish its primary
emptive right [Sec. 39] purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be
Shares issued in good faith in exchange for property necessary.
or previously incurred indebtedness with the approval
of the stockholders representing 2/3 of the 10. Power to enter into management
outstanding capital stock are not subject to pre- contracts [Sec. 44]
emptive rights.
See discussion under By a Majority Vote
7. Sale/disposition of all or substantially
all of corporate assets [Sec. 40] 11. Removal of directors or trustees [Sec.
28]
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the Any director or trustee may be removed from office
outstanding capital stock/membership. by a vote of the stockholders holding or representing
at least 2/3 of the outstanding capital
Includes all stockholders with or without voting stock/membership.
rights.
12. Ratifying contracts with respect to
A sale or other disposition shall be deemed to cover dealings with directors/trustees [Sec.
substantially all the corporate property and assets if 32]
thereby the corporation would be rendered incapable
of continuing the business or accomplishing the A contract of the corporation with one or more of its
purpose for which it was incorporated. directors is voidable, at the option of such
corporation, unless all the following conditions are
If the same is necessary in the usual and regular course present:
of business of said corporation or if the proceeds of a. The director’s presence in the BOD meeting in
the sale or other disposition of such property and which the contract was approved was not
assets be appropriated for the conduct of its necessary to constitute a quorum
remaining business, authorization of stockholders no b. The vote of such director was not necessary for
longer needed. the approval of the contract
c. The contract is fair and reasonable under the
In non-stock corporations where there are NO circumstances
members with voting rights, the vote of at least the d. In case of an officer, the contract has been
majority of the BOT will be sufficient authorization previously authorized by the BOD.
15
The voting requirement for voluntary dissolution where no creditors are
affected is now only a majority vote of the outstanding capital
stock/membership. [Sec.134-135, RCC]
2. Minute book for meetings of the to the interests of the corporation [Gokongwei Jr. v.
stockholders/members; SEC, G.R. No. L-45911 (1979)].
3. Minute book for meetings of the board/trustees;
4. Stock and transfer book Among the changes introduced in the new Code with
respect to the right of inspection granted to a
Stock transfer agent - One engaged principally in the stockholder are the following:
business of registering transfers of stocks in behalf of 1. The records must be kept at the principal office
a stock corporation (licensed by the SEC). of the corporation;
2. The inspection must be made on business days;
The corporate secretary is the one duly authorized to 3. The stockholder may demand a copy of the
make entries in the stock and transfer book. excerpts of the records or minutes;
4. The refusal to allow such inspection shall subject
It is the corporate secretary's duty and obligation to the erring officer or agent of the corporation to
register valid transfers of stocks and if said corporate civil and criminal liabilities.
officer refuses to comply, the transferor-stockholder
may rightfully bring suit to compel performance However, while seemingly enlarging the right of
[Torres et al v. CA, G.R. No. 120138 (1997)]. inspection, the new Code has prescribed limitations
to the same. It is now expressly required as a
Financial Statements [Sec. 75] condition for such examination that the one
Within 10 days from written request, the corporation requesting it must not have been guilty of using
shall furnish its most recent financial statement improperly any information through a prior
(balance sheet and profit or loss statement as of last examination, and that the person asking for such
taxable year) examination must be "acting in good faith and for a
legitimate purpose in making his demand." [Gonzales
At a regular meeting, the Board shall present a v. PNB, G.R. No. L-33320 (1983)]
financial report of the operations of the corporation
for the preceding year, which shall include financial Directors of a corporation have the unqualified right
statements duly signed and certified by an to inspect the books and records of the corporation
independent CPA. at all reasonable times. The right of inspection is not
to be denied on the ground that the director or
Exception shareholder is on unfriendly terms with the officers of
If the paid-up capital is less than P50,000 – the the corporation whose records are sought to be
financial statements may be certified under oath by inspected. A director or stockholder can make copies,
the treasurer or any responsible officer of the abstracts, and memoranda of documents, books, and
corporation (instead of an independent CPA). papers as an incident to the right of inspection, but
cannot, without an order of a court, be permitted to
Requirements for the exercise of the right of take books from the office of the corporation.
inspection [Sec. 74] However, a director or stockholder does not have any
1. It must be exercised at reasonable hours on absolute right to secure certified copies of the minutes
business days and in the place where the of the corporation until these minutes have been
corporation keeps all its records (i.e., principal written up and approved by the directors [Veraguth v.
office). Isabela Sugar, G.R. No. L-37064 (1932)].
2. The stockholder has not improperly used any
information he secured through any previous A stockholder of a sequestered company has the
examination. right to inspect and/or examine the records of the
3. Demand is made in good faith or for a legitimate corporation pursuant to Sec. 74 of the Corporation
purpose. If the corporation or its officers contest Code [Africa v. PCGG, G.R. No. 83831 (1992)].
such purpose or contend that there is evil motive
behind the inspection, the burden of proof is Remedies when inspection is refused
with the corporation or such officer to show the 1. Mandamus
same. 2. Injunction
3. Action for damages
TEST TO DETERMINE WHETHER THE 4. File an action under Sec. 144 to impose a penal
PURPOSE IS LEGITIMATE offense by fine and/or imprisonment
A legitimate purpose is one which is germane to the
interests of the stockholder as such and not contrary
Under the Rules of Court, the writ of mandamus and likewise on treasury shares held by the
should be granted only if the court is satisfied that corporation; while the right of first refusal is a right
justice so requires [Sec.8, Rule 65]. exercisable against another stockholder on his shares
of stock [Villanueva].
Refusal to allow inspection is a criminal offense. Such
refusal, when done in violation of Sec. 74(4) of the Basis of Preemptive Right: to preserve the existing
Corporation Code, properly falls within the purview proportional rights of the stockholders [Campos]
of Sec. 144 of the same code and thus may be
penalized as an offense [Yujuico and Sumbilla v. Limitations to exercise of pre-emptive right [Sec.
Quiambao and Pilapil, G.R. No. 180416 (2014)]. 39]
1. Such pre-emptive right shall NOT extend to
Because the obligations provided for in Sec. 74 fall on shares to be issued in compliance with laws
the corporation, violation of the same is done by the requiring stock offerings or minimum stock
corporation; thus, criminal action based on such ownership by the public;
violation can only be maintained against corporate 2. It shall also NOT extend to shares to be issued in
officers or other such persons acting on behalf of the good faith with the approval of the stockholders
corporations. representing 2/3 of the outstanding capital stock,
in exchange for property needed for corporate
d. Pre-Emptive Right purposes or in payment of a previously
contracted debt
DEFINITION AND DISTINGUISHED 3. It shall not take effect if denied in the Articles of
FROM RIGHT OF FIRST REFUSAL Incorporation or an amendment thereto.
Pre-emptive right is an option privilege of an existing 4. If one shareholder does not want to exercise his
stockholder to subscribe to a proportionate part of pre-emptive right, the other shareholders are not
shares subsequently issued by the corporation before entitled to purchase the corresponding shares of
the same can be disposed of in favor of others; this the shareholder who declined. But if nobody
right includes all issues and disposition of shares of purchased the same and later on the board re-
any class. It is a common law right and may be issued the shares, the pre-emptive right applies
exercised by stockholders even without legal [Sundiang and Aquino].
provision. On the other hand, a right of first refusal
arises only by virtue of contract stipulations, by which Remedies in case of unwarranted denial
the right is strictly construed against the right of 1. Injunction
person to dispose or deal with their property. 2. Mandamus
3. The suit should be individual and not derivative
Stockholders of a corporation shall enjoy pre-emptive because the wrong done is to the stockholders
right to subscribe to ALL ISSUES OR individually
DISPOSITIONS OF SHARES OF ANY CLASS, in 4. SEC can cancel shares if the 3rd party is not
proportion to their respective shareholdings. The innocent
purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain Waiver/Denial of Preemptive Right
his equity in the surplus. Allowed by the Code provided that it is made in the
Articles of Incorporation
Note: The broad phrase “all issues or disposition of o Waiver made through Articles of
shares of any class” is construed to include not only Incorporation – would bind present and
new shares issued in pursuance of an increase in subsequent shareholders
capital stock or from the unissued shares which form o 2/3 vote of the outstanding capital stock is
part of the ACS, but also covers “treasury shares.” necessary before waiver is binding
Treasury shares would come under the term o Result of Non-placement of waiver clause in
“disposition.” Likewise considering that it is not Articles of Incorporation: waiver shall not
included among the exceptions enumerated therein, bind future stockholders but only those who
where pre-emptive right shall not extend, the agreed to it
intention is to include it in its application [SEC The shareholders must be given reasonable time
Opinion, 14 January 1993]. within which to exercise their pre-emptive rights.
Upon expiration of such period, any shareholders
A pre-emptive right is a right claimed against the who did not exercise such will be deemed to have
corporation on unissued shares of its capital stock, waived it. This is necessary so as to not hinder future
Incorporation, by-laws, laws or rules governing erring corporate officers [Gochan v. Young, G.R. No.
the corporation or partnership to obtain the relief 131889 (2001)].
he desires.
3. That there is no appraisal right available for the Status of heirs as co-owners of shares before partition
act(s) complained of; of estate does not make them shareholders until there
4. That the suit is not a nuisance or harassment suit. is compliance with Sec. 63 on the manner of
[Rule 8, Interim Rules of Procedure for Intra- transferring shares, thus the heirs are not
Corporate Controversies] automatically registered shareholders of the
corporation [Reyes v. RTC of Makati, G.R. No. 165744
Note: Fifth requisite is that the action brought by the (2008)].
stockholder or member must be "in the name of [the]
corporation or association.” [implied from first Stockholder may commence a derivative suit “for
paragraph of Rule 8, Section 1; see also Florete v. mismanagement, waste or dissipation of corporate
Florete, GR. No. 174909 (2016)] assets because of a special injury to him for which he
is otherwise without redress. In effect, the suit is an
The action brought by the shareholder or member action for specific performance of an obligation owed
must be in the name of the corporation or association by the corporation to the stockholders to assist its
[Villamor v. Umale, G.R. No. 172843 (2014)]. right of action when the corporation is put on default
by the wrongful refusal of the directors or
How this works in terms of procedure? Corporation as an management to make suitable measures for its
unwilling co-plaintiff (Rule 3, Sec. 10, ROC); suing protection.” [Yu v. Yukayguan, G.R. No. 177549
stockholder mere nominal party/plaintiff. (2009)]
Requisites of a Derivative Suit according to The power to sue and be sued in any court by a
Jurisprudence [SMC v. Kahn, G.R. No. 85339 (1989)] corporation even as a stockholder is lodged in the
1. The party bringing the suit should be a BOD that exercises its corporate powers and not in
shareholder as of the time of the act or the president or officer thereof. But where corporate
transaction complained of, the number of his directors are guilty of a breach of trust, not of mere
shares not being material; error of judgment or abuse of discretion, and intra-
2. He has tried to exhaust intra-corporate remedies, corporate remedy is futile or useless, a shareholders
i.e., has made a demand on the BOD for the may institute a derivative suit in behalf of himself and
appropriate relief but the latter has failed or other stockholders and for the benefit of the
refused to heed his plea; and corporation, to bring about a redress of the wrong
3. The cause of action actually devolves on the inflicted directly upon the corporation and indirectly
corporation, the wrongdoing or harm having upon the stockholders [Bitong v. CA, G.R. No. 123553
been, or being caused to the corporation and not (1998)].
to the particular stockholder bringing the
suit [Lisam Enterprises, Inc., represented by Lolita A. Jurisdiction over derivative suits lies with the RTC
Soriano and Lolita A. Soriano v. Banco de Oro [Sec. 5.2, Securities Regulation Code].
Unibank, Inc., et al., G.R. No. 143264 (2012)].
the corporation rising from any other transaction the defect in issuance. The existence of watered
[China Banking Corp. v. CA G.R. No. 117604 (1997)]. stocks is determined at the time of issuance of the
stock.
b. Liability to the Corporation for
Liability of directors or officers
Interest on Unpaid Subscription Any director or officer of a corporation consenting to
if so Required By the By-Laws the issuance of watered stocks or who, having
[Sec 66] knowledge thereof, does not forthwith express his
objection in writing and file the same with the
General Rule: Subscribers for stock are NOT liable to corporate secretary shall be SOLIDARILY liable with
pay interest on his unpaid subscription. the stockholder concerned to the corporation and its
creditors for the difference in value [Sec. 65].
Exception: If so required in the by-laws at the rate fixed
in the by-laws. If no rate is fixed in the by-laws, such It is hornbook principle that personal liability of
rate shall be deemed to be the legal rate [Sec. 66]. corporate directors, trustees or officers attaches only
when: (a) they assent to a patently unlawful act of the
Notes: corporation, or when they are guilty of bad faith or
Transfer for consideration of treasury shares is a sale gross negligence in directing its affairs, or when there
(or disposition) by the corporation (not subscription). is a conflict of interest resulting in damages to the
A transfer of previously issued shares by a corporation, its stockholders or other persons; (b)
stockholder to a third person is a sale (or disposition). they consent to the issuance of watered down
Transfer of unissued shares is subscription. stocks or when, having knowledge of such
issuance, do not forthwith file with the corporate
Shareholders are not creditors of the corporation with secretary their written objection; (c) they agree to
respect to their shareholdings thereto and the hold themselves personally and solidarily liable with
principle of compensation or set-off has no the corporation; or (d) they are made by specific
application. provision of law personally answerable for their
corporate action [SPI Technologies Inc. v Mapua, G.R.
Subscription contract is NOT required to be in No. 191154 (2014)].
writing.
d. Liability for Dividends
c. Liability for Watered Stocks [Sec. Unlawfully Paid
65]
When a director, trustee or officer attempts to acquire
Definition or acquires, in violation of his duty, any interest
These are shares issued as fully paid when in truth no adverse to the corporation in respect of any matter
consideration is paid, or the consideration received is which has been reposed in him in confidence, as to
known to be less than the par value or issued value of which equity imposes a disability upon him to deal in
the shares [Sec. 65]. his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which
These include the following: otherwise would have accrued to the corporation
[Sec. 31].
• Issued without consideration (bonus share)
• Issued as fully paid when the corporation has Violations of any of the provisions of the Corporation
received less sum of money than its par or issued Code not otherwise specifically penalized therein shall
value (discounted share) be punished by a fine of not less than one thousand
• Issued for consideration other than actual cash (P1,000.00) pesos but not more than ten thousand
(i.e., property or services), the fair valuation of (P10,000.00) pesos or by imprisonment for not less
which is less than its par or issued value than thirty (30) days but not more than 5 years, or
• Issue stock dividend when there are no sufficient both, in the discretion of the court [Sec. 144].
retained earnings or surplus profit to justify it.
All persons who assume to act as a corporation Special meetings of stockholders or members shall be
knowing it to be without authority to do so shall be held at any time deemed necessary or as provided in
liable as general partners for all debts, liabilities and the by-laws.
damages incurred or arising as a result thereof.
Where?
When any such ostensible corporation is sued on any • Stock: City or municipality where the
transaction entered or on any tort committed by it as principal office of the corporation is located,
a corporation, it shall not be allowed to use as a or, if practicable, in the principal office of the
defense its lack of corporate personality. corporation: Provided, Metro Manila shall be
considered a city or municipality [Sec. 51]
One who assumes an obligation to an ostensible • Non-stock: Any place even outside the
corporation cannot resist performance thereof on the place where the principal office is located,
ground that there was in fact no corporation [Sec. 21]. within the Philippines [Sec. 93]
Who May Attend and Vote? Effect of Failure to Give Notice: Failure to give
• Stockholders, either in person or by proxy notice would render a meeting VOIDABLE at the
• Pledgors or mortgagors [Sec. 55] instance of an absent stockholder, who was not
• Pledgee or mortgagee, IF expressly given such notified of the meeting [Board of Directors of the SMB
right by the pledgor or mortgagor in writing Workers v. Tan, G.R. No. L-12282 (1959)].
which is recorded on the corporate books [Sec.
55] b. Who Calls the Meeting
• Executors, administrators, receivers, and other
legal representatives duly appointed by the court, Any petitioning stockholder or member upon order
without need of any written proxy [Sec. 55] of the SEC when there is no person authorized to call
• ALL joint owners of stocks, or any one of them a meeting [Sec. 50].
with the consent of ALL the co-owners, unless
there is a written proxy, signed by all the co- c. Who Presides at the Meeting
owners [Sec. 56]
• Any one of the joint owners of shares owned in The president, unless the by-laws provide otherwise
an "and/or" capacity or a proxy thereof [Sec. 56] [Sec. 54].16
16
It is now the chairman, or in his absence, the president who shall preside
at all meetings of the stockholders or members, unless the bylaws provide
otherwise. [Sec. 53, RCC]
Regular Special
When
Held annually on a date
fixed in the by-laws, or At any time deemed
if not so fixed, on any necessary or as
date in April of every provided in the by-laws
year as determined by [Sec. 50]
the BOD or trustees
Where
STOCK: City or municipality where the principal
office of the corporation is located, or, if
practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality [Sec. 51]
NON-STOCK: Any place even outside the place
where the principal office is located, within the
Philippines [Sec. 93]
Notice
Notice sent to all
Notice sent to all
shareholders or
shareholders or
members at least 2
members at least 1
weeks prior to the
week prior to the
meeting, unless a
meeting, unless
different period is
otherwise provided in
required by the by-
the by-laws [Sec. 50]
laws17
Quorum
General Rule: Stockholders representing majority of
the Outstanding Capital Stock or majority of the
members
17
Notice of regular meetings must now be sent at least 21 days prior to the
meeting [Sec. 49, RCC]
Limitations:
e. Classes of Shares of Stock • Preferred shares can only be issued with par
value.
Shares of stock of stock corporations may be divided
into classes or series of shares or both. Each class or • Preferred shares must be stated in the Articles of
series of shares may have rights, privileges or Incorporation and in the certificate of stock.
restrictions, as stated in the Articles of Incorporation. • The BOD may fix the terms and conditions only
when so authorized by the Articles of
Classification of shares: Incorporation and such terms and conditions
1. Common shares shall be effective upon filing a certificate thereof
2. Preferred shares with the SEC.
3. Par value shares
4. No-par value shares Preference as to dividends:
5. Founder’s shares 1. Participating and Non-participating
6. Redeemable shares a. Participating - those which, after getting
7. Treasury shares their fixed dividend preference, share with
8. Convertible shares common stocks the rest of the dividends.
9. Non-voting shares b. Non-participating - those which, after
getting their fixed dividend preference, have
General Rule: No share may be deprived of voting no more right to share in the remaining
rights [Sec. 6] dividends with the common stocks.
Unless otherwise provided, preferred stocks are
Exceptions non-participating.
• Preferred non-voting or
2. Cumulative and Non-cumulative
• Redeemable shares,
a. Cumulative - regardless of lack of profits in
• Provided by the Code (e.g. Treasury shares) any given year, and lack of declaration of
dividends, the arrears for such year have to
There shall always be a class/series of shares which be paid to the preferred stocks in a
have COMPLETE VOTING RIGHTS [Sec. 6]. subsequent year (once profits are made)
before any dividends can be paid to the
Doctrine of Equality of Shares common stocks.
Each share shall be EQUAL in ALL respects to every b. Non-Cumulative – entitlement to receipt
other share, except as otherwise provided in the of dividends essentially depends on
Articles of Incorporation and stated in the certificate declaration of such; types:
of stock [Sec. 6].
No First crack
advantage, at
Preference priority, or dividends/
Upon preference profits/
Liqui- over any distribution
dation other SH of assets
in the
same class
4. Payment of Balance of Delinquent Shares - These are shares for which the
Subscription [Secs. 66 and corresponding subscription or balance remains
unpaid after a grace period of 30 days from the date
67] specified in the contract of subscription or from the
date stated in the call made by the BOD [Sec. 67].
a. Call by BOD
EFFECT OF DELINQUENCY [SEC. 71]
The BOD of any stock corporation may at any time No delinquent stock shall be voted for or be entitled
declare due and payable to the corporation unpaid to vote or to representation at any stockholders’
subscriptions to the capital stock and may collect the meeting.
same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary. The holder thereof shall NOT be entitled to any of
the rights of a stockholder except the right to
Payment shall be made on the date specified in the dividends. But the dividends it will receive will be
contract of subscription or on the date stated in the subject to Sec. 43, that is, cash dividends shall first be
call. Failure to pay on such date shall render the entire applied to the unpaid balance on the subscription plus
balance due and payable and shall make the costs and expenses, and stock dividends shall be
stockholder liable for interest at the legal rate on such withheld until the unpaid subscription is fully paid.
balance, unless a different rate of interest is provided
for in the by-laws. If within 30 days from said date no Such shares shall be subject to delinquency sale.
payment is made, all stocks covered by said
subscription shall become delinquent and subject to CALL BY RESOLUTION OF THE BOD [SEC.
sale under Sec. 68 unless the BOD orders otherwise. 68]
The BOD may, by resolution, order the sale of
There are 2 instances when call is not necessary to delinquent stock and shall specifically state the
make the subscriber liable for payment of the unpaid amount due on each subscription plus all accrued
subscription: interest, and the date, time and place of the sale which
1. When, under the terms of the subscription shall not be less than 30 days nor more than 60 days
contract, subscription is payable, not upon call, from the date the stocks became delinquent, which is
but immediately, or on a specified day, or when it 30 days after the date specified in the contract of
is payable in installments at specified times; [Sec. subscription or on the date stated in the call.
67] and
2. If the corporation becomes insolvent, which
makes the liability on the unpaid subscription due
and demandable, regardless of any stipulation to
the contrary in the subscription agreement
[Villanueva].
b. Notice Requirement
Where call is necessary, notice must be given to the
stockholder concerned. A call without notice to the
subscriber is practically no call at all.
a. Delivery
b. Indorsement d. Issuance
2. To be valid as to third persons:
a. Recorded in the books of the corporation FULL PAYMENT
[Republic v. Estate of Hans Menzi, G.R. No. General Rule: No certificate of stock shall be issued to
152578 (2005)] a subscriber until the full amount of his subscription
together with interest and expenses (in case of
The execution of a deed of sale does not necessarily delinquent shares), if any is due, has been paid [Sec.
make the transfer effective. The delivery of the stock 64].
certificate duly indorsed by the owner is the operative
act that transfers the shares. The absence of delivery Exception: Where it was the practice of the corporation
is a fatal defect which is not cured by mere execution since its inception to issue certificates of stock to its
of a deed of assignment [Rural Bank of Lipa City v. CA, individual SHs for unpaid shares of stock and to give
G.R. No. 124535 (2001)]. full voting power to shares fully paid [Baltazar v.
Lingayen Gulf Electric Power Company, G.R. No. L-16236
The stock and transfer book is the basis for (1965)].
ascertaining the persons entitled to the rights and
subject to the liabilities of a stockholder. Where a PAYMENT PRO-RATA
transferee is not yet recognized as a stockholder, the The entire subscription must be paid first before the
corporation is under no specific legal duty to issue certificates of stock can be issued. Partial payments
stock certificates in the transferee’s name [Ponce v. are to be applied pro rata to each share of stock
Alsons Cement Corp., G.R. NO. 139802 (2002)]. subscribed [Nava v Peers Mktg. Corp., G.R. No. L-
• Citing Hager v. Bryan (1911): A mandamus should 28120 (1976)].
not issue to compel the secretary of a corporation
to make a transfer of the stock on the books of
the company, unless it affirmatively appears that
e. Lost or Destroyed Certificates
he has failed or refused so to do, upon the
Procedure for re-issuance in case of loss, stolen
demand either of the person in whose name the
or destroyed certificates:
stock is registered, or of some person holding a
1. Registered owner to file an affidavit of loss with
power of attorney for that purpose from the
the corporation.
registered owner of the stock.
2. Publication of notice of loss in a newspaper of
general circulation published in the place where
A transfer of shares is not valid unless recorded in the
the corporation has its principal office, once a
books of the corporation. The purpose of
week for 3 consecutive weeks at the expense of
registration is two-fold: (a) to enable the transferee
the owner of the certificate of stock
to exercise all the rights of a stockholder, including
3. Cancellation of the certificate in the books of the
the right to vote and to be voted for, and (b) to inform
corporation and issuance of new certificates, after
the corporation of any change in share ownership so
the expiration of 1 year from the date of the last
that it can ascertain the persons entitled to the rights
publication and there is no contest. The right to
and subject to the liabilities of a stockholder [Batangas
make such contest shall be barred after the
Laguna Tayabas Bus Co. v. Bitangas, G.R. No. 137934
expiration of the one-year period.
(2001)].
4. Issuance of new certificates before 1 year period
• Until challenged in a proper proceeding, a if the registered owner files a bond and there is
stockholder of record has a right to participate in no pending contest regarding the ownership of
any meeting; his vote can be properly counted to said certificates.
determine whether a stockholders’ resolution was
approved, despite the claim of the alleged Note: Except in cases of fraud, bad faith, or negligence
transferee. On the other hand, a person who has on the part of the corporation and its officers, no
purchased stock, and who desires to be action may be brought against the corporation which
recognized as a stockholder for the purpose of shall have issued certificates of stock in lieu of those
voting, must secure such a standing by having the lost, stolen or destroyed pursuant to the above
transfer recorded in the corporate books. Until procedure.
the transfer is registered, the transferee is not a
stockholder but an outsider.
Note: Thus, except for the expiration of its term, no A voluntary dissolution may be effected by amending
dissolution can be effective without some act of the the Articles of Incorporation to shorten the corporate
State [Daguhoy Enterprises v. Ponce, G.R. No. L-6515 term; and upon approval of the expired shortened
(1954)]. term, the corporation shall be deemed dissolved
without any further proceedings.
WHERE CREDITORS ARE AFFECTED [SEC
119] A publication of notice of dissolution is required and
1. A petition shall be filed with the SEC containing cannot be dispensed with by alleging that it was not
the following: required in Sec. 120 and that no creditors will be
a. signature by a majority of its BOD or BOT prejudiced by its dissolution. [SEC Opinion, August
or other officers having management of its 30, 1988]
affairs;
b. verified by its president, or secretary or one SEC Opinion No. 06-20, March 13, 2006:
of its director or trustees; • If the shortened term expires before the SEC
c. all claims and demands against the approval – the corporation will be dissolved upon
corporation; and the SEC approval
d. resolved upon by affirmative vote of the • If the shortened term expires after the SEC
stockholders representing at least 2/3 of the approval – the corporation will be dissolved upon
Outstanding Capital Stock or 2/3 of the expiration of the shortened term
members; • If SEC fails to act within 6 months from filing of
2. If the petition is sufficient in form and substance, the amended Articles of Incorporation and
the SEC shall issue an order fixing the date on or shortened term expires after the 6-month period
before which objections to the petition may be – the corporation will be dissolved upon the
filed. Such date shall not be less than 30 days nor expiration of the shortened term.
more than 60 days after the entry of the order.
• If SEC fails to act within 6 months from filing of
3. A copy of the order shall be published at least
the amended Articles of Incorporation and
once a week for 3 consecutive weeks in a
shortened term expires before the 6-month
newspaper of general circulation, or if there is no
period – the corporation will be dissolved at the
newspaper in the city or municipality of the
end of the 6-month period. [Campos]
principal office, posting for 3 consecutive weeks
in 3 public places is sufficient.
Note: This is among the corporate acts where appraisal
4. A hearing shall be conducted 5 days after the
right is available [see Sec. 81]
lapse of the expiration of the time to file
objections.
5. If the objections are insufficient or the material b. Involuntary
facts in the petition are true, judgment shall be
rendered dissolving the corporation and directing BY EXPIRATION OF CORPORATE TERM
the disposition of assets. The judgment may Once the period expires, the corporation is
include appointment of a receiver. automatically dissolved without any other proceeding
a. As long as 2/3 vote is obtained, no member/ and it cannot thereafter be considered a de facto
stockholder can prevent such dissolution corporation.
unless the majority stockholders acted in bad
faith. The latter may be held liable for FAILURE TO ORGANIZE AND
damages [Campos]. COMMENCE BUSINESS WITHIN 2 YEARS
b. Even where there are creditors of the FROM INCORPORATION
corporation who may be prejudiced by the Failure to formally organize and commence the
dissolution, it is still possible for the transaction of its business or construction of its works
corporation to terminate its existence prior within 2 years - its corporate powers shall cease and
to the expiration of its term, provided said the corporation shall be deemed dissolved [Sec. 22]. 18
creditors are given the opportunity to
present their claims and objections so that Dissolution in this case is automatic [Campos].
their interests may be protected [Campos]. • Contrary view: Since there is a defense available
to the corporation, that is, if its failure to organize
BY SHORTENING OF CORPORATE TERM and commence its business is due to causes
18
This 2-year period has been increased to 5 years. [Sec. 21, RCC]
beyond the control of the corporation as may be A corporation may be dissolved by the SEC, upon a
determined by the SEC, therefore, the verified complaint and after proper notice and
dissolution is not automatic. hearing, on the following grounds [Sec. 6, par. i, PD
902-A]:
Formal organization includes not only the adoption 1. Fraud in procuring its certificate of registration
of the by-laws but also the establishment of the body 2. Serious misrepresentation as to what the
which will administer the affairs of the corporation corporation can or is doing to the great prejudice
and exercise its powers of or damage to the general public
• By-laws should be adopted within one month of 3. Refusal to comply or defiance of any lawful order
receipt of official notice of the issuance of the of the Commission restraining commission of
certificate of incorporation, otherwise the acts which would amount to a grave violation of
certificate may be suspended or revoked [PD its franchise
902-A, Sec. 6 (i)(5)]. 4. Continuous inoperation for a period of at least
five years
Failure to operate for at least 5 consecutive years after 5. Failure to file by-laws within the required period
commencement of business - ground for suspension 6. Failure to file required reports in appropriate
or revocation of its corporate franchise or certificate forms as determined by the Commission within
of incorporation. However, dissolution in this case is the prescribed period
not automatic [Campos]. 7. Other grounds, such as:
a. Violation by the corporation of any
The corporation may show that the failure to provision of the Corporation Code [Sec. 144
commence its business or to continuously operate is BP 68]
due to causes beyond its control [Sec. 22]. b. In case of a deadlock in a close corporation,
and the SEC deems it proper to order the
LEGISLATIVE DISSOLUTION dissolution of the corporation as the only
The inherent power of Congress to make laws carries practical solution to the dispute [Sec. 104 BP
with it the power to amend or repeal them. 68]
Involuntary corporate dissolution may be effected
through the amendment or repeal of the Corporation 2. Methods of Liquidation
Code [implied from Sec. 145, DE LEON].
Liquidation is the process by which all the assets of
The limitations on the power to dissolve corporations the corporation are converted into liquid assets (cash)
by legislative enactment are as follows: in order to facilitate the payment of obligations to
1. Under the Constitution, the amendment, creditors, and the remaining balance if any is to be
alteration, or repeal of the corporate franchise of distributed to the stockholders. It is a proceeding in
a public utility shall be made only “when the rem.
common good so requires”;
2. Under Sec. 145 of the Code, it is provided that:
“No right or remedy in favor of or against any a. By the Corporation Itself
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability Under Sec. 122 of the Corporation Code, a
incurred by any such corporation, stockholders, corporation whose corporate existence is terminated
members, directors, trustees, or officers, shall be in any manner continues to be a body corporate for 3
removed or impaired either by the subsequent years after its dissolution for purposes of prosecuting
dissolution of said corporation or by any and defending suits by and against it and to enable it
subsequent amendment or repeal of this Code or to settle and close its affairs, culminating in the
of any part thereof”; disposition and distribution of its remaining assets. It
3. While Congress may provide for the dissolution may, during the 3-year term, appoint a trustee or a
of a corporation, it cannot impair the obligation receiver who may act beyond that period.
of existing contracts between the corporation
and third persons, or take away the vested rights The termination of the life of a corporate entity does
of its creditors. [De Leon] not by itself cause the extinction or diminution of the
rights and liabilities of such entity. If the 3-year
DISSOLUTION BY THE SEC ON GROUNDS extended life has expired without a trustee or receiver
UNDER EXISTING LAWS having been expressly designated by the corporation,
within that period, the BOD (or trustees) itself, may
be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation In SEC’s judgment dissolving the corporation and
[Pepsi-Cola Products Philippines, Inc. v. CA, G.R. No. directing disposition of its assets as justice requires, it
145855 (2004)]. may appoint a receiver to collect such assets and pay
the debts of the corporation [Sec. 119].
A corporation under liquidation may not amend its
articles of incorporation to extend its lifespan. When The mere appointment of a receiver, without anything
a corporation is liquidating pursuant to the statutory more, does not result in the dissolution of the
period of 3 years to liquidate, it is only allowed to corporation nor bar it from the exercise of its
continue for the purpose of final closure of its corporate rights [Leyte Asphalt and Mineral Oil Co. Ltd.,
business and no other purposes. In fact, within that v. Block Johnston and Breenbrawn, G.R. No. 9755 (1928)].
period, the corporation is enjoined from “continuing
the business for which it was established.” [Alhambra d. Liquidation after Three Years
Cigar and Cigarette Mfg. v. SEC, G.R. No. L-23606
(1968)] What is the difference between Liquidation and
Rehabilitation?
b. Conveyance to a Trustee Within
A 3-Year Period Liquidation is the winding up of a corporation so
that assets are distributed to those entitled to receive
In this method, the 3-year limitation does not apply, them. It is the process of reducing assets to cash,
provided that the designation of the trustees is made discharging liabilities and dividing surplus or loss. On
within the period. the other hand, rehabilitation contemplates a
continuance of corporate life and activities in an
General rule: There is no time limit within which the effort to restore and reinstate the corporation to its
trustee must finish the liquidation, and he may sue and former position of successful operation and solvency.
be sued as such even beyond the 3-year period. Both cannot be undertaken at the same time [Phil.
Veterans Bank v. Employees Union, G.R. No. 105364
Exception: (2001)].
The trusteeship is limited in its duration by the deed
of trust. If full liquidation can only be effected after the 3-year
period and there is no trustee, the directors may be
Trustees to whom the corporate assets have been permitted to complete the liquidation by continuing
conveyed pursuant to liquidation may sue and be sued as trustees by legal implication [Reburiano v. CA, G.R.
as such in all matters connected with the liquidation No. 102965 (1999)].
[National Abaca v. Pore, G.R. No. L-16779 (1961)].
A corporation’s BOD is not rendered functus officio
The trustee of a dissolved corporation may by its dissolution. Since Sec. 122 allows a corporation
commence a suit which can proceed to final judgment to continue its existence for a limited purpose,
even beyond the 3-year period of liquidation. No necessarily there must be a board that will continue
reason can be conceived why a suit already acting for and on behalf of the dissolved corporation
commenced by the corporation itself during its for that purpose [Aguirre vs. FQB+, Inc., G.R. No.
existence, not by a mere trustee who, by fiction, 170770 (2013)].
merely continues the legal personality of the dissolved
corporation, should not be accorded similar treatment The trustee of a corporation may continue to
— to proceed to final judgment and execution thereof prosecute a case commenced by the corporation
[Reburiano v. CA, G.R. No. 102965 (1999)]. within 3 years from its dissolution until rendition of
the final judgment, even if such judgment is rendered
Unless the trusteeship is limited in its duration by the beyond the 3-year period allowed by Sec. 122 of the
deed of trust, there is no time limit within which the Corporation Code. However, an already defunct
trustee must finish liquidation [Board of Liquidators v corporation is barred from initiating a suit after the
Kalaw, G.R. No. L-18805 (1967)]. lapse of the said 3-year period. If a petition is filed
after the corporate existence, the effect is that
petitioner lacks the capacity to sue as a corporation.
c. By Management Committee or To allow such petition to prosper, on the ground that
Rehabilitation Receiver it is for the sole purpose of liquidating the
corporation’s assets, would be to circumvent the
provisions of Sec. 122 of the Corporation Code
[Alabang Development Corporation v. Alabang Hills Village A narrow distribution of ownership does not, by
Association and Rafael Tinio, G.R. No. 187456 (2014)]. itself, make a close corporation.
Exceptions: mining or oil companies, stock exchanges, The stocks cannot be listed in the stock exchange nor
banks, insurance companies, public utilities, be publicly offered.
educational institutions and corporations declared to
be vested with public interest a. Characteristics of a Close
Corporation
Notes:
Under Sec. 96, the 3 provisions MUST appear in the DIRECT MANAGEMENT BY
Articles of Incorporation, otherwise, a corporation is STOCKHOLDERS [Sec. 97]
not considered as a close corporation [San Juan The stockholders themselves can directly manage the
Structural and Steel Fabricators v CA, G.R. No. 129459 corporation and perform the functions of directors
(1998)]. without need of election:
1. When they manage, stockholders are liable as
However, do note that in the earlier case of Dulay v. directors;
CA (1993), the court did not look at Sec. 96 in 2. There is no need to call a meeting to elect
concluding that the corporation involved was a close directors;
corporation. 3. The stockholders active in the management of
the close corporation are personally liable for
Also note that, even after satisfying the 3 mandatory corporate torts unless the corporation has
provisions, a corporation shall not be deemed a close obtained reasonably adequate liability insurance
corporation when at least 2/3 of its voting stock or [Sec. 100(5)]
voting rights is owned or controlled by another
corporation which is not a close corporation within IDENTITY AND NUMBER OF
the meaning of this Code. STOCKHOLDERS [Sec. 96]
1. Stockholders of record not more than 20
2. Stocks not publicly listed holder of stock of the corporation, or (b) that transfer
3. Restricted transfer of ownership of stock to him would cause the stock of the
corporation to be held by more than the number of
b. Validity of Restrictions on persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer
Transfer of Shares of stock is in violation of a restriction on transfer of
stock, the corporation may, at its option, refuse to
VALIDITY OF RESTRICTIONS [Sec. 98] register the transfer of stock in the name of the
Restrictions must appear in the articles of transferee.
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be The provisions of subsection (4) shall not be
binding on any purchaser thereof in good faith. applicable if the transfer of stock, though contrary to
subsections (1), (2) of (3), has been consented to by
Restrictions shall not be more onerous than granting all the stockholders of the close corporation, or if the
the existing stockholders or the corporation the close corporation has amended its articles of
option to purchase the shares of the transferring incorporation in accordance with this Title.
stockholder with such reasonable terms, conditions or
period stated therein. After expiration of said period The term "transfer", as used in this section, is not
and upon failure of the existing stockholders or the limited to a transfer for value.
corporation to purchase said shares, the transferring
stockholder may sell his shares to any third person. The provisions of this section shall not impair any
right which the transferee may have to rescind the
c. Issuance or Transfer of Stock in transfer or to recover under any applicable warranty,
Breach of Qualifying Conditions express or implied [Sec. 99].
2. Non-Stock Corporations
Stock Non-stock
Definition
Corporations which have capital stock divided into
All other private corporations [Sec. 3]
shares and
are authorized to distribute to the holders of shares
One where no part of its income is distributable as
dividends or allotments of the surplus profits on the
dividends to its members, trustees or officers. [Sec. 87]
basis of the shares [Sec. 3]
Purpose
Distribution of profits
Whatever incidental profit made is not distributed among
its members but is used for furtherance of its purpose. AOI
Profit is distributed to shareholders or by-laws may provide for the distribution of its assets
among its members upon its dissolution. Before then, no
profit may be made by members [Sec. 87].
Scope of Voting Rights
Each stockholder votes according to the proportion
of his shares in the corporation. No shares may be Each member, regardless of class, is entitled to one (1) vote
deprived of voting rights except those classified and UNLESS such right to vote has been limited, broadened, or
issued as "preferred" or "redeemable" shares, and as denied in the AOI or by-laws [Sec. 89].
otherwise provided by the Code [Sec. 6].
Voting by proxy
Cannot be denied [Sec. 58] May be denied by the AOI or the by-laws [Sec. 89]
Stock Non-stock
Term of Directors of Trustees
Board classified in such a way that the term of office of 1/3
Directors / trustees shall hold office for 1 year and of their number shall expire every year. Subsequent
until their successors are elected and qualified [Sec. elections of trustees comprising 1/3 of the board shall be
23]. held annually, and trustees so elected shall have a term of 3
years [Sec. 92].
Election of Officers
Officers are elected by the Board of Directors [Sec.
25], except in close corporations where the Officers may directly elected by the members UNLESS the
stockholders themselves may elect the officers [Sec. AOI or by-laws provide otherwise [Sec. 92].
97].
Transferability of interest or membership
Generally non-transferable since membership and all rights
Transferable. arising therefrom are personal. However, the AOI or by-
laws can provide otherwise [Sec. 90].
a. Definition
d. Distribution of Assets upon
One where no part of its income is distributable as Dissolution
dividends to its members, trustees, or officers, subject
to the provisions of this Code on dissolution [Sec.87]. Order of distribution of assets upon dissolution
of non-stock corporation
b. Purposes 1. All liabilities and obligations of the corporation
shall be paid, satisfied and discharged, or
• Charitable adequate provision shall be made therefore
• Religious 2. Assets held subject to return on dissolution shall
• Educational be delivered back to the givers.
3. Assets held for charitable, religious purposes,
• Professional
etc., without a condition for their return on
• Cultural dissolution, shall be conveyed to one or more
• Fraternal organizations engaged in similar activities as
• Literary dissolved corporation
• Scientific 4. All other assets shall be distributed to members,
• Social as provided in the Articles of Incorporation or
• Civic services by-laws [Sec. 94]
• Similar purposes, such trade, industry or
agriculture and like chambers, or combinations Procedure for the plan for distribution
thereof [Sec. 88] BOT, by majority vote in a resolution, shall adopt a
plan for distribution of the assets of the corporation
c. Treatment of Profits Written notice for a meeting must be sent to all
members entitled to vote, stating the time and place
Any profit which a non-stock corporation may obtain of such meeting and the purpose thereof
as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of At such meeting, the plan must be approved by 2/3
the purpose or purposes for which the corporation votes of the members having the right to vote, who
was organized [Sec. 87, 2nd sentence]. are present or represented by proxy [Sec. 95;
Villanueva].
3. Religious Corporations
CORPORATION SOLE [SEC. 110]
One formed for the purpose of administering and membership. The one member is but a trustee
managing, as trustee, the affairs, property and of its membership.
temporalities of any religious denomination, sect or • There is no point to dissolving the corporation
church by the chief archbishop, bishop, priest, sole of one member to enable the corporation
minister, rabbi or other presiding elder of such aggregate to emerge from it. The one member,
religious denomination, sect or church [Sec. 110]. with the concurrence of two-thirds of the
membership of the organization for whom he
A special form of corporation, usually associated with acts as trustee, can self-will the amendment. He
clergy and consists of one person only and his can, with membership concurrence, increase the
successors, who are incorporated by law to give some technical number of the members of the
legal capacities and advantages. corporation from “sole” or one to the greater
number authorized by its amended articles.
A registered corporation sole can acquire land if its [Iglesia Evangelica Metodista En Las Filipinas
members constitute at least 60% Filipinos [SEC (Corporation Sole) Inc., et al v. Bishop Nathanael
Opinion, 8 August 1994]. Lazaro, et al, G.R. No. 184088 (2010)]
Nationality
A corporation sole does not have any nationality but
4. Foreign Corporations
for purposes of applying our nationalization laws,
nationality is determined by the nationality of the Foreign Corporation are those formed, organized, or
members [Roman Catholic Apostolic, etc v. Register of Deeds existing under any laws other than those of the
of Davao City, G.R. No. L-8451 (1957)]. Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state
RELIGIOUS SOCIETIES [Sec. 123].
Non-stock corporation formed by a religious society,
group, diocese, synod, or district of any religious a. Bases of Authority over Foreign
denomination, sect, or church after getting the Corporations
approval of 2/3 of its members [Sec. 116].
CONSENT
The Corporation Code provides no specific As a rule, a foreign corporation can have no legal
mechanism for amending the articles of incorporation existence or status beyond the bounds of the State or
of a corporation sole. But Sec. 109 allows the sovereignty by which it is created or incorporated and
application to religious corporations of the general organized. It exists only in contemplation of law and
provisions governing non-stock corporations. by force of the law and where that law ceases to
• For non-stock corporations, the power to amend operate, the corporation can have no existence. This
its Articles of Incorporation lies in its principle, however, does not prevent a corporation
members. The code requires two-thirds of their from acting in another State or country with the
votes for the approval of such an latter’s express or implied consent. This is the
amendment. So how will this requirement apply “consent doctrine” which is provided in Sections 125
to a corporation sole that has technically but one and 126. But every power which a corporation
member (the head of the religious organization) exercises as such in another State depends for its
who holds in his hands its broad corporate validity upon the laws of the sovereignty in which it is
powers over the properties, rights, and interests exercised. A corporation can exercise none of the
of his religious organization? functions and privileges conferred by its charter in
• Although a non-stock corporation has a another State or country except by the comity and
personality that is distinct from those of its consent of such State or country. [DE LEON] Under
members who established it, its Articles of Philippine law, the condition is that it must pbtain a
Incorporation cannot be amended solely through license to do business in the Philippines [CAMPOS].
the action of its BOT. The amendment needs
the concurrence of at least two-thirds of its DOCTRINE OF “DOING BUSINESS”
membership. If such approval mechanism is (RELATED TO DEFINITION UNDER THE
made to operate in a corporation sole, its one FOREIGN INVESTMENTS ACT, R.A. NO.
member in whom all the powers of the 7042)
corporation technically belongs, needs to get
the concurrence of two-thirds of its Jurisprudential Tests of “Doing Business In The
Philippines”
questioned if the other d. its paid-up capital stock, in the case of a foreign
party is estopped company, is impaired or deficient, or that the
NOT doing business May sue; margin of solvency required of such company is
in the PH, on isolated may be sued deficient [Sec. 247, Insurance Code]
transactions
2. GENERAL BANKING ACT
f. Grounds for Revocation of The Monetary Board may revoke the license to
License transact business in the Philippines of any foreign
bank, if it finds that:
UNDER THE CORPORATION CODE a. the foreign bank is insolvent; or
1. Failure to file its annual report or pay any fees as b. in imminent danger thereof; or
required by this Code; c. its continuance in business will involve probable
2. Failure to appoint and maintain a resident agent loss to those transacting business with it. [Sec. 78,
in the Philippines as required by this Title; GBA]
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as
required by this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any
amendment to its articles of incorporation or by
laws or of any articles of merger or consolidation
within the time prescribed by this Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines [Sec. 134]
1. INSURANCE CODE
L. Mergers and
4. Articles of Merger or
Consolidations Consolidation
1. Definition and Concept Each of the constituent corporation shall execute
Articles of Merger or Consolidation signed by the
Merger – a corporation absorbs the other and president/vice-president, and certified by the
remains in existence while the others are dissolved secretary/assistant secretary setting forth:
[Sec.76]. a. Plan of merger or consolidation;
b. For stock corporation, the number of shares
One of the constituent corporations remains as an outstanding; for non-stock, the number of
existing juridical person, whereas the other members;
corporation shall cease to exist. Merger is the c. As to each corporation, number of shares or
disappearance of one of the corporations (generally, members voting for and against such plan
by amending the articles of incorporation and respectively.
shortening its term of existence [Sec.40]) with the
other corporation acquiring all the assets, rights of The Articles of Merger or Consolidation:
action, and assuming all the liabilities of the a. take the place of the Articles of Incorporation of
disappearing corporation. the consolidated corporation; or
b. amend the Articles of Incorporation of the
Consolidation – a new corporation is created, and surviving corporation.
consolidating corporations are extinguished [Sec.76].
Each of the constituent corporations must draw up a Notice of such meetings shall be given to all
Plan of Merger or Consolidation which shall set forth: stockholders or members of the respective
a. Names of the corporation involved; corporations, at least 2 weeks prior to the date of the
b. Terms and mode of carrying it; meeting, either personally or by registered mail. Said
c. Statement of changes, if any, in the present notice shall state the purpose of the meeting and shall
articles of the surviving corporation to be formed include a copy or a summary of the plan of merger or
in the case of merger; and with respect to the consolidation.
consolidated corporation in case of consolidation
Any dissenting stockholder in stock corporations may Notwithstanding Sec. 79, parties may stipulate a
exercise his appraisal right in accordance with the specific effective date of merger (or consolidation)
Code. Provided, that if after the approval by the where no 3rd party will be prejudiced [SEC Opinion
stockholders of such plan, the board of directors No. 09-13, July 1, 2009].
decides to abandon the plan, the appraisal right shall
be extinguished. 6. Limitations
Amendment to the plan of merger or consolidation
Consent of appropriate government agency:
may be made by approval of the majority vote of the
In the case of merger or consolidation of banks or
respective boards of directors or trustees of all the
banking institutions, building and loan associations,
constituent corporations and ratified by the
trust companies, insurance companies, public utilities,
affirmative vote of stockholders representing at least
educational institutions and other special
two-thirds (2/3) of the outstanding capital stock or of
corporations governed by special laws, the favorable
two-thirds (2/3) of the members of each of the
recommendation of the appropriate government
constituent corporations. Such plan, together with
agency shall first be obtained [Sec. 79].
any amendment, shall be considered as the agreement
of merger or consolidation.
7. Effects [Sec. 80]
b. Execution of Articles of Merger
AS TO THE CONSTITUENT
or Consolidation CORPORATIONS
Articles of Merger or Articles of Consolidation shall Corporate existence
be executed by each of the constituent corporations. The constituent corporations shall become a single
corporation.
c. Submission to SEC of the
Articles The separate existence of the constituents shall cease,
except that of the surviving or the consolidated
Submission of Four (4) copies of the Articles of corporation.
Merger or Articles of Consolidation to the SEC for
approval. The absorbed or constituent corporations are ipso
facto dissolved by operation of law [SEC Opinion,
Mergers and consolidations of corporations governed July 16, 1981].
by special laws requires a recommendation from the
appropriate government agency [Sec. 79 (1)]. Assets and liabilities
There is no liquidation of the assets of the dissolved
corporations [CAMPOS].
d. Action by SEC
The surviving or the consolidated corporation shall
Conduct hearing or issue certificate If necessary, the possess all the rights, privileges, immunities, powers,
SEC shall set a hearing, notifying all corporations and franchises of each constituent corporation and
concerned at least 2 weeks before. the properties shall be deemed transferred to and
vested in the surviving or consolidated corporation
Issuance of certificate of merger or consolidation. without further act or deed.
Merger or consolidation does not become effective by The creditors of a corporation cannot prevent its
mere agreement of the constituent corporations. The merger or consolidation with another even if the
approval of the SEC is required [PNB v. Andrada surviving or new corporation is not as acceptable a
Electric and Engr. Co., Inc. (2002)]. debtor as the absorbed corporation [CAMPOS].
SECURITIES
REGULATION CODE
Commercial Law
EXCEPTIONS:
the owner thereof, or by his representative for the h. Broker’s transaction, executed upon
owner’s account, such sale or offer for sale, customer’s orders, on any registered Exchange
subscription or delivery not being made in the or other trading market.
course of repeated and successive transaction of • Rationale: If broker’s transactions are
a like character by such owner, or on his account registered each time, the transactions on the
by such representative and such owner or exchange will be unduly hampered. Besides,
representative not being the underwriter of such the brokers are subject to a “code of
security. conduct” protective of the interest of the
• Rationale: Isolated and not meant to be an investors.
ongoing public offering.
i. Subscriptions for shares of the capitals stock
d. The distribution by a corporation actively of a corporation prior to the incorporation
engaged in the business authorized by its articles thereof or in pursuance of an increase in its
of incorporation, of securities to its stockholders authorized capital stocks, when no expense is
or other security holders as a stock dividend or incurred, or no commission, compensation or
other distribution out of surplus. remuneration is paid or given in connection with
• Rationale: The offerees are not the public but the sale or disposition of such securities, and only
shareholders already familiar with their when the purpose for soliciting, giving or taking
company. of such subscription is to comply with the
requirements of such law as to the percentage of
e. The sale of capital stock of a corporation to the capital stock of a corporation which should
its own stockholders exclusively, where no be subscribed before it can be registered and duly
commission or other remuneration is paid or incorporated, or its authorized capital increased.
given directly or indirectly in connection with the • Rationale: This is not a public offering.
sale of such capital stock. Besides, the SEC is involved in the
• Rationale: Same as d. above. subscription process, as a regulator.
• Note the condition for such exemption • Note the condition that the exemption
applies only in respect of issuance for
f. The issuance of bonds or notes secured by compliance with the percentage needed for
mortgage upon real estate or tangible personal an increase in authorized capital stock, and
property, when the entire mortgage together with the similar condition in f. where no
all the bonds or notes secured thereby are sold to compensation is paid or given.
a single purchaser at a single sale.
• Rationale: This is not a public sale. j. The exchange of securities by the issuer with
the existing security holders exclusively,
g. The issue and delivery of any security in where no commission or other remuneration is
exchange for any other security of the same paid or given directly or indirectly for soliciting
issuer pursuant to a right of conversion such exchange.
entitling the holder of the security surrendered in • Rationale: This is not a public offering.
exchange to make such conversion: Provided, • Note the condition for exemption.
That the security so surrendered has been
registered under this Code or was, when sold, k. The sale of securities by an issuer to fewer
exempt from the provision of this Code, and that than twenty (20) persons in the Philippines
the security issued and delivered in exchange, if during any twelve-month period.
sold at the conversion price, would at the time of • Rationale: This is not a public offering but a
such conversion fall within the class of securities private placement.
entitled to registration under this Code. Upon • If the original purchaser shall resell said
such conversion the par value of the security securities resulting in more than 19 holders,
surrendered in such exchange shall be deemed the registration requirement shall apply,
the price at which the securities issued and notwithstanding the exemption of their
delivered in such exchange are sold. issuances [Rule 10.1.2.2].
• Rationale: The SEC has already registered
the convertible security and presumably l. The sale of securities to any number of the
also passed upon the security to be issued following qualified buyers:
upon conversion. 1. Bank;
2. Registered investment house;
registration statement or any document registration of the security thereunder after due notice
used in connection therewith; and and hearing, if it finds that:
b. Where the registration statement
includes shares to be sold by selling a. The issuer:
shareholders - a written certification by 1. Has been judicially declared insolvent;
such selling shareholders as to the 2. Has violated any of the provision of this
accuracy of any part of the registration Code, the rules promulgated pursuant
statement contributed to by such selling thereto, or any order of the Commission of
shareholders [Sec. 12.4]. which the issuer has notice in connection
with the offering for which a registration
b. Payment to the SEC of a fee of not more than statement has been filed;
one-tenth of one per centum (1/10 of 1%) of 3. Has been or is engaged or is about to engage
the maximum aggregate price at which such in fraudulent transactions;
securities are proposed to be offered [Sec. 4. Has made any false or misleading
12.5a] representation of material facts in any
prospects concerning the issuer or its
The Commission shall prescribe, by rule, securities;
diminishing fees in inverse proportion to the 5. Has failed to comply with any
value of the aggregate price of the offering. This requirements that the Commission may
fee paid to the SEC is called a diminishing fee. impose as a condition for registration of the
security for which the registration statement
c. Publication of the notice of the filing of has been filed [Sec. 13.1.a]
registration statement. [Sec. 12.5b] b. The registration statement is on its face
incomplete or inaccurate in any material
The notice must be published by the issuer, at its respect or includes any untrue statements of a
own expense, in two (2) newspapers of general material fact required to be stated therein or
circulation in the Philippines, once a week for necessary to make the statement therein not
two (2) consecutive weeks, or in such other misleading [Sec. 13.1.b]
manner as the SEC shall prescribe. c. The issuer, any officer, director or controlling
person performing similar functions, or any
d. Declaration by the SEC whether the under writer has been convicted, by a
registration statement is effective or rejected. competent judicial or administrative body,
upon plea of guilty, or otherwise, of an offense
Declaration is made within 45 days from filing of involving moral turpitude and /or fraud or is
the registration statement or on such later date to enjoined or restrained by the Commission or
which the issuer has consented unless applicant other competent or administrative body for
has been allowed to amend the registration violations of securities, commodities, and other
statement under Sec. 14 [Sec. 12.6]. related laws [Sec. 13.1.c]
• The term “competent judicial or
e. Statement under oath by the issuer in all administrative body” shall include a foreign
prospectus that: court of competent jurisdiction.
d. If any issuer shall refuse to permit an
1. Registration requirements have been met and examination to be made by the SEC [Sec.
2. All information are true and correct as 13.3]
represented by the issuer or the one making the
statement. Note: A registration statement may be withdrawn by
the issuer only with the consent of the Commission
Statement under oath must be made upon effectivity [Sec. 13.6].
of the registration statement. [Sec. 12.7]
Grounds for suspension of registration [Sec. 15]
Grounds for Rejection and/or Revocation of the a. If, at any time, the information contained in the
Registration of Securities registration statement filed is or has become
The SEC may reject a registration statement and reuse misleading, incorrect, inadequate or incomplete
registration of the security thereunder, or revoke the in any material respect;
effectivity of a registration statement and the
SEC has passed upon or approved the and the lapse of a reasonable time for the market
financial standing, business or conduct of to absorb the information; or
such Broker Dealer, or the merits of any b. It would be considered by a reasonable person
security or any transaction/s conducted thereby; important under the circumstances in
c. Person to represent that a security is a determining his course of action whether to buy,
particular type of security when such sell or hold a security [Sec. 27.2]
representation is inconsistent with a stated
definition under the Code or rules or PRINCIPLES ON INSIDER TRADING
regulations adopted thereunder; a. What is sought to be addressed is the asymmetry
d. Person to represent that a security to be sold, in information about a “public company” (such
transferred, pledged, mortgaged, encumbered, as a company listed on the Philippine Stock
used for delivery, or any other purpose to another Exchange) between insiders and outsiders.
entity or itself has been legally authorized by b. Insiders could have material information not yet
the registered owner when such known to the public about the company, and they
representation is not true and documented in might use this information to benefit themselves
writing at the time and date it was used; at the expense of the outsiders or the public.
e. Person, whether as principal or agent, to buy, Therefore, they must not trade in the shares
sell or deal in securities or solicit investments of the company pending the disclosure of
in securities and other investment contracts, such information to the public.
unless he is a registered broker, dealer or
licensed salesman of a broker dealer and the UNLAWFUL ACTS OF AN INSIDER
securities are registered under the Code or a. To sell or buy a security of the issuer, while in
exempt from registration. possession of material information with
respect to the issuer or the security that is not
3. Insider Trading [Sec. 27] generally available to the public, unless:
a. The insider proves that the information was
not gained from such relationship; or
An ‘Insider’ means:
b. If the other party selling to or buying from
a. The issuer;
the insider (or his agent) is identified, the
b. A director or officer (or any person performing
insider proves:
similar functions) of, or a person controlling the
issuer; • That he disclosed the information to the
c. A person whose relationship or former other party, or
relationship to the issuer gives or gave him access • That he had reason to believe that the
to material information about the issuer or the other party otherwise is also in
security that is not generally available to the possession of the information [Sec. 27.1]
public;
d. A government employee, director, or officer of Note: Presumption that purchase or sale made by
an exchange, clearing agency and/or self- an insider, or such insider’s spouse or relatives by
regulatory organization who has access to affinity or consanguinity within the second
material information about an issuer or a security degree, legitimate or common-law, is effected
that is not generally available to the public; or while in possession of material non-public
e. A person who learns such information by a information arises:
communication from any of the foregoing 1. If the purchase or sale is transacted after such
insiders [Sec. 3.8] information came into existence but prior to
dissemination of such information to the
‘Issuer’ means: public; and
Any entity authorized by the SEC to offer to sell, sell 2. The lapse of a reasonable time for market to
or promote the sale to the public of its equity, bonds, absorb such information.
instruments of indebtedness and other forms of
securities [Sec. 3.1.11., 2015 SRC-IRR]. Presumption may be rebutted by showing of
purchaser’s or seller’s lack of awareness of the
‘Material non-public information’ means: material non-public information at the time of
a. It has not been generally disclosed to the public purchase or sale [Sec. 27.1]
and would likely affect the market price of the
security after being disseminated to the public b. To communicate material non-public
information about the issuer or the security
MANDATORY TENDER OFFER [Rule 19.2, 3. Hand deliver a copy of the SEC Form 19-1,
2015 SRC-IRR] including all its exhibits, to the target company at
Tender offer is mandatory whenever any person or its principal executive office and to each
group of persons acting in concert intends to: Exchange where such class of the target
company's securities is listed for trading. [Rule
When Mandatory How Effected 19.6.1.2]
a. Acquire fifteen percent They shall file a 4. File with the SEC copies of any additional tender
(15%) of equity securities declaration to that effect offer materials as exhibit to SEC Form 19-1 and,
in a public company in with the SEC. if a material change occurs in the information set
one or more forth in such SEC Form, copies of an
transactions within a amendment to such form. Copies shall be hand
period of 12 months. delivered to the target company and to any
b. Acquire thirty They shall disclose such Exchange as required above. [Rule 19.6.2]
five percent (35%) or intention and make a 5. Report the results of the tender offer to the SEC
more of the outstanding tender offer for the by filing, not later than ten (10) business days
voting shares or such percentage sought to all after the termination of the tender offer, copies
outstanding voting shares holders of such of the final amendments to SEC Form 19-1.
that are sufficient to gain securities. [Rule 19.6.3]
control of the board in a
public company in one or CEMCO HOLDINGS, INC. v. NATIONAL
more transactions LIFE INSURANCE COMPANY OF THE
within a period of 12 PHILIPPINES, INC. [G.R. No. 171815 (2007)]
months;
c. Acquire thirty They shall make a tender UCC, a publicly-listed company, has two principal
five percent (35%) or offer for all the stockholders: (a) UCHC with shares amounting to
more of the outstanding outstanding voting 60% and (b) Cemco with 17%. Majority of UCHC’s
voting shares or such shares. stocks were owned by BCI and ACC, with Cemco
outstanding voting shares being a minority shareholder of UCHC.
that are sufficient to gain
Note: If the tender offer
control of the board in a is oversubscribed, the BCI and ACC later sold their stocks in UCHC to
public company directly aggregate amount of Cemco. As a result of Cemco’s acquisition of BCI
from one or more securities to be acquired and ACC’s shares, its total stocks in UCHC
stockholders; at the close of the tender amounted to 60%. Consequently, Cemco’s total
offer shall be beneficial ownership, direct (17%) and indirect
proportionately (36%) in UCC amounted to at least 53% of the
distributed [Sundiang, shares of UCC.
2017].
d. Acquire any They shall make a tender Respondent, a minority stockholder of UCC, filed a
number of shares that offer for all outstanding complaint against Cemco, praying that the
would result in ownership equity securities to all mandatory tender offer rule be applied to its UCC
of over fifty percent remaining stockholders shares. Cemco argued that the tender offer rule
(50%) of the total of the company. The applied only to a direct acquisition of the shares of
outstanding equity acquirer shall be required a listed company, not an indirect acquisition.
securities of a public to accept all securities
company. tendered. Held: The coverage of the mandatory tender
offer rule covers not only direct acquisition but
Obligations of a person making a tender offer also indirect acquisition or “any type of
[Rule 19, 2015 SRC-IRR] acquisition.”
1. Make an announcement of his intention in a
national newspaper of general circulation, prior The legislative intent of Section 19 of the Securities
to the commencement of the offer. A copy of the Regulation Code is to regulate activities relating to
said notice shall be submitted to the Commission acquisition of control of the listed company and for
on the date of its publication. [Rule 19.5] the purpose of protecting the minority stockholders
2. File with the Commission SEC Form 19-1, of a listed corporation. Whatever may be the
including all its exhibits. [Rule 19.6.1.1] method by which control of a public company
is obtained, either through the direct purchase
of its stocks or through an INDIRECT means, if they acquire the remainder through a block sale if,
mandatory tender offer applies. after acquisition through the Exchange, they fail to
acquire their target of thirty five percent (35%) or
What is decisive is the determination of the such outstanding voting shares that is sufficient to
power of control. The legislative intent behind the gain control of the board [Sec 19.2.3, 2015 SRC-IRR].
tender offer rule makes clear that the type of activity
intended to be regulated is the acquisition of control ISSUER TENDER OFFER
of the listed company through the purchase of “Issuer Tender Offer” means a publicly announced
shares. Control may [be] effected through a direct intention by an issuer to acquire any of its own class
and indirect acquisition of stock, and when this of equity securities, or by an associate of such issuer
takes place, irrespective of the means, a tender offer to acquire such securities [Sec 19.1.5, 2015 SRC-IRR].
must occur. The bottom line of the law is to give
the shareholder of the listed company the A reacquisition or repurchase by an issuer of its own
opportunity to decide whether or not to sell in securities shall only be made if such issuer has
connection with a transfer of control. unrestricted retained earnings in its books to cover the
amount of shares to be purchased, and is undertaken
In conclusion, the indirect acquisition by Cemco of for any of the following purposes:
thirty six percent (36%) of UCC shares through the a. To implement a stock option or stock purchase
acquisition of the non-listed UCHC shares is plan;
covered by the mandatory tender offer rule. b. To meet short-term obligations which can be
settled by the reissuance of the repurchased
Exemptions from the mandatory tender offer shares;
requirement [Rule 19.3, 2015 SRC-IRR] c. To pay dissenting or withdrawing stockholders
a. Any purchase of securities from the unissued entitled to payment for their securities; and
capital stock, d. Such other legitimate corporate purpose/s [Sec.
Provided, the acquisition will not result to a fifty 19.4, 2015 SRC-IRR].
percent (50%) or more ownership of securities by
the purchaser, or such percentage that is PROHIBITED ACTS
sufficient to gain control of the board; It shall be unlawful when a tender offer has
b. Any purchase of securities from an increase in commenced or about to commence for:
authorized capital stock; a. Any person (other than the tender offeror) who
c. Purchase in connection with foreclosure is in possession of material nonpublic
proceedings involving a duly constituted pledge information relating to such tender offer, to buy
or security arrangement where the acquisition is or sell the securities of the issuer that are sought
made by the debtor or creditor; or to be sought by such tender offer; and
d. Purchases in connection with a privatization b. Any tender offeror, those acting on its behalf, the
undertaken by the government of the issuer of the securities sought or to be sought by
Philippines; such tender offer, and any insider of such issuer
e. Purchases in connection with corporate to communicate material nonpublic information
rehabilitation under court supervision; relating to the tender offer to any other person
f. Purchases in the open market at the prevailing where such communication is likely to result in a
market price; and violation of (1). [Sec. 27.4]
g. Merger or consolidation.
2. Rules on Proxy Solicitation
Note: Purchasers of securities in the foregoing
transactions shall, however, comply with the [Sec. 20]
disclosure and other obligations under SRC-IRR 18.1
and 23. DEFINITION
Proxy Solicitation involves the securing and
When not required to make a tender offer submission of proxies. It is where the corporation
Any person or group of persons acting in concert, obtains proxies of the stockholders to vote on
who intends to acquire thirty five percent (35%) of corporate matters. [GSIS v. CA, G.R. No. 183905
the outstanding voting shares or such outstanding (2009)]
voting shares that are sufficient to gain control of the
board in a public company through the Exchange The terms solicit and solicitation shall include:
shall not be required to make a tender offer even a. Any request for proxy or authorization;
b. Any request to execute or not to execute, or to a report identifying the beneficial owner of ten
revoke, a proxy or authorization; or days after such acquisition, for its own account or
c. The furnishing of a form of proxy or other customer, to the issuer of security, to the
communication to security holders under exchange where the security is traded and to the
circumstances reasonably calculated to result in Commission. [Sec. 20.5]
the procurement, withholding or revocation of a
proxy [Rule 20.2.2, 2015 SRC-IRR]. Note: For proxy or consent solicitation, the SEC
may require that the person making such filing
The terms shall not apply to: pay a fee of not more than one-tenth of one percent
a. The performance by any person of ministerial (1/10 of 1%) of the proposed payment in cash, and
acts on behalf of a person soliciting a proxy; or the value of any security or property to be transferred
b. Any solicitation made otherwise than on behalf in the acquisition, merger or consolidation, or the
of the issuer where the total number of persons cash and value of any securities proposed to be
solicited is not more than 19 [Rule 20.2.2, 2015 received upon sale or disposition of such assets in
SRC-IRR]. case of a solicitation. [Sec. 21]
prescribe and it notifies the Commission of acquisition or such reasonable time as fixed by the
such; Commission, submit to:
2. An issuer with a class of securities listed for • the issuer of the securities;
trading on an Exchange; and • to the Exchange where the security is traded; and
3. An issuer with assets of at least 50 million pesos • to the Commission,
or such other amount as the Commission shall a sworn statement containing the following
prescribe, and having 200 or more holders each information:
holding at least 100 shares of a class of its equity 1. The personal background, identity, residence,
securities. and citizenship of, and the nature of such
• The obligation of such issuer to file reports beneficial ownership by, such person and all
shall be terminated ninety (90) days after other persons by whom or on whose behalf the
notification to the Commission by the issuer purchases are effected; in the event the beneficial
that the number of its holders holding at owner is a juridical person, the line of business of
least one hundred (100) shares is reduced to the beneficial owner shall also be reported;
less than one hundred (100) [Sec. 17.2] 2. If the purpose of the purchases or prospective
purchases is to acquire control of the business of
PHILIPPINE VETERANS BANK v. the issuer of the securities, any plans or proposals
CALLANGAN [G.R. No. 191995 (2011)] which such persons may have that will effect a
major change in its business or corporate
The issue in this case is whether the Philippine structure;
Veterans Bank qualifies as a “public company” 3. The number of shares of such security which are
under Section 17.2 of the Securities Regulation beneficially owned, and the number of shares
Code (SRC) in relation to Rule 3(1)(m) of the concerning which there is a right to acquire,
Amended SRC-IRR, required to comply with the directly or indirectly, by; (1) such person, and (2)
reportorial requirements set forth in Section 17.1 each associate of such person, giving the
of the SRC. background, identity, residence, and citizenship
of each such associate; and
Under Rule 3(1)(m), a “public company” is 4. Information as to any contracts, arrangements, or
defined as “any corporation with a class of equity understanding with any person with respect to
securities listed on an Exchange or with assets in any securities of the issuer including but not
excess of Fifty Million Pesos (P50,000,000.00) and limited to transfer, joint ventures, loan or option
having 200 or more holders, at least 200 of which arrangements, puts or call guarantees or division
are holding at least 100 shares of a class of its of losses or profits, or proxies naming the
equity securities.” persons with whom such contracts,
arrangements, or understanding have been
It is clear that a “public company,” as entered into, and giving the details thereof.
contemplated by the SRC, is not limited to a 5. Such other information as the Commission may
company whose shares of stock are publicly listed; require in the public interest or for the protection
even companies like the Bank, whose shares are of investors
offered ONLY to a specific group of people, are
considered a public company, PROVIDED they Note: If it appears to the SEC that securities were
meet the requirements enumerated [under Sections acquired by person in the ordinary course of his
17.1 and 17.2 of the SRC and/or under the business and were not acquired for the purpose of and
Amended IRR of the SRC]. do not have the effect of changing or influencing the
control of the issuer nor in connection with any
b. Disclosure by Equity Holders transaction having such purpose or effect it may
[Sec. 18] permit any person to file in lieu of the statement
required by subsection 17.1, a notice stating:
1. The name of such person;
Reports by Five per centum Holders of Equity
2. The shares of any equity securities subject to
Securities [Sec. 18]
Subsection 17.1 which are owned by him;
In every case in which an issuer is subject to the
3. The date of their acquisition; and
reportorial requirements, any person who acquires
4. Such other information as the commission may
directly or indirectly the beneficial ownership of more
specify [Sec. 18.3]
than five of per centum (5%) of such class or in excess
of such lesser per centum as the Commission by rule
may prescribe, shall, within 10 days after such
Note: When the security is acquired AFTER the issuer to this Code or any rule or regulation thereunder,
has made generally available to its security holders an which statement as at the time and in the light of the
INCOME STATEMENT covering a period of at circumstances under which it was made false or
least twelve (12) months beginning from the effective misleading with respect to any material fact [Sec. 57.2]
date of the registration statement, the right of
recovery under Section 56 shall be conditioned on Defense
proof that such person acquired the security Good faith and lack of knowledge of the false and
RELYING UPON such untrue statement in the misleading statement [Sec. 57.2].
registration statement or relying upon the registration
statement AND NOT KNOWING of such income Who May Sue
statement [Sec. 56.2] Purchaser or seller of security who purchased or sold
at a price which was affected by such statement, NOT
2. Civil Liabilities Arising in KNOWING that such statement was false or
misleading, and RELYING UPON such statement
Connection With
Sue For: Damages caused by such reliance [Sec.
Prospectus, 57.2]
Communications and
Reports [Sec. 57] 3. Civil Liability of Fraud in
Connection with Securities
a. Liability of Sellers/Offerors Transactions [Sec. 58]
Who May Be Liable
1. Offeror or seller of a security in violation of Who May Be Liable
Chapter on Registration of Securities; Any person who engages in any act or transaction in
2. Offeror or seller of a security, whether or not violation of Sections 19.2 (Fraudulent, deceptive, or
exempted by the provisions of this Code, by manipulative acts or practices in connection with
means of a prospectus or other written or oral tender offers), 20 (Proxy Solicitations) or 26
communication which includes an: (Fraudulent Transactions), or any rule or regulation
a. untrue statement of a material fact OR of the Commission thereunder.
b. omits to state a material fact necessary in
order to make the statements, in the light of Who May Sue
the circumstances under which they were Any person who:
made, not misleading (the purchaser not a. Purchases or sells any security,
knowing of such untruth or omission) b. Grants or refuses to grant any proxy, consent or
authorization, or
Defense c. Accepts or declines an invitation for tender of a
No knowledge of untruth or omission, despite the security
exercise of reasonable care. [Sec. 57.1]
Sue For: Damages as a result of the act or
Who May Sue transaction.
Purchaser of the security may sue to recover:
1. Consideration paid for such security with interest 4. Civil Liability for
thereon, LESS the amount of any income
received thereon, upon the tender of such
Manipulation of Security
security; or Prices [Sec. 59]
2. For damages if he no longer owns the security
[Sec. 57.1]. Who May Be Liable
Any person who WILLFULLY participates in any act
b. Liability of Makers of or transaction in Section 24 (Manipulation of Security
False/Misleading Statements Prices).
1. By or through stock ownership, agency, or 1. Any person who aids, abets, counsels,
otherwise, or commands, induces or procures any violation of
2. In connection with an agreement or this Code, or any rule, regulation or order of the
understanding with one or more other persons Commission thereunder [Sec. 51.4]
[Sec. 51.1] 2. Every person who substantially assists the act or
omission of any person primarily liable under
Defense: Lack of knowledge of the existence of facts Sections 57, 58, 59 and 60 of this Code, with
by reason of which the liability of the controlled knowledge or in reckless disregard that such act
person is alleged to exist [Sec. 51.1] or omission is wrongful
• Jointly and severally liable as an aider and
b. Liability of Director/Officer for abettor for damages resulting from the
conduct of the person primarily liable [Sec.
Delay in the Filing of Required 51.5]
Documents 3. Any person who, DIRECTLY or
INDIRECTLY, do ANY act or thing which
Who May Be Liable would be unlawful for such person to do under
Any director or officer of, or any owner of any the provisions of this Code or any rule or
securities issued by, any issuer required to file any regulation thereunder [Sec. 51.2]
document, report or other information under this
Code or any rule or regulation of the Commission Note: An aider and abettor shall be LIABLE ONLY:
thereunder, who, without just cause, hinders, delays 1. To the extent of his relative contribution in
or obstructs the making or filing of any such causing such damages in comparison to that of
document, report, or information [Sec. 51.3] the person primarily liable, or
2. To the extent to which the aider and abettor was
c. Liability of Aider/Abettor unjustly enriched thereby, whichever is
GREATER [Sec. 51.5]
Who May Be Liable
H. Settlements,
2. Prescription of Actions [Sec.
Prescriptive Period, and 62]
Damages
Type of Action Prescriptive Period
1. Settlement of Cases [Sec. 55] Within 2 years after the
discovery of the untrue
statement or the
At any time, during an investigation or proceeding
False Registration omission, but not more
under this Code, parties being investigated and/or
Statement [Sec. 56] than 5 years after the
charged may propose in writing an offer of settlement
security was bona
with the Commission.
fide offered to the
public.
Upon receipt of the offer of settlement, the
Within 2 years after the
Commission shall consider such offer based on the Offering to sell or
violation upon which it
following: selling a security in
is based, but not more
a. Timing; violation of the
than 5 years after the
b. Nature of the investigation or proceeding; and registration
security was bona
c. Public interest requirements [Sec.
fide offered to the
57.1 (a)]
public.
The Commission may only agree to a settlement offer
Offering to sell or Within 2 years after the
based on its findings that such settlement is in the
selling a security, by discovery of the untrue
public interest.
means of a prospectus, statement or the
Any agreement to settle shall have no legal effect until or other omission, but not more
publicly disclosed. Such decision may be made communication, which than 5 years after the
without a determination of guilt on the part of the includes an untrue sale.
person making the offer. statement of a material
BANKING LAWS
Commercial Law
MEMBERS
Capitalization of the BSP 1. The BSP Governor or his designated alternate,
The BSP has a capitalization of P200B subscribed by i.e., a deputy governor);
the Government. [Sec. 2] 2. A Cabinet member to be designated by the
President or his designated alternate, i.e., an
The BSP as transferee of Philippine Central Bank Undersecretary in his department); and
powers 3. 5 members from the private sector [Sec. 6]
All powers, duties and functions vested by law in the
Central Bank of the Philippines not inconsistent with c. Reappointment
the NCBA were deemed transferred to the BSP. All
references to the Central Bank of the Philippines in No member of the MB may be reappointed more
any law or special charters shall be deemed to refer to than once. [Sec. 6]
the BSP. [Sec. 136]
d. Qualifications
3. Monetary Board (MB)
1. Citizenship – Natural-born citizens of the
The body through which the powers and functions of Philippines;
the BSP are exercised [Sec. 6] 2. Age
General Rule: At least 35 years old
a. Powers and Functions Exception: Governor must be at least 40 years old;
3. Of good moral character;
1. Issue rules and regulations it considers necessary 4. Of unquestionable integrity;
for the effective discharge of the responsibilities 5. Of known probity and patriotism; and
and exercise of the powers vested in it; 6. With recognized competence in social and
2. Direct the management, operations, and economic disciplines. [Sec. 8]
administration of the BSP, reorganize its
personnel and issue such rules and regulations as e. Disqualifications
it may deem necessary or desirable for this
purpose; In addition to the disqualifications under the Code of
3. Establish a human resource management system Conduct and Ethical Standards for Public Officials
which governs the selection, hiring, appointment, and Employees [RA 6713], a member of the MB is
transfer, promotion, or dismissal of all personnel; disqualified by:
4. Adopt an annual budget for and authorize such a. Direct connection with any multilateral banking
expenditures by BSP as are in the interest of the or financial institution; or
effective administration and operations of BSP in b. Substantial interest in any private bank in the
accordance with applicable laws and regulations; Philippines, within 1 year prior to his
and appointment [Sec. 9]
5. Indemnify its members and other officials of the
BSP, including personnel of the departments f. Prohibition on a Member of the
performing supervision and examination
functions, against all costs and expenses MB
reasonably incurred by such persons in
connection with any civil or criminal action, suit a. Being a director, officer, employee, consultant,
or proceeding, to which any of them may be lawyer, agent or stockholder of any bank, quasi-
made a party by reason of the performance of bank, or any other institution which is subject to
their functions or duties, unless such members or supervision or examination by the BSP (remedy:
other officials are found to be liable for willful resign and divest interests before assuming
violation of this Act, performed in evident bad office];
faith or with gross negligence. [Sec. 15] b. Holding any other public office or public
employment during his tenure; and
c. Being employed in any multilateral banking or
b. Composition financial institution within 2 years after the
expiration of his term.
The MB shall be composed of 7 members appointed
by the President with a 6-year term. [Sec. 6]
Exception: When he serves as an official representative
of the government to such institution. [Sec. 9]
c. Acquisition of Inconvertible
6. Foreign Exchange Currencies
Operations
General Rule: The BSP shall avoid the acquisition and
holding of currencies which are not freely convertible.
a. Rate of Exchange
Exception: The acquisition of such currencies in an
The MB shall: amount exceeding the minimum balance necessary to
1. Determine the exchange rate policy of the cover current demand for said currencies only when
country; and to the extent that such acquisition is considered
2. Determine the rates at which the BSP shall buy by the MB to be in the national interest.
and sell spot exchange;
3. Establish deviation limits from the effective
exchange rate or rates as it may deem proper; d. In Times of Crises
4. Determine the rates for other types of foreign
exchange transactions by the BSP, including The MB may exercise its emergency restrictions on
purchases and sales of foreign notes and coins. exchange operations
[Sec. 74] • These restrictions may be exercised by a majority
vote of the entire MB, i.e. 5 votes.
Limitation: The margins between the effective • The vote must be approved by the President.
exchange rates and the rates established by the MB
may not exceed the corresponding margins for spot The restrictions the BSP may choose to impose are:
exchange transactions by more than the additional 1. Temporary suspension or restriction of sales of
costs or expenses involved in each type of exchange by the BSP;
transactions. [Sec. 74] 2. Subjecting all transactions in gold and foreign to
license by the BSP; or
b. Purchases and Sales of Foreign 3. Requiring that any foreign exchange thereafter
obtained by any person residing in or any entity
Currency operating in the Philippines be delivered to the
BSP or to an agent bank, at effective exchange
The BSP may: rates. [Sec. 74]
1. Buy and sell foreign notes and coins, and • These restrictions do not apply to Foreign
documents and instruments of types customarily Currency Deposits under RA 6426.
employed for the international transfer of funds;
2. Engage in future exchange operations; and
3. In order to maintain the convertibility of the
Peso, at the request of any banking institution
operating in the Philippines, buy any quantity of
foreign exchange offered, and sell any quantity of
foreign exchange demanded, by such institution,
Provided, the foreign exchange offered or
demanded is freely convertible to gold or USD.
[Sec. 70]
is found in R.A. No. 1405, otherwise known as the infra], except that no court order is required if the
Bank Secrecy Act of 1955. [BSB Group, Inc., v. Go, G.R. covered investments are related to:
No. 168644 (2010)] 1. Kidnapping for Ransom [RPC ];
2. Dangerous Drugs [2002 Comprehensive
4. Exceptions Dangerous Drugs Act];
3. Hijacking and other violations of RA 6235;
4. Destructive arson and murder;
Deposits:
5. Felonies similar to (i) to (iv) above which are
a. Upon written permission of the depositor
punishable under the penal laws of other
b. In cases of impeachment
countries; and
c. Upon order of competent court in cases of
6. Terrorism and conspiracy to commit
bribery and dereliction of duty.
terrorism under the Human Security Act of
d. In cases where the money deposited or invested
2007.
is the subject matter of litigation
d. BSP inquiry or examination in the course of its
periodic or special examination of the bank. [Sec.
If the case is for the recovery of money as a result of
11, AMLA]
failure to inform regarding improper crediting, the
1. Disclosure of certain information about
money in the account is not the subject matter of
bank deposits which have been dormant for
litigation. This is because the amount sought to be
at least 10 years, to the Treasurer of the
recovered is different from the amount that is already
Philippine in a sworn statement, a copy of
in the account. By the terms of RA 1405, the ‘money
which is posted in the bank premises. [Sec.
deposited’ itself should be the subject matter of
2, Unclaimed Balances Law, Act No. 3926, as
the litigation [Union Bank v. Court of Appeals, G.R.
amended by PD 679]
No. 134699 (1999)]
2. The PDIC and/or the BSP can inquire into
or examine deposit accounts and all
In contrast, where the case is for the recovery of
information related thereto in case there is a
amounts converted by the depositors, the amount
finding of unsafe and unsound banking
sought to be recovered is exactly the money that is
practice [Sec. 8, paragraph 8, RA 3591, as
supposedly in the account. If the case necessarily
amended by RA 9576].
involves inquiring into the whereabouts of the illegally
acquired amount, this falls under the exceptions to
Not necessarily an exception: Power of the
bank secrecy under RA 1405. [Mellon Bank, N.A. v.
Ombudsman to “examine and have access to bank
Magsino, G.R. No. 71479 (1990)]
accounts and records” under Sec. 15[8] of RA 6770
[Morales, The Philippine General Banking Law (Annotated)
Other Exceptions
(2017) citing Marquez v. Desierto, infra ]
a. The Commissioner of Internal Revenue can
inquire into the bank accounts of the following
taxpayers: 5. Power of the Ombudsman to
1. A decedent in order to determine his gross Examine Accounts
estate; or
2. A taxpayer who has filed an application to
While the Ombudsman is empowered to “examine
compromise his tax liability on the ground of
and have access to bank accounts and records” under
financial incapacity; [NIRC, Sec. 6(f)]
Sec. 15[8] of RA 6770, this power was limited in
3. A taxpayer, information on whose account is
Marquez v. Desierto [G.R. No.135882 (2001)], where
requested by a foreign tax authority
the SC ruled that before an inspection could be
b. Unexplained wealth under Sec. 8 of the Anti-
allowed, there must be a pending case before a
Graft and Corrupt Practices Act [RA 3019].
court of competent jurisdiction. This is, in turn,
[PNB v. Gancayco, G.R. No. L-18343 (1965); Banco
subject to the following additional requirements:
Filipino v. Purisima, G.R. No. L-56429 (1988);
a. The account must be clearly identified;
Marquez v. Desierto, G.R. No. 135882 (2001)]
b. The inspection limited to the subject matter of
c. Inquiry by the Anti-Money Laundering Council,
the pending case before the court of competent
under the AMLA [RA 9160, the Anti-Money
jurisdiction;
Laundering Act of 2001, as amended], after
c. The bank personnel and the account holder must
obtaining a court order, when there is probable
be notified to be present during the inspection;
cause that the deposits or investments involved
and
are in any way related to an unlawful activity or a
money laundering offense [Sec. 11, AMLA, see
d. Such inspection may cover only the account was used to fund and open the foreign currency
identified in the pending case. deposit account. [China Banking v. CA, G.R. No.
140687 (2006)]. Note that both decisions are pro
6. Garnishment of Deposits hac vice.
7. Confidentiality of Foreign
Currency Deposits
General rule: Foreign currency deposits are
confidential.
Exceptions:
a. Upon written permission of the depositor [Sec. 8,
Foreign Currency Deposit Act ; Intengan vs CA,
G.R. No. 128996 (2002)]
Thrift Bank
C. General Banking Law of Thrift banks are banks that focus on basic banking
2000 (GBL) services for their clients, with an emphasis on
individuals and small businesses. Thrift banks are
The section numbers hereinafter generally pertain to primarily governed by RA 7906, the Thrift Banks Act.
RA 8791, unless otherwise indicated.
Thrift banks include:
• Savings and mortgage banks;
1. Introduction • Savings and loan associations; and
• Private development banks.
a. Definition
Rural Banks
"Banks" shall refer to entities engaged in the lending These are banks that are formed for the purpose of
of funds obtained in the form of deposits. [Sec. 3.1] providing adequate credit facilities to farmers and
merchants, or to cooperatives of such farmers and
How Banks are Structured merchants and in general, the people of the rural
Generally, banks are corporations. However, communities.
cooperative banks may also be formed under the
Cooperative Code. They are primarily governed by RA 7353 (Rural
Banks Act).
N.B. Note that under RA 10641, banks, with MB
approval, may now be fully foreign owned, through Cooperative Banks
any of the following modes of entry: These are banks organized as cooperatives under RA
1. Acquiring, purchasing, or owning up to 100% of 6938, the Cooperative Code.
the voting stock of an existing bank;
2. Investing in up to 100% of the voting stock of a Islamic Banks
new banking subsidiary incorporated under the There is only one Islamic Bank in the Philippines, the
laws of the Philippines; or Al-Amanah Islamic Bank, which aims to provide
3. Establishing branches with full banking banking under the Shari’a principles governing
authority. banking.
• However, the foreign bank must be
established, reputable, and financially sound. Other banks as classified by the BSP
• Further, it must be widely-owned and This includes Land Bank of the Philippines, the
publicly listed in the country of origin. Philippine Veteran’s Bank, and Development Bank of
the Philippines.
b. Classification of Banks
2. Quasi-Banks and Trust
Universal Bank (UB) Entities
As the name implies, a universal bank has the most
banking power, as it has the same powers as a
commercial bank, plus the powers: Quasi-banks refer to entities engaged in the
borrowing of funds through the issuance,
1. To operate an investment house, whether as an endorsement or assignment with recourse or
integral unit or as a subsidiary. acceptance of deposit substitutes as defined in
Section 95 of the “New Central Bank Act” for
In turn, an investment house underwrites purposes of relending or purchasing of receivables
and other obligations.
securities either on firm underwriting (good as
sold) or best efforts (excess to be returned to the
Deposit-Substitute Taking or Quasi-Banking
firm)
Deposit-substitute taking or quasi-banking is an
2. To invest in non-allied enterprises alternative form of obtaining funds from the public,
other than deposits, through the issuance,
Commercial Bank (KB) endorsement, or acceptance of debt instruments for
Has the powers defined in Secs. 29. And 53, infra. the borrower's own account, for the purpose of
This is the most common kind of bank. relending or purchasing of receivables and other
obligations.
These instruments may include, but need not be b. Banking Powers and Incidental
limited to, bankers’ acceptances, promissory notes,
participations, certificates of assignment and similar Powers
instruments with recourse, and repurchase
agreements. A commercial bank shall have, in addition to the
general powers incident to corporations, all such
Instead, the funds are received from investors in powers as may be necessary to carry on the business
exchange for a financial instrument like a bond or a of commercial banking such as:
promissory note, which will be paid at a given time.
1. Accepting Drafts;
However, the deposit substitute must be on a with
recourse basis. General rule: Only a UB and a KB can accept or
create demand deposits [Sec. 33]
Trust entities (Manual of Regulation for Banks)
are: Exception: Banks other than a UB or KB with
a. a bank, through its specifically designated prior approval of, and subject to such conditions
business unit to perform trust functions; or and rules as may be prescribed by the MB. [Sec.
b. trust corporation, authorized by the BSP to 33]
engage in trust and other fiduciary business under
the GBL. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed
by the provisions concerning simple loan. [Art.
3. Core Banking Functions 1980, NCC]
6. Buying and selling foreign exchange and gold or 5. Nature of Bank Funds and
silver bullion;
7. Acquiring marketable bonds and other debt Bank Deposits
securities; and
8. Extending credit. The deposit is a contract of loan with the bank being
lent money by the depositor. Under the Civil Code
“Know your customer” rule provisions on loan, this means that the money
Before granting a loan or other credit deposited with the bank becomes its property, which
accommodation, a bank must ascertain that the it is free to use, subject to the condition that the
debtor is capable of fulfilling its commitments to the depositor can demand repayment, in the form of
bank. [Sec. 40] withdrawals, at any time.
Therefore, Art. 1287 of the Civil Code, which unconscionable rates of interest collected on salary
prohibits compensation when one of the debts arises loans and similar credit accommodations [Sec. 43]
from depositum, does not apply.
7. Grant of Loans and Security
Current and savings deposits are loans to a bank
because the bank can use the same and they earn Requirements
interest [BPI vs. CA, G.R. No. 104612 (1994)].
a. Limit on Loans, Credit
The relationship being contractual in nature,
mandamus is therefore not an available remedy since Accommodations and
mandamus does not lie to enforce the performance of Guarantees
contractual obligations [Maclaring Lucman vs. Alimatar
Malawi, G.R. No. 159794 (2006)] General rule: Shall not exceed
75% of the appraised value of
Money deposited is commingled with other money the respective real estate
constituting a common fund. security, plus 60% of the
appraised value of the insured
6. Stipulation on Interests Against real improvements, and such
estate loans may be made to the
As an accessory to its power to grant loans, banks may owner of the real estate or to
stipulate interests. his assignees
With the removal of the limit on imposable interest Exception: Where the MB
under CB Circular 905, banks may impose interest otherwise prescribes [Sec. 37]
past the legal interest rate of 6%. [CB Circular 799-13] General rule: Shall not exceed
75% of the appraised value of
• However, this does not give banks the right to On security of
the security, and such loans
impose excessive interests. A stipulated interest chattels and
and other credit
rate under Art. 1956 of the Civil Code may intangible
accommodations may be
nevertheless be equitably reduced should the properties
made to the title-holder of
same be found to be iniquitous, unconscionable, (patents,
the chattels and intangible
and exorbitant under Art. 1229 of the Civil Code. trademarks,
properties or his assignees
If such is the case, there is no stipulated rate, and trade names,
the legal rate applies. [Dio v. Japor, G.R. No. and copyrights)
Exception: The MB otherwise
154129 (2005)]
prescribes [Sec. 38]
• A 3% monthly interest rate has been ruled
iniquitous. [Macalinao v. BPI, G.R. No. 175490 Grant of loans
(2009)] 1. Only in amounts and for the periods of time
• Also, while it is acceptable for banks to stipulate essential for the effective completion of the
that interest rates on a loan not be fixed and operations to be financed; and
instead be made dependent on market 2. Consistent with safe and sound banking
conditions, there should always be a reference practices. [Sec. 39]
rate upon which to peg the rates. [Consolidated
Bank v. CA, G.R. No. 114286 (2011)] Purpose of loans
The purpose shall be stated in the application and in
The MB may prescribe the maturities, as well as the contract between the bank and the borrower. [Sec.
related terms and conditions for various types of bank 39]
loans and other credit accommodations.
Effect of usage of loan proceeds for purposes
Any change by the MB in the maximum maturities other than those agreed upon with the bank
shall apply only to loans and other credit The bank shall have the right to terminate the loan or
accommodations made after the date of such action. other credit accommodation and demand immediate
repayment of the obligation. [Sec. 39]
The MB shall regulate the interest imposed on micro
finance borrowers by lending investors and similar
lenders such as, but not limited to, the
Concept: The minimum ratio which the net worth of Increase of Limit
a bank must bear to its total risk assets which may The MB may increase the limit prescribed by an
include contingent accounts, i.e., net worth: total risk additional 10% of the net worth, when:
assets. [Sec. 34] 1. The additional liabilities of any borrower are
adequately secured by trust receipts, shipping
General rule: A bank must conform to the risk-based documents, warehouse receipts or other similar
capital ratio prescribed by the MB. documents transferring or securing title;
2. Covering readily marketable, non-perishable
Exceptions: The MB may alter or suspend compliance goods; and
with such ratio whenever necessary for a maximum 3. Which must be fully covered by insurance [Sec.
period of 1 year. 35.2]
1. In case of a bank merger or consolidation; or
2. When a bank is under rehabilitation under a Purpose
program approved by the BSP; [Sec. 34] To prevent the bank from making excessive loans and
other credit accommodations to a single borrower or
Purpose corporate group, including guarantees for the account
A bank must not be allowed to expand the volume of of such borrower or group. The bank is prohibited
its loans and investments in a manner that is from… placing many eggs in the basket of one client.
disproportionate to its net worth. [Morales (2017)]
4. The required approval shall be entered upon the Likewise, it is negligent for withdrawals to be allowed
record of the bank and a copy of such entry shall from an account, if the bank itself failed to follow its
be transmitted forthwith to the appropriate own rules and procedures [BPI v. IAC, G.R. No. L-
supervising and examining department of the 66826 (1988)]
BSP; and
5. Limited to an amount equivalent to the DOSRI The bank is not expected to be infallible but it must
borrower’s unencumbered deposits and book hear the blame for not discovering the mistake of its
value of his paid-in capital contribution in the teller despite the established procedure. [BPI v. CA]
bank [Sec. 36]
The Rural Bank of Cabadbaran should not have
Exceptions [Sec. 36, GBL]: simply relied on the face of SPAs since its undertaking
1. Non-risk items; and to lend P200k as a banking institution requires a
2. Loans in the form of fringe benefits. greater degree of diligence. [RBCI v. Melecio-Yap, G.R.
No. 178451 (2014)]
Waiver of Bank Secrecy
A DOSRI borrower is required to waive the secrecy When the teller lost the passbook, the bank failed to
of his deposits of whatever nature in all banks in the meet the high standards of integrity and performance.
Philippines. [Sec. 26, NCBA] [Consolidated Bank v. CA, G.R. No. 114286 (2011)]
INTELLECTUAL
PROPERTY CODE
Commercial Law
a. Invention Patent
A patentable invention is any technical solution of a
problem in any field of human activity which is new,
involves an inventive step and is industrially
applicable shall be patentable. It may be, or may relate
to, a product, or process, or an improvement of any
of the foregoing. [Sec. 21, RA 8293]
1. Novelty
PRIOR ART
This shall consist of:
a. Everything which has been made available to the
public anywhere in the world, before the filing
date or the priority date of the application
claiming the invention; [Sec. 24.1, RA 8293]
b. The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with this
Act, filed or effective in the Philippines, with a c. The mere use of a known process unless such
filing or priority date that is earlier than the filing known process results in a new product that
or priority date of the application: Provided, That employs at least one reactant. [Sec. 26.2, RA 8293
the application which has validly claimed the as amended by RA 9502]
filing date of an earlier application under Section
31 of this Act, shall be prior art with effect as of 3. Industrial Applicability
the filing date of such earlier application:
Provided further, That the applicant or the An invention that can be produced and used in any
inventor identified in both applications are not industry shall be industrially applicable. [Sec. 27, RA
one and the same. [Sec. 24.2, RA 8293] 8293]
or the mere use of a known process unless such employee’s regularly assigned duties [Sec. 30.2,
known process results in a new product that RA 8293].
employs at least one new reactant. Salts, esters, 2. In case of inventions created pursuant to a
ethers, polymorphs, metabolites, pure form, commission, the person who commissions the
particle size, isomers, mixtures of isomers, work shall own the patent [Sec. 30.1, RA 8293].
complexes, combinations, and other derivatives
of a known substance shall be considered to be First-to-File rule
the same substance, unless they differ RA 8293 changed the basis of ownership of a patent
significantly in properties with regard to efficacy; from First to Invent under RA 165 to First to File.
[Sec. 22.1, RA 8293 as amended by RA 9502]
b. Schemes, rules and methods of performing If two or more persons have made the invention
mental acts, playing games or doing business, and separately and independently of each other, the right
programs for computers; [Sec. 22.2, RA 8293] to the patent shall belong to the person who filed an
c. Methods for treatment of the human or animal application for such invention, or where two or more
body by surgery or therapy and diagnostic applications are filed for the same invention, to the
methods practiced on the human or animal body. applicant who has the earliest filing date or, the
This provision shall not apply to products and earliest priority date. [Sec. 29, RA 8293]
composition for use in any of these methods;
[Sec. 22.3, RA 8293] Right of Priority
d. Plant varieties or animal breeds or essentially An application for patent filed by any person who has
biological process for the production of plants or previously applied for the same invention in another
animals. This provision shall not apply to micro- country which by treaty, convention, or law affords
organisms and non-biological and similar privileges to Filipino citizens, shall be
microbiological processes; [Sec. 22.4, RA 8293] considered filed as of the date of filing the foreign
e. Aesthetic creations; [Sec. 22.5, RA 8293] application: Provided, That:
f. Anything which is contrary to public order or a. The local application expressly claims priority;
morality. [Sec. 22.6, RA 8293] b. It is filed within 12 months from the date the
earliest foreign application was filed; and
Cheaper Medicines Act: In addition to discoveries, c. A certified copy of the foreign application
scientific theories and mathematical methods, the IP together with an English translation is filed
Code now includes (as non-patentable), in case of within 6 months from the date of filing in the
drugs and medicines: Philippines. [Sec. 31, RA 8293]
a. The mere discovery of a new form or new
property of a known substance which does not 5. Term of a Patent
result in the enhancement of the known efficacy
of that substanc
b. The mere discovery of any new property or new a. Term of Invention Patent
use of a known substance
c. the mere use of a known process unless such The term of a patent shall be 20 years from the filing
known process results in a new product that date of the application. [Sec. 54, RA 8293]
employs at least one reactant [Sec. 26.2, RA 8293
as amended by RA 9502] A patent shall take effect on the date of the
publication of the grant of the patent in the IPO
Gazette. [Sec. 50.3, RA 8293]
4. Ownership of a Patent
b. Term of Utility Model
a. Right to a Patent
A utility model registration shall expire, without any
General Rule: The right to patent belongs to the possibility of renewal, at the end of the 7th year after
inventor, his heirs, or assigns. When two or more the date of the filing of the application. [Sec. 109.3,
persons have jointly made an invention, the right to a RA 8293]
patent shall belong to them jointly. [Sec. 28, RA 8293]
d. Experimental Use: Where the act consists of been tampered, unlawfully modified, or infringed.
making or using exclusively for experimental use [Sec.159.4 RA 8293 as amended by RA 9502]
of the invention for scientific purposes or
educational purposes and such other activities Prior User
directly related to such scientific or educational Any prior user, who, in good faith was using the
experimental use; [Sec. 72.3, RA 8293 as invention or has undertaken serious preparations to
amended by RA 9502] use the invention in his enterprise or business, before
e. Drugs and Medicine: In the case of drugs and the filing date or priority date of the application on
medicines, where the act includes testing, using, which a patent is granted, shall have the right to
making or selling the invention including any data continue the use thereof as envisaged in such
related thereto, solely for purposes reasonably preparations within the territory where the patent
related to the development and submission of produces its effect. [Sec. 73.1, RA 8293]
information and issuance of approvals by
government regulatory agencies required under The right of the prior user may only be transferred or
any law of the Philippines or of another country assigned together with his enterprise or business, or
that regulates the manufacture, construction, use with that part of his enterprise or business in which
or sale of any product: Provided, That, in order the use or preparations for use have been made. [Sec.
to protect the data submitted by the original 73.2, RA 8293]
patent holder from unfair commercial use
provided in Article 39.3 of the Agreement on Use by the Government
Trade-Related Aspects of Intellectual Property A Government agency or third person authorized by
Rights (TRIPS Agreement), the Intellectual the Government may exploit the invention even
Property Office, in consultation with the without agreement of the patent owner where:
appropriate government agencies, shall issue the 1. The public interest, in particular, national
appropriate rules and regulations necessary security, nutrition, health or the development of
therein not later than 120 days after the other sectors, as determined by the appropriate
enactment of this law; [Sec. 72.4, RA 8293 as agency of the government, so requires; [Sec.
amended by RA 9502] 74.1(a), RA 8293]
f. Medicine Individual Preparation: Where the 2. A judicial or administrative body has determined
act consists of the preparation for individual that the manner of exploitation, by the owner of
cases, in a pharmacy or by a medical professional, the patent or his licensee, is anti-competitive.
of a medicine in accordance with a medical shall [Sec. 74.1(b), RA 8293]
apply after a drug or medicine has been
introduced in the Philippines or anywhere else in The use by the Government, or third person
the world by the patent owner, or by any party authorized by the Government shall be subject,
authorized to use the invention: Provided, mutatis mutandis, to the conditions set forth in the
further, That the right to import the drugs and sections on compulsory licensing. [Sec. 74.2, RA
medicines contemplated in this section shall be 8293]
available to any government agency or any
private third party; [Sec. 72.5, RA 8293 as All cases arising from the implementation of this
amended by RA 9502] provision shall be cognizable by courts with
g. Where the invention is used in any ship, vessel, appropriate jurisdiction provided by law. No court
aircraft, or land vehicle of any other country except the Supreme Court of the Philippines, shall
entering the territory of the Philippines issue any temporary restraining order or preliminary
temporarily or accidentally: Provided, That such injunction or such other provisional remedies that will
invention is used exclusively for the needs of the prevent its immediate execution. [Sec. 74.3, RA 8293
ship, vessel, aircraft, or land vehicle and not used as amended by RA 9502]
for the manufacturing of anything to be sold
within the Philippines. 10. Patent Infringement
There shall be no infringement of trademarks or
It is the making, using, offering for sale, selling, or
tradenames of imported or sold drugs and medicines
importing a patented product or a product obtained
allowed as well as imported or sold off-patent drugs
directly or indirectly from a patented process, or the
and medicines: Provided, That said drugs and
use of a patented process without the authorization of
medicines bear the registered marks that have not
the patentee. [Sec. 76.1, RA 8293 as amended by RA
9502]
Patent found invalid may be cancelled 3. In the event the technology transfer arrangement
In an action for infringement, if the court shall find shall provide for arbitration, the Procedure of
the patent or any claim to be invalid, it shall cancel the Arbitration of the Arbitration Law of the
same, and the Director of Legal Affairs upon receipt Philippines or the Arbitration Rules of the United
of the final judgment of cancellation by the court, Nations Commission on International Trade Law
shall record that fact in the register of the Office and (UNCITRAL) or the Rules of Conciliation and
shall publish a notice to that effect in the IPO Arbitration of the International Chamber of
Gazette. [Sec. 82, RA 8293] Commerce (ICC) shall apply and the venue of
arbitration shall be the Philippines or any neutral
Doctrine of File Wrapper Estoppel country; [Sec. 88.3, RA 8293]
Patentee is precluded from claiming as part of 4. The Philippine taxes on all payments relating to
patented product that which he had to excise or the technology transfer arrangement shall be
modify in order to avoid patent office rejection, and borne by the licensor. [Sec. 88.4, RA 8293]
he may omit any additions he was compelled to add
by patent office regulations. [Advance Transformer Co. v. Prohibited Clauses
Levinson 837 F.2d 1081(1988)] The following provisions shall be deemed prima facie
to have an adverse effect on competition and trade:
c. Burden of Proof in Process 1. Those which impose upon the licensee the
obligation to acquire from a specific source
Patents capital goods, intermediate products, raw
materials, and other technologies, or of
If the subject matter of a patent is a process of permanently employing personnel indicated by
obtaining a product, any identical product shall be the licensor; [Sec. 87.1, RA 8293]
presumed to have been obtained through the use of 2. Those pursuant to which the licensor reserves the
the patented process if the product is new or there is right to fix the sale or resale prices of the
substantial likelihood that the identical product was products manufactured on the basis of the
made by the process and the owner of the patent has license; [Sec. 87.2, RA 8293]
been unable despite reasonable efforts, to determine 3. Those that contain restrictions regarding the
the process actually used. In ordering the defendant volume and structure of production; [Sec. 87.3,
to prove that the process to obtain the identical RA 8293]
product is different from the patented process, the 4. Those that prohibit the use of competitive
court shall adopt measures to protect, as far as technologies in a non-exclusive technology
practicable, his manufacturing and business secrets. transfer agreement; [Sec. 87.4, RA 8293]
[Sec. 76, RA 8293] 5. Those that establish a full or partial purchase
option in favor of the licensor; [Sec. 87.5, RA
13. Licensing 8293]
6. Those that obligate the licensee to transfer for
free to the licensor the inventions or
a. Voluntary improvements that may be obtained through the
use of the licensed technology; [Sec. 87.6, RA
Voluntary Licensing is the grant by the patent owner
8293]
to a third person of the right to exploit the patented
7. Those that require payment of royalties to the
invention. [Sec. 85, RA 8293]
owners of patents for patents which are not used;
[Sec. 87.7, RA 8293]
Mandatory Provisions
8. Those that prohibit the licensee to export the
The following provisions shall be included in
licensed product unless justified for the
voluntary license contracts:
protection of the legitimate interest of the
1. That the laws of the Philippines shall govern the
licensor such as exports to countries where
interpretation of the same and in the event of
exclusive licenses to manufacture and/or
litigation, the venue shall be the proper court in
distribute the licensed product(s) have already
the place where the licensee has its principal
been granted; [Sec. 87.8, RA 8293]
office; [Sec. 88.1, RA 8293]
9. Those which restrict the use of the technology
2. Continued access to improvements in techniques
supplied after the expiration of the technology
and processes related to the technology shall be
transfer arrangement, except in cases of early
made available during the period of the
termination of the technology transfer
technology transfer arrangement; [Sec. 88.2, RA
8293]
another patent, hereafter referred to as the "first 1. The scope and duration of such license shall be
patent," granted on a prior application or limited to the purpose for which it was
benefiting from an earlier priority, a compulsory authorized; [Sec. 100.1, RA 8293]
license may be granted to the owner of the 2. The license shall be non-exclusive; [Sec. 100.2,
second patent to the extent necessary for the RA 8293]
working of his invention, subject to certain 3. The license shall be non-assignable, except with
conditions. [Sec. 97, RA 8293] that part of the enterprise or business with which
8. Manufacture and export of drugs and medicines the invention is being exploited; [Sec. 100.3, RA
to any country having insufficient or no 8293]
manufacturing capacity in the pharmaceutical 4. Use of the subject matter of the license shall be
sector to address public health problems: devoted predominantly for the supply of the
Provided, That, a compulsory license has been Philippine market: Provided, that this limitation
granted by such country or such country has, by shall not apply where the grant of the license is
notification or otherwise, allowed importation based on the ground that the patentee's manner
into its jurisdiction of the patented drugs and of exploiting the patent is determined by judicial
medicines from the Philippines in compliance or administrative process, to be anti-competitive.
with the TRIPS Agreement. [Sec. 93-A.2, RA [Sec. 100.4, RA 8293]
8293 as amended by RA 9502] 5. The license may be terminated upon proper
showing that circumstances which led to its grant
Period of Filing a Petition for Compulsory have ceased to exist and are unlikely to recur:
License Provided, That adequate protection shall be
At any time after the grant of patent. However, a afforded to the legitimate interest of the licensee;
compulsory license may not be applied for on the [Sec. 100.5, RA 8293]
ground stated in Sec. 93.5 before the expiration of a 6. The patentee shall be paid adequate
period of 4 years from the date of filing of the remuneration taking into account the economic
application or 3 years from the date of the patent value of the grant or authorization, except that in
whichever period expires last. [Sec. 94, RA 8293 as cases where the license was granted to remedy a
amended by RA 9502] practice which was determined after judicial or
administrative process, to be anti-competitive,
Requirement to Obtain a License on Reasonable the need to correct the anti-competitive practice
Commercial Terms may be taken into account in fixing the amount
General Rule: The license will only be granted after the of remuneration. [Sec. 100.6, RA 8293]
petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial 14. Assignment and
terms and conditions but such efforts have not been
successful within a reasonable period of time. [Sec. Transmission of Rights
95.1, RA 8293 as amended by RA 9502]
An assignment may be of the entire right, title or
Exceptions: The requirement of authorization shall not interest in and to the patent and the invention covered
apply in the following cases: thereby, or of an undivided share of the entire patent
1. Where the petition for compulsory license seeks and invention, in which event the parties become joint
to remedy a practice determined after judicial or owners thereof. An assignment may be limited to a
administrative process to be anti-competitive; specified territory. [Sec. 104, RA 8293]
2. In situations of national emergency or other
circumstances of extreme urgency; If two or more persons jointly own a patent and the
3. In cases of public non-commercial use. invention covered thereby, each joint owner shall be
4. In cases where the demand for the patented entitled to personally make, use, sell, or import the
drugs and medicines in the Philippines is not invention for his own profit. However, neither of the
being met to an adequate extent and on joint owners shall be entitled to grant licenses or to
reasonable terms, as determined by the Secretary assign his right, title or interest or part thereof without
of the Department of Health. [Sec. 95.2, RA 8293 the consent of the other owner or owners, or without
as amended by RA 9502] proportionally dividing the proceeds with such other
owner or owners. [Sec. 107, RA 8293]
Terms and Conditions of Compulsory License
The assignment must be in writing and must be
notarized. [Sec. 105 RA 8293] It shall be void as
Suggestive Marks
Marks that hint or suggest the nature or quality of the at its expiration upon payment of the prescribed fee
good or service without directly describing it. They and upon filing of a request. [Sec. 145-146, RA 8293]
are “subtly descriptive” and are entitled to protection
despite lack of distinctiveness. Ex. “JAGUAR”
Descriptive Marks
Consists exclusively of signs or of indications that
may serve in trade to designate the kind, quality,
quantity, intended purpose, value, geographical
origin, time or production of the goods or rendering
of the services, or other characteristics of the goods
or services; [Sec. 123.j, RA 8239]
Generic Marks
Generic Marks are those which constitute the name
of an article or substance; or comprise the genus of
which the particular product is a species of. [Societe Des
Produits Nestle v. CA, G.R. No. 112012, 2001]
2. Acquisition of Ownership of
Mark
While the IP Code expressly provides that the rights
to a mark shall be acquired through registration made
validly in accordance with law [Sec. 122, RA 8293],
the Supreme Court in 2 cases [Berris Agricultural Co.,
Inc. vs. Norvy Abyadang, G.R. No. 183404, 13 October
2010 ; E.Y. Industrial Sales, Inc. and Engracio Yap v. Shen
Dar Electricity and Machinery Co., Ltd., G.R.
No. 184850, 20 October 2010] held that
notwithstanding this express provision in the IP
Code, prior use is still the basis of trademark
ownership.
DURATION OF CERTIFICATE
A certificate of registration shall remain in force for
10 years and may be renewed for periods of 10 years
This doctrine is to the effect that a word or phrase registrable mark but such disclaimer shall not
originally incapable of exclusive appropriation with prejudice or affect the applicant’s or owner’s rights
reference to an article of the market, because then existing or thereafter arising in the disclaimed
geographically or otherwise descriptive, might matter, nor such shall disclaimer prejudice or affect
nevertheless have been used so long and so the applicant’s or owner’s right on another application
exclusively by one producer with reference to his of later date if the disclaimed matter became
article that, in that trade and to that branch of the distinctive of the applicant’s or owner’s goods,
purchasing public, the word or phrase has come to business or services. [Sec. 126, RA 8293]
mean that the article was his product [Ang v. Teodoro,
G.R. No. L-48226 (1942)]. The basic purpose of disclaimers is to make of record,
that a significant element of a composite mark is not
5. Use of Mark as a being exclusively appropriated by itself apart from the
composite. [Rule 608, Rule on Trademarks]
Requirement
DISCLAIMED WORDS
a. While RA 8293 No Longer Words in a mark that are not being claimed for
exclusive use, including: 1. Generic terms; 2.
Requires Prior Use Before Filing Descriptive words; and 3. Those that do not function
the Application, It Still Requires as part of the trademark. [Rule 608, Rule on
Use of the Mark After Filing Trademarks]
RA 8293 no longer requires prior use before filing the Note: Disclaimed words can later on be registered as
application (i.e., it shifted to an intent to use part of the trademark if it acquires distinctiveness.
system). However, the law still requires use of the
mark after filing. b. Non-Use of Mark When Excused
Declaration of Actual Use (DAU) 1. If caused by circumstances arising independently
The applicant or the registrant is required to file a of the will of the trademark owner. Lack of funds
Declaration of Actual Use after filing, registration and shall not excuse non-use of a mark; [Sec. 152.1,
renewal. RA 8293]
2. A use which does not alter its distinctive
Note: Failure to file declaration of actual use character though the use is different from the
automatically results in the denial of the registration form in which it is registered. [Sec. 152.2, RA
or the cancellation of the registration by operation of 8293]
law. 3. Use of a mark in connection with one or more of
the goods/services belonging to the class in
When to File Declaration of Actual Use which the mark is registered. [Sec. 152.3, RA
Under the IPC or RA 8293: 8293]
1. Within 3 years from the application date (3rd 4. The use of mark by a company related to the
Year DAU); and applicant or registrant
2. Within 1 year from the 5th anniversary of the 5. The use of mark by a person controlled by the
registration of the mark (5th Year DAU); and registrant. [Sec. 152.4, RA 8293]
3. Within 1 year from the date of renewal of the
registration of the mark. The use of a mark by a company related with the
registrant or applicant shall inure to the latter's
Trademarks registered under RA 166: benefit, and such use shall not affect the validity of
1. Within 1 year from the 5th anniversary of such mark or of its registration: Provided, that such
registration of the mark (5th Year DAU); mark is not used in such manner as to deceive the
2. Within 1 year from the 10th anniversary of public. [Sec.152.4, RA 8293]
registration of the mark (10th Year DAU); and
3. Within 1 year from the 15th anniversary of Declaration of Non-Use (DNU)
registration of the mark (15th Year DAU). A registrant is allowed to keep the registration active
if such registrant is not able to comply with the
DISCLAIMERS requirements of DAU for non-use of the mark.
The Office may allow or require the applicant to
disclaim an unregistrable component of an otherwise
In the following cases, a Declaration of Non-Use may be dissipated as soon as the court assumed to analyze
be filed within 3 years from filing of the application carefully the respective features of the mark. [Del
or within the extension period if a request for Monte Corporation, et al. v. CA, G.R. No. L-78325
extension (1990)]
was timely made:
1. Where the applicant or registrant is prohibited c. Doctrine of Related
from using the mark in commerce because of a
requirement imposed by another government Goods/Services
agency prior to putting the goods in the market
or rendering of the services; 1. Goods are related when they belong to the same
2. Where a restraining order or injunction was class or have the same descriptive properties or
issued by the Bureau of Legal Affairs, the courts physical attributes, or they serve the same
or quasi-judicial bodies prohibiting the use of the purpose or flow through the same channel of
mark; or trade.
3. Where the mark is the subject of an opposition 2. The use of identical marks on non-competing but
or cancellation case. related goods may likely cause confusion.
3. Corollarily, the use of identical marks on non-
The Declaration of Non-Use shall be under oath and competing and unrelated goods is not likely to
shall clearly state the facts prohibiting the actual use cause confusion.
of the mark in commerce. The corresponding fee
must also be paid upon filing of the declaration. [Rule In resolving whether goods are related, several factors
206 as amended by Office Order No. 56 (2013)] come into play:
1. The business (and its location) to which the
goods belong
6. Tests To Determine 2. The class of product to which the goods belong;
Confusing Similarity 3. The product's quality, quantity, or size, including
the nature of the package, wrapper or container;
between Marks 4. The nature and cost of the article;
5. The descriptive properties, physical attributes or
a. Dominancy Test essential characteristics with reference to their
form, composition, texture or quality;
The dominancy test considers the dominant features 6. The purpose of the goods;
in the competing marks in determining whether they 7. Whether the article is bought for immediate
are confusingly similar. Under the dominancy test, consumption, that is, day-to-day household
courts give greater weight to the similarity of the items;
appearance of the product arising from the adoption 8. The fields of manufacture;
of the dominant features of the registered mark, 9. The conditions under which the article is usually
disregarding minor differences. Courts will consider purchased; and
more the aural and visual impressions created by the 10. The channels of trade through which the goods
marks in the public mind, giving little weight to flow, how they are distributed, marketed,
factors like prices, quality, sales outlets and market displayed and sold [Mighty Corp. v. E&J Gallo,
segments. [McDonald’s Corporation v. L.C. Big Mak G.R. No. 154342, Jul 14, 2004]
Burger, Inc., et al., G.R. No. 143993 (2004)]
It has been held that where the products are different,
The dominancy test is now embodied in Sec. 155 of the prior owner’s chance of success is a function of
the IPL and is therefore the controlling test. [Ibid] many variables, such as the:
1. Strength of his mark;
2. Degree of similarity between the two marks;
b. Holistic Test 3. Reciprocal of defendant’s good faith in adopting
its own mark;
To determine whether a trademark has been 4. Quality of defendant’s product;
infringed, we must consider the mark as a whole and 5. Proximity of the products;
not as dissected. If the buyer is deceived, it is 6. Likelihood that the prior owner will bridge the
attributable to the marks as a totality, not usually to gap;
any part of it. The court therefore should be guided 7. Actual confusion; and
by its first impression, for the buyer acts quickly and 8. Sophistication of the buyers.
is governed by a casual glance, the value of which may
of off-patent drugs and medicines, the owner of a applications for registration shall, on payment of
registered mark shall have the exclusive right to the same fee, be provisionally recorded, and the
prevent all third parties not having the owner's mark, when registered, shall be in the name of the
consent from using in the course of trade identical or assignee or transferee. [Sec. 149.4, RA 8293]
similar signs or containers for goods or services which 5. Assignments and transfers shall have no effect
are identical or similar to those in respect of which the against third parties until they are recorded at the
trademark is registered where such use would result in Office. [Sec. 149.5, RA 8293]
a likelihood of confusion. In case of the use of an
identical sign for identical goods or services, a Any license contract concerning the registration of a
likelihood of confusion shall be presumed. [Sec. mark, or an application therefor, shall provide for
147.1, RA 8293 as amended by RA 9502] effective control by the licensor of the quality of the
goods or services of the licensee in connection with
a. Limitations on Such Rights which the mark is used. If the license contract does
not provide for such quality control, or if such quality
1. Duration (except that, inasmuch as the control is not effectively carried out, the license
registration of a trademark could be renewed contract shall not be valid. [Sec. 150.1, RA 8293]
every 10 years, a trademark could conceivably
remain registered forever); c. Use by Third Parties of Names,
2. Territorial (except well-known marks). Etc. Similar to Registered Mark
Registration of the mark shall not confer on the The IPC deems unlawful any subsequent use of the
registered owner the right to preclude third parties trade name by a third party, whether as a trade name
from using bona fide their names, addresses, or a mark or collective mark, or any such use of a
pseudonyms, a geographical name, or exact similar trade name or mark, likely to mislead the
indications concerning the kind, quality, quantity, public. [Sec. 165.2 (b), RA 8293]
destination, value, place of origin, or time of
production or of supply, of their goods or services:
Provided, That such use is confined to the purposes 9. Infringement and Remedies
of mere identification or information and cannot
mislead the public as to the source of the goods or a. Trademark infringement
services. [Sec. 148, RA 8293]
Any person who shall, without the consent of the
b. Assignment and Transfer of owner of the registered mark:
Application and Registration 1. Use in commerce any reproduction, counterfeit,
copy, or colorable imitation of a registered mark
or the same container or a dominant feature
1. An application for registration of a mark, or its
thereof in connection with the sale, offering for
registration, may be assigned or transferred with
sale, distribution, advertising of any goods or
or without the transfer of the business using the
services including other preparatory steps
mark. [Sec. 149.1, RA 8293]
necessary to carry out the sale of any goods or
2. Such assignment or transfer shall, however, be
services on or in connection with which such use
null and void if it is liable to mislead the public,
is likely to cause confusion, or to cause mistake,
particularly as regards the nature, source,
or to deceive; [Sec. 155.1, RA 8293]
manufacturing process, characteristics, or
2. Reproduce, counterfeit, copy or colorably imitate
suitability for their purpose, of the goods or
a registered mark or a dominant feature thereof
services to which the mark is applied. [Sec. 149.2,
and apply such reproduction, counterfeit, copy or
RA 8293]
colorable imitation to labels, signs, prints,
3. The assignment of the application for registration
packages, wrappers, receptacles or
of a mark, or of its registration, shall be in writing
advertisements intended to be used in commerce
and require the signatures of the contracting
upon or in connection with the sale, offering for
parties. Transfers by mergers or other forms of
sale, distribution, or advertising of goods or
succession may be made by any document
services on or in connection with which such use
supporting such transfer. [Sec. 149.3, RA 8293]
is likely to cause confusion, or to cause mistake,
4. Assignments and transfers of registrations of
or to deceive. [Sec. 155.2, RA 8293]
marks shall be recorded at the Office on payment
of the prescribed fee; assignment and transfers of
container must be legible and visible for registration. 1. The reasonable profit which the complaining
[Rule 1001, Rule on Trademarks] party would have made, had the defendant not
infringed his rights; or
General Rule: It is unlawful for any person, without the 2. The profit which the defendant actually made out
consent of the manufacturer, bottler or seller who has of the infringement; or
registered the mark of ownership to fill such bottles, 3. A reasonable percentage based upon the amount
boxes, kegs, barrels or other containers so marked and of gross sales of the defendant or the value of the
stamped, for the purpose of sale, dispose of, or services in connection with which the mark or
wantonly destroy the same, whether filled or not, to trade name was used in the infringement of the
use the same for drinking vessels or drain pipes, rights of the complaining party if such measure
foundation pipes, for any other purpose than that of damages cannot be readily ascertained with
registered. [Sec. 2, RA 623 as amended by RA 5700] reasonable certainty. [Sec. 156.1, RA 8293]
The enjoyment and exercise of copyright, including a. Original Literary and Artistic
moral rights, shall not be the subject of any formality; Works
such enjoyment and such exercise shall be
independent of the existence of protection in the Literary and artistic works, hereinafter referred to as
country of origin of the work. [Article 5(2), Berne "works", are original intellectual creations in the
Convention for the Protection of Literary and Artistic Works] literary and artistic domain protected from the
moment of their creation and shall include in
The Denicola Test in intellectual property law states particular:
that if design elements of an article reflect a merger of 1. Books, pamphlets, articles and other writings;
aesthetic and functional considerations, the artistic 2. Periodicals and newspapers;
aspects of the work cannot be conceptually separable 3. Lectures, sermons, addresses, dissertations
from the utilitarian aspects; thus, the article cannot be prepared for oral delivery, whether or not
copyrighted. reduced in writing or other material form;
4. Letters;
part of the work either in its original form or in any Art. 723, NCC. Letters and other private
form recognizably derived from the original: communications in writing are owned by the
Provided, That the copyright in any such work shall person to whom they are addressed and delivered,
not include the right to control the reconstruction or but they cannot be published or disseminated
rehabilitation in the same style as the original of a without the consent of the writer or his heirs.
building to which that copyright relates. [Sec. 186, RA However, the court may authorize their
8293] publication or dissemination if the public good or
the interest of justice so requires.
Communication to the Public of Copyrighted
Works
This includes point-to-point transmission of a work,
b. When Copyright Vests
including video on demand, and providing access to
an electronic retrieval system, such as computer Works are protected by the sole fact of their creation,
databases, servers, or similar electronic storage irrespective of their mode or form of expression, as
devices. Broadcasting, rebroadcasting, retransmission well as of their content, quality and purpose. [Sec.
by cable, and broadcast and retransmission by satellite 172.2, RA 8293]
are all acts of “communication to the public” within
the meaning of the IPC. [Rule 11, Copyright The issuance of the certificates of registration and
Safeguards and Regulations] deposit as provided by Sec. 2, Rule 7 of the Copyright
Safeguards and Regulations, are purely for recording
First Public Distribution of Work the date of registration and deposit of the work, and
An exclusive right of first distribution of work are not conclusive as to copyright ownership (nor
includes all acts involving distribution, specifically does it determine the time when copyright vests).
including the first importation of an original and each [Manly Sportwear v. Dadodette Enterprises, G.R. No.
copy of the work into the jurisdiction of the Republic 165306 (2005)]
of the Philippines. [Rule 12, Copyright Safeguards and
Regulations] c. Moral rights
Civil Code Provisions on Ownership of The author of a work shall, independently of the
Intellectual Creation economic rights in Section 177 or the grant of an
assignment or license with respect to such right, have
Art. 721, NCC. By intellectual creation, the the right:
following persons acquire ownership: 1. To require that the authorship of the works be
(1) The author with regard to his literary, attributed to him, in particular, the right that his
dramatic, historical, legal, philosophical, name, as far as practicable, be indicated in a
scientific or other work; prominent way on the copies, and in connection
(2) The composer; as to his musical composition; with the public use of his work; [Sec. 193.1, RA
(3) The painter, sculptor, or other artist, with 8293]
respect to the product of his art; 2. To make any alterations of his work prior to, or
(4) The scientist or technologist or any other to withhold it from publication; [Sec. 193.2, RA
person with regard to his discovery or 8293]
invention. 3. To object to any distortion, mutilation or other
modification of, or other derogatory action in
relation to, his work which would be prejudicial
Art. 722, NCC. The author and the composer,
to his honor or reputation; [Sec. 193.3, RA 8293]
mentioned in Nos. 1 and 2 of the preceding article,
4. To restrain the use of his name with respect to
shall have the ownership of their creations even
any work not of his own creation or in a distorted
before the publication of the same. Once their
version of his work. [Sec. 193.4, RA 8293]
works are published, their rights are governed by
the Copyright laws.
In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall have a
The painter, sculptor or other artist shall have
copyright consisting merely of the right of
dominion over the product of his art even before
reproduction of the typographical arrangement of the
it is copyrighted. The scientist or technologist has
published edition of the work. [Sec.174, RA 8293]
the ownership of his discovery or invention even
before it is patented.
The author of speeches, lectures, sermons, addresses,
and dissertations mentioned in the preceding
e. Collective Management
c. Presumption of Authorship Organizations (CMO)
The natural person whose name is indicated on a The owners of copyright and related rights or their
work in the usual manner as the author shall, in the heirs may designate a society of artists, writers,
absence of proof to the contrary, be presumed to be composers and other right-holders to collectively
the author of the work. This provision shall be manage their economic or moral rights on their
applicable even if the name is a pseudonym, where the behalf. For the said societies to enforce the rights of
pseudonym leaves no doubt as to the identity of the their members, they shall first secure the necessary
author. The person or body corporate, whose name accreditation from the Intellectual Property Office.
appears on an audio-visual work in the usual manner, [Sec. 183, RA 8293 as amended by RA 10372]
shall, in the absence of proof to the contrary, be
presumed to be the maker of said work. [Sec. 219, RA CMOs are entities that manage the bundle of
8293] copyrights that their members own by providing the
legal platform to efficiently enforce their intellectual
The term of protection subsequent to the death of the property rights.
author shall run from the date of his death or of
publication, but such terms shall always be deemed to A group of artists, writers, composers and other
begin on the first day of January of the year following creators, or copyright/related rights holders whose
the event which gave rise to them. [Sec. 214, RA 8293] primary purpose is to collectively manage copyright
and/or related rights. including any or all of the
d. Transfer or Assignment of following activities:
Copyright 1. Negotiation with and grant of licenses to users of
protected literary, scholarly, scientific and artistic
The copyright may be assigned or licensed in whole works, derivative works, performances, sound
or in part. Within the scope of the assignment or recordings, audiovisual works and broadcasts;
license, the assignee or licensee is entitled to all the 2. Collection of royalties and other forms of
rights and remedies which the assignor or licensor had remuneration for the use of protected literary,
with respect to the copyright. [Sec. 180.1, RA 8293 as scholarly, scientific and artistic works, derivative
amended by RA 10372] works, performances, sound recordings,
audiovisual works and broadcasts;
The copyright is not deemed assigned or licensed inter 3. Collection of proceeds In subsequent transfers of
vivos in whole or in part unless there is a written the originals of paintings, sculptures and
indication of such intention. [Sec. 180.2, RA 8293 as manuscripts;
amended by RA 10372] 4. Collection of additional remuneration for
subsequent communication or broadcast of a
The submission of a literary, photographic or artistic performance;
work to a newspaper, magazine or periodical for 5. Collection of single equitable remuneration for
publication shall constitute only a license to make a the broadcast, other communication to the public
single publication unless a greater right is expressly or public performance of a sound recording; and
granted. If two or more persons jointly own a 6. Distribution of the abovementioned collections
copyright or any part thereof, neither of the owners to the rights holders [Office Order 13-173
shall be entitled to grant licenses without the prior s.2013]
written consent of the other owner or owners. [Sec.
180.3, RA 8293] 7. Limitations on Copyright
The copyright is distinct from the property in the DOCTRINE OF FAIR USE
material object subject to it. Consequently, the The fair use of copyrighted work for criticism, news
transfer, assignment or licensing of the copyright shall reporting, teaching (including multiple copies for classroom
not itself constitute a transfer of the material object. use), research and similar purposes is not an
Nor shall a transfer or assignment of the sole copy or infringement of copyright.
of one or several copies of the work imply transfer,
assignment or licensing of the copyright. [Sec. 181, A privilege, in persons other than the owner of the
RA 8293 as amended by RA 10372] copyright, to use the copyrighted material in a
reasonable manner without his consent,
assembling, packaging to marketing, including the h. Use made of a work by or under the direction or
mere offering for sale of counterfeit goods. [Microsoft control of the government for public interest
Corp vs. Maxicorp Inc., G.R. No. 140946 (2004)] compatible with fair use; [Sec. 184.1(h), RA 8293]
i. Public performance or the communication to the
Knowledge of infringement is material only when a public of a work in a place where no admission
person is charged of aiding and abetting a copyright fee is charged by a club on institution for
infringement. The liability for copyright infringement charitable or educational purpose only and the
is in in the nature of strict liability. It does not require aim is not profit-making; [Sec. 184.1(i), RA 8293]
mens rea or culpa. [ABS–CBN Corp vs. Gozon, G.R. j. Public display of the original or a copy of the
No. 195956 (2015)] work not made by means of a film, slide,
television, image or otherwise on screen or by
The following shall NOT constitute means of any other device or process either the
infringement of copyright: work has been published, sold, given away, or
a. Recitation or performance of a work once it has transferred to another person by the author or his
been made accessible to the public if (1) privately successor in title; [Sec. 184.1(j), RA 8293]
done AND free of charge OR (2) strictly for a k. Use made of a work for the purpose of any
charitable or religious institution; [Sec. 184.1(a), judicial proceedings or for the giving of
RA 8293] professional advice by a legal practitioner. [Sec.
b. Making of quotations from a published work: (1) 184.1(k), RA 8293]
compatible with fair use, (2) extent is justified by l. The reproduction or distribution of published
the purpose, (3) source and name of the author, articles or materials in a specialized format
appearing on work, must be mentioned; [Sec. exclusively for the use of the blind, visually- and
184.1(b), RA 8293] reading-impaired persons: Provided, That such
c. Reproduction or communication to the public by copies and distribution shall be made on a
mass media of articles on current political, social, nonprofit basis and shall indicate the copyright
economic, scientific or religious topic, lectures, owner and the date of the original publication.
addresses and other works, delivered in public: [Sec. 184.1(l), RA 8293 as amended by RA 10372]
(1) for information purposes, (2) not expressly
reserved, and (3) source is already indicated; [Sec. Reproduction of Published Work
184.1(c), RA 8293] General Rule: The private reproduction of a published
d. Reproduction and communication to the public work in a single copy, where the reproduction is made
of literary, scientific or artistic works as part of by a natural person exclusively for research and
reports of current events by means of private study, shall be permitted, without the
photography, cinematography or broadcasting to authorization of the owner of copyright in the work.
the extent necessary for the purpose; [Sec. [Sec. 187.1, RA 8293]
184.1(d), RA 8293]
e. Inclusion of a work in a publication, broadcast or Exceptions: Such permission shall not extend to:
other communication to the public, sound a. A work of architecture in the form of building or
recording or film if made by way of illustration other construction;
for teaching purposes compatible with fair use b. An entire book, or a substantial part thereof, or
and the source and the name of the author of a musical work in graphic form by
appearing on work, must be mentioned; [Sec. reprographic means;
184.1(e), RA 8293] c. A compilation of data and other materials;
f. Recording made in schools, universities, or d. A computer program except as provided in
educational institutions of a work included in a Section 189; and
broadcast for the use of schools, universities or e. Any work in cases where reproduction would
educational institutions. Such recording must be unreasonably conflict with a normal exploitation
deleted within a reasonable period; such of the work or would otherwise unreasonably
recording may not be made from audio-visual prejudice the legitimate interests of the author.
works which are part of the general cinema, [187.2, RA 8293]
repertoire of feature films except of brief
excerpts of the work; [Sec. 184.1(f), RA 8293] Reprographic Reproduction by Libraries
g. Making of ephemeral recordings; (1) by a Any library or archive whose activities are not for
broadcasting organization, (2) by means of its profit may, without the authorization of the author of
work or facilities, (3) for use in its own broadcast; copyright owner, make a single copy of the work by
[Sec. 184.1(g), RA 8293] reprographic reproduction:
a. Where the work by reason of its fragile character infringing articles prohibited under Part IV of this Act
or rarity cannot be lent to user in its original form; and under relevant treaties and conventions to which
b. Where the works are isolated articles contained in the Philippines may be a party and for seizing and
composite works or brief portions of other condemning and disposing of the same in case they
published works and the reproduction is are discovered after they have been imported or
necessary to supply them, when this is considered before they are exported [Sec. 190, RA 8293 as
expedient, to persons requesting their loan for amended by RA 10372]
purposes of research or study instead of lending
the volumes or booklets which contain them; and Remedies for Infringement
c. Where the making of such a copy is in order to a. An injunction restraining such infringement;
preserve and, if necessary in the event that it is b. Actual damages, including legal costs and other
lost, destroyed or rendered unusable, replace a expenses, as he may have incurred due to the
copy, or to replace, in the permanent collection infringement as well as the profits the infringer
of another similar library or archive, a copy which may have made due to such infringement, and in
has been lost, destroyed or rendered unusable proving profits the plaintiff shall be required to
and copies are not available with the publisher. prove sales only and the defendant shall be
[Sec. 188.1, RA 8293] required to prove every element of cost which he
claims, or, in lieu of actual damages and profits,
It shall not be permissible to produce a volume of a such damages which to the court shall appear to
work published in several volumes or to produce be just and shall not be regarded as penalty.
missing tomes or pages of magazines or similar works, c. Impounding during the pendency of the action,
unless the volume, tome or part is out of stock: upon such terms and conditions as the court may
Provided, That every library which, by law, is entitled prescribe, sales invoices and other documents
to receive copies of a printed work, shall be entitled, evidencing sales, all articles and their packaging
when special reasons so require, to reproduce a copy alleged to infringe a copyright and implements
of a published work which is considered necessary for for making them;
the collection of the library but which is out of stock. d. Deliver under oath for destruction without any
[Sec. 188.2, RA 8293] compensation all infringing copies or devices, as
well as all plates, molds, or other means for
Reproduction of Computer Program making such infringing copies as the court may
The reproduction in one back-up copy or adaptation order.
of a computer program shall be permitted, without e. Such other terms and conditions, including the
the authorization of the author of, or other owner of payment of moral and exemplary damages, which
copyright in, a computer program, by the lawful the court may deem proper, wise and equitable
owner of that computer program: Provided, That the and the destruction of infringing copies of the
copy or adaptation is necessary for: work even in the event of acquittal in a criminal
a. The use of the computer program in conjunction case.
with a computer for the purpose, and to the f. Criminal liability.
extent, for which the computer program has been
obtained; and
b. Archival purposes, and, for the replacement of
the lawfully owned copy of the computer
program in the event that the lawfully obtained
copy of the computer program is lost, destroyed
or rendered unusable. [Sec. 189.1, RA 8293]
SPECIAL LAWS
Commercial Law
communicating, directly or indirectly, in any e. Aids, abets, assists in or counsels the commission
manner, to any person, entity, or the media: of the money laundering offenses referred to in
1. The fact that a covered transaction report paragraphs (a), (b) or (c) above; and
has or is about to be reported; f. Performs or fails to perform any act as a result of
2. The contents thereof; which he facilitates the offense of money
3. Any other information in relation thereto; laundering referred to in paragraphs (a), (b) or (c)
and above
b. Neither may such reporting be published or
aired in any manner or form by the mass media, Money laundering is also committed by any covered
electronic mail, or other similar devices [Sec. 9, person who, knowing that a covered or suspicious
RA 10365]. transaction is required under this Act to be reported
to the Anti-Money Laundering Council (AMLC), fails
In case of violation, criminal liability ensues as against to do so [Sec. 4, RA 10365].
the concerned officer and employee of the covered
person and media. Note: prior to the amendment made by RA 10365,
Anti-Money Laundering was committed by the
SAFE HARBOR PROVISION – No following:
administrative, criminal or civil proceedings shall lie a. Any person knowing that any monetary
against any person for having made a covered instrument or property represents, involves, or
transaction report in the regular performance of his relates to the proceeds of any unlawful activity,
duties and in good faith, whether or not such transacts or attempts to transact said monetary
reporting results in any criminal prosecution under instrument or property.
this Act or any other Philippine law. [Sec. 9, RA 9160] b. Any person knowing that any monetary
instrument or property involves the proceeds of
Lawyers and accountants acting as independent legal any unlawful activity, performs or fails to
professionals are not subject to the reporting perform any act as a result of which he facilitates
requirement if the relevant information was obtained the offense of money laundering referred to in
in circumstances subject to professional secrecy or the paragraph above.
legal professional privilege [Sec. 9(c), as amended]. c. Any person knowing that any monetary
instrument or property is required under this Act
6. When is Money Laundering to be disclosed and filed with the Anti-Money
Laundering Council (AMLC), fails to do so. [Sec.
Committed 4]
f. Jueteng and Masiao punished as illegal j. Violations of Sections 101 to 107, and 110 of RA
gambling under Presidential Decree No. 1602; 7942, otherwise known as the Philippine
g. Piracy on the high seas under the Revised Mining Act of 1995;
Penal Code, as amended and Presidential Decree k. Violations of Section 27(c), (e), (f), (g) and (i), of
No. 532; RA 9147, otherwise known as the Wildlife
h. Qualified theft under Article 310 of the Revised Resources Conservation and Protection Act;
Penal Code, as amended; l. Violation of Section 7(b) of RA 9072, otherwise
i. Swindling under Article 315 of the Revised known as the National Caves and Cave
Penal Code, as amended; Resources Management Protection Act;
j. Smuggling under RA Nos. 455 and 1937; m. Violation of RA 6539, otherwise known as the
k. Violations under RA 8792, otherwise known as Anti-Carnapping Act of 2002, as amended;
the Electronic Commerce Act of 2000; n. Violations of Sections 1, 3 and 5 of PD 1866, as
l. Hijacking and other violations under RA 6235; amended, otherwise known as the decree
destructive arson and murder, as defined Codifying the Laws on Illegal/Unlawful
under the Revised Penal Code, as amended, Possession, Manufacture, Dealing In,
including those perpetrated by terrorists against Acquisition or Disposition of Firearms,
non-combatant persons and similar targets; Ammunition or Explosives;
m. Fraudulent practices and other violations under o. Violation of PD 1612, otherwise known as the
RA 8799, otherwise known as the Securities Anti-Fencing Law;
Regulation Code of 2000; p. Violation of Section 6 of RA 8042, otherwise
n. Felonies or offenses of a similar nature that known as the Migrant Workers and Overseas
are punishable under the penal laws of other Filipinos Act of 1995, as amended by RA 10022;
countries. [Sec. 3 (i)] q. Violation of RA 8293, otherwise known as the
Intellectual Property Code of the Philippines;
RA 10365 further added the following: r. Violation of Section 4 of RA 9995, otherwise
a. Terrorism and conspiracy to commit known as the Anti-Photo and Video
terrorism as defined and penalized under Voyeurism Act of 2009;
Sections 3 and 4 of RA No. 9372 s. Violation of Section 4 of RA 9775, otherwise
b. Financing of terrorism under Section 4 and known as the Anti-Child Pornography Act of
offenses punishable under Sections 5, 6, 7 and 8 2009;
of RA 10168, otherwise known as the Terrorism t. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e),
Financing Prevention and Suppression Act of 11, 12 and 14 of RA 7610, otherwise known as
2012: the Special Protection of Children Against
c. Bribery under Articles 210, 211 and 211-A of the Abuse, Exploitation and Discrimination
Revised Penal Code, as amended, and
Corruption of Public Officers under Article 8. Anti-Money Laundering
212 of the Revised Penal Code, as amended;
d. Frauds and Illegal Exactions and Council (AMLC)
Transactions under Articles 213, 214, 215 and
216 of the Revised Penal Code, as amended; The Anti-Money Laundering Council shall be
e. Malversation of Public Funds and Property composed of the Governor of the Bangko Sentral ng
under Articles 217 and 222 of the Revised Penal Pilipinas (BSP) as chairman, and the Commissioner of
Code, as amended; the Insurance Commission and the Chairman of the
f. Forgeries and Counterfeiting under Articles Securities and Exchange Commission (SEC) as
163, 166, 167, 168, 169 and 176 of the Revised members. [Sec. 7]
Penal Code, as amended;
g. Violations of Sections 4 to 6 of RA 9208, Functions
otherwise known as the Anti-Trafficking in The AMLC shall act unanimously in the discharge
Persons Act of 2003; of its functions as defined hereunder:
h. Violations of Sections 78 to 79 of Chapter IV, of a. To require and receive covered or suspicious
Presidential Decree No. 705, otherwise known as transaction reports from covered institutions;
the Revised Forestry Code of the Philippines, b. To issue orders addressed to the appropriate
as amended; Supervising Authority or the covered institution
i. Violations of Sections 86 to 106 of Chapter VI, to determine the true identity of the owner of
of RA 8550, otherwise known as the Philippine any monetary instrument or property subject of
Fisheries Code of 1998; a covered transaction or suspicious transaction
report or request for assistance from a foreign Registration Authority and all its Registries of
State, or believed by the Council, on the basis of Deeds to submit copies of relevant documents of
substantial evidence, to be, in whole or in part, all real estate transactions [Sec. 7, as amended by
wherever located, representing, involving, or Sec. 6 of RA 10365].
related to, directly or indirectly, in any manner or
by any means, the proceeds of an unlawful 9. Freezing of Monetary
activity.
c. To institute civil forfeiture proceedings and all Instrument or Property
other remedial proceedings through the Office
of the Solicitor General; Requisites:
d. To cause the filing of complaints with the The Court of Appeals may issue a Freeze Order
Department of Justice or the Ombudsman for under the following conditions:
the prosecution of money laundering offenses; a. A verified ex parte petition by the AMLC; and
e. To investigate suspicious transactions and b. Determination of the CA of probable cause that
covered transactions deemed suspicious after an any monetary instrument or property is in any
investigation by AMLC, money laundering way related to an unlawful activity as defined in
activities, and other violations of this Act; Section 3(i) [Sec. 10]
f. To apply before the Court of Appeals, ex parte,
for the freezing of any monetary instrument or As the law now stands, it is solely the CA which has
property alleged to be laundered, proceeds from the authority to issue a freeze order as well as to
or instrumentalities used/ intended for use in any extend its effectivity. It also has the exclusive
unlawful activity (as defined in Section 3(i) jurisdiction to extend existing freeze orders previously
hereof); issued by the AMLC vis-à-vis accounts and deposits
g. To implement such measures as may be related to money-laundering activities. [Republic v.
necessary and justified under this Act to Cabrini Green & Ramos, G.R. No. 154522 (2006)]
counteract money laundering;
h. To receive and take action in respect of, any The CA is required to act on the petition to freeze
request from foreign states for assistance in within twenty-four (24) hours from filing of the
their own anti-money laundering operations petition. If the application is filed a day before a
provided in this Act; nonworking day, the computation of the twenty-four
i. To develop educational programs on the (24)-hour period shall exclude the nonworking days
pernicious effects of money laundering, the [Sec. 10, as amended by RA 10365 and RA 10927].
methods and techniques used in money
laundering, the viable means of preventing Purpose
money laundering and the effective ways of To give the government the necessary time to prepare
prosecuting and punishing offenders; its case and to file the appropriate charges without
j. To enlist the assistance of any branch, having to worry about the possible dissipation of the
department, bureau, office, agency or assets that are in any way related to the suspected
instrumentality of the government, including illegal activity.
government-owned and -controlled
corporations, in undertaking any and all anti- Thus, a separate criminal charge, much less a
money laundering operations, which may include conviction, is not required for a freeze order. [Ligot v
the use of its personnel, facilities and resources Republic, G.R. No. 176944 (2013)]
for the more resolute prevention, detection and
investigation of money laundering offenses and Duration [As amended by RA 10927]
prosecution of offenders; and The Freeze Order shall be effective immediately,
k. To impose administrative sanctions for the for a period of 20 days.
violation of laws, rules, regulations and orders
and resolutions issued pursuant thereto. [Sec. 7] Within the 20-day period, the CA shall conduct a
l. To require the Land Registration Authority and summary hearing, with notice to the parties, to
all its Registries of Deeds to submit to the determine whether or not to modify or lift the freeze
AMLC, reports on all real estate transactions order, or extend its effectivity.
involving an amount in excess of Php 500,000
within 15 days from the date of registration of the The total period of the freeze order issued by the CA
transaction, in a form to be prescribed by the under this provision shall not exceed 6 months. This
AMLC. The AMLC may also require the Land is without prejudice to an asset preservation order that
2. It has been substantially altered, destroyed, c. Hijacking and other violations under RA No.
diminished in value or otherwise rendered 6235; destructive arson and murder as defined
worthless by any act or omission, directly or under the Revised Penal Code as amended,
indirectly, attributable to the offender, or including those perpetrated by terrorists against
3. It has been concealed, removed, converted, non-combatant persons and similar targets;
or otherwise transferred to prevent the same d. Felonies or offenses of a nature similar to those
from being found or to avoid forfeiture mentioned in Section 3(i) (1), (2), and (12) which
thereof, or are punishable under the penal laws of other
4. It is located outside the Philippines or has countries;
been placed or brought outside the e. Terrorism and conspiracy to commit terrorism as
jurisdiction of the court, or defined and penalized under RA No. 9372.
5. It has been commingled with other monetary
instruments or property belonging to either The authority of AMLC to inquire into or examine
the offender himself or a third person or the main account and the related accounts shall
entity, thereby rendering the same difficult to comply with the Due Process requirements (Art. III,
identify or be segregated for purposes of Sec. 2 and 3) of the 1987 Constitution. Likewise, the
forfeiture constitutional injunction against ex post facto laws
and bills of attainder shall be respected. [Sec. 21, as
Then the court may, instead of enforcing the order of amended by RA 10365]
forfeiture of the monetary instrument or property or
part thereof or interest therein, accordingly order the A bank inquiry order may be availed of without
convicted offender to pay an amount equal to the need of a pre-existing case under the AMLA. If
value of said monetary instrument or property the contrary position is adopted, the AMLC would be
[Sec.12(c) as amended by RA 10365]. virtually deprived of its character as a discovery tool,
and thus would become less circumspect in filing
Note: This provision shall apply in both civil and complaints against suspect account holders.
criminal forfeiture. However, unlike a freeze order, it cannot be
issued ex parte. Without doubt, a requirement that
11. Authority to Inquire into the application for a bank inquiry order be done with
notice to the account holder will alert the latter that
Bank Deposits there is a plan to inspect his bank account on the
belief that the funds therein are involved in an
General Rule: The AMLC may inquire into or examine unlawful activity or money laundering offense.
any particular deposit or investment, including related [Republic v Eugenio, G.R. No. 174629 (2008)]
accounts, with any banking institution or non – bank
financial institution upon order of any competent
court in cases of violation of this Act when it has been
established that there is probable cause that the
deposits or investments involved are related:
(1) To an unlawful activity as defined in Sec. 3(i); or
(2) To any money laundering offense under Sec. 4
Apart from: Any endorsement and any electronic document necessary for his consent or
authorized change, or any change which arises in approval through the electronic signature;
the normal course of communication, storage b. Said method is reliable and appropriate for the
and display. purpose for which the electronic document was
generated or communicated, in the light of all
b. The electronic document is reliable in the light circumstances, including any relevant agreement;
of the purpose for which it was generated and in c. It is necessary for the party sought to be bound,
the light of all relevant circumstances [Sec. 7]. in or order to proceed further with the
transaction, to have executed or provided the
Where the law requires that a document be presented electronic signature; and
or retained in its original form, that requirement is d. The other party is authorized and enabled to
met by an electronic document if verify the electronic signature and to make the
a. There exists a reliable assurance as to the integrity decision to proceed with the transaction
of the document from the time when it was first authenticated by the same.
generated in its final form; and
b. That document is capable of being displayed to Original Documents [Sec. 10]
the person to whom it is to be presented Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3)
Note: provides consequences for the document not being
a. That no provision of this Act shall apply to vary presented or retained in its original from, that
any and all requirements of existing laws on requirement is met by an electronic data message or
formalities required in the execution of electronic document if:
documents for their validity. a. The integrity of the information from the time
b. This Act does not modify any statutory rule when it was first generated in its final form, as an
relating to admissibility of electronic data electronic data message or electronic document
massages or electronic documents, except the is shown by evidence aliunde or otherwise; and
rules relating to authentication and best evidence. 1. Criteria for assessing integrity - whether
the information has remained complete and
ELECTRONIC SIGNATURES unaltered, apart from the addition of any
Section 5. Definition of Terms. – For the endorsement and any change which arises in
purposes of this Act, the following terms are the normal course of communication,
defined, as follows: storage and display
2. Standard of reliability - assessed in the light
xxx of purposed for which the information was
generated and in the light of all the relevant
(e) "Electronic Signature" refers to any distinctive circumstances.
mark, characteristic and/or sound in electronic b. Where it is required that information be resented,
form, representing the identity of a person and that the information is capable of being displayed
attached to or logically associated with the to the person to whom it is to be presented.
electronic data message or electronic document or
any methodology or procedures employed or Authentication of Electronic Data Messages and
adopted by a person and executed or adopted by Electronic Documents
such person with the intention of authenticating or Now governed by: A.M. No. 01-7-10-SC – RULES
approving an electronic data message or electronic ON ELECTRONIC EVIDENCE
document.
Before any private electronic document offered as
Rules for Legal Recognition of Electronic authentic is received in evidence, its authenticity must
Signatures [Sec. 8] be proved by any of the following means:
An electronic signature on the electronic document a. By evidence that it had been digitally signed by
shall be equivalent to the signature of a person on a the person purported to have signed the same;
written document if that signature is proved by b. By evidence that other appropriate security
showing that a prescribed procedure, not alterable by procedures or devices as may be authorized by
the parties interested in the electronic document, the Supreme Court or by law for authentication
existed under which: of electronic documents were applied to the
a. A method is used to identify the party sought to document; or
be bound and to indicate said party's access to the
c. By other evidence showing its integrity and b. On the ground that it is not in the standard
reliability to the satisfaction of the judge. [Sec. 2, written form, and the electronic data message or
Rules on Electronic Evidence] electronic document meeting, and complying
with the requirements (under Sections 6 or 7)
Note: The terms electronic data message and shall be the best evidence of the agreement and
electronic document, as defined under the transaction contained therein [Sec. 12].
Electronic Commerce Act of 2000, do not include
a facsimile transmission. Accordingly, a facsimile Note: This Act does not modify any statutory rule
transmission cannot be considered as electronic relating to admissibility of electronic data massages or
evidence. It is not the functional equivalent of an electronic documents, except the rules relating to
original under the Best Evidence Rule and is not authentication and best evidence [Sec. 7].
admissible as electronic evidence. Since a facsimile
transmission is not an electronic data message or an EVIDENTIAL WEIGHT
electronic document, and cannot be considered as The following shall be given due regard In assessing
electronic evidence by the Court, with greater the evidential weight of an electronic data message or
reason is a photocopy of such a fax transmission electronic document:
not electronic evidence. In the present case, a. the reliability of the manner in which it was
therefore, Pro Forma Invoice Nos. ST2-POSTS0401- generated, stored or communicated,
1 and ST2-POSTS0401-2, which are mere b. the reliability of the manner in which its
photocopies of the original fax transmittals, are not originator was identified, and
electronic evidence [MCC Industrial Sales Corporation v c. other relevant factors. [Sec. 12]
Ssangyong Corporation, G.R. No. 170633 (2007)].
6. Obligation of Confidentiality
4. Presumption Relating to
Electronic Signatures Except for the purposes authorized under this Act,
any person who obtained access to any electronic key,
electronic data message, or electronic document,
Presumption Relating to Electronic Signatures
book, register, correspondence, information, or other
[Sec. 9]
material pursuant to any powers conferred under this
In any proceeding involving an electronic signature, it
Act, shall not convey to or share the same with any
shall be presumed that:
other person [Sec. 32].
a. The electronic signature is the signature of the
person to whom it correlates; and
b. The electronic signature was affixed by that 7. Formation of Contracts in
person with the intention of signing or approving Electronic Form
the electronic document.
Except: When the person relying on the electronically
Except as otherwise agreed by the parties, an offer,
signed electronic document knows or has noticed of
the acceptance of an offer and such other elements
defects in or unreliability of the signature or reliance
required under existing laws for the formation of
on the electronic signature is not reasonable under the
contracts may be expressed in, demonstrated and
circumstances.
proved by means of electronic data messages or
electronic documents and no contract shall be denied
5. Admissibility and Evidential validity or enforceability on the sole ground that it is
Weight of Electronic Data in the form of an electronic data message or electronic
document, or that any or all of the elements required
Message or Electronic under existing laws for the formation of contracts is
Document expressed, demonstrated and proved by means of
electronic data messages or electronic documents
[Sec. 16].
ADMISSIBILITY
In any legal proceedings, nothing in the application of
the rules on evidence shall deny the admissibility of
an electronic data message or electronic document in
evidence:
a. On the sole ground that it is in electronic form;
or
C. Data Privacy Act (RA (b) The entity has a link with the
Philippines, and the entity is
10173) processing personal information
in the Philippines or even if the
processing is outside the
1. Scope Philippines As long as it is about
Philippine citizens or residents
The Data Privacy Act of 2012 applies to the such as, but not limited to, the
processing of all types of personal information and to following:
any natural and juridical person involved in personal (1) A contract is entered in the
information processing including those personal Philippines;
information controllers and processors who, although (2) A juridical entity
not found or established in the Philippines, use unincorporated in the
equipment that are located in the Philippines, or those Philippines but has central
who maintain an office, branch or agency in the management and control in
Philippines subject to the immediately succeeding the country; and
paragraph: Provided, That the requirements of (3) An entity that has a branch,
Section 5 are complied with [Sec. 4]. agency, office or subsidiary
in the Philippines and the
Nothing in this Act shall be construed as to have parent or affiliate of the
amended or repealed the provisions of Republic Act Philippine entity has access
No. 53, which affords the publishers, editors or duly to personal information; and
accredited reporters of any newspaper, magazine or (c) The entity has other links in the
periodical of general circulation protection from Philippines such as, but not
being compelled to reveal the source of any news limited to:
report or information appearing in said publication (1) The entity carries on business
which was related in any confidence to such in the Philippines; and
publisher, editor, or reporter [Sec.5]. (2) The personal information was
collected or held by an entity
As to the All types of personal in the Philippines [Sec. 6].
type of information.
information:
As to whom Any natural and juridical This Act does not apply to the following [Sec. 4]:
applicable: person involved in personal a. Information about any individual who is or was
information processing. an officer or employee of a government
institution that relates to the position or
This includes those personal functions of the individual, including:
information controllers and 1. The fact that the individual is or was an
processors who, although not officer or employee of the government
found or established in the institution;
Philippines, use equipment that 2. The title, business address and office
are located in the Philippines, or telephone number of the individual;
those who maintain an office, 3. The classification, salary range and
branch or agency in the responsibilities of the position held by the
Philippines [Sec. 4]. individual; and
As to where The Act applies to an act done, 4. The name of the individual on a document
applicable: practiced or engaged in and prepared by the individual in the course of
outside the Philippines by an employment with the government;
entity if:
b. Information about an individual who is or was
(a) The act, practice or processing performing service under contract for a
relates to personal information government institution that relates to the services
about a Philippine citizen or a performed.
resident;
Such as the granting of a license or permit given by the f. Information necessary for banks and other
government to an individual, including the name of financial institutions under the jurisdiction of the
the individual and the exact nature of the benefit; independent, central monetary authority or BSP
to comply with the Credit Information System
d. Personal information processed for journalistic, Act (RA 9510) and Anti-Money Laundering Act
artistic, literary or research purposes; (RA 9160) and other applicable laws; and
e. Information necessary in order to carry out the g. Personal information originally collected from
functions of public authority residents of foreign jurisdictions in accordance
with the laws of those foreign jurisdictions,
This includes: the processing of personal data for the including any applicable data privacy laws, which
performance by the independent, central monetary is being processed in the Philippines.
authority and law enforcement and regulatory
agencies of their constitutionally and statutorily
mandated functions.
Definition
Any information whether recorded in Refers to personal information:
a material form or not, from which the (a) About an individual’s race, ethnic origin, marital status, age, color,
identity of an individual is apparent or and religious, philosophical or political affiliations;
can be reasonably and directly (b) About an individual’s health, education, genetic or sexual life of a
ascertained by the entity holding the person, or to any proceeding for any offense committed or alleged
information, or when put together to have been committed by such person, the disposal of such
with other information would directly proceedings, or the sentence of any court in such proceedings;
and certainly identify an individual (c) Issued by government agencies peculiar to an individual which
[Sec. 3(g)]. includes, but not limited to, social security numbers, previous or
current health records, licenses or its denials, suspension or
revocation, and tax returns; and
(d) Specifically established by an executive order or an act of Congress
to be kept classified [Sec. 3(L)].
way compatible with such declared, specified and authority which necessarily includes the
legitimate purposes only processing of personal data for the
• When purposes are determined and declared: before, fulfillment of its mandate; or
or as soon as reasonably practicable after 6. The processing is necessary for the purposes
collection. of the legitimate interests pursued by the
b. Processed fairly and lawfully; personal information controller or by a third
c. Accurate, relevant and, where necessary for party or parties to whom the data is
purposes for which it is to be used the processing disclosed.
of personal information, kept up to date. Except: where such interests are overridden by
• Inaccurate or incomplete data must be fundamental rights and freedoms of the data subject
rectified, supplemented, destroyed or their which require protection under the Philippine
further processing restricted; Constitution [Sec. 12].
d. Adequate and not excessive in relation to the
purposes for which they are collected and See: Penalties for unauthorized processing of
processed; Personal Information above [Sec. 25].
e. Retained only for as long as necessary for the
fulfillment of the purposes for which the data was 4. Rights of Data Subject
obtained or for the establishment, exercise or
defense of legal claims, or for legitimate business The data subject is entitled to:
purposes, or as provided by law; and a. Be informed
f. Kept in a form which permits identification of As to whether personal information pertaining to
data subjects for no longer than is necessary for him/her shall be, are being, or have been
the purposes for which the data were collected processed;
and processed.
• Provided, That personal information b. Be furnished
collected for other purposes may lie processed With the following before the entry of his or her
for historical, statistical or scientific purposes, personal information into the processing system
and in cases laid down in law may be stored of the personal information controller, or at the
for longer periods. next practical opportunity:
• Provided, further, That adequate safeguards 1. Description of the personal information to
are guaranteed by said laws authorizing their be entered into the system;
processing. [Sec. 11] 2. Purposes for which they are being or are to
be processed;
CRITERIA FOR LAWFUL PROCESSING OF 3. Scope and method of the personal
PERSONAL INFORMATION information processing;
It shall be permitted if: 4. The recipients or classes of recipients to
a. Not otherwise prohibited by law; and whom they are or may be disclosed;
b. When at least one of the following conditions 5. Methods utilized for automated access, if the
exists: same is allowed by the data subject, and the
1. The data subject has given his or her extent to which such access is authorized;
consent; 6. The identity and contact details of the
2. The processing is necessary and is related to personal information controller or its
the fulfillment of a contract with the data representative;
subject or in order to take steps at the 7. The period for which the information will be
request of the data subject prior to entering stored; and
into a contract; 8. The existence of their rights, i.e., to access,
3. The processing is necessary for compliance correction, as well as the right to lodge a
with a legal obligation to which the personal complaint before the Commission.
information controller is subject;
4. The processing is necessary to protect vitally Note:
important interests of the data subject, General Rule: Any information supplied/
including life and health; declaration made to the data subject on these
5. The processing is necessary in order to matters shall not be amended without prior
respond to national emergency, to comply notification.
with the requirements of public order and
safety, or to fulfill functions of public
Exception: notification under (b) shall not apply if information from the personal information
the personal information is needed pursuant to a controller’s filing system
subpoena or when the collection and processing
are for obvious purposes (e.g., when it is This is upon discovery and substantial proof that
necessary for the performance of or in relation to the personal information are incomplete,
a contract or service or when necessary or outdated, false, unlawfully obtained, used for
desirable in the context of an employer-employee unauthorized purposes or are no longer necessary
relationship, between the collector and the data for the purposes for which they were collected.
subject) or when the information is being In this case, the personal information controller
collected and processed as a result of legal may notify third parties who have previously
obligation. received such processed personal information;
and
c. Reasonable access to the following, upon
demand: f. Be indemnified
1. Contents of his or her personal information For any damages sustained due to such
that were processed; inaccurate, incomplete, outdated, false,
2. Sources from which personal information unlawfully obtained or unauthorized use of
were obtained; personal information. [Sec. 16]
3. Names and addresses of recipients of the
personal information; g. Transmissibility of Rights of the Data
4. Manner by which such data were processed; Subject
5. Reasons for the disclosure of the personal The lawful heirs and assigns of the data subject
information to recipients; may invoke the rights of the data subject for
6. Information on automated processes where which he or she is an heir or assignee.
the data will or likely to be made as the sole
basis for any decision significantly affecting When may they invoke: (1) At any time after the
or will affect the data subject; death of the data subject OR (2) when the data
7. Date when his or her personal information subject is incapacitated or incapable of exercising
concerning the data subject were last the above-enumerated rights. [Sec. 17].
accessed and modified; and
8. The designation, or name or identity and h. Right to Data Portability
address of the personal information Where personal information is processed by electronic
controller; means and in a structured and commonly used format:
The data subject shall have the right to obtain
d. Dispute the inaccuracy or error in the personal from the personal information controller a copy
information and have the personal information of data undergoing processing in an electronic or
controller correct it immediately and structured format, which is commonly used and
accordingly. allows for further use by the data subject [Sec.
Unless: the request is vexatious or otherwise 18].
unreasonable.
Exception: These rights are not applicable if the
Note: If the personal information have been processed personal information are used/ gathered
corrected, the personal information controller only:
shall ensure the accessibility of both the new and a. For the needs of scientific and statistical
the retracted information and the simultaneous research and, on the basis of such, no activities
receipt of the new and the retracted information are carried out and no decisions are taken
by recipients thereof. regarding the data subject.
Provided, That the third parties who have In such case, however, the personal information
previously received such processed personal shall be held under strict confidentiality and shall
information shall he informed of its inaccuracy be used only for the declared purpose.
and its rectification upon reasonable request of
the data subject; b. For the purpose of investigations in relation
to any criminal, administrative or tax
e. Suspend, withdraw or order the blocking, liabilities of a data subject [Sec. 19].
removal or destruction of his or her personal
authorized by the stockholders representing 2/3 deficiency is not complied with, the court may dismiss
of the outstanding capital stock in a meeting the petition.
called for the purpose;
4. Non-Stock Corporation: When approved by If the petition for rehabilitation is sufficient in form
2/3 of the members in a meeting called for the and substance, it shall issue a Commencement Order
purpose. within five (5) working days from the filing of the
petition.
A group of debtors may file a petition for
rehabilitation when: The rehabilitation proceedings shall commence upon
1. One of more of its members foresee the the issuance of the Commencement Order.
impossibility of meeting debts when they
respectively fall due; and Contents of the Commencement Order
2. The financial distress would likely adversely 1. Identifies the debtor, its principal business and
affect the financial condition and/or operations principal place of business;
of the other members of the group, and/or the 2. Summarize the grounds for initiating
participation of the other members of the group proceedings;
is essential under the terms and conditions of the 3. States the legal effects of the Order;
Rehabilitation Plan. 4. Declares the debtor is under rehabilitation;
5. Directs the publication of the Commencement
The debtor must file a verified petition for Order;
rehabilitation with the court, to establish: 6. Directs service by personal delivery of a copy of
1. The insolvency of the debtor; and the petition to the creditor or to the debtor (not
2. The viability of the rehabilitation. the petitioner);
7. Appoints a rehabilitation receiver;
b. Involuntary [Secs. 13 and 14] 8. Summarizes the requirements and deadlines for
creditors to establish their claims against the
Refers to proceedings initiated by the creditor(s). debtor;
9. Directs the BIR to file and serve its comment or
Value Requirement for Creditors opposition;
The claim(s), or aggregate thereof, must amount to at 10. Prohibits the debtor’s suppliers from
least Php 1 million or at least 25% of the subscribed withholding the supply of goods and services in
capital stock or partners’ contributions, whichever is the ordinary course of business for as long as the
higher. debtor makes payments for services/goods
supplied after issuance of the Order;
Circumstances for Involuntary Rehabilitation 11. Authorizes the payment of administrative
1. There is no genuine issue of fact or law on the expenses;
claims of the creditors; and 12. Sets the case for initial hearing;
2. That the due and demandable payments have not 13. Makes available copies of the petition and
been made for at least 60 days; or Rehabilitation Plan for examination and copying
3. The debtor has failed generally to meet its by any interested party;
liabilities as they fall due (illiquidity); or 14. Indicates the location(s) at which documents
4. At least one creditor, other than the petitoner(s), may be reviewed and copied;
has initiated foreclosure proceedings against the 15. States that any creditor or debtor, not the
debtor that will prevent the debtor from paying petitioner, may submit the name or nominate any
its debts as they become due or will render it other qualified person to the position of
insolvent. rehabilitation receiver;
16. Includes a Stay or Suspension Order.
[Sec. 16]
c. Provisions Common to Voluntary
and Involuntary Rehabilitation Effects of the Commencement Order
Proceedings In addition to the effects of a Stay or Suspension
Order:
COMMENCEMENT ORDER 1. Vests the rehabilitation receiver with all the
If the petition for rehabilitation is deficient in form powers and functions provided for this Act,
and substance, the court may give a reasonable period subject to the approval by the court of the
to amend or supplement the petition. If such
performance bond filed by the rehabilitation of the creditor's or of any group of creditors;
receiver; and
2. Prohibits or otherwise serves as the legal basis • The debtor would likely be able to pursue a
rendering null and void the results of any attempt viable Rehabilitation Plan;
to collect or enforce a claim against the debtor 5. The petition, the Rehabilitation Plan and the
after the commencement date, unless otherwise attachments thereto do not contain any materially
allowed under the FRIA; false or misleading statement;
3. Serves as the legal basis for rendering null and 6. If the petitioner is the debtor, that the debtor has
void any setoff after the commencement date of met with its creditor/s representing at least three-
any debt owed to the debtor by any of the fourths (3/4) of its total obligations to the extent
debtor's creditors; reasonably possible and made a good faith effort
4. Serves as the legal basis for rendering null and to reach a consensus on the proposed
void the perfection of any lien against the Rehabilitation Plan; or if the petitioner/s is/are a
debtor's property, after the commencement date; creditor or group of creditors, that/ the
and petitioner/s has/have met with the debtor and
5. Consolidates the resolution of all legal made a good faith effort to reach a consensus on
proceedings by and against the debtor to the the proposed Rehabilitation Plan; and
court; however, the court may allow the 7. The debtor has not committed acts of
continuation of cases on other courts where the misrepresentation or in fraud of its creditor/s
debtor had initiated the suit. [Sec. 17] or a group of creditors.
Removal
The receiver may be removed at any time by the court,
either by (1) motu propio or (2) motion by any
creditor(s) holding more than 50% of the total
obligations of the creditor, on the following grounds:
1. Incompetence, gross negligence, failure to
perform or failure to exercise the proper degree
of care in the performance of his duties and
powers;
2. Lack of particular or specialized competency
required by the specific case;
3. Illegal acts or conduct in the performance of his
duties and powers;
4. Lack or qualification or presence of any
disqualification;
5. Conflict of interest that arises after his
appointment; and
6. Manifest lack of independence that is detrimental
to the general body of the stakeholders [Sec. 32].
In case of failure to nominate, the court shall appoint b. It must comply with the required contents
the member(s) concerned. In case the decision to under FRIA and FR Rules. Aside from the
appoint a management committee is due to the third above, this includes, among others:
ground (mismanagement, etc.), the court shall appoint 1. Material Financial Commitments
the first member. This is one of the required contents of a
Rehabilitation Plan, which shall “include
REHABILITATION PLAN material financial undertakings or
Refers to a plan by which the financial well-being and commitments to support [it]” [FR Rules,
viability of an insolvent debtor can restored using Rule 2, Sec.61 (Y)]
various means including, but not limited to:
1. Debt Forgiveness: Condoning and/or waiving A material financial commitment becomes
the claims; significant in gauging the resolve,
2. Debt Rescheduling: Extending the time to pay determination, earnestness and good faith of
the claim; the distressed corporation in financing the
3. Reorganization or Quasi-Reorganization: proposed rehabilitation plan. This
Changing the equity, corporate or operating commitment may include the voluntary
structure of the debtor; undertakings of the stockholders or the
4. Dacion en Pago: Assigning property and assets would-be investors of the debtor-
as payment for certain claims; corporation indicating their readiness,
5. Debt to Equity Conversion: The issuance of willingness and ability to contribute funds or
equity and/or ownership interests as payment for property to guarantee the continued
certain claims; successful operation of the debtor
6. Sale of the Business (or parts of it) as a going corporation during the period of
concern; rehabilitation [Philippine Bank of
7. Setting up of new business entities; or Communications v. Basic Polyprinters and
Packaging Corporation, G.R. No. 187581 Asset Growth Two, Inc. v. Fastech Synergy Phils.
(2014)]. Inc., G.R. 206528 (2016)].
In this case, aside from the harped on merger Note: Effect: The failure of the Rehabilitation Plan to
of St. Michael Hospital with SMMCI, the state any material financial commitment to support
only proposed source of revenue the rehabilitation, as well as to include a liquidation
Rehabilitation Plan suggests is the capital analysis, renders the CA's considerations for
which would come from SMMCI’s potential approving the same as actually unsubstantiated, and
investors, which negotiations are merely hence, insufficient to decree the feasibility of
pending. Evidently, both propositions respondents' rehabilitation. It is well to emphasize
commonly border on the speculative and, that the remedy of rehabilitation should be denied to
hence, hardly fit the description of a material corporations that do not qualify under the Rules.
financial commitment which would inspire Neither should it be allowed to corporations whose
confidence that the rehabilitation would turn sole purpose is to delay the enforcement of any of the
out to be successful [BPI Family Savings Bank, rights of the creditors [Ibid].
Inc. v. St. Michael Medical Center, Inc., G.R.
205469 (2015)]. Approval of the Rehabilitation Plan
The receiver shall notify the stakeholders that the Plan
[T]he conversion of all deposits for future is ready for examination. Within 20 days from
subscriptions to common stock and the notification, the receiver shall convene the creditors
treatment of all payables to officers and to vote on the Plan.
stockholders as trade payables was hardly
constituting material financial commitments. The Plan must be approved by all classes of creditors
Such “conversion” of cash advances to trade whose rights are adversely modified or affected.
payables was, in fact, a mere re-classification Otherwise, it is deemed rejected.
of the liability entry and had no effect on the
shareholders’ deficit [Wonder Book Corporation The Plan is approved by a class of creditors if
v. Philippine Bank of Communications, G.R. No. members of the said class holding more than 50% of
187316 (2012)]. the total claims of the class vote in favor of the Plan.
[Sec. 64]
2. Liquidation Analysis
As one of the required contents of a If the Plan is approved, the receiver shall submit the
Rehabilitation Plan, a liquidation analysis same to the court for confirmation.
sets out for each creditor or each class of
creditor, as applicable, the amounts they Objections to Rehabilitation Plan
expect to receive under the Rehabilitation The creditor may file an objection to the Plan with 20
Plan and those that they will receive if days from receipt of notice that it has been submitted
liquidation ensues within one hundred for confirmation.
twenty (120) days after the filing of the
petition [FR Rules, Rule 2, Sec.61 (B)]. Objections are limited to the following:
1. The creditors’ support was induced by fraud;
Respondents likewise failed to include any 2. The documents or data relied upon in the Plan
liquidation analysis in their Rehabilitation are materially false or misleading;
Plan. The total liquidation assets and the 3. The Plan is in fact not supported by the voting
estimated liquidation return to the creditors. [Sec. 66]
creditors, as well as the fair market value
vis-a-vis the forced liquidation value of the If upon hearing, the court finds merit in the
fixed assets were not shown. As such, the objections, it should order the curing of the defect.
Court could not ascertain if the petitioning
debtor's creditors can recover by way of the If the court determines the debtor acted in bad faith,
present value of payments projected in the or that it is not possible to cure the defect, the court
plan, more if the debtor continues as a shall convert the proceedings into one for liquidation.
going concern than if it is immediately
liquidated. This is a crucial factor in a Cram Down Effect
corporate rehabilitation case, which the CA, Notwithstanding the rejection of the creditors of the
unfortunately, failed to address [Philippine Rehabilitation Plan, the court may nonetheless
confirm the Rehabilitation Plan in what is known as a In general, the treatment of claims should adhere to
cram down. the following rules:
1. Within 20 days from assumption into office, the
The effect of the cram down is to bind the debtor and receiver shall establish a preliminary registry of
all persons who may be affected, whether or not they claims. The registry shall be available for public
participated in the proceedings or opposed the plan. inspection; notice must be given to stakeholders
on when and where they may inspect it. [Sec. 44]
A cram down is permitted only if all of the following 2. Stakeholders may challenge the claim within 30
circumstances are present: days from the expiration of the 20-day period for
1. The Rehabilitation Plan complies with the establishing a registry. After the 30-day period,
requirements specified in the FRIA; the receiver shall submit a registry of claims
2. The receiver recommends confirmation of the including claims not subject to challenge. [Sec.
Rehabilitation Plan; 45]
3. The shareholders, owners or partners of the 3. By virtue of the Stay or Suspension Order, all
debtor lost at least their controlling interest as a actions to enforce claims are suspended. [Sec. 16]
result of the Rehabilitation Plan; and 4. The Rehabilitation Plan shall treat equally all
4. The Rehabilitation Plan would likely provide the claims within the same class, unless a particular
objecting class or creditors with compensation creditor voluntarily agrees to less favorable
which has a net present value greater than that treatment. [Sec. 62]
which they would have received if the debtor 5. The Rehabilitation Plan must ensure that
were under liquidation. [Sec. 64] payments under the plan comply with the
concurrence and preference of credits. [Sec. 62]
Confirmation of the Rehabilitation Plan 6. The failure to file a notice of claim, where such is
The court has a maximum period of one year from not listed in the schedule of liabilities,
the date of filing to confirm a Rehabilitation Plan. nonetheless entitles the creditor to receive
If no Rehabilitation Plan is confirmed, the distributions. However, the creditor cannot
proceedings may be converted into one for participate in the rehabilitation proceedings. [Sec.
liquidation. [Sec. 72] 23]
Confirmation has the following effects: The following rules also apply to the treatment of
1. The Plan and its provisions shall be binding upon secured claims:
the debtor and all persons who may be affected 1. The security of lien of a secured creditor is not
by it; diminished or impaired, but his right to enforce
2. The debtor shall comply with the provisions of may be suspended during the Stay Order. [Sec.
the Plan and shall take all actions necessary to 16]
carry out the Plan; 2. Upon motion or recommendation of the
3. Payments shall be made to the creditors in receiver, the court may allow the enforcement of
accordance with the provisions of the Plan; the security if the property is not necessary for
4. Contracts and other arrangements between the rehabilitation. [Sec. 60]
debtor and its creditors shall be interpreted as 3. Upon motion or recommendation of the
continuing to apply to the extent that they do not receiver, the court may terminate or modify the
conflict with the provisions of the Rehabilitation Stay or Suspension Order if a secure creditor
Plan; does not have adequate protection over security,
5. Any compromises on amounts or rescheduling of or the value of a claim secured by a lien on
timing of payments by the debtor shall be binding property which is not necessary for rehabilitation
on creditors regardless of whether the Plan is exceeds the fair market value of the property.
successfully implemented; and [Sec. 61]
6. Claims arising after approval of the Plan that are 4. The Rehabilitation Plan shall maintain the
otherwise not treated by the Plan are not subject security interest of secured creditors and preserve
to any Suspension Order. [Sec. 69] the liquidation value of the security, unless such
has been voluntarily waived or modified. [Sec. 62]
TREATMENT OF CLAIMS, ASSETS AND
CONTRACTS Rules applicable to specific claims include:
1. Employee’s claims upon issuance of the
Treatment of Claims Commencement Order are considered
administrative expenses. [Sec. 56]
Exception:
1. If in the ordinary course of business of the
debtor; or
2. If necessary to finance the administrative
expenses of the proceedings. [Sec. 48]
Treatment of Contracts
Rehabilitation. It also results in a cram down, as it agreement would bind all creditors if the minimum
binds not only the debtor but also all persons affected vote requirements were met. [Sec. 85]
by it.
Effects of the OCRA
5. Out-of-Court Rehabilitation a. Results in a cram down, binding not only the
debtor but also all persons affected;
b. Any proceedings arising or relating to the OCRA
An extrajudicial insolvency proceeding of an Out-of-
shall not stay its implementation, unless the
Court or Informal Restructuring Agreement (OCRA),
relevant party secures a TRO or injunctive relief
or a restructuring of the claims negotiated between
from the Court of Appeals.
the debtor and the creditor(s). No petitions are filed
with the court, though the debtor and/or the creditor
Annulment of the OCRA/Standstill Agreement
may seek court assistance in implementation.
The debtor or creditor may file a petition to annul
based only on the following grounds:
Pending negotiation and finalization of the OCRA,
a. Non-compliance with the requirements for a
there may be a standstill period that allows the
standstill agreement or an OCRA under the
debtor not to pay liabilities as they fall due and
FRIA or the implementing rules; or
prevents creditors from enforcing their claims.
b. Vitiation of consent due to fraud, intimidation
[GOMEZ-SOMERA]
or violence if committed against such number of
creditors required to approve the OCRA or the
Requirements for OCRA
standstill agreement [FR Rules, Rule 4, Sec. 11].
a. The debtor must agree to the out-of-court or
informal restructuring/workout agreement or
Rehabilitation Plan; 6. Conversion into Liquidation
b. It must be approved by creditors representing at Proceedings
least 67% of the secured obligations;
c. It must be approved by creditors representing at
Under the FRIA, court-supervised or pre-negotiated
least 75% of the unsecured obligations;
rehabilitation proceedings may be converted in the
d. It must be approved by creditors holding at least
following instances:
85% of the total liabilities, secured or unsecured,
a. Within 10 days from receipt of the receiver’s
of the debtor. [Sec. 84]
report, a court finding that the debtor is insolvent
and there is no substantial likelihood of
Standstill Period/Agreement
substantial rehabilitation; [Sec. 25(c)]
This refers to the period agreed upon by the debtor
b. If no Rehabilitation Plan is confirmed within 1
and its creditors to enable them to negotiate and enter
year from filing the petition to confirm the Plan;
into an out-of-court or informal restructuring/
[Sec. 72]
workout agreement or rehabilitation plan. It may
c. If termination is due to failure or rehabilitation or
include provisions identical with or similar to the legal
dismissal of the petition for reasons other than
effects of a commencement order [FR Rules, Rule 1,
technical grounds [Sec. 75]; or
Sec. 5(q)].
d. Motion filed by the insolvent debtor for
conversion into liquidation proceedings. [Sec. 90]
The standstill period/agreement is effective and
enforceable not only against contracting parties but
also against other creditors, provided that: 7. Liquidation
a. Such agreement is approved by creditors
representing more than 50% of the total liabilities a. Key Concepts and Definitions
of the debtor;
b. Notice of the standstill agreement is published in Liquidation is a judicial insolvency proceeding by
a newspaper of general circulation in the which the debtor’s assets are reduced and converted
Philippines once a week for two consecutive to cash to discharge the claims against the debtor
weeks; [GOMEZ-SOMERA].
c. The standstill period does not exceed 120 days
from the date of effectivity. The concept of liquidation is thus diametrically
opposed to that of rehabilitation, and both cannot be
The notice must invite creditors to participate in the undertaken at the same time [Philippine Veterans Bank
negotiation for the OCRA and inform them that the Employees Union-NUBE v. Vega, G.R. No. 105364
(2001)].
rights or credits with intent to hinder or delay the the proceeds to be deposited in court to abide by the
liquidation or defraud his creditors; results of the liquidation proceedings. [Sec. 110]
10. That he has, in contemplation of insolvency,
made any payment, gift, grant, sale, conveyance
or transfer of his estate, property, rights or
credits;
11. That being a merchant or tradesman, he has
generally defaulted in the payment of his current
obligations for a period of 30 days;
12. That for a period of 30 days, he has failed after
demand to pay any moneys deposited with him
or received by him a fiduciary capacity; and
13. That an execution having been issued against him
on final judgment for money, he shall have been
found to be without sufficient property subject to
execution to satisfy the judgment. [Sec. 105]
Interim Measures
Where the individual debtor:
1. Resides out of the Philippines;
2. Has departed therefrom;
3. Cannot after due diligence be found therein; or
4. Conceals himself to avoid service of the Order to
show cause, or any other preliminary process or
orders
10. Set the case for hearing for the election and
d. Liquidation of a Juridical Debtor appointment of the liquidator, which date shall
not be less than thirty (30) days nor more than
Voluntary Liquidation forty-five (45) days from the date of the last
An insolvent debtor may apply for liquidation by publication. [Sec. 112]
filing a petition for liquidation with the court.
Effects of the Liquidation Order:
There is no value requirement as to the claims of the 1. The juridical debtor shall be deemed dissolved
creditor(s) against the debtor. [Sec. 90] and its corporate or juridical existence
terminated;
Involuntary Liquidation 2. Legal title to and control of all the assets of the
A petition for liquidation of the debtor may be filed debtor, except those that may be exempt from
by a group of at least three creditors whose claims are, execution, shall be deemed vested in the
whichever is higher: liquidator or, pending his election or
1. At least Php 1,000,000; or appointment, with the court;
2. At least 25% of the subscribed capital stock or 3. All contracts of the debtor shall be deemed
partner’s contributions terminated and/or breached, unless the
liquidator, within ninety (90) days from the date
The petition shall show that: of his assumption of office, declares otherwise
1. There is no genuine issue of fact or law on the and the contracting party agrees;
claims; and 4. No separate action for the collection of an
2. The due and demandable payments have not unsecured claim shall be allowed. Such actions
been made for at least 180 days, or that the debtor already pending will be transferred to the
has failed generally to meet its liabilities as they Liquidator for him to accept and settle or contest.
fall due; and If the liquidator contests or disputes the claim,
3. There is no substantial likelihood that the debtor the court shall allow, hear and resolve such
may be rehabilitated. contest except when the case is already on appeal.
In such a case, the suit may proceed to judgment,
and any final and executor judgment therein for
e. Provisions Common to a claim against the debtor shall be filed and
Liquidation of Individual and allowed in court; and
Juridical Debtors 5. No foreclosure proceeding shall be allowed for a
period of one hundred eighty (180) days.
LIQUIDATION ORDER
The Liquidation Order shall: The Liquidation Order results in the dissolution of a
1. Declare the debtor insolvent; juridical debtor; however, the individual debtor is only
2. Order the liquidation of the debtor and, in the discharged upon termination of the proceedings.
case of a juridical debtor, declare it as dissolved; [GOMEZ-SOMERA]
3. Order the sheriff to take possession and control
of all the property of the debtor, except those LIQUIDATOR
that may be exempt from execution; Any qualified person, natural or juridical, may serve as
4. Order the publication of the petition or motion a receiver.
in a newspaper of general circulation once a week
for two (2) consecutive weeks; If the receiver is a juridical entity, he must designate a
5. Direct payments of any claims and conveyance of natural person as a representative. Such representative
any property due the debtor to the liquidator; must possess all the qualifications and none of the
6. Prohibit payments by the debtor and the transfer disqualifications.
of any property by the debtor;
7. Direct all creditors to file their claims with the Qualifications
liquidator within the period set by the rules of The liquidator shall have the same qualifications as
procedure; that of rehabilitator, thus;
8. Authorize the payment of administrative 1. Citizen or resident for at least six (6) months
expenses as they become due; immediately prior to nomination;
9. State that the debtor and creditors who are not 2. Of good moral character and with acknowledged
petitioner/s may submit the names of other integrity, impartiality and independence;
nominees to the position of liquidator; and
3. Has the requisite knowledge of insolvency and 4. The debtor and the creditor have the right to set
other relevant commercial laws, rules and off their debts against each other; only the
procedures, as well as the relevant training balance if any shall be allowed in the proceedings.
and/or experience that may be necessary to (Sec. 124)
enable him to properly discharge the duties and 5. Within 30 days from expiration of the period for
obligations of a receiver; and filing of applications for recognition of claims,
4. Has no conflict of interest, which may be waived interested parties may challenge claims to the
by a party who may be prejudiced. [Sec. 29] court.
6. Upon the expiration of the 30-day period, the
Powers, Duties and Responsibilities liquidator shall submit the registry of claims
The principal duty of the liquidator is to preserve and containing the claims not subject to challenge.
maximize the value and recover the assets of the Such claims shall become final upon filing of the
debtor, with the end of liquidating them and register.
discharging all the claims against the debtor. 7. Claims that have become final may be set aside
only on grounds of fraud, accident, mistake or
The powers, duties and responsibilities include: inexcusable neglect. [Sec. 125]
1. To sue and recover all the assets, debts and 8. The liquidator shall submit disputed claims to
claims, belonging or due to the debtor; court for final approval. [Sec. 126]
2. To take possession of all the property of the
debtor except property exempt by law from Rights of Secured Creditors
execution; Upon issuance of the Liquidation Order, no
3. To sell, with the approval of the court, any foreclosure proceeding shall be allowed for 180 days.
property of the debtor which has come into his [Sec. 113]
possession or control;
4. To redeem all mortgages and pledges, and so However, the Liquidation Order shall not affect the
satisfy any judgement which may be an right of a secured creditor to enforce his lien.
encumbrance on any property sold by him;
5. To settle all accounts between the debtor and his During the proceedings, a secured creditor may:
creditors, subject to the approval of the court; 1. Waive his right under the security or lien, prove
6. To recover any property or its value, fraudulently his claim in the liquidation proceedings and share
conveyed by the debtor; in the distribution of the assets of the debtor; or
7. To recommend to the court the creation of a 2. Maintain his rights under the security or lien.
creditors' committee which will assist him in the
discharge of the functions and which shall have If the secured creditor maintains his rights under the
powers as the court deems just, reasonable and security or lien:
necessary; and 1. The value of the property may be fixed in a
8. Upon approval of the court, to engage such manner agreed upon by the creditor and the
professional as may be necessary and reasonable liquidator.
to assist him in the discharge of his duties.
If the value of the property is less than the claim,
TREATMENT OF CLAIMS AND the liquidator may convey the property to the
CONTRACTS secured creditor and the latter will be admitted in
the liquidation proceedings as a creditor for the
Determination of Claims balance.
The rules on the determination of claims are as
follows: If its value exceeds the claim secured, the
1. Within 20 days from assuming office, the liquidator may convey the property to the
liquidator shall prepare a preliminary registry of creditor and waive the debtor's right of
claims. redemption upon receiving the excess from the
2. Secured creditors who have waived their security creditor;
or have fixed the value of the property subject of
the security shall be considered unsecured. 2. The liquidator may sell the property and satisfy
3. The registry shall be available for public the secured creditor's entire claim from the
inspection and publication notice shall be proceeds of the sale; or
provided to stakeholders. (Sec. 123)
Treatment of Contracts
General Rule: All contracts are deemed terminated
and/or breached.
LIQUIDATION PLAN
Within three months from assuming office, the
liquidator shall submit a Liquidation Plan
enumerating the assets, claims and a schedule of
liquidation and payment. [Sec. 129].
TERMINATION OF PROCEEDINGS
Upon determining that the liquidation has been
completed, the court shall issue an order ordering the
SEC to remove the debtor from the registry of legal
entities. [Sec. 134]
1. Overview
[Philippine Competition Commission Primer]
controlled by the government, engaged directly or prevent, restrict, or lessen competition in the
indirectly in any economic activity [Sec. 4 (h)] relevant market;
c. Monitor and undertake consultation with
b. International trade having direct, substantial, and stakeholders and affected agencies
reasonably foreseeable effects in trade, industry, d. Stop or redress any anti-competitive agreement
or commerce in the Republic of the Philippines, e. Conduct administrative proceedings, impose
including those that result from acts done outside sanctions, fines or penalties for any
the Republic of the Philippines. noncompliance with or breach of this Act and its
implementing rules and regulations (IRR) and
Note: The PCA does not apply to the combinations or punish for contempt;
activities of workers or employees nor to agreements f. Issue subpoena duces tecum and subpoena ad
or arrangements with their employers when such testificandum to require the production of books,
combinations, activities, agreements, or arrangements records, or other documents or data which relate
are designed solely to facilitate collective to any matter relevant to the investigation
bargaining in respect of conditions of g. Upon order of the court, undertake inspections
employment. of business premises and other offices, land and
vehicles, as used by the entity,
4. Philippine Competition h. Issue adjustment or divestiture orders including
orders for corporate reorganization or
Commission divestment which are structural remedies, should
only be imposed:
The PCA is being implemented and enforced by the 1. Where there is no equally effective
Philippine Competition Commission (“PCC” or the behavioral remedy; or
“Commission”). The PCC is an independent quasi- 2. Where any equally effective behavioral
judicial body being given original and primary remedy would be more burdensome for the
jurisdiction over issues related to competition. It is the enterprise concerned than the structural
main authority on all matters related to competition remedy;
in the country. i. Deputize any and all enforcement agencies of the
government or enlist the aid and support of any
COMPOSITION [Sec. 6] private institution, corporation, entity or
a. Chairman; and association, in the implementation of its powers
b. Four (4) Commissioners who serve for a fixed and functions;
term of seven (7) years. j. Monitor compliance by the person or entities
concerned with the cease and desist order or
To ensure their independence and to insulate the consent judgment;
Commission from undue external influence, all k. Issue advisory opinions and guidelines on
Commissioners have security of tenure and shall competition matters and submit annual and
not be reappointed. Appointments are made by the special reports to Congress, including proposed
President, and the PCA requires that s/he appoints legislation;
senior experts in economics, law, finance, l. Monitor and analyze the practice of competition
commerce, or engineering. in markets that affect the Philippine economy;
m. Conduct, publish, and disseminate studies and
POWERS AND FUNCTIONS OF THE PCC reports on anti-competitive conduct and
[Sec. 12] agreements to inform and guide the industry and
The Commission shall have original and primary consumers;
jurisdiction over the enforcement and n. Intervene or participate in administrative and
implementation of PCA. The Commission shall regulatory proceedings requiring consideration of
exercise the following powers and functions: the provisions of this Act that are initiated by
a. Conduct inquiry, investigate, and hear and decide government agencies;
on cases involving any violation of this Act and o. Assist the National Economic and Development
other existing competition laws motu proprio or Authority, in consultation with relevant agencies
upon receipt of a verified complaint and sectors, in the preparation and formulation
b. Review proposed mergers and acquisitions, and of a national competition policy;
upon exercise of its powers to review, prohibit p. Act as the official representative of the Philippine
mergers and acquisitions that will substantially government in international competition matters;
q. Promote capacity building and the sharing of c. Exceptions or exemptions from the notification
best practices with other competition-related requirement;
bodies; d. Other rules relating to the notification
r. Advocate pro-competitive policies of the procedures. [Sec. 19]
government by:
1. Reviewing economic and administrative Note: The current rule is that this power has been
regulations, motu proprio or upon request; and exercised by the Commission because it adjusted the
2. Advising the Executive Branch on the thresholds for the transaction values under PCC
competitive implications of government Memorandum Circular 18-001, promulgated on
actions, policies and programs; and March 1, 2018:
s. Charging reasonable fees to defray the
administrative cost of the services rendered. Parties to a merger or acquisition are required to
provide notification when:
5. Mergers and Acquisitions (a) The aggregate annual gross revenues in, into or
from the Philippines, or value of the assets in
the Philippines of the ultimate parent entity of
OVERVIEW
at least one of the acquiring or acquired
A merger refers to the joining of two (2) or more
entities, exceeds Five Billion Pesos (Php
entities into an existing entity or to form a new entity.
5,000,000,000); and
Acquisition, on the other hand, refers to the
(b) The value of the transaction exceeds Two
purchase of one firm by another.
Billion Pesos (Php 2,000,000,00).
“Acquisition” refers to the purchase of securities or
assets, through contract or other means, for the Should the Commission deem it necessary, it may
purpose of obtaining control by: request further information that are reasonably
a. One (1) entity of the whole or part of another; necessary and directly relevant to the prohibition
b. Two (2) or more entities over another; or from the parties to the agreement before the
c. One (1) or more entities over one (1) or more expiration of the thirty (30)-day period. The issuance
entities [Sec. 4(a)] of such a request has the effect of extending the
period within which the agreement may not be
“Merger” refers to the joining of two (2) or more consummated for an additional sixty (60) days,
entities into an existing entity or to form a new entity beginning on the day after the request for information
[Sec. 4(j)] is received by the parties. [Sec. 17]
PROHIBITED MERGERS AND Note: Total period for review by the Commission of
ACQUISITIONS the subject agreement shall not exceed ninety (90)
Mergers and acquisitions that substantially prevent, days from initial notification by the parties. [Sec.
restrict or lessen competition in the relevant 17]
market or in the market for goods or services are
prohibited. AGREEMENT DEEMED APPROVED
When the above periods have expired and no decision
MANDATORY NOTICE has been promulgated for whatever reason, the
The old rule: Parties to the merger or acquisition merger or acquisition shall be deemed approved and
agreement wherein the value of the transaction the parties may proceed to implement or consummate
exceeds one billion pesos (P1, 000,000,000.00) are it. [Sec. 17]
prohibited from consummating their agreement
until thirty (30) days after providing notification HOW ARE MERGERS AND ACQUISITIONS
to the Commission. REVIEWED [Philippine Competition
Commission Primer]
The transactional limit in the code is not final because A comprehensive review includes a determination of
the PCC is given the power to publish regulations the “relevant market,” whether there will be
stipulating: substantial changes to the market structure, and the
a. The transaction value threshold and such other potential impact of the transaction on public welfare.
criteria subject to the notification requirement;
b. The information that must be supplied for “Relevant market” refers to the market in which a
notified merger or acquisition; particular good or service is sold and which is a
combination of the relevant product market and the buying the new entrant will be an easy way to get
relevant geographic market, defined as follows: back lost customers and market share without
a. A relevant product market comprises all those having to invest or improve their services. In
goods and/or services which are regarded as markets with few players, a merger between a
interchangeable or substitutable by the consumer large player and a maverick can be destructive to
or the customer, by reason of the goods and/or competition.
services’ characteristics, their prices and their
intended use; and EFFECT OF PROHIBITED MERGER OR
b. The relevant geographic market comprises the ACQUISITION
area in which the entity concerned is involved in If the PCC determines that the agreement results
the supply and demand of goods and services, in in a prohibited merger or acquisition, it may
which the conditions of competition are a. Prohibit the implementation of the agreement;
sufficiently homogenous and which can be b. Prohibit the implementation of the agreement
distinguished from neighboring areas because the unless and until it is modified by changes
conditions of competition are different in those specified by the Commission;
areas. [Sec. 4(k)] c. Prohibit the implementation of the agreement
unless and until the pertinent party or parties
Some key factors that may be considered when enter into legally enforceable agreements
determining the effect of a merger or acquisition specified by the Commission. [Sec. 18]
on competition in a relevant market include:
a. Number of competitors in a market: A market FINALITY OF RULINGS
with only a handful of players may raise a red flag. General Rule: Merger or acquisition rulings that have
Fewer players in the market could have an received a favorable ruling from the PCC may not be
implication on the level of competition. Mergers challenged under the PCA
that significantly decrease the number of
competitors in the market require a closer review Exception: Ruling was obtained on the basis of fraud
of possible anti-competitive effects that could or false material information [Sec. 23]
harm consumers.
b. Entry barriers: Mergers among competitors EXEMPT AGREEMENTS
need thorough review for potential lessening of Any prohibited merger or acquisition may be exempt
competition especially when costs of entering a from the prohibition when the parties establish either
market are high. of the following:
Examples: high cost of infrastructure investments and a. The concentration has brought about or is likely
regulatory barriers. to bring about gains in efficiencies that are greater
c. Switching cost for consumers: Both actual and than the effects of any limitation on competition
perceived switching costs can be a barrier to entry that result; or
and growth of existing competitors. The higher b. A party to the merger or acquisition agreement is
the switching cost for consumers, the more faced with actual or imminent financial failure,
concerns a merger will raise, as the flexibility of and the agreement represents the least anti-
the market and the potential for new entrants are competitive arrangement among the known
limited alternative uses for the failing entity’s assets. [Sec.
Example: long-term agreements with consumers that 21]
apply “exit-fines” such as contracts with cellular
service suppliers or cable providers Burden of proof lies on the party seeking the
d. Potential for collusion: If a result of a merger is exemption [Sec. 22].
the emergence of a market with fewer
competitors who have similar market shares, the List of exceptions not final because the PCC is given
potential for collusion and therefore, the threat the power to add exceptions [Sec. 19]
to competition, is much higher
e. Eliminating a “Maverick”: In markets where a ADMINISTRATIVE FINES AND
new entrant has developed to be a “maverick” — PENALTIES
a creator of competition — established players
may try and remove the maverick by simply Grounds:
buying it. The result of such transactions is a a. Failure to notify the PCC when mandatory;
reduction or elimination of competition in the b. Entering into a prohibited agreement as defined
concerned market. Large players may find that
6. Anti-Competitive
Agreements [Sec. 14]
OVERVIEW
Anti-competitive agreements are those that
substantially prevent, restrict, or lessen competition.
It is illegal for business rivals to act together in
ways that can limit competition, lead to higher
prices, or hinder other businesses from entering the
market.
PROHIBITED AGREEMENTS
a. Horizontal agreements which are prohibited
outright:
1. Restricting competition as to price, or
components, or other terms of trade;
2. Fixing price at an auction or in any form of
bidding including cover bidding, bid
suppression, bid rotation and market
allocation and other analogous practices;
b. Horizontal agreements which substantially
prevent, restrict or lessen competition are also
prohibited, such as:
1. Setting, limiting, or controlling production,
markets, technical development, or
investment;
2. Dividing or sharing the market, whether by
volume of sales or purchases, territory, type
addresses of the partners in the existing joint venture currency as properly documented by the export
in his application for registration with SEC During enterprise;
the transitory period as provided in Section 15 hereof, c. If the enterprise is engaged in merchandise
SEC shall disallow registration of the applying non- trading: the percentage share of the volume or
Philippine national if the existing joint venture peso value of goods exported to the total volume
enterprise, particularly the Filipino partners therein, or value of goods purchased domestically in any
can reasonably prove they are capable to make the taxable year
investment needed for the domestic market activities
to be undertaken by the competing applicant. Upon 5. Foreign Investment in
effectivity of this Act, SEC shall effect registration of
any enterprise applying under this Act within fifteen Domestic Market Enterprise
(15) days upon submission of completed
requirements. [Sec. 5] Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
4. Foreign Investments in enterprises unless foreign ownership therein is
prohibited or limited by the Constitution existing law
Export Enterprise or the Foreign Investment Negative List under
Section 8 hereof. (Sec. 7)
Foreign investment in export enterprises whose
products and services do not fall within Lists A and B A domestic market enterprise may change its status to
of the Foreign Investment Negative List provided export enterprise if over a three (3) year period it
under Section 8 hereof is allowed up to one hundred consistently exports in each year thereof sixty per cent
percent (100%) ownership. (60%) or more of its output.